-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IHbli93Y1CR2DHLViFWuEGH+J8WgkqLENAx0/AwGN9diyCV6OsHYr6zpuJlWGO/j tRy9bT5N5MqoLbzcDc7YlQ== 0000950135-97-003944.txt : 19970926 0000950135-97-003944.hdr.sgml : 19970926 ACCESSION NUMBER: 0000950135-97-003944 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FERROFLUIDICS CORP CENTRAL INDEX KEY: 0000353286 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 020275185 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12198 FILM NUMBER: 97685173 BUSINESS ADDRESS: STREET 1: 40 SIMON STREET CITY: NASHUA STATE: NH ZIP: 03061 BUSINESS PHONE: 6038839800 MAIL ADDRESS: STREET 1: 40 SIMON STREET CITY: NASHUA STATE: NH ZIP: 03061 10-K 1 FERROFLUIDICS CORPORATION 1 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 [Fee required] For the fiscal year ended June 28, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee required] For transition period from _________ to _________ Commission file number 0-10734 FERROFLUIDICS CORPORATION (Exact name of registrant as specified in its charter) -------------------- 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 August 29, 1997, 6,178,262 shares of $.004 par value Common Stock of the registrant were outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price of $7.50 per share for the registrant's Common Stock, as reported on the Nasdaq National Market as of August 29, 1997 was $45,260,175. 2
TABLE OF CONTENTS ITEM PAGE - ---- ---- PART I 1 Business.............................................................................. 1 2. Properties............................................................................ 9 3. Legal Proceedings..................................................................... 10 4. Submission of Matters to a Vote of Security Holders................................... 10 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................................................... 11 6. Selected Consolidated Financial Data.................................................. 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 13 8. Financial Statements and Supplementary Data........................................... 19 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ 45 PART III 10. Directors and Executive Officers of the Registrant.................................... 45 11. Executive Compensation................................................................ 45 12. Security Ownership of Certain Beneficial Owners and Management...................................................................... 45 13. Certain Relationships and Related Transactions........................................ 46 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 46 (a) Financial Statement Schedules (b) Reports on Form 8-K Signatures............................................................................ 51
3 PART I ITEM 1. BUSINESS Founded in 1968, Ferrofluidics Corporation (the "Company" or "Ferrofluidics") is engaged principally in developing, manufacturing and marketing ferrofluids and products based on or derived from its proprietary ferrofluid technology. Ferrofluids, the Company's core technology, are stable magnetic liquids that can be precisely positioned or controlled with a magnetic force. Ferrofluids consist of molecular-sized magnetic particles that are surface treated so that they can be dispersed in various fluids, usually a synthetic lubricating oil. Ferrofluids are designed to have a choice of properties such as viscosity, magnetic strength and vapor pressures to perform numerous specific functions such as sealing, sensing, lubricating, damping and heat transfer. The Company creates commercial applications for its ferrofluid technology either by creating a ferrofluid to serve one or more functions in an existing product (such as the utilization of ferrofluids in audio loudspeakers) or by combining proprietary ferrofluid technology with broad applications engineering to develop ferrofluid-based (Ferrofluidic(R)) products, such as the Company's various sealing devices and fluid-film bearings. The Company synthesizes all ferrofluids for sale, or for use in its own proprietary products. With respect to its products incorporating ferrofluids, the Company generally designs the product and then procures from third party vendors the fabrication of all or a substantial proportion of machined parts and components for the product. The Company assembles, tests and ships the product from its Nashua, New Hampshire plant. The Company seeks to apply its Ferrofluidic(R) technologies in situations where its use significantly enhances the final product into which the technology is incorporated. As a result, pricing reflects value added rather than the direct cost of producing the fluid or Ferrofluidic(R) product supplied to the Company's customers. The Company also seeks to supply markets in which it can achieve a position of market leadership. The Company believes that it, along with its licensee, currently supplies the vast majority of the ferrofluids and ferrofluid-based products used in the world. As a vertical integration of its ferrofluid sealing technology, the Company designs, assembles and markets systems for growing crystals of silicon, germanium, gallium arsenide and other metal alloys for the semiconductor, photovoltaic, military and advanced materials markets. CORPORATE STRUCTURE The Company has its headquarters in Nashua, New Hampshire where it conducts substantially all of the engineering and manufacturing of its products. The Company conducts its operations overseas through the following wholly-owned subsidiaries: (1) ADVANCED PRODUCTS & TECHNOLOGIES, GMBH ("AP&T"), with headquarters in Nurtingen, Germany, with sales offices in Oxford, England and Madrid, Spain, which: (a) markets and services Ferrofluidic(R) products in Europe; (b) designs, manufactures and markets products for the optical coating and thin-film deposition industries such as electron beam guns and related controllers; and 1 4 (c) serves as an exclusive distributor in Europe for several U.S. and European corporations that manufacture compatible products for similar industries. (2) FERROFLUIDICS JAPAN CORPORATION ("FJC"), located in Tokyo, Japan, which distributes Ferrofluidics' components to the semiconductor industry and for application in vacuum-related products. FJC also provides after-sales service for these components, and distributes ferrofluids to the audio loudspeaker industry. In addition, FJC provides sales and service for the Company's crystal growing systems customers located in Japan. In addition to its wholly-owned subsidiaries, the Company has licensed its vacuum rotary feedthrough seals and ferrofluid technology, on a non-exclusive basis, to Ferrotec Corporation ("Ferrotec," formerly Nippon Ferrofluidics Corporation), a former subsidiary located in Japan. In addition, under an exclusive license granted by Ferrofluidics in August 1993, Ferrotec manufactures and sells Ferrofluidic(R) exclusion seals for use on computer peripheral equipment. OPERATING STRUCTURE The Company is organized into three business segments: (i) the COMPONENTS DIVISION, or FERROFLUIDIC PRODUCTS segment, which manufactures and markets: (a) ferrofluids used in the Company's own engineered core products, audio loudspeakers for the commercial, home and automotive markets, and for use in nondestructive testing, inertia dampers, stepper motors and sensor applications; and (b) Ferrofluidic(R) sealing devices and subsystems, primarily for use in the semiconductor process, industrial process, lamp and fiber optic manufacturing, and medical equipment industries. Sales generated by the Components Division accounted for approximately 24.6%, 25.8% and 41.3% of total product sales in fiscal 1997, 1996 and 1995, respectively. (ii) the SYSTEMS DIVISION, or CRYSTAL GROWING SYSTEMS segment, which designs, assembles and markets fully-integrated systems for growing crystals of silicon, germanium, gallium arsenide and other metal alloys for the semiconductor, photovoltaic, military, and advanced materials markets. Sales generated by the Systems Division accounted for 63.0%, 62.7% and 34.5% of total product sales in fiscal 1997, 1996 and 1995, respectively. (iii) DISTRIBUTED PRODUCTS DIVISION, or THIN FILM DEPOSITION segment, which includes the sale in Europe and Asia by AP&T of compatible products on an exclusive basis for several U.S. and European companies. Sales generated by the Distributed Products Division accounted for 12.4%, 11.5% and 24.2% of total product sales in fiscal 1997, 1996 and 1995, respectively. 2 5 In fiscal 1997, $31,684,000, or 46.7%, of the Company's total sales were to foreign customers, primarily through AP&T, FJC and to the Systems Divisions' customers in the Pacific Rim. Sales to unaffiliated foreign customers in fiscal 1996 and 1995 totaled $54,080,000 (74.1%) and $21,412,000 (62.7%), respectively. All manufacturing and assembly of products for the Components and Systems Divisions is conducted at the Company's headquarters in Nashua, NH. Marketing of those products for all markets, excluding Europe and Japan, is principally conducted by its direct sales force at the Company's headquarters. In the case of its standard seals to end-user markets, the Company has distribution agreements with the Kurt J. Lesker Company ("KJLC"), a worldwide distributor of vacuum related products, and with Varian Associates. In addition, the Company has established distributor relationships for its ferrofluid and Ferrofluidic(R) products in Korea, Taiwan, India, China, and developing Pacific Rim countries. PRODUCT LINES The Company manufactures and sells products in three major product categories: (i) ferrofluids; (ii) magnetic fluid seals, sealing subsystems, and other Ferrofluidic(R) components products; and (iii) crystal growing systems and related equipment. In addition, the Company distributes advanced technology component products and systems for use in the manufacture of semiconductors and in the thin-film deposition and optical coating industries through AP&T in Europe and Asia. (i) FERROFLUIDS. The Company supplies ferrofluids for use in the Company's own engineered products, for use in home and automotive loudspeakers, for nondestructive testing, and for use in sensors and stepper motors. The Company currently supplies fluids for approximately 40 million speakers per year, representing the vast majority of the ferrofluid applications in speakers. Sales of ferrofluids accounted for approximately 3.7%, 3.6% and 7.0% of total product sales in fiscal 1997, 1996 and 1995, respectively. The Company supplies Ferrofluidic(R)inertia dampers that are used in semiconductor equipment, disk drives testers, XY plotters, computer printers and other computer peripheral equipment. The dampers eliminate resonance, reduce settling time, eliminate corrosion and improve positional accuracies. (ii) MAGNETIC FLUID SEALS AND SUBSYSTEMS. The Company combines proprietary ferrofluid technology with applications engineering to develop a variety of products that provide state-of-the-art seals and sealing subsystems that either seal the environment from a manufacturing process or seal a manufacturing process from the environment. In each of the applications in which the Company provides Ferrofluidic(R) seals and sealing subsystems it is the leading provider of such technology products. Sales of magnetic fluid seals accounted for approximately 20.9%, 22.2% and 32.1% of total product sales in fiscal 1997, 1996 and 1995 respectively. The Company's major magnetic sealing products are: Rotary Seals for Critical Process Applications: Historically, one of the Company's core commercial applications of ferrofluids is a rotary seal assembly with long life, unmeasurable leakage and high-speed capability for rotary motion penetrations into vacuum and other highly controlled, ultra-clean process environments. The Company 3 6 supplies the semiconductor and other critical process industries with low vapor pressure seal assemblies and subsystems which help exclude atmospheric contamination from manufacturing processes. These applications include semiconductor processing, electro-optical subsystems, thin-film vacuum coating, excimer laser and x-ray based machines. The Company produces standard and custom-engineered sealing components and subsystems including multiport rotary valve assemblies. Customers include both original equipment manufacturers ("OEMs") and end users. The selling price for the majority of such seal assemblies sold by the Company is in the range of $500 to $25,000, with some seal subsystems approaching $100,000, depending on design complexity. The Company, in fiscal 1992, introduced two new commercial applications of its rotary seals: (a) a Lamp Process Sealing System now being supplied to General Electric and certain other lighting manufacturers for use as an integral part of the process to produce energy efficient lamps for automotive, commercial and residential lighting; and (b) a Medical X-Ray Sealing System now being supplied to major medical equipment manufacturers for use to rotate, seal and cool target anodes inside the x-ray vacuum chamber of Computer Aided Tomography ("CAT") scan equipment. Industrial Process Seals: Following approximately three years of development and close cooperation with two key strategic partners in the petroleum refining and chemical processing industries, Ferrofluidics, during fiscal 1993, introduced its industrial process seals for the elimination of volatile organic compounds ("VOCs") and volatile hazardous air pollutants ("VHAPs") from petroleum refining and chemical processing plants. Using this magnetic fluid sealing technology, these facilities can comply cost-effectively with the strictest regulations, which mandate decreasing "fugitive emissions" (as they are referred to under the Federal Clean Air Act of 1990 and its Amendments of 1990) according to a phased program over the next few years and are subject to acceleration by certain state and local authorities. During fiscal 1997, a new series of gas tight seals (GT-6) for the industrial market was introduced. This product series is targeted at industrial fans, blowers, and other low pressure gas handling devices where emissions control and process contamination are critical. Other products within the GT family will be introduced periodically and targeted other equipment such as compressors, centrifuges, mixers, agitators and pumps. The GT-6 product recently received certification from TA Luft, the German air quality authority. Subsystems: During 1996, as an extension of its core capability to design and manufacture rotary seals for a variety of vacuum processing applications, the Company began marketing sealing sub-systems to original equipment manufacturers, which incorporate existing Ferrofluidic sealing technology with other mechanical and electrical components to produce a fully integrated sub-system. Sub-systems allow the Company's customers to outsource more of their manufacturing without compromising quality. Some of the new opportunities include robotics, cluster tooling, and other semiconductor processing sub-assemblies. (iii) CRYSTAL GROWING SYSTEMS. The Company entered the crystal growing capital equipment business through an acquisition in 1981 as a vertical integration to its supply of sealing subsystems. Since entering the business, the Company has focused on building technologically advanced crystal growing systems that incorporate advanced design, unique technical features, comprehensive automation and proprietary operational 4 7 software. The Company's principal product within this product line, silicon crystal growing systems, facilitates the growth of silicon for the electronics industry. The crystals, grown from molten poly-silicon, are then sliced into wafers and used by the semiconductor industry in the manufacture of integrated circuits and other electronic components. Typically, the Company customizes each system for a particular customer incorporating proprietary designs with its own technology. The Company designs all aspects of its crystal growing systems and subcontracts the manufacture of system components. Assembly and testing of each system is performed at the Company's headquarters. Upon the completion of testing, a system is partially disassembled, shipped to the customer and reassembled by the Company's technical support staff. During the past three years, the Company has experienced a rise in orders for silicon systems for semiconductor manufacturing as well as equipment for making other advanced materials for new applications, including multiple-unit orders from major companies in the U.S., Japan, Taiwan and Korea. Typically, shipments are spread over many months, timed for the customer's start-up of new plants or production ramp-ups. Sales of silicon crystal growing systems accounted for approximately 63.0%, 62.7% and 34.5% of total product sales in fiscal 1997, 1996, and 1995, respectively. Silicon crystal growing systems typically sell at prices ranging from $350,000 and $2,000,000 or more, depending on the size crystals to be grown and special features included in the systems. The Company continues to develop equipment and process technologies in several other areas in cooperation with major industrial companies and specific product specialists. SIGNIFICANT CUSTOMERS In fiscal 1997, sales by the Systems Division to companies affiliated with MEMC Electronic Materials, Inc. ("MEMC") totaled $28,017,000 and accounted for 41.3% of consolidated product sales. Sales to these and other affiliates of MEMC totaled $45,344,000 and $6,419,000 in fiscal 1996 and 1995, which represented 62.1% and 18.8%, respectively, of consolidated product sales in those fiscal years. Management believes that the loss of this customer, and its affiliates, could have a material adverse effect on its future results of operations. COMPETITION The Company believes that its competitive advantage will continue to depend upon its trade secrets, know-how and ability to develop both ferrofluids for specific applications and technologically-advanced products which use ferrofluids. The Company believes that its competitive position with respect to its proprietary products, while aided by its patents, is not now materially dependent upon them. The Company does, however, believe that several of its pending patents, if issued, could further strengthen its competitive position. The Company's ferrofluids are proprietary to the Company. 5 8 (i) MAGNETIC FLUIDS. Numerous other companies around the world supply various forms of magnetic fluids for commercial applications. Nevertheless, the Company, in conjunction with Ferrotec, its former Japanese subsidiary and licensee, supplies the vast majority of the world's commercial applications of ferrofluids and believes that its ferrofluids are the principal product used in applications utilizing magnetic fluids. The Company believes its principal competitor in the audio ferrofluid market is Ferrotec with respect to sales in the Pacific Rim. (ii) SEALS AND SEALING SUBSYSTEMS. In semiconductor and other process industry applications, the Company's magnetic fluid sealing devices and sealing subsystems compete against traditional, non-ferrofluid based sealing methods marketed by other vendors, some of which have lower initial cost than the Company's products. In comparison to the Company, some of these firms have greater financial, marketing, technical or other resources available to them. In the Pacific Rim, the Company's licensees compete with other suppliers of magnetic fluid seals. In addition, one competitor in Japan ships seals into the United States. In industrial process applications, Ferrofluidics' sealing system competes with various nonmagnetic fluid sealing devices and sealing subsystems; however, the Company believes that the competitive devices are either more expensive or have higher maintenance costs and are not adequate at the stricter compliance levels mandated by the EPA. (iii) CRYSTAL GROWING SYSTEMS. The Company is aware that there are currently two other companies worldwide that manufacture silicon crystal growing systems. These companies historically have had established market shares and are subsidiaries of larger corporations. In addition, several crystal producers, principally in Japan, manufacture their own growing systems through captive equipment affiliates. Of the non-captive market for silicon crystal growing systems used in the production of 200 millimeter diameter wafers, the Company believes that it currently is the supplier with the greatest market share. There are a limited number of large customers for silicon crystal growing systems. The market is cyclical and even during high-demand periods, only one or two suppliers generate most of the equipment sales. During the past three years, the Company has shipped over 100 systems to customers in the U.S., Europe, Japan and the Pacific Rim. However, there is no assurance that these sales will continue. The need to develop new crystal growing systems technology, including larger diameter wafers, could require investment in research and development well into the future. In addition, the Company may need to invest in manufacturing facilities to stay competitive in the developing larger diameter crystal growing systems market. SEASONALITY While the Company is not impacted by the seasonal demands of its customers, the Systems Division, and as a result the Company, is affected by the delivery demands of its customers. A typical customer of the Company's crystal growing systems segment orders multiple units for delivery under time schedules specifically defined by the customer. As a result, quarter to quarter operating results and working capital requirements may fluctuate considerably. 6 9 EMPLOYEES AND MARKETING The Company currently has approximately 261 employees worldwide, of which 207 are employed in the United States, 47 in Europe and 7 in Japan. In the United States, the Company markets its products through a direct field sales force and an applications engineering staff with headquarters in Nashua, NH which is augmented by a third-party sales representative organization in the U.S and Europe with respect to its Components business. Abroad, products are sold in Europe through AP&T, the Company's wholly-owned subsidiary, in Japan through its wholly-owned subsidiary, Ferrofluidics Japan Corporation, and elsewhere in Europe and Asia through various sales representative and distributor relationships. MANUFACTURING The Company produces all of its ferrofluids at its headquarters, and, to protect the proprietary nature of its ferrofluid technology, conducts such activities in a limited-access environment. The Company's manufacturing presently consists primarily of assembly and test operations, although it has in-house precision machining capabilities in the United States in support of special marketing and customer requirements. The Company's manufacturing operations rely substantially on outside vendors who fabricate components and subassemblies to the Company's specifications. These components are assembled at the Company's facilities and subjected to the Company's rigorous test and inspection procedures. During 1996, the Company increased its capacity for in-house precision machining through the establishment of a state-of-the-art machining center and the addition of a second shift of machine operators. This enhanced capability has proven to be critical in the ability to meet ever shortening lead times for delivery of component products to customers, in particular in Japan and Asia where the competition has historically dominated market share. During 1997, the Company invested in some modifications to its facility for assembling crystal growing systems to accommodate the manufacture of its first 300mm system. More substantial increases in its capacity for assembly and test of its crystal growing systems were made during 1996 and 1995 in order to meet the increasing order backlog for such systems. OUTSIDE SUPPLIERS With respect to its sealing devices, the Company relies on outside suppliers to manufacture, to the Company's specifications, a substantial portion of its metal components requirements. The Company performs assembly and quality control procedures at its headquarters. If the Company's current suppliers were unable to continue to manufacture components, the Company believes that other suppliers would be available to do such work, although there is no guarantee that the Company would be able to obtain all of its supply requirements on comparable terms. The new in-house machining center, established in 1996, supplies a portion of the Company's need for precision machined component parts, reducing its reliance on outside suppliers. It is not, however, the intent of management to conduct all of the component production in-house. 7 10 A substantial portion of the cost of the crystal growing systems, including electrical components and machined parts, are purchased from third-party suppliers. Wherever possible, the Company has made efforts to dual source critical component parts and subassemblies for the systems and believes that there are a number of other suppliers for these parts. INTELLECTUAL PROPERTY RIGHTS The Company owns a number of U.S. and foreign patents for its seals, dampers, bearings and systems, with expiration dates ranging up to 2006. In addition, the Company has applied for additional patents for these products as well as for certain new features developed for crystal growing machinery. In many cases, however, the Company relies more upon its trade secrets, know-how and ability to develop technological advances than patents to protect its technologies and products. The Company has registered trademarks for a logo design utilizing an "F" and for Ferromedic, Ferrofluidic, FerroSound, FerroSound-The solution is loud and clear, and Spin Technology. INTERNAL RESEARCH AND DEVELOPMENT The Company's internal research and development effort is aimed at synthesizing proprietary ferrofluids and using the unique properties of magnetic fluid technology to develop new products and business opportunities, as well as at developing new products in the crystal growing systems business. The Company spent (and charged to expense) $2,033,000, $1,723,000 and $1,479,000 in fiscal years 1997, 1996 and 1995, respectively, on the development of new products and the improvement of existing products. All research is Company-directed and is conducted primarily by employees of the Company. The Company's research and development is carried out by an interdisciplinary group of product development engineers, physicists, chemists, technicians and marketing professionals who seek to apply ferrofluid technology in diverse and expanding markets where that technology adds a significant value. The Company is experimenting with new ferrofluids and seals for new higher speed and higher vacuum applications for new and existing markets. Additionally, the Company has developed a number of new technical advances in crystal growing systems, including a laser melt level control and a continuous feed system for polysilicon. In 1996 the Company embarked on the development of a 300mm crystal growing system in connection with an order received from a foreign customer. This system is expected to ship in the first quarter of fiscal 1998. In fiscal 1997, the Company undertook the development of another 300mm crystal growing system for another customer. BACKLOG As of June 28, 1997, the Company had a consolidated order backlog of $37,483,000, as compared to $59,020,000 at June 30, 1996. A comparative summary of the consolidated backlog by business segment is as follows: 8 11 1997 1996 ---- ---- Systems $30,276,000 $53,072,000 Components 4,787,000 3,944,000 Distributed Products 2,420,000 2,004,000 ----------- ----------- Total Backlog $37,483,000 $59,020,000 =========== =========== Of the total backlog at June 28, 1997, approximately 78% is expected to ship during fiscal 1998. WARRANTY POLICY With respect to the sale of ferrofluids and the sale of seals and other products to the computer peripheral industry, the Company warrants only as to workmanship and materials, and its express warranties for such products terminate upon acceptance by the customer. With respect to sales of seals to the semiconductor and other industries for controlled environment applications, the Company offers a one-year warranty. Its warranty service expenses for such products have not been significant. Because of the low warranty service rate, the cost of warranty returns to date has been expensed as incurred, and no reserves for warranty service have been established. With respect to crystal growing systems, the Company generally offers a one-year warranty as to workmanship and materials from date of acceptance by the customer. Warranty expenses have historically been within the reserves established by the Company. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Financial information with respect to the Company's industry segments is hereby incorporated by reference to Note I to the Consolidated Financial Statements in Item 8 of this report. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Financial information about the Company's foreign and domestic operations and export sales is hereby incorporated by reference to Note I of Notes to the Consolidated Financial Statements in Item 8 of this report. ITEM 2. PROPERTIES The Company's offices, engineering and manufacturing operation is located in Nashua, New Hampshire in a 71,000 square foot facility situated on approximately 4.5 acres of land owned by the Company. This land, the building, and substantially all the Company's machinery and equipment at its Nashua facility have been pledged as security for its short and long term debt. (See Notes A and E to the Consolidated Financial Statements in Item 8.) The Company and its subsidiaries lease office space, aggregating approximately 15,000 square feet, under varying terms in Oxford, England; Nurtingen, Germany; Madrid, Spain; and Tokyo, Japan. 9 12 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 have violated or caused the Company to violate the federal securities laws. Among the areas of inquiry identified in the order is whether publicity about the Company, including research reports, were published without fully disclosing consideration given or received therefor. The order also indicates that the inquiry will examine possible manipulation by certain unnamed persons of the Company's securities, payment in connection therewith, and failure to disclose such activities in public filings made by the Company (including the financial statements contained or incorporated therein), as well as possible nondisclosure of transactions with the Company in which such persons may have had a material interest. Throughout the investigation, the Company has cooperated fully with the SEC's inquiry. In June 1997, the SEC completed its investigation with respect to the Company, and on June 23, 1997, the Company entered into a Consent and Understanding, whereby it agreed to be permanently enjoined from violating the federal securities laws. The Company is continuing to cooperate with the SEC as it completes its investigation with respect to certain unnamed persons. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended June 28, 1997. 10 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Ferrofluidics' Common Stock is traded on the Nasdaq National Market under the stock symbol "FERO". The following table sets forth the high and low closing transactions for the Common Stock of the Company for the fiscal periods indicated, as reported by the Nasdaq National Market. 1997 HIGH LOW ---- ---- --- 7/1/96 - 9/30/96 13 3/4 8 1/4 10/9/96 - 12/31/96 9 5/8 7 3/8 1/1/97 - 3/31/97 10 7/8 7 1/4 4/1/97 - 6/30/97 8 3/4 5 3/4 1996 ---- 7/1/95 - 9/30/95 14 3/8 9 1/2 10/9/95 - 12/31/95 13 5/8 9 3/4 1/1/96 - 3/31/96 11 5/8 8 5/8 4/1/96 - 6/30/96 18 7/8 9 3/4 On August 29, 1997, the closing sale price for the Company's Common Stock, as reported by the Nasdaq National Market, was $7.50. On that date, there were approximately 3,137 holders of record of the common stock of the Company. DIVIDEND POLICY The Company has never paid a cash dividend on its Common Stock. Its policy is to retain earnings and use funds for the operation and expansion of its business. Future dividend policy will be determined by the Board of Directors based upon the Company's earnings, financial condition and capital requirements. 11 14 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data for the five years ended June 28, 1997, should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, in Item 8 of this report and with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report.
