-----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, Qo8/FoepmNb6kN7syKv2PGhp0hhvE1s3qCew/IY2c29mhrPTT49748Q37nez3pxS INCN3dEB5ojqbMdiNXisFA== 0000950135-95-002018.txt : 19951002 0000950135-95-002018.hdr.sgml : 19951002 ACCESSION NUMBER: 0000950135-95-002018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FERROFLUIDICS CORP CENTRAL INDEX KEY: 0000353286 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 020275185 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12198 FILM NUMBER: 95576844 BUSINESS ADDRESS: STREET 1: P O BOX 7823 CITY: COLUMBUS STATE: OH ZIP: 43207 BUSINESS PHONE: 6144912515 MAIL ADDRESS: STREET 1: 40 SIMON STREET CITY: NASHUA STATE: NH ZIP: 03061 10-K 1 FORM 10-K FOR 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 06/30/95 [ ] 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 No x ------ ------ (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 September 8, 1995, 5,997,198 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 $14.00 per share for the registrant's Common Stock, as reported on the NASDAQ National Market as of September 8, 1995 was $83,600,496. 2 TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 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 . . . . . . . . . . . . . . . . . . . . 20 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 . . . . . . . . . . . . . . . . . . 45 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . 46 (a) Financial Statement Schedule (b) Reports on Form 8-K Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
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 when a magnetic force is employed. Ferrofluids are comprised of molecular-sized magnetic particles that are surface treated so that they can be dispersed in 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 Company's 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 or application, then outsources the fabrication of all critical machined parts and components. The product is then assembled, tested and shipped from the Company's headquarters in Nashua, New Hampshire. The Company seeks to apply its Ferrofluidic 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 is headquartered and conducts its domestic operations in Nashua, New Hampshire and operates overseas through the following wholly-owned subsidiaries: (1) ADVANCED PRODUCTS & TECHNOLOGIES, GmbH ("AP&T"), headquartered in Neurtingen, Germany which: (a) designs, manufactures and markets products for the optical coating and thin-film deposition industries such as electron beam guns and related controllers; 1 4 (b) serves as an exclusive distributor in Europe for several U.S. and European corporations that manufacture compatible products for similar industries; and (c) markets and services Ferrofluidic(R) products in Europe through its sales offices in Germany, England and Spain. (2) FERROFLUIDICS JAPAN CORPORATION ("FJC"), located in Tokyo, Japan which distributes and services Ferrofluidics' vacuum rotary feedthrough seals to the semiconductor industry, ferrofluid to the audio loudspeaker industry and 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 Nippon Ferrofluidics Corporation ("NFC"), a former subsidiary located in Japan. In addition, under an exclusive license granted by Ferrofluidics in August 1993, NFC manufactures and sells Ferrofluidic exclusion seals for use on computer peripheral equipment. OPERATING STRUCTURE The Company is organized into three business segments: (i) the COMPONENTS BUSINESS, or FERROFLUIDIC(R) PRODUCTS segment, which manufactures and markets: (a) ferrofluids used in the Company's own engineered core products, loudspeakers for the home and automotive markets, and for use in nondestructive testing, inertia dampers, stepper motors and sensor applications; (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; and (c) fluid-film bearing spindles for the optical scanning, laser printing and computer peripheral industries. Sales generated by the Components Business accounted for approximately 41.3%, 42.7% and 25.5% of total product sales in fiscal 1995, 1994 and 1993, respectively. (ii) the SYSTEMS BUSINESS, 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 Business accounted for 34.5%, 32.7% and 52.8% of total product sales in fiscal 1995, 1994 and 1993, respectively. 2 5 (iii) DISTRIBUTED PRODUCTS BUSINESS, or Thin Film Deposition segment, which includes the sale in Europe by AP&T of compatible products on an exclusive basis for several U.S. and European companies. Sales generated by the Distributed Products Business accounted for 24.2%, 24.6% and 21.7% of total product sales in fiscal 1995, 1994 and 1993, respectively. In fiscal 1995, $21,412,000, or 62.7%, of the Company's total sales were to foreign customers, primarily through AP&T, FJC and to the Systems Business' customers in Europe and the Pacific Rim. Sales to unaffiliated foreign customers in fiscal 1994 and 1993 totaled $16,229,000 (61.5%) and $20,733,000 (61.5%), respectively. All manufacturing and assembly of products for the Components Business and the Systems Business is conducted at the Company's headquarters. Marketing of those products for all markets, excluding Europe and Japan, is principally conducted by its direct sales force at the Company's headquarters or, in the case of standard vacuum rotary feedthrough seals to the end-user markets, through the Kurt J. Lesker Company ("KJLC"), a worldwide distributer of vacuum related products. The Company has established, and continues to develop, 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 four major product categories: (i) ferrofluids; (ii) magnetic fluid seals, sealing subsystems, and other Ferrofluidic(R) products; (iii) crystal growing systems and related equipment; and (iv) fluid-film bearing spindles. In addition, the Company distributes advanced technology component and systems products for use in the manufacture of semiconductors and in the thin film deposition and optical coating industries through AP&T in Europe. (i) FERROFLUIDS. The Company supplies ferrofluids for use in the Company's own engineered products and for use in home and automotive loudspeakers and for nondestructive testing, sensors and stepper motors. The Company, in conjunction with its licensees, currently supplies fluids for approximately 30 million speakers per year, representing the vast majority of the ferrofluid applications in speakers. Sales of ferrofluids accounted for approximately 7.0%, 7.7% and 4.7% of total product sales in fiscal 1995, 1994 and 1993, respectively. The selling price for the majority of the Company's third-party ferrofluid applications ranges from $1,000 to $10,000 per liter. (ii) MAGNETIC FLUID SEALS AND SUBSYSTEMS. The Company combines proprietary ferrofluid technology with broad applications engineering to develop a variety of products that provide state-of-the-art seals and sealing subsystems that either seal the environment out of a manufacturing process or seal a manufacturing process out of 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. Sales of magnetic fluid sealing devices accounted for approximately 32.1%, 33.4% and 19.9% of total product sales in fiscal 1995, 1994 and 1993 respectively. The Company's major magnetic sealing products are: 3 6 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 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 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 ("OEM's") 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 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. The Company's other Ferrofluidic(R) products include: Inertia Dampers: The Company supplies Ferrofluidic(R) inertia dampers that are used in semiconductor equipment, disk drives, XY plotters, computer printers and other computer peripheral equipment. The dampers eliminate resonance, reduce settling time and improve positional accuracies. Computer Exclusion Seals: The Company, through its Japanese licensee, supplies the computer peripheral industry with Ferrofluidic exclusion seals for use on hard disk drives. The seals are used to prevent contaminants and small particles from entering the critical head-to-disk recording region in disk drive memories. Such contaminants can cause "head crash" failures resulting in loss of information. 4 7 (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 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 memory 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 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 34.5%, 32.7% and 52.8% of total product sales in fiscal 1995, 1994, and 1993, respectively. Silicon crystal growing systems typically sell at prices ranging between $300,000 and $1,000,000, 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. (iv) FLUID-FILM BEARING SPINDLES. Incorporating over ten years of experience in ferrofluid film and hydrodynamic bearings, the Company has developed a high accuracy, ultra-high speed aerodynamic bearing spindle ("air bearing"). This air bearing spindle was developed to meet the increasing demands for higher speeds -- in excess of 20,000 rpm -- and for improved accuracy of less than 0.5 arc seconds in high-end laser scanning, imagesetter and laser printer applications. For traditional ball bearing spindles, the major source of runout (which can be defined as the total amount of random motion that the shaft experiences while being rotated at the design speed) is the ball bearing itself. Air bearing spindles have no inherent nonrepeatable runout. Sales of ferrofluid-film and air bearing spindles accounted for approximately 2.2%, 1.6% and 0.8% of total product sales in fiscal 1995, 1994 and 1993, respectively. SIGNIFICANT CUSTOMERS In fiscal 1995, sales to one foreign customer of the Systems Business of $6,209,000 accounted for 18.2% of consolidated product sales. In fiscal 1994, sales to this same customer in the amount of $5,667,000 accounted for 21.5% of consolidated product sales. Management believes that the loss of this customer could have a material adverse effect on its future results of operations. Sales under 5 8 related contracts to that same foreign customer and a related U.S. customer accounted for approximately $9,907,000 and $5,959,000, or 30.1% and 18.1%, respectively, of consolidated sales in fiscal 1993. COMPETITION The Company believes that its competitive business will continue to be dependent upon its trade secrets, know-how and ability to develop both ferrofluids for specific applications and technologically-advanced products which utilize ferrofluids. The Company believes that its competitive position with respect to its proprietary products, while aided by its patents, is not at present materially dependent upon them. The Company does, however, believe that several of its pending patents, if issued, could further strengthen its competitive position. The Company's ferrofluids are proprietary to the Company. (i) MAGNETIC FLUIDS. Numerous other companies around the world supply various forms of magnetic fluids for commercial applications. Nevertheless, the Company, in conjunction with NFC, 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 competitors in the audio ferrofluid market are NFC with respect to sales in the Pacific Rim. (ii) SEALS. In semiconductor and other critical 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 are less expensive in terms of 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; however, it represents a minor competitor to the Company's seals business in terms of relative market share. In industrial process applications, Ferrofluidics' sealing system competes with various nonmagnetic fluid sealing devices and sealing subsystems; however, the Company believes all other solutions 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 total worldwide installed base of crystal growing systems, the Company estimates that approximately 40% are Ferrofluidics crystal growers. However, 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 major supplier with a greater than 85% market share. 6 9 There are a limited number of large customers for silicon crystal growing systems. The market is cyclical and even during "up" cycles, one or two suppliers generate most of the equipment sales. The Company during the past three years has shipped more than 45 systems to customers in the U.S., Japan and Korea. 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. (iv) FLUID-FILM BEARING SPINDLES. The Company's fluid-film bearing spindles compete with conventional ball bearing and other air- bearing spindles manufactured by established companies, some of which have substantially greater resources than the Company. The Company's design and manufacture of spindles is currently being directed toward higher-end applications, such as laser optical scanning, which require higher rotational speeds and greater accuracy. 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. EMPLOYEES AND MARKETING The Company currently has approximately 249 employees worldwide, of which 203 are employed in the United States, 40 in Europe and 6 in Japan. In the United States, the Company markets all of its products through a direct field sales force and an applications engineering staff headquartered in Nashua, NH which is augmented by a third party sales representative organization. Abroad, products are sold in Europe through AP&T, the Company's wholly-owned German subsidiary, its U.K. sales office, and unaffiliated distributors and sales representatives in other European countries and in Japan through its licensee, NFC, and through its wholly- owned subsidiary, FJC. The Company has also sold certain products through MSB, a former licensee in Israel. 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. 7 10 During 1995, the Company substantially expanded its capacity for assembly and test with respect to its crystal growing systems 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, substantially all 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 Company does not presently have the capacity to conduct a substantial portion of component production in-house. A substantial portion of the cost of the components of the crystal growing systems, including electrical components and machined parts, are purchased from third parties. The Company believes that there are a number of suppliers for these parts. INDUSTRIAL PROPERTY RIGHTS The Company has a number of U.S. and foreign patents and patent applications for its seals, dampers, bearings and systems, with expiration dates from 1995 to 2006. 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 Ferrometic, 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. The Company spent (and charged to expense) $1,479,000, $1,237,000 and $1,269,000 in fiscal years 1995, 1994 and 1993, respectively, on the development of new products and the improvement of existing products. Substantially 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 8 11 number of new technical advances in crystal growing systems, including laser melt level control and a continuous feed system for polysilicon. BACKLOG As of June 30, 1995, the Company had a consolidated order backlog of $37,756,000, as compared to $14,613,000 at June 30, 1994. A comparative summary of the consolidated backlog by business segment is as follows:
1995 1994 ---- ---- Components $ 3,839,000 $ 3,939,000 Systems 32,406,000 8,162,000 Distributed Products 1,511,000 2,512,000 ----------- ----------- Total Backlog $37,756,000 $14,613,000
Of the total backlog at June 30, 1995, approximately 98% is expected to ship during fiscal 1996. 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. Product refinement and increased field experience have continually reduced warranty costs on a per unit basis and warranty expenses have historically been well 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 K to the Consolidated Financial Statements in Item 8 of this report. 9 12 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 K of Notes to the Consolidated Financial Statements in Item 8 of this report. ITEM 2. PROPERTIES The Company's offices, product development facility and principal manufacturing plant are located in Nashua, New Hampshire in a 71,000 square foot facility situated on approximately 4.5 acres of land owned by the Company. This land, the building, and substantially all the Company's machinery and equipment at its Nashua facility have been pledged as security against an industrial revenue bond. (See Note A and H 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 and Tokyo, Japan. ITEM 3. LEGAL PROCEEDINGS Securities and Exchange Commission - ---------------------------------- On February 19, 1993, the Company received an informal inquiry from the SEC requesting that the Company provide the SEC with certain documents concerning publicity relating to the Company for the period of January 1, 1992 to February 19, 1993. In August 1993, the SEC issued an order directing a private investigation to determine whether certain unnamed persons 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. Since inception of the investigation, the Company has cooperated fully with the SEC's inquiry. 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 30, 1995. 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 NASDAQ.
