-----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, Mf7E70zbsqGAqxF2zhzbyfledGQIcHtdLTyWbP2bprqWEyCRb4tQH10vVnt8ZYaS HRiVWZPJOcuErqtSr/Mdyg== 0001029869-98-001194.txt : 19981012 0001029869-98-001194.hdr.sgml : 19981012 ACCESSION NUMBER: 0001029869-98-001194 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19981009 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FERROFLUIDICS CORP CENTRAL INDEX KEY: 0000353286 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 020275185 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12198 FILM NUMBER: 98723513 BUSINESS ADDRESS: STREET 1: 40 SIMON STREET CITY: NASHUA STATE: NH ZIP: 03061 BUSINESS PHONE: 6038839800 MAIL ADDRESS: STREET 1: 40 SIMON STREET CITY: NASHUA STATE: NH ZIP: 03061 10-K 1 FERROFLUIDICS CORPORATION FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 27, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For transition period from _________ to _________ Commission file number 0-10734 FERROFLUIDICS CORPORATION (Exact name of registrant as specified in its charter) -------------------- Massachusetts 02-0275185 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 40 Simon Street Nashua, New Hampshire 03061 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (603) 883-9800 -------------------- Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $.004 per share (Title of class) Preferred Stock Purchase Rights (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes x No -- -- (2) Yes x No -- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of October 1, 1998, 6,218,207 shares of $.004 par value Common Stock of the registrant were outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price of $3.00 per share for the registrant's Common Stock, as reported on the NASDAQ National Market as of October 1, 1998 was $17,130,846. 1 TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I 1 Business ............................................................................................ 3 2. Properties .......................................................................................... 8 3. Legal Proceedings ................................................................................... 8 4. Submission of Matters to a Vote of Security Holders ................................................. 8 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................................................................ 9 6. Selected Consolidated Financial Data ................................................................ 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................... 11 7A. Quantitative and Qualitative Disclosures about Market Risk .......................................... 17 8. Financial Statements and Supplementary Data ......................................................... 18 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................................................ 41 PART III 10. Directors and Executive Officers of the Registrant ................................................ 41 11. Executive Compensation ............................................................................ 43 12. Security Ownership of Certain Beneficial Owners and Management ................................................................................. 54 13. Certain Relationships and Related Transactions .................................................... 55 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................... 55 (a) Financial Statement Schedules (b) Reports on Form 8-K Signatures .......................................................................................... 60
2 ITEM 1. Business Founded in 1968, Ferrofluidics Corporation (the "Company" or "Ferrofluidics") is engaged principally in developing, manufacturing and marketing ferrofluids and products based on or derived from its proprietary ferrofluid technology. Ferrofluids, the Company's core technology, are stable magnetic liquids that can be precisely positioned or controlled with a magnetic force. Ferrofluids consist of molecular-sized magnetic particles that are surface treated so that they can be dispersed in various fluids, usually a synthetic lubricating oil. Ferrofluids are designed to have a choice of properties such as viscosity, magnetic strength and vapor pressures to perform numerous specific functions such as sealing, sensing, lubricating, damping and heat transfer. The Company creates commercial applications for its ferrofluid technology either by creating a ferrofluid to serve one or more functions in an existing product (such as the utilization of ferrofluids in audio loudspeakers) or by combining proprietary ferrofluid technology with broad applications engineering to develop ferrofluid-based (Ferrofluidic(R)) products, such as the Company's various sealing devices and fluid-film bearings. The Company manufactures all ferrofluids for sale or for use in its own proprietary products. With respect to its products incorporating ferrofluids, the Company generally designs the product and then procures from third party vendors the fabrication of all or a substantial proportion of machined parts and components for the product. The Company assembles, tests and ships the product from its Nashua, New Hampshire plant. The Company seeks to apply its Ferrofluidic(R) technologies in situations where its use significantly enhances the final product into which the technology is incorporated. As a result, pricing reflects value added rather than the direct cost of producing the fluid or Ferrofluidic(R) product supplied to the Company's customers. The Company also seeks to supply markets in which it can achieve a position of market leadership. The Company believes that it, along with a licensee, currently supplies the vast majority of the ferrofluids and ferrofluid-based products used in the world. On September 23, 1998, the Company entered into an agreement with General Signal Technology Corporation ("General Signal") whereby General Signal purchased the intellectual property and certain other assets of the Company's Crystal Growing Systems Division (the "Systems Division") for $10,800,000 in cash on such date (the "Sale"). Although the Sale took place after the close of fiscal 1998, in accordance with generally accepted accounting principles, the Company is reporting the results of operations of this business as discontinued operations in fiscal 1998, and the Company's consolidated financial statements for prior periods, as well as all related footnote and financial discussions, have been revised to reflect this accounting treatment of the Systems Division in those periods. See Note K to the Consolidated Financial Statements for additional information regarding the Sale. The Sale did not include any liabilities or accounts receivable outstanding as of the closing of the Sale, which remain with the Company. The Sale also did not include the obligation by the Company to complete backlog, which obligation remains with the Company, or approximately $5,873,000 in inventory on hand, all of which is needed to fulfill existing backlog. The terms of the Sale provide that, generally, any backlog existing on December 31, 1998 will be transferred to General Signal. Corporate Structure The Company has its headquarters in Nashua, New Hampshire where it conducts substantially all of the engineering and manufacturing of its products. The Company conducts its operations overseas through the following wholly owned subsidiaries: (1) Advanced Products & Technologies, GmbH ("AP&T"), with headquarters in Nurtingen, Germany and sales offices in Oxford, England and Madrid, Spain, which: (a) markets and services Ferrofluidic(R) products in Europe; (b) designs, manufactures and markets products for the optical coating and thin-film deposition industries such as electron beam guns and related controllers; and (c) serves as an exclusive distributor in Europe for several U.S. and European corporations that manufacture compatible products for similar industries. 3 (2) Ferrofluidics Japan Corporation ("FJC"), located in Tokyo, Japan, which distributes Ferrofluidics' components to the semiconductor industry and for application in vacuum-related products. FJC also provides after-sales service for these components, and distributes ferrofluids to the audio loudspeaker industry. In addition to its wholly-owned subsidiaries, the Company has licensed its vacuum rotary feedthrough seals and ferrofluid technology, on a non-exclusive basis, to Ferrotec Corporation ("Ferrotec," formerly Nippon Ferrofluidics Corporation), a former subsidiary located in Japan. In addition, under an exclusive license granted by Ferrofluidics in August 1993, Ferrotec manufactures and sells Ferrofluidic(R) exclusion seals for use on computer peripheral equipment. Operating Structure Following the Sale, the Company is organized into two business segments: (i) the Components Division, or Ferrofluidic Products segment, which manufactures and markets: (a) ferrofluids used in the Company's own engineered core products, audio loudspeakers for the commercial, home and automotive markets, and for use in nondestructive testing, inertia dampers, stepper motors and sensor applications; and (b) Ferrofluidic(R) sealing devices and subsystems, primarily for use in the semiconductor process, industrial process, lamp and fiber optic manufacturing, and medical equipment industries. Sales generated by the Components Division accounted for approximately 66.7%, 66.5% and 69.1% of total product sales from continuing operations in fiscal 1998, 1997 and 1996, respectively. (ii) Distributed Products Division or Thin Film Deposition segment, which includes the sale in Europe and Asia by AP&T of compatible products on an exclusive basis for several U.S. and European companies. Sales generated by the Distributed Products Division accounted for 33.3%, 33.5% and 30.9% of total product sales from continuing operations in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, $16,520,000, or 58.6%, of the Company's sales from continuing operations were to foreign customers, primarily through AP&T and FJC. Sales to unaffiliated foreign customers in fiscal 1997 and 1996 totaled $14,180,000 (56.5%) and $14,941,000 (54.9%), respectively. All manufacturing and assembly of products for the Components Division is conducted at the Company's headquarters in Nashua, NH. Marketing of those products for all markets, excluding Europe and Japan, is principally conducted by its direct sales force at the Company's headquarters. In the case of its standard seals to end-user markets, the Company has distribution agreements with the Kurt J. Lesker Company ("KJLC"), a worldwide distributor of vacuum related products, and with Varian Associates. In addition, the Company has established distributor relationships for its ferrofluid and Ferrofluidic(R) products in Korea, Taiwan, India, China, and developing Pacific Rim countries. Product Lines Following the Sale, the Company manufactures and sells products in two major product categories: (i) ferrofluids and (ii) magnetic fluid seals, sealing subsystems, and other Ferrofluidic(R) components products. In addition, the Company distributes advanced technology component products and systems for use in the manufacture of semiconductors and in the thin-film deposition and optical coating industries through AP&T in Europe and Asia. (i) Ferrofluids. The Company supplies ferrofluids for use in the Company's own engineered products, for use in home and automotive loudspeakers, for nondestructive testing, and for use in sensors and stepper motors. The Company currently supplies fluids for approximately 65 million speakers per year, representing the vast majority of the ferrofluid applications in speakers. Sales of ferrofluids accounted for approximately 7.8%, 10% and 9.5% of total product sales from continuing operations in fiscal 1998, 4 1997 and 1996, respectively. The Company supplies Ferrofluidic(R)inertia dampers that are used in semiconductor equipment, disk drives testers, XY plotters, computer printers and other computer peripheral equipment. The dampers eliminate resonance, reduce settling time, eliminate corrosion and improve positional accuracy. (ii) Magnetic Fluid Seals and Subsystems. The Company combines proprietary ferrofluid technology with applications engineering to develop a variety of products that provide state-of-the-art seals and sealing subsystems that seal the environment from a manufacturing process. In each of the applications in which the Company provides Ferrofluidic(R) seals and sealing subsystems it is the leading provider of such technology products. Sales of magnetic fluid seals accounted for approximately 58.9%, 56.5% and 59.6% of total product sales from continuing operations in fiscal 1998, 1997 and 1996 respectively. The Company's major magnetic sealing products are: Rotary Seals for Critical Process Applications: Historically, one of the Company's core commercial applications of ferrofluids is a rotary seal assembly with long life, unmeasurable leakage and high-speed capability for transferring rotary motion into vacuum and other highly controlled, ultra-clean process environments. The Company supplies the semiconductor and other critical process industries with low vapor pressure seal assemblies and subsystems, which help exclude atmospheric contamination from manufacturing processes. These applications include semiconductor processing, electro-optical subsystems, thin-film vacuum coating, excimer laser and x-ray-based machines. The Company produces standard and custom-engineered sealing components and subsystems including multiport rotary valve assemblies. Customers include both original equipment manufacturers ("OEMs") and end users. The selling price for the majority of such seal assemblies sold by the Company is in the range of $500 to $25,000, with some seal subsystems approaching $100,000, depending on design complexity. In addition, the Company has two additional commercial applications for its rotary seals: (a) a Lamp Process Sealing System that is supplied to General Electric and certain other lighting manufacturers for use as an integral part of the process to produce energy efficient lamps for automotive, commercial and residential lighting; and (b) a Medical X-Ray Sealing System that is supplied to major medical equipment manufacturers for use to rotate, seal and cool target anodes inside the x-ray vacuum chamber of computer aided tomography scan equipment. Industrial Process Seals: The Company's industrial process seals eliminate volatile organic compounds and volatile hazardous air pollutants from petroleum refining and chemical processing plants. Using this magnetic fluid sealing technology, these facilities can comply cost-effectively with the strictest regulations, which mandate decreasing "fugitive emissions" (as they are referred to under the Federal Clean Air Act of 1990 and its Amendments of 1990) according to a phased program over the next few years and are subject to acceleration by certain state and local authorities. During fiscal 1997, a new series of gas tight seals (GT-6) for the industrial market was introduced. This product series is targeted at industrial fans, blowers, and other low-pressure gas handling devices where emissions control and process contamination are critical. Other products within the GT family will be introduced periodically and target other equipment such as compressors, centrifuges, mixers, agitators and pumps. The GT-6 product recently received certification from TA Luft, the German air quality authority. Subsystems: During fiscal 1996, as an extension of its core capability to design and manufacture rotary seals for a variety of vacuum processing applications, the Company began marketing sealing sub-systems to OEMs, which incorporate existing Ferrofluidic sealing technology with other mechanical and electrical components to produce a fully integrated sub-system. Sub-systems allow the Company's customers to outsource more of their manufacturing without compromising quality. Some of the new opportunities include robotics, cluster tooling, and other semiconductor processing sub-assemblies. The Company continues to develop equipment and process technologies in several other areas in cooperation with major industrial companies and specific product specialists. 5 Competition The Company believes that its competitive advantage will continue to depend upon its trade secrets, know-how and ability to develop both ferrofluids for specific applications and technologically advanced products which use ferrofluids. The Company believes that its competitive position with respect to its proprietary products, while aided by its patents, is not now materially dependent upon them. The Company does, however, believe that several of its pending patents, if issued, could further strengthen its competitive position. The Company's ferrofluids are proprietary to the Company. (i) Magnetic Fluids. Numerous other companies around the world supply various forms of magnetic fluids for commercial applications. Nevertheless, the Company, in conjunction with Ferrotec, its Japanese licensee and former subsidiary, supplies the vast majority of the world's commercial applications of ferrofluids and believes that its ferrofluids are the principal product used in applications utilizing magnetic fluids. The Company believes its principal competitor in the audio ferrofluid market is Ferrotec with respect to sales in the Pacific Rim. (ii) Seals and Sealing Subsystems. In semiconductor and other process industry applications, the Company's magnetic fluid sealing devices and sealing subsystems compete against traditional, non-ferrofluid based sealing methods marketed by other vendors, some of which have lower initial cost than the Company's products. In comparison to the Company, some of these firms have greater financial, marketing, technical or other resources available to them. In the Pacific Rim, the Company's licensees compete with other suppliers of magnetic fluid seals. In addition, one competitor in Japan ships seals into the United States. In industrial process applications, Ferrofluidics' sealing system competes with various nonmagnetic fluid sealing devices and sealing subsystems; however, the Company believes that the competitive devices are either more expensive or have higher maintenance costs and are not adequate at the stricter compliance levels mandated by the EPA. Employees and Marketing The Company currently has approximately 219 employees worldwide, of which 167 are employed in the United States, 46 in Europe and 6 in Japan. These figures include 56 employees in the discontinued Systems Division. In the United States, the Company markets its products through a direct field sales force and an applications engineering staff with headquarters in Nashua, NH which is augmented by a third-party sales representative organization in the U.S. and Europe with respect to its Components business. Abroad, products are sold in Europe through AP&T, the Company's wholly-owned subsidiary, in Japan through its wholly-owned subsidiary, Ferrofluidics Japan Corporation, and elsewhere in Europe and Asia through various sales representative and distributor relationships. Manufacturing The Company produces all of its ferrofluids at its headquarters, and, to protect the proprietary nature of its ferrofluid technology, conducts such activities in a limited-access environment. The Company's manufacturing presently consists primarily of assembly and test operations, although it has in-house precision machining capabilities in the United States in support of special marketing and customer requirements. The Company's manufacturing operations rely substantially on outside vendors who fabricate components and subassemblies to the Company's specifications. These components are assembled at the Company's facilities and subjected to the Company's rigorous test and inspection procedures. During 1996, the Company increased its capacity for in-house precision machining through the establishment of a state-of-the-art machining center. This enhanced capability has proven to be critical in the ability to meet ever shortening lead times for delivery of component products to customers, in particular in Japan and Asia where the competition has historically dominated market share. 6 Outside Suppliers With respect to its sealing devices, the Company relies on outside suppliers to manufacture, to the Company's specifications, a substantial portion of its metal components requirements. The Company performs assembly and quality control procedures at its headquarters. If the Company's current suppliers were unable to continue to manufacture components, the Company believes that other suppliers would be available to do such work, although there is no guarantee that the Company would be able to obtain all of its supply requirements from such other suppliers on terms comparable to those of its current suppliers. The new in-house machining center, established in 1996, supplies a portion of the Company's need for precision machined component parts, reducing its reliance on outside suppliers. It is not, however, the intent of management to conduct all of the component production in-house. Intellectual Property Rights The Company owns a number of U.S. and foreign patents for its seals, dampers and bearings, with expiration dates ranging up to 2006. In addition, the Company has applied for additional patents for these products. In many cases, however, the Company relies more upon its trade secrets, know-how and ability to develop technological advances than patents to protect its technologies and products. The Company has registered trademarks for a logo design utilizing an "F" and for Ferromedic, Ferrofluidic, FerroSound, FerroSound-The solution is loud and clear, and Spin Technology. Internal Research and Development The Company's internal research and development effort is aimed at developing proprietary ferrofluids and using the unique properties of magnetic fluid technology to develop new products and business. The Company spent (and charged to expense) $890,000, $685,000 and $782,000 in fiscal years 1998, 1997 and 1996, respectively, on the development of new products and the improvement of existing products. All research is Company-directed and is conducted primarily by employees of the Company. The Company's research and development is carried out by an interdisciplinary group of product development engineers, physicists, chemists, technicians and marketing professionals who seek to apply ferrofluid technology in diverse and expanding markets where that technology adds a significant value. The Company is experimenting with new ferrofluids and seals for new higher speed and higher vacuum applications for new and existing markets. Backlog As of June 27, 1998, the Company had a consolidated order backlog from continuing operations of $8,226,000, as compared to $7,207,000 at June 28, 1997. A comparative summary of the consolidated backlog by business segment is as follows:
1998 1997 ---- ---- Components $4,335,000 $4,787,000 Distributed Products 3,891,000 2,420,000 ---------- ---------- Total Backlog $8,226,000 $7,207,000 ========== ==========
The majority of the total backlog at June 27, 1998 is expected to ship during fiscal 1999. Warranty Policy With respect to the sale of ferrofluids and the sale of seals and other products to the computer peripheral industry, the Company warrants only as to workmanship and materials, and its express warranties for such products terminate upon acceptance by the customer. With respect to sales of seals to the semiconductor and other industries for controlled environment applications, the Company offers a one-year warranty. Its warranty service expenses for such products have not been significant. Because of the low warranty service rate, the cost of warranty returns to date has been expensed as incurred, and no reserves for warranty service have been established. 7 With respect to the Company's former Systems Division, the Company generally offered a one-year warranty as to workmanship and materials from date of acceptance by the customer. Warranty expenses have historically been within the reserves established by the Company. Financial Information About Industry Segments Financial information with respect to the Company's industry segments is hereby incorporated by reference to Note I to the Consolidated Financial Statements in Item 8 of this report. Financial Information About Foreign and Domestic Operations and Export Sales Financial information about the Company's foreign and domestic operations and export sales is hereby incorporated by reference to Note I of Notes to the Consolidated Financial Statements in Item 8 of this report. ITEM 2. Properties The Company's offices, engineering and manufacturing operations are located in Nashua, New Hampshire in a 71,000 square foot facility situated on approximately 4.5 acres of land owned by the Company. This land, the building, and substantially all the Company's machinery and equipment at its Nashua facility have been pledged as security for its short and long term debt. (See Notes A and D to the Consolidated Financial Statements in Item 8.) The Company and its subsidiaries lease office space, aggregating approximately 15,000 square feet, under varying terms in Oxford, England; Nurtingen, Germany; Madrid, Spain; and Tokyo and Nagano, Japan. ITEM 3. Legal Proceedings Securities and Exchange Commission - ---------------------------------- On February 19, 1993, the Company received an informal inquiry from the SEC requesting that the Company provide the SEC with certain documents concerning publicity relating to the Company for the period of January 1, 1992 to February 19, 1993. In August 1993, the SEC issued an order directing a private investigation to determine whether certain unnamed persons had violated or caused the Company to violate the federal securities laws. Among the areas of inquiry identified in the order was whether publicity about the Company, including research reports, were published without fully disclosing consideration given or received therefor. The order also indicated that the inquiry would examine possible manipulation by certain unnamed persons of the Company's securities, payment in connection therewith, and failure to disclose such activities in public filings made by the Company (including the financial statements contained or incorporated therein), as well as possible nondisclosure of transactions with the Company in which such persons may have had a material interest. Throughout the investigation the Company has cooperated fully with the SEC's inquiry. In June 1997, the SEC completed its investigation with respect to the Company, and on June 23, 1997, the Company entered into a Consent and Understanding, whereby it agreed to be permanently enjoined from violating the federal securities laws. The Company is continuing to cooperate with the SEC as it completes its investigation with respect to certain unnamed persons. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended June 27, 1998. 8 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters Ferrofluidics' Common Stock is traded on the NASDAQ National Market under the stock symbol "FERO". The following table sets forth the high and low closing transactions for the Common Stock of the Company for the fiscal periods indicated, as reported by the NASDAQ National Market.