Fiscal Years Ended ------------------ June 28, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993 ------------- ------------- ------------- ------------- ------------- Income Statement Data: - ---------------------- Net product sales $ 67,785,000 $ 72,967,000 $ 34,149,000 $ 26,379,000 $ 32,905,000 Royalty revenues -- -- 6,000 82,000 372,000 ------------ ------------ ------------ ------------ ------------ Total net sales and 67,785,000 72,967,000 34,155,000 26,461,000 33,277,000 revenues Engineering & 4,811,000 4,440,000 3,410,000 3,390,000 3,129,000 product development expenses Nonrecurring -- -- (1,156,000) 3,108,000 8,594,000 operating expenses (income) Operating income 1,530,000 4,937,000 943,000 (9,662,000) (11,716,000) (loss) Interest expense, net (765,000) (443,000) (406,000) (356,000) (254,000) Income tax benefit 1,175,000 (487,000) 322,000 (1,169,000) (466,000) (expense) Net income (loss) $ 1,672,000 $ 3,820,000 $ 889,000 $(10,713,000) $(12,446,000) Per Share Data: Net income (loss) $ 0.27 $ 0.61 $ 0.16 $ (2.00) $ (2.49) Weighted average 6,239,581 6,313,045 5,563,160 5,366,350 5,005,120 shares outstanding Balance Sheet Data: Working capital $ 13,323,000 $ 12,350,000 $ 7,811,000 $ (1,601,000) $ 6,775,000 Total assets 45,001,000 43,429,000 39,529,000 32,508,000 36,884,000 Total liabilities 23,420,000 23,727,000 23,748,000 21,325,000 15,107,000 Long-term debt 5,000,000 5,000,000 5,036,000 28,000 -- Stockholders' equity 21,581,000 19,702,000 15,781,000 11,183,000 21,777,000
Note: (a) No dividends have been declared or paid during the five years ended June 28, 1997. 12 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information to assist in the understanding of Ferrofluidics' results of operations and financial condition. It should be read in conjunction with the selected financial data in the preceding section and the consolidated financial statements and notes thereto that appear elsewhere herein. RESULTS OF OPERATIONS Fiscal 1997 Versus Fiscal 1996: - ------------------------------- In fiscal 1997, net income declined to $1,672,000, or $.27 per share, compared to $3,820,000, or $.61 per share, recorded in fiscal 1996. The decline was the result of lower sales volumes and increased expenses, particularly in the areas of marketing and product development. In fiscal 1997, product revenues decreased 7.1% to $67,785,000 from $72,967,000 in fiscal 1996. This decrease in the Company's level of business can be directly attributed to a significant decline in the semiconductor industry in general, which accounts for all of the revenues of the Systems segment and a substantial portion of the Components segment revenues. The changes in revenues by segment are summarized as follows: 1997 1996 ---- ---- Systems $42,691,000 $45,741,000 Components 16,685,000 18,827,000 Distributed Products 8,409,000 8,399,000 ----------- ----------- Total Revenues $67,785,000 $72,967,000 =========== =========== The decrease in revenues in the Systems segment in 1997 was due principally to a delay in the contractual shipment schedules relating to certain multi-unit orders received in the prior year from the Company's largest customer. Further slowdowns in the schedule of shipping machines to this customer are expected in the next fiscal year, as the customer has at present committed to receive one machine per month for the fiscal year, a decline from the average of a little under three machines per month in fiscal 1997. During the first three quarters of fiscal 1997, a slowdown in the production of capital equipment for the semiconductor industry caused demand for the Company's rotary feedthrough seals to decline sharply, resulting in an 11% decrease in consolidated revenues from the Components segment. During the fourth quarter, the order rate for seals began to improve as the outlook for the industry improved. Revenues in the Distributed Products segment, which principally serves the thin-film deposition industry, remained relatively level with those of last year. Total sales from the Company's European subsidiary, AP&T, which includes the sale of the Company's components and fluid products in Europe, as well as comprising the Distributed Products segment, decreased 5.7% to $11,979,000 in 1997, as compared to $12,702,000 in fiscal 1996. The decrease was entirely within the Ferrofluidic product lines, as the distributed products revenues remained level with the prior year. Sales by the Company's Japanese subsidiary, FJC, increased to $11,825,000 over the $568,000 of revenues in 1996. Sales of seals and fluids increased over 200% in 1997, evidencing the Company's penetration into that market. In addition, the Company sold a significant number of crystal growing systems, both of a prototype and production nature, to five of the major Japanese silicon wafer manufacturers, resulting in a substantial increase in revenues in Japan. Despite the significant increase in business with Japan, total foreign sales declined to 13 16 $31,684,000 from $54,080,000 in 1996, because the majority of the non-Japanese crystal puller shipments were to domestic customers in 1997, whereas 1996 shipments were primarily to Korean and Taiwanese wafer manufacturing facilities. Bookings in 1997 decreased 51%, to $46,487,000, from $94,231,000 in 1996, as orders for crystal growing systems declined substantially as a result of industry over-capacity. Fiscal 1997 bookings included $19,892,000 in orders of crystal growing systems and related equipment, as compared to $66,427,000 in 1996. The majority of the 1996 bookings were from one affiliated group of customers. In contrast, the crystal growing systems orders received during 1997 included orders from a number of different and unrelated international wafer suppliers in Scandinavia, Eastern Europe, Taiwan, China, and Japan. These orders reflect the success of the Company's efforts in the past two years to reduce its dependence on one customer. Order bookings in the Company's Components Division, which includes the sale of seals and fluids, totaled $17,511,000, which includes bookings in the fourth quarter of fiscal 1997 of $6,300,000, a record for the segment. The resulting order backlog for that segment at the end of the fiscal year was $4,787,000, an increase of 21% over the Components Division backlog at June 30, 1996. Consolidated order backlog at June 28, 1997 totaled $37,742,000 as compared to $59,020,000 at June 30, 1996. Of the consolidated backlog at June 28, 1997, approximately 78% is expected to ship during the coming fiscal year. The consolidated gross margin for the year ended June 28, 1997 of 28.9% increased slightly over the gross margin of 28.8% in the previous year. Although revenues declined, the overall product mix was essentially unchanged. Lower gross margins were experienced in the crystal growing systems business due to expenses related to the development of machines for new customers, but this was offset by an increase in the margins in the Components segment. Consolidated operating income before general corporate and non-operating expenses declined in 1997 to 8.8% of product revenues as compared to 11.2% in 1996. This was the result of lower revenues, higher sustaining engineering, and higher product development costs. The Company spent $4,811,000 during fiscal 1997 on engineering and product development, an amount equal to 7.1% of product revenues compared to $4,440,000 or 6.1% of product revenues in the preceding year. Engineering costs as a percent of revenues increased in 1997 principally due to the increased level of first-time, or prototype, systems sold during 1997, as well as the increased development work in the area of 300mm crystal growing systems. Of the total engineering and product development expenditures in fiscal 1997, $2,904,000 was in the Systems Division as compared to $2,194,000 in the prior fiscal year. The balance of engineering and product development expenditures were made for development of seals and fluids products. Selling, general and administrative ("SG&A") expenses in 1997 increased $1,577,000 or 13.5% over such expenses in 1996, and increased as a percent of revenues from 16% in 1996 to 19.5% in 1997. Selling and marketing costs increased by $450,000, due in part to a $130,000 increase in selling expenses in Japan, a $160,000 increase in sales commissions and a $100,000 increase in selling expenses in Europe. Administrative expenses accounted for the rest of the increase, which was due in part to increases in legal costs ($230,000), personnel costs ($420,000), severance ($210,000), and insurance and stock-based compensation ($100,000). Interest income in 1997 was down from that in 1996, due principally to lower levels of invested cash. Interest expense of $854,000 is up 47% over the $580,000 in the prior year as a result of 14 17 higher borrowings against the Company's revolving line of credit. See Note E to the Consolidated Financial Statements for a more complete discussion of the Company's debt obligations. The Company records transaction gains and losses resulting from fluctuations of foreign currency as other income or expense. During fiscal 1997, $217,000 of net foreign currency transaction losses were recorded as compared to a net gain of $33,000 in fiscal 1996. The losses in 1997, primarily incurred by the Company's Japanese subsidiary whose functional currency is the U.S. dollar for accounting purposes, arose as a result of the weakening of the Japanese yen against the dollar during much of 1997. Gains and losses resulting from the translation of the financial statements of subsidiaries whose functional currency is other than the U.S. dollar are recorded directly to equity. The balance of other income (expense) in 1997 was principally amortization of bank financing costs, which did not change materially from the previous fiscal year. In accordance with FASB Statement No. 109, Accounting for Income Taxes, the Company recorded, in the fourth quarter of 1997, a $1,200,000 tax benefit from a reduction of the valuation allowance against deferred tax assets that is required to be recorded when the Company's management is of the opinion that the tax benefit is more likely than not to be realized. The recording of this benefit may affect the Company's effective corporate tax rate in future periods. Income tax expense of $487,000 in 1996 consisted of a provision for state and foreign income taxes on the Company's earnings and a federal alternative minimum tax provision. See Note D to the Consolidated Financial Statements for a more complete discussion of income taxes. Fiscal 1996 Versus Fiscal 1995: - ------------------------------- In fiscal 1996, net income was $3,820,000, or $.61 per share, as compared to $889,000, or $.16 per share, in 1995. In fiscal 1996, product revenues increased 114% to $72,967,000 from $34,155,000 in fiscal 1995. The overall increase in the Company's level of business can be directly attributed to the growth in the semiconductor industry in general, which accounts for all of its Systems segment and a substantial portion of its Components segment. The increases in revenues by segment are summarized as follows: 1996 1995 ---- ---- Systems $45,741,000 $11,782,000 Components 18,827,000 14,125,000 Distributed Products 8,399,000 8,248,000 ----------- ----------- Total Revenues $72,967,000 $34,155,000 =========== =========== The increase in revenues from systems is attributed to increased demand for silicon wafers and the resulting increase in production capacity for the wafers. During 1996 and 1995, the Company received orders for over 100 of its model CZ-150 crystal growing system, which grows 200 millimeter diameter silicon ingots. Increases in the production of capital equipment by OEM's in the semiconductor industry have driven the demand for our component seals and sealing subsystems resulting in a 33% increase in consolidated revenues from the Components segment. Distributed Products, which principally serves the thin-film deposition industry, showed a modest 2% revenue increase in 1996. Total sales from the Company's European operations, AP&T, which includes the sale of the Company's components and fluid products in Europe, as well as comprising the Distributed Products 15 18 segment, increased 13.4% to $12,702,000 in 1996 as compared to $11,201,000 in fiscal 1995. Sales by the Company's Japanese operation, FJC, totaled $568,000, up 93% from $294,000 in 1995. During 1996, FJC experienced a significant increase in its sales order activity for both components products and crystal growing systems. Total foreign sales increased over 150% to $54,080,000 in 1996 from $21,412,000 in 1995 due primarily to the shipment of crystal growing systems to large scale wafer fabrication facilities in Korea and Taiwan. Bookings in 1996 increased 66% to $94,231,000 from $56,911,000 in the prior year. Of the new business booked, $66,427,000 represented orders of crystal growing systems and related equipment, as compared to $35,700,000 in the prior year. Order backlog at June 28, 1997 totaled $59,020,000 as compared to $37,756,000 at June 30, 1996. During July and August of 1996, the Company, in consultation with its customers, rescheduled approximately one half of the shipments of crystal pullers initially scheduled for fiscal 1997 into future years. The consolidated gross margin for the year ended June 28, 1997 of 28.8% declined from the gross margin of 40.7% in the previous year due to the change in product mix of revenues. In 1996, 62.7% of consolidated revenues pertained to crystal growing systems, which generate lower gross margins, as compared to 34.5% in the prior year. Consolidated operating income, before general corporate expenses and nonrecurring operating income, improved in 1996 to 11.2% of product revenues as compared to 7.4% in 1995. Operating income in the Systems segment improved from 5.5% of revenues in 1995 to 10.8% in 1996. In the Components segment, operating income improved from 11.9% of revenues to 15.2%. The Company expended $4,440,000 during fiscal 1996 on engineering and product development, representing 6.1% of revenues compared to $3,410,000 or 10% of revenues in the preceding year. Of the total engineering and product development expenditures in fiscal 1996, $2,194,000 was in the Systems segment as compared to $1,135,000 in the prior fiscal year. The remaining balance of expenditures related to engineering and development of the Company's core products, including seals and fluids. Selling, general and administrative ("SG&A") expenses in 1996 increased $955,000 or 8.9% over those of 1995, however, declined as a percent of revenues from 31.3% in 1995 to 16% in 1996. Contributing to the increase in SG&A expenses are increased warranty provisions and increased sales commissions to third parties. Also included in the increase in SG&A expenses is a $520,000 increase in general corporate expenses, which includes a $177,000 increase in non-cash stock related compensation. As more fully discussed in Note B to the Consolidated Financial Statements, in September 1994, the Company discontinued the operations of a subsidiary and, in November 1994, entered into an agreement to license certain of its technology to a third party. As a result of these transactions, the Company recorded nonrecurring operating income in fiscal 1995 of $1,156,000. Interest income in 1996 was down from that in 1995 due principally to the cancellation of certain paid-up insurance policies on the life of a former officer which is more fully discussed in Note C to the Consolidated Financial Statements. Invested cash remained at low levels as a result of the need to finance the operations of the business. Interest expense of $580,000 is also down from the prior year due to the elimination of borrowings against the canceled insurance policies. See Note E to the Consolidated Financial Statements for a more complete discussion of the Company's debt obligations. 16 19 The Company records translation and exchange gains and losses resulting from fluctuations of foreign currency as other income (expense). The net impact of currency translation and exchange was $33,000 and $260,000 of income in 1996 and 1995, respectively. Included in the income from currency translation in 1995 was a gain of approximately $245,000 which the Company realized upon the sale of its investment in Ferrotec. The balance of other income (expense) in 1996 and 1995 was principally amortization of bank financing costs. The income tax expense in 1996 of $487,000 is comprised principally of a provision for state and foreign income taxes on the Company's earnings and a federal alternative minimum tax provision. The tax provision in 1995 includes approximately $300,000 in various state and foreign taxes, offset by a benefit of approximately $615,000 resulting from the recording of a tax asset in Europe at AP&T reflecting that business's return to profitability from continuing operations. See Note D to the Consolidated Financial Statements for a more complete discussion of income taxes. LIQUIDITY AND CAPITAL RESOURCES In 1997, the operations of the business used $2,153,000 of cash, which was principally the result of the increases in accounts receivable and inventories and the decline in the balance of deposits from systems customers. This cash requirement was financed from borrowings under the Company's expanded revolving line of credit as discussed below. Cash receipts from the sale of crystal growing systems under large multi-unit contracts are typically received by the Company as certain milestones are met, including receipt of the order, submission of accepted engineering drawings, shipment and final acceptance of the units. In 1997 and 1996, the Company received advance payments of $6,523,000 and $12,547,000, respectively, in connection with orders for crystal growing systems. In order to secure its sources of supply for critical long lead inventory items, the Company has also had to make advance payments to its vendors. The balance remaining on deposit with vendors was $1,341,000 at June 28, 1997. The Company has purchase contracts for inventory with various suppliers which, in some cases, extend beyond two years. At June 28, 1997, outstanding purchase commitments pursuant to these contracts totaled approximately $15,000,000. The ratio of current assets to current liabilities was 1.7 at the end of both 1997 and 1996. Working capital at June 28, 1997 increased to $13,323,000 from $12,350,000 at June 30, 1996. Current assets increased, principally due to higher accounts receivable balances, as the receivable turnover decreased in 1997 compared to 1996 as a softening in the semiconductor industry caused customers to lengthen their payment terms. Inventory balances increased somewhat in 1997 as compared to 1996, but reduced business levels caused overall inventory turnover to decline to 3.3 times annual consumption in 1997 from 3.7 in 1996. In December 1996, the Company entered into a new agreement with its bank which resulted in the expansion of its revolving line of credit from $2,500,000 to $8,500,000. This change is discussed in more detail in Note E to the consolidated financial statements. Capital expenditures totaled $1,249,000 in 1997, as compared to $2,422,000 in 1996. The spending in both years consisted primarily of various improvements to the Company's Nashua facility, including the final acceptance of a machine for its in-house machine shop, and additions to the Company's computer hardware and software. The Company is considering plans to undertake a significant increase in its facilities in connection with the development of its 300mm crystal puller 17 20 business. Proceeding with these plans, if decided upon, may require the Company to develop new sources of financing to supplement its internal cash generation and current borrowing arrangements. The Company has long-term financing in the form of a $5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB") that is subject to a variable rate of interest keyed to short-term nontaxable rates (at June 28, 1997, 4.9%), the proceeds of which were primarily used to fund the construction of the Company's Nashua, NH headquarters. The Company has a credit facility with its bank which provides the Company with total credit of approximately $13,900,000, $5,400,000 of which is in the form of a stand-by letter of credit for the Company's VRIRB, and $8,500,000 (increased from $2,500,000 in December 1996) of which is a revolving line of credit for working capital purposes. The stand-by letter of credit has a term of five years with a fee of 1% per year and the revolving credit facility bears interest at prime rate plus 1% with a fee of 1/8% on the unused portion. At June 28, 1997, $6,170,000 was outstanding against the revolving line of credit. During 1996, the Company borrowed $1,000,000, in the form of a demand note with its bank, for working capital purposes, which had interest at prime plus 1%. In 1997, this demand note was canceled as the balance was rolled into the newly increased revolving line of credit. Also during 1996, the Company borrowed $800,000, in the form of an installment demand note with its bank, to finance the capital expansion of its in-house machine shop, which bears interest at 9.75%. At June 28, 1997, the balance on this note was $611,000. In addition, the Company, through its wholly-owned foreign subsidiaries, has various short-term facilities with local banks totaling approximately $2,000,000 at June 28, 1997. During 1997, the maximum outstanding borrowing on these foreign credit lines was $329,000. The weighted average interest rates during the year on these facilities ranged from 7.4% to 9% and the interest rates at June 28, 1997 ranged from 7.0% to 9.5%. Management believes that current financial resources (working capital and short-term borrowing arrangements) and anticipated funds from operations will be adequate to meet cash requirements in the year ahead, with the possible exception of financing related to the facility expansion referred to above. The Company has undertaken to develop new sources of financing to supplement its present capabilities in this area. EFFECTS OF INFLATION Inflation rates over the past three years have remained relatively low and, as a result, have not had a material impact on the financial results of the Company. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. There are many factors that could cause actual results to differ materially from those anticipated by such forward-looking statements. These include, but are not limited to, cancellation of letters of intent, further rescheduling of existing crystal puller orders, additional crystal puller orders from existing or new customers, including those mentioned in the report, lack of new crystal puller orders from existing or new customers, change in revenues in the Company's components, fluids, and thin film deposition businesses, and a material change in the market conditions within the semiconductor industry. For additional information concerning these and other important factors which may cause the Company's actual results to differ materially from expectations and underlying assumptions, please refer to the reports filed by the Company with the Securities and Exchange Commission. 18 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page(s) Reports of Independent Auditors..........................................................20-21 Consolidated Balance Sheets as of June 28, 1997 and June 30, 1996...........................22 Consolidated Statements of Operations for each of the three years in the period ended June 28, 1997.....................................................23 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 28, 1997..................................24 Consolidated Statements of Cash Flows for each of the three years in the period ended June 28, 1997.....................................................25 Notes to Consolidated Financial Statements...............................................26-45
19 22 Report of Independent Auditors ------------------------------ To the Stockholders and Directors of Ferrofluidics Corporation We have audited the accompanying consolidated balance sheets of Ferrofluidics Corporation as of June 28, 1997 and June 30, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule, for the years ended June 28, 1997 and June 30, 1996, listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ferrofluidics Corporation at June 28, 1997 and June 30, 1996, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Manchester, New Hampshire August 21, 1997 20 23 Report of Independent Accountants --------------------------------- To the Stockholders and Directors of Ferrofluidics Corporation We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Ferrofluidics Corporation for the year ended June 30, 1995 and the financial statement schedule listed in Item 14(a) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Ferrofluidics Corporation for the year ended June 30, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Manchester, New Hampshire August 31, 1995 21 24 FERROFLUIDICS CORPORATION CONSOLIDATED BALANCE SHEETS JUNE 28, 1997 AND JUNE 30, 1996
1997 1996 ---- ---- ASSETS - ------ Current Assets: Cash and cash equivalents $ 883,000 $ 1,701,000 Accounts receivable - trade, less allowance of $199,000 ($320,000 in 1996) 13,609,000 12,757,000 Inventories 15,263,000 13,829,000 Advances to suppliers 1,341,000 1,916,000 Prepaid and other current assets 474,000 672,000 ------------ ------------ Total Current Assets 31,570,000 30,875,000 ------------ ------------ Property, plant and equipment, at cost, net of accumulated depreciation of $10,961,000 ($9,583,000 in 1996) 8,377,000 8,784,000 Cash value of life insurance, net 1,751,000 1,731,000 Deferred income taxes, net 1,815,000 615,000 Other assets, net 1,488,000 1,424,000 ------------ ------------ TOTAL ASSETS $ 45,001,000 $ 43,429,000 ============ ============ LIABILITIES - ----------- Current Liabilities: Bank notes payable $ 6,781,000 $ 4,262,000 Accounts payable 5,126,000 6,366,000 Customer deposits 2,426,000 4,368,000 Accrued expenses and other current liabilities 3,914,000 3,529,000 ------------ ------------ Total Current Liabilities 18,247,000 18,525,000 ------------ ------------ Long-term debt obligations 5,000,000 5,000,000 Other liabilities 173,000 202,000 Commitments and contingencies STOCKHOLDERS' EQUITY - -------------------- Preferred stock, $.001 par value, authorized 100,000 shares, issued and outstanding - none -- -- Common stock, $.004 par value, authorized 12,500,000 shares, outstanding - 6,178,262 (6,060,902 in 1996) 25,000 24,000 Additional paid-in capital 36,477,000 35,871,000 Accumulated deficit (13,971,000) (15,643,000) Currency translation adjustments (950,000) (550,000) ------------ ------------ Total Stockholders' Equity 21,581,000 19,702,000 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,001,000 $ 43,429,000 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 22 25 FERROFLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
1997 1996 1995 ---- ---- ---- Net sales and revenues $ 67,785,000 $ 72,967,000 $ 34,155,000 Cost of sales 48,218,000 51,941,000 20,264,000 ------------ ------------ ------------ Gross profit 19,567,000 21,026,000 13,891,000 Operating expenses: Engineering and product development expense 4,811,000 4,440,000 3,410,000 Selling, general and administrative expense 13,226,000 11,649,000 10,694,000 Nonrecurring operating income -- -- (1,156,000) ------------ ------------ ------------ Operating income 1,530,000 4,937,000 943,000 Interest income 89,000 137,000 232,000 Interest expense (854,000) (580,000) (638,000) Other income (expense), net (268,000) (187,000) 30,000 ------------ ------------ ------------ Income before income taxes 497,000 4,307,000 567,000 Income taxes (benefit) (1,175,000) 487,000 (322,000) ------------ ------------ ------------ Net income $ 1,672,000 $ 3,820,000 $ 889,000 ============ ============ ============ Net income per share $ .27 $ .61 $ .16 ============ ============ ============ Weighted average common and common equivalent shares 6,239,581 6,313,045 5,563,160