High Low - ------------------------------------------------------------------------------------------------- 1994 - ---- 7/1/93 - 9/30/93 16 1/4 5 3/4 10/1/93 - 12/31/93 8 1/4 5 1/2 1/1/94- 3/31/94 6 3/4 3 3/4 4/1/94 - 6/30/94 7 4 3/4 1995 - ---- 7/1/94 - 9/30/94 6 1/8 4 3/4 10/1/94 - 12/31/94 7 1/8 4 1/8 1/1/95- 3/31/95 8 1/8 5 1/4 4/1/95 - 6/30/95 10 1/4 5 1/4
On September 8, 1995, the closing sale price for the Company's Common Stock, as reported by NASDAQ, was $14.00. On that date, there were approximately 3,970 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 30, 1995, 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 30, --------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ----- INCOME STATEMENT DATA: - ---------------------- Net product sales $34,149,000 $ 26,379,000 $32,905,000 $ 20,926,000 $23,855,000 Royalty revenues 6,000 82,000 372,000 767,000 527,000 ----------- ------------- ----------- ------------ ----------- Total net sales and revenues 34,155,000 26,461,000 33,277,000 21,693,000 24,382,000 Engineering & product development expenses 3,410,000 3,390,000 3,129,000 1,757,000 1,474,000 Nonrecurring operating expenses (income) (1,156,000) 3,108,000 8,594,000 (470,000) (930,000) Operating income (loss) 943,000 (9,662,000) (11,716,000) 35,000 4,165,000 Interest expense, net (406,000) (356,000) (254,000) (567,000) (366,000) Income tax benefit (expense) 322,000 (1,169,000) (466,000) 30,000 (1,225,000) Income (loss) from continuing operations 889,000 (10,713,000) (12,446,000) (167,000) 2,802,000 Net income (loss) $889,000 $ (10,713,000) $(12,446,000) $ (167,000) $ 3,890,000 =========== ============= ============ ============ =========== PER SHARE DATA: - --------------- Income (loss) from continuing operations $.16 $(2.00) $(2.49) $(.06) $ .93 Net income (loss) $.16 $(2.00) $(2.49) $(.06) $1.23 ==== ====== ====== ===== ===== Weighted average shares outstanding 5,563,160 5,366,350 5,005,120 3,008,916 3,595,887 BALANCE SHEET DATA: - ------------------- Working capital $ 7,811,000 $ (1,601,000) $ 6,775,000 $ 16,994,000 $ 7,470,000 Total assets 39,529,000 32,508,000 36,884,000 35,209,000 27,640,000 Total liabilities 23,748,000 21,325,000 15,107,000 11,678,000 18,256,000 Long-term debt 5,036,000 28,000 - 7,500,000 8,827,000 Stockholders' equity 15,781,000 11,183,000 21,777,000 23,531,000 9,386,000 Note: (a) No dividends had been declared or paid during the five years ended June 30, 1995.
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 1995 Versus Fiscal 1994: - ------------------------------- In fiscal 1995, net product sales and revenues increased 29% to $34,155,000 from $26,461,000 in fiscal 1994. Revenues from the Company's Crystal Growing Systems segment increased 37% from $8,612,000 in 1994 to $11,782,000 in 1995. The increase in revenues for this product line can be attributed to the industry-wide increase in the demand for 200 millimeter (8 inch) silicon wafers and the resulting increase in the demand for the equipment for growing the silicon crystals. The Company's model CZ-150, which is capable of growing silicon ingots from which 200 millimeter diameter wafers are made, has received strong acceptance worldwide by silicon wafer manufacturers. Further, product revenues in this segment are impacted by customers' contracted delivery schedules, and often are not recorded evenly over the reporting period. Worldwide revenues in the Company's Components business rose 25% from $11,285,000 in 1994 to $14,119,000 in 1995. The comparison of revenues by major product line within the Components Business is as follows:
1995 1994 ---- ---- Seals $10,986,000 $8,822,000 Bearings 746,000 429,000 Ferrofluid 2,387,000 2,034,000 ------------ ----------- Total Components Business $14,119,000 $11,285,000
Sales from the Company's European operations, AP&T, which includes the sale of the Company's core products in Europe as well comprising the Thin Film Deposition segment, increased 20% to $11,201,000 in 1995 as compared to $9,354,000 in fiscal 1994. Bookings in 1995 amounted to $56,911,000, (including $35,734,000 of orders for crystal growing systems) compared to $30,317,000 in 1994 (including $12,091,000 of systems orders). Backlog at June 30, 1995 totaled $37,756,000 (including $32,406,000 of crystal growing systems) compared to $14,613,000 at June 30, 1994 (including $8,162,000 of crystal growing systems). Of the order backlog at June 30, 1995, approximately 98% is expected to be shipped in fiscal 1996. Consolidated gross margin for the year ended June 30, 1995 amounted to 40.7% of product sales as compared to 33.9% of product sales in the previous year. Higher production volumes in 1995 contributed to the improved gross margins through better absorption of overhead costs. Additionally, improved pricing and inventory and production management contributed to the improvement in overall gross margins in 1995. In addition, gross margins benefitted from management's decision to discontinue the operations of VSE Vakuumtechnik GmbH ("VSE") an Austrian majority-owned company for which AP&T and the Company distributed products and which had experienced prolonged operating losses. The gross margin in 1994 reflected the impact of poor margins of VSE 13 16 products and certain higher than normal warranty costs relating to the crystal growing systems and certain excess inventory charges pertaining to feedthrough seals. As more fully discussed in Note B to the Consolidated financial statements, in November 1994, the Company entered into a license agreement with a Swiss vacuum-valve manufacturer pursuant to which the manufacturer has been granted the exclusive right to incorporate certain Ferrofluidic(R) technology into its products in exchange for the receipt of $1,300,000 in cash. The $1,300,000 has been included in nonrecurring operating income in the consolidated statement of operations for the year ended June 30, 1995. The agreement also provides for the receipt of an additional $200,000 by June 30, 1996, contingent upon the occurrence of certain events by that time. The Company will record any additional cash receipts as income when they become assured. In connection with the aforementioned license agreement, in September 1994, management decided to abandon the operations of VSE due to its prolonged operating losses and its inability to compete effectively in the standard vacuum-valve industry. The results of operations for VSE for fiscal 1995 has been reclassified and included in nonrecurring operating income (expense) in the accompanying consolidated statements of operations . The Company expended $3,410,000 during fiscal 1995 on engineering and product development, representing 10% of net sales and revenues compared to $3,390,000, or 12.8% of net sales and revenues in the preceding year. Of the total amount expended in 1995, $1,930,000 represents design and applications engineering and $1,480,000 represents amount spent on the development of new products. In fiscal 1994, the design and applications engineering totaled $2,153,000 and the new product development totaled $1,237,000. Of the total fiscal 1995 engineering and product development expenditures, $1,135,000 was in the crystal growing systems segment as compared to $1,496,000 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 decreased 12% from $12,133,000 in 1994 to $10,694,000 in fiscal 1995. The decline in SG&A expenses were principally the result of cost cutting measures undertaken at the Company's headquarters in Nashua, with approximately $150,000 of reductions in the Europe and Japan operations combined. Interest income in 1995 of $232,000 represents principally the income earned on certain paid-up insurance policies on the lives of former officers. Interest expense of $638,000 includes approximately $243,000 of interest on the Company's variable rate industrial revenue bond and approximately $140,000 in interest expense on amounts drawn on a revolving credit line. See Note G for a more complete discussion of the Company's debt obligations. At June 30, 1995, there were no amounts outstanding against this revolving credit line. Additionally, the Company recorded $201,000 of interest expense pertaining to loans against certain keyman insurance policies, which are more fully discussed in Note E to the Consolidated Financial Statements. The Company records translation and exchange gains and losses resulting from fluctuations of foreign currency as other income (expense). In 1995, the Company realized a gain upon the sale of its investment in NFC (see Note D to the Consolidated Financial Statements) of approximately $200,000. The remaining balance in other income (expense) was principally amortization of bank financing costs. 14 17 The tax provision in 1995 includes a benefit of approximately $620,000 resulting from the recording of a tax asset in Europe at AP&T reflecting that business's return to profitability from continuing operations. Additionally, the provision includes the recording of approximately $300,000 in tax reserves pertaining to various state and foreign taxes. Fiscal 1994 Versus Fiscal 1993: - ------------------------------- In fiscal 1994, net product sales and revenues decreased 20% to $26,461,000 from $33,277,000 in fiscal 1993. Revenues from the Company's Crystal Growing Systems segment declined nearly $8,779,000 from $17,391,000 in 1993 to $8,612,000 in 1994. Revenues of the Company's Components Business rose 35% from $8,382,000 in 1993 to $11,285,000 in 1994. The comparison of revenues by product line within the Components Business is as follows:
1994 1993 ---- ---- Seals $ 8,822,000 $ 6,544,000 Air bearings 429,000 279,000 Ferrofluid 2,034,000 1,559,000 ----------- ----------- Total Components Business $11,285,000 $ 8,382,000
Sales of sealing devices and subsystems in 1994 include approximately $870,000 of sales of standard product to The Kurt J. Lesker Company, a components distributor servicing the semi-conductor and other vacuum process-related industries, which also acts as a sales representative for the Company's custom seals to end users in these markets. Sales from the Company's European operations, AP&T, which includes the sale of the Company's core products in Europe as well as the Thin Film Deposition segment, totaled $9,354,000 in 1994, relatively unchanged from the $9,417,000 of sales in fiscal 1993. Additionally, consolidated product revenue for the years ended June 30, 1994 and 1993 include royalties from the sale of Ferrofluidics products by the Company's two licensees, NFC in Japan and MSB in Israel, of $82,000 and $372,000, respectively. Bookings in 1994 amounted to $30,317,000, (including $12,091,000 of orders for the Company's crystal growing systems) compared to $27,925,000 in 1993, which included $9,120,000 of systems orders. Backlog at June 30, 1994 totaled $14,613,000 (including $8,162,000 of crystal growing systems) compared to $11,451,000 at June 30, 1993 (including $4,982,000 of crystal growing systems). Consolidated gross margin for the year ended June 30, 1994 amounted to 33.9% of product sales as compared to 38.8% of product sales in the previous year. The decline in the gross margin is primarily attributable to product mix in the crystal growing systems and components segments. The introduction of new, lower margin, products within the Company's components segment, lower than expected margins on the VSE product line in Austria and certain warranty costs relating to the crystal growing systems all contributed to the decline in the gross margin. Additionally, in 1994, the Company has provided $400,000 of reserves for excessive inventory levels with respect to its standard line of feedthrough seals. 15 18 The Company expended $3,390,000, during fiscal 1994 on engineering and product development, representing 12.8% of total net sales and revenues compared to $3,129,000, or 9.4% of total net sales and revenues in the preceding year. Of the total amount expended in 1994, $2,153,000 represents design and applications engineering and $1,237,000 represents amount spent on the development of new products. In fiscal 1993, the design and applications engineering totaled $1,860,000 and the new product development totaled $1,269,000. Of the total fiscal 1994 engineering and product development expenditures, $1,496,000 was in the crystal growing systems segment as compared to $1,483,000 in the prior fiscal year. The remaining balance of expenditures related to engineering and development of the Company's fluids and other core products. Selling, general and administrative ("SG&A") expenses decreased from $13,136,000 in 1993 to $12,133,000 in fiscal 1994. However, SG&A at the Company's headquarters in Nashua was reduced from $8,700,000 to $7,004,000 as a result of the restructuring of operations implemented by new management. The reductions in Nashua were partially offset by increases in SG&A in Japan and Europe of $471,000 and $222,000, respectively. Administrative expenses for fiscal 1993 include charges of approximately $890,000 principally representing reserves against certain long term receivables, potential indemnification liabilities associated with the insurance loan agreements with former officers and certain sales related costs. The results of operations in 1994 includes a loss from operations at Ferrofluidics Japan of $949,000 and a loss from operations at AP&T in Europe of $620,000. The loss in Europe included a loss from operations of VSE, the Company's majority owned subsidiary in Austria which was acquired in May 1993, of $429,000. Settlement of NFC Litigation - ---------------------------- As more fully discussed in Note D to the Consolidated Financial Statements, on June 30, 1993, Ferrofluidics entered into a series of new license and other agreements ending all litigation between Ferrofluidics and NFC, its former Japanese subsidiary. Pursuant to the agreements, in August 1993, Ferrofluidics received one billion Japanese Yen (approximately $9.5 million), in settlement of all claims against NFC including all future royalties owing to the Company under the new and a previous license agreement, any past due royalties owing under the previous agreement, and reimbursement of expenses incurred by Ferrofluidics in connection with the litigation. The one billion Yen (approximately $9.5 million) was remitted to the Company net of $815,000 in Japanese withholding tax on that portion of the settlement representing royalty payments, which has been included in income tax expense for the year ended June 30, 1994. Also pursuant to the agreements, Ferrofluidics acquired 125,000 shares of NFC's common stock, approximately 16% of NFC's outstanding stock, for one billion Japanese Yen, and was given a seat on NFC's board of directors. Given that the transactions involved an exchange of identical amounts, it has been treated as a nonmonetary transaction and, therefore, the value assigned to the settlement is equivalent to the fair market value of the NFC shares purchased. In September 1993 and August 1994, Ferrofluidics engaged an independent firm to ascertain the fair market value of its investment in NFC as of the transaction date and June 30, 1994 for purposes of recording the transaction. The results of the valuations placed the fair market value of the 125,000 NFC shares at $4,286,000 which was recorded in the first quarter of fiscal 1994. In fiscal 1994 the Company has established a valuation reserve against this investment and a corresponding charge to operations in the amount of $600,000, net of 16 19 approximately $258,000 of translation gains, in recognition of NFC losses for its fiscal year ended March 31, 1994. The resulting gain of $3,322,000, which is the $4,286,000, less the valuation reserve and expenses related to the transaction, has been