1998 High Low ---- ---- --- 7/1/97 - 9/30/97 8 7/8 5 7/8 10/1/97 - 12/31/97 7 13/16 4 5/8 1/1/98 - 3/31/98 6 7/16 4 5/8 4/1/98 - 6/30/98 5 11/16 3 1/8 1997 ---- 7/1/96 - 9/30/96 13 3/4 8 1/4 10/9/96 - 12/31/96 9 5/8 7 3/8 1/1/97 - 3/31/97 10 7/8 7 1/4 4/1/97 - 6/30/97 8 3/4 5 3/4
On October 1, 1998, the closing sale price for the Company's Common Stock, as reported by the NASDAQ National Market, was $3.00. On that date, there were approximately 2,489 holders of record of the Common Stock of the Company. Dividend Policy The Company has never paid a cash dividend on its Common Stock. Its policy is to retain earnings and use funds for the operation and expansion of its business. Future dividend policy will be determined by the Board of Directors based upon the Company's earnings, financial condition and capital requirements. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data for the five years ended June 27, 1998, should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, in Item 8 of this report and with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report.
Fiscal Years Ended ------------------ June 28, June 30, June 30, June 30, June 27, 1998 1997(b) 1996(b) 1995(b) 1994(b) ------------- ------- ------- ------- ------- Income Statement Data: - ---------------------- Net sales $52,700,000 $67,785,000 $72,967,000 $34,155,000 $26,461,000 Net sales from continuing operations 28,170,000 25,094,000 27,226,000 22,373,000 17,849,000 Nonrecurring operating expenses (income) -- -- -- (1,156,000) 3,108,000 Income (loss) from continuing operations 1,338,000 (97,000) 498,000 2,166,000 (7,362,000) Income (loss) from discontinued operations (4,810,000) 1,769,000 3,322,000 (1,277,000) (3,352,000) Net income (loss) (3,472,000) 1,672,000 3,820,000 889,000 (10,713,000) Per Share Data: Earnings Per Common Share-Basic: Income (loss) from continuing operations 0.22 (0.02) 0.08 0.39 (1.37) Income (loss) from discontinued operations (0.78) 0.29 0.55 (0.23) (0.63) Net income (loss) (0.56) 0.27 0.63 0.16 (2.00) Earnings Per Common Share-Diluted: Income (loss) from continuing operations 0.21 (0.02) 0.08 0.39 (1.37) Income (loss) from discontinued operations (0.77) 0.29 0.53 (0.23) (0.63) Net income (loss) (0.56) 0.27 0.61 0.16 (2.00) Balance Sheet Data: Working capital $8,182,000 $13,323,000 $12,350,000 $7,811,000 $(1,601,000) Total assets 44,019,000 45,001,000 43,429,000 39,529,000 32,508,000 Total liabilities 25,818,000 23,420,000 23,727,000 23,748,000 21,325,000 Long-term debt 5,000,000 5,000,000 5,000,000 5,036,000 28,000 Stockholders' equity 18,201,000 21,581,000 19,702,000 15,781,000 11,183,000
Note: (a) Dividends have neither been declared nor paid during the five years ended June 27, 1998. (b) Certain amounts for fiscal 1997, 1996, 1995 and 1994 have been restated to reflect the Systems Division as discontinued operations. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information to assist in the understanding of the Company's results from continuing operations, unless otherwise noted, and financial condition. As described in Item 1, on September 23, 1998, certain of the assets of the Company's Systems Division were sold to General Signal for $10,800,000 in cash. See Note K to the Consolidated Financial Statements for more information regarding the Sale. This discussion reflects the fact that in accordance with generally accepted accounting principles, the Company is reporting the results of operations from the Systems Division as discontinued operations and that the Company's Consolidated Financial Statements for fiscal 1998 and prior periods, as well as all related footnotes, have been revised to reflect this accounting treatment of the Systems Division in those periods. It should be read in conjunction with the selected financial data in the preceding section and the consolidated financial statements and notes thereto that appear elsewhere herein. Results of Operations Fiscal 1998 Versus Fiscal 1997: - ------------------------------- In fiscal 1998, the Company's consolidated net revenues increased to $28,170,000 from the $25,094,000 reported in fiscal 1997. The changes in revenues by segment are shown in the following table:
1998 1997 ---- ---- Components $18,780,000 $16,685,000 Distributed Products 9,390,000 8,409,000 Total Revenues $28,170,000 $25,094,000 =========== ===========
Sales in the Components product lines increased due primarily to the upturn in semiconductor equipment manufacturing that began in the fourth quarter of fiscal 1997, and from a significant increase in sales of rotary feedthrough seals in Europe primarily in non-semiconductor markets. In addition, the recently introduced line of industrial gas tight seals also contributed to the increase in sales in fiscal 1998. In the Distributed Products business segment, sales of components and power supplies for the thin film deposition industry contributed significantly to the increase. Sales of magnetic fluids remained relatively flat for the year as compared to the prior year, as heavy competition in the audio fluid business, particularly in Asia, prevented a significant sales increase. Total sales of the Company's European subsidiary, AP&T, which includes the sale of the Company's components and fluid products in Europe, as well as comprising the Distributed Products segment, increased by 15.2% to $13,801,000 as compared to $11,979,000 in fiscal 1997. The increases were in both the Ferrofluidic(R) product lines and in the distributed products. Sales from the Company's Japanese subsidiary were 22% lower than in the previous fiscal year, which was due to the competitive price pressures brought on by the decline of the yen in relation to the dollar, putting products manufactured in the U.S. at a significant cost disadvantage. Bookings increased from $26,595,000 in fiscal 1997 to $31,263,000 in fiscal 1998. This increase was both in Distributed Products and in rotary feedthrough seals. Bookings for magnetic fluid sales for 1998 were $2,758,000, which is slightly higher than the $2,542,000 for 1997. Order backlog at the end of fiscal 1998 was $8,226,000, as compared to the backlog in the prior year of $7,207,000. The majority of the order backlog at the end of fiscal 1998 is expected to ship in fiscal 1999. Consolidated gross margin for fiscal 1998 was 43.9%, a decrease from the 47.3% in fiscal 1997. The decrease in margin was due to decreases in margin in the magnetic fluids product line and in the Company's European operations. Engineering and product development expenses in fiscal 1998 were $1,977,000, which is comparable to the $1,907,000 spent in fiscal 1997. Engineering and product development expenses have been allocated between continuing operations and discontinued operations on the basis of the amounts actually spent by each Division. Selling, general and administrative ("SG&A") expenses in fiscal 1998 were $8,321,000, which is $1,595,000 or 16.1% less than the $9,916,000 incurred in 1997 and, as a percent of revenues, decreased from 39.5% in 1997 to 11 29.5% in 1998. Selling and marketing costs decreased by $1,200,000, due primarily to a $872,000 decrease in selling expenses at AP&T which was the result of restructuring efforts undertaken in late fiscal 1997 and a $151,000 decrease in selling expenses in Japan. Administrative expenses accounted for the remainder of the decrease, which was due in part to decreases in legal costs ($278,000) and insurance ($260,000). General corporate expenses have been allocated between continuing operations and discontinued operations on the basis of the actual amounts incurred on behalf of the respective divisions. In addition, certain expenses for Corporate Officers (salaries, travel, etc.) and Accounting Department personnel (primarily salaries) were also allocated on the basis of the estimated time and expenses incurred on behalf of each respective Division. Net interest expense in fiscal 1998 was $601,000, an increase of $178,000 from net interest expense incurred in fiscal 1997. The increase is due to higher average borrowings under the Company's line-of-credit agreement. Net interest expense and other bank charges and fees have been allocated between continuing operations and discontinued operations on the basis of the net identifiable assets used in those operations. See Note D to the Consolidated Financial Statements for a more complete discussion of the Company's debt obligations. The Company records transaction gains and losses resulting from fluctuations of foreign currency as other income or expense. During fiscal 1998, $47,000 of net foreign currency transaction losses were recorded as compared to a net loss of $106,000 in fiscal 1997. The losses in 1998 and 1997, primarily incurred by the Company's Japanese subsidiary whose functional currency is the U.S. dollar for accounting purposes, arose as a result of the weakening of the Japanese yen against the dollar during much of 1998 and 1997. Gains and losses resulting from the translation of the financial statements of subsidiaries whose functional currency is other than the U.S. dollar are recorded directly to equity. The balance of other income (expense) in 1998 was principally other financing costs, which did not change materially from the previous fiscal year. The income tax expense in 1998 of $74,000 is comprised of a provision for foreign income taxes on the Company's earnings. The income tax benefit of $448,000 in 1997 consisted principally of a tax benefit of $467,000 recorded in the fourth quarter of 1997 which represents a reduction in the valuation allowance against deferred tax assets. See Note C to the Consolidated Financial Statements for a more complete discussion of income taxes. Income (loss) from discontinued operations, net of income taxes, was approximately $(4,810,000) for 1998 as compared to $1,769,000 for 1997. Fiscal 1997 Versus Fiscal 1996: - ------------------------------- In fiscal 1997, the Company incurred a loss of $(97,000) or $(.02) per share, compared to income of $498,000, or $.08 per share, recorded in fiscal 1996. The decline was the result of lower sales volumes and increased expenses, particularly in the areas of marketing and product development. In fiscal 1997, product revenues decreased 7.8% to $25,094,000 from $27,226,000 in fiscal 1996. This decrease in the Company's level of business can be directly attributed to a significant decline in the semiconductor industry in general, which accounts for a substantial portion of the Components segment revenues. The changes in revenues by segment are summarized as follows:
1997 1996 ---- ---- Components $16,685,000 $18,827,000 Distributed Products 8,409,000 8,399,000 ----------- ----------- Total Revenues $25,094,000 $27,226,000 =========== ===========
The decrease in Components revenues in 1997 was due to a slowdown in the production of capital equipment for the semiconductor industry during the first three quarters of 1997 which caused the demand for the Company's rotary feedthrough seals to decline sharply, resulting in an 11.4% decrease in revenues. During the fourth quarter of 1997, the order rate for seals began to improve as the outlook for the industry improved. Revenues in the Distributed Products segment, which principally serves the thin-film deposition industry, remained relatively level with those of 1996. 12 Total sales from the Company's European subsidiary, AP&T, which includes the sale of the Company's components and fluid products in Europe, as well as comprising the Distributed Products segment, decreased 5.7% to $11,979,000 in 1997, as compared to $12,702,000 in fiscal 1996. The decrease was entirely within the Ferrofluidic(R) product lines, as the distributed products revenues remained level with the prior year. Sales of seals and fluids by the Company's Japanese subsidiary, FJC, increased to $1,239,000 over the $419,000 of revenues in 1996, evidencing the Company's penetration into that market. Despite the increase in business with Japan, total foreign sales declined to $14,180,000 from $14,941,000 in 1996. Bookings in 1997 decreased 4.4% to $26,595,000 from $27,804,000 in 1996, which was due primarily to the slow-down in the semiconductor industry in 1997. Order bookings in the Company's Components Division, which includes the sale of seals and fluids, totaled $17,511,000, which includes bookings in the fourth quarter of fiscal 1997 of $6,300,000, a record for the segment. The resulting order backlog for that segment at the end of the fiscal year was $4,787,000, an increase of 21% over the Components Division backlog at June 30, 1996. Consolidated order backlog at June 28, 1997 totaled $7,207,000 as compared to $5,948,000 at June 30, 1996. The consolidated gross margin for the year ended June 28, 1997 was 47.3%, an increase of over 2% from the gross margin of 45% in the previous year. Although revenues declined, the overall product mix was essentially unchanged. The improvement in margin was due to primarily to an increase in margin in the magnetic fluids segment. Consolidated operating income before general corporate and non-operating expenses increased in 1997 to 14.6% of product revenues as compared to 11.9% in 1996. This was the result of better margins from the Components' segment as well as lower sustaining engineering and product development costs. The Company spent $1,907,000 during fiscal 1997 on engineering and product development, an amount equal to 7.6% of product revenues compared to $2,248,000 or 8.3% of product revenues in the preceding year. Engineering costs as a percent of revenues decreased in 1997 principally due to the reallocating of engineers to the former Systems Division. Engineering and product development expenses have been allocated between continuing operations and discontinued operations on the basis of the amounts actually spent by each Division. Selling, general and administrative ("SG&A") expenses in 1997 increased $806,000 or 8.9% over such expenses in 1996, and increased as a percent of revenues from 33.5% in 1996 to 39.5% in 1997. Selling and marketing costs increased by $162,000, due in part to a $60,000 increase in selling expenses in Japan and a $100,000 increase in selling expenses in Europe. Administrative expenses accounted for the rest of the increase, which was due in part to increases in legal costs ($233,000), personnel costs ($100,000) and severance ($207,000). General corporate expenses have been allocated between continuing operations and discontinued operations on the basis of the actual amounts incurred on behalf of the respective divisions. In addition, certain expenses for corporate officers (salaries, travel, etc.) and Accounting Department personnel (primarily salaries) were also allocated on the basis of the estimated time and expenses incurred on behalf of each division. Interest income in 1997 was down from that in 1996, due principally to lower levels of invested cash. Interest expense of $503,000 was up 61.7% over the $311,000 in the prior year as a result of higher borrowings against the Company's revolving line of credit. Net interest expense and other bank charges and fees have been allocated between continuing operations and discontinued operations on the basis of the net identifiable assets used in those operations. See Note D to the Consolidated Financial Statements for a more complete discussion of the Company's debt obligations. In accordance with FASB Statement No. 109, Accounting for Income Taxes, the Company recorded, in the fourth quarter of 1997, a $467,000 tax benefit. The benefit resulted from a reduction of the valuation allowance against deferred tax assets that is required to be recorded when the Company's management is of the opinion that the tax benefit is more likely than not to be realized. The recording of this benefit may affect the Company's effective corporate tax rate in future periods. Income tax expense of $121,000 in 1996 consisted of a provision for foreign income taxes on the Company's foreign earnings. See Note C to the Consolidated Financial Statements for a more complete discussion of income taxes. Income from discontinued operations, net of income taxes, was approximately $1,769,000 for 1997 as compared to $3,322,000 for 1996. 13 Liquidity and Capital Resources The discussion in this section reflects both continuing and discontinued operations. In 1998, the operations of the business used $9,000 of cash, as compared to $2,153,000 in 1997. For fiscal 1998, the net loss of $(3,472,000) was offset by decreases in accounts receivable, inventories, prepaids and other current assets and an increase in customer deposits which amounted to $1,432,000, $1,326,000, $451,000 and $352,000, respectively. The cash requirements for 1998 and 1997 were financed from borrowings under the Company's expanded revolving line of credit as discussed below. The Company typically received advance payments from the sale of crystal growing systems under large multi-unit contracts as certain milestones were met, including receipt of the order, submission of accepted engineering drawings, shipment and final acceptance of the units. In 1998 and 1997, the Company received advance payments of $4,196,000 and $6,523,000, respectively, in connection with orders for crystal growing systems. In order to secure its sources of supply for critical long lead-time inventory items, the Company has also had to make advance payments to its vendors. The balance remaining on deposit with vendors was $578,000 at June 27, 1998. The Company has purchase contracts for inventory with various suppliers which, in some cases, extend beyond two years. At June 27, 1998, outstanding purchase commitments pursuant to these contracts totaled approximately $7,000,000. The ratio of current assets to current liabilities was 1.4 at the end of 1998 which is down from 1.7 at the end of 1997. Working capital at June 27, 1998 decreased to $8,182,000 from $13,323,000 at June 28, 1997. Current assets decreased, principally due to lower accounts receivable, inventories and advances to suppliers. However, the decrease in receivables did not result in an improvement in receivable turnover in 1998 as the softening in the semiconductor industry caused customers to delay their payments. Due to the large decrease in inventories from 1997, inventory turnover increased from 2.3 times annual consumption in 1997 to 3.0 times in 1998. In December 1996, the Company entered into a new credit agreement with its bank which resulted in the expansion of its revolving line of credit from $2,500,000 to $8,500,000. In October, 1997, the Company began to construct a second 300mm machine with the intent to install it in a 300mm crystal growing demonstration center at its Nashua facilities (see further discussion in next paragraph). In connection with this project, the Company's bank agreed to lend the Company an additional $1,500,000 on a 90-day promissory note to assist in the financing of the construction of this machine. These changes are discussed in more detail in Note D to the Consolidated Financial Statements. Capital expenditures on a consolidated basis totaled $2,399,000 in fiscal 1998, as compared to $1,249,000 in fiscal 1997. The spending in both years consisted primarily of improvements to the Company's Nashua facility, and in 1998 included the construction of a 300mm machine and the replacement of two old and outdated lathes in the Company's in-house machine shop. Other spending included modifications to the manufacturing facility and upgrades to computer equipment and software, primarily for engineering purposes. Also, during 1998, the Company spent approximately $1,500,000, not including engineering costs which have been expensed, on the construction of a 300mm machine for demonstration purposes. On September 21, 1998, the Company sold this 300mm machine and certain optional equipment for approximately book value. Upon signing of the sales agreement for this machine, the Company received $1,385,000 in cash with the balance due upon shipment of the machine, which is expected to occur within six months. The Company has long-term financing in the form of a $5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB"). The VRIRB is subject to a variable rate of interest keyed to short-term nontaxable rates (at June 27, 1998, 4.25%), the proceeds of which were primarily used to fund the construction of the Company's Nashua, NH headquarters. The Company also has a credit facility with its bank which provided the Company with total credit of approximately $15,400,000, $5,400,000 of which is in the form of a stand-by letter of credit for the Company's VRIRB, $8,500,000 of which was a revolving line of credit for working capital purposes and $1,500,000 of which was in the form of a 90 day promissory note. The stand-by letter of credit expired in August 1998, and has been renewed for one year. The letter of credit carries a fee of 1% per year and the revolving credit facility bears interest at prime rate plus 1% (9.5% at June 27, 1998) with a fee of 1/8% on the unused