The accompanying notes are an integral part of the consolidated financial statements. 23 26 FERROFLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
Common Stock Additional Currency ------------------------ Paid-In Accumulated Translation Shares Par Value Capital Deficit Adjustments ------ --------- ------- ------- ----------- BALANCE, JUNE 30, 1994 5,366,949 $21,467 $32,109,000 $(20,352,000) $(595,000) Issuance of common stock for: Settlement of stockholder class action suit 600,000 2,400 3,148,000 -- -- Restricted stock plan, charge to operations 38,385 154 290,000 -- -- Redemption of stock for taxes (8,136) (33) (62,000) -- -- Net income -- -- -- 889,000 -- Current year translation adjustments -- -- -- -- 330,000 --------- ------- ----------- ------------ --------- BALANCE, JUNE 30, 1995 5,997,198 23,988 35,485,000 (19,463,000) (265,000) --------- ------- ----------- ------------ --------- Issuance of common stock for restricted stock plan, charge to operations 70,878 284 467,000 -- -- Redemption of stock for taxes (7,174) (28) (81,000) -- -- Net income -- -- -- 3,820,000 -- Current year translation adjustments -- -- -- -- (285,000) --------- ------- ----------- ------------ --------- BALANCE, JUNE 30, 1996 6,060,902 24,244 35,871,000 (15,643,000) (550,000) --------- ------- ----------- ------------ --------- Issuance of common stock for: Restricted stock plan, charge to operations 93,762 375 511,000 -- -- Exercise of options 33,138 132 166,000 -- -- Redemption of stock for taxes (9,540) (38) (71,000) -- -- Net income -- -- -- 1,672,000 -- Current year translation adjustments -- -- -- -- (400,000) --------- ------- ----------- ------------ --------- BALANCE, JUNE 28, 1997 6,178,262 $24,713 $36,477,000 $(13,971,000) $(950,000) ========= ======= =========== ============ =========
The accompanying notes are an integral part of the consolidated financial statements. 24 27 FERROFLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 28, 1997, AND JUNE 30, 1996 AND 1995
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 1,672,000 $ 3,820,000 $ 889,000 Adjustments to reconcile net income to cash flow provided by (used in) operating activities: Depreciation and amortization 1,602,000 1,145,000 1,030,000 Deferred income taxes (credits) (1,200,000) -- (615,000) Increase in cash surrender value (20,000) (3,000) (202,000) Gain on sale of assets (16,000) (9,000) (4,000) Stock-related compensation 511,000 467,000 290,000 Foreign transaction (gains) losses 217,000 (33,000) (260,000) Other (508,000) 457,000 224,000 Changes in operating assets and liabilities, net of disposition of business: Accounts receivable, net (1,144,000) (5,663,000) (3,150,000) Inventories (1,632,000) 134,000 (3,710,000) Prepaid and other current assets 764,000 (900,000) (2,047,000) Accounts payable and accrued expenses (463,000) 1,857,000 330,000 Customer deposits (1,936,000) (4,073,000) 7,855,000 ----------- ----------- ----------- Net cash provided by (used in) operating activities (2,153,000) (2,801,000) 630,000 ----------- ----------- ----------- Cash flows from investing activities: Acquisition of property, plant and equipment (1,249,000) (2,422,000) (1,880,000) Proceeds from cancellation of key-man policies -- 1,248,000 -- Proceeds from notes receivable -- -- 350,000 Sale of investment in affiliate -- -- 3,991,000 Proceeds from sales of assets 37,000 34,000 753,000 ----------- ----------- ----------- Net cash provided by (used in) investing activities (1,212,000) (1,140,000) 3,214,000 ----------- ----------- ----------- Cash flows from financing activities: Short-term borrowings, net 2,519,000 4,262,000 (2,775,000) Exercise of stock options 166,000 -- -- Payments under capital lease obligations -- (76,000) (72,000) Proceeds from borrowing of cash surrender value -- -- 189,000 ----------- ----------- ----------- Net cash provided by (used in) financing activities 2,685,000 4,186,000 (2,658,000) ----------- ----------- ----------- Effect of currency rate changes on cash (138,000) (107,000) 55,000 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (818,000) 138,000 1,241,000 ----------- ----------- ----------- Cash and cash equivalents at beginning of year 1,701,000 1,563,000 322,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 883,000 $ 1,701,000 $ 1,563,000 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 25 28 FERROFLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - ------------ Ferrofluidics Corporation (the "Company") is a multinational company engaged principally in developing, manufacturing and marketing ferrofluids (magnetic fluids), rotary sealing devices based on or derived from its proprietary ferrofluid technology, and systems for growing crystals of silicon, germanium, gallium arsenide and other metal alloys for the semiconductor, photovoltaic, military and advanced materials markets. Information on the Company's operations by segment and geographic area are included in Note I. Approximately 85% of the Company's sales is attributable to the semiconductor industry, which can experience cyclical fluctuations. A prolonged decline in the semiconductor industry could have a materially adverse effect on the Company's operating results. Fiscal Year - ----------- Effective July 1, 1996, the Company changed its fiscal year end from June 30 to a 52 or 53-week year ending on the Saturday nearest June 30. Accordingly, the 1997 fiscal year ended June 28, whereas the previous two fiscal years ended on June 30. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates - ---------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash on hand, money market funds and commercial paper with original maturities of less than 90 days. Fair Value of Financial Instruments - ----------------------------------- The carrying amounts of the Company's financial instruments, including accounts receivable, accounts payable and short-term and long-term debt, approximate fair value. Concentration of Credit Risk - ---------------------------- Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade accounts receivable. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company performs ongoing credit evaluations of its customers' financial condition and, under certain conditions, requires collateral from its foreign unaffiliated customers in the form of irrevocable letters of credit or other acceptable guarantees. With regard to the Company's Components segment, concentrations of trade credit risk are limited due to the large number of 26 29 customers and their dispersion across many different geographical regions. In the Company's Crystal Growing Systems segment, customers belonging to an affiliated group of companies, some foreign and some domestic, accounted for 65.6% of that segment's fiscal 1997 net sales (41.3% of consolidated net sales) and 39.9% of gross consolidated accounts receivable at June 28, 1997. Additionally, the Company has made advance payments to suppliers for inventory aggregating $1,341,000 at June 28, 1997. Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following elements at June 28, 1997 and June 30, 1996: 1997 1996 ---- ---- Raw materials and purchased parts $ 8,082,000 $ 6,845,000 Work-in-process 2,962,000 3,188,000 Finished goods 4,219,000 3,796,000 ----------- ----------- $15,263,000 $13,829,000 =========== =========== The Company has purchase contracts for inventory with various suppliers which, in some cases, extend beyond two years. At June 28, 1997, outstanding purchase commitments pursuant to these contracts totaled approximately $15,000,000. Property, Plant And Equipment - ----------------------------- Property, plant and equipment are recorded at cost. Depreciation on machinery and equipment and furniture and fixtures is computed on a straight-line method over estimated useful lives of three to eight years; leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease or the estimated useful life of the improvements. Depreciation on buildings and building improvements is computed using the straight-line method over estimated lives of ten to thirty years. Depreciation charges for assets begin in the month subsequent to the asset being placed in service. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of disposed assets and the related accumulated depreciation are eliminated from the accounts. Gains or losses on disposition are reflected in other income (expense) at the time of disposition. Property, plant and equipment consisted of the following at June 28, 1997 and June 30, 1996: 1997 1996 ---- ---- Land $ 321,000 $ 321,000 Buildings and improvements 8,033,000 6,633,000 Machinery and equipment 5,399,000 4,420,000 Furniture, fixtures and vehicles 5,408,000 5,263,000 Construction in process 177,000 1,730,000 ------------ ----------- 19,338,000 18,367,000 Less: Accumulated depreciation and amortization 10,961,000 9,583,000 ---------- ----------- $ 8,377,000 $ 8,784,000 =========== =========== 27 30 Intangible Assets - ----------------- At June 28, 1997, the Company had recorded goodwill in an amount of $1,064,000, which is included on the accompanying balance sheet with other assets, resulting from the acquisition in fiscal 1989 of AP&T. This amount is being amortized over a 16 year life on a straight line basis. Accumulated amortization as of June 28, 1997 amounted to $514,000. All other intangible assets, including patents and trademarks, are recorded at cost and amortized on a straight-line basis over their estimated useful lives, generally ten years. Income Taxes - ------------ Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Taxes are not provided on undistributed income of subsidiaries not consolidated for U.S. tax purposes as it is intended that such earnings will remain invested in those companies or, if distributed, the tax effect would not be material. As of June 28, 1997, each of these subsidiaries had an accumulated loss. Revenue Recognition - ------------------- The Company generally recognizes product revenue upon shipment of products to the customer. Royalty revenue is recognized as it is earned. Product Development Expenses - ---------------------------- Product development expenditures are charged to expense when first incurred. The Company incurred $2,033,000, $1,723,000 and $1,479,000 in product development during 1997, 1996 and 1995, respectively. Translation Of Foreign Currencies - --------------------------------- The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with Financial Accounting Standards Board ("FASB") Statement No. 52, Foreign Currency Translation. All balance sheet accounts of foreign subsidiaries whose functional currency is other than the U.S. dollar have been translated at year-end exchange rates. Income statement amounts have been translated at average exchange rates during the year. Translation gains and losses have been accumulated as a separate component of stockholders' equity. Transaction gains and losses of foreign subsidiaries whose functional currency is the U.S. dollar have been charged directly to operations as incurred. Foreign Exchange Contracts - -------------------------- The Company from time to time enters into foreign exchange contracts to hedge against adverse exchange losses on certain assets or liabilities denominated in a foreign currency. Market value gains and losses are recognized, with the resulting credit or debit offsetting foreign exchange gains or losses on those instruments. At June 28, 1997, there was one foreign exchange contract outstanding, in which there was no material exchange gain or loss. 28 31 Other Income (Expense) - ---------------------- Other income (expense) consisted of the following for the years ended June 28, 1997 and June 30, 1996 and 1995:
1997 1996 1995 --------- --------- --------- Foreign transaction gains (losses) $(217,000) $ 33,000 $ 260,000 Gain on sale of fixed assets 16,000 9,000 4,000 Other (67,000) (229,000) (234,000) --------- --------- --------- $(268,000) $(187,000) $ 30,000 ========= ========= =========
Stock-based Compensation ------------------------ The Company has stock-based compensation programs and has elected to account for them in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, except for restricted stock awards, recognizes no compensation expense for the stock option grants (See Note H). Earnings Per Share - ------------------ Net income per share for fiscal 1997, 1996, and 1995 is based on the weighted average number of common shares outstanding as well as the effect of all dilutive common stock equivalents. Statement Of Cash Flows - ----------------------- For the years ended June 28, 1997 and June 30, 1996 and 1995, cash payments for income taxes amounted to $473,000, $290,000 and $121,000, respectively. Cash payments for interest in each of the three years amounted to $795,000, $421,000 and $427,000, respectively. During 1996, the Company transferred its ownership in certain single premium, paid-up life insurance policies on the life of a former CEO to the former CEO. At the time of the transfer, the policies had a gross cash value of approximately $2,300,000, against which the Company had outstanding borrowings in the amount of approximately $1,300,000, and an offset for amounts due the former CEO of approximately $1,000,000. As the policies had no net carrying value to the Company, the transfer was treated as a noncash transaction (See Notes C and J). Also during 1996, the Company transferred certain equipment with a net book value of $488,000 into inventory. Impact Of Recently Issued Accounting Standards - ---------------------------------------------- In February 1997, the FASB issued Statement No. 128, Earnings per Share, which must be adopted by the Company in fiscal 1998, and which establishes standards for computing and presenting earnings per share by simplifying previous standards and making them comparable to international standards. The Company will then be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. This change would not have affected the primary earnings per share calculation for the years ended June 28, 1997 and June 30, 1995, but it would have increased primary earnings per share by $.01 for the year ended June 30, 1996. The impact of Statement 128 on the calculation of fully diluted earnings per share for these years is not expected to be material. In February 1997, the FASB also issued Statement No. 129, Disclosure of Information about Capital Structure, which must also be adopted by the Company in fiscal 1998. Statement 129 establishes standards for disclosing information about the Company's capital structure. 29 32 In July 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income and Statement No. 131, Disclosure about Segments of an Enterprise and Related Information. Both statements must be adopted by the Company in fiscal year 1999. Statement No. 130 establishes standards for the reporting and display of comprehensive income and its components in a complete set of financial statements. Statement No. 131 changes the way segment information is reported and establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company believes that the adoption of these standards is not likely to have a material impact on the Company's financial position or results of operations. Reclassifications - ----------------- Certain amounts for 1996 have been reclassified to conform to 1997 presentation. Fourth Quarter Adjustments - -------------------------- The Company made adjustments to its financial statements in the fourth quarter ended June 28, 1997 which included approximately $570,000 in valuation reserves for slow moving inventory and anticipated field costs resulting from the delivery of new equipment. Additionally, the Company recorded a $1,200,000 tax benefit resulting from a reduction of the valuation allowance against deferred tax assets (See Note D). B. NONRECURRING OPERATING TRANSACTIONS VSE - --- In September 1994, management decided to discontinue the operations of VSE, its majority owned subsidiary in Austria, due to prolonged operating losses and its inability to compete effectively in the standard vacuum-valve industry. In the process of liquidating the subsidiary, VSE went into technical receivership and, in October, the minority owner acquired the business out of receivership and assumed all of its liabilities. The loss from operations of VSE in fiscal 1995 until the date of abandonment of $205,000, in addition to the one-time gain on the abandonment of $61,000, have been presented on the Consolidated Statement of Operations for the year ended June 30, 1995 as nonrecurring operating expenses. VAT Vakuumventile, GmbH - ----------------------- In November 1994, the Company entered into a fifteen-year agreement with VAT Vakuumventile, GmbH ("VAT"), a Swiss vacuum-valve manufacturer, pursuant to which VAT has been granted exclusive right to utilize certain rotary feedthrough sealing technology of the Company in exchange for $1,300,000 in cash. During October and November 1994, the Company received an aggregate of $1,300,000 in cash payments pursuant to this arrangement and has recorded the payments as nonrecurring operating income in the Consolidated Statement of Operations for fiscal 1995. 30 33 C. CASH VALUE OF LIFE INSURANCE During fiscal 1988 and 1989, the Company invested an aggregate of $5,000,000 in six single premium life insurance policies on the lives of Dr. Ronald Moskowitz, a former CEO, and Mr. Frank Bloom, a former CFO. The policies yielded a minimum guaranteed rate of return of 6.0%, less a nominal charge for the cost of insurance. Under the terms of certain insurance loan agreements relating to these policies, this former CEO and CFO were given the right to borrow specified amounts annually from the insurance company, to a specified date, and the former officers' estates were beneficiaries of the policies to the extent of their respective borrowing rights. The allowable borrowings under these policies approximated the earnings accruing to the Company. The Company did not recognize earnings under these policies to the extent they were subject to the executive borrowing rights. During 1996, the Company entered into a settlement agreement with Dr. Moskowitz which, among other things, required the transfer of ownership in two of these policies to the former CEO and the cancellation of the remaining two policies on his life. The transferred policies had no carrying value on the Company's books and, accordingly, the Company did not incur a charge on the transfer (See Note J). Upon cancellation of the other two policies, the Company received the net cash value of approximately $1,248,000. At June 28, 1997, the remaining two policies on the life of the former CFO had an aggregate cash value of $1,931,000, against which the Company had $1,908,000 in loans and accrued interest outstanding at an interest rate of 8%. In addition, the Company has recorded its interest in the value of other key man life insurance policies under split-dollar agreements with the aforementioned former CEO of $1,728,000 and $1,699,000 at June 28, 1997 and June 30, 1996, respectively. This former CEO's estate is the principal beneficiary of the aggregate face value of these policies of approximately $8,000,000, from which the Company will receive, upon death or surrender, an amount approximating the cash surrender value of the policies at that time. D. INCOME TAXES Income before income taxes for the years ended June 28, 1997 and June 30, 1996 and 1995 was taxed in the following jurisdictions: 1997 1996 1995 ----------- ----------- ----------- Domestic $ 371,000 $ 4,000,000 $ 1,012,000 Foreign 126,000 307,000 (445,000) ----------- ----------- ----------- Total $ 497,000 $ 4,307,000 $ 567,000 =========== =========== =========== Significant components of the provision for income taxes (benefit) are as follows: 31 34
1997 1996 1995 ----------- ----------- ----------- Current: Federal $ (48,000) $ 133,000 $ -- State 54,000 233,000 20,000 Foreign 19,000 121,000 273,000 ----------- ----------- ----------- Total current 25,000 487,000 293,000 ----------- ----------- ----------- Deferred: Federal (1,200,000) -- -- State -- -- -- Foreign -- -- (615,000) ----------- ----------- ----------- Total deferred (1,200,000) -- (615,000) ----------- ----------- ----------- Total $(1,175,000) $ 487,000 $ (322,000) =========== =========== ===========
The following is a reconciliation between the statutory provision for federal income taxes and the effective income taxes for the years ended June 28, 1997 and June 30, 1996 and 1995:
1997 1996 1995 ----------- ----------- ----------- Income tax expense at federal statutory rate $ 169,000 $ 1,464,000 $ 193,000 Change in valuation allowance (1,190,000) (1,180,000) (1,629,000) Settlement of stockholders' class action suit -- -- 1,247,000 State income tax, net of federal tax benefit 36,000 153,000 20,000 Foreign income taxes at differing statutory rates (24,000) 17,000 (342,000) Other (166,000) 33,000 189,000 ----------- ----------- ----------- Income tax expense (benefit) $(1,175,000) $ 487,000 $ (322,000) =========== =========== ===========
The components of the net deferred tax asset as of June 28, 1997 and June 30, 1996 were as follows:
Deferred tax assets: 1997 1996 ------------ ------------ Net operating loss carryforwards $ 10,443,000 $ 10,689,000 Capital loss carryforward 1,821,000 1,766,000 Compensation related items 167,000 235,000 Investment writedowns 631,000 612,000 Valuation allowances 210,000 160,000 Inventories 1,155,000 1,016,000 Research & development credits 150,000 150,000 Alternative minimum tax credits 186,000 172,000 Other 207,000 340,000 ------------ ------------ Total deferred tax assets 14,970,000 15,140,000 Valuation allowance for deferred tax assets (12,027,000) (13,217,000) ------------ ------------ Net deferred tax assets 2,943,000 1,923,000 Deferred tax liabilities: Depreciable assets (965,000) (1,118,000) Other (163,000) (190,000) ------------ ------------ Total deferred tax liabilities (1,128,000) (1,308,000) ------------ ------------ Net deferred tax assets $ 1,815,000 $ 615,000 ============ ============
32 35 FASB Statement No. 109, Accounting for Income Taxes, requires a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Due to the uncertainty surrounding the Company's ability to realize the benefit of the entire deferred tax asset, a valuation allowance in the amount of $12,027,000 has been established at June 28, 1997. Reported earnings in 1997 and projected earnings in 1998 partially alleviated this uncertainty and, accordingly, resulted in a reduction in the valuation allowance and a corresponding reduction in income tax expense of $1,200,000 for the year ended June 28, 1997. The valuation allowance relating to a foreign deferred tax asset was reduced by $615,000 during 1995. As of June 28, 1997, the Company had remaining net operating loss carryforwards for Federal income tax purposes of approximately $25,576,000, and for foreign income tax purposes of approximately $5,073,000, which can be used to offset future taxable income. The net operating loss carryforwards for Federal income tax purposes will expire at various dates through 2010. Included in the loss carryforward, for income tax purposes, is approximately $16,800,000 of tax deductions resulting from the excess of the market price over the exercise price on the date of exercise of the Company's stock purchase options and warrants which were exercised during 1993 and prior years. The tax benefit to be realized upon utilization of the $16,800,000 of loss carryforwards will result in a decrease in current income taxes payable and an increase to additional paid-in capital. E. SHORT TERM BORROWINGS AND OTHER DEBT OBLIGATIONS As of June 28, 1997 and June 30, 1996, the Company and its subsidiaries have the following debt obligations outstanding:
1997 1996 ----------- ----------- Revolving line of credit $ 6,170,000 $ 2,500,000 1984 Industrial Revenue Bond 5,000,000 5,000,000 Bank notes 611,000 1,762,000 ----------- ----------- 11,781,000 9,262,000 Less: current portion of debt obligations 6,781,000 4,262,000 ----------- ----------- Long term debt obligations $ 5,000,000 $ 5,000,000 =========== ===========