recorded in the Statement of Operations for the year ended June 30, 1994. Nonrecurring Operating Charges - ------------------------------ Settlement of class action lawsuit ---------------------------------- On June 23, 1994, the Company and certain other parties to the shareholder litigation described in Note M to the Consolidated Financial Statements entered into a Stipulation of Settlement which provided for the settlement of all claims against the Company and certain other defendants. Following the preparation and execution of definitive settlement documents satisfactory to the settling parties, the Massachusetts federal district court approved the settlement as fair and reasonable and dismissed the case on August 19, 1994. In the settlement, the Company issued 600,000 freely tradable shares of the Company's Common Stock. The Company recorded its portion of the settlement and related expenses totaling $3,300,000 as a charge to nonrecurring operating charges in the third quarter of fiscal 1994 ($2,925,000 representing the estimated value of the 600,000 shares of the Company's common stock and $375,000 representing for legal and other costs). In the fourth quarter of 1994, the Company recorded an additional $225,000 charge to nonrecurring operating charges which adjusted the value of the shares to the approximate market price of the Company's common stock on August 19, 1994. Management Restructuring ------------------------ As more fully discussed in Note M to the Consolidated Financial Statements, in September 1993, the former chief executive officer retired from the Company and entered into a Termination Agreement with the Company, superseding his existing employment agreement. Pursuant to the Termination Agreement, the former CEO is receiving payments aggregating $725,000 over four years for making himself available to be used as a senior advisor to the Company during that period (the "Consultancy Period"), whether or not the Company elects to use his services. The Company has charged the entire $725,000 to nonrecurring operating expenses in the first quarter of fiscal 1994. Additionally, the Company incurred $175,000 of severance and other termination charges relating to the reduction of its executive management and operating staff in the fall of 1993. Molecular BioQuest, Inc. ------------------------ As more fully discussed in Note D to the Consolidated Financial Statements, in 1994 the Company advanced $300,000 commitment to Molecular BioQuest, Inc. ("BioQuest") pursuant to certain commitments outstanding at the time. In April 1994, the Company entered into an agreement with BioQuest pursuant to which the Company paid an additional $175,000 in full satisfaction of all obligations to BioQuest and, in exchange, received ownership of 5% of the outstanding common stock of BioQuest. The entire $475,000 paid to BioQuest has been charged to operations in the first quarter of 1994, in recognition of BioQuest's undeveloped technology and its continued operating losses. Other Charges ------------- As more fully discussed in Note D to the Consolidated Financial Statements, in 1994 and 1993, the Company advanced $209,000 and $85,000, respectively, to Ferrofluidics Taiwan 17 20 Corporation (FTC) for operating purposes. In July 1994, the Company made an investment in FTC of $75,000, representing a 19.9% interest in that company. Of the combined investment in and advances made to FTC, $230,000 and $85,000 have been charged to nonrecurring operating expenses on the Consolidated Statement of Operations in 1994 and 1993, respectively. In fiscal 1993, the Company incurred approximately $1,205,000 of legal costs pertaining principally to the class action litigation and matters associated with the inquiry and investigation of the Securities and Exchange Commission (see Note M to the Consolidated Financial Statements for a more complete discussion). These amounts have been charged to nonrecurring operating expenses on the Consolidated Statement of Operations for the year ended June 30, 1994. LIQUIDITY AND CAPITAL RESOURCES In 1995, the operations of the business provided $630,000 of cash. During 1994 and 1993, the operations of the business used cash $6,044,000 and $665,000, respectively. The recent growth in orders for the Company's products has required the investment of capital into accounts receivable and inventory. The Company continues to rely heavily on advance payments received from customers with respect to its crystal growing systems to fund the growth in that segment. Cash receipts from the sale of crystal growing systems under large multiunit contracts are typically received by the Company as certain milestones are met, including receipt of order, submission of accepted engineering drawings, shipment and final acceptance of the units. In 1995 and 1994, the Company received advance payments of $7,855,000 and $1,539,000, respectively. In order to secure its sources of supply for critical long lead inventory items, the Company has made advance payments to its vendors aggregating $2,145,000 at June 30, 1995. At June 30, 1995, the Company had outstanding purchase commitments for inventory of approximately $25,000,000. Working capital at June 30, 1995 totaled $7,811,000 as compared to a working capital deficit at June 30, 1994 of ($1,601,000), which included the classification of the $5,000,000 industrial development bond as a current liability. Renegotiation of the terms of the agreements with its bank, along with the correction of certain defaults that existed as of June 30, 1994, has enabled the Company to reclassify the bonds, which mature in 2004, to a non-current liability at June 30, 1995. During 1995, investing activities provided $3,142,000 in cash. As more fully discussed in Note D to the Consolidated Financial Statements, in 1995, the Company completed the sale of its 125,000 shares of NFC common stock to several Japanese financial institutions for an aggregate price of Y.362,500,000 (approximately $4.0 million) in cash. Additionally, as more fully discussed in Note C to the Consolidated Financial Statements, during 1995 the Company received $350,000 in full satisfaction of a note receivable from the sale of a former subsidiary. Investing activities used cash of $907,000 and $7,824,000 in 1994 and 1993, respectively. due principally to $785,000 of capital investments. Investing activities in fiscal 1993 used cash of $7,824,000, including $3,926,000 of cash paid for the Company's investment in Fuji Seiki, which is net of $2,500,000 received from Fuji Seiki in connection with the March 1993 license agreement relating to the manufacture and sale of the Company's vacuum rotary feedthroughs in Japan. Capital expenditures totaled $1,880,000 in 1995, as compared to $785,000 in 1994 and $3,387,000 in 1993. During 1995, the increase in the demand for the Company's crystal growing equipment necessitated an investment in plant and equipment in order to enhance the Company's production capacity. Management expects additional capital expenditures of in excess of $1,000,000 18 21 during fiscal 1996 to complete the upgrade of its manufacturing facility, including the installation of approximately $700,000 of equipment for fabrication and machining of critical component parts. The significant capital expenditures in 1993 were incurred primarily in connection with the acquisition of $675,000 of equipment in Japan, $905,000 of fixed assets acquired in the purchase of VSE, as well as the expansion of the Company's existing manufacturing capabilities and computer hardware and software systems. Financing activities used $2,586,000 in cash in 1995, principally representing the repayment of the outstanding balances on revolving lines of credit. With the significant advance payments received from its crystal grower customers in 1995, the Company has not needed to utilize its revolving credit lines for working capital. Also included in the cash from financing activities in 1995 is the elimination of approximately $1,700,000 of bank debts in Austria upon the abandonment of the VSE operation (See Note B to the Consolidated Financial Statements). Financing activities provided cash of $1,270,000 in 1994. Due to its need for working capital, the Company borrowed $823,000 during 1994 against the revolving credit lines discussed above. Additionally, during 1994, the Company elected to retire its $2,500,000 1985 Series Industrial Revenue Bonds, which were due to mature in December 1995. The bonds carried a fixed interest rate of 7.25%, plus the cost of the standby letter of credit and various administrative costs, and as such, management elected to redeem the bonds early utilizing borrowings of cash surrender value in the amount of $2,927,000. In fiscal 1993, the exercise of stock purchase options and warrants ($5,302,000) and the sale of 315,000 shares of the Company's common stock to Fuji Seiki ($4,173,000) were the principal source of cash. In connection with the audit of the Company's financial statements for the fiscal year ended June 30, 1993, the Company received a disclaimer of opinion with respect to the consolidated statements of operations, stockholders' equity and cash flows for the year ended June 30, 1993. As a result of receiving the disclaimer, the Company is precluded from accessing the capital markets for financing until it obtains three years of audited financial statements. Management expects that it will meet this requirement after its fiscal year 1996, at which time the Company will have the option of raising capital, if needed, through the sale of its common stock in the public markets. On June 30, 1994, the Company entered into a series of credit agreements with a new bank which provides the Company with total credit of approximately $7,900,000, including approximately $5,400,000 in the form of a standby letter of credit for the Company's $5,000,000 1984 Series Industrial Revenue Bonds, and a $2,500,000 revolving line of credit for working capital purposes. As of June 30, 1995, the entire $2,500,000 was available to be borrowed. Through its foreign subsidiaries, the Company has various short-term facilities with local banks aggregating approximately $2,000,000. At June 30, 1995, $35,000 was outstanding against these facilities. Throughout fiscal 1995, the average outstanding balance on these facilities was $18,000. The weighted average interest rates during the year on these facilities ranged from 9.0% to 9.2%, and the interest rates at June 30, 1994 ranged from 8.0% to 9.75%. While the Company believes it has sufficient working capital resources to fund current operations and future growth of its components and thin film deposition segments, its crystal growing systems segment continues to rely heavily upon the receipt of customer deposits to fund the manufacture and delivery of systems. 19 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements -----------------------------
Page(s) Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Consolidated Balance Sheets as of June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 22 Consolidated Statements of Operations for each of the three years in the period ended June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended June 30, 1995 . . . . . . . . . . . . . . . . . . 24 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 26-44
20 23 Report of Independent Accountants --------------------------------- To the Shareholders and Directors of Ferrofluidics Corporation We have audited the accompanying consolidated balance sheet of Ferrofluidics Corporation as of June 30, 1995 and 1994 and the related statements of operations, stockholders equity, and cash flows for the years ended June 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 balance sheet presentation. We believe that our audits provide a reasonable basis for our report. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ferrofluidics Corporation as of June 30, 1995 and 1994 and the results of its operations and its cash flows for the years ended June 30, 1995 and 1994, in conformity with generally accepted accounting principles. We were also engaged to audit the accompanying consolidated statement of operations, stockholders' equity and cash flows of Ferrofluidics Corporation for the year ended June 30, 1993. These financial statements are the responsibility of the Company's management. During 1994, the Company's then chairman and chief executive officer and its then chief financial officer relinquished all positions with the Company. Based on our understanding of the underlying circumstances leading to the departure of these individuals from the Company, we believe we cannot rely on their representations nor can we be certain we have been provided with all appropriate documentation relevant to the transactions which they have initiated or for which they were responsible. Because of these matters, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the consolidated statements of operations, stockholders' equity and cash flows for the year ended June 30, 1993. /s/ Coopers & Lybrand L.L.P. Manchester, New Hampshire August 31, 1995 21 24 FERROFLUIDICS CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 1995 and June 30, 1994
ASSETS 1995 1994 - ------ ---- ---- Current Assets: Cash and cash equivalents $ 1,563,000 $ 322,000 Accounts receivable - trade, less allowance for doubtful accounts of $357,000 at June 30, 1995 and $705,000 at June 30, 1994 7,774,000 4,676,000 Inventories 14,130,000 10,169,000 Note receivable - 350,000 Prepaid and other current assets 2,659,000 590,000 ----------- ----------- Total Current Assets 26,126,000 16,107,000 ----------- ----------- Property, plant and equipment, at cost, net of accumulated depreciation of $8,895,000 at June 30, 1995 and $8,240,000 at June 30, 1994 8,116,000 7,935,000 Investment in affiliates - 3,669,000 Cash value of life insurance, net 2,976,000 2,963,000 Other assets, net 2,311,000 1,834,000 ----------- ----------- TOTAL ASSETS $39,529,000 $32,508,000 =========== =========== LIABILITIES - ----------- Current Liabilities: Industrial revenue bonds payable - 5,000,000 Bank notes payable - 2,801,000 Accounts payable 5,318,000 4,371,000 Customer deposits 9,403,000 1,543,000 Accrued expenses and other current liabilities 3,594,000 3,993,000 ----------- ----------- Total Current Liabilities 18,315,000 17,708,000 ----------- ----------- Long term debt obligations 5,036,000 28,000 Other liabilities 397,000 439,000 Class action settlement reserve - 3,150,000 Commitments and contingencies STOCKHOLDERS' EQUITY - -------------------- Preferred stock, $.001 par value, authorized 100,000 shares, issued and outstanding, none - - Common stock, $.004 par value, authorized 12,500,000 shares, issued 5,997,198 at June 30, 1995 and 5,366,949 shares at June 30, 1994 24,000 21,000 Additional paid-in capital 35,485,000 32,109,000 Retained deficit (19,463,000) (20,352,000) Currency translation adjustments (265,000) (595,000) ----------- ----------- Total Stockholders' Equity 15,781,000 11,183,000 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,529,000 $32,508,000 =========== ===========
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 30, 1995, 1994, AND 1993