portion. At June 27, 1998, $7,749,000 was outstanding against the revolving line of credit. The promissory note, which was renewed on June 30, 1998, bears interest at the same rate as the revolving credit line. The Company used a portion of the cash proceeds from the Sale to pay off the entire $7,956,000 balance of the line of credit and the entire $1,500,000 balance of the promissory note 14 outstanding as of September 23, 1998. See discussion below regarding the reduction of the maximum available borrowings under the line of credit agreement. See also Note K to the Consolidated Financial Statements for a more complete discussion of the Sale. During 1996, the Company borrowed $800,000 in the form of an installment demand note with its bank, to finance the capital expansion of its in-house machine shop. The note bears interest at 9.75% and expires in January 2001. At June 27, 1998, the balance on this note was $461,000. In addition, the Company, through its wholly owned foreign subsidiaries, has various short-term financing arrangements with local banks totaling approximately $835,000 at June 27, 1998. During 1998, the maximum outstanding borrowing on these foreign credit lines was $110,000. The weighted-average interest rates during the year on these facilities ranged from 7.0% to 10.2% and the interest rates at June 27, 1998 ranged from 7.0% to 10.5%. As described in Item 1, certain of the assets of the Company's Systems Division were sold on September 23, 1998 to General Signal for $10,800,000 in cash. A portion of the cash proceeds from this Sale has been used to pay off certain outstanding debt as of the closing of the Sale. The Sale, as structured, did not include any of the Systems Division accounts receivable or liabilities, which remain with the Company. The Sale also did not include the obligation to complete approximately $18,433,000 in backlog for crystal growing systems, which obligation remains with the Company, or approximately $5,873,000 in inventory on hand, all of which is needed to fulfill such backlog. The terms of the Sale provide that, generally, any unfulfilled backlog existing as of December 31, 1998, will be transferred to General Signal. The backlog includes a purchase order from one customer for nine machines, representing approximately $7,658,000. The Company believes that the customer is seeking to modify the terms of the order, including its potential cancellation. However, the Company believes that the purchase order remains legally valid, and that under its terms, the customer is obligated to pay the Company the costs incurred up to cancellation of the order. In connection with these machines, the Company has inventory of approximately $3,104,000 on hand and approximately $2,471,000 in parts on order at vendors. If the Company is unable to recover these cancellation charges from the customer, the Company may be required to take a material write-down of the inventory relating to the purchase order. The Sale did not include approximately $6,472,000 in accounts receivable which were outstanding as of the closing of the Sale. While the Company believes that it will be able to collect these receivables within established reserves but there can be no assurance that the Sale will not adversely affect their collectibility. See Note K to the Consolidated Financial Statements for a more complete discussion of discontinued operations. The present line of credit from the Company's Bank expires in November 1998. In connection with the Sale, on September 23, 1998, the Company and its bank agreed to reduce the maximum borrowings under the line of credit agreement from $8,500,000 to $2,000,000. In the fall of 1998, management expects to begin discussions with the bank to renew the line of credit at a level which management believes will be in line with the working capital needs in the continuing operations. It is expected that the proceeds received from the Sale and other cash flow will significantly reduce the Company's need for short-term borrowing arrangements to finance working capital needs in the near future. Management therefore believes that anticipated funds from operations and the borrowing arrangements that are expected to be put into place will be adequate to meet cash requirements for the year ahead. Impact of Recently Issued Accounting Standards In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income and Statement No. 131, Disclosure about Segments of an Enterprise and Related Information. Both statements must be adopted by the Company in fiscal year 1999. Statement No. 130 establishes standards for the reporting and display of comprehensive income and its components in a complete set of financial statements. Statement No. 131 changes the way segment information is reported and establishes standards for related disclosures about products and services, geographic areas, and major customers. In March 1998, the Accounting Standards Executive Committee issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year 1999, requires capitalization of certain costs to develop or obtain internal-use software. The Company believes that the adoption of these standards is not likely to have a material impact on the Company's financial position or results of operations. 15 Effects of Inflation Inflation rates over the past three years have remained relatively low and, as a result, have not had a material impact on the financial results of the Company. Year 2000 The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is a result of computer programs being written using two digits (rather than four) to define the applicable year. The Company's products in the Components Business are mechanical devices or fluids and do not contain any electronic components. The Company's products in its Distributed Products Business include an electron beam gun for use in vacuum deposition processes which is electronically controlled, but includes no date-sensitive devices. Consequentially, the Company has no need to make any changes to its products in anticipation of the Year 2000. Prior to the Sale, the Company's Systems Division sold products that were controlled by computerized hardware and software, but the processes involved were inherently not date-sensitive. The software involved was purchased off-the-shelf, and was not customized by the Company. All recent products delivered to customers with Company-supplied control systems have been Year 2000 compliant, but some older systems contain older versions of the software and, as a result, may not be Year 2000 compliant. Since these products are not in warranty, and since the Company has not warranted their Year 2000 compliance, the Company believes that it has no further obligations with respect to these products. All products delivered with Company-supplied control systems out of backlog prior to December 31, 1998, in accordance with the terms of the Sale, will be Year 2000 compliant. The Company has sent requests to all of its principal providers of services and component parts to advise the Company of their progress in making their internal systems Year 2000 compliant. The Company believes it has a sufficient base of critical component suppliers so that if any supplier is unable to deliver parts due to Year 2000 problems, alternate sources will be available and that any supply interruption will not be material to its operations. There can be no assurances, however, that the Company would be able to obtain all of its supply requirements from such alternate sources on terms comparable with that of its current suppliers. The Company has identified one critical service supplier (its bank), the failure of whose systems for an extended period for any reason, including Year 2000 problems, could cause financially material adverse consequences to the Company. The bank has provided assurance in writing to the Company that its systems will be Year 2000 compliant. With respect to its internal systems, the Company has undertaken an assessment of its vulnerability to the Year 2000 issue. The Company does not rely on electronic interaction with customers or vendors, and has in recent years relied almost entirely on purchased off-the-shelf software packages for both business and engineering purposes. These packages have not been materially customized by the Company for its purposes. These software packages run on a personal computer based local area network which was installed by the Company in 1993, and which has been upgraded as needed since then. The assessment was based upon formal and informal communications with the software vendors, literature supplied with the software, literature received in connection with maintenance contracts, and test evaluations of the software. Systems critical to the business which have been identified as vulnerable to the Year 2000 problem either have been, or are being, replaced with new purchased software or corrected by upgrades available from vendors. Outside companies such as vendors, major customers, service suppliers, communications providers and banks are being asked to verify their Year 2000 readiness and the Company is testing interaction with such systems where appropriate. The assessment thus far has been accomplished, and is expected to be completed, utilizing the Company's existing resources, and is not expected to have an adverse material effect on the Company's financial results. It is the Company's belief that the results of the assessment to date indicate that all of the Company's major business systems software is Year 2000 compliant, or will be Year 2000 compliant by the end of calendar year 1998, and that the Year 2000 issue is not likely to have a material impact on the Company's operations. However, there can be no assurances that the systems or software of third parties on which the Company relies will be timely converted and the Company may be adversely affected by the failure of such a third party to become Year 2000 compliant. 16 The Company has not yet developed a plan to deal with this contingency but expects to have such a plan in place by the end of fiscal 1999. Euro Currency The Company derived approximately 49% of its revenue from continuing operations in fiscal 1998 from its operations in Germany and England. Historically, transactions in Europe have been denominated in a variety of currencies. On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to adopt the Euro as their common legal currency. Following the introduction of the Euro, the local currencies are scheduled to remain legal tender in the participating countries until January 1, 2002. During this transition period, goods and services may be paid for using either the Euro or the participating country's local currency. Thereafter, the local currencies will be canceled and the Euro currency will be used for all transactions between the eleven participating members of the European Union. The Euro conversion raises strategic as well as operational issues. The conversion is expected to result in a number of changes, including the stimulation of cross-border competition by creating cross-border price transparency. The Company is evaluating the implications of the Euro conversion and is uncertain as to the potential impact on its operations. Forward-Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. There are certain factors that could cause actual results to differ materially from those anticipated by the statements made above. These include, but are not limited to, changes in revenues in the Company's components, fluids and thin film deposition businesses, expected working capital needs of the continuing operations, a material change in the market conditions within the semiconductor industry and, changes in management's assessments regarding the Company's obligations under outstanding purchase orders, ability to fulfill existing sales order backlog, the recoverability of inventory and the ability to collect accounts receivable relating to the discontinued Systems Division, the resolution of a dispute with a customer over the validity of a purchase order relating to the discontinued Systems Division and failure of the Company's systems or software, or the systems or software of a third party on which the Company relies to be Year 2000 compliant. For additional information concerning these and other important factors, which may cause the Company's actual results to differ materially from expectations and underlying assumptions, please refer to the reports filed by the Company with the Securities and Exchange Commission. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The Company maintains foreign operations in England, Germany and Japan and conducts business in many other countries. As a result of these international activities, the Company is exposed to changes in foreign currency exchange rates, which could have some impact on the results of operations. The Company manages exposure to changes in foreign currency exchange rates through its normal operating and financing activities, as well as through the use of some financial instruments. Generally, the only financial instruments the Company utilizes are forward exchange contracts. The purpose of the Company's hedging activities is to mitigate the impact of changes in foreign currency exchange rates. The Company utilizes foreign currency forward exchange contracts for such hedging purposes. These contracts generally do not exceed 12 months in duration, and are designed to coincide with settlement dates of the related transactions, or to hedge balance sheet translation exposure. The Company engages neither in speculative nor derivative trading activities. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements
Page(s) Reports of Independent Auditors ........................................................................... 19 Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997 ......................................... 20 Consolidated Statements of Operations for each of the three years in the period ended June 27, 1998 .................................................................. 21 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 27, 1998 ............................................... 22 Consolidated Statements of Cash Flows for each of the three years in the period ended June 27, 1998 .................................................................. 23 Notes to Consolidated Financial Statements ............................................................. 24-40
18 Report of Independent Auditors ------------------------------ To the Stockholders and Directors of Ferrofluidics Corporation We have audited the accompanying consolidated balance sheets of Ferrofluidics Corporation as of June 27, 1998 and June 28, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 27, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ferrofluidics Corporation at June 27, 1998 and June 28, 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 27, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Manchester, New Hampshire September 23, 1998 19 FERROFLUIDICS CORPORATION CONSOLIDATED BALANCE SHEETS June 27, 1998 and June 28, 1997
ASSETS 1998 1997 - ------ ---- ---- Current Assets: Cash and cash equivalents $ 1,516,000 $ 883,000 Accounts receivable - trade, less allowance of $329,000 ($199,000 in 1997) 12,083,000 13,609,000 Inventories 13,855,000 15,263,000 Advances to suppliers 578,000 1,341,000 Prepaid and other current assets 783,000 474,000 ----------- ----------- Total Current Assets 28,815,000 31,570,000 ----------- ----------- Property, plant and equipment, at cost, net of accumulated depreciation of $12,462,000 ($10,961,000 in 1997) 8,826,000 8,377,000 Cash value of life insurance, net 1,921,000 1,751,000 Deferred income taxes, net 3,154,000 1,815,000 Other assets, net 1,303,000 1,488,000 ----------- ----------- TOTAL ASSETS $44,019,000 $45,001,000 =========== =========== LIABILITIES - ----------- Current Liabilities: Bank notes payable $ 9,710,000 $ 6,781,000 Accounts payable 3,860,000 5,126,000 Customer deposits 2,777,000 2,426,000 Accrued expenses and other current liabilities 4,286,000 3,914,000 ----------- ----------- Total Current Liabilities 20,633,000 18,247,000 ----------- ----------- Long-term debt obligations 5,000,000 5,000,000 Other liabilities 185,000 173,000 Commitments and contingencies STOCKHOLDERS' EQUITY - -------------------- Preferred stock, $.001 par value, authorized 100,000 shares, issued and outstanding - none -- -- Common stock, $.004 par value, authorized 12,500,000 shares, outstanding 6,218,581 (6,178,262 in 1997) 25,000 25,000 Additional paid-in capital 36,738,000 36,477,000 Accumulated deficit (17,443,000) (13,971,000) Currency translation adjustments (1,119,000) (950,000) ----------- ----------- Total Stockholders' Equity 18,201,000 21,581,000 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,019,000 $45,001,000 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 20 FERROFLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended June 27, 1998, and June 28, 1997 and June 30, 1996
1998 1997 1996 ---- ---- ---- Net sales $28,170,000 $25,094,000 $27,226,000 Cost of sales 15,792,000 13,232,000 14,962,000 ------------ ------------ ----------- Gross profit 12,378,000 11,862,000 12,264,000 Operating expenses: Engineering and product development expense 1,977,000 1,907,000 2,248,000 Selling, general and administrative expense 8,321,000 9,916,000 9,110,000 ------------ ------------ ----------- Operating income 2,080,000 39,000 906,000 Interest income 33,000 80,000 137,000 Interest expense (634,000) (503,000) (311,000) Other income (expense), net (67,000) (161,000) (113,000) ------------ ------------- ----------- Income (loss) from continuing operations before income taxes 1,412,000 (545,000) 619,000 Income taxes (benefit) 74,000 (448,000) 121,000 ------------ ------------- ----------- Income (loss) from continuing operations 1,338,000 (97,000) 498,000 Discontinued operations--Note K: Income (loss) from operations of discontinued Systems Division, less applicable income taxes (benefit) of $(1,339,000) in 1998; $(727,000) in 1997; and $366,000 in 1996 (4,810,000) 1,769,000 3,322,000 ------------ ----------- ----------- Net income (loss) $ (3,472,000) $ 1,672,000 $ 3,820,000 ============ =========== =========== Per Share: Income (loss) from continuing operations: Basic $ 0.22 $(0.02) $0.08 Diluted $ 0.21 $(0.02) $0.08 Income (loss) from discontinued operations: Basic $(0.78) $0.29 $0.55 Diluted $(0.77) $0.29 $0.53 Net income (loss): Basic $(0.56) $0.27 $0.63 Diluted $(0.56) $0.27 $0.61 Weighted average common shares outstanding: Basic 6,198,603 6,116,176 6,019,201 Diluted 6,232,429 6,116,176 6,256,065
The accompanying notes are an integral part of the consolidated financial statements. 21 FERROFLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 27, 1998, and June 28, 1997 and June 30, 1996
Common Stock Additional Currency ------------ Paid-In Accumulated Translation Shares Par Value Capital Deficit Adjustments ------ --------- ------- ------- ----------- Balance, June 30, 1995 5,997,198 $23,988 $35,485,000 $(19,463,000) $ (265,000) Issuance of common stock for restricted stock plan, charge to operations 70,878 284 467,000 -- -- Redemption of stock for taxes (7,174) (28) (81,000) -- -- Net income -- -- -- 3,820,000 -- Current year translation adjustments -- -- -- -- (285,000) --------- ------- ----------- ------------ ----------- Balance, June 30, 1996 6,060,902 24,244 35,871,000 (15,643,000) (550,000) --------- ------- ----------- ------------ ----------- Issuance of common stock for: Restricted stock plan, charge to operations 93,762 375 511,000 -- -- Exercise of options 33,138 132 166,000 -- -- Redemption of stock for taxes (9,540) (38) (71,000) -- -- Net income -- -- -- 1,672,000 -- Current year translation adjustments -- -- -- -- (400,000) --------- ------- ----------- ------------ ----------- Balance, June 28, 1997 6,178,262 24,713 36,477,000 (13,971,000) (950,000) --------- ------- ----------- ------------- ----------- Issuance of common stock for restricted stock plan, charge to operations 44,531 236 287,000 -- -- Redemption of stock for taxes (4,212) (17) (26,000) -- -- Net loss -- -- -- (3,472,000) -- Current year translation adjustments -- -- -- -- (169,000) --------- ------- ----------- ------------ ----------- Balance, June 27, 1998 6,218,581 $24,932 $36,738,000 $(17,443,000) $(1,119,000) ========= ======= =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. 22 FERROFLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 27, 1998, and June 28, 1997 and June 30, 1996