In fiscal 1985 and 1986, the Company secured long-term financing in the form of a $5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB") and a $2,500,000 Fixed Rate (7.25%) Industrial Revenue Bond ("FRIRB" and, together with the VRIRBs, the "IRBs"), respectively. The VRIRB is subject to a variable rate of interest generally keyed to short-term nontaxable rates, and has a seven day call feature. The interest rate at June 28, 1997 was 4.9%. The proceeds from these bonds were used to fund the construction of the Company's Nashua, New Hampshire facility and the purchase of machinery and equipment. The VRIRB is payable in full on September 1, 2004 and is guaranteed by a bank stand-by letter of credit (through August 15, 1998) which is a part of the credit facility extended to the Company by a bank as described below. On June 30, 1994, the Company entered into a credit facility with a bank which provided the Company with a total credit of approximately $7,900,000, including approximately $5,400,000 in the form of a stand-by letter of credit for the Company's $5,000,000 VRIRB, and a $2,500,000 revolving line of credit for working capital purposes. As further discussed below, in December 1996, the credit facility was amended and increased. The stand-by letter of credit has a term of five 33 36 years with a fee of 1% per year and the revolving line of credit carries an interest rate at the bank's prime rate plus 1% with a fee of 1/8% on the unused portion. The credit facility is collateralized by substantially all of the assets of the Company. At June 30, 1996, the entire $2,500,000 was outstanding on the revolving line of credit at an interest rate of 9.25%. During 1996, the Company borrowed $1,000,000, in the form of a demand note with its bank, for working capital purposes to supplement the revolving line of credit which was fully borrowed. The note was payable on demand and bore interest at the bank's prime plus 1% (9.25% at June 30, 1996) and was collateralized by substantially all of the assets of the Company. Also as discussed below, this demand note was consolidated into an increased line of credit in December 1996. Also during 1996, the Company borrowed $800,000 in the form of an installment note with its bank in order to finance the capital expansion of its in-house machine shop. The note, which is payable upon demand, is being amortized in 59 monthly installments of $16,899 with a final payment on January 25, 2001 of $21,151. The note bears interest at 9.75% and is collateralized by the machinery and equipment acquired. At June 28, 1997, the balance on this note was $611,000. In December 1996, the bank agreed to increase the Company's revolving line of credit agreement from $2,500,000 to $8,500,000, which included the consolidation of the $1,000,000 demand note outstanding at the end of 1996. Interest on the line is at prime plus 1% (9.5% at June 28, 1997). Under the new arrangement with its bank, the Company has available to it a total credit facility of approximately $13,900,000, which includes the $5,400,000 standby letter of credit for the Company's VRIRB and the revolving line of credit. The credit facility is collateralized by substantially all of the assets of the Company. At June 28, 1997, there was approximately $6,170,000 outstanding under the revolving line of credit agreement. In February 1997, the Company obtained an additional increase of approximately $1,500,000 in the credit facility from its bank in the form of a stand-by letter of credit to secure a customer prepayment received with an order for crystal growing systems. The letter of credit carries a fee of $17,300 and will be reduced by the amount of the prepayment for each system upon shipment. The systems are expected to ship before the end of calendar 1997. In addition, the Company, through its wholly-owned foreign subsidiaries, has various short-term facilities with local banks totaling approximately $2,000,000 at June 28, 1997. Approximately $329,000 was borrowed against one of these facilities during fiscal 1997, and repaid prior to the end of the fiscal year. No borrowings were made against these short-term facilities during 1996. The weighted average interest rates during the year on these facilities ranged from 7.4% to 9.0% and the interest rates at June 28, 1997 ranged from 7.0% to 9.5%. F. COMMITMENTS AND CONTINGENCIES The Company has entered into operating leases for office space and equipment. Future minimum lease payments for the five years subsequent to fiscal 1997 amount to: $315,000 in 1998; $116,000 in 1999; $104,000 in 2000; $104,000 in 2001; and $73,000 in 2002. Rent expense under operating leases amounted to $489,000 in 1997, $459,000 in 1996, and $336,000 in 1995. During 1997, the Company terminated its agreement to lease to a third party approximately 11,000 square feet of its headquarters office in Nashua in exchange for payment to the tenant of 34 37 $100,000, which was charged to operations during fiscal 1997. The Company received total lease payments of $28,000 in 1997 from this third party. As part of the sale, in June 1990, of the Company's former UK subsidiary, AF Technologies, Ltd. (AF), the Company agreed to provide a guarantee of the lease of AF's' facility. On June 26, 1992, the Company entered into a new agreement with the landlord of the property, whereby the Company would provide a British Pound Sterling (P) 300,000 guarantee, over the next ten years, for a new tenant under the lease, allowing AF to vacate the premises and relocate to a less expensive location. On July 2, 1992, the Company deposited P300,000 into an escrow account, which currently earns interest at a rate of 2.2%, pursuant to the terms of the guarantee. The Company would be relieved of this obligation before the ten-year expiration date if the new tenant were to attain certain minimum pretax operating results over any period of three consecutive years. The Company has provided a reserve in the amount of $265,000 against this deposit in recognition of the uncertainty surrounding the ultimate collectibility of the amount. In June 1997, the Company was notified by the landlord of the property that the tenant had accumulated approximately $112,000 of arrearages under the lease, and that the landlord intended to draw that amount from the deposit. After consulting with counsel in Great Britain, the Company believes that the ultimate resolution of this issue will be within the reserve established and, thus, the Company has made no additional provision. At June 28, 1997, the Company had possible indemnification liabilities to its former CFO in connection with the single premium, paid-up life insurance policies described in Note C. The unrecorded portion of this contingent liability ranges from a nominal amount to $150,000. G. COMMON STOCK At June 28, 1997, an aggregate of 793,054 shares of the Company's common stock had been reserved for issuance in connection with the nonqualified and incentive stock option plans, the restricted stock plan and stock purchase warrants outstanding (See Note H). Shareholder Rights Plan - ----------------------- On August 3, 1994, the Board of Directors of the Company adopted a Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the terms of the Rights Agreement, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (a "Right") for each outstanding share of common stock of the Company to stockholders of record as of the close of business on August 19, 1994 (the "Record Date"). Each Right entitles the registered holder to purchase from the Company, upon the occurrence of certain events, a unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par value $0.001 per share (the "Preferred Stock"), at a cash exercise price of $25.00 per Unit (the "Exercise Price"), subject to adjustment. The rights currently are not exercisable and are attached to and trade with the outstanding shares of common stock. Under the Rights Agreement, the Rights become exercisable (i) if a person becomes an "acquiring person" by acquiring 15% or more of the outstanding shares of common stock, (ii) if a person who owns 10% or more of the common stock is determined to be an "adverse person" by the Board of Directors, or (iii) if a person commences a tender offer that would result in that person owning 15% or more of the common stock. In the event that a person becomes an 35 38 "acquiring person" or is declared an "adverse person" by the Board, each holder of a Right (other than the acquiring person or the adverse person) would be entitled to acquire such number of shares of the Company's preferred stock which are equivalent to such number of shares of common stock having a value of twice the then-current exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. Until a Right is exercised, the holder will have no rights as a stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders or to the Company, stockholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Units, other securities of the Company, other consideration or for common stock of an acquiring company. H. EMPLOYEE BENEFIT PLANS Restricted Stock Plan - --------------------- In 1994, the Board of Directors adopted, and the stockholders approved, the Ferrofluidics Corporation 1994 Restricted Stock Plan (the "Restricted Stock Plan"). Persons eligible to participate in the Restricted Stock Plan are those full or part-time officers and other employees of the Company and its subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its subsidiaries. Under the Restricted Stock Plan, the maximum number of shares of common stock that may be reserved and authorized for issuance by the Board of Directors may not exceed five percent of the total number of outstanding shares of common stock at the time of any award of restricted stock. Upon adoption of the plan, the Board of Directors initially reserved and authorized 271,000 shares of common stock for issuance, which represented not more than five percent of the outstanding shares of common stock as of the date of adoption. The grants were valued at the fair market value of the common stock on the date of grant and vest at a rate of 33-1/3% per year beginning one year from the date of grant. The charge to operations in connection with these restricted stock awards for the years ended June 28, 1997 and June 30, 1996 and 1995 amounted to $511,000, $467,000 and $290,000, respectively. A summary of the changes in outstanding shares of restricted stock for the years ended June 28, 1997 and June 30, 1996 and 1995 is set forth below: Weighted Shares Average Price ------ ------------- OUTSTANDING, JUNE 30, 1994 121,096 $ 5.00 Granted 102,580 6.04 Forfeited (5,940) 5.00 Vested (38,385) 5.00 ------- OUTSTANDING, JUNE 30, 1995 179,351 $ 5.60 Granted 40,000 9.75 Forfeited (3,400) 5.00 Vested (70,878) 5.55 ------- OUTSTANDING, JUNE 30, 1996 145,073 $ 6.80 Granted 10,000 12.50 Forfeited (2,454) 8.87 Vested (93,762) 6.56 ------- OUTSTANDING, JUNE 28, 1997 58,857 $ 8.06 ======= 36 39 Nonqualified and Incentive Stock Option Plans - --------------------------------------------- The Company has a Nonqualified Stock Option Plan for its employees which was adopted in 1984 (the "1984 Plan"). During fiscal year 1995, the 1984 Plan's term expired and, accordingly, no further shares may be granted thereunder. The exercise price of the options granted under the plan is not less than the fair market value of the stock at the date of the grant. Under the 1984 Plan, 800,000 shares of the Company's common stock were made available for grant. In June 1995, the Board of Directors adopted the Ferrofluidics Corporation 1995 Nonqualified Stock Option Plan (the "1995 Plan") with the intent to replace options that had been granted under the 1984 Plan which were expected to expire during 1996. Neither directors nor employees of the Company who are subject to the provisions of Section 16 of the Securities and Exchange Act of 1934 are eligible to participate in the 1995 Plan and awards under the 1995 Plan consist only of nonqualified options to purchase shares of the Company's common stock. Under the 1995 Plan, 100,000 shares of the Company's common stock were made available for grant. On June 13, 1995, the Board of Directors adopted, and the stockholders approved, the Ferrofluidics Corporation 1995 Stock Option and Incentive Plan (the "1995 Incentive Plan"). Awards under the 1995 Incentive Plan include stock options (both incentive options and nonqualified options), stock appreciation rights, restricted and unrestricted stock, performance shares and dividend equivalent rights. The Board of Directors has authorized 750,000 shares of the Company's common stock for issuance pursuant to the 1995 Incentive Plan. Generally, options granted by the Company are exercisable at rates of 25% to 100% per year commencing one or two years after the date of the grant, and expire from five to ten years from the grant date. A summary of the changes in outstanding stock options under the three plans discussed above for fiscal 1995, 1996 and 1997 is set forth below:
Weighted Average Shares Exercise Price ------------------------------------------------------------ ------------------ "1995 Incentive "1984 Plan" "1995 Plan" Plan" Total ------------------------------------------------------------ OUTSTANDING, JUNE 30, 1994 253,768 -- -- 253,768 $11.85 Granted -- -- 255,550 255,550 9.17 Canceled/expired (13,640) -- -- (13,640) 10.89 Exercised -- -- -- -- -- -------- -------- -------- -------- OUTSTANDING, JUNE 30, 1995 240,128 -- 255,550 495,678 $10.49 Granted 4,125 71,925 151,000 227,050 12.01 Canceled/expired (56,324) -- (1,000) (57,324) 8.17 Exercised -- -- -- -- -- -------- -------- -------- -------- OUTSTANDING, JUNE 30, 1996 187,929 71,925 405,550 665,404 $11.21 Granted -- -- 95,210 95,210 8.41 Canceled/expired (58,416) (11,363) (20,500) (90,279) 13.23 Exercised (33,138) -- -- (33,138) 5.00 -------- -------- -------- -------- OUTSTANDING, JUNE 28, 1997 96,375 60,562 480,260 637,197 $10.83 ======== ======== ======== ========
37 40 The following table summarizes information about stock options outstanding at June 28, 1997:
Options Outstanding Options Excercisable ---------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (In Years) Price Shares Price - --------------- ------ --------------- ----- ------ ----- $ 7.63 - $10.21 394,947 7.71 $ 9.08 190,322 $ 9.38 $11.00 - $15.25 242,250 5.80 $13.68 177,250 $13.79 $ 7.63 - $15.25 637,197 6.98 $10.83 367,572 $11.51
As of June 28, 1997 and June 30, 1996 and 1995, options to purchase 367,572, 326,729 and 195,641 shares were exercisable at a weighted average exercise price of $11.51, $11.08 and $10.60 per share, respectively. Stock Purchase Warrants - ----------------------- Stock purchase warrants have been granted by the Board of Directors to officers, directors, key employees and to consultants of the Company, with the exercise price of the warrant not less than the fair market value of the stock on the date of grant. At June 28, 1997 and June 30, 1996 and 1995, 97,000 shares, 259,829 shares and 281,267 shares, respectively, of common stock were reserved for issuance upon the exercise of outstanding stock purchase warrants at prices, and subject to expiration dates, as set forth below:
Shares - ----------------------------------------------------- June 28, 1997 June 30, 1996 June 30, 1995 Price Expiration Date - ------------- ------------- ------------- ----- --------------- - - 10,000 $8.50 September 3, 1995 - - 9,188 5.00 October 10, 1995 - - 4,250 10.00 March 13, 1996 - - 12,500 9.13 April 30, 1996 - 3,000 3,000 14.50 September 29, 1996 - 37,329 37,329 5.00 October 10, 1996 - 17,500 17,500 14.00 February 4, 1997 - 17,500 17,500 14.50 February 24, 1997 - 40,000 40,000 15.60 February 24, 1997 - 47,500 47,500 15.63 June 18, 1997 62,500 62,500 62,500 11.75 August 31, 1997 20,000 20,000 20,000 11.00 October 27, 1997 14,500 14,500 - 9.75 October 10, 2000 -------- -------- -------- 97,000 259,829 281,267 ======== ======== ========
38 41 A summary of the changes in outstanding stock purchase warrants for the three years ended June 28, 1997 is set forth below:
Weighted Average Shares Exercise Price ------ -------------- OUTSTANDING, JUNE 30, 1994 296,142 $12.06 Granted -- -- Canceled/expired (14,875) 15.78 Exercised -- -- --------- OUTSTANDING, JUNE 30, 1995 281,267 $11.87 Granted 14,500 9.75 Canceled/expired (35,938) 8.00 Exercised -- -- --------- OUTSTANDING, JUNE 30, 1996 259,829 $12.28 Granted -- -- Canceled/expired (162,829) $12.87 Exercised -- -- --------- OUTSTANDING, JUNE 28, 1997 97,000 $11.30 =========
At June 28, 1997, all 97,000 warrants were exercisable at a weighted average price of $11.30. In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"). Under this Statement, the Company had a choice of adopting a fair-value based method of accounting for employee stock-based compensation plans, as established by FAS 123, or retaining the intrinsic value-based method in accordance with APB Opinion No. 25 ("APB 25"), provided certain pro forma disclosures were made. The Company chose to retain the intrinsic value-based method of accounting for stock-based compensation in accordance with APB 25 and adopted the pro-forma disclosure provisions of FAS 123. Accordingly, no compensation expense has been recognized for stock option awards or warrants as they are granted at prices not less than fair market value of the stock on the date of grant. The following pro-forma disclosures required by FAS 123 have been prepared as if the Company accounted for the stock options and warrants using the fair-value method of accounting (in thousands, except per share data): Year Ended June --------------- 1997 1996 Net Income As reported $ 1,672 $ 3,820 Pro-forma 603 2,938 Net Income per share As reported $ 0.27 $ 0.61 Pro-forma 0.10 0.47 39 42 The fair value of each option and warrant is estimated on the date of grant using the following weighted-average assumptions in fiscal 1997 and 1996:
1997 1996 ---- ---- Risk-free interest rate 6.12% 6.08% Expected stock price volatility 60.0 % 60.0 % Expected life of options and warrants (years) 4.3 4.1
The weighted average fair value of options granted during the years ended June 28, 1997 and June 30, 1996 were $4.47 and $6.21, respectively. For purposes of this disclosure, the Company amortizes the fair value of the options and warrants over the vesting period of the option or warrant. In estimating the fair value of each option, the Company uses the Black-Scholes option valuation method. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models, such as the Black-Scholes model, require the input of highly subjective assumptions, including the expected stock price volatility, which are subject to change from time to time. For this reason, and because the FAS 123 fair value-based method of accounting has not been applied to options and warrants granted prior to July 1, 1996, the resulting pro-forma compensation costs are not necessarily indicative of costs to be expected in future years. Deferred Income (401-K) Plan - ---------------------------- The Company has an elective employees savings plan for all eligible employees. Ferrofluidics Corporation Tax Savings Deposit and Investment Plan (the "401-k Plan") is a qualified trust under Section 401(a) of the Internal Revenue Code and is, therefore, exempt from federal income taxes under the provisions of Section 501(a). The 401-k Plan allows an employee to contribute between 1% and 20% of his or her salary and bonus to the 401-k Plan, up to a maximum of $9,500 (for calendar 1997) per year (subject to annual adjustments based on increases in the consumer price index over the 1988 base year). In December 1993, the Board of Directors approved an annual Company match, effective January 1, 1994, of 50% of an employee's contribution of up to 4% of the employee's salary. In fiscal 1997, 1996 and 1995, the Company made matching contributions to the Plan, and corresponding charges to operations, in the amounts of $155,000, $208,000 and $92,000, respectively. The 401-k Plan consists of two equity funds, a fixed income fund, a balanced fund and a money market fund, and participants may choose to split their investments among funds. I. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION The Company's operations are conducted in three industry segments: component products utilizing ferrofluid technology, including ferrofluids for audio loudspeakers and nondestructive testing and sensing, rotary sealing devices and bearings (collectively, "components"); crystal growing systems and related products; and thin film deposition products manufactured and/or distributed by AP&T. Sales between segments and geographic enterprises are accounted for at cost plus a reasonable profit. Segment operating profit (loss) includes all costs and expenses directly related to the segment. General corporate expenses principally represent the costs associated with managing all industry segments and cannot be specifically identified with a particular industry segment. General corporate assets consist primarily of cash and cash equivalents, restricted cash, notes receivable, deferred income tax assets, certain fixed assets, and other non-current assets, including cash surrender value 40 43 of life insurance, net of loans, in the amount of $1,751,000 and $1,731,000 at June 28, 1997 and June 30, 1996, respectively. In fiscal 1997, sales by the Systems Division to companies affiliated with MEMC Electronic Materials, Inc. ("MEMC") totaled $28,017,000 and accounted for 41.3% of consolidated product sales. Sales to these and other affiliates of MEMC totaled $45,344,000 and $6,419,000 in fiscal 1996 and 1995, which represented 62.1% and 18.8%, respectively, of consolidated product sales in those fiscal years. Management believes that the loss of this customer, and its affiliates, could have a materially adverse effect on its future results of operations. The following table presents financial information for the Company's industry segments for the years ended June 28, 1997 and June 30, 1996 and 1995. All amounts are expressed in thousands of dollars. 41 44
FERROFLUIDIC PRODUCTS --------------------- CRYSTAL GROWING THIN FILM COMPONENTS SYSTEMS DEPOSITION CONSOLIDATED ---------- ------- ---------- ------------ Year ended June 28, 1997: - ------------------------- Sales to unaffiliated customers $ 16,685 $ 42,691 $ 8,409 $ 67,785 ======== Segment operating profit 3,699 2,303 (35) $ 5,967 General corporate expenses (4,437) -------- Operating Income $ 1,530 ======== Net identifiable assets 17,641 18,247 2,854 $ 38,742 General corporate assets 6,259 -------- Total Assets $ 45,001 ======== Depreciation and amortization 1,193 248 161 Capital expenditures 919 205 125 Year Ended June 30, 1996: - ------------------------- Sales to unaffiliated customers $ 18,827 $ 45,741 $ 8,399 $ 72,967 ======== Segment operating profit 2,854 4,957 387 $ 8,198 General corporate expenses (3,261) -------- Operating Income $ 4,937 ======== Net identifiable assets 15,843 19,018 2,777 $ 37,638 General corporate assets 5,791 -------- Total Assets $ 43,429 ======== Depreciation and amortization 794 172 179 Capital expenditures 1,790 414 218 Year Ended June 30, 1995: - ------------------------- Sales to unaffiliated customers $ 14,119 $ 11,782 $ 8,248 $ 34,149 Royalty revenues 6 -- -- 6 -------- -------- -------- -------- Total net sales and revenues 14,125 11,782 8,248 $ 34,155 ======== Segment operating profit 1,682 646 200 $ 2,528 General corporate expenses (2,741) Nonrecurring operating income, net 1,156 -------- Operating Income $ 943 ======== Net identifiable assets 12,594 16,191 3,585 $ 32,370 General corporate assets 7,159 -------- Total Assets $ 39,529 ======== Depreciation and amortization 715 168 132 Capital expenditures 1,885 73 138
42 45 The following is a summary of certain financial data by geographic areas:
UNITED STATES EUROPEAN JAPANESE OPERATIONS OPERATIONS OPERATIONS ELIMINATIONS TOTAL Year ended June 28, 1997 - ------------------------ Sales to unaffiliated domestic customers $ 36,101 $ -- $ -- $ -- $ 36,101 Sales to unaffiliated foreign customers 7,880 11,979 11,825 -- 31,684 Sales to subsidiaries 12,390 -- -- (12,390) -- -------- -------- -------- -------- -------- Total net sales and revenues 56,371 11,979 11,825 (12,390) $ 67,785 ======== Geographic operating profit (loss) 5,891 174 (99) 1 $ 5,967 General corporate expenses (4,437) -------- Operating Income $ 1,530 ======== Net identifiable assets 34,466 4,416 2,388 (2,528) $ 38,742 General corporate assets 6,259 -------- Total Assets $ 45,001 ======== Year ended June 30, 1996: - ------------------------- Sales to unaffiliated domestic customers $ 18,887 $ -- $ -- $ -- $ 18,887 Sales to unaffiliated foreign customers 40,835 12,702 543 -- 54,080 Sales to subsidiaries 3,922 -- 25 (3,947) -- -------- -------- -------- -------- -------- Total net sales and revenues 63,644 12,702 568 (3,947) $ 72,967 ======== Geographic operating profit (loss) 8,459 587 (829) (19) $ 8,198 General corporate expenses (3,261) -------- Operating Income $ 4,937 ======== Net identifiable assets 33,393 4,208 1,450 (1,413) $ 37,638 General corporate assets 5,791 -------- Total Assets $ 43,429 ======== Year ended June 30, 1995: - ------------------------- Sales to unaffiliated domestic customers $ 12,737 $ -- $ -- $ -- $ 12,737 Sales to unaffiliated foreign customers 9,919 11,201 292 -- 21,412 Sales to subsidiaries l,691 -- 2 (1,693) -- Royalty and other revenues 6 -- -- -- 6 -------- -------- -------- -------- -------- Total net sales and revenues 24,353 11,201 294 (1,693) $ 34,155 ======== Geographic operating profit (loss) 2,882 510 (826) (38) $ 2,528 General corporate expenses (2,741) Nonrecurring operating income, net 1,156 -------- Operating Income $ 943 ======== Net identifiable assets 28,107 4,917 247 (901) $ 32,370 General corporate assets 7,159 -------- Total Assets $ 39,529 ========
43 46 J. LITIGATION Shareholder Class Action Lawsuits - --------------------------------- In August and September 1993, four actions were brought against the Company and certain of its officers and former officers. These actions alleged violations of federal securities law, fraud and deceit and negligent misrepresentation based upon alleged misrepresentations in certain statements made by the Company in various public documents. The actions were consolidated in the federal district court in Massachusetts in March 1994, and in June 1994, a Consolidated Amended Complaint was filed in the actions. On June 23, 1994, the parties entered into a Stipulation of Settlement which provided for the settlement of all of the actions and a release of all claims which were made or could have been made in the litigation. In exchange, the Company agreed to issue 600,000 shares of its common stock and other defendants agreed to pay $3,110,000 in cash. The settlement of these actions on these terms was approved by the Court in August 1994, and the settlement became effective on September 23, 1994. Securities and Exchange Commission - ---------------------------------- In February 1993, the Company received an informal inquiry from the SEC requesting that the Company provide the SEC with certain documents concerning publicity relating to the Company for the period from January 1, 1992 to February 19, 1993. In August 1993, the SEC issued an order directing a private investigation to determine whether certain unnamed persons have violated or caused the Company to violate the federal securities laws. Among the areas of inquiry identified in the order is whether publicity about the Company, including research reports, was published without fully disclosing consideration given or received therefore. The order also indicates that the inquiry will examine possible manipulation by certain unnamed persons of the Company's securities, payment in connection therewith, and failure to disclose such activities in public filings made by the Company (including the financial statements contained or incorporated therein), as well as possible nondisclosure of transactions with the Company in which such persons may have had a material interest. Throughout the investigation, the Company has cooperated fully with the SEC's inquiry. In June 1997, the SEC completed its investigation with respect to the Company and on June 23, 1997, the Company entered into a Consent and Understanding, whereby it agreed to be permanently enjoined from violating the federal securities laws. The Company is continuing to cooperate with the SEC as it completes its investigation with respect to certain unnamed persons. Former Management - ----------------- In March 1993, a special committee of three outside directors was appointed by the Company's Board of Directors to conduct an internal investigation, with the assistance of counsel retained by that committee. In connection with the investigation, in September 1993, the Company announced the retirement of Dr. Ronald Moskowitz, its then Chairman and Chief Executive Officer, and that the Company and Dr. Moskowitz had entered into a Termination Agreement that superseded his previous employment agreement. Pursuant to the agreement, the former CEO was to receive payments aggregating $725,000 over the four years ended June 30, 1997 in advisory fees The Company charged the entire $725,000 to nonrecurring operating charges in fiscal 1994. During fiscal 1996 and 1995, the Company made cash payments under this agreement totaling $37,000 and $200,000, respectively. 44 47 In September 1995, the Company and the former CEO entered into a agreement (the "Settlement Agreement") to amend the Termination Agreement and accelerate the termination of his relationship with the Company. Among other things, the Settlement Agreement required (i) the extension of the former CEO's covenant-not-to-compete to June 30, 2000, (ii) a payment to the former CEO of $196,000 in full satisfaction of the $213,000 in remaining payments owed him under the Termination Agreement, (iii) a payment to the former CEO of $150,000 in full satisfaction of a $200,000 legal indemnification, and (iv) the transfer, to the former CEO, of the Company's ownership in two single premium, paid-up life insurance policies on his life (See Note C). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information called for by this Item 9 was previously reported in a Current Report on Form 8-K filed with the SEC on November 28, 1995, as amended by a Current Report on Form 8-K/A filed with the SEC on December 8, 1995, and in a Current Report on Form 8-K filed with the SEC on December 14, 1995. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required to be furnished by this Item is set forth under the captions "Information Regarding Directors," "Executive Officers" and "Executive Compensation" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required to be furnished by this Item is set forth under the captions "Information Regarding Directors" and "Executive Compensation" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required to be furnished by this Item is set forth under the caption "Principal and Management Stockholders" in the Proxy Statement and is incorporated herein by reference. Solely for the purpose of calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant as set forth on the cover of this report it has been assumed that directors and executive officers of the Registrant are affiliates. 45 48 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required to be furnished by this Item is set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The consolidated financial statements of the Company have been included in Item 8 herein.