1995 1994 1993 ---- ---- ----- Net sales and revenues $34,155,000 $26,461,000 $33,277,000 Cost of sales 20,264,000 17,492,000 20,134,000 ----------- ------------ ------------ Gross profit 13,891,000 8,969,000 13,143,000 Operating expenses: Engineering and product development expense 3,410,000 3,390,000 3,129,000 Selling, general and administrative expense 10,694,000 12,133,000 13,136,000 Nonrecurring operating (income) expenses (1,156,000) 3,108,000 8,594,000 ----------- ------------ ------------ Operating income (loss) 943,000 (9,662,000) (11,716,000) Interest income 232,000 224,000 319,000 Interest expense (638,000) (580,000) (573,000) Other income (expense), net 30,000 474,000 (10,000) ----------- ------------ ------------ Income (loss) before income taxes 567,000 (9,544,000) (11,980,000) Income taxes (322,000) 1,169,000 466,000 ----------- ------------ ------------ Net Income (Loss) $ 889,000 $(10,713,000) $(12,446,000) =========== ============ ============ Net Income (Loss) per common share: Net Income (Loss) $ 0.16 $ (2.00) $ (2.49) =========== ============ ============ Weighted average common and common equivalent shares outstanding 5,563,160 5,366,350 5,005,120
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 30, 1993, 1994 AND 1995
Retained Common Stock Additional Earnings Currency ------------ Paid-In (Accumulated Translation Shares Par Value Capital Deficit) Adjustments ------ --------- --------- ----------- ----------- BALANCE, JUNE 30, 1992 4,129,621 $16,518 $20,821,000 $ 2,807,000 $(114,000) Issuance of common stock for: Options and warrants exercised 816,046 3,264 5,258,000 - - Investment in affiliates 415,000 1,660 5,824,000 - - Employee stock purchase plan 3,154 13 38,000 - - Valuation of warrants granted to non- employees - - 100,000 - - Net loss - - - (12,446,000) - Current year translation adjustments - - - - (532,000) --------- ------- ----------- ------------ --------- BALANCE, JUNE 30, 1993 5,363,821 21,455 32,041,000 (9,639,000) (646,000) --------- ------- ----------- ------------ --------- Issuance of common stock for: Options and warrants exercised 812 3 4,000 - - Employee stock purchase plan 2,316 9 16,000 - - Restricted stock plan, charge to operations - - 48,000 - - Net loss - - - (10,713,000) - Current year translation adjustments - - - - 51,000 --------- ------- ----------- ------------ --------- BALANCE, JUNE 30, 1994 5,366,949 21,467 32,109,000 (20,352,000) (595,000) --------- ------- ----------- ------------ --------- Issuance of common stock for: Settlement of shareholder 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) ========= ======= =========== ============ =========
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 30, 1995, 1994, AND 1993
1995 1994 1993 Cash flows from operating activities: Net income (loss) $ 889,000 $(10,713,000) $(12,446,000) Adjustments to reconcile net income (loss) to cash flow from operating activities: Depreciation and amortization 1,030,000 1,150,000 1,801,000 Deferred taxes (615,000) 176,000 252,000 Provision for doubtful accounts (397,000) (107,000) 348,000 Interest on long-term investments (132,000) (167,000) (113,000) Increase in cash surrender value (70,000) (412,000) (250,000) Gain on sale of fixed assets (4,000) (90,000) - Stock related compensation 290,000 48,000 100,000 Nonrecurring operating charges - 450,000 8,125,000 Translation (gains) losses (322,000) (336,000) 1,000 Gain on settlement with licensee, net of allowances - (3,411,000) - Other 286,000 (42,000) (244,000) Changes in assets and liabilities, net of acquisitions and dispositions of businesses: Accounts receivable (2,753,000) 1,358,000 (2,004,000) Inventories (3,710,000) (1,379,000) 2,483,000 Prepaid and other current assets (2,047,000) 296,000 179,000 Accounts payable and accrued expenses 330,000 2,446,000 1,103,000 Customer deposits 7,855,000 1,539,000 - Settlement reserve - 3,150,000 - ----------- ----------- ----------- Net cash provided by (used in) operating activities 630,000 (6,044,000) (665,000) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from notes receivable 350,000 125,000 63,000 Payments under capital lease obligations (72,000) - - Sale of investment in affiliate 3,991,000 - - Investment in affiliates, net - - (3,926,000) Restricted cash - (449,000) (574,000) Acquisition of property, plant and equipment (1,880,000) (785,000) (3,387,000) Proceeds from sales of assets 753,000 202,000 - ----------- ----------- ----------- Net cash provided by (used in) investing activities 3,142,000 (907,000) (7,824,000) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock - 20,000 9,475,000 Redemption of industrial revenue bond - (2,500,000) - Proceeds from borrowing of cash surrender value 189,000 2,927,000 - Short-term borrowings, net (2,775,000) 823,000 (30,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities (2,586,000) 1,270,000 9,445,000 ----------- ----------- ----------- Effect of currency rate changes on cash 55,000 (46,000) (50,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,241,000 (5,727,000) 906,000 ----------- ----------- ----------- Cash and cash equivalents at beginning of year 322,000 6,049,000 5,143,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 1,563,000 $ 322,000 $ 6,049,000 =========== =========== ===========
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 Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of Ferrofluidics Corporation and its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Reclassification - ---------------- Certain amounts in 1994 and 1993 have been reclassified to conform with the 1995 financial statement presentation. Revenue Recognition - ------------------- The Company generally recognizes product revenue upon shipment of products to the customer; royalty revenue is recognized as it is earned. 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. With regard to the Company's Core Products segment, concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers and their dispersion across many different geographical regions. In the Company's crystal growing systems segment, one Pacific Rim customer accounted for 52.7% of that segment's fiscal 1995 net sales and 14.1% of gross consolidated accounts receivable at June 30, 1995. This customer has provided the Company with irrevocable letters of credit as security for payment. Additionally, the Company has made advance payments to suppliers for inventory aggregating $2,145,000 as of June 30, 1995, which have been classified as prepaid and other current assets on the accompanying Consolidated Balance Sheet. 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. Amounts of interest bearing deposits at June 30, 1995 and 1994 totaled $1,549,000 and $661,000, respectively. Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories are comprised of the following elements at June 30, 1995 and 1994, respectively:
1995 1994 ---- ---- Raw materials and purchased parts $ 8,018,000 $ 4,278,000 Work-in-process 2,634,000 2,513,000 Finished goods 3,478,000 3,378,000 ----------- ----------- $14,130,000 $10,169,000 =========== ===========
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 to eight years; leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease 26 29 or the estimated useful life of the improvements. Depreciation on buildings and building improvements is computed using the straight-line method over estimated lives from 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 (loss) at the time of disposition. Property, plant and equipment consisted of the following at June 30, 1995 and 1994:
1995 1994 ---- ---- Land $ 321,000 $ 435,000 Buildings and improvements 6,573,000 6,854,000 Machinery and equipment 4,717,000 4,499,000 Furniture, fixtures and vehicles 4,307,000 4,076,000 Construction in process 1,093,000 311,000 ---------- ---------- 17,011,000 16,175,000 Less: Accumulated depreciation and amortization 8,895,000 8,240,000 ---------- ---------- $8,116,000 $7,935,000 ========== ==========
Intangible Assets - ----------------- At June 30, 1995, the Company had goodwill resulting from the acquisition in fiscal 1989 of AP&T GmbH of $1,334,000 that is being amortized over a 16 year life on a straight line basis. Accumulated amortization as of June 30, 1995 amounted to $477,000. 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. Product Development and Advertising Expenses - -------------------------------------------- Product development expenditures and advertising costs are charged to expense when first incurred. Income Taxes - ------------ The Company accounts for income taxes under the provisions of Statement of Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). Under --------------------------- this statement, deferred tax assets and liabilities are recognized based on temporary differences between the financial statements and tax bases of these amounts using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. It also requires a valuation reserve against deferred assets if it is more likely than not that some or all of the deferred tax assets will not berealized. The adoption of this standard in 1994 did not have a material impact on the financial statements. 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 30, 1995, each of these subsidiaries had an accumulated loss. Translation of Foreign Currencies - --------------------------------- All asset and liability amounts in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. Income statement amounts are translated at average exchange rates during the year. Translation gains and losses are accumulated as a separate component of stockholders' equity. Translation gains and losses of foreign subsidiaries whose functional currency is the U.S. dollar are charged directly to operations as incurred. Foreign Exchange Contracts - -------------------------- The Company from time to time enters into foreign exchange contracts as a hedge against certain debts denominated in a foreign currency. Market value gains and losses are recognized, and the resulting credit or 27 30 debit offsets foreign exchange gains or losses on those debts. At June 30, 1995, there were no foreign exchange contracts outstanding. Other Income (Expense) - ---------------------- Other income (expense) consisted of the following for the years ended June 30, 1995, 1994 and 1993:
1995 1994 1993 ---- ---- ---- Translation gain (loss), net $241,000 $336,000 $ (1,000) Exchange gain (loss), net 19,000 (144,000) 234,000 Gain (loss) on sale of fixed assets 4,000 90,000 (126,000) Other (234,000) 192,000 (117,000) -------- -------- --------- $ 30,000 $474,000 $ (10,000) ======== ======== =========
Earnings (Loss) Per Share - ------------------------- Income per share for fiscal 1995 is based on the weighted average number of common shares outstanding as well as the effect of all dilutive common stock equivalents. Losses per share for 1994 and 1993 are based on the weighted average number of common shares outstanding as the inclusion of common stock equivalents would have been antidilutive in those years. Statement of Cash Flows - ----------------------- For the years ended June 30, 1995, 1994 and 1993, cash payments for income taxes amounted to $121,000, $1,200,000 and $220,000, respectively. Cash payments for interest in each of the three years amounted to $427,000, $624,000 and $494,000, respectively. Significant non-cash investing, financing and operating activities during the three years ended June 30, 1995 were as follows: As more fully discussed in Note D, in August 1993, Ferrofluidics received one billion Japanese Yen (approximately $9.5 million), in settlement of all claims against NFC including all future royalties owing to the Company under the new and a previous license agreement, any past due royalties owing under the previous agreement, and reimbursement of expenses incurred by Ferrofluidics in connection with the litigation. The one billion Yen (approximately $9.5 million) was remitted to the Company net of $815,000 in Japanese withholding tax on that portion of the settlement representing royalty payments. Also pursuant to the agreements, Ferrofluidics acquired 125,000 shares of NFC's common stock, approximately 16% of NFC's outstanding stock, for one billion Japanese Yen, and was given a seat on NFC's board of directors. Given that the transactions involve an exchange of identical amounts, it is being treated as a noncash transaction (See Note D). In May 1993, the Company acquired 80% of VSE by assuming 80% of VSE's existing obligations. The Company recorded $1,885,000 of VSE bank debt. The Company applied the excess of the liabilities assumed over the assets acquired of $1,298,000 to goodwill, which was fully written off as of June 30, 1993. (See Note B) In October 1992, the Company sold 100,000 shares of its common stock at $18.00 per share to Molecular BioQuest ("BioQuest"), receiving in return a $1,800,000 promissory note, convertible into 10% of the outstanding common stock of BioQuest. (See Note D) Fourth Quarter Adjustments - -------------------------- The Company made adjustments to its financial statements in the fourth quarter ended June 30, 1995, including approximately $200,000 in reductions in the reserve for doubtful accounts and other valuation accounts, and a net change of $415,000 to the provision for income taxes including a $615,000 reduction to the valuation reserve for a foreign deferred tax asset and $200,000 in additional foreign income tax provision. 28 31 B. VSE In May 1993, the Company acquired, through its wholly-owned subsidiary AP&T, 80% of VSE for a nominal amount and the guarantee of its bank debts. VSE is an Austrian manufacturer of high precision vacuum valves for the semiconductor and other process industries. The Company acquired VSE from VSE management (27%) and Fuji Seiki (53%). As of the date of acquisition, VSE had liabilities of approximately $3,503,000, including bank debt of $1,885,000. The remaining 20% interest in VSE was held by VSE management. Also included in VSE's liabilities were amounts advanced from Fuji Seiki of approximately $1,150,000 (Y.120,000,000). In connection with the acquisition, the Company recorded an intangible asset of $2,239,000. The pro forma combined results of operations of the Company and VSE for the year ended June 30, 1993 would not have differed materially from those presented in the accompanying financial statements had the acquisition occurred at the beginning of fiscal 1993. In October 1993, Fuji Seiki entered into an agreement with the Company that provided, among other things, for the forfeiture by Fuji Seiki of amounts due it by VSE (See Note D). As of June 30, 1993, the Company had eliminated this liability to Fuji Seiki with an offsetting reduction to intangible assets recorded in the purchase of VSE. Additionally, as of June 30, 1993, the Company had written off all intangibles recorded in connection with the transaction in recognition of the uncertainty surrounding its future economic value. 