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $(3,472,000) $ 1,672,000 $3,820,000 Adjustments to reconcile net income (loss) to cash flow used in operating activities: Depreciation and amortization 1,818,000 1,602,000 1,145,000 Deferred income taxes (credits) (1,339,000) (1,200,000) -- Increase in cash surrender value (170,000) (20,000) (3,000) Gain on sale of assets (57,000) (16,000) (9,000) Stock-related compensation 287,000 511,000 467,000 Foreign transaction (gains) losses 94,000 217,000 (33,000) Other 29,000 (508,000) 457,000 Changes in operating assets and liabilities: Accounts receivable, net 1,432,000 (1,144,000) (5,663,000) Inventories 1,326,000 (1,632,000) 134,000 Prepaid and other current assets 451,000 764,000 (900,000) Accounts payable and accrued expenses (760,000) (463,000) 1,857,000 Customer deposits 352,000 (1,936,000) (4,073,000) ----------- ---------- ----------- Net cash used in operating activities (9,000) (2,153,000) (2,801,000) ----------- ---------- ----------- Cash flows from investing activities: Acquisition of property, plant and equipment (2,399,000) (1,249,000) (2,422,000) Proceeds from cancellation of key-man policies - -- 1,248,000 Proceeds from sales of assets 70,000 37,000 34,000 Other 90,000 -- -- ----------- ----------- ----------- Net cash used in investing activities (2,239,000) (1,212,000) (1,140,000) ----------- ----------- ----------- Cash flows from financing activities: Short-term borrowings, net 2,929,000 2,519,000 4,262,000 Exercise of stock options -- 166,000 -- Payments under capital lease obligations -- -- (76,000) ----------- ------------ ----------- Net cash provided by financing activities 2,929,000 2,685,000 4,186,000 ----------- ----------- ----------- Effect of currency rate changes on cash (48,000) (138,000) (107,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 633,000 (818,000) 138,000 ----------- ----------- ----------- Cash and cash equivalents at beginning of year 883,000 1,701,000 1,563,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 1,516,000 $ 883,000 $ 1,701,000 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 23 FERROFLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Summary of Significant Accounting Policies Organization - ------------ Ferrofluidics Corporation (the "Company") is a multinational company engaged principally in developing, manufacturing and marketing ferrofluids (magnetic fluids) and rotary sealing devices based on or derived from its proprietary ferrofluid technology. Note K to these statements describes the discontinuance of its crystal growing systems business. Information on the Company's operations by segment and geographic area are included in Note I. Approximately 35% of the Company's sales are attributable to the semiconductor industry, which can experience cyclical fluctuations. A prolonged decline in the semiconductor industry could have, and has in the past had, a materially adverse effect on the Company's operating results. Fiscal Year - ----------- Effective July 1, 1996, the Company changed its fiscal year end from June 30 to a 52 or 53-week year ending on the Saturday nearest June 30. Accordingly, the 1998 and 1997 fiscal years ended June 27 and June 28, respectively, whereas the previous fiscal year ended on June 30. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All inter-company accounts and transactions have been eliminated. Use of Estimates - ---------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash on hand and money market funds with original maturities of less than 90 days. Fair Value of Financial Instruments - ----------------------------------- The carrying amounts of the Company's financial instruments, including accounts receivable, accounts payable and short-term and long-term debt, approximate fair value. Concentration of Credit Risk - ---------------------------- Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade accounts receivable. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company performs ongoing credit evaluations of its customers' financial condition and, under certain conditions, requires collateral from its foreign unaffiliated customers in the form of irrevocable letters of credit or other acceptable guarantees. With regard to the Company's Components segment, concentrations of trade credit risk are limited due to the large number of customers and their dispersion across many different geographical regions. The Company has made advance payments to suppliers for inventory aggregating $578,000 and $1,341,000 at June 27, 1998 and June 28, 1997, respectively. 24 Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following elements at June 27, 1998 and June 28, 1997:
1998 1997 ---- ---- Raw materials and purchased parts $ 6,348,000 $ 8,082,000 Work-in-process 2,650,000 2,962,000 Finished goods 4,857,000 4,219,000 ----------- ----------- $13,855,000 $15,263,000 =========== ===========
The Company has purchase contracts for inventory with various suppliers which, in some cases, extend beyond two years. At June 27, 1998 and June 28, 1997, outstanding purchase commitments pursuant to these contracts totaled approximately $7,000,000 and $15,000,0000, respectively. Property, Plant and Equipment - ----------------------------- Property, plant and equipment are recorded at cost. Depreciation on machinery and equipment and furniture and fixtures is computed on a straight-line method over estimated useful lives of three to eight years; leasehold improvements are amortized using the straight-line method over the lesser of the life of the lease or the estimated useful life of the improvements. Depreciation on buildings and building improvements is computed using the straight-line method over estimated lives of ten to thirty years. Depreciation charges for assets begin in the month after the asset is placed in service. Property, plant and equipment consisted of the following at June 27, 1998 and June 28, 1997:
1998 1997 ---- ---- Land and improvements $ 330,000 $ 321,000 Buildings and improvements 8,072,000 8,033,000 Machinery and equipment 5,730,000 5,399,000 Furniture, fixtures and vehicles 5,597,000 5,408,000 Construction in process 1,559,000 177,000 ----------- ----------- 21,288,000 19,338,000 Less: Accumulated depreciation and amortization 12,462,000 10,961,000 ----------- ----------- $ 8,826,000 $ 8,377,000 =========== ===========
Intangible Assets - ----------------- At June 27, 1998, the Company had recorded goodwill in an amount of $1,023,000, which is included on the accompanying balance sheet with other assets, resulting from the acquisition in fiscal 1989 of AP&T. This amount is being amortized over a 16 year life on a straight line basis. Accumulated amortization as of June 27, 1998 and June 28, 1997 amounted to $578,000 and $514,000, respectively. All other intangible assets, including patents and trademarks, are recorded at cost and amortized on a straight-line basis over their estimated useful lives, generally ten years. Income Taxes - ------------ Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Taxes are not provided on undistributed income of subsidiaries not consolidated for U.S. tax purposes as it is intended that such earnings will remain invested in those companies. As of June 27, 1998, those subsidiaries each had an accumulated loss. Revenue Recognition - ------------------- The Company recognizes revenue upon shipment of products to the customer. 25 Product Development Expenses - ---------------------------- Product development expenditures are charged to expense when first incurred. The Company incurred $890,000, $685,000 and $782,000 in product development during 1998, 1997 and 1996, respectively, from continuing operations. Translation of Foreign Currencies - --------------------------------- The Company translates the assets and liabilities of its foreign subsidiaries whose functional currency is other than the U.S. dollar at the exchange rates in effect at the balance sheet date. Income statement amounts are translated at average exchange rates for the period. Translation gains and losses are accumulated as a separate component of stockholders' equity. In addition, the Company recognizes, in current income, gains or losses from the remeasurement of transactions denominated in currencies other than the Company's functional currencies. Foreign Exchange Contracts - -------------------------- The Company, from time to time, enters into forward foreign exchange contracts to hedge against adverse exchange losses on certain assets or liabilities denominated in a foreign currency. Market value gains and losses are recognized, with the resulting credit or debit offsetting foreign exchange gains or losses on those instruments. At June 27, 1998, there were three foreign exchange contracts outstanding in which there was no material exchange gain or loss. Stock-Based Compensation - ------------------------ The Company has stock-based compensation programs and has elected to account for them in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, except for restricted stock awards, recognizes no compensation expense for the stock option grants (see Note H). Earnings Per Share - ------------------ In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings per Share, which is required to be adopted for financial statements issued for periods ending after December 15, 1997. In accordance with this statement, the Company changed the method previously used to compute earnings per share and restated all prior periods presented. Basic earnings per share is calculated based on the weighted average of common shares outstanding. Diluted earnings per share includes the effect of dilutive stock options and non-vested restricted stock awards. Statement of Cash Flows - ----------------------- For the years ended June 27, 1998, June 28, 1997 and June 30, 1996, cash payments for income taxes amounted to $20,000, $473,000 and $290,000, respectively. Cash payments for interest in each of the three years amounted to $1,092,000, $795,000 and $421,000, respectively. During 1996, the Company transferred its ownership in certain single premium, paid-up life insurance policies on the life of a former CEO to the former CEO. At the time of the transfer, the policies had a gross cash value of approximately $2,300,000, against which the Company had outstanding borrowings in the amount of approximately $1,300,000, and an offset for amounts due the former CEO of approximately $1,000,000. As the policies had no net carrying value to the Company the transfer was treated as a non-cash transaction (see Notes B and J). Also during 1996, the Company transferred certain equipment with a net book value of $488,000 into inventory. Impact of Recently Issued Accounting Standards - ---------------------------------------------- In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income and Statement No. 131, Disclosure about Segments of an Enterprise and Related Information. Both statements must be adopted by the Company in fiscal year 1999. Statement No. 130 establishes standards for the reporting and display of comprehensive income and its components in a complete set of financial statements. Statement No. 131 changes the way segment information is reported and establishes standards for related disclosures about products and services, geographic areas, and major customers. In March 1998, the Accounting Standards Executive Committee issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year 1999, requires capitalization of certain costs to develop or obtain internal-use software. 26 The Company believes that the adoption of these standards is not likely to have a material impact on the Company's financial position or results of operations. Fourth Quarter Adjustments - -------------------------- The Company made adjustments to its financial statements in the fourth quarter ended June 27, 1998, which included approximately $500,000 in valuation reserves for anticipated field costs resulting from the delivery of new equipment and a $430,000 accrual for purchase contract cancellation charges. These adjustments related to the discontinued operations of the Systems Division. B. Cash Value of Life Insurance During fiscal 1988 and 1989, the Company invested an aggregate of $5,000,000 in six single premium life insurance policies on the lives of Dr. Ronald Moskowitz, a former CEO, and Mr. Frank Bloom, a former CFO. The policies yielded a minimum guaranteed rate of return of 6.0%, less a nominal charge for the cost of insurance. Under the terms of certain insurance loan agreements relating to these policies, this former CEO and CFO were given the right to borrow specified amounts annually from the insurance company, to a specified date, and the former officers' estates were beneficiaries of the policies to the extent of their respective borrowing rights. The allowable borrowings under these policies approximated the earnings accruing to the Company. The Company did not recognize earnings under these policies to the extent they were subject to the executive borrowing rights. During 1996, the Company entered into a settlement agreement with Dr. Moskowitz which, among other things, required the transfer of ownership in two of these policies to the former CEO and the cancellation of the remaining two policies on his life. The transferred policies had no carrying value on the Company's books and, accordingly, the Company did not incur a charge on the transfer (see Note J). Upon cancellation of the other two policies, the Company received the net cash value of approximately $1,248,000. At June 27, 1998 and June 28, 1997, the remaining two policies on the life of the former CFO had an aggregate cash value of $2,075,000 and $1,931,000, respectively, against which the Company had $2,064,000 and $1,908,000, respectively, in loans and accrued interest outstanding at an interest rate of 8%. In addition, the Company has recorded its interest in the value of other key man life insurance policies under split-dollar agreements with the aforementioned former CEO of $1,910,000 and $1,728,000 at June 27, 1998 and June 28, 1997, respectively. This former CEO's estate is the principal beneficiary of the aggregate face value of these policies of approximately $8,000,000, from which the Company will receive, upon death or surrender, an amount equal to the premiums paid by the Company plus interest at the rate of 6%. C. Income Taxes Income (loss) from continuing operations before income taxes for the years ended June 27, 1998 and June 28, 1997 and June 30, 1996 was taxed in the following jurisdictions:
1998 1997 1996 ---- ---- ---- Domestic $1,304,000 $(157,000) $ (49,000) Foreign 108,000 (388,000) 668,000 ---------- --------- --------- Total $1,412,000 $(545,000) $619,000 ========== ========= =========
Significant components of the provision for income taxes (benefit) from continuing and discontinued operations are as follows:
1998 1997 1996 ---- ---- ---- Continuing operations $ 74,000 $ (448,000) $121,000 Discontinued operations (1,339,000) (727,000) 366,000 ----------- ----------- -------- Total $(1,265,000) $(1,175,000) $487,000 =========== =========== ========
27 The components of the provision for income taxes (benefit) attributable to continuing operations are as follows:
1998 1997 1996 ---- ---- ---- Current: Federal $ -- $ -- $ -- State -- -- -- Foreign 74,000 19,000 121,000 ------- --------- -------- Total current 74,000 19,000 121,000 ------- --------- -------- Deferred: Federal -- (467,000) -- State -- -- -- Foreign -- -- -- -------- --------- -------- Total deferred -- (467,000) -- ------- --------- -------- Total income taxes $74,000 $(448,000) $121,000 ======= ========= ========
The following is a reconciliation between the statutory provision for federal income taxes and the effective income taxes from continuing operations for the years ended June 27, 1998, June 28, 1997 and June 30, 1996:
1998 1997 1996 ---- ---- ---- Income tax expense (benefit) at federal statutory rate $480,000 $(185,000) $210,000 Change in valuation allowance (562,000) (73,000) (139,000) Foreign income taxes at differing statutory rates 138,000 (24,000) 17,000 Other 18,000 (166,000) 33,000 -------- ---------- -------- Income tax expense (benefit) $ 74,000 $(448,000) $121,000 ======== ========= ========
The components of the net deferred tax asset as of June 27, 1998 and June 28, 1997 were as follows:
1998 1997 ---- ---- Deferred tax assets: Net operating loss carryforwards $11,408,000 $10,443,000 Capital loss carryforward 1,821,000 1,821,000 Compensation related items 276,000 167,000 Investment writedowns -- 631,000 Valuation allowances 142,000 210,000 Inventories 1,446,000 1,155,000 Research & development credits 150,000 150,000 Alternative minimum tax credits 186,000 186,000 Other 613,000 207,000 ----------- ----------- Total deferred tax assets 16,042,000 14,970,000 Valuation allowance for deferred tax assets (12,217,000) (12,027,000) ----------- ----------- Net deferred tax assets 3,825,000 2,943,000 Deferred tax liabilities: Depreciable assets (461,000) (965,000) Other (210,000) (163,000) ----------- ----------- Total deferred tax liabilities (671,000) (1,128,000) ----------- ----------- Net deferred tax assets $ 3,154,000 $ 1,815,000 =========== ===========
28 FASB Statement No. 109, Accounting for Income Taxes, requires a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Due to the uncertainty about the Company's ability to realize the benefit of the entire deferred tax asset, a valuation allowance in the amount of $12,217,000 has been established at June 27, 1998. As of June 27, 1998, the Company had remaining net operating loss carryforwards for Federal income tax purposes of approximately $28,276,000, and for foreign income tax purposes of approximately $3,508,000, which can be used to offset future taxable income. The net operating loss carryforwards for Federal income tax purposes will expire at various dates through 2013. Included in the loss carryforward, for income tax purposes, is approximately $16,800,000 of tax deductions resulting from the excess of the market price over the exercise price on the date of exercise of the Company's stock purchase options and warrants which were exercised during 1993 and prior years. The tax benefit to be realized upon utilization of the $16,800,000 of loss carryforwards will result in a decrease in current income taxes payable and an increase to additional paid-in capital. D. Short-Term Borrowings and Other Debt Obligations As of June 27, 1998 and June 28, 1997, the Company and its subsidiaries have the following debt obligations outstanding:
1998 1997 ---- ---- Revolving line of credit $ 7,749,000 $ 6,170,000 1984 Industrial Revenue Bond 5,000,000 5,000,000 Bank notes 1,961,000 611,000 ----------- ----------- 14,710,000 11,781,000 Less: current portion of debt obligations 9,710,000 6,781,000 ----------- ----------- Long-term debt obligations $ 5,000,000 $ 5,000,000 =========== ===========