(a) FINANCIAL STATEMENT SCHEDULES for the years ended June 28, 1997 and June 30, 1996 and 1995 PAGE Schedule II - Valuation and Qualifying Accounts 56
Financial statement schedules other than that listed above are omitted because they are either not required or not applicable or the required information is shown in the financial statements or notes thereto. The above financial schedule does not include discontinued operations. (b) REPORTS ON FORM 8-K ------------------- No reports on Form 8-K have been filed by the Company during the last quarter of the year ended June 28, 1997. (c) EXHIBITS -------- 3.1 Restated Articles of Organization of the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-18 (Registration No. 2-72394-B), filed May 19, 1981 (the "1981 Registration Statement"). 3.2 Articles of Amendment, filed November 19, 1980, increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 2.2 to the 1981 Registration Statement). 3.3 Articles of Amendment, filed February 19, 1981, further increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 2.3 to the 1981 Registration Statement). 3.4 Articles of Amendment, filed November 21, 1985, further increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 4E to the Registrant's Registration Statement on Form S-2 (Registration No. 33-1000), filed October 18, 1985). 46 49 3.5 Articles of Amendment, filed November 25, 1987, eliminating certain liabilities of directors and reducing the vote required to effect certain corporate actions (incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the year ended 6/30/88). 3.6 Articles of Amendment, filed November 14, 1989, effecting reverse stock split and amending terms of Preferred Stock (incorporated by reference to Exhibit 3.6 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-33736), filed March 5, 1990 (the "1990 Registration Statement"). 3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G to the Registrant's Form 10K for the year ended 6/30/90). 3.8 Certificate of Vote of Directors Establishing the Series A Junior Participating Cumulative Preferred Stock, par value $.001 per share, dated August 3, 1994.(1) 4.1 Shareholder Rights Agreement, dated as of August 3, 1994, between the Registrant and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to Registrant's current report on Form 8-K dated August 3, 1994). 10.1 Revolving Loan and Security Agreement, dated June 30, 1994, by and among the Registrant and Bank of New Hampshire.(1) 10.2 Letter of Credit Reimbursement Agreement, dated June 30, 1994 made by Ferrofluidics Corporation in favor of Bank of New Hampshire.(1) 10.3 Guarantee Agreement, dated June 30, 1994, between the Registrant, the Business Finance Authority of the State of New Hampshire and Bank of New Hampshire.(1) 10.4 Interbank Letter of Credit Agreement, dated June 30, 1994, between Bank of New Hampshire, a New Hampshire trust company and BayBank, a Massachusetts trust company.(1) 10.5 Master Term Note, dated June 30, 1994, by and among the Registrant and Bank of New Hampshire.(1) 10.6 Ferrofluidics Corporation Amended and Restated 1994 Restricted Stock Plan.(3) 10.7 Stipulation of Settlement, dated June 23, 1994, IN RE FERROFLUIDICS CORPORATION SECURITIES LITIGATION, Civil Action No. 93-11976PBS, United States District Court, District of Massachusetts.(1) 10.8 Order and Final Approval of Settlement and Final Judgment, dated August 19, 1994, IN RE FERROFLUIDICS CORPORATION SECURITIES LITIGATION, Civil Action No. 93-11976PBS, United States District Court, District of Massachusetts.(1) 10.9 Release and Settlement Agreement, dated April 13, 1994, between the Registrant and Molecular BioQuest, Incorporated.(1) 47 50 10.10 Consent and Undertaking of Ferrofluidics Corporation, dated June 20, 1997, In re the matter of the Securities and Exchange Commission vs. Ferrofluidics Corporation, et al, United States District Court, Southern District of New York.(4) 10.11 Amendment Agreement, dated December 23, 1987, to 1985 Letter of Credit Reimbursement Agreement and 1984 Letter of Credit Reimbursement Agreement between the Registrant and Fleet National Bank (incorporated by reference to Exhibit 10I to the Registrant's Form 10-K for the year ended 6/30/89). 10.14 Loan and Trust Agreement, dated September 1, 1984, among the Registrant, The Industrial Development Authority of the State of New Hampshire and State Street Bank and Trust Company, as Trustee (incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1984). 10.15 Assignment, Assumption and Amendment Agreement, dated June 18, 1991, by and among the Registrant, Chase Manhattan Capital Markets Corporation and Fleet Norstar Securities, Inc. (incorporated by reference to Exhibit 1000 to the Registrant's Form 10-K for the year ended 6/30/91). 10.16 Amendment Agreement, dated October 13, 1990, to 1984 Letter of Credit Reimbursement Agreement and 1985 Letter of Credit Reimbursement Agreement (incorporated by reference to Exhibit 10ZZ to the Registrant's Form 10-K for the year ended 6/30/90). 10.17 Escrow, Pledge and Security Agreement dated January 31, 1991, made by the Registrant in favor of State Street Bank and Trust Company, as Trustee, and Fleet National Bank (incorporated by reference to Exhibit 10.36 to the 1991 Registration Statement). 10.19 Amended and Restated Employment Agreement, dated May 17, 1996, between the Registrant and Salvatore J. Vinciguerra.(3) 10.20 Consulting Agreement, dated May 1, 1997, between the Registrant and Paul F. Avery, Jr.(4) 10.21 License Agreement, dated February 27, 1987, between the Registrant, Ferrofluidics GmbH and Ferrofluidics, Ltd. (incorporated by reference to the Exhibit to the Registrant's Form 8-K dated 5/13/87). 10.22 Deed relating to repayment of a promissory note dated August 25, 1994 by and among the Registrant, Rumpack Limited and Arbuthnot Latham and Co., Ltd.(1) 10.23 Release and discharge of certain guarantees and debentures and a Stock Pledge Agreement dated August 25, 1994 by and among the Registrant and Rumpack Limited and Arbuthnot Latham and Co., Ltd.(1) 10.24 Ferrofluidics Corporation Amended and Restated 1995 Stock Option and Incentive Plan.(3) 10.25 Ferrofluidics Corporation Amended and Restated 1995 Nonqualified Stock Option Plan.(3) 10.26 Employment Agreement, dated September 23, 1996, between the Registrant and William B. Ford.(4) 48 51 10.27 First Amendment to Note and Loan Agreement, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.28 Amended Master Term Note, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.29 Amendment to Mortgage, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.30 Amendment to Assignment of Leases, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.35 Form of Stock Purchase Agreement between the Registrant and certain Selling Stockholders (incorporated by reference to Exhibit 10.53 to Amendment No. 1, filed April 9, 1992, to the Registrant's Registration Statement on Form S-3 (Registration No. 33-46888), filed April 1, 1992 (the "April 1992 Registration Statement"). 10.36 Form of Stock Purchase Agreement between the Registrant and certain Selling Stockholders (incorporated by reference to Exhibit 10.54 to Amendment No. 2, filed April 30, 1992, to the April 1992 Registration Statement). 10.37 Form of Stock Purchase Agreement between the Registrant and certain Selling Stockholders (incorporated by reference to Exhibit 10.55 to Amendment No. 2 to the April 1992 Registration Statement). 10.55 Termination Agreement, dated November 25, 1993, between Registrant and Fuji Seiki, Inc. for the purpose of termination of The Patent, Technical Information and Trademark License Agreement, dated March 30, 1993, between the Registrant and Fuji Seiki, Inc.(2) 10.56 Preferred Vendor Agreement, dated November 30, 1993, between the Registrant and Fuji Seiki, Inc.(2) 10.57 Patent, Technical Information and Trademark License Agreement, dated November 30, 1993, between the Registrant and Fuji Seiki, Inc.(2) 10.58 Agreement, dated March 8, 1993, among the Registrant, Fuji Seiki, Inc., VSE Austria GmbH, and AP&T GmbH for the purchase of 80% of VSE GmbH by AP&T GmbH.(2) 10.59 Letter Agreement, dated September 15, 1993, between the Registrant and Dr. Ronald Moskowitz concerning Dr. Moskowitz' retirement from Ferrofluidics.(2) 10.62 Indemnification Agreement, dated October 1, 1993, between the Registrant and Alvan F. Chorney.(2) 10.63 Indemnification Agreement, dated October 1, 1993, between the Registrant and Stephen P. Morin.(2) 10.64 Severance Agreement dated October 1, 1993, between the Registrant and Alvan F. Chorney.(2) 49 52 10.66 Amended and Restated Insurance Loan Agreement, dated June 30, 1991, between the Registrant and Ronald Moskowitz (incorporated by reference to Exhibit 10R to the Registrant's Form 10-K for the year ended 6/30/91). 10.67 Amended and Restated Insurance Loan Agreement, dated May 31, 1989, between the Registrant and Frank Bloom (incorporated by reference to Exhibit 10.37 to the 1990 Registration Statement). 10.68 Form of Common Stock Purchase Warrant -- directors and key employees (incorporated by reference to Exhibit 10T to the Registrant's Form 10-K for the year ended 6/30/88). 10.69 Form of Common Stock Purchase Warrant -- employees (incorporated by reference to Exhibit 10U to the Registrant's Form 10-K for the year ended 6/30/88). 10.70 1984 Non-Qualified Stock Option Plan, as amended through December 15, 1992.(2) 10.71 1983 Employee Stock Purchase Plan, as amended through December 14, 1990 (incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 1, filed January 23, 1991, to the Registrant's Registration Statement on Form S-8 (Registration No. 2-95090)). 10.72 Settlement Agreement and Release, dated June 30, 1993, between Nippon Ferrofluidics Corporation, Akira Yamamura, Koichi Goto, Yoshitada Akahori, Tadao Ishizawa, Atsumi Nakamura, Nobuo Yamamura, past and present members of NFC's Board of Directors and the Registrant.(2) 10.73 Stock Subscription Agreement, dated June 30, 1993 between the Registrant and Nippon Ferrofluidics Corporation pursuant to the acquisition of Nippon Ferrofluidics Corporation Common Stock by Ferrofluidics.(2) 10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between the Registrant and Nippon Ferrofluidics Corporation.(2) 11 Computation of Per Share Earnings(3) 21 Subsidiaries of the Registrant(3) 23.1 Consent of Ernst & Young LLP(3) 23.2 Consent of Coopers & Lybrand L.L.P.(3) 27 Financial Data Schedule (1) Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. (2) Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. (3) Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. (4) Filed herewith 50 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorize, this 4th day of September, 1997. FERROFLUIDICS CORPORATION By: /s/ Salvatore J. Vinciguerra ---------------------------- Salvatore J. Vinciguerra Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
Signatures Title Dated Signed - ---------- ----- ------------ /s/ Salvatore J. Vinciguerra Chief Executive Officer, 9/4/97 - ---------------------------- President Salvatore J. Vinciguerra /s/ William B. Ford Vice President Finance 9/4/97 - ---------------------------- (Chief Financial Officer) William B. Ford /s/ Stephen B. Hazard Director 9/4/97 - ---------------------------- Stephen B. Hazard /s/ Dean Kamen Director 9/4/97 - ---------------------------- Dean Kamen /s/ Howard F. Nichols Director 9/4/97 - ---------------------------- Howard F. Nichols /s/ Robert P. Rittereiser Director 9/4/97 - ---------------------------- Robert P. Rittereiser /s/ Dennis R. Stone Director 9/4/97 - ---------------------------- Dennis R. Stone
51 54 EXHIBIT 11 Ferrofluidics Corporation Statement Re: Computation of Per Share Earnings For the Years ended June 28, 1997 and June 30, 1996 and 1995
1997 1996 1995 ---- ---- ---- Primary Average shares outstanding 6,234,534 6,196,934 5,563,160 Net effect of dilutive stock options - based on the treasury stock method using average market price 5,047 116,111 N/A ---------- ---------- ---------- Total 6,239,581 6,313,045 5,563,160 Net income $1,672,000 $3,820,000 $ 889,000 Per share amount $ .27 $ .61 $ .16 ========== ========== ========== Fully Diluted Average shares outstanding 6,234,534 6,196,934 5,563,160 Net effect of dilutive stock options - based on the treasury stock method using year-end market price, if higher than average market price 5,047 156,817 N/A ---------- ---------- ---------- Total 6,239,581 6,353,751 5,563,160 Net income $1,672,000 $3,820,000 $ 889,000 Per share amount $ .27 $.60 (A) $ .16 ========== ========== ==========
(A) Earnings per share assuming full dilution is not presented in the Statement of Operations for 1996 as it is less than 3% more dilutive than the primary computation. 52 55 EXHIBIT 21 Subsidiaries of the Ferrofluidics Corporation As of June 28, 1997 NAME PLACE OF ORGANIZATION - ---- --------------------- Advanced Products and Technologies, GmbH Nurtingen, Germany Advanced Products and Technologies, Ltd. Oxford, England Advanced Products and Technologies, S.A. Madrid, Spain Ferrofluidics Japan Corporation Tokyo, Japan Ferrohydrodynamics Corporation Massachusetts 53 56 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-38642) pertaining to the 1983 Employee Stock Purchase Plan, (Form S-8 No. 33-38643) pertaining to the 1984 Non-Qualified Stock Option Plan, and (Form S-8 No. 333-13587) pertaining to the 1995 Stock Option and Incentive Plan, the 1995 Non-Qualified Stock Option Plan, and the 1994 Restricted Stock Plan of Ferrofluidics Corporation of our report dated August 21, 1997, with respect to the consolidated financial statements and schedule of Ferrofluidics Corporation for the year ended June 28, 1997, included in the Annual Report (Form 10-K) for the year ended June 28, 1997. /s/ Ernst & Young LLP Manchester, New Hampshire September 19, 1997 54 57 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Ferrofluidics Corporation on Form S-8 (File No. 33-38642, File No. 33-38643 and File No. 333-13587) of our report dated August 31, 1995, on our audit of the consolidated financial statements and financial statement schedule of Ferrofluidics Corporation as of June 30, 1995 and for the year ended June 30, 1995, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts September 19, 1997 55 58 FERROFLUIDICS CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS JUNE 28, 1997, JUNE 30, 1996 AND JUNE 30, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ------------------------------------------------- --------------- ---------------------- ----------- ---------- BALANCE AT CHARGED CHARGED BALANCE BEGINNING TO COSTS TO OTHER AT END OF DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- --------- ------------ -------- ---------- ------ Year ended June 28, 1997: - ------------------------- (a) Amounts deducted from the assets to which they apply: Reserve for doubtful accounts - trade $ 320,000 $ 50,000 -- $ 171,000 $ 199,000 Reserve for excess and obsolete inventory 962,000 326,000 -- -- 1,288,000 Reserve for rent guarantee 265,000 -- -- -- 265,000 (b) Other Reserves: Warranty reserve 291,000 550,000 -- 438,000 403,000 Self-Insurance reserve 113,000 -- -- -- 113,000 Sales related reserve 447,000 -- -- 53,000 394,000 ---------- ---------- ---------- ---------- Total $2,398,000 $ 926,000 -- $ 662,000 $2,662,000 ========== ========== ========== ========== Year ended June 30, 1996: - ------------------------- (a) Amounts deducted from the assets to which they apply: Reserve for doubtful accounts - trade $ 357,000 $ 28,000 -- $ 65,000 $ 320,000 Reserve for excess and obsolete inventory 948,000 240,000 -- 226,000 962,000 Reserve for rent guarantee 275,000 -- -- 10,000 265,000 Reserve against cash surrender value 1,407,000 -- -- 1,407,000 -- (b) Other Reserves: Warranty reserve 384,000 -- -- 93,000 291,000 Self-Insurance reserve 103,000 10,000 -- -- 113,000 Sales related reserve 447,000 -- -- -- 447,000 ---------- ---------- ---------- ---------- Total $3,921,000 $ 278,000 -- $1,801,000 $2,398,000 ========== ========== ========== ========== Year ended June 30, 1995: - ------------------------- (a) Amounts deducted from the assets to which they apply: Investment valuation reserve $ 600,000 -- -- $ 600,000 -- Reserve for doubtful accounts - trade 705,000 $ 34,000 -- 382,000 $ 357,000 Reserve for uncollectible note receivable 432,000 -- -- 432,000 -- Reserve for excess and obsolete inventory 1,372,000 195,000 -- 619,000 948,000 Reserve for rent guarantee 275,000 -- -- -- 275,000 Reserve against cash surrender value 1,407,000 -- -- -- 1,407,000 (b) Other Reserves: Performance bond reserve 300,000 -- -- 300,000 -- Insurance Indemnification reserve 150,000 -- -- 150,000 -- Warranty reserve 359,000 55,000 -- 30,000 384,000 Self-Insurance reserve 81,000 22,000 -- -- 103,000 Sales related reserve 397,000 50,000 -- -- 447,000 Reserve for employee benefit plan 66,000 -- -- 66,000 -- ---------- ---------- ---------- ---------- Total $6,144,000 $ 356,000 -- $2,579,000 $3,921,000 ========== ========== ========== ==========
56 EX-10.10 2 CONSENT OF UNDERTAKING 1 EXHIBIT 10.10 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK - ---------------------------------------------------- : SECURITIES AND EXCHANGE COMMISSION : 450 Fifth Street, N.W. : Washington, D.C. 20549, : : Plaintiff, : v. : 97 Civ. _____ : Ferrofluidics CORPORATION, : RONALD MOSKOWITZ, : JEROME R. ALLEN, : JAN R. KIRK, : STEPHEN P. MORIN, : BRUCE S. MOODY, and : THE 1991 RPM IRREVOCABLE TRUST, : : Defendants. : - ---------------------------------------------------- CONSENT AND UNDERTAKING OF FERROFLUIDICS CORPORATION 1. Defendant Ferrofluidics Corporation ("Ferrofluidics") enters a general appearance, admits the jurisdiction of this Court over it and over the subject matter of this action, waives service upon it of a Summons and of the Complaint of Plaintiff Securities and Exchange Commission (the "Commission") in this action, and the filing of an Answer. 2. Defendant Ferrofluidics without admitting or denying the allegations in the Complaint, except as to jurisdiction, which it admits, and without. trial, argument or adjudication of any issue of fact or law, consents to the entry of the Final Judgment of Permanent Injunction as to Ferrofluidics Corporation (the "Final Judgment"), in the form annexed hereto and incorporated by reference herein, which permanently restrains and 2 enjoins Ferrofluidics from violating Section 17(a) of the Securities Act of 1933 (the "Securities Acts") Sections 10(b), 13(a), 13(b) (2) (A), 13(b) (2) (B) and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b- 20, 13a-1, 13a-13, and 14a-9 thereunder. 3. Defendant Ferrofluidics waives the entry of findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. 4. Defendant Ferrofluidics waives any right it may have to appeal from the entry of the Final Judgment. 5. Defendant Ferroflutdics enters into this Consent and Undertaking of Ferrofluidics Corporation (the "Consent") voluntarily and of its own accord and represents that no threats, offers, promises or inducements of any kind have been made by the Commission or any member, officer, employee, agent or representative of the Commission to induce it to enter into this Consent. 6. Defendant Ferrofluidics agrees that this Consent shall be incorporated into the Final Judgment with the same force and effect as if fully set forth therein. 7. Defendant Ferrofluidics agrees that it will not oppose the enforcement of the Final Judgment on the ground, if any exists, that it fails to comply with Rule 65(d) of the Federal Rules of Civil Procedure, and hereby waives any objection it may have based thereon. 2 3 8. Defendant Ferrofluidics agrees that the Final Judgment may be presented by the Commission to the Court for signature and entry without further notice. 9. Defendant Ferrofluidics waives service of the Final Judgment entered herein upon it and agrees that entry of the Final Judgment by the Court and filing with the Clerk in the Southern District of New York will constitute notice to it of the terms and conditions of such Final Judgment. 10. Defendant Ferrofluidics agrees and undertakes that, at the Commission's request, on reasonable notice and without service of a subpoena, it will instruct its employees, agents and representatives to cooperate with the Commission and its staff and to truthfully disclose all information with respect to their activities and the activities of others about which the Commission or its staff may inquire with respect to the matters alleged in the Complaint; designate representatives to testify in all investigations, administrative and judicial proceedings at which the Commission or its staff makes requests for its testimony; make its employees, agents and representatives available as may be required by the Commission or its staff; produce any documents within its possession, custody or control, domestic or foreign, which are requested by the Commission or its staff; be accompanied at any time it so desires by counsel of its choice; and give truthful and accurate information and testimony and not assert any evidentiary or other privilege, other than the attorney-client and work product privileges. 3 4 11. Consistent with the provisions of 17 C.F.R. secs. 202.5(f), Defendant Ferrofluidics waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein. 12. Defendant Ferrofluidics understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings" (17 C.F.R. secs.202.5(e)). In compliance with this policy, Defendant Ferrofluidics agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the Complaint or creating the impression that the Complaint is without factual basis. If Defendant Ferrofluidics breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this case to its active docket. Nothing in this provision affects Defendant Ferrofluidics' testimonial obligations or right to take legal positions in litigation in which the Commission is not a party. 4 5 13. Defendant Ferrofluidics agrees that this Court shall retain jurisdiction over this matter for the purpose of enforcing the terms of the Final Judgment. FERROFLUIDICS CORPORATION By: /s/ ??? ????????? ------------------------------- Its: Chief Executive Officers Dated: 6-20-1997 County of Hillsborrough State of New Hampshire On this 20th day of June, 1997, Salvatore J. Vinciguerra being known to me and who executed the foregoing CONSENT AND UNDERTAKING OF FERROFLUIDICS CORPORATION, personally appeared before me and did duly acknowledge to me that he executed the same. /s/ Joan C. Deichler --------------------------------- Notary Public My Commission expires Sept. 8, 1999 Approved as to form /s/ Kenneth J. Parsigian - ------------------------------------ Kenneth J. Parsigian, Esq. Goodwin, Proctor & Hoar LLP Exchange Place Boston, Massachusetts 02109-2881 Attorney for Defendant Ferrofluidics Corporation Dated: 5 6 CERTIFICATION I, Stuart M. Cable, the Secretary of Ferrofluidics Corporation (the "Corporation"), hereby certify that, at a meeting of the Board of Directors (the "Board") of the Corporation on June 20, 1997, the Board adopted a Resolution, which is still in effect and which appears in the minutes of the Corporation in the form attached hereto; that all approvals referred to in said Resolution have been obtained; and that Salvatore S. Vinciguerra, the Chief Executive Officer of the Corporation, is an officer of the Corporation who is authorized to execute the documents referred to in the Resolution on behalf of the Corporation. Dated: Nashua, New Hampshire June 20, 1997 /s/ Stuart M. Cable ---------------------------------- 6 EX-10.20 3 CONSULTING AGREEMENT W/ PAUL F. AVERY, JR. 1 EXHIBIT 10.20 CONSULTING AGREEMENT -------------------- This Consulting Agreement (the "Agreement") is made as of May 1, 1997, by and between Ferrofluidics Corporation (the "Company"), a Massachusetts corporation with its principal place of business at 40 Simon Street, Nashua, New Hampshire, and Paul F. Avery, Jr. ("Consultant") of 178 Drinkwater Road, Kensington, New Hampshire. WHEREAS, Consultant has been employed by the Company as its Chairman of the Board of Directors and Treasurer pursuant to that certain Amended and Restated Employment Agreement dated as of May 17, 1996 (the "Employment Agreement"); WHEREAS, the Company and Consultant desire to terminate the Employment Agreement and the Consultant's employment with the Company; WHEREAS, the Company desires to retain Consultant to render consulting and advisory services to the Company on an independent contractor basis and on the terms and conditions set forth herein; WHEREAS, Consultant desires to furnish such consulting and advisory services to the Company on an independent contractor basis and on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree: 1. TERMINATION OF EMPLOYMENT: ENGAGEMENT OF CONSULTANT. The Company and Consultant acknowledge and agree that Consultant's employment with the Company pursuant to the Employment Agreement is terminated effective as of the date hereof, and that the Employment Agreement shall be deemed to have been terminated as of the date hereof and shall be of no further force or effect. Subject to the terms and conditions set forth in this Agreement, the Company hereby retains Consultant for the term set forth in Section 2 as a consultant and advisor to the Company. 