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 charges. In November 1994, the Company entered into a fifteen-year agreement with VAT Vakuumventile (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, with an additional payment of $200,000 by June 30, 1996 contingent upon the occurrence of certain events by that date. During October and November 1994, the Company received an aggregate of $1,300,000 in cash payments pursuant to this arrangement and has recorded the payments as nonrecurring operating income in the Consolidated Statement of Operations for fiscal 1995. C. NOTES RECEIVABLE In June 1990, the Company sold its manufacturing subsidiary in the United Kingdom, AF Technologies, to Rumpack, Ltd. ("Rumpack") for $3,380,000 in cash and a note. The note called for quarterly installments of $12,500 with a $250,000 balloon payment on June 30, 1994 and with any remaining balance paid on June 30, 1995. The note was collateralized by a lien on the fixed assets of AF Technologies as well as the common stock of AF Technologies. On June 30, 1993, Rumpack defaulted on the note when it failed to make its scheduled payment. In the fourth quarter of 1993, the Company established a valuation reserve in the amount of $260,000 against the note. During 1994, Rumpack made payments totalling $125,000, reducing the carrying value to $522,000. In May 1994, the Company entered into negotiations with Rumpack and its bank to settle the debt in full. At June 30, 1994, the carrying value of the note was reduced to $350,000, after 29 32 a charge of $172,000 to operations in the fourth quarter of 1994. In August 1994, the Company received $350,000 in full settlement of the note. D. INVESTMENTS IN AFFILIATES Nippon Ferrofluidics Corporation - -------------------------------- On June 30, 1993, Ferrofluidics consummated a series of new license and other agreements ending all litigation between Ferrofluidics and NFC, its former Japanese subsidiary. Due to uncertainties with respect to the license and other related agreements that existed at June 30, 1993, the transaction is being accounted for in the first quarter of fiscal 1994. Pursuant to these agreements, in August 1993, Ferrofluidics received one billion Japanese Yen (approximately $9.5 million), in settlement of all claims against NFC including all future royalties owing to the Company under the new and a previous license agreement, any past due royalties owing under the previous agreement, and reimbursement of expenses incurred by Ferrofluidics in connection with the litigation. The one billion Yen (approximately $9.5 million) was remitted to the Company net of $815,000 in Japanese withholding tax on that portion of the settlement representing royalty payments. Also pursuant to the agreements, Ferrofluidics acquired 125,000 shares of NFC's common stock, approximately 16% of NFC's outstanding stock, for one billion Japanese Yen, and was given a seat on NFC's board of directors. Given that the transactions involved an exchange of identical amounts, it is being treated as a nonmonetary transaction and, therefore, the value assigned to the settlement is equivalent to the fair market value of the NFC shares acquired. Ferrofluidics engaged an independent firm to ascertain the fair market value of its investment in NFC as of August 1993 and June 1994 for purposes of recording the transaction. As a result of the valuation, the Company recorded the estimated fair market value of the NFC shares as of August 1993 of $4,286,000 during the first quarter of fiscal 1994. In recognition of NFC losses during its fiscal year ended March 31, 1994, the Company has established a valuation reserve against this investment in the amount of $600,000, net of a translation gain of $258,000, in the fourth quarter of 1994 in the consolidated statement of operations. Under the new license agreement, effective upon signing of the agreements: (i) NFC was granted a worldwide license with respect to Ferrofluidic exclusion seals for computer disc drive memories; (ii) Ferrofluidics retains its worldwide exclusive rights to its Ferrofluidic environmental sealing system (developed and being marketed by Ferrofluidics in response to the global problem of fugitive emissions into the atmosphere from petroleum-refining and chemical processing facilities), and (iii) both companies will have nonexclusive rights to market vacuum rotary feedthrough seals and ferrofluids in Asia. In the fall of 1994, management began discussions with NFC to find a buyer for the 125,000 shares after concluding a financial interest in NFC was not strategically in the best interest of the Company. In March 1995 the Company completed the sale of its 125,000 shares of NFC common stock to several Japanese financial institutions for an aggregate price of Y.362,500,000 (approximately $4.0 million) in cash. The sale generated a gain of approximately $245,000, principally the result of currency translation, which has been included in other income in the consolidated statement of operations for the year ended June 30, 1995. Fuji Seiki, Inc. - ---------------- On September 19, 1992, the Company entered into a series of agreements with Fuji Seiki, a Japanese pump and valve manufacturer, in which the Company acquired 900,000 shares of Fuji Seiki common stock, representing an approximately 20% ownership interest, for $7,450,000, and established an alliance for joint marketing and service of certain of each other's products, as well as joint development of new products. In a related transaction, Fuji Seiki acquired 315,000 shares of the Company's common stock. These transactions have been accounted for as a nonmonetary transaction at $13.25, the market value of the Ferrofluidics shares at the time of their investment. As of June 30, 1993, in recognition of a reevaluation of its investment in Fuji Seiki by an investment banking firm, the Company established a valuation reserve in an amount equivalent 30 33 to the entire remaining investment balance of $3,926,000. This valuation reserve was included in nonrecurring operating expenses in the Statement of Operations for the year ended June 30, 1993. Also during fiscal 1993, Fuji Seiki entered into a license agreement with the Company for which it paid the Company $2,500,000 as a non-refundable license fee for the non-exclusive rights to manufacture and sell Ferrofluidics' proprietary rotary feedthrough seals in Japan. The agreement had a term of ten years and granted Fuji Seiki a royalty-free period for the first $10,000,000 of revenues generated by the sale of Ferrofluidics rotary feedthrough seals, and a royalty of 5% on all sales thereafter. The Company applied the $2,500,000 of cash payments under this agreement as a reduction of its investment in Fuji Seiki In October 1993, under new management direction, Ferrofluidics terminated its relationship with Fuji Seiki by entering into a series of agreements whereby Ferrofluidics: (i) returned its entire ownership interest in Fuji Seiki; (ii) granted to Fuji Seiki the exclusive rights to manufacture, sell, market and distribute VSE vacuum valves in Asia for 15 years, and (iii) agreed that Fuji Seiki may be granted preferred vendor status for certain Ferrofluidic products in certain markets. In return, Fuji Seiki: (i) terminated its current nonexclusive licensing agreement for Ferrofluidics product discussed above and (ii) forgave 120 million Japanese Yen (approximately $1,150,000) in advance royalty payments due to Fuji Seiki from VSE, the Company's 80%-owned subsidiary (See Note B). Molecular BioQuest, Inc. - ------------------------ During 1993, Ferrofluidics entered into a series of agreements with Molecular BioQuest, Inc. ("BioQuest"), a private company engaged in the development and manufacture of biotechnology and pharmaceutical products. Under these agreements, Ferrofluidics was to provide consulting services and BioQuest acquired 100,000 shares of Ferrofluidics common stock at a valuation of $18.00 per share, paid in the form of a debenture convertible into 10% of BioQuest's common stock and paying interest at a rate of 8%. The fair market value of the Ferrofluidics common stock on that date was $16.50, and as such the investment has recorded at a value of $1,650,000. The Company also agreed to make available a line of credit in the amount of $825,000 at an interest rate of 8%. On June 15, 1993, the Company committed to loan up to an additional $750,000 to BioQuest, $500,000 in fiscal 1994 and $250,000 in fiscal 1995, in return for a note, convertible under certain circumstances, into 3.4% of the common stock of BioQuest, and the option to acquire an additional 5% of such common stock for $1,100,000 or 55,000 shares of Ferrofluidics' common stock. During 1993, BioQuest borrowed $620,000 against the line of credit, of which $545,000 was repaid in 1993. No further amounts could be borrowed under this line. Additionally, the agreement provided Ferrofluidics with an option to acquire another 10% of Bioquest for $1,800,000. During 1993, the Company received $19,000 in consulting fees and $50,000 of interest payments related to the notes which have been accounted for as reductions in the investment. In fiscal 1993 the Company had reduced its investment in BioQuest by a charge against earnings of $1,594,000, which represented a charge for the undeveloped technology of BioQuest and the Company's share of BioQuest's estimated losses since the date of the Company's investment. These amounts are included in nonrecurring operating expenses in the Statement of Operations for the year ended June 30, 1993. In April 1994, the Company entered into an agreement with BioQuest pursuant to which: (i) the Company paid $175,000 in full satisfaction of all obligations to BioQuest ($300,000 had previously been advanced under the $750,000 commitment discussed above), (ii) the Company's options to acquire additional shares of BioQuest were cancelled and (iii) it received 5% of the outstanding common stock of BioQuest. Under this agreement, the obligation of BioQuest under the convertible debenture was cancelled, it was entitled to retain the shares of Ferrofluidics common stock purchased in October 1992 and was required to restrict its use of the name "The Ferrofluid Company" in the future. The entire $475,000 paid to BioQuest had been charged to operations in the first quarter of 1994, in recognition of BioQuest's undeveloped technology and its continued operating losses. 31 34 Ferrofluidics Taiwan Corporation - -------------------------------- In May 1993, the Company entered into an agreement with Junsun Technologies, Inc., a Taiwanese distributor of semiconductor process equipment, to form Ferrofluidics Taiwan Corporation (FTC), which would distribute Ferrofluidics products in Taiwan, Korea, and Peoples Republic of China. The Company acquired a 19.9% interest in FTC for $75,000 and agreed to fund the start-up and FTC's first year operating costs. Pursuant to this agreement, the Company advanced, and charged to nonrecurring operating expenses, $85,000 and $230,000 in 1993 and 1994, respectively. The Company is not obligated to make any further advances and has entered into negotiations with FTC to have its investment of $75,000 returned in exchange for the 19.9% interest. In 1995, the Company established new third party distribution relationships in Taiwan for its products and has discontinued its association with FTC. E. CASH VALUE OF LIFE INSURANCE During fiscal 1988 and 1989, the Company invested an aggregate of $5,000,000 in single premium life insurance policies on the lives of the former CEO and the former CFO, who are also partial beneficiaries of the policies. These policies currently yield their minimum guaranteed rate of return of 6.0%, less a nominal charge for the cost of insurance. Under the terms of certain insurance loan agreements relating to these policies, the former CEO and the former CFO referred to above were given the right to borrow specified amounts annually from the insurance company, to a specified date. Such allowable borrowings approximate the earnings accruing to the Company under the policies. The former CFO's borrowing rights were fixed at $243,000, all of which has been borrowed. At June 30, 1995, outstanding borrowings by the former chief executive officer under the policies, including accrued interest, approximated $2,354,000 and approximately $151,000 of additional amounts could be borrowed. The former officers' estates are beneficiaries of these policies to the extent of their borrowing rights under the policies. Earnings under these policies are not recognized as income to the extent they are subject to the executive borrowing rights. The accompanying financial statements do not include a liability for future borrowing rights, as management believes such rights terminate upon termination of the underlying policies, which termination is at the sole discretion of the Company. During fiscal 1991, the former chief executive officer and the Company entered into an agreement permitting the officer to deposit amounts with the Company equivalent to the amounts borrowed, and in the future, borrowable from the insurance company by him. During fiscal 1992, the Company entered into a similar agreement with the former chief financial officer. Deposited amounts are, under certain circumstances, repayable by the Company to the former officers upon their death or the surrender of the policies. At June 30, 1995, approximately $1,407,000 is reflected as an offset to the cash surrender value of these policies in recognition of these deposited amounts. Borrowings bear interest at a rate of 8% with a borrowing limit equal to the total single premium of $5,000,000, less the declining termination charge. At June 30, 1995, the Company had $2,604,000 in loans and accrued interest outstanding against these policies and is restricted from further borrowing under its new credit facility (Note G). In addition to the above, the Company has recorded the cash surrender value of other key man life insurance policies under split dollar agreements with the former CEO of $1,696,000 and $1,626,000 at June 30, 1995 and 1994, respectively. The former CEO's estate will be 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. 32 35 F. INCOME TAXES Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes", which requires the use of the asset and liability approach for accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The standard also requires a valuation reserve against deferred 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 $14,229,000 has been established. The cumulative effect of the adoption of SFAS 109 resulted in no material charge to operations in the year ended June 30, 1994. Income (loss) before income taxes and the related income tax expense for the years ended June 30, 1995, 1994 and 1993 are as follows:
Income (loss) before income taxes: 1995 1994 1993 ---- ---- ---- Domestic $1,012,000 $ (8,000,000) $(9,648,000) Foreign (445,000) (1,544,000) (2,332,000) ---------- ------------ ----------- Total 567,000 (9,544,000) (11,980,000) Currently payable: Federal - - - State $ 20,000 $ 20,000 $ 115,000 Foreign 273,000 973,000 99,000 ---------- ------------ ----------- Total current 293,000 993,000 214,000 ---------- ------------ ----------- Deferred: Federal - 176,000 252,000 State - - - Foreign (615,000) - - ---------- ------------ ----------- Total deferred (615,000) 176,000 252,000 ---------- ------------ ----------- Total income tax expense (benefit) $ (322,000) $ 1,169,000 $ 466,000 ========== ============ ===========
The income tax benefit in 1995 is principally the result of adjustments to the valuation reserve relating to the deferred tax asset in the amount of $615,000. The provision of $293,000 is principally related to a reserve for income taxes at a foreign subsidiary. The income tax provision in 1994 is primarily attributable to foreign taxes paid in connection with the Company's settlement with NFC and changes in the deferred tax asset valuation allowance. The income tax provision of $466,000 in 1993 is attributable primarily to income taxes paid as a result of examinations of prior tax years by certain states and foreign countries and a valuation adjustment made to a deferred tax asset. 33 36 The following is a reconciliation between the statutory provision for federal income taxes and the effective income taxes for the years ended June 30, 1995, 1994 and 1993:
1995 1994 1993 ---- ---- ---- Income tax benefit at federal statutory rate $ 193,000 $(3,245,000) $(4,073,000) Change in valuation allowance (1,629,000) 3,469,000 - Settlement of stockholders class action suit 1,247,000 - - Net operating losses for which no tax is provided - - 4,303,000 Adjustment to deferred tax assets - - 252,000 State income tax 20,000 20,000 76,000 Permanent differences 189,000 (58,000) (191,000) Foreign income taxes at differing statutory rates (342,000) 973,000 99,000 Other - 10,000 - ---------- ----------- ----------- Income tax expense (benefit) $ (322,000) $ 1,169,000 $ 466,000 ========== =========== ===========