In fiscal 1985, the Company secured long-term financing in the form of a $5,000,000 Variable Rate Industrial Revenue Bond ("VRIRB"). The VRIRB is subject to a variable rate of interest generally keyed to short-term nontaxable rates, and has a seven day call feature. The interest rate at June 27, 1998 was 4.25%. The proceeds from these bonds were used to fund the construction of the Company's Nashua, New Hampshire facility and the purchase of machinery and equipment. The VRIRB is payable in full on September 1, 2004 and is guaranteed by a bank stand-by letter of credit (through August 15, 1999) which is a part of the credit facility extended to the Company by a bank as described below. On June 30, 1994, the Company entered into a credit facility with a bank which provided the Company with a total credit of approximately $7,900,000, including approximately $5,400,000 in the form of a stand-by letter of credit for the Company's $5,000,000 VRIRB, and a $2,500,000 revolving line of credit for working capital purposes. As further discussed below, the credit facility was amended and increased in December 1996. The stand-by letter of credit has a one-year term which expires in August 1999 and has a fee of 1% per year. The revolving line of credit bears interest at the bank's prime rate plus 1% with a fee of 1/8% on the unused portion. The credit facility is collateralized by substantially all of the assets of the Company. In December 1996, the bank agreed to increase the Company's revolving line of credit agreement from $2,500,000 to $8,500,000. Interest on the line is at prime plus 1% (9.5% at June 27, 1998). Under the new arrangement with its bank, the Company has available to it a total credit facility of approximately $13,900,000, which includes the $5,400,000 standby letter of credit for the Company's VRIRB and the revolving line of credit. The credit facility is collateralized by substantially all of the assets of the Company. At June 27, 1998, there was approximately $7,749,000 outstanding under the revolving line of credit agreement. In February 1997, the Company obtained an additional increase of approximately $1,500,000 in the credit facility from its bank in the form of a stand-by letter of credit to secure a customer prepayment received with an order for crystal growing systems. Subsequent to the shipment of the systems, the letter of credit was rewritten into a 90-day promissory 29 note. The $1,500,000 promissory note, which was renewed on June 30, 1998, bears interest at the same rate as the revolving credit line. During 1996, the Company borrowed $800,000 in the form of an installment note with its bank in order to finance the capital expansion of its in-house machine shop. The note, which is payable upon demand, is being amortized in 59 monthly installments of $16,899 with a final payment on January 25, 2001 of $21,151. The note bears interest at 9.75% and is collateralized by the machinery and equipment acquired. At June 27, 1998, the balance on this note was $461,000. In addition, the Company, through its wholly owned foreign subsidiaries, has various short-term financing arrangements with local banks totaling approximately $835,000 at June 27, 1998. Approximately $110,000 and $329,000 was borrowed against one of these facilities during fiscal 1998 and 1997, respectively, and repaid prior to the end of the fiscal year. The weighted average interest rates during the year on these facilities ranged from 7.0% to 10.2% and the interest rates at June 27, 1998 ranged from 7.0% to 10.5%. On September 23, 1998, in connection with the sale of the Systems Division, the Company used a portion of the cash proceeds to pay off the then outstanding balance of the line of credit and the $1,500,000 promissory note. As a result of this sale, the Company and its bank agreed to reduce the maximum available borrowings under the line of credit agreement from $8,500,000 to $2,000,000. The present line of credit agreement expires in November 1998. See Note K to the Consolidated Financial Statements for additional discussion of the sale of the Systems Division. E. Commitments and Contingencies The Company has entered into operating leases for office space and equipment. Future minimum lease payments for the five years subsequent to fiscal 1998 amount to: $576,000 in 1999; $128,000 in 2000; $102,000 in 2001; $70,000 in 2002; and $62,000 in 2003. Rent expense under operating leases amounted to $446,000 in 1998, $489,000 in 1997 and $459,000 in 1996. During 1997, the Company terminated its agreement to lease to a third party approximately 11,000 square feet of its headquarters office in Nashua in exchange for payment to the tenant of $100,000, which was charged to operations during fiscal 1997. The Company received total lease payments of $28,000 in 1997 from this third party. In connection with the sale in June 1990, of the Company's former UK subsidiary, AF Technologies, Ltd. (AF), the Company agreed to provide a guarantee of the lease of AF's' facility. On June 26, 1992, the Company entered into a new agreement with the landlord of the property, whereby the Company would provide a British Pound Sterling ((pound)) 300,000 guarantee, over the next ten years, for a new tenant under the lease, allowing AF to vacate the premises and relocate to a less expensive location. On July 2, 1992, the Company deposited (pound)300,000 into an escrow account, which currently earns interest at a rate of 2.55%, pursuant to the terms of the guarantee. The Company would be relieved of this obligation before the ten-year expiration date if the new tenant were to attain certain minimum pretax operating results over any period of three consecutive years. The Company has provided a reserve in the amount of $265,000 against this deposit in recognition of the uncertainty surrounding the ultimate collectibility of the amount. In June 1997, the Company was notified by the landlord of the property that the tenant had accumulated approximately $112,000 of arrearages under the lease, and that the landlord intended to draw that amount from the deposit. After consulting with counsel in Great Britain, the Company believes that the ultimate resolution of this issue will be within the reserve established and the Company has therefore made no additional provision. At June 27, 1998, the Company had possible indemnification liabilities to its former CFO in connection with the single premium, paid-up life insurance policies described in Note B. The unrecorded portion of this contingent liability ranges from a nominal amount to $150,000. 30 F. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ---- ---- ---- Numerator: Income (loss) from continuing operations $ 1,338,000 $ (97,000) $ 498,000 Income (loss) from discontinued operations (4,810,000) 1,769,000 3,322,000 ----------- ---------- ---------- Net income (loss) $(3,472,000) $1,672,000 $3,820,000 =========== ========== ========== Denominator: Denominator for basic earnings per share -- weighted average shares 6,198,603 6,116,176 6,019,201 Effect of dilutive securities: Employee stock options 1,763 -- 116,111 Non-vested restricted stock awards 32,063 -- 120,753 ----------- ---------- ---------- Dilutive potential common shares 33,826 -- 236,864 ----------- ---------- ---------- Denominator for diluted earnings per share -- adjusted weighted average shares 6,232,429 6,116,176 6,256,065 =========== ========== ========== Per Share: Income (loss) from continuing operations: Basic $0.22 $(0.02) $0.08 Diluted $0.21 $(0.02) $0.08 Income (loss) from discontinued operations: Basic $(0.78) $0.29 $0.55 Diluted $(0.77) $0.29 $0.53 Net income (loss): Basic $(0.56) $0.27 $0.63 Diluted $(0.56) $0.27 $0.61
At June 27, 1998, June 28, 1997 and June 30, 1996, options and warrants to purchase 443,259 shares at prices ranging from $6.13 to $13.50 per share, 688,987 shares at prices ranging from $9.00 to $15.25 per share and 258,950 shares at prices ranging from $13.25 to $15.63 per share, respectively, of common stock were anti-dilutive and therefore were excluded from the computation of diluted earnings per share. G. Common Stock At June 27, 1998, an aggregate of 553,085 shares of the Company's common stock had been reserved for issuance in connection with the nonqualified and incentive stock option plans, the restricted stock plan and stock purchase warrants outstanding (see Note H). Shareholder Rights Plan - ----------------------- On August 3, 1994, the Board of Directors of the Company adopted a Shareholder Rights Agreement (the "Rights Agreement"). Pursuant to the terms of the Rights Agreement, the Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (a "Right") for each outstanding share of common stock of the Company to stockholders of record as of the close of business on August 19, 1994 (the "Record Date"). Each Right entitles the registered holder to purchase from the Company, upon the occurrence of certain events, a unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior Participating Cumulative Preferred Stock, par value $0.001 per share (the "Preferred Stock"), at a cash exercise price of $25.00 per Unit (the "Exercise Price"), subject to adjustment. 31 The rights currently are not exercisable and are attached to and trade with the outstanding shares of common stock. Under the Rights Agreement, the Rights become exercisable (i) if a person becomes an "acquiring person" by acquiring 15% or more of the outstanding shares of common stock, (ii) if a person who owns 10% or more of the common stock is determined to be an "adverse person" by the Board of Directors, or (iii) if a person commences a tender offer that would result in that person owning 15% or more of the common stock. In the event that a person becomes an "acquiring person" or is declared an "adverse person" by the Board, each holder of a Right (other than the acquiring person or the adverse person) would be entitled to acquire such number of shares of the Company's preferred stock which are equivalent to such number of shares of common stock having a value of twice the then-current exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. Until a Right is exercised, the holder will have no rights as a stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders or to the Company, stockholders may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable for Units, other securities of the Company, other consideration or for common stock of an acquiring company. H. Employee Benefit Plans Restricted Stock Plan - --------------------- In 1994, the Board of Directors adopted, and the stockholders approved, the Ferrofluidics Corporation 1994 Restricted Stock Plan (the "Restricted Stock Plan"). Persons eligible to participate in the Restricted Stock Plan are those full or part-time officers and other employees of the Company and its subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its subsidiaries. Under the Restricted Stock Plan, the maximum number of shares of common stock that may be reserved and authorized for issuance by the Board of Directors may not exceed five percent of the total number of outstanding shares of common stock at the time of any award of restricted stock. Upon adoption of the plan, the Board of Directors initially reserved and authorized 271,000 shares of common stock for issuance, which represented not more than five percent of the outstanding shares of common stock as of the date of adoption. The grants are valued at the fair market value of the common stock on the date of grant and generally vest at a rate of 33-1/3% per year beginning one year from the date of grant. The charge to operations in connection with these restricted stock awards for the years ended June 27, 1998 and June 28, 1997 and June 30, 1996 amounted to $287,000, $511,000 and $467,000, respectively. A summary of the changes in outstanding shares of restricted stock for the years ended June 27, 1998 and June 28, 1997 and June 30, 1996 is set forth below:
Weighted Shares Average Price ------ ------------- Outstanding, June 30, 1995 179,351 $5.60 Granted 40,000 9.75 Forfeited (3,400) 5.00 Vested (70,878) 5.50 ------- Outstanding, June 30, 1996 145,073 $6.80 Granted 10,000 12.50 Forfeited (2,454) 8.87 Vested (93,762) 6.56 ------- Outstanding, June 28, 1997 58,857 $8.06 Granted -- -- Forfeited (4,500) 11.28 Vested (44,531) 7.37 ------- Outstanding, June 27, 1998 9,826 $9.75 =======
32 Nonqualified and Incentive Stock Option Plans - --------------------------------------------- The Company has a Nonqualified Stock Option Plan for its employees which was adopted in 1984 (the "1984 Plan"). During fiscal year 1995, the 1984 Plan's term expired and, accordingly, no further shares may be granted thereunder. The exercise price of the options granted under the plan is not less than the fair market value of the stock at the date of the grant. Under the 1984 Plan, 800,000 shares of the Company's common stock were made available for grant. In June 1995, the Board of Directors adopted the Ferrofluidics Corporation 1995 Nonqualified Stock Option Plan (the "1995 Plan") with the intent to replace options that had been granted under the 1984 Plan which were expected to expire during 1996. Neither directors nor employees of the Company who are subject to the provisions of Section 16 of the Securities and Exchange Act of 1934 are eligible to participate in the 1995 Plan and awards under the 1995 Plan consist only of nonqualified options to purchase shares of the Company's common stock. Under the 1995 Plan, 100,000 shares of the Company's common stock were made available for grant. On June 13, 1995, the Board of Directors adopted, and the stockholders approved, the Ferrofluidics Corporation 1995 Stock Option and Incentive Plan (the "1995 Incentive Plan"). Awards under the 1995 Incentive Plan include stock options (both incentive options and nonqualified options), stock appreciation rights, restricted and unrestricted stock, performance shares and dividend equivalent rights. The Board of Directors has authorized 750,000 shares of the Company's common stock for issuance pursuant to the 1995 Incentive Plan. Generally, options granted by the Company are exercisable at rates of 25% to 100% per year commencing one or two years after the date of the grant, and expire from five to ten years from the grant date. A summary of the changes in outstanding stock options under the three plans discussed above for fiscal 1996, 1997 and 1998 is set forth below:
Weighted Average Shares Exercise Price -------------------------------------------------------------- ------------------------ "1995 "1984 Plan" "1995 Plan" Incentive Plan" Total -------------------------------------------------------------- Outstanding, June 30, 1995 240,128 -- 255,550 495,678 $10.49 Granted 4,125 71,925 151,000 227,050 12.01 Canceled/expired (56,324) -- (1,000) (57,324) 8.17 Exercised -- -- -- -- -- -------------------------------------------------------------- Outstanding, June 30, 1996 187,929 71,925 405,550 665,404 $11.21 Granted -- -- 95,210 95,210 8.41 Canceled/expired (58,416) (11,363) (20,500) (90,279) 13.23 Exercised (33,138) -- -- (33,138) 5.00 -------------------------------------------------------------- Outstanding, June 28, 1997 96,375 60,562 480,260 637,197 $10.83 Granted Granted -- -- 115,000 115,000 4.68 Canceled/expired (96,375) (2,063) (125,000) (223,438) 12.63 Exercised -- -- -- -- -- -------------------------------------------------------------- Outstanding, June 27,1998 -- 58,499 470,260 528,759 $ 8.73 ==============================================================
33 The following table summarizes information about stock options outstanding at June 27, 1998:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------------- ------------------------------------ Weighted Average Remaining Weighted Weighted Range of Contractual Average Average Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price --------------- ------ --------------- -------------- ------ -------------- $ 3.50 - $ 7.63 160,210 9.42 $ 5.51 30,165 $ 7.63 $ 9.00 - $ 13.50 368,549 6.79 $10.13 187,155 $10.30 ------- ------- $ 3.50 - $ 13.50 528,759 7.59 $ 8.73 217,320 $ 9.93 ======= =======
As of June 27, 1998 and June 28, 1997 and June 30, 1996, options to purchase 217,320, 367,572 and 326,729 shares were exercisable at a weighted average exercise price of, $9.93, $11.51 and $11.08 per share, respectively. Stock Purchase Warrants - ----------------------- Stock purchase warrants have been granted by the Board of Directors to officers, directors, key employees and to consultants of the Company, with the exercise price of the warrant not less than the fair market value of the stock on the date of grant. At June 27, 1998, June 28, 1997 and June 30, 1996, 14,500 shares, 97,000 shares and 259,829 shares, respectively, of common stock were reserved for issuance upon the exercise of outstanding stock purchase warrants at prices, and subject to expiration dates, as set forth below:
S h a r e s - -------------------------------------------------------------- June 27, 1998 June 28, 1997 June 30, 1996 Price Expiration Date - -------------------------- ------------- ------------- ----- --------------- -- -- -- 3,000 14.50 September 29, 1996 -- -- 37,329 5.00 October 10, 1996 -- -- 17,500 14.00 February 4, 1997 -- -- 17,500 14.50 February 24, 1997 -- -- 40,000 15.60 February 24, 1997 -- -- 47,500 15.63 June 18, 1997 -- 62,500 62,500 11.75 August 31, 1997 -- 20,000 20,000 11.00 October 27, 1997 14,500 14,500 14,500 9.75 October 10, 2000 ------ ------ ------- 14,500 97,000 259,829 ====== ====== =======
A summary of the changes in outstanding stock purchase warrants for the three years ended June 27, 1998 is set forth below:
Weighted Average Shares Exercise Price ------ -------------- Outstanding, June 30, 1995 281,267 $11.87 Granted 14,500 9.75 Canceled/expired (35,938) 8.00 Exercised -- -- ---------- Outstanding, June 30, 1996 259,829 $12.28 Granted -- -- Canceled/expired (162,829) 12.87 Exercised -- -- ---------- Outstanding, June 28, 1997 97,000 $11.30 Granted -- -- Canceled/expired (82,500) 11.57 Exercised -- -- ---------- Outstanding, June 27, 1998 14,500 $ 9.75 =========
At June 27, 1998, all 14,500 warrants were exercisable at a price of $9.75. 34 In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"). Under this Statement, the Company had a choice of adopting a fair-value based method of accounting for employee stock-based compensation plans, as established by FAS 123, or retaining the intrinsic value-based method in accordance with APB Opinion No. 25 ("APB 25"), provided certain pro forma disclosures were made. The Company chose to retain the intrinsic value-based method of accounting for stock-based compensation in accordance with APB 25 and adopted the pro-forma disclosure provisions of FAS 123. Accordingly, no compensation expense has been recognized for stock option awards or warrants as they are granted at prices not less than fair market value of the stock on the date of grant. The following pro-forma disclosures required by FAS 123 have been prepared as if the Company accounted for the stock options and warrants using the fair-value method of accounting (in thousands, except per share data):
1998 1997 1996 -------- -------- -------- Net income (loss), as reported $(3,472) $1,672 $3,820 Pro-forma net income (loss) (3,607) 603 2,938 Net income (loss) per share, as reported -- basic $(0.56) $0.27 $0.63 Net income (loss) per share, as reported -- diluted (0.56) 0.27 0.61 Pro-forma net income (loss) per share -- basic (0.58) 0.10 0.49 Pro-forma net income (loss) per share -- diluted (0.58) 0.10 0.47
The fair value of each option and warrant is estimated on the date of grant using the following weighted-average assumptions in fiscal 1998, 1997, and 1996:
1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.57% 6.12% 6.08% Expected stock price volatility 60.0% 60.0% 60.0% Expected life of options and warrants (years) 2.0 4.3 4.1
The weighted average fair value of options granted during the years ended June 27, 1998, June 28, 1997, and June 1996 were $1.62, $4.47 and $6.21 respectively. For purposes of this disclosure, the Company amortizes the fair value of the options and warrants over the vesting period of the option or warrant. In estimating the fair value of each option, the Company uses the Black-Scholes option valuation method. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models, such as the Black-Scholes model, require the input of highly subjective assumptions, including the expected stock price volatility, which are subject to change from time to time. For this reason, and because the FAS 123 fair value-based method of accounting has not been applied to options and warrants granted prior to July 1, 1996, the resulting pro-forma compensation costs are not necessarily indicative of costs to be expected in future years. Deferred Income (401-K) Plan - ---------------------------- The Company has an elective employees savings plan for all eligible employees. Ferrofluidics Corporation Tax Savings Deposit and Investment Plan (the "401-k Plan") is a qualified trust under Section 401(a) of the Internal Revenue Code and is, therefore, exempt from federal income taxes under the provisions of Section 501(a). The 401-k Plan allows an employee to contribute between 1% and 20% of his or her salary and bonus to the 401-k Plan, up to a maximum of $10,000 (for calendar 1998) per year (subject to annual adjustments based on increases in the consumer price index over the 1988 base year). In December 1993, the Board of Directors approved an annual Company match, effective January 1, 1994, of 50% of an employee's contribution of up to 4% of the employee's salary. In fiscal 1998, 1997 and 1996, the Company made matching contributions to the Plan, and corresponding charges to operations, in the amounts of $105,000, $155,000 and $208,000, respectively. The 401-k Plan consists of four equity funds, a fixed income fund, a balanced fund and a money market fund, and participants may choose to split their investments among funds. 35 I. Industry Segment and Geographical Area Information The Company's operations, after the effects of the discontinuation of the Systems Division, are conducted in two industry segments: component products utilizing ferrofluid technology, including ferrofluids for audio loudspeakers and nondestructive testing and sensing, rotary sealing devices and bearings (collectively, "components"); and thin film deposition products manufactured and/or distributed by AP&T. Sales among segments and geographic enterprises are accounted for at cost plus a reasonable profit. See Note K for a further discussion regarding discontinued operations. Segment operating profit (loss) includes all costs and expenses directly related to the segment. General corporate expenses principally represent the costs associated with managing all industry segments and cannot be specifically identified with a particular industry segment. General corporate assets consist primarily of cash and cash equivalents, deferred income tax assets, certain fixed assets, and other non-current assets, including cash surrender value of life insurance, net of loans, at June 27, 1998 and June 28, 1997, respectively. 36 The following table presents financial information for the Company's industry segments from continuing operations for the years ended June 27, 1998, June 28, 1997, and June 30, 1996. All amounts are expressed in thousands of dollars.