2. TERM. This Agreement shall commence on the date hereof and shall continue for a period of three (3) years (such period being referred to as the "Consultation Period"), unless sooner terminated in accordance with the provisions of Section 5. The parties hereto may extend the Consultation Period upon mutual written agreement. 3. SERVICES. Consultant agrees to perform such consulting, advisory and related services for the Company as may be reasonably requested from time to time by the Company (the "Services"). During the Consultation Period, Consultant shall perform the Services under the direction and restriction of the Chief Executive Officer of the Company. 2 4. COMPENSATION. a. CONSULTING FEES. During the term of this Agreement, Company shall pay to Consultant consulting fees at a rate of $10,000 per month, payable in arrears on the last day of each month. Payment for any partial month shall be prorated. b. MATTERS CONCERNING RESTRICTED STOCK AND STOCK OPTIONS. (i) Notwithstanding any provision to the contrary contained in any other agreement, all shares of restricted stock granted to Consultant pursuant to any plan maintained by the Company and held by Consultant on the date hereof (whether vested or unvested) shall become fully vested as of the date hereof. (ii) Notwithstanding any provision to the contrary contained in any other agreement, all options to purchase stock of the Company granted to Consultant under any plan maintained by the Company and held by Consultant on the date hereof (whether exercisable or unexercisable) shall become fully vested and exercisable and may hereafter be exercised by Consultant until the expiration date thereof. c. LIFE INSURANCE. The Company and Consultant acknowledge that the Company has paid all premiums due or payable through November 5, 1997 (the "Paid-Up Premium Date"), relating to that certain life insurance policy (Policy # 41019258) on the life of Consultant in the amount of one million dollars ($1,000,000) (the "Life Insurance Policy"). The Company and Consultant agree that the Company shall not take any action that would be inconsistent with maintaining such policy through the Paid-Up Premium Date, but that the Company shall have no obligation to maintain such policy at any time following the Paid-Up Premium Date; provided, however, that Consultant shall be entitled to assume the Company's obligations under the Life Insurance Policy and continue to maintain such policy in accordance with its terms following the Paid-Up Premium Date. Each of the Company and Consultant shall use its or his best efforts to arrange for the assumption by Consultant on the Paid-Up Premium Date of the Company's obligations under the Life Insurance Policy. d. RETIREMENT PLANS. In connection with the termination of Consultant's employment with the Company on the date hereof, Consultant shall be entitled to participate in and enjoy the benefit of the Company's retirement, supplementary retirement, deferred compensation or similar plans, programs or arrangements as available to the Company's management as of the date hereof. e. HEALTH, MEDICAL AND WELFARE PLANS. Consultant may, at his sole expense, elect to continue his group health insurance pursuant to COBRA. f. 401(k) PLAN. The Company shall use its best efforts to assist Consultant in the roll over or withdrawal of his interest in the Company's Tax Savings and Deposit and 2 3 Investment Plan (the "401(k) Plan"), all in accordance with and subject to applicable law and the terms of the 401(k) Plan. g. REIMBURSEMENT OF EXPENSES. The Company shall reimburse Consultant for all reasonable and necessary expenses incurred or paid by Consultant in connection with, or related to, the performance of the Services under this Agreement; provided, however, that the Company shall provide all airline tickets to Consultant on a prepaid basis in connection with all travel by Consultant for purposes of performance of the Services hereunder. Consultant shall submit to the Company itemized monthly statements, in a form reasonably satisfactory to the Company, of such expenses incurred in the previous month. The Company shall pay to Consultant amounts shown on each such statement within thirty (30) days after receipt thereof. 5. TERMINATION OF CONSULTANCY AND TERMINATION COMPENSATION. a. GENERAL TERMINATION COMPENSATION. If Consultant's consultancy is terminated pursuant to Sections 5b or 5d, the Company shall continue to make payments to Consultant (or, if applicable, to Consultant's beneficiary) as provided in Section 4a for the balance of the Consultation Period. b. DEATH OR DISABILITY.. In the event Consultant dies or becomes disabled during the Consultation Period, his consultancy hereunder shall automatically terminate. For the purpose of this Agreement, "disability" shall refer to a situation in which Consultant is totally disabled from performing Services for the Company during a period of thirteen (13) consecutive weeks. If any question shall arise as to whether during any period Consultant has suffered a disability, Consultant may, and at the request of the Company will, submit to the Company a certification in reasonable detail by a physician selected by Consultant or his guardian to whom the Company has no reasonable objection as to whether Consultant was so disabled and such certification shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and Consultant shall fail to submit such certification, the Company's determination of such issue shall be binding on Consultant. c. BY THE COMPANY FOR CAUSE. The Company may terminate Consultant's consultancy hereunder for cause at any time upon notice to Consultant setting forth in reasonable detail the nature of such cause. The following, as determined by the Board of Directors of the Company in its good faith and reasonable judgment, shall constitute "cause" for termination: (1) Consultant's embezzlement of funds of or theft from the Company or other material dishonesty with respect to the Company or any of its affiliates; or 3 4 (2) Conviction of, or plea of nolo contendere to, a felony or other crime involving moral turpitude (it being understood that violation of a motor vehicle code does not constitute such a crime); or (3) Conduct engaged in or action taken or omitted to be taken by Consultant which is in material breach of this Agreement, in which case where such breach is incapable of being cured and remains uncured after written notice by the Company to Consultant; or (4) Gross or willful misconduct of Consultant with respect to the Company or any subsidiary or affiliate thereof. Upon the giving of notice of termination of Consultant's consultancy hereunder for cause, the Company shall have no further obligation or liability to Consultant, other than the payment of consulting fees earned and unpaid at the date of termination and the contribution by the Company to the cost of Consultant's participation (subject to any required contribution by Consultant under the terms of the applicable plans) in the Company's group health and medical plans as the same are in effect from time to time for so long as Consultant is entitled to continue such participation under applicable law and plan terms. d. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate Consultant's consultancy hereunder other than for cause at any time upon sixty (60) days' written notice to Consultant. e. BY CONSULTANT. Consultant may terminate his consultancy hereunder at any time upon sixty (60) days' written notice to the Company. 6. INDEPENDENT CONTRACTOR STATUS. Consultant shall perform all services under this Agreement as an "independent contractor" and not as an employee or agent of the Company. Consultant is not authorized to assume or create any obligation or responsibility, express or implied, on behalf of, or in the name of, the Company or to bind the Company in any manner. 7. ASSIGNMENT. Neither the Company nor Consultant may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided, however, that (i) the Company may assign its rights and obligations under this Agreement without the consent of Consultant in the event that the Company shall hereafter effect a reorganization, consolidate with, or merge into, any other person or entity or transfer all of its properties or assets to any other person or entity, and (ii) Consultant may assign its rights and obligations under this agreement without the consent of the Company to P.F. Avery Corporation. This Agreement shall inure to the benefit of and be binding upon the Company and Consultant, their respective successors, executors, administrators, heirs and permitted assigns. 4 5 8. SEVERABILITY. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 9. WAIVER. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 10. NOTICES. Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be deemed given when delivered by hand, telex or facsimile, or if mailed, five days after mailing (two business days in the case of courier service), to the parties as follows: If to Consultant: Paul F. Avery, Jr. 178 Drinkwater Road Kensington, NH 03833 If to the Company: Ferrofluidics Corporation 40 Simon Street Nashua, NH 03061 Attn: Salvatore J. Vinciguerra 11. ENTIRE AGREEMENT. This Agreement and the Non-Disclosure/Non-Compete Agreement dated September 22, 1993 between the Company and Consultant constitute the entire agreement between the parties and supersede all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of Consultant's consultancy and prior employment with the Company. 12. AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by Consultant and by an expressly authorized representative of the Company. 13. HEADINGS. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope of or content of any provision of this Agreement. 5 6 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 15. GOVERNING LAW. This is a New Hampshire contract and shall be construed and enforced under and be governed in all respects by the laws of The State of New Hampshire, without regard to the conflict of laws principles thereof. [END OF TEXT] 6 7 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by Consultant, as of the date first above written. "CONSULTANT" FERROFLUIDICS CORPORATION /s/ Paul F. Avery, Jr. By: /s/ Salvatore J. Vinciguerra - ---------------------------- ------------------------------------- Paul F. Avery, Jr. Salvatore J. Vinciguerra President and Chief Executive Officer 7 8 ASSIGNMENT AND ASSUMPTION Paul F. Avery, Jr. ("Avery") hereby assigns his rights and obligations under the second sentence of Section 1, Sections 2, 3, 4a, and 4g, Sections 6 through 10 and Sections 12 through 15 (collectively, the "Assigned Provisions"), of the Consulting Agreement dated May 1, 1997 between Ferrofluidics Corporation and Avery, and P.F. Avery Corporation ("P.F. Avery") hereby agrees to be bound by and perform all of Avery's obligations under the Assigned Provisions of the Consulting Agreement as if a party thereto. P.F. Avery further agrees to make Avery available to provide the Services set forth in Section 3 of the Consulting Agreement. Avery and P.F. Avery acknowledge that the provisions of Section 5b shall relate to the death or disability of Avery and that the provisions of Section 5c shall relate to the conduct of Avery or P.F. Avery. Date: May 2, 1997 /s/ Paul F. Avery, Jr. ------------------------------- Paul F. Avery, Jr. P.F. AVERY CORPORATION /s/ Paul F. Avery, Jr. ------------------------------- Name Paul F. Avery, Jr. Title: President 8 EX-10.26 4 EMPLOYMENT AGREEMENT W/ WILLIAM B. FORD 1 EXHIBIT 10.26 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (the "Agreement"), dated September 23, 1996, is entered into by and between Ferrofluidics Corporation (the "Company"), a Massachusetts corporation with its principal place of business at 40 Simon Street, Nashua, New Hampshire, and William B. Ford ("Employee"), of 3 Bruce Road, Winchester, Massachusetts 01890. WHEREAS, the financial operations of the Company are a complex matter requiring direction and leadership in a variety of areas; WHEREAS, Employee possesses the experience and expertise to provide the direction and leadership required by the Company; and WHEREAS, subject to the terms and conditions hereinafter set forth, the Company, therefore, wishes to establish the terms of employment of Employee as its Vice President and Chief Financial Officer, and Employee agrees to so establish such terms of this employment; NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree: 1. EMPLOYMENT. Subject to the terms and conditions set forth in this Agreement, the Company hereby offers and Employee hereby accepts employment on the terms and conditions set forth in this Agreement. 2. EFFECTIVE DATE. The effective date (the "Effective Date") of this Agreement shall be September 23, 1996. 3. Capacity and Performance. ------------------------- a. Employee shall be employed by the Company as its Vice President and Chief Financial Officer, and shall have all powers and duties consistent with those positions, subject to the direction of the Company's Board of Directors. b. Employee shall devote his best efforts, business judgment, skill and knowledge to the advancement of the business and interests of the Company and its affiliates, and to the discharge of his duties and responsibilities hereunder. In accordance with the foregoing, Employee shall not engage in any other business activity, except as may be approved by the Board of Directors; PROVIDED, HOWEVER, that nothing herein shall be construed as preventing Employee from investing his assets in a manner not otherwise prohibited by this Agreement, and in such form or manner as shall not require any material services on his part in the operations or affairs of the companies or other entities in which such investments are made. c. Except for required travel on the Company's business, Employee shall not be required to work on a regular basis at any location outside of Hillsborough County in the State of New Hampshire. 2 4. Compensation and Benefits. -------------------------- a. BASE SALARY. The Company shall pay Employee a base salary at an annual rate (the "Base Salary") equal to $140,000 per year, payable in accordance with the payroll practices of the Company for its executives, subject to annual salary reviews by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") or the President, as appropriate, on October 1st of each year for the duration of the Term of this Agreement. b. BONUS. Employee shall be entitled to participate in the Company's Cash Incentive Plan (the "Bonus Plan"), whereby Employee will be eligible to, and may, in the sole discretion of the Compensation Committee, earn as an annual bonus a percentage of his Base Salary based 50% upon the percentage of the Bonus Plan goals, as established by the Board of Directors of the Company, achieved by the Company and 50% on individual goals established by the President of the Company, in any given year, as follows: Percentage of Bonus Plan Percentage of Base Salary Goals Achieved* Earned as Bonus ------------------------ ------------------------ 80% 0% 100% 20% 120% 40% * For percentages between 80% and 120%, the percentage of Base Salary that may be earned by Employee will be determined by linear interpolation. c. On the Effective Date of this Agreement, Employee will be awarded an incentive stock option to purchase 30,000 shares of Common Stock (the "Stock Option") pursuant to the Company's 1995 Stock Option and Incentive Plan (the "Stock Option Plan"). The Stock Option will be granted to Employee at the market price of the shares of Common Stock underlying such Stock Option as of the Effective Date and shall vest as follows: Percentage of Shares Cumulative Vesting Date Becoming Vested Percentage Vested ------------ --------------- ----------------- September 23, 1997 25% 25% September 23, 1998 25% 50% September 23, 1999 25% 75% September 23, 2000 25% 100% As provided in Section 15 of the Stock Option Plan, all of the shares subject to the Stock Option above shall become immediately vested and exercisable in full, whether or not the Stock Option or any portion thereof is vested and exercisable at such time, upon the occurrence of a "Change of Control" of the Company as such term is defined in the Stock Option Plan. 2 3 d. VACATIONS. Employee shall be entitled to the number of paid vacation days to which he would be entitled in accordance with the Company's normal vacation policy, to be taken at such times and intervals as shall be determined by Employee, subject to the reasonable business needs of the Company. e. RETIREMENT PLANS. Employee shall be entitled to participate in and enjoy the benefit of the Company's retirement, supplementary retirement, deferred compensation or similar plans, programs or arrangements as available to the Company's management from time to time. f. HEALTH, WELFARE AND FRINGE BENEFIT PLANS, ETC. Employee shall be entitled to participate in and enjoy the benefit of all the health, medical, dental, cafeteria, reimbursement, death (including life insurance), accident, travel insurance, long-term disability, short-term disability, sick leave, other leaves of absence, holidays and other similar welfare, fringe-benefit or employment-related plans, programs, arrangements, policies or perquisites available to the Company's management from time to time. Participation shall be subject to the terms of the applicable plan documents and the discretion of the Board of Directors or any administrative or other committee provided for in or contemplated by such plan. The Company may alter, modify, add to or delete its employee benefit plans as they apply to the Company's management at such times and in such manner as the Company determines to be appropriate, without recourse by Employee. g. BUSINESS EXPENSES. The Company shall pay or reimburse Employee for reasonable business expenses incurred or paid by him in the performance of his duties and responsibilities hereunder, subject to any restrictions on such expenses set by the Board of Directors and to such reasonable substantiation and documentation as may be specified by the Company from time to time. h. MOVING EXPENSES. The Company shall reimburse Employee for reasonable moving expenses incurred in connection with Employee's relocation to New Hampshire, including without limitation costs and expenses of moving furniture and family. 5. Termination of Employment and Severance Benefits. ------------------------------------------------- a. GENERAL SEVERANCE BENEFITS. The Company or Employee may terminate this employment at will upon six (6) months prior written notice if such notice is given within one year of Employee's employment hereunder, or upon one year's prior written notice if such notice is given after the first year of Employee's employment hereunder. b. Change of Control Benefits. --------------------------- (1) If the Company undergoes a Change of Control (as defined below) during the Term of this Agreement, and a Terminating Event (as defined below) occurs within twelve (12) months after the date on which such Change of Control occurs, Employee shall be entitled to receive an amount equal to six (6) months' Base Salary at the rate then in effect under this Agreement if such Terminating Event occurs within the first year of Employee's employment hereunder, and an amount equal to twelve (12) months' Base Salary at the rate then in effect under 3 4 this Agreement if such Terminating Event occurs after the first year of Employee's employment hereunder. (2) "Change of Control" shall mean the occurrence of any one of the following events: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Act) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company's then outstanding securities; or (ii) persons who, as of the Effective Date, constituted the Company's Board of Directors (the "Incumbent Board") cease for any reason, including without limitation as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board of Directors, provided that any person becoming a director of the Company subsequent to the Effective Date whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Agreement, be considered a member of the Incumbent Board; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation or other entity, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (3) A "Terminating Event" shall mean any voluntary or involuntary termination of Employee's employment occurring subsequent to a Change of Control, other than the termination of Employee's employment pursuant to Section 5d hereunder. c. DEATH OR DISABILITY. In the event Employee dies or becomes disabled during the Term this Agreement, his employment hereunder shall automatically terminate. In such case, the Company shall pay to Employee or his beneficiary, as the case may be, any earned but unpaid 4 5 salary as of the date of his death or disability. For the purpose of this Agreement, "disability" shall refer to a situation in which Employee is totally disabled from performing his duties for the Company during a period of thirteen (13) consecutive weeks. If any question shall arise as to whether during any period Employee has suffered disability, Employee may, and at the request of the Company will, submit to the Company a certification in reasonable detail by a physician selected by Employee or his guardian to whom the Company has no reasonable objection as to whether Employee was so disabled and such certification shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and Employee shall fail to submit such certification, the Company's determination of such issue shall be binding on Employee. d. BY THE COMPANY FOR CAUSE. The Company may terminate Employee's employment hereunder for cause at any time upon notice to Employee setting forth in reasonable detail the nature of such cause. The following, as determined by the Board of Directors in its reasonable judgment, shall constitute "cause" for termination: (1) Employee's falsification of the accounts of the Company, embezzlement of funds of the Company or other material dishonesty with respect to the Company or any of its affiliates; or (2) Conviction of, or plea of nolo contendere to, a felony or other crime involving moral turpitude (it being understood that violation of a motor vehicle code does not constitute such a crime); or (3) Conduct engaged in or action taken or omitted to be taken by Employee which is in material breach of this Agreement; or (4) Material failure to perform a substantial portion of Employee's duties and responsibilities hereunder, which failure continues for more than thirty (30) days after written notice given to Employee pursuant to a vote of the Board of Directors, such vote to set forth in reasonable detail the nature of such failure; or (5) Gross or willful misconduct of Employee' with respect to the Company or any subsidiary or affiliate thereof. Upon the giving of notice of termination of Employee's employment hereunder for cause, the Company shall have no further obligation or liability to Employee, other than the payment of salary earned and unpaid at the date of termination and the contribution by the Company to the cost of Employee's participation (subject to any required employee contribution by Employee under the terms of the applicable plans) in the Company's group medical and dental insurance plans as the same are in effect from time to time for so long as Employee is entitled to continue such participation under applicable law and plan terms. 6 e. LIMITATION OF BENEFITS. It is the intention of Employee and of the Company that no payments by the Company to or for the benefit of Employee under this Agreement or any ether agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Company by reason of the operation of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") relating to "parachute payments," Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Company, the payments which Employee is entitled to receive under this Agreement shall be reduced by that amount which exceeds the maximum amount deductible by the Company under Section 280G. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of Employee, such excess payments shall be refunded to the Company with interest thereon at the applicable federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Company by reason of the operation of said Section 280G. 6. WITHHOLDING. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law. 7. ASSIGNMENT. Neither the Company nor Employee may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this Agreement without the consent of Employee in the event that the Company shall hereafter affect a reorganization, consolidate with, or merge into, any other person or entity or transfer all of its properties or assets to any other person or entity. This Agreement shall inure to the benefit of and be binding upon the Company and Employee, their respective successors, executors, administrators, heirs and permitted assigns. 