The components of the net deferred tax asset as of June 30, 1995 and 1994 was as follows: Deferred tax assets:
1995 1994 ---- ---- Net operating loss carryforwards $ 11,163,000 $ 10,206,000 Capital loss carryforward 1,808,000 - Compensation related 391,000 365,000 Investment writedowns 617,000 2,395,000 Reserves 297,000 1,749,000 Inventory 900,000 900,000 Other 157,000 269,000 Research & development credits 174,000 174,000 Foreign tax credits 873,000 873,000 ------------ ------------ Gross deferred tax asset 16,380,000 16,931,000 Valuation allowance (14,229,000) (15,857,000) ------------ ------------ Net deferred tax asset 2,151,000 1,074,000 Deferred tax liabilities: Other (381,000) - Depreciable assets (1,155,000) (1,074,000) ------------ ------------ Net deferred tax asset $ 615,000 - ============ ============
As of June 30, 1995, the Company had remaining net operating loss carryforwards for Federal income tax purposes of approximately $30,000,000, and for foreign income tax purposes of approximately $3,000,000 which can be used to offset future taxable income, if any, and 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 (See Note L). 34 37 G. SHORT TERM BORROWINGS AND OTHER DEBT OBLIGATIONS As of June 30, 1995 and 1994, the Company and its subsidiaries have the following long term debt obligations outstanding:
1995 1994 ---- ---- Revolving line of credit - $1,200,000 1984 Industrial Revenue Bond $5,000,000 5,000,000 Bank loans, Germany 36,000 46,000 Bank loans, Austria - 1,583,000 ---------- ---------- 5,036,000 7,829,000 Less: current portion of debt obligations - 7,801,000 ---------- ---------- Long term debt obligations $5,036,000 $ 28,000 ========== ==========
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 30, 1995 was 5.0%. 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 standby letter of credit (through August 15, 1998) for which substantially all of the Company's assets are pledged as collateral. In December 1993, upon expiration of the standby letter of credit for the $2,500,000 FRIRB, which had been provided by its former banks, the bonds were redeemed and the letter of credit was drawn upon, repaying the bondholders in full. The Company borrowed against certain keyman insurance contracts to satisfy the resulting obligations to its banks. On June 30, 1994, the Company entered into a new credit facility with a new bank ("New Bank"). Under the new credit facility, the Company is provided with 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. The stand-by letter of credit has a term of five years with a fee of 1% per year and the revolving line of credit carries an interest rate of prime rate plus 1% with a fee of 1/8% on the unused portion. The Company also is required to make annual principal reduction payments equal to 5% of the total credit facility. At June 30, 1995, in lieu of a principal payment, the available credit line was reduced by $395,000. The credit facility is collateralized by substantially all of the assets of the Company. Additionally, the Business Finance Authority of the State of New Hampshire (the "BFA") has provided a guarantee of 60% of the entire credit facility. At June 30, 1995, there were no amounts outstanding against the revolving line of credit. The average balance outstanding during 1995 amounted to $1,500,000. The interest rate on the revolving line at June 30, 1995 was 10%. Through its wholly-owned foreign subsidiaries, the Company has various short-term facilities with local banks totaling approximately $2,000,000 at June 30, 1995. Throughout fiscal 1995, the average outstanding balance on these facilities was $18,000. The weighted average interest rates during the year on these facilities was 9.0% and the interest rates at June 30, 1995 ranged from 8.0% to 9.75%. Future principal payments for the five years subsequent to fiscal 1995 amount to: $21,000 in 1996, $15,000 in 1997 and $5,000,000 in 2004. 35 38 H. COMMITMENTS AND CONTINGENCIES The Company has entered into operating leases for office space and equipment in Europe. Future minimum lease payments for the five years subsequent to fiscal 1995 amount to: $463,000 in 1996; $172,000 in 1997; $73,000 in 1998, $278,000 in 1999 and $61,000 in 2000. Rent expense under operating leases amounted to $336,000 in 1995, $349,000 in 1994 and $195,000 in 1993. The Company also leases approximately 11,000 square feet of its headquarters in Nashua to a third party. Under the terms of the lease, which expires in February 1997, the Company will receive future minimum lease payments of $113,000 in 1996 and $75,000 in 1997. During 1995, the Company acquired $210,000 in computer hardware and software under a capital lease. The lease has a term of 36 months and expires in July 1998. The Company made payments totaling $75,000 in 1995 and will make future lease payments of $81,000 in 1996, $81,000 in 1997 and $7,000 in 1998. As part of the sale in June 1990 of the Company's former UK subsidiary, AF Technologies, the Company agreed to provide a guarantee of the lease of AF Technologies' 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 (L.) 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 L.300,000 into an escrow account, which currently earns interest at a rate of 6.0%, pursuant to the terms of the guarantee and was recorded as restricted cash at June 30, 1995. The Company is relieved of this obligation before the ten year term has expired upon the new tenant attaining certain minimum pretax operating results over any three consecutive year period. The Company has provided a reserve in the amount of $275,000 against this restricted cash in recognition of the uncertainty surrounding the ultimate collectibility of the cash. At June 30, 1995, the Company had possible indemnification liabilities to its former CEO and CFO in connection with its single premium, paid up life insurance policies described in Note F. The unrecorded portion of this contingent liability ranges from a nominal amount to $750,000. The accompanying financial statements also do not include a liability for future borrowing rights under insurance loan agreements associated with these policies, as management believes such rights terminate upon termination of the underlying policies, which termination is at the sole discretion of the Company. I. COMMON STOCK At June 30, 1995, an aggregate of 956,296 shares of the Company's common stock has been reserved for issuance in connection with the nonqualified stock option plan, the restricted stock plan and stock purchase warrants outstanding (See Note J). In October 1992, certain officers, employees and advisors exercised options and warrants for the purchase of 474,374 shares of the Company's common stock. In connection with these exercises, the Company provided financing to the individuals in an aggregate amount of $3,998,000, at 5% interest, with the underlying shares held by the Company as collateral. All loans have either been repaid with interest or cancelled, and the underlying stock retired. 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 (the "Common Stock") 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") 36 39 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 "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. J. EMPLOYEE BENEFIT PLANS Employee Stock Purchase Plan - ---------------------------- An aggregate of 35,000 shares of common stock is issuable pursuant to the Company's 1983 Employee Stock Purchase Plan, dated July 21, 1983 (the "Stock Purchase Plan"). Under the Stock Purchase Plan, non-officer eligible employees may acquire common stock through authorized payroll deductions. As a result of receiving the disclaimer of opinion discussed below, the registration statement on Form S-8 on file with the Securities and Exchange Commission for this plan may no longer be used to effect sales under it and, accordingly, the Company has temporarily suspended activity under this plan. The Stock Purchase Plan provides for shares to be purchased four times a year, on the last business day of each quarterly payment period at a purchase price of 85% of the fair market value of the shares on the lower of the first or the last day of the fiscal quarter. The maximum number of shares that an eligible participant is allowed to purchase in any year is the lesser of 1,000 shares or the number of whole shares equal in value to 15% of the participant's compensation divided by the option price. The Stock Purchase Plan will terminate when all, or substantially all, of the unissued shares of common stock reserved for the purpose of the plan have been purchased, or earlier if the plan is terminated by the Board of Directors. As of June 30, 1995, 31,727 shares of the Company's common stock had been purchased pursuant to this plan. 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. A registration statement on Form S-8 relating to the shares of common stock which may be acquired pursuant to the plan is on file with the Securities and Exchange Commission. 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. In connection with the audit of the Company's financial statements for the fiscal year ended June 30, 1993, the Company received a disclaimer of opinion with respect to the balance sheet as of June 30, 1992 and the consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1993. As a result of receiving the disclaimer, the Company suspended activity under the 1984 Plan and, in addition, the registration statement on Form S- 8 relating to the plan may no 37 40 longer be used to effect sales under the plan. 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 are expected to expire during 1996. As discussed above, employees holding options granted under the prior plan may not use the Company's Registration Statement under Form S-8 to effect sales under that plan, which condition is expected to continue beyond the date that certain granted options are scheduled to expire. Employees of the Company who are subject to the provisions of Section 16 of the Securities and Exchange Act of 1934 are not 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, 60,000 shares of the Company's common stock have been made available for grant. At June 30, 1995, no options were outstanding pursuant to the 1995 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 five years from the grant date. At June 30, 1995, as a result of the aforementioned disclaimer of opinion in 1993, there were no options currently exercisable under the plans. A summary of the changes in outstanding stock options for the three years ended June 30, 1995 is set forth below:
Shares Price Range ---------- ----------- OUTSTANDING, JUNE 30, 1992 291,399 $5.00 - $16.76 Granted 160,200 11.75 - 15.25 Cancelled (17,621) 5.00 - 16.00 Exercised (54,123) 5.00 - 14.50 -------- OUTSTANDING, JUNE 30, 1993 379,855 $5.00 - $16.76 Granted - - Cancelled (125,275) 5.00 - 16.00 Exercised (812) 5.00 - 9.13 -------- OUTSTANDING, JUNE 30, 1994 253,768 $5.00 - $16.76 Granted - - Cancelled (13,640) 5.00 - 16.76 Exercised - - -------- OUTSTANDING, JUNE 30, 1995 240,128 $5.00 - $15.25 ========
On June 13, 1995, the Board of Directors adopted, subject to stockholder approval, 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. At June 30, 1995, options for the purchase of 255,550 shares of the Company's common stock had been granted by the Board under this plan at 100% of the fair market value on the date of grant, which ranged from $9.13 to $9.63. 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. The Board of Directors has reserved and authorized 271,000 shares of the Company's common stock for issuance pursuant to the Restricted Stock Plan. The grants are 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 commencing one year from the date of grant. The charge to operations in connection with these restricted stock awards for the years ended June 30, 1995 and 1994 amounted to $290,000 and $48,000, respectively. 38 41 A summary of the changes in outstanding shares of restricted stock for the years ended June 30, 1995 and 1994 is set forth below:
Shares ---------- OUTSTANDING, JUNE 30, 1993 - Granted 143,264 Forfeited (22,168) Vested - ------- OUTSTANDING, JUNE 30, 1994 121,096 Granted 102,580 Forfeited (5,940) Vested (38,385) ------- OUTSTANDING, JUNE 30, 1995 179,351 =======
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 30, 1995, 1994 and 1993, 281,267 shares, 296,142 shares and 405,392 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 30, 1995 June 30, 1994 June 30, 1993 Price Expiration Date ------------- ------------- ------------- ----- --------------- - - 2,500 10.00 February 7, 1994 - - 625 16.00 April 11, 1994 - 1,250 1,250 13.28 July 11, 1994 - 8,500 8,500 18.00 November 13, 1994 - 2,500 2,500 12.28 November 30, 1994 - 2,625 3,750 13.13 May 22, 1995 10,000 10,000 10,000 8.50 September 3, 1995 9,188 9,188 9,188 5.00 October 10, 1995 4,250 4,250 4,250 10.00 March 13, 1996 12,500 12,500 12,500 9.13 April 30, 1996 3,000 3,000 3,000 14.50 September 29, 1996 37,329 37,329 37,329 5.00 October 10, 1996 17,500 17,500 55,000 14.00 February 4, 1997 17,500 17,500 17,500 14.50 February 24, 1997 40,000 40,000 40,000 15.60 February 24, 1997 47,500 47,500 77,500 15.63 June 18, 1997 62,500 62,500 100,000 11.75 August 31, 1997 20,000 20,000 20,000 11.00 October 27, 1997 ------- ------- ------ 281,267 296,142 405,392 ======= ======= =======
39 42 A summary of the changes in outstanding stock purchase warrants for the three years ended June 30, 1995 is set forth below:
Shares Price Range ------ ----------- OUTSTANDING, JUNE 30, 1992 948,937 $ 5.00 - $18.00 Granted 277,500 11.75 - 15.63 Cancelled (4,125) 13.76 Exercised (816,920) 5.00 - 15.25 --------- OUTSTANDING, JUNE 30, 1993 405,392 $ 5.00 - $18.00 Granted - - Cancelled (109,250) 10.00 - 16.00 Exercised - - --------- OUTSTANDING, JUNE 30, 1994 296,142 $ 5.00 - $18.00 Granted - - Cancelled (14,875) 12.28 - 18.00 Exercised - - --------- OUTSTANDING, JUNE 30, 1995 281,267 $ 5.00 - $15.63 =========
At June 30, 1995, 241,595 warrants are exercisable at prices ranging from $5.00 - $15.63. During 1996, an additional 27,172 warrants will become exercisable at prices ranging from $5.00 - $15.63 and 12,500 warrants will become exercisable in 1997 at $11.75. 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 $9,240 (for calendar 1995) 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 1995, the Company made a matching contribution to the Plan, and a corresponding charge to operations, in the amount of $92,000. No contributions were made in fiscal 1993 or 1994. 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. K. 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, "core products"); crystal growing systems and related products; and thin film deposition products manufactured and/or distributed by AP&T. 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, short and long-term investments, notes receivable, deferred income tax assets, certain fixed assets, and other assets, including cash surrender value of life insurance in the amount of $2,976,000 and $2,963,000 in 1995 and 1994, respectively. For the year ended June 30, 1995, one foreign customer accounted for $6,209,000 of revenues in the Crystal Growing Systems industry segment. For the year ended June 30, 1994, the same foreign customer accounted for approximately $5,667,000 of revenues in the Crystal Growing Systems industry segment. For the year ended June 30, 1993, two related customers accounted for approximately $9,900,000 and $5,900,000, respectively, of revenues in the Crystal Growing Systems industry segment. 40 43 The following table presents financial information for the Company's industry segments for the years ended June 30, 1995, 1994 and 1993. All amounts are expressed in thousands of dollars.