Thin Film Components Deposition Consolidated ---------- ---------- ------------ Year ended June 27, 1998: - ------------------------- Sales to unaffiliated customers $18,780 $9,390 $28,170 ======= Segment operating profit 5,653 281 $ 5,934 General corporate expenses (3,854) ------- Operating Income $2,080 ======= Net identifiable assets, continuing operations 15,099 3,557 $18,656 Net identifiable assets, discontinued operations 17,200 General corporate assets 8,163 ------- Total Assets $44,019 ======= Depreciation and amortization 1,289 268 Capital expenditures 551 157 Year ended June 28, 1997: - ------------------------- Sales to unaffiliated customers $16,685 $8,409 $25,094 ======= Segment operating profit 3,699 (35) $ 3,664 General corporate expenses (3,625) ------- Operating Income $ 39 ======= Net identifiable assets, continuing operations 17,641 2,854 $20,495 Net identifiable assets, discontinued operations 18,247 General corporate assets 6,259 ------- Total Assets $45,001 ======= Depreciation and amortization 1,193 161 Capital expenditures 919 125 Year ended June 30, 1996: - ------------------------- Sales to unaffiliated customers $18,827 $8,399 $27,226 ======= Segment operating profit 2,854 387 $ 3,241 General corporate expenses (2,335) ------- Operating Income $ 906 ======= Net identifiable assets, continuing operations 15,843 2,777 $18,620 Net identifiable assets, discontinued operations 19,018 General corporate assets 5,791 ------- Total Assets $43,429 ======= Depreciation and amortization 794 179 Capital expenditures 1,790 218
37 The following is a summary of certain financial data by geographic areas:
United States European Japanese Operations Operations Operations Eliminations Total ---------- ---------- ---------- ------------ ----- Year ended June 27, 1998: - ------------------------ Sales to unaffiliated domestic customers $11,650 $ -- $ -- $ -- $11,650 Sales to unaffiliated foreign customers 1,756 13,801 963 -- 16,520 Sales to subsidiaries 3,702 -- - (3,702) -- ------- ------ ----- ------ ------- Total net sales and revenues 17,108 13,801 963 (3,702) $28,170 ======= Geographic operating profit (loss) 5,443 870 (358) (21) $ 5,934 General corporate expenses (3,854) ------- Operating Income $ 2,080 ======= Net identifiable assets, continuing operations 15,342 4,973 2,875 (4,534) $18,656 Net identifiable assets, discontinued operations 17,200 General corporate assets 8,163 ------- Total Assets $44,019 ======= Year ended June 28, 1997: - ------------------------ Sales to unaffiliated domestic customers $10,914 $ -- $ -- $ -- $10,914 Sales to unaffiliated foreign customers 962 11,979 1,239 -- 14,180 Sales to subsidiaries 4,434 -- -- (4,434) -- ------- ------ ----- ------ ------- Total net sales and revenues 16,310 11,979 1,239 (4,434) $25,094 ======= Geographic operating profit (loss) 4,033 174 (544) 1 $ 3,664 General corporate expenses (3,625) ------- Operating Income $ 39 ======= Net identifiable assets, continuing operations 16,219 4,416 2,388 (2,528) $20,495 Net identifiable assets, discontinued operations 18,247 General corporate assets 6,259 ------- Total Assets $45,001 ======= Year ended June 30, 1996: - ------------------------- Sales to unaffiliated domestic customers $12,285 $ -- $ -- $ -- $12,285 Sales to unaffiliated foreign customers 1,820 12,702 419 -- 14,941 Sales to subsidiaries 3,922 - -- (3,922) -- ------- ------ ----- ------ ------- Total net sales and revenues 18,027 12,702 419 (3,922) $27,226 ======= Geographic operating profit (loss) 3,160 587 (487) (19) $ 3,241 General corporate expenses (2,335) ------- Operating Income $ 906 ======= Net identifiable assets, continuing operations 14,375 4,208 1,450 (1,413) $18,620 Net identifiable assets, discontinued operations 19,018 General corporate assets 5,791 ------- Total Assets $43,429 =======
38 J. Litigation Securities and Exchange Commission - ---------------------------------- In February 1993, the Company received an informal inquiry from the SEC requesting that the Company provide the SEC with certain documents concerning publicity relating to the Company for the period from January 1, 1992 to February 19, 1993. In August 1993, the SEC issued an order directing a private investigation to determine whether certain unnamed persons had violated or caused the Company to violate the federal securities laws. Among the areas of inquiry identified in the order was whether publicity about the Company, including research reports, was published without fully disclosing consideration given or received therefore. The order also indicated that the inquiry would examine possible manipulation by certain unnamed persons of the Company's securities, payment in connection therewith, and failure to disclose such activities in public filings made by the Company (including the financial statements contained or incorporated therein), as well as possible nondisclosure of transactions with the Company in which such persons may have had a material interest. Throughout the investigation, the Company has cooperated fully with the SEC's inquiry. In June 1997, the SEC completed its investigation with respect to the Company and on June 23, 1997, the Company entered into a Consent and Understanding, whereby it agreed to be permanently enjoined from violating the federal securities laws. The Company is continuing to cooperate with the SEC as it completes its investigation with respect to certain unnamed persons. Former Management - ----------------- In March 1993, a special committee of three outside directors was appointed by the Company's Board of Directors to conduct an internal investigation, with the assistance of counsel retained by that committee. In connection with the investigation, in September 1993, the Company announced the retirement of Dr. Ronald Moskowitz, its then Chairman and Chief Executive Officer, and that the Company and Dr. Moskowitz had entered into a Termination Agreement that superseded his previous employment agreement. Pursuant to the agreement, the former CEO was to receive payments aggregating $725,000 over the four years ended June 30, 1997 in advisory fees. The Company charged the entire $725,000 to nonrecurring operating charges in fiscal 1994. Prior to fiscal 1997, the Company made cash payments under this agreement totaling $512,000. In September 1995, the Company and the former CEO entered into a agreement (the "Settlement Agreement") to amend the Termination Agreement and accelerate the termination of his relationship with the Company. Among other things, the Settlement Agreement required (i) the extension of the former CEO's covenant-not-to-compete to June 30, 2000, (ii) a payment to the former CEO of $196,000 in full satisfaction of the $213,000 in remaining payments owed him under the Termination Agreement, (iii) a payment to the former CEO of $150,000 in full satisfaction of a $200,000 legal indemnification, and (iv) the transfer, to the former CEO, of the Company's ownership in two single premium, paid-up life insurance policies on his life (see Note B). Other - ----- From time to time, as a normal incidence of the nature of the Company's business, various claims, charges or litigation are or may be asserted or commenced against the Company relating to, among other things, contractual matters, patent disputes, environmental matters and product liability. While there can be no assurance that the Company will prevail in all these matters, the Company does not believe that these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. However, an adverse resolution of one or more of such matters could have an adverse effect on the Company's consolidated results of operations in a quarter in which such matters might be resolved. 39 K. Discontinued Operations On September 23, 1998, the Company sold certain assets of the Systems Division to General Signal Technology Corporation ("General Signal") for $10,800,000 in cash. The Systems Division represented a separate line of business and, accordingly, its net operating results have been reported, net of applicable income taxes, as discontinued operations for all periods presented. The Company expects to record a net gain on the disposal of the Systems Division in the first quarter of fiscal 1999. The Sale, as structured, did not include any Systems Division liabilities, which remain with the Company. The sale did not include the obligation by the Company to complete approximately $18,433,000 in Systems Division backlog, which obligation remains with the Company, or approximately $5,873,000 in inventory on hand, all of which is needed to fulfill existing backlog. The terms of the sale of the Systems Division provide that, generally, any backlog existing on December 31, 1998, will be transferred to General Signal. The backlog includes a purchase order from a customer for nine machines representing approximately $7,658,000. The Company believes that the customer is seeking to modify the terms of the order, including its potential cancellation. However, the Company believes that the purchase order remains legally valid, and that under its terms, the customer is obligated to pay the Company the costs incurred up to cancellation of the order. In connection with these machines, the Company has inventory of approximately $3,104,000 on hand and approximately $2,471,000 in parts on order at vendors. If the Company is unable to recover these cancellation charges from the customer, the Company may be required to take a material write-down of the inventory relating to the purchase order. The sale of the Systems Business also did not include approximately $6,472,000 in accounts receivable which were outstanding as of the closing of the sale. The Company believes that it will be able to collect these receivables within established reserves but, there can be no assurance that the sale of the Systems Business will not adversely affect their collectibility. The Company allocated approximately $726,000, $833,000 and $573,000 of general corporate expenses and $459,000, $352,000 and $269,000 of interest expense to the Systems Division in determining income (loss) from discontinued operations for the years ended June 27, 1998, June 28, 1997 and June 30, 1996, respectively. General corporate expenses were allocated based on the actual amounts incurred on behalf of the Systems Division. In addition, certain expenses for Corporate officers (salaries, travel, etc) and Accounting Department personnel (salaries) were allocated on the basis of the estimated time and expense incurred on behalf of the Systems Division. Interest expense was allocated based on the proportionate share of the Systems Division's net identifiable assets to the total net assets of the Company. The operating results of the discontinued Systems Division are summarized as follows (000's omitted):
1998 1997 1996 ---- ---- ---- Net sales $24,530 $42,691 $45,741 ======= ======= ======= Income (loss) from operations before income taxes $(6,149) $1,042 $3,688 Income taxes (benefit) (1,339) (727) 366 --------- -------- -------- Income (loss) from operations $(4,810) $1,769 $3,322 ======== ====== ======
The net assets at June 27, 1998 of the discontinued Systems Division are summarized as follows (000's omitted) Current assets $17,986 Property, plant and equipment, net 1,893 Other non-current assets, net 98 Current liabilities (2,777) ------- Net assets of the discontinued Systems Division $17,200 =======
40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information Regarding Directors Set forth below is certain information regarding the Directors of the Company, including the two Class III Directors who have been nominated for election at the Annual Meeting, based on information furnished by them to the Company.
Director Name Age Since - ---------------------------------------------------------------------------------------------- Class I Stephen B. Hazard..................................................... 53 1994 Dennis R. Stone....................................................... 51 1994 Class II Howard F. Nichols..................................................... 70 1979 Robert P. Rittereiser................................................. 60 1989 Class III Dean Kamen*........................................................... 47 1989 Paul F. Avery, Jr.*................................................... 69 1998
- ----------------- * Nominee for election. Mr. Avery has been the President, Chief Executive Officer and Chairman of the Board of Directors of the Company since June 3, 1998. He also served as the Chief Executive Officer of the Company from October 1, 1993 until June 25, 1996, President of the Company from October 1, 1993 until January 1, 1995 and Chairman of the Board and Treasurer of the Company from October 1, 1993 until May 1, 1997. He is also President of P.F. Avery Corporation, a management consulting firm, a position he has held since 1983. From 1967 to 1983 he was President and Treasurer of C.E. Avery, a wholly owned subsidiary of Combustion Engineering, Inc., and President and Chief Executive Officer of CE-KSB Pump Company, Inc. Both companies were involved in the design and fabrication of pumps and reactor internals for the utility industry. Mr. Avery is also general partner of a 3MW hydroelectric facility in Nashua, New Hampshire, and serves as a director of several privately held companies and as a trustee of New Hampshire Public Radio, WEVO. Mr. Hazard is founder and managing partner of the law firm of Pepe & Hazard, Hartford, Connecticut. He is a director of First New England Capital, L.P., a closely held small business investment company. He is also a trustee and a member of the executive committee of the Kingswood-Oxford School. Mr. Kamen is the founder and Chairman and Chief Executive Officer of DEKA Research and Development Corporation, which develops highly specialized medical equipment. Mr. Kamen in the founder and, from 1976 to 1982, was the Chief Executive Officer of Auto-Syringe, Inc., a manufacturer of medical devices that was acquired by Baxter Healthcare Corporation. He is a member of the Board of Directors of Sander's Prototype, Inc. and Zero Emissions Technology. He also serves as a director of several privately held companies. 41 Mr. Nichols is a consultant. Until July 1989, he was a Vice President of The First National Bank of Boston, Trust Department. He is also a member of the Board of Directors of Doble Engineering Co., Bemir Associates, Inc., Weymouth Art Leather Co., McCullough & Eldudger Insurance, Inc. and Seamann Supply Co. Mr. Rittereiser has been the Chairman of the Board of Directors and Chief Executive Officer of Gruntal Financial L.L.C., an investment services firm based in New York City, and its wholly-owned subsidiary Gruntal & Co., L.L.C., since 1995. He is also the Chairman of the Board of Directors of Yorkville Associates Corp., a private investment and financial concern since its formation in 1989. He served as Trustee of the DBL Liquidating Trust from April 1992 to April 1996. He served as Director in 1990, as Chairman in November 1992 and as President and Chief Executive Office from March 1993 until February 1995 of Nationar, a banking services corporation. He is also a member of the Board of Directors of Cendant Corporation and Interchange Financial Services Corp. Mr. Stone is a stockholder and director of the accounting firm of Nathan Wechsler & Company, Professional Association, Portsmouth, New Hampshire. From 1989 to 1997 he was a principal in the firm of Dennis R. Stone, CPA, Portsmouth, New Hampshire. From 1989 to 1991 he also served as Executive Vice President and Chief Financial Officer of The Blake Insurance Group, Inc., Portsmouth, New Hampshire. Mr. Stone serves as an investigative auditor for the New Hampshire Supreme Court Professional Conduct Committee. He is a member of the Board of Directors of Odyssey House, Inc. Information Regarding Executive Officers The names and ages of all executive officers of the Company and principal occupation and business experience during at least the last five years for each are set forth below.