8. SEVERABILITY. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 9. WAIVER. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 10. NOTICES. Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be deemed given when delivered by hand, telex or facsimile, or if mailed, five days after mailing (two business days in the case of courier service), to the parties as follows: to Employee at his last known address on the books of 6 7 the Company and, in the case of the Company, to its principal place of business, attention of Clerk or to such other address as either party may specify by notice to the other. 11. ENTIRE AGREEMENT. This Agreement and the Non-Disclosure/Non-Compete Agreement executed by Employee constitute the entire agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of Employee's employment. 12. AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by Employee and by an expressly authorized representative of the Company. 13. HEADINGS. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope of or content of any provision of this Agreement. 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 15. GOVERNING LAW. This is a Massachusetts contract and shall be construed and enforced under and be governed in all respects by the laws of The Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. [END OF TEXT] 7 8 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by Employee, as of the date first above written. FERROFLUIDICS CORPORATION /s/ William B. Ford By: /s/ Salvatore J. Vinciguerra - ---------------------- ---------------------------- William B. Ford Salvatore J. Vinciguerra President and Chief Executive Officer EX-10.27 5 FIRST AMENDMENT TO NOTE & LOAN AGREEMENT 1 EXHIBIT 10.27 FIRST AMENDMENT TO NOTE AND LOAN AGREEMENT This First Amendment to Note and Loan Agreement is made this 3rd day of December, 1996 between Ferrofluidics Corporation, whose address is 40 Simon Street, Nashua, New Hampshire 03061 ("Borrower") and Bank of New Hampshire, whose address is 191 Main Street, Nashua, New Hampshire 03060 ("Lender"). WHEREAS, Lender and Borrower are party to a certain Revolving Loan and Security Agreement dated June 30, 1994 ("Loan Agreement") pursuant to which the Lender has provided the Borrower with (i) a Revolving Line of Credit in the amount of Two Million Five Hundred Thousand Dollars ($2,500,000); and (ii) a Reimbursement Agreement Line of Credit in the amount of Five Million Four Hundred Eleven Thousand Dollars ($5,411,000) all in accordance with the terms of the $7,911,000 Master Term Note also dated June 30, 1994 ("Note") and the other documents and agreements between Borrower and Lender ("Loan Documents"); WHEREAS, Borrower is willing to pay to Lender a fee of Fifteen Thousand Dollars ($15,000) in consideration of Lender's agreement to increase the amount that Borrower may borrower from Lender under the Revolving Line of Credit, from Two Million Five Hundred Thousand Dollars ($2,500,000) to Eight Million Five Hundred Thousand Dollars ($8,500,000) as more particularly set forth in this First Amendment. NOW THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the Lender and Borrower hereby agree as follows: 1. The Loan Agreement, the Note and other Loan Documents, effective as of the date of this First Amendment to Note and Loan Agreement, shall be amended as follows: 1.1 The Note. 1.1.1 The amount stated in the Note as "$7, 911,000" is hereby changed to "$13,911,000." 1.1.2 The Maturity Date is hereby changed to November 30, 1997. 1.1.3 The first two paragraphs of Section I of the Note are hereby amended to read as follows: FOR VALUE RECEIVED, Maker hereby promises to pay to the order Of Bank of New Hampshire, ("Lender") at its of/fives at 191 Main Street, Nashua, New Hampshire, or at such other place Lender or any subsequent holder hereof may in writing designate, in immediately available funds, the Principal Amount, 2 Page 2 as from time to time advanced and readvanced by Lender to Borrower for the following purposes and amounts: (i) Eight Million Five Hundred Thousand dollars ($8,500,000) advanced to Borrower as a Revolving Line of Credit for purposes of working capital pursuant to Section 3.1 et seq. of the Loan Agreement. 1.1.4 In addition, the Borrower shall execute a conformed and amended Master Term Note in the form attached hereto as Exhibit 1. 1.2 The Loan Agreement. 1.2.1 Paragraph 1 of the Loan Agreement is hereby amended to read as follows: 1. RECITALS. 1.1 Borrower has requested and Lender has agreed to provide Borrower lines of credit consisting of a revolving line of credit loan in the amount of up to Eight Million Five Hundred Thousand Dollars ($8,500,000.00) and a line of credit in the amount of up to Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00) to fund Borrower's obligations under a Letter of Credit Reimbursement Agreement, of even date by and between Borrower and Lender, whereby Lender has agreed to establish a Letter of Credit in the face amount of Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00), all as evidenced in the Master Term Note of even date in the principal amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) ("Note"). 1.2.2 Paragraph 2.7 of the Loan Agreement is hereby amended to read as follows: 2.7 "Cash Flow" means, for any period, Net Income of Borrower, plus depreciation and amortization, plus deferred taxes resulting from the tax basis net operating losses reduced by amounts expended to acquire fixed assets. 1.2.3 Paragraph 2.13 of the Loan Agreement is hereby amended to read as follows: 2.13 "Earnings Before Interest Charges and Taxes" means, for any period, Net .Income for such period plus (i) Interest Charges for such period, and (ii) income and excess profit taxes for such period and all other taxes for such period which are imposed on or measured by income after deduction of Interest Charges. 3 Page 3 1.2.4 Paragraph 7.1.c of the Loan Agreement is hereby amended to read as follows: 7.1.c Within thirty (30) days of a written request by Lender, Borrower shall prepare consolidated and consolidating internal financial reports, in a form satisfactory to Lender, and deliver same to Lender. Borrower shall upon request by Lender make and deliver to Lender reports on accounts receivable aging, accounts payable aging and an inventory listing and such other information as Lender may request to determine Borrower's Availability. 1.2.5 Paragraph 7.12 of the Loan Agreement is hereby amended to read as follows: 7.12 Borrower shall use the proceeds of the Loans for the purpose of Borrower's proposed short term working capital requirements, which shall not include (i) payments of expenses for or settlements of any claim against the Borrower in excess of $200,000 during any fiscal year for any single claim or related claims; (ii) capital expenditures in excess of $250,000 during any fiscal year for any single or related items; or (iii) payments, advances or loans to or recapitalizations of any subsidiary or affiliate in excess of $500,000 during any fiscal year for all such items. Except as permitted by the express terms hereof,, no proceeds shall be commingled with funds of any stockholder, or any general or limited partner, nor shall any proceeds be transferred to any stockholder, Subsidiary or Affiliate or any general or limited partner. 1.2.6 Paragraph 7.14(b) of the Loan Agreement is hereby amended to read as follows: 7.14.b Indebtedness to Tangible Net Worth. Commencing October 1, 1996 and continuing thereafter, Borrower shall maintain a ratio of Indebtedness to Tangible Net Worth (which for purposes of the calculation required in this Section 7.14.b shall be defined to exclude all investments or loans to Subsidiaries or Affiliates and customer deposits) of not more than 1.25:1, such ratio to be measured at the end of each quarter of Borrower. 1.3 Amendment to Mortgage. The Borrower shall execute and deliver to Lender an Amendment to Mortgage, in the form attached as EXHIBIT 1.3 which shall amend paragraph 1 of the Mortgage Deed from Borrower to Lender, recorded in 4 Page 4 the Hillsborough County Registry of Deeds at Book 5561, Page 1011, to read as follows: 1. That Mortgagor in order to secure its payment in the amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) plus interest, together with all advances, readvances, extensions, charges, expenses, fees, amendments and other charges as set forth in the Master Term Note from Mortgagor to Mortgagee ("Note") in the amounts of (i) Eight Million Five Hundred Thousand Dollars ($8,500,000.00) for a revolving line of credit of even date; and (ii) Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00), for a line of credit to fund Borrower's obligations under an agreement with Lender of even date ("Reimbursement Agreement"); and (iii) the Revolving Loan and Security Agreement of even date herewith ("Loan Agreement"), including the performance of all conditions, undertakings and obligations contained therein, and in the Loan Agreement and in other instruments and documents executed in connection therewith the obligations described in paragraphs (i) through (iii), inclusive, shall be referred to collectively as the "Liabilities" (the Note, the Reimbursement Agreement, the Loan Agreement and all ancillary documents are referred to in the aggregate as the "Instruments"), and for other good and valuable consideration paid by Borrower to Mortgagee, hereby grants to Mortgagee, with Mortgage Covenants, certain property with all buildings and improvements thereon located in Nashua, Hillsborough County, New Hampshire, as more particularly described on Exhibit A hereto (the "Premises"). 1.4 Amendment to Subordination, Non-Disturbance and Attornment Agreement. The second paragraph after the word "Witnesseth" is hereby amended to read as follows: WHEREAS, Lender has agreed to loan the Landlord the amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) (the "Loan") which Loans are secured by a certain mortgage from Landlord to Lender recorded in the Hillsborough County Registry of Deeds at Book 5561, Page 1011, and an Assignment of Leases recorded in the Hillsborough County Registry of Deeds at Book 5561, Page 1020, (collectively the "Mortgage"), which Mortgage encumbers the Premises and Landlord's interest in the Lease; and, 1.5 Amendment to Environmental Indemnity. The first paragraph after the word "Witnesseth" is hereby amended to read as follows: WHEREAS, Beneficiary provided Indemnitor with a loan in an amount of up to Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) (the "Loan"), evidenced by a Master Term Note of even date in the amount of the Loan and executed by Indemnitor (the "Note"); 1.6 Amendment to Assignment of Leases. The Borrower shall execute and deliver to Lender an Amendment to Assignment of Leases, in the form attached as 5 Page 5 EXHIBIT 1.6 which shall amend the Assignment of Leases from Borrower to Lender, recorded in the Hillsborough County Registry of Deeds at Book 5561, Page 1020, by changing the first paragraph after the word "Witnesseth" to read as follows: WHEREAS, Lender has agreed to provide Borrower with lines of credit consisting of.' (i) a revolving line of credit loan in the amount of up to Eight Million Five Hundred Thousand Dollars ($8,500, 000. 00) and (ii) a line of credit in the amount of up to Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00) pursuant to an agreement with Lender of even date herewith ("Reimbursement Agreement"), all as evidenced in the Master Term Note of even date in the principal amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13, 911, 000. 00) ("Note") ; 2. Legal Effect. In all other respects, the Note and Loan Agreement and all other Loan Documents shall remain in full force and effect in accordance with their original terms and the rights and obligations of the Lender and Borrower shall remain enforceable in accordance therewith. 3. No Defenses; Reaffirmation of Obligations. Borrower acknowledges and agrees and represents to Lender that there are no defenses, offsets, rights or other claims which Borrower or any other party can assert that would affect the obligations of Borrower or the rights of Lender under the Note and Loan Agreement as amended by this First Amendment to Note and Loan Agreement. 4. Borrower's Representations. Borrower further represents to Lender that: (i) Borrower is in full compliance with all requirements and conditions of the Note and Loan Agreement and all of Loan Documents; (ii) all representations and warranties and information contained in schedules are true as of the date of this First Amendment to Note and Loan Agreement; and (iii) there is no Event of Default in existence and there is no condition in existence which, with the passage of time, would constitute an Event of Default under the Note or Loan Agreement; (iv) the matters contemplated by this First Amendment to Note and Loan Agreement have been fully authorized by all necessary corporate action of Borrower's shareholders, directors and officers and have received all necessary governmental approvals, including without limitation, such approvals as may be required by the New Hampshire Public Utilities Commission. 6 Page 6 In Witness whereof, the parties have hereunto set their hands this 3rd day of December 1996 to this First Amendment to Note and Loan Agreement. WITNESS: BORROWER: FERROFLUIDICS CORPORATION /s/ Stephen P. Morin - --------------------------- By: /s/ William B. Ford -------------------------------- Name: William B. Ford Title Vice President LENDER: BANK OF NEW HAMPSHIRE /s/ Stephen P. Morin By: /s/ Paul E. Duffy - --------------------------- -------------------------------- Name: Paul E. Duffy Title: Senior Vice President STATE OF NEW HAMPSHIRE COUNTY OF On this the 3rd day of December, 1996, before me, the undersigned officer, personally appeared William B. Ford, who acknowledged himself to be the Vice President and Chief Financial Officer of FERROFLUIDICS CORPORATION and that he, as such Vice President and Chief Financial Officer, being authorized to do so, executed the foregoing First Amendment to Note and Loan Agreement for the purposes therein contained, by signing the name of the corporation by himself as Vice President and Chief Financial Officer with the intention that it be effective as of the date first above written. /s/ Joan C. Deichler --------------------------------------- Joan C. Deichler Justice of the Peace/Notary Public My Commission expires: Sept. 8, 1999 7 Page 7 STATE OF NEW HAMPSHIRE COUNTY OF HILLSBOROUGH On this the 3rd day of December, 1996, before me, the undersigned officer, personally appeared Paul E. Duffy, II, who acknowledged himself to be a Senior Vice President of Bank of New Hampshire, and that he as such Senior Vice President being authorized to do so, executed the foregoing First Amendment to Note and Loan Agreement for the purposes therein contained by signing the name of the Bank of New Hampshire by himself as Senior Vice President with the intention that it be effective as of the date first above written. IN WITNESS WHEREOF I hereunto set my hand and official seal. /s/ Joan C. Deichler --------------------------------------- Joan C. Deichler Justice of the Peace/Notary Public My Commission expires: Sept. 8, 1999 8 Page 8 EXHIBIT I AMENDED MASTER TERM NOTE $13,911,000.00 Concord, New Hampshire Initially executed June 30,1994 Amended November__, 1996 MAKER: Ferrofluidics Corporation, a Massachusetts corporation 40 Simon Street Nashua, New Hampshire 03061 ("Maker"). PRINCIPAL AMOUNT: Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) ("Principal Amount"), as provided in the Revolving Loan and Security Agreement by and among Ferrofluidics Corporation and Bank of New Hampshire ("Loan Agreement"). MATURITY DATE: November 30, 1997 ("Maturity Date"). LATE CHARGE: Five percent (5%) of the overdue amount of any regularly scheduled payment after any applicable grace period including Principal, Interest, costs and any accelerated amount. MONTHLY PAYMENT DATE: The first day of each month unless otherwise specified herein. 1. PROMISE TO PAY. FOR VALUE RECEIVED, Maker hereby promises to pay to the order of Bank of New Hampshire, ("Lender") at its offices at 191 Main Street, Nashua, New Hampshire, or at such other place Lender or any subsequent holder hereof may in writing designate, in immediately available funds, the Principal Amount, as from time to time advanced and readvanced by Lender to Borrower for the following purposes and amounts: (i) Eight Million Five Hundred Thousand dollars ($8,500,000) advanced to Borrower as a Revolving Line of Credit for purposes of working capital pursuant to Section 3.1 et seq. of the Loan Agreement. (ii) Five Million Four Hundred Eleven Thousand dollars ($5,411,000) advanced to Borrower pursuant to Section 3A et seq. of the Loan Agreement for purposes of funding Borrower's obligations under a Reimbursement Agreement with Lender of even date herewith. 9 Page 9 All payments shall be made in lawful currency of the United States of America ("Dollars"), as provided herein, and in the Loan Agreement, including all subsequent modifications, extensions and amendments thereto, but in any event at the Maturity Date, together with payments as provided herein of interest thereon from the date hereof on the Principal Amount from time to time outstanding at the Applicable Rate or Rates (as defined below) and in the manner hereinafter provided. All payments by Maker hereunder shall be applied in such fashion as Lender deems appropriate in its complete discretion. 2. INTEREST AND PRINCIPAL PAYMENTS. 2.1 APPLICABLE INTEREST RATE. The Applicable Interest Rate will be a variable rate, which will be calculated as provided below: The Applicable Interest Rate will be equal to One percent (1%) per annum above the Lender's Prime Rate, as adjusted by Lender from time to time, calculated on the basis of a 360 day year. The Applicable Interest Rate will change each time and as of the date that the Lender's Prime Rate is changed without notice to Maker ("Payment Change Date"). Each new Applicable Interest Rate will become effective on the Payment Change Date and shall remain in effect until the next Payment Change Date. 2.2 INTEREST PAYMENTS. Interest, which has accrued during the preceding month on the outstanding principal at the Applicable Interest Rate set forth above, shall be paid monthly, commencing August 1, 1994 and continuing on the same day of each successive month thereafter with a final payment of all unpaid interest due on the Maturity date. 3. PREPAYMENT. Borrower shall have the right to prepay all or any portion of the Principal Amount at any time during the term hereof. 4. EVENTS OF DEFAULT. Upon the occurrence of any of the following Events of Default, all sums payable under this Note shall, at the option of Lender, become immediately due and payable without further notice or demand: 4.1 failure to make a payment of principal or interest on this Note not cured in accordance with the Loan Agreement and the Reimbursement Agreement or any other sum payable hereunder, as and when due, or within any applicable cure period, or on any other obligation of Maker to Lender, now existing or subsequently created, whether by direct 10 Page 10 loan, guarantee or otherwise, or acceleration with respect thereto and not paid within the applicable cure period; and, 4.2 any Event of Default of Maker pursuant to the Loan Agreement, the Reimbursement Agreement or other Instruments or with any other document now or subsequently evidencing any indebtedness or obligation of Maker to Lender. 5. WAIVERS. Maker and all sureties and endorser of this Note hereby (a) waive demand, presentment for payment, notice of nonpayment, protest, notice of protest and all other notice, filing of suit and diligence in collecting this Note, in enforcing any of the security rights or in proceeding against any of the property covered by the Instruments, (b) agree to any substitution, exchange, addition or release of any such property or the addition or release of any party or person primarily or secondarily liable hereon, (c) agree that Lender shall not be required first to institute any suit, or to exhaust its remedies against Maker or any other person or party in order to enforce payment of this Note or any guarantee, (d) consent to any extension, rearrangement, renewal or postponement of time of payment of this Note and to any other indulgence with respect hereto without notice, consent or consideration to any of them, (e) waive any defense arising out of the alleged negligent release of any parties, and (f) agree that, notwithstanding the occurrence of any of the foregoing, except as to any such person expressly released in writing by Lender they shall be and remain jointly and severally, directly and primarily, liable for all sums due hereunder and under any and all of the Instruments. 6. RIGHT OF SET-OFF. In the event of an Event of Default, and in addition to the other rights contained herein, Lender shall have the immediate and unconditional right of offset against all demand deposits, accounts, certificates, securities, chases in action and all other rights or property of Maker reflecting an obligation of Lender to Maker or any endorser, or any of them, which are then maintained with (or in existence as against) Lender ("Cash Collateral"). 7. LATE PAYMENT. In the event a payment is not made by Maker when due, Maker shall in addition to all other amounts then due pay a late charge (as liquidated damages) equal to the Late Charge defined above. Acceptance by Lender of payment of the Late Charge shall not be deemed a waiver of any default. 8. GENERAL PROVISIONS. 11 Page 11 8.1 No delay or omission on the part of Lender in exercising any right hereunder shall operate as a waiver of such right, or of any other right of Lender, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. No single or partial exercise of a power hereunder shall preclude other exercises thereof, or the exercise of any other power hereunder. 8.2 Any reference herein to a party in the masculine gender shall be construed in the feminine or neuter gender, as the context may require. 8.3 If an Event of Default exists under the Note, or this Note is collected or attempted to be collected by the initiation or prosecution of any suit or through any probate or bankruptcy court, or by any other judicial proceeding, or is placed in the hands of an attorney for collection, then Maker shall pay, in addition to all other amounts owing hereunder, all collection costs, appraisal costs, court costs and reasonable attorney's fees and all other out-of-pocket expenses incurred by Lender. 8.4 This Note is fully negotiable, and upon negotiation may be enforced by Lender or any holder in accordance with its terms. 8.5 This Note shall be governed exclusively by the laws of the State of New Hampshire. Maker hereby agrees that any action under this Note shall be maintained in a court of competent jurisdiction located therein, and consents to the jurisdiction of any such New Hampshire court for all purposes connected herewith. Maker consents to the jurisdiction of any court in any state in which property of Maker is located. Any action by Maker against Lender may be maintained only in the State and Federal courts in the State of New Hampshire. 8.6 In the event any payment of principal or interest received upon this obligation and paid by Maker or any surety, co-maker or endorser, shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or otherwise, then in such event to the extent such payment is returned pursuant to such order, the obligation of the undersigned, or any surety, co-maker or endorser shall, jointly and severally, survive as an obligation due hereunder and shall not be discharged or satisfied by said payment or payments, which obligation shall be payable ON DEMAND, with interest as provided herein, notwithstanding return by Lender hereof to said parties of this original hereof or any endorsement or the like. 8.7 This Note shall inure to the benefit of Lender, its successors, assigns, endorsees and any person to whom Lender may grant any interest in this Note, including without limitation, interests granted to the New Hampshire Business Finance Authority, and shall be binding upon the undersigned and the successors, assigns, heirs, executors, 12 Page 12 administrators and other legal representatives thereof; this Note is not intended to create any right or other cause of action in or on behalf of any person other than Lender, its successors, assigns, endorsees and any person to whom Lender may grant any interest in this Note. 8.8 To the extent possible, each provision of this Note shall be interpreted in a manner as to be valid, legal and enforceable under applicable law. If any provision of this Note shall be held invalid, illegal or unenforceable, such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability and the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 8.9 This Note may be extended, modified, or renewed by agreement of Maker and Lender without releasing, discharging or affecting the liability of Maker or any sureties, endorser or guarantors of this Note. 8.10 All capitalized terms used herein and not herein defined shall have the meaning given to them in the Loan Agreement. 