Ferrofluidic Products --------------------- Crystal Core Growing Thin Film Products Systems Deposition Consolidated -------- ------- ---------- ------------ 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 ======= 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 Year ended June 30, 1994: - ------------------------- Sales to unaffiliated customers $11,285 $ 8,612 $ 6,482 $26,379 Royalty revenues 82 - - 4,262 ------- ------- ------- ------- Total net sales and revenues 11,367 8,612 6,482 30,641 ======= Segment operating profit (loss) (1,449) (2,018) (434) (3,901) General corporate expenses (2,653) Nonrecurring operating income (expense), net (3,108) ------- Operating Loss $(9,662) ======= Identifiable assets 16,310 6,819 3,589 26,718 General corporate assets 5,790 ------- Total Assets $32,508 ======= Depreciation and amortization 823 148 179 Capital expenditures 494 127 164 Year ended June 30, 1993 - ------------------------ Sales to unaffiliated customers $ 8,382 $17,391 $ 7,132 $32,905 Royalty revenues 372 - - 372 -------- ------- ------- ------- Total net sales and revenues 8,754 17,391 7,132 33,277 ======= Segment operating profit (loss) (245) 1,392 108 1,255 General corporate expenses (4,377) Nonrecurring operating charges (8,594) ------- Operating Loss (11,716) ======= Identifiable assets 13,772 6,690 3,004 23,466 General corporate assets 13,418 ------- Total Assets $36,884 ======= Depreciation and amortization 1,002 72 409 Capital expenditures 2,111 512 1,187
41 44 The following is a summary of certain financial data by geographic areas:
UNITED STATES EUROPEAN JAPANESE OPERATIONS OPERATIONS OPERATIONS ELIMINATIONS TOTAL ---------- ---------- ---------- ------------ ----- 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 1,691 - 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 ======= Year ended June 30, 1994: - ------------------------- Sales to unaffiliated domestic customers $10,150 - - - $10,150 Sales to unaffiliated foreign customers 6,778 9,354 97 - 16,229 Sales to subsidiaries 1,360 - 48 (1,408) - Royalty and other revenues 82 - - - 82 ------- ------- ---- ------- ------- Total net sales and revenues $18,370 $9,354 $145 ($1,408) $26,461 ======= ======= ==== ======= ======= Geographic operating profit (loss) (2,358) (620) (949) 26 (3,901) General corporate expenses (2,653) Nonrecurring operating gains and charges, net (3,108) ------- Operating Income (9,662) ======= Net identifiable assets 21,952 5,127 236 (597) 26,718 General corporate assets 5,790 ------- Total Assets $32,508 ======= Year ended June 30, 1993: - ------------------------- Sales to unaffiliated domestic customers $12,172 - - - $12,172 Sales to unaffiliated foreign customers 11,306 9,417 10 - 20,733 Sales to subsidiaries 1,258 - - (1,258) - Royalty revenues 372 - - - 372 ------- ------- ---- ------- ------- Total net sales and revenues $25,108 $ 9,417 $ 10 ($1,258) $33,277 ======= ======= ==== ======= ======= Geographic operating profit (loss) 1,589 143 (534) 57 1,255 General corporate expenses (4,377) Legal and nonrecurring operating charges (8,594) ------- Operating Income (11,716) ======= Net identifiable assets 18,809 4,292 595 (230) 23,466 General corporate assets 13,418 ------- Total Assets $36,884 =======
42 45 L. RELATED PARTY TRANSACTIONS During fiscal 1992 and 1993, certain trusts, established by the former CEO for the benefit of his children and grandchildren, exercised warrants to purchase an aggregate of 1,300,000 shares of common stock having an aggregate fair market value on the date exercised of $19,596,000 for an aggregate purchase price of $6,500,000.The warrants were transferred to the trusts by the former CEO in January 1991. The former CEO has disclaimed any beneficial interest in these trusts. During 1993, the Company advanced $619,000 to a financial advisor and granted him warrants to purchase 100,000 shares of the Company's common stock, for which the Company has recorded a charge to operations for the estimated value of these warrants of $100,000. (Also, see Note E for the borrowings by the former CEO under certain life insurance policies.) M. LITIGATION Shareholder Class Action Lawsuits - --------------------------------- During the period from August 13, 1993, through September 30, 1993, four actions were brought against the Company and certain of its officers and former officers. Each of these actions was sought on behalf of classes of persons who purchased the Company's securities during the period from March 30, 1992 through September 3, 1993. 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 on March 9, 1994. On June 21, 1994, a Consolidated Amended Complaint was filed in the actions. The Consolidated Amended Complaint alleged, among other things, that certain statements were false and misleading because they failed to disclose that the Company allegedly made payments to obtain favorable coverage and reports concerning its operations and prospects and because they allegedly misstated the Company's earnings in various respects during its 1992 and 1993 fiscal years. The Complaint set forth claims for liability under the federal securities laws on behalf of all purchasers of the common stock of the Company during the period from June 30, 1991 through January 31, 1994, and, in addition, set forth certain claims against the Company's Directors on a derivative basis. 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 the class period extending from June 30, 1991 through January 31, 1994, and including the derivative claims as well. 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 United States District Court for the District of Massachusetts on August 19, 1994, and the settlement became effective upon the expiration of the appeal period from the Court's Order of Approval, on September 23, 1994. The Company recorded its portion of the settlement and related expenses totaling $3,525,000 as a charge to nonrecurring operating charges in fiscal 1994 ($3,150,000 representing the value of the 600,000 shares of the Company's common stock on August 19, 1994 and $375,000 representing legal and other costs). 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 43 46 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. Since the inception of this investigation, the Company has cooperated fully with the SEC's inquiry. 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. Afterinvestigating the matters raised in the SEC's inquiry and related issues, the special committee called a special meeting of the Board of Directors, to be held on August 30, 1993, for the purpose of considering the removal of Dr. Ronald Moskowitz as Chairman, Chief Executive Officer, and all other offices he held with the Company on the grounds that he had taken various improper actions. At the August 30 meeting, Dr. Moskowitz was granted a three week period, until September 20, 1993, to respond to the special committee's charges. On September 15, 1993, five days before the Board of Directors was to reconvene to consider the removal of Dr. Moskowitz, the Company announced that he had retired from the Company 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 will receive payments aggregating $725,000 over the four years ended June 30, 1997 for making himself available to be used, at the Company's sole discretion, as a senior advisor to the Company during that period. During this period, the former CEO will be available to render such services as the Company may reasonably request, provided, however, that he will receive the agreed upon payments whether or not the Company elects to use his services. The Company charged the entire $725,000 to nonrecurring operating charges in fiscal 1994. During 1995 and 1994, the Company made cash payments under this agreement totalling $200,000 and $275,000, respectively. Of the remaining balance, $100,000 has been classified as a non-current liability on the consolidated balance sheet as of June 30, 1995. 44 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 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. 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. 45 48 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 30, 1995, 1994 and 1993 PAGE Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . 53 Financial statement schedules other than those 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 schedules do 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 30, 1995. (c) EXHIBITS -------- 3.1 Restated Articles of Organization of the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-18 (Registration No. 2-72394-B), filed May 19, 1981 (the "1981 Registration Statement") 3.2 Articles of Amendment, filed November 19, 1980, increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 2.2 to the 1981 Registration Statement) 3.3 Articles of Amendment, filed February 19, 1981, further increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 2.3 to the 1981 Registration Statement) 3.4 Articles of Amendment, filed November 21, 1985, further increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 4E to the Registrant's Registration Statement on Form S-2 (Registration No. 33-1000), filed October 18, 1985) 3.5 Articles of Amendment, filed November 25, 1987, eliminating certain liabilities of directors and reducing the vote required to effect certain corporate actions (incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the year ended 6/30/88) 3.6 Articles of Amendment, filed November 14, 1989, effecting reverse stock split and amending terms of Preferred Stock (incorporated by reference to Exhibit 3.6 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-33736), filed March 5, 1990 (the "1990 Registration Statement") 3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G to the Registrant's Form 10K for the year ended 6/30/90) 3.8 Certificate of Vote of Directors Establishing the Series A Junior Participating Cumulative Preferred Stock, par value $.001 per share, dated August 3, 1994.1 46 49 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 The Ferrofluidics Corporation 1994 Restricted Stock Plan.1 10.7 Stipulation of Settlement, dated June 23, 1994, In re Ferrofluidics Corporation Securities Litigation, Civil Action No. 93-11976PBS, United States District Court, District of Massachusetts.1 10.8 Order and Final Approval of Settlement and Final Judgment, dated August 19, 1994, In re Ferrofluidics Corporation Securities Litigation, Civil Action No. 93-11976PBS, United States District Court, District of Massachusetts.1 10.9 Release and Settlement Agreement, dated April 13, 1994, between the Registrant and Molecular BioQuest, Incorporated.1 10.11 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) 10.12 Employment Agreement, dated April 1, 1995, between the Registrant and Paul F. Avery, Jr. 10.13 Employment Agreement, dated December 19, 1994, between the Registrant and Salvatore J. Vinciguerra. 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 10OO 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) 47 50 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) 10.21 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 10.35 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 10.60 Employment Agreement, dated October 1, 1993, between the Registrant and Paul F. Avery, Jr.2 10.61 Amendment No. 1 To Employment Agreement between the Registrant and Paul F. Avery, Jr., dated November 15, 1993.2 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 48 51 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 21 Subsidiaries of the Registrant 23 Report of Independent Accountants On Financial Statement Schedules 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. 49 52 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 26th day of September, 1995. Ferrofluidics Corporation By: /s/ Paul F. Avery, Jr. ------------------------------------------------- Paul F. Avery, Jr. Chief Executive Officer, Chief Financial Officer, Treasurer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
Signatures Title Dated signed - ---------- ----- ------------ /s/ Paul F. Avery, Jr. Chief Executive Officer, September 26, 1995 - --------------------------------- Chairman of the Board, Paul F. Avery, Jr. Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer) /s/ Salvatore J. Vinciguerra President, Chief Operating September 26, 1995 - --------------------------------- Officer Salvatore J. Vinciguerra /s/ Alvan F. Chorney Senior Vice President September 26, 1995 - --------------------------------- Alvan F. Chorney /s/ Stephen B. Hazard Director September 26, 1995 - --------------------------------- Stephen B. Hazard Dean Kamen Director - --------------------------------- Dean Kamen /s/ Howard F. Nichols Director September 26, 1995 - --------------------------------- Howard F. Nichols /s/ Robert P. Rittereiser Director September 26, 1995 - --------------------------------- Robert P. Rittereiser /s/ Dennis R. Stone Director September 26, 1995 - --------------------------------- Dennis R. Stone
50 53 FERROFLUIDICS CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Years Ended June 30, 1995, June 30, 1994 and June 30, 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ---------------------------------------------- ----------- ------------------------- ------------ ---------- BALANCE AT CHARGED CHARGED BALANCE AT BEGINNING TO COSTS TO OTHER END OF DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- --------- ------------ -------- ---------- ------ 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 surender 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) - Year ended June 30, 1994: - ------------------------- (a) Amounts deducted from the assets to which they apply: Investment valuation reserve - $600,000 - - $600,000 Reserve for doubtful accounts - trade $779,000 - ($74,000) 705,000 Reserve for uncollectible note receivable 260,000 172,000 - - 432,000 Reserve for excess and obsolete inventory 1,090,000 282,000 - - 1,372,000 Reserve for rent guarantee 447,000 - - (172,000) 275,000 Reserve against cash surender 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 150,000 209,000 - - 359,000 Self-Insurance reserve 92,000 - - (11,000) 81,000 Sales related reserve 397,000 - - - 397,000 Reserve for employee benefit plan - 66,000 - - 66,000 Year ended June 30, 1993: - ------------------------- (a) Amounts deducted from the assets to which they apply: Reserve for doubtful accounts - trade 431,000 348,000 - - 779,000 Reserve for uncollectible note receivable - 260,000 - - 260,000 Reserve for excess and obsolete inventory 860,000 230,000 - - 1,090,000 Reserve for rent guarantee - 447,000 - - 447,000 Reserve against cash surender value - 1,407,000 - - 1,407,000 (b) Other Reserves: Insurance Indemnification reserve - 150,000 - - 150,000 Warranty reserve 100,000 50,000 - - 150,000 Self-Insurance reserve 91,000 1,000 - - 92,000 Sales related reserve - 397,000 - - 397,000
EX-10.12 2 EMPLOYMENT AGREEMENT AMENDMENT FOR P.J. AVERY 1 Exhibit 10.12 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), dated April 1, 1995, 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 Paul F. Avery, Jr. ("Avery"), of 178 Drinkwater Road, Kensington, New Hampshire, and supersedes and replaces the employment agreement dated October 1, 1993 between Avery and the Company, as amended on November 15, 1993. WHEREAS, the operations of the Company are a complex matter requiring direction and leadership in a variety of areas; WHEREAS, Avery 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 Avery as its Chief Executive Officer, and Avery 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 Avery hereby accepts employment on the terms and conditions set forth in this Agreement. 2. EFFECTIVE DATE AND TERM. The commencement date (the "Commencement Date") of this Agreement shall be April 1, 1995. Subject to the provisions of Section 5, the initial term (the "Initial Term") of Avery's employment hereunder shall be from the Commencement Date to the second anniversary of the Commencement Date (the "Initial Expiration Date"); provided, however, that this Agreement shall automatically be extended for successive one (1) year terms commencing on the Initial Expiration Date and ending on each subsequent anniversary thereof (each subsequent annual period being referred to as a "Subsequent Term"), unless either Avery or the Employer provides sixty (60) days' written notice prior to the Initial Expiration Date (or sixty (60) days' written notice prior to the last day of any Subsequent Term) of his or its intention, as the case may be, not to extend the term of this Agreement. 3. CAPACITY AND PERFORMANCE. a. Avery shall be employed by the Company as its Chief Executive Officer, and shall have all powers and duties consistent with those positions, subject to the direction of the Company's Board of Directors. 2 b. Avery 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, Avery 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 Avery from: (1) devoting a portion of his efforts, from time to time, to certain other business interests with which he is involved, provided that such activity does not materially impair Avery's ability to discharge his obligations and responsibilities as Chief Executive Officer of the Company hereunder; (2) 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; (3) serving on the board of directors of any company, provided that he shall not be required to render any material services with respect to the operations or affairs of any such company; or (4) engaging in religious, charitable or other community or non-profit activities which do not impair his ability to fulfill his duties and responsibilities under this Agreement. c. Except for required travel on the Company's business and except for attendance at meetings of the Board of Directors of the Company and/or its affiliates, Avery shall not be required to work on a regular basis at any location outside of Hillsborough County in the State of New Hampshire. 4. COMPENSATION AND BENEFITS. a. BASE SALARY. For the first twelve (12) month period of the Initial Term, the Company shall pay Avery a base salary at an annual rate (the "Base Salary") equal to $225,000 per year, payable in accordance with the payroll practices of the Company for its executives. For the second twelve (12) month period of the Initial Term and for the twelve (12) month period of any Subsequent Term, such Base Salary shall equal $200,000. b. STOCK BONUS PLAN. On the effective date of this Agreement, Avery will be awarded 15,000 shares of Common Stock of the Company as a restricted stock award under the Company's 1994 Restricted Stock Plan (the "Plan") to be vested as follows: 3
Cumulative Percentage of Shares Percentage Vesting Date Becoming Vested Vested ------------ -------------------- -------- January 1, 1996 33 1/3% 33 1/3% January 1, 1997 33 1/3% 66 2/3% January 1, 1998 33 1/3% 100%