Name Age Position - ----------------------------------------------------------------------------------------------------- Paul F. Avery, Jr. 69 President, Chief Executive Officer and Chairman of the Board Alvan F. Chorney 53 Vice President and General Manager--Components Division William B. Ford 58 Vice President, Chief Financial Officer and Treasurer Thomas J. Uhlig 48 Vice President and General Manager--Systems Division
Mr. Avery has held the positions of President, Chief Executive Officer and Chairman of the Board of the Company since June 3, 1998. Mr. Avery also served as Chief Executive Officer of the Company from October 1, 1993 until June 25, 1996, President of the Company from October 1, 1993 until January 1, 1995 and Chairman of the Board and Treasurer of the Company from October 1, 1993 until May 1, 1997. See "Information Regarding Directors" above. Mr. Chorney has held the position of Vice President and General Manager--Components Division since April 19, 1996. Prior to that, Mr. Chorney served as Senior Vice President of the Company from November 1991 to April 19, 1996. Mr. Chorney was also a Director of the Company from 1986 to April 1994. 42 Mr. Ford has held the position of Treasurer of the Company since May 19, 1997 and the position of Vice President and Chief Financial Officer of the Company since September 23, 1996. From November 1993 until April 1995, Mr. Ford was Vice President and Chief Financial Officer of Versyss Incorporated, a software developer and distributor of integrated hardware and software systems for medical practice management and other small business applications. From 1987 to November 1993, he was a Director in the Financial Advisory Services consulting practice of Coopers & Lybrand L.L.P. Mr. Uhlig held the position of Vice President and General Manager--Systems Division from April 22, 1996 until April 30, 1998, at which time Mr. Uhlig resigned. Before then, he served as President of Johnstown America Corporation, a manufacturer of railroad freight cars and components, from 1993 until April 1996. From 1992 to 1993, he was Director of Manufacturing of The Timken Company, a manufacturer of tapered roller bearings, and before that he was President of MPB Corporation, a subsidiary of The Timken Company, a manufacturer of precision ball and roller bearings. Section 16(a) Beneficial Ownership Reporting Compliance The Company's Directors, executive officers and beneficial owners of more than 10% of its Common Stock are required under Section 16(a) of the Securities Exchange Act of 1934, as amended, to file reports of ownership and changes in ownership with the SEC. Copies of those reports must also be furnished to the Company. Based solely on a review of the copies of reports furnished to the Company and written representations that no other reports were required, the Company believes that during the fiscal year ended June 27, 1998 ("fiscal 1998"), no person who was a Director, executive officer or greater than 10% beneficial owner of the Company's Common Stock failed to file on a timely basis all reports required by Section 16(a). ITEM 11. EXECUTIVE COMPENSATION Compensation of Directors Directors who are officers or employees of the Company receive no compensation for their service as Directors. Directors who are not officers or employees of the Company receive such compensation for their services as the Board of Directors may from time to time determine. Non-employee Directors each receive an annual retainer of $16,000, payable quarterly. In addition, non-employee Directors receive $1,000 for each Board of Directors meeting or committee meeting attended or $600 for attending each committee meeting that is held on the same day as a Board of Directors meeting or meeting of another committee on which such Director serves. Pursuant to the Ferrofluidics Corporation Amended and Restated 1995 Stock Option and Incentive Plan (the "1995 Incentive Plan"), eligible non-employee Directors are entitled to receive options to purchase shares of Common Stock in accordance with the formula provisions thereof. Under the 1995 Incentive Plan, eligible non-employee Directors automatically receive an option to purchase 3,000 shares of Common Stock on the fifth business day after each annual meeting of stockholders of the Company, commencing with the 1995 Annual Meeting. Accordingly, on November 25, 1997, each of Messrs. Hazard, Stone, Nichols, Rittereiser and Kamen were granted an option to purchase 3,000 shares of Common Stock at an exercise price of $6.125. All such options vested and became immediately exercisable upon grant and have an exercise price equal to 100% of the fair market value of a share of Common Stock on the grant date. Compensation of Executive Officers The following sections set forth and discuss the compensation paid or awarded during the last three years to the Company's Chief Executive Officer and the four most highly compensated executive officers who earned in excess of $100,000 during fiscal 1998. 43 Summary Compensation Table The following table shows for the fiscal years ended June 30, 1996, June 28, 1997 and June 27, 1998, the annual compensation paid by the Company to the Chief Executive Officer and the four most highly compensated executive officers who earned in excess of $100,000 during fiscal 1998.
Long Term Compensation ------------------------------------------- Annual Compensation Awards Payouts --------------------------------------------- -------------------------------- ---------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Securities Restricted Underlying Name and Salary Other Annual Stock Warrants/ LTIP All Other Principal Position Year ($)(3) Bonus ($) Compensation($) Award($) Options (#) Payouts($) Compensation - ------------------- ----- ------ --------- --------------- ---------- ------------ ---------- ------------- Paul F. Avery, Jr. .... President, Chief 1998 19,230(4) -- 1,111(5) -- 75,000(8) -- 120,450(9) Executive Officer and 1997 183,814(4) -- 3,615(5) -- -- -- 19,350(10) Chairman of the Board(1) 1996 223,931 -- 8,774(5) -- 65,000(8) -- 16,400(11) Salvatore J. Vinciguerra............ 1998 279,303 -- 2,750 -- -- -- -- Chief Executive Officer(2) 1997 255,961 -- 5,043(5) -- -- -- -- 1996 202,938 -- 6,839(5) -- 50,000(8) -- -- Alvan F. Chorney ............... 1998 183,974 1,720 1,000(6) -- -- -- -- Vice President and 1997 170,223 5,156 1,000(6) -- -- -- -- General Manager -- Components Division 1996 164,097 5,152 1,000(6) -- -- -- 2,099(12) William B. Ford ....... Vice President, 1998 150,365 -- -- -- -- -- 5,832(12) Chief Financial 1997 112,223(4) -- -- -- 30,000(8) -- -- Officer and 1996 -- -- -- -- -- -- -- Treasurer Thomas J. Uhlig........ 1998 139,839(4) 1,650 -- -- -- -- -- Vice President and 1997 160,154 4,688 2,308(5) -- -- -- -- General Manager-- Systems 1996 28,846(4) -- 962(5) 125,000(7) 15,000(8) -- -- Division
(1) Mr. Avery became the President, Chief Executive Officer and Chairman of the Board of the Company on June 3, 1998. (2) Mr. Vinciguerra was the Chief Executive Officer of the Company from June 26, 1996 until June 1, 1998. (3) Includes all voluntary pre-tax contributions to the Ferrofluidics Corporation Tax Savings and Deposit and Investment Plan. (4) This amount represents less than a full year's salary. (5) This amount represents an automobile allowance. (6) This amount represents an allowance for medical and health expenses incurred by Mr. Chorney in excess of amounts covered by the Company's group health plan. (7) Represents 10,000 shares of restricted stock which had a market value as of the date of grant of $125,000. Seventy-five percent (75%) of the shares were vested on April 22, 1998. In connection with Mr. Uhlig's resignation from the position of Vice President and General Manager--Systems Division on April 30, 1998, and pursuant to the provisions of the Company's 1994 Restricted Stock Plan, the remaining 2,500 restricted shares held by Mr. Uhlig were forfeited. (8) Represents stock options. (9) This amount includes the full dollar value of insurance premiums paid by the Company on behalf of Mr. Avery with respect to term life insurance in the amount of $10,450 and payments made to Mr. Avery pursuant to a consulting agreement with the Company in the amount of $110,000. See "Employment Agreements" below. 44 (10) This amount includes the full dollar value of insurance premiums paid by the Company on behalf of Mr. Avery with respect to term life insurance in the amount of $9,350 and payments made to Mr. Avery pursuant to a consulting agreement with the Company in the amount of $10,000. See "Employment Agreements" below. (11) This amount represents the full dollar value of insurance premiums paid by the Company on behalf of Mr. Avery with respect to term life insurance. (12) These amounts represent reimbursement by the Company to Mr. Ford and Mr. Chorney of expenses incurred in connection with their relocation to New Hampshire. Option Grants in Last Fiscal Year - --------------------------------- The following table sets forth each grant of stock options during fiscal 1998 to the Chief Executive Officer and each other executive officer named in the Summary Compensation Table. No stock appreciation rights ("SARs") have been granted.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term(5) ----------------------------------------------------------------- ------------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Options Employees in Base Price Name Granted(#)(3) Fiscal Year(4) ($/Sh) Expiration Date 5% ($) 10%($) - ---- ------------- -------------- ------ --------------- ------ ------ Paul F. Avery, Jr.(1) 75,000(6) 78.95% $4.09 6/3/2008 192,913 488,880 Salvatore J. Vinciguerra(2) -- -- -- -- -- -- Alvan F. Chorney -- -- -- -- -- -- William B. Ford -- -- -- -- -- -- Thomas J. Uhlig -- -- -- -- -- --
- ------------------ (1) Mr. Avery became the President, Chief Executive Officer and Chairman of the Board of the Company on June 3, 1998. (2) Mr. Vinciguerra was the Chief Executive Officer of the Company from June 26, 1996 until June 1, 1998. (3) All options were granted pursuant to the 1995 Incentive Plan. (4) Percentages are based on a total of 95,000 shares of Common Stock underlying all options granted to employees of the Company in fiscal 1998. (5) Represents the value of the options granted at the end of the option terms if the price of the Company's Common Stock were to appreciate annually by 5% and 10% respectively. There is no assurance that the stock price will appreciate at the rates shown in the table. If the stock price appreciates, the value of stock held by all shareholders will increase. (6) Such option became fully vested and immediately exercisable on the date of grant, June 3, 1998. 45 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Values - -------------------------------------------------------------------------- The following table sets forth the shares acquired and the value realized upon exercise of stock options during fiscal 1998 by the Chief Executive Officer and each other executive officer named in the Summary Compensation Table and certain information concerning the number and value of unexercised stock options. There are currently no outstanding SARs.
(a) (b) (c) (d) (e) Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/ Options/Warrants FY-END(#) Warrants at FY-End(#)(3) Shares Acquired on Value Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable ---- ------------ ----------- ----------- ------------- ----------- ------------- Paul F. Avery, Jr. (1) -- -- 205,000 -- -- -- Salvatore J. Vinciguerra (2) -- -- 50,000 50,000 -- -- Alvan F. Chorney -- -- 18,750 6,250 -- -- William B. Ford -- -- 7,500 22,500 -- -- Thomas J. Uhlig -- -- -- -- -- --
- ------------------ (1) Mr. Avery became the President, Chief Executive Officer and Chairman of the Board of the Company on June 3, 1998. (2) Mr. Vinciguerra was the Chief Executive Officer of the Company from June 26, 1996 until June 1, 1998. (3) Equal to the market value of shares covered by in-the-money options on June 27, 1998, less the aggregate options exercise price. Options are in-the-money if the market value of the shares covered thereby is greater than the exercise price of the options. Report of the Compensation Committee of the Board of Directors on Executive Compensation The members of the Compensation Committee of the Board of Directors of the Company, whose names are set forth below, have prepared the following report on the Company's executive compensation policies and philosophy for fiscal 1998. General The Compensation Committee consists of Mr. Rittereiser and Mr. Hazard, both of whom are non-employee Directors. The Compensation Committee is generally responsible for developing the Company's executive and management compensation policies, including awards of equity-based compensation. The Company's executive compensation program is designed to provide competitive levels of compensation, reward above-average individual performance and assist the Company in attracting and retaining qualified management. Where applicable, the Compensation Committee takes into account employment agreements between an executive officer and the Company. See "Employment Agreements" below. Mr. Vinciguerra, the Chief Executive Officer of the Company from June 26, 1996 until June 1, 1998 made, and Mr. Avery, the Chief Executive Officer of the Company since June 3, 1998, makes general recommendations to and reviews with the Compensation Committee salary increases and bonus compensation of executive officers and employees other than himself. 46 Compensation Policy Review During the fiscal year ended June 30, 1995, the Compensation Committee, together with certain members of management and the Board of Directors, completed a review of the Company's policies regarding executive compensation. The Compensation Committee's primary objectives in evaluating the Company's executive compensation philosophy were to (i) review base salaries, cash bonuses and short-term and long-term incentives for executive officers based upon a survey of compensation for executive officers in a group of comparable high-technology companies, and (ii) to develop an appropriate methodology for structuring long-term incentive awards to ensure that such awards more closely align the interests of the executive officers with those of the Company's stockholders. To accomplish the aforementioned objectives and goals, the Compensation Committee retained an independent compensation consulting firm (the "Consultant") which conducted a survey of executive compensation levels and practices of companies within a proxy peer group (the "Peer Group") of companies of similar size to the Company. The Peer Group consisted of seven companies in the specialty machinery industry having annual revenues of $30 million to $50 million. Based upon the results of the Consultant's survey, the Compensation Committee has made certain adjustments to the Company's compensation policies during fiscal 1998 which are discussed below. Compensation Policies for Executive Officers Base Salary. The annual base salary and base salary adjustments for executive officers are determined by the Compensation Committee in its discretion and are targeted according to the salaries of executives holding similar offices and having similar responsibilities within the Company's industry segment. The Compensation Committee also considers factors such as industry experience and executive retention. Annual salary adjustments for executive officers are determined by evaluating the competitive marketplace, the performance of the Company, the performance of the executive officer and any change in the responsibilities assumed by the executive officer. Salary adjustments are normally determined and made on an annual basis. The base salaries of Salvatore J. Vinciguerra, the Chief Executive Officer of the Company from June 26, 1996 until June 1, 1998, and Paul F. Avery, Jr., the current Chief Executive Officer of the Company, were established pursuant to employment agreements with the Company, which are described below in "Employment Agreements", and were based on the foregoing criteria. Cash Bonuses. As a result of the Compensation Committee's review of executive compensation policies, the Compensation Committee recommended that the Company adopt a cash incentive program (the "Cash Incentive Plan") to better align the Company's total cash compensation for its executives with the median of the Consultant's survey of the Peer Group. The Cash Incentive Plan, which became effective on July 1, 1995, is intended to encourage, recognize and reward performance by executives by providing cash compensation based upon the achievement of a pre-determined annual operating budget and a combination of quantitative and qualitative measures (the relative weights of which are determined in the sole discretion of the Compensation Committee when it performs its performance review), including orders received (for marketing managers), percent defect rate (for production managers), timeliness and quality of monthly reporting (for accounting managers) and effectiveness of improvement projects (for all managers). The annual operating budget is determined by the Compensation Committee and the Board of Directors prior to the beginning of the fiscal year and the total pool from which cash incentives may be awarded under the plan is formed based upon the achievement of the operating profits contained in the annual operating budget. The Chief Executive Officer is eligible to receive up to 35% of his respective base salary depending upon the extent to which the operating profits contained in the annual operating budget are achieved, while executive officers other than the Chief Executive Officer are eligible to receive up to either 20% or 25% of their respective base salaries depending upon the extent to which the operating profits contained in the annual operating budget are achieved. Based upon the foregoing criteria, no executive officers of the Company received a cash bonus under the Cash Incentive Plan for fiscal 1998 performance. Although cash bonuses generally are awarded pursuant to the Cash Incentive Plan, the Compensation Committee, in its discretion, may award a cash bonus to an executive officer for outstanding performance based upon individual performance reviews (which may or may not take into account specific performance measures relative to that executive officer), retention considerations and general industry practice. During fiscal 1998, the Compensation Committee exercised its discretion and awarded cash bonuses outside of the Cash Incentive Plan in the amount of $1,720 to Mr. Chorney and $1,650 to Mr. Uhlig in view of their individual performances in fiscal 1998. 47 Equity and Equity-Based Incentives. Equity and equity-based incentive awards are designed to attract and retain executives who can make significant contributions to the Company's success, reward executives for such significant contributions and give executives a longer-term incentive to increase shareholder value. The size and frequency of equity and equity-based incentive awards are determined by the Compensation Committee in its discretion, taking into account individual performance and responsibilities, but without any specific performance measures. The Compensation Committee also may grant stock options for executive retention purposes, taking into account, among other things, general industry practice. To ensure that high levels of performance occur over the long-term, stock options granted to executives typically vest over a period of time. All outstanding options have been granted with an exercise price equal to 100% of the fair market value of the Company's Common Stock on the grant date. The 1995 Incentive Plan is the principal vehicle by which the Company intends to achieve the executive compensation policy objective of providing long-term incentives to executive officers that will more closely align the interests of such executives with those of the Company's stockholders. Pursuant to the 1995 Incentive Plan, the Compensation Committee may grant a variety of long-term incentive awards based on the Common Stock of the Company, including stock options (both incentive options and non-qualified options), SARs, restricted stock, unrestricted stock, performance shares and dividend equivalent rights. In fiscal 1998, Paul F. Avery, Jr., was granted an option to purchase 75,000 shares of Common Stock. This option became fully vested and immediately exercisable on the date of grant, June 3, 1998. The Compensation Committee granted this award to Mr. Avery in connection with his election to the positions of President, Chief Executive Officer and Chairman of the Board of the Company. At its discretion, under the Ferrofluidics Corporation Amended and Restated 1994 Restricted Stock Plan (the "1994 Restricted Stock Plan"), the Compensation Committee may also award restricted stock bonuses to executive officers and other key employees. Shares of restricted stock granted to executive officers under the 1994 Restricted Stock Plan vest over a period of time and are subject to forfeiture in the event an officer's employment with the Company terminates prior to vesting. Shares of restricted stock are not transferable prior to vesting. During fiscal 1998, no executive officers of the Company received an award of restricted stock. Any value received by an executive officer from a stock option grant and any increase in the value of stock received as a bonus depends entirely on increases in the price of the Company's Common Stock. Other Compensation. The Company provides executive officers and management with health, retirement and other benefits under plans that are generally available to the Company's employees. Compensation of the Chief Executive Officer Mr. Salvatore J. Vinciguerra, former Chief Executive Officer. Mr. Vinciguerra, who was Chief Executive Officer of the Company from June 26, 1996 until June 1, 1998, had an employment agreement with the Company, the terms of which are described below under "Employment Agreements." Mr. Vinciguerra's base salary was established pursuant to the criteria described above in "Base Salary." Mr. Paul F. Avery, Jr., current Chief Executive Officer. Mr. Avery, who became the Chief Executive Officer of the Company on June 3, 1998, has an employment agreement with the Company, the terms of which are described below under "Employment Agreements." Mr. Avery's base salary was established pursuant to the criteria described above in "Base Salary." In connection with his election to the position of Chief Executive Officer, President and Chairman of the Board of the Company, the Compensation Committee awarded Mr. Avery an option to purchase 75,000 shares of Common Stock which became fully vested and immediately exercisable on the date of grant, June 3, 1998. 48 Federal Tax Regulations Applicable to Executive Compensation As a result of Section 162(m) of the Internal Revenue Code (the "Code"), the Company's deduction of executive compensation may be limited to the extent that a "covered employee" (i.e., the chief executive officer or one of the four highest compensated officers who is employed on the last day of the Company's taxable year and whose compensation is reported in the summary compensation table) receives compensation in excess of $1,000,000 in such taxable year of the Company (other than performance-based compensation that otherwise meets the requirements of Section 162(m) of the Code). The Company intends to take appropriate action to comply with such regulations, if applicable, in the future. Robert P. Rittereiser, Chairman Stephen B. Hazard Compensation Committee Interlocks and Insider Participation Mr. Vinciguerra, the Chief Executive Officer and President of the Company from June 26, 1996 until June 1, 1998, made and Mr. Avery, the Chief Executive Officer of the Company since June 3, 1998, makes general recommendations to and reviews with the Compensation Committee the salary increases and bonus compensation of executives and management other than himself. Employment Agreements Avery Employment Agreement -------------------------- On June 3, 1998, the Company and Mr. Avery entered into an employment agreement (the "Avery Employment Agreement") that provided for Mr. Avery's employment as President, Chief Executive Officer and Chairman of the Board of the Company for one year (the "Initial Term") at a salary of $250,000 per year subject to (a) a one-year extension upon the written consent of Mr. Avery and the Company (the "Subsequent Term") and (b) earlier termination for death, disability, cause, upon 60 days' written notice by either Mr. Avery or the Company. Pursuant to the Avery Employment Agreement, the Company is required to, among other things, (i) reimburse Mr. Avery for all reasonable business expenses incurred by Mr. Avery in the performance of his duties, (ii) provide Mr. Avery with an automobile for business and personal use and pay or reimburse Mr. Avery for all expenses associated therewith, and (iii) maintain insurance on Mr. Avery's life in the amount of $1,000,000, payable as directed by Mr. Avery, until the expiration of the Initial Term or the Subsequent Term, as applicable, unless Mr. Avery is terminated by the Company for cause. Pursuant to the Avery Employment Agreement, Mr. Avery received an option to purchase 75,000 shares, which option became fully vested and immediately exercisable on the date of grant, June 3, 1998. In addition, Mr. Avery is entitled to participate in the health, welfare, retirement and other fringe benefit plans which the Company makes available to management from time to time. Pursuant to the Avery Employment Agreement, Mr. Avery may terminate his employment at any time upon 60 days written notice to the Company and the Company may terminate Mr. Avery's employment other than for cause (as defined in the Avery Employment Agreement) at any time upon 60 days' written notice to Mr. Avery. If Mr. Avery is terminated for cause, he is entitled to any earned but unpaid salary at the date of termination and the contribution by the Company to the cost of Mr. Avery's participation in the Company's group medical and dental insurance plans as permissible under applicable law and plan terms. If the Company undergoes a change in control (as defined in the Avery Employment Agreement), and Mr. Avery is terminated, voluntarily or involuntarily, other than for cause after the date such change in control occurs, Mr. Avery is entitled to receive an amount equal to the aggregate base salary which Mr. Avery would have received had he been employed by the Company through (a) the last day of the Initial Term if such termination occurs during the Initial Term or (b) the last day of the Subsequent Term if such termination occurs during the Subsequent Term (the "General Severance Benefits"). If Mr. Avery's employment is terminated for reasons other than for cause, a change in control of the Company or voluntary termination by Mr. Avery, Mr. Avery is entitled to receive the General Severance Benefits as described above. If Mr. Avery dies or becomes disabled during the term of the Avery Employment Agreement, Mr. Avery's employment immediately terminates and he is entitled to any earned but unpaid salary. 49 Under the terms of the Avery Employment Agreement, upon the termination of Mr. Avery's employment by the Company other than for cause or the expiration of the Initial Term or the Subsequent Term, as applicable, the Company and Mr. Avery shall immediately enter into an agreement pursuant to which Mr. Avery shall be engaged as a consultant to the Company. Upon the engagement of Mr. Avery as a consultant as provided by the foregoing, the Company may also request that Mr. Avery continue to serve as Chairman of the Board. If the Company so requests, and if Avery agrees to so serve, the Company shall pay Mr. Avery an annual retainer of $50,000 for such service for so long as Mr. Avery serves in such position. Such retainer shall be in addition to any and all payments to be made to Avery with respect to his consultancy. The terms an conditions of such consultancy shall be identical to those set forth in the Consulting Agreement dated May 1, 1997 between the Company and Mr. Avery (the "Avery Consulting Agreement"), which terminated upon Mr. Avery's engagement by the Company as President, Chief Executive Officer and Chairman on the Board of Directors on June 3, 1998. The relevant provisions of the Avery Consulting Agreement are described below. On May 1, 1997, the Company and Mr. Avery entered into the Avery Consulting Agreement, pursuant to which Mr. Avery performed such consulting, advisory and related services for the Company as were reasonably requested by the Company form time to time for a consulting fee of $10,000 per month for a term of three years, which term could be extended upon mutual written agreement. Pursuant to the Avery Consulting Agreement, all shares of restricted stock granted to Mr. Avery became fully vested as of the date of the Avery Consulting Agreement and all options to purchase stock of the Company granted to Mr. Avery and held by Mr. Avery as of the date of the Avery Consulting Agreement became fully vested and exercisable until the expiration of such options. Pursuant to the Avery Consulting Agreement, the Company was required to reimburse Mr. Avery for all reasonable business expenses incurred by Mr. Avery in the performance of his duties. Mr. Avery was entitled to participate in and enjoy the benefit of the Company's retirement plans, but was not entitled to participate in the health, welfare, retirement and other fringe benefit plans, which the Company made available to management from time to time, except as his own expense. Pursuant to the Avery Consulting Agreement, Mr., Avery could terminate his consultancy at any time upon 60 days notice to the Company and the Company could terminate Mr. Avery's consultancy other than for cause (as defined in the Avery Consulting Agreement) at any time upon 60 days written notice to Mr. Avery. If Mr. Avery was terminated for cause, he would have been entitled to any earned but unpaid consulting fees at the date of termination. If Mr. Avery died or became disabled during the term of the Avery Consulting Agreement, Mr. Avery's consultancy would have immediately terminated. If Mr. Avery's employment was terminated for reasons other than for cause or due to death or disability, the Company would have continued to pay Mr. Avery his consulting fees for the duration of the term of the Avery Consulting Agreement. Vinciguerra Employment Agreements --------------------------------- On April 1, 1995, the Company and Mr. Vinciguerra, who became President and Chief Operating Officer of the Company on January 1, 1995, entered into an employment agreement (the "Vinciguerra Employment Agreement") that provides for Mr. Vinciguerra's employment as President and Chief Operating Officer of the Company at a salary of $185,000 per year, subject to an increase to $200,000 per year upon six (6) months of satisfactory performance, as determined by the Chief Executive Officer. Pursuant to the Vinciguerra Employment Agreement, Mr. Vinciguerra received 75,000 shares of restricted stock on January 1, 1995, which vest ratably over three years beginning January 1, 1996. Pursuant to the Vinciguerra Employment Agreement, the Company is required to reimburse Mr. Vinciguerra for all reasonable business expenses incurred by Mr. Vinciguerra in the performance of his duties. In addition, Mr. Vinciguerra is entitled to participate in the health, welfare, retirement and other fringe benefit plans which the Company makes available to management from time to time. Pursuant to the Vinciguerra Employment Agreement, Mr. Vinciguerra may terminate his employment upon 60 days written notice to the Company and the Company may terminate Mr. Vinciguerra's employment at any time other than for cause (as defined in the Vinciguerra Employment Agreement) upon notice to Mr. Vinciguerra. If the Company terminates Mr. Vinciguerra's employment other than for cause, he is entitled to a severance payment of six months' salary if he was employed for less than six months and twelve months' salary if he was employed for more than six months and the Company will continue pay Mr. Vinciguerra the salary and other benefits under the Vinciguerra Employment Agreement to the end of its term. If Mr. Vinciguerra dies or becomes disabled during the term of the Vinciguerra Employment Agreement, Mr. Vinciguerra's employment immediately terminates and he is 50 entitled to any earned but unpaid salary. If the Company undergoes a change in control (as defined in the Vinciguerra Employment Agreement) and Mr. Vinciguerra (i) is terminated by the Company or its successor for any reason other than death, disability or cause, or (ii) resigns because (A) there occurs a significant change in the nature or scope of Mr. Vinciguerra's responsibilities, authorities, powers, functions or duties as compared to the responsibilities, authorities, powers, functions or duties exercised by Mr. Vinciguerra prior to the change in control, (B) Mr. Vinciguerra is required to relocate outside of his current county of residence in order to maintain his employment after the change in control or (C) there is a decrease in the total annual compensation payable to Mr. Vinciguerra after the change in control, then Mr. Vinciguerra is entitled to an amount equal to eighteen months' base salary at the rate then in effect under the Vinciguerra Employment Agreement. If Mr. Vinciguerra is terminated for cause, he is entitled to any earned but unpaid salary at the date of termination and the contribution by the Company to the cost of Mr. Vinciguerra's participation in the Company's group medical and dental insurance plans as permissible under applicable law and plan terms. On May 17, 1996, the Company and Mr. Vinciguerra entered into an Amended and Restated Employment Agreement (the "Amended and Restated Vinciguerra Employment Agreement") which amended and restated the Vinciguerra Employment Agreement. Pursuant to the Amended and Restated Vinciguerra Employment Agreement, Mr. Vinciguerra was named as the Chief Executive Officer of the Company, but is no longer the Chief Operating Officer of the Company. In addition, pursuant to the Amended and Restated Vinciguerra Employment Agreement, Mr. Vinciguerra received an option to purchase 50,000 shares of the Company's Common Stock at an exercise price of $13.00, which option vests and becomes exercisable ratably over four years beginning on May 17, 1998. If Mr. Vinciguerra's employment is terminated by reason of death or by the Company for any reason other than for cause (as defined in the Company's 1994 Restricted Stock Plan or 1995 Stock Option and Incentive Plan, as appropriate), any restricted stock held by Mr. Vinciguerra shall become fully vested and any option held by Mr. Vinciguerra shall become fully vested and exercisable and may thereafter be exercised by Mr. Vinciguerra or Mr. Vinciguerra's legal representative or legatee until the expiration date of such option. If Mr. Vinciguerra's employment is terminated by the Company for cause, any shares of restricted stock that shall have not vested as of the date of such termination shall either be repurchased by the Company or forfeited by Mr. Vinciguerra, and any such option held by Mr. Vinciguerra shall immediately terminate and be of no further force and effect. If Mr. Vinciguerra terminates his employment for any reason other than death, any shares of restricted stock that shall have not vested as of the date of such termination shall either be repurchased by the Company or forfeited by Mr. Vinciguerra and any such option held by Mr. Vinciguerra may thereafter be exercised, to the extent it was exercisable on the date of such termination, for a period of three months or until the expiration date of such option, whichever is longer. All other provisions of the Vinciguerra Employment Agreement remain in effect. On June 1, 1998, Mr. Vinciguerra resigned as President and Chief Executive Officer of the Company. Accordingly, the Amended and Restated Vinciguerra Employment Agreement was terminated on that day. Ford Employment Agreement ------------------------- On September 23, 1996, the Company and Mr. Ford entered into an employment agreement (the "Ford Employment Agreement") that provides for Mr. Ford's employment as Vice President and Chief Financial Officer of the Company at a salary of $140,000 per year, subject to annual salary reviews by the Compensation Committee or the President of the Company, as appropriate. Pursuant to the Ford Employment Agreement, Mr. Ford received an option to purchase 30,000 shares of the Company's common stock at an exercise price of $9.38, which option vests and becomes exercisable ratably over four years beginning on September 23, 1997. Pursuant to the Ford Employment Agreement, the Company reimbursed Mr. Ford for all reasonable moving expenses in connection with Mr. Ford's relocation to New Hampshire and is required to reimburse Mr. Ford for all reasonable business expenses incurred by Mr. Ford in the performance of his duties. In addition, Mr. Ford is entitled to participate in the health, welfare, retirement and other fringe benefit plans which the Company makes available to management from time to time. Pursuant to the Ford Employment Agreement, the Company or Mr. Ford may terminate Mr. Ford's employment at will upon one year's written notice. If the Company undergoes a change of control (as defined in the Ford Employment Agreement) and Mr. Ford is terminated by the Company other than for cause within 12 months after such change of control occurs, Mr. Ford shall be entitled to an amount equal to 12 months' salary at the rate then in effect. If Mr. Ford dies or becomes disabled during the term of the Ford Employment Agreement, Mr. Ford's employment automatically terminates and he is entitled to any earned but unpaid salary. If Mr. Ford is 51 terminated for cause (as defined in the Ford Employment Agreement), he is entitled to any earned but unpaid salary at the date of termination and the contribution by the Company to the cost of Mr. Ford's participation in the Company's group medical and dental insurance plans as permissible under applicable law and plan terms. Chorney Severance Agreement --------------------------- The Company has an agreement with Mr. Chorney, dated October 1, 1993, that provides Mr. Chorney with certain severance benefits in the event that his employment is terminated by the Company other than by reason of death, disability or cause. Pursuant to this agreement, if Mr. Chorney's employment is terminated other than for any of the aforementioned reasons, he is entitled to receive for a period of eighteen months an aggregate amount equal to the greater of (i) $225,000 and (ii) the annual base salary which he would have received over an eighteen-month period commencing on the date of such termination. Stockholder Return Performance Graph Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company's Common Stock, based on the market price of the Company's Common Stock and assuming reinvestment of dividends, with the cumulative total return of companies within the NASDAQ Stock Market and the companies within the Dow Jones Industrial Technology Index. The calculation of total cumulative return assumes a $100 investment in the Company's Common Stock, the NASDAQ Stock Market and the Dow Jones Industrial Technology Index on July 1, 1993. The comparisons in this table are historical and are not intended to forecast or be indicative of possible future performance of the Common Stock of the Company. 52 Stockholder Return Performance Graph Ferrofluidics Performance Graph Plot Points 27-Jun-98
June 30, 93 June 30, 94 June 30, 95 June 30, 96 June 28, 97 June 27, 98 ----------- ----------- ----------- ----------- ----------- ----------- DJIA 100 108.41 154.42 152.71 164.1 144.09 NASDAQ 100 100.96 134.77 173.03 210.38 277.61 FERRO 100 38.89 71.3 100 62.04 30.79
53 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Solely for the purpose of calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant as set forth on the cover of this report it has been assumed that directors and executive officers of the Registrant are affiliates. The following table sets forth, to the best knowledge and belief of the Company, certain information regarding the beneficial ownership of the Company's Common Stock as of October 1, 1998 by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of the Company's Directors and nominees, (iii) each of the named executive officers in the Summary Compensation Table and (iv) all of the Company's executive officers and Directors as a group.
Shares Directors, Executive Officers Beneficially Percent of and 5% Stockholders Owned(1) Class(2) - ----------------------------------------------------------------------- ------------ ---------- Pioneering Management Corporation...................................... 401,000(3) 6.45% 60 State Street Boston, MA 02114 Paul F. Avery, Jr...................................................... 242,000(4) 3.89% Salvatore J. Vinciguerra............................................... 145,000(5) 2.33% Alvan F. Chorney....................................................... 18,750(6) * William B. Ford........................................................ 22,000(7) * Thomas J. Uhlig........................................................ 6,609 * Howard F. Nichols...................................................... 22,725(8) * Dean Kamen............................................................. 15,850(9) * Robert P. Rittereiser.................................................. 15,850(10) * Stephen B. Hazard...................................................... 12,000(11) * Dennis R. Stone........................................................ 14,100(12) * All directors and executive officers as a group (10 persons).............................................. 514,884(13) 8.28% - --------------------------
* Less than 1%. (1) Beneficial share ownership is determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Accordingly, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares the power to vote such security or the power to dispose of such security. The amounts set forth above as beneficially owned include shares of Common Stock owned, if any, by spouses and relatives living in the same home as to which beneficial ownership may be disclaimed. The amounts set forth above as beneficially owned also include shares of Common Stock which such persons had the right to acquire within 60 days of October 1, 1998 pursuant to stock options. 54 (2) Percentages are calculated on the basis of 6,218,207 shares of Common Stock outstanding as of October 1, 1998, together with applicable stock options for each stockholder. (3) Based on Amendment No. 4 to Schedule 13G filed with the SEC on January 6, 1998 and other information available to the Company. Pioneering Management Corporation has sole voting power with respect to all 401,000 shares. (4) Includes 205,000 shares of Common Stock which Mr. Avery may acquire upon the exercise of stock options, within 60 days of October 1, 1998. (5) Includes 50,000 shares of Common Stock which Mr. Vinciguerra may acquire upon the exercise of stock options, within 60 days of October 1, 1998. (6) Includes 18,750 shares of Common Stock which Mr. Chorney may acquire upon the exercise of stock options, within 60 days of October 1, 1998. (7) Includes 15,000 shares of Common Stock which Mr. Ford may acquire upon the exercise of Stock Options, within 60 days of October 1, 1998. (8) Includes 17,350 shares of Common Stock which Mr. Nichols may acquire upon the exercise of stock options, within 60 days of October 1, 1998. (9) Includes 15,100 shares of Common Stock which Mr. Kamen may acquire upon the exercise of stock options, within 60 days of October 1, 1998. (10) Includes 15,100 shares of Common Stock which Mr. Rittereiser may acquire upon the exercise of stock options, within 60 days of October 1, 1998. (11) Includes 9,000 shares of Common Stock which Mr. Hazard may acquire upon the exercise of stock options within 60 days of October 1, 1998. (12) Includes 9,000 shares of Common Stock which Mr. Stone may acquire upon the exercise of stock options within 60 days of October 1, 1998. (13) Includes shares of Common Stock which may be acquired by such persons upon the exercise of stock options, within 60 days of October 1, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Robert Rittereiser, a Director of the Company, is the Chairman of the Board of Directors and Chief Executive Officer of Gruntal & Co., L.L.C. In connection with the Sale, Gruntal & Co., L.L.C., billed the Company approximately $280,600 for its services as investment banker to the Company. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The consolidated financial statements of the Company have been included in Item 8 herein. (a) Financial Statement Schedules for the years ended June 27, 1998 and June 28, 1997 and June 30, 1996
Page ---- Schedule II - Valuation and Qualifying Accounts 61
55 Financial statement schedules other than that listed