8.11 This Note shall have the effect of an instrument executed under seal. IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as of the date first above written. IN THE PRESENCE OF: MAKER: FERROFLUIDICS CORPORATION - --------------------------- By: ------------------------------ Name: Title: 13 Page 13 STATE OF NEW HAMPSHIRE COUNTY OF On this the __ day of September, 1996, before me, the undersigned officer, personally appeared William B. Ford, the Vice President and Chief Financial Officer of Ferrofluidics Corporation, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed this instrument as a free act and deed and for the purposes therein contained on behalf of the corporation. ---------------------------------- Notary Public/Justice of the Peace My Commission expires: 14 Page 14 EXHIBIT 1.3 Amendment To Mortgage For valuable consideration, the sufficiency of which is hereby acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation with a place of business at 40 Simon Street, Nashua, New Hampshire ("Mortgagor") hereby amends the Mortgage Deed, previously given by Mortgagor to Bank of New Hampshire, a bank chartered under the laws of the State of New Hampshire, with a place of business at 191 Main Street, Nashua, New Hampshire 03060, ("Mortgagee") which Mortgage is dated June 30, 1994 and recorded in the Hillsborough County Registry of Deeds at Book 5551, Page 1011, ("Mortgage") for the purpose of increasing the amount secured by said Mortgage from $7,911,000 to $13,911,000. Accordingly, Mortgagor hereby amends the Mortgage as follows: Paragraph one of the Mortgage is hereby amended to read as follows: 1. That Mortgagor in order to secure its payment in the amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) plus interest, together with all advances, readvances, extensions, charges, expenses, fees, amendments and other charges as set forth in the Master Term Note from Mortgagor to Mortgagee ("Note") in the amounts of (i) Eight Million Five Hundred Thousand Dollars ($8,500,000.00) for a revolving line of credit of even date; and (ii) Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00), for a line of credit to fund Borrower's obligations under an agreement with Lender of even date ("Reimbursement Agreement"); and (iii) the Revolving Loan and Security Agreement of even date herewith (" Loan Agreement"), including the performance of all conditions, undertakings and obligations contained therein, and in the Loan Agreement and in other instruments and documents executed in connection therewith the obligations described in paragraphs (i) through (iii), inclusive, shall be referred to collectively as the "Liabilities" (the Note, the Reimbursement Agreement, the Loan Agreement and all ancillary documents are referred to in the aggregate as the "Instruments"), and for other good and valuable consideration paid by Borrower to Mortgagee, hereby grants to Mortgagee, with Mortgage Covenants, certain property with all buildings and improvements thereon located in Nashua, Hillsborough County, New Hampshire, as more particularly described on Exhibit A hereto (the "Premises"). In all other respects, the Mortgage shall remain in full force and effect in accordance with its original terms and priority and the and obligations of the Mortgagor shall remain enforceable in accordance therewith. Mortgagor acknowledges and agrees and represents to Mortgagee that there are no defenses, offsets, rights or 15 Page 15 other claims which Mortgagor or any other party can assert that would affect the obligations of Mortgagor or the rights of Mortgagor under the Mortgage. WITNESS: BORROWER: FERROFLUIDICS CORPORATION - --------------------------- By: ------------------------------ Name: Title: STATE OF NEW HAMPSHIRE COUNTY OF On this the __ day of ,1996, before me, the undersigned officer, personally appeared William B. Ford, who acknowledged himself to be the Vice President and Chief Financial Officer of Ferrofluidics CORPORATION and that he, as such Vice President and Chief Financial Officer, being authorized to do so, executed the foregoing First Amendment to Note and Loan Agreement for the purposes therein contained, by signing the name of the corporation by himself as Vice President and Chief Financial Officer with the intention that it be effective as of the date first above written. ------------------------------------------- Justice of the Peace/Notary Public 16 Page 16 EXHIBIT 1.6 Amendment To Assignment of Leases For valuable consideration, the sufficiency of which is hereby acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation with a place of business at 40 Simon Street, Nashua, New Hampshire ("Borrower") hereby amends the Assignment of Leases, previously given by Mortgagor to Bank of New Hampshire, a bank chartered under the laws of the State of New Hampshire, with a place of business at 191 Main Street, Nashua, New Hampshire 03060, ("Lender") which Mortgage is dated June 30, 1994 and recorded in the Hillsborough County Registry of Deeds at Book 5551, Page 1020, for the purpose of increasing the amount secured by said Assignment, as follows 1. The first Recital paragraph, after the "Witnesseth" clause, is hereby amended to read as follows: WHEREAS, Lender has agreed to provide Borrower with lines of credit consisting of: (i) a revolving line of credit loan in the amount of up to Eight Million Five Hundred Thousand Dollars ($8,500, 000. 00) and (ii) a line of credit in the amount of up to Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00) pursuant to an agreement with Lender of even date herewith ("Reimbursement Agreement"), all as evidenced in the Master Term Note of even date in the principal amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) ('"Note"): In all other respects, the aforesaid Assignment of Leases shall remain in full force in effect, entitled to its priority in accordance with the original date of execution and recording. IN WITNESS WHEREOF, Borrower has executed this instrument as of this day of November, 1996. WITNESS: BORROWER: FERROFLUIDICS CORPORATION - --------------------------- By: ------------------------------ Name: Title: 17 Page 17 STATE OF NEW HAMPSHIRE COUNTY OF On this the __ day of November, 1996, before me, the undersigned officer, personally appeared William B. Ford who acknowledged himself to be the Vice President and Chief Financial Officer of Ferrofluidics Corporation, a _________________ corporation, and that he, as such Vice President and Chief Financial Officer, being authorized to do so, executed the foregoing Assignment of Leases for the purposes therein contained, by signing the name of the corporation by himself as Vice President and Chief Financial Officer with the intention that it be effective as of the date first above written. ----------------------------------------- Justice of the Peace/Notary Public EX-10.28 6 AMENDED MASTER TERM NOTE 1 EXHIBIT 10.28 AMENDED MASTER TERM NOTE $13,911,000.00 Concord, New Hampshire Initially executed June 30,1994 Amended December 3, 1996 MAKER: Ferrofluidics Corporation, a Massachusetts corporation 40 Simon Street Nashua, New Hampshire 03061 ("Maker"). PRINCIPAL AMOUNT: Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) ("Principal Amount"), as provided in the Revolving Loan and Security Agreement by and among Ferrofluidics Corporation and Bank of New Hampshire ("Loan Agreement"). MATURITY DATE: November 30, 1997 ("Maturity Date"). LATE CHARGE: Five percent (5%) of the overdue amount of any regularly scheduled payment after any applicable grace period including Principal, Interest, costs and any accelerated amount. MONTHLY PAYMENT DATE: The first day of each month unless otherwise specified herein. 1. PROMISE TO PAY. FOR VALUE RECEIVED, Maker hereby promises to pay to the order of Bank of New Hampshire, ("Lender") at its offices at 191 Main Street, Nashua, New Hampshire, or at such other place Lender or any subsequent holder hereof may in writing designate, in immediately available funds, the Principal Amount, as from time to time advanced and readvanced by Lender to Borrower for the following purposes and amounts: (i) Eight Million Five Hundred Thousand dollars ($8,500,000) advanced to Borrower as a Revolving Line of Credit for purposes of working capital pursuant to Section 3.1 et seq. of the Loan Agreement (ii) Five Million Four Hundred Eleven Thousand dollars ($5,411,000) advanced to Borrower pursuant to Section 3A et seq. of the Loan Agreement for purposes of funding Borrower's obligations under a Reimbursement Agreement with Lender of even date herewith. All payments shall be made in lawful currency of the United States of America ("Dollars"), as provided herein, and in the Loan Agreement, including all subsequent modifications, extensions and amendments thereto, but in any event at the Maturity Date, 2 Page 2 together with payments as provided herein of interest thereon from the date hereof on the Principal Amount from time to time outstanding at the Applicable Rate or Rates (as defined below) and in the manner hereinafter provided. All payments by Maker hereunder shall be applied in such fashion as Lender deems appropriate in its complete discretion. 2. INTEREST AND PRINCIPAL PAYMENTS. 2.1 APPLICABLE INTEREST RATE. The Applicable Interest Rate will be a variable rate, which will be calculated as provided below: The Applicable Interest Rate will be equal to One percent (1%) per annum above the Lender's Prime Rate, as adjusted by Lender from time to time, calculated on the basis of a 360 day year. The Applicable Interest Rate will change each time and as of the date that the Lender's Prime Rate is changed without notice to Maker ("Payment Change Date"). Each new Applicable Interest Rate will become effective on the Payment Change Date and shall remain in effect until the next Payment Change Date. 2.2 INTEREST PAYMENTS. Interest, which has accrued during the preceding month on the outstanding principal at the Applicable Interest Rate set forth above, shall be paid monthly, commencing August 1, 1994 and continuing on the same day of each successive month thereafter with a final payment of all unpaid interest due on the Maturity DATE. 3. PREPAYMENT. Borrower shall have the right to prepay all or any portion of the Principal Amount at any time during the term hereof. 4. EVENTS OF DEFAULT. Upon the occurrence of any of the following Events of Default, all sums payable under this Note shall, at the option of Lender, become immediately due and payable without further notice or demand: 4.1 failure to make a payment of principal or interest on this Note not cured in accordance with the Loan Agreement and the Reimbursement Agreement or any other sum payable hereunder, as and when due, or within any applicable cure period, or on any other obligation of Maker to Lender, now existing or subsequently created, whether by direct loan, guarantee or otherwise, or acceleration with respect thereto and not paid within the applicable cure period; and, 3 Page 3 4.2 any Event of Default of Maker pursuant to the Loan Agreement, the Reimbursement Agreement or other Instruments or with any other document now or subsequently evidencing any indebtedness or obligation of Maker to Lender. 5. WAIVERS. Maker and all sureties and endorser of this Note hereby (a) waive demand, presentment for payment, notice of nonpayment, protest, notice of protest and all other notice, filing of suit and diligence in collecting this Note, in enforcing any of the security rights or in proceeding against any of the property covered by the Instruments, (b) agree to any substitution, exchange, addition or release of any such property or the addition or release of any party or person primarily or secondarily liable hereon, (c) agree that Lender shall not be required first to institute any suit, or to exhaust its remedies against Maker or any other person or party in order to enforce payment of this Note or any guarantee, (d) consent to any extension, rearrangement, renewal or postponement of time of payment of this Note and to any other indulgence with respect hereto without notice, consent or consideration to any of them, (e) waive any defense arising out of the alleged negligent release of any parties, and (f) agree that, notwithstanding the occurrence of any of the foregoing, except as to any such person expressly released in writing by Lender they shall be and remain jointly and severally, directly and primarily, liable for all sums due hereunder and under any and all of the Instruments. 6. RIGHT OF SET-OFF. In the event of an Event of Default, and in addition to the other rights contained herein, Lender shall have the immediate and unconditional right of offset against all demand deposits, accounts, certificates, securities, chases in action and all other rights or property of Maker reflecting an obligation of Lender to Maker or any endorser, or any of them, which are then maintained with (or in existence as against) Lender ("Cash Collateral"). 7. LATE PAYMENT. In the event a payment is not made by Maker when due, Maker shall in addition to all other amounts then due pay a late charge (as liquidated damages) equal to the Late Charge defined above. Acceptance by Lender of payment of the Late Charge shall not be deemed a waiver of any default. 4 Page 4 8. GENERAL PROVISIONS. 8.1 No delay or omission on the part of Lender in exercising any right hereunder shall operate as a waiver of such right, or of any other right of Lender, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. No single or partial exercise of a power hereunder shall preclude other exercises thereof, or the exercise of any other power hereunder. 8.2 Any reference herein to a party in the masculine gender shall be construed in the feminine or neuter gender, as the context may require. 8.3 If an Event of Default exists under the Note, or this Note is collected or attempted to be collected by the initiation or prosecution of any suit or through any probate or bankruptcy court, or by any other judicial proceeding, or is placed in the hands of an attorney for collection, then Maker shall pay, in addition to all other amounts owing hereunder, all collection costs, appraisal costs, court costs and reasonable attorney's fees and all other out-of-pocket expenses incurred by Lender. 8.4 This Note is fully negotiable, and upon negotiation may be enforced by Lender or any holder in accordance with its terms. 8.5 This Note shall be governed exclusively by the laws of the State of New Hampshire. Maker hereby agrees that any action under this Note shall be maintained in a court of competent jurisdiction located therein, and consents to the jurisdiction of any such New Hampshire court for all purposes connected herewith. Maker consents to the jurisdiction of any court in any state in which property of Maker is located. Any action by Maker against Lender may be maintained only in the State and Federal courts in the State of New Hampshire. 8.6 In the event any payment of principal or interest received upon this obligation and paid by Maker or any surety, co-maker or endorser, shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or otherwise, then in such event to the extent such payment is returned pursuant to such order, the obligation of the undersigned, or any surety, co- maker or endorser shall, jointly and severally, survive as an obligation due hereunder and shall not be discharged or satisfied by said payment or payments, which obligation shall be payable ON DEMAND, with interest as provided herein, notwithstanding return by Lender hereof to said parties of this original hereof or any endorsement or the like. 8.7 This Note shall inure to the benefit of Lender, its successors, assigns, endorsees and any person to whom Lender may grant any interest in this Note, including 5 Page 5 without limitation, interests granted to the New Hampshire Business Finance Authority, and shall be binding upon the undersigned and the successors, assigns, heirs, executors, administrators and other legal representatives thereof;, this Note is not intended to create any right or other cause of action in or on behalf of any person other than Lender, its successors, assigns, endorsees and any person to whom Lender may grant any interest in this Note. 8.8 To the extent possible, each provision of this Note shall be interpreted in a manner as to be valid, legal and enforceable under applicable law. If any provision of this Note shall be held invalid, illegal or unenforceable, such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability and the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 8.9 This Note may be extended, modified, or renewed by agreement of Maker and Lender without releasing, discharging or affecting the liability of Maker or any sureties, endorser or guarantors of this Note. 8.10 All capitalized terms used herein and not herein defined shall have the meaning given to them in the Loan Agreement. 8.11 This Note shall have the effect of an instrument executed under seal. IN WITNESS WHEREOF, Maker has caused this Note to be duly executed as of the date first above written. IN THE PRESENCE OF: MAKER: FERROFLUIDICS CORPORATION /s/ Stephen P. Morin - -------------------------- By: /s/ William B. Ford ------------------------------------ Name: William B. Ford Title: Vice President 6 Page 6 STATE OF NEW HAMPSHIRE COUNTY OF On this the 3rd day of December 1996, before me, the undersigned officer, personally appeared William B. Ford, the Vice President and Chief Financial Officer of Ferrofluidics Corporation, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed this instrument as a free act and deed and for the purposes therein contained on behalf of the corporation. /s/ Joan C. Deichler -------------------------------------------- Joan C. Deichler Notary Public/Justice of the Peace My Commission expires: Sept. 8, 1999 EX-10.29 7 AMENDMENT TO MORTGAGE 1 EXHIBIT 10.29 AMENDMENT TO MORTGAGE For valuable consideration, the sufficiency of which is hereby acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation with a place of business at 40 Simon Street, Nashua, New Hampshire ("Mortgagor") hereby amends the Mortgage Deed, previously given by Mortgagor to Bank of New Hampshire, a bank chartered under the laws of the State of New Hampshire, with a place of business at 191 Main Street, Nashua, New Hampshire 03060, ("Mortgagee") which Mortgage is dated June 30,1994 and recorded in the Hillsborough County Registry of Deeds at Book 5551, Page 1011, ("Mortgage") for the purpose of increasing the amount secured by said Mortgage from $7,911,000 to $13,911,000. Accordingly, Mortgagor hereby amends the Mortgage as follows: Paragraph one of the Mortgage is hereby amended to read as follows: 1. That Mortgagor in order to secure its payment in the amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ($13,911,000.00) plus interest, together with all advances, readvances, extensions, charges, expenses, fees amendments and other charges as set forth in the Master Term Note from Mortgagor to Mortgagee ("Note") in the amounts of (i) Eight Million Five Hundred Thousand Dollars ($8,500,000.00) for a revolving line of credit of even date; and (ii) Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00), for a line of credit to fund Borrower's obligations under an agreement with Lender of even date ("Reimbursement Agreement"); and (ii) the Revolving Loan and Security Agreement of even date herewith ("Loan Agreement"), including the performance of all conditions, undertakings and obligations con rained therein, and in the Loan Agreement and in other instruments and documents executed in connection therewith the obligations described in paragraphs (i) through (iii), inclusive, shall be referred to collectively as the "Liabilities" (the Note, the Reimbursement Agreement, the Loan Agreement and all ancillary documents are referred to in the aggregate as the "Instruments"), and for other good and valuable consideration paid by Borrower to Mortgagee, hereby grants to Mortgagee, with Mortgage Covenants, certain property with all buildings and improvements thereon located in Nashua, Hillsborough County, New Hampshire, as more particularly described on Exhibit A hereto (the "Premises"). In all other respects, the Mortgage shall remain in full force and effect in accordance with its original terms and priority and the and obligations of the Mortgagor shall remain enforceable in accordance therewith. Mortgagor acknowledges and agrees and represents to Mortgagee that there are no defenses, offsets, rights or other claims which Mortgagor or any other party can assert that would affect the obligations of Mortgagor or the rights of Mortgagor under the Mortgage. 2 Page 2 WITNESS: BORROWER: FERROFLUIDICS CORPORATION /S/ William B. Ford By: /s/ Stephen P. Morin - ------------------------ ----------------------------- Name: Stephen P. Morin Title: Controller STATE OF NEW HAMPSHIRE COUNTY OF On this the 3rd day of December, 1996, before me, the undersigned officer, personally appeared Stephen P. Morin, who acknowledged himself to be the Controller of FERROFLUIDICS CORPORATION and that he, as such Controller, being authorized to do so, executed the foregoing First Amendment to Note and Loan Agreement for the purposes therein contained, by signing the name of the corporation by himself as Controller with the intention that it be effective as of the date first above written. /s/ Joan C. Deichler ------------------------------------ Justice of the Peace/Notary Public My Commission Expires Sept. 8, 1999 EX-10.30 8 AMENDMENT TO ASSIGNMENT OF LEASES 1 EXHIBIT 10.30 AMENDMENT TO ASSIGNMENT OF LEASES For valuable consideration, the sufficiency of which is hereby acknowledged, Ferrofluidics Corporation, a Massachusetts business corporation with a place of business at 40 Simon Street, Nashua, New Hampshire ("Borrower") hereby amends the Assignment of Leases, previously given by Mortgagor to Bank of New Hampshire, a bank chartered under the laws of the State of New Hampshire, with a place of business at 191 Main Street, Nashua, New Hampshire 03060, ("Lender") which Mortgage is dated June 30,1994 and recorded in the Hillsborough County Registry of Deeds at Book 5551, Page 1020, for the purpose of increasing the amount secured by said Assignment, as follows 1. The first Recital paragraph, after the "Witnesseth" clause, is hereby amended to read as FOLLOWS: WHEREAS, Lender has agreed to provide Borrower with lines of credit Consisting of: (i) a revolving line of credit loan in the amount of up to Eight Million Five Hundred Thousand Dollars ($8,500,000.00) and (ii) a line of credit in the amount of up to Five Million Four Hundred Eleven Thousand Dollars ($5,411,000.00) pursuant to an agreement with Lender of even date herewith ("Reimbursement Agreement"), all as evidenced in the Master Term Note of even date in the principal amount of Thirteen Million Nine Hundred Eleven Thousand Dollars ('$13,911,000.00) ("Note"): In all other respects, the aforesaid Assignment of Leases shall remain in full force in effect, entitled to its priority in accordance with the original date of execution and recording. IN WITNESS WHEREOF, Borrower has executed this instrument as of this 3rd day of December, 1996. WITNESS: BORROWER: FERROFLUIDICS CORPORATION /s/ Stephen P. Morin By: /s/ William B. Ford - ------------------------ ------------------------------ Stephen P. Morin Name: William B. Ford Title: Vice President 2 Page 2 STATE OF NEW HAMPSHIRE COUNTY OF On this the 3rd day of December, 1996, before me, the undersigned officer, personally appeared William B. Ford, who acknowledged himself to be the Vice President and Chief Financial Officer of Ferrofluidics Corporation, Massachusetts corporation, and that he, as such Vice President and Chief Financial Officer, being authorized to do so, executed the foregoing Assignment of Leases for the purposes therein contained, by signing the name of the corporation by himself as Vice President and Chief Financial Officer with the intention that it be effective as of the date first above written. /s/ Joan C. Deichler ----------------------------------------- Joan C. Deichler Justice of the Peace/Notary Public My Commission Expire Sept. 8, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FERROFLUIDICS CORP.'S BALANCE SHEETS AS OF JUNE 28, 1997 AND THE RESULTS OF OPERATION FOR THE YEAR ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 28, 1997. 0000353286 FERROFLUIDICS CORP. 1 U.S. DOLLARS YEAR JUN-28-1997 JUL-01-1996 JUN-28-1997 1 883,000 0 13,808,000 199,000 15,263,000 31,570,000 19,338,000 10,961,000 45,001,000 18,247,000 5,000,000 0 0 36,502,000 (14,921,000) 45,001,000 67,785,000 67,785,000 48,218,000 48,218,000 18,037,000 0 854,000 497,000 (1,175,000) 1,672,000 0 0 0 1,672,000 .27 .27
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