As provided in Section 10 of the Plan, all of the shares subject to the Restricted Stock Award above shall vest upon the occurrence of a "Change of Control" as such term is defined in the Plan. c. LIFE INSURANCE. During the period from the Commencement Date through the Initial Expiration Date and through the last day of any Subsequent Term, the Company shall maintain a life insurance policy on the life of Avery in the amount of two million dollars ($2,000,000) payable as directed by Avery; provided, however, that the Company shall have no obligation to maintain such policy at any time following the termination of Avery's employment pursuant to Section 5d hereunder. d. VACATIONS. Avery shall be entitled to the number of paid vacation days to which he would entitled in accordance with the Company's normal vacation policy, to be taken at such times and intervals as shall be determined by Avery, subject to the reasonable business needs of the Company. e. RETIREMENT PLANS. Avery 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. Avery 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 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 Avery. g. BUSINESS EXPENSES. The Company shall pay or reimburse Avery for all 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 and 4 to such reasonable substantiation and documentation as may be specified by the Company from time to time. h. AUTO LEASE. The Company shall furnish Avery, during the Initial Term and any Subsequent Term, with an automobile for his use, and the Company shall pay or reimburse all costs incurred in connection therewith including, without limitation, any leasing fees, insurance, operating or repairs costs, tax obligations, etc. In the event that Avery's employment hereunder is terminated pursuant to Section 5 hereof, he shall surrender the automobile to the Company not later than thirty (30) days following the termination of such employment. 5. TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. a. GENERAL SEVERANCE BENEFITS. If terminated for reasons other than as set forth under Section 5b or 5d hereof, Avery shall be entitled to receive as a severance payment an amount equal to the greater of (i) the aggregate Base Salary which Avery would have received had he been employed by Employer through the last day of the Initial Term or (ii) twelve (12) months' Base Salary at the rate then in effect under this Agreement. b. CHANGE OF CONTROL BENEFITS. (1) If the Company undergoes a Change of Control (as defined below) during the Initial Term or any Subsequent Term, and a Terminating Event (as defined below) occurs within twenty-four (24) months after the date on which such Change of Control occurs, Avery shall be entitled to receive an amount equal to twenty-four (24) months' Base Salary at the rate then in effect under this Agreement. (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 Commencement 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, provided that any person becoming a director of the Company subsequent to the Commencement Date 5 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 Avery's employment occurring subsequent to a Change in Control, other than the termination of Avery's employment pursuant to Section 5d hereunder. c. DEATH OR DISABILITY. In the event Avery dies or becomes disabled during the Initial Term or any Subsequent Term of this Agreement, his employment hereunder shall automatically terminate. In such case, the Company shall pay to Avery or his beneficiary, as the case may be, any earned but unpaid salary as of the date of his death or disability. For the purpose of this Agreement, "disability" shall refer to a situation in which Avery 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 Avery has suffered disability, Avery may, and at the request of the Company will, submit to the Company a certification in reasonable detail by a physician selected by Avery or his guardian to whom the Company has no reasonable objection as to whether Avery was so disabled and such certification shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and Avery shall fail to submit such certification, the Company's determination of such issue shall be binding on Avery. d. BY THE COMPANY FOR CAUSE. The Company may terminate Avery's employment hereunder for cause at any time upon notice to Avery setting forth in reasonable detail the nature of such case. The following, as determined by the Board in its reasonable judgment, shall constitute "cause" for termination: 6 (1) Avery'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 Avery which is in material breach of this Agreement; or (4) Material failure to perform a substantial portion of Avery's duties and responsibilities hereunder, which failure continues for more than thirty (30) days after written notice given to Avery 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 Avery with respect to the Company or any subsidiary or affiliate thereof. Upon the giving of notice of termination of Avery's employment hereunder for cause, the Company shall have no further obligation or liability to Avery, other than the payment of salary earned and unpaid at the date of termination and the contribution by the Company to the cost of Avery's participation (subject to any required employee contribution by Avery 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 Avery is entitled to continue such participation under applicable law and plan terms. e. BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate Avery's employment hereunder other than for cause at any time upon sixty (60) days' written notice to Avery. f. BY AVERY. Avery may terminate his employment hereunder at any time upon sixty (60) days' written notice to the Company. g. LIMITATION OF BENEFITS. It is the intention of Avery and of the Company that no payments by the Company to or for the benefit of Avery under this Agreement or any other 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 Avery 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 7 of Avery, 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 Avery 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 Avery 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 insure to the benefit of and be binding upon the Company and Avery, 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 Avery at his last known address on the books of 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 Avery 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 Avery's employment. 12. AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by Avery and by an expressly authorized representative of the Company. 8 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 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] 9 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by Avery, as of the date first above written. FERROFLUIDICS CORPORATION /s/ Paul F. Avery, Jr. By: /s/ Robert P. Rittereiser - --------------------------- ------------------------------- Paul F. Avery, Jr. Robert P. Rittereiser Chairman, Compensation Committee of the Board of Directors EX-10.13 3 EMPLOYMENT AGREEMENT - S.J. VINCIGUERRA 1 Exhibit 10.13 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") 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 Salvatore J. Vinciguerra ("Vinciguerra"), of 5 Byfield Road, Newton, Massachusetts 02168, and is to be effective as of January 1, 1995. WHEREAS, the operations of the Company are a complex matter requiring direction and leadership in a variety of areas; WHEREAS, Vinciguerra 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 Vinciguerra as its President and Chief Operating Officer, and Vinciguerra 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 Vinciguerra hereby accepts employment on the terms and conditions set forth in this Agreement. 2. CAPACITY AND PERFORMANCE. (a) Vinciguerra shall be employed by the Company as its President and Chief Operating Officer, and shall have all powers and duties consistent with those positions, subject to the direction of the Company's Chief Executive Officer. (b) Vinciguerra 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, Vinciguerra 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 Vinciguerra from: (1) investing his assets in a manner not otherwise prohibited by this Agreement, and in such form or manner as shall not require any 2 material services on his part in the operations or affairs of the companies or other entities in which such investments are made; (2) serving on the board of directors of any company, provided that he shall not be required to render any material services with respect to the operations or affairs of any such company; or (3) engaging in religious, charitable or other community or non-profit activities which do not impair his ability to fulfill his duties and responsibilities under this Agreement. (c) Except for required travel on the Company's business Vinciguerra shall not be required to work on a regular basis at any location outside of Hillsborough County in the State of New Hampshire. 3) COMPENSATION AND BENEFITS. (a) BASE SALARY. The Company shall pay Vinciguerra a base salary at an annual rate equal to $185,000 per year, payable in accordance with the payroll practices of the Company for its executives. After six (6) months of satisfactory performance, as determined by the CEO, said base salary will be increased to an annual rate equal to $200,000 per year. (b) STOCK BONUS PLAN. On the effective date of this Agreement, Vinciguerra will be awarded 75,000 shares of Common Stock of the Company as a restricted stock award under the Company's 1994 Restricted Stock Plan (the "Plan") to be vested as follows:
Cumulative Percentage of Shares Percentage Vesting Date Becoming Vested Vested ------------ -------------------- ---------- January 1, 1996 33 1/3% 33 1/3% January 1, 1997 33 1/3% 66 2/3% January 1, 1998 33 1/3% 100%
As provided in Section 10 of the Plan, the shares subject to the Restricted Stock Award above shall vest upon the occurrence of a "Change of Control" as such term is defined in the Plan. (c) VACATIONS. Vinciguerra shall be entitled to the number of paid vacation days to which he would entitled in accordance with the Company's normal vacation policy, to be taken at such times and intervals as shall be determined by Vinciguerra, subject to the reasonable business needs of the Company. 3 (d) RETIREMENT PLANS. Vinciguerra 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. (e) HEALTH, WELFARE AND FRINGE BENEFIT PLANS, ETC. Vinciguerra 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 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 Vinciguerra. (f) BUSINESS EXPENSES. The Company shall pay or reimburse Vinciguerra for all 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 and to such reasonable substantiation and documentation as may be specified by the Company from time to time. 4) TERMINATION OF EMPLOYMENT AND SEVERANCE BENEFITS. If employed for 6 months or less, Vinciguerra shall be entitled to receive as a severance payment if terminated for reasons other than "cause" an amount equal to 6 months' salary, or 12 months' salary if employed for a period of more than 6 months. If the Company undergoes a Change of Control (as defined in the Plan) and a Terminating Event (as defined below) occurs within a 24 month period of the date on which the Change of Control occurs then Vinciguerra will be paid an amount equal to 18 month's base salary at the rate then in effect under this Agreement. If Vinciguerra desires to terminate his employment, then 8 weeks' notice must be given to the Company. Vinciguerra's employment shall terminate under the following circumstances: For purpose of this Agreement, a "Terminating Event" shall mean (A) termination by the Company or its successor entity of the employment of Vinciguerra for any reason other than death, disability or cause pursuant to Section 5(a) or (b) of this Agreement, or (B) resignation of Vinciguerra upon the occurrence of any of the following events: (1) there is a significant change in the nature or scope of Vinciguerra's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by Vinciguerra immediately prior to the Change in Control or (2) Vinciguerra is required to relocate outside 4 Hillborough County, New Hampshire in order to maintain his employment hereunder after the Change in Control or (3) there is a decrease in the total annual compensation payable by the surviving or successor entity, as applicable, to Vinciguerra from the total annual compensation paid to Vinciguerra by the Company prior to the Change in Control. (a) DEATH OR DISABILITY. In the event Vinciguerra dies or becomes disabled during the term of this Agreement, his employment hereunder shall automatically terminate. In such case, the Company shall pay to Vinciguerra or his beneficiary, as the case may be, in addition to such amounts as may be payable to Vinciguerra pursuant to Section 3(b) of this Agreement, any earned but unpaid salary as of the date of his death or disability. For the purpose of this Agreement, "disability" shall refer to a situation in which Vinciguerra is totally disabled from performing his duties for the Company during a period of 13 consecutive weeks, in which case the Company's Chief Executive Officer may terminate his employment, on account thereof. (b) BY THE COMPANY FOR CAUSE. The Company may terminate Vinciguerra's employment hereunder for cause at any time upon notice to Vinciguerra setting forth in reasonable detail the nature of such case. The following, as determined by the Board in its reasonable judgment, shall constitute cause for terminate: (i) Vinciguerra'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 (ii) 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 (iii) Conduct engaged in or action taken or omitted to be taken by Vinciguerra which is in material breach of this Agreement; or (iv) Material failure to perform a substantial portion of Vinciguerra's duties and responsibilities hereunder, which failure continues for more than thirty days after written notice given to Vinciguerra pursuant to a vote of the Board of Directors, such vote to set forth in reasonable detail the nature of such failure; or (v) Gross or willful misconduct of Vinciguerra with respect to the Company or any subsidiary or affiliate thereof. If any question shall arise as to whether during any period Vinciguerra has suffered disability, Vinciguerra may, and at the request of the Company will, submit to the Company a certification in reasonable detail by a physician selected by Vinciguerra or his guardian to whom the Company has no reasonable objection as to whether Vinciguerra was so disabled 5 and such certification shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and Vinciguerra shall fail to submit such certification, the Company's determination of such issue shall be binding on Vinciguerra. Upon the giving of notice of termination of Vinciguerra's employment hereunder for cause, the Company shall have no further obligation or liability to Vinciguerra, other than the payment of salary earned and unpaid at the date of termination and the contribution by the Company to the cost of Vinciguerra's participation (subject to any required employee contribution by Vinciguerra 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 Vinciguerra is entitled to continue such participation under applicable law and plan terms. (c) BY THE COMPANY OTHER THAN FOR CAUSE. The Company may terminate Vinciguerra's employment hereunder other than for cause at any time upon notice to Vinciguerra. In the event of such termination, the Company shall continue to pay Vinciguerra the salary and other benefits specified by Section 3 and 4 of this Agreement, to the end of its term. (d) BY VINCIGUERRA. Vinciguerra may terminate his employment hereunder at any time upon sixty (60) days' notice to the Company. 5) 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. 6) ASSIGNMENT. Neither the Company nor Vinciguerra 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 Vinciguerra 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 insure to the benefit of and be binding upon the Company and Vinciguerra, their respective successors, executors, administrators, heirs and permitted assigns. 7) 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. 8) 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 6 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. 9) 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 Vinciguerra at his last known address on the books of the Company and, in the case of the Company, to its principal place of business, attention of Chairman of the Board or to such other address as either party may specify by notice to the other. 10) ENTIRE AGREEMENT. This Agreement and the Non- Disclosure/Non-Compete agreement to be signed by Vinciguerra and the Company 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 Vinciguerra's employment. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 7 11) AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by Vinciguerra and by an expressly authorized representative of the Company. 12) 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. 13) 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. 14) 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. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by Vinciguerra, as of the date first above written. FERROFLUIDICS CORPORATION /s/ Salvatore J. Vinciguerra By: /s/ Paul F. Avery, Jr. - ------------------------------- ------------------------------ Salvatore J. Vinciguerra Paul F. Avery, Jr. Chief Executive Officer EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 Subsidiaries of the Ferrofluidics Corporation As of June 30, 1995
NAME PLACE OF ORGANIZATION ---- --------------------- Advanced Products and Technologies, GmbH Nurtingen, Germany Advanced Products and Technologies, Ltd. Oxford, England Advanced Products and Technologies, S.A. Spain Ferrofluidics Japan Corporation Tokyo, Japan Ferrohydrodynamics Corporation Massachusetts Ferrofluid Finance Corporation, N.V. Netherlands Antilles
51 EX-23 5 REPORT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Ferrofluidics Corporation: Our report on the consolidated financial statements of Ferrofluidics Corporation is included on page 21 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 46 of this Form 10-K. In our opinion, based on our audit of the Company's balance sheet as of June 30, 1995 and 1994 and the related statements of operations, retained earnings and cash flows for the years ended June 30, 1995 and 1994, the amounts contained in the financial statement schedule referred to above as of June 30, 1995 and 1994 and for the years ended June 30, 1995 and 1994, when considered in relation to the basic financial statements taken as whole, present fairly, in all material respects, the information required to be included as of that date. Because of the matters referred to in the fourth paragraph of our report, we are unable to and do not report on other amounts contained in the financial statement schedule. /s/ Coopers & Lybrand L.L.P. Manchester, New Hampshire August 31, 1995 52 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1995 AND 1994 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K. 1 US DOLLARS YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 1 1,563,000 0 8,131,000 357,000 14,130,000 26,126,000 17,011,000 8,895,000 39,529,000 18,315,000 5,000,000 35,509,000 0 0 (19,728,000) 39,529,000 34,155,000 34,155,000 20,264,000 14,104,000 (1,156,000) 0 406,000 567,000 (322,000) 889,000 0 0 0 889,000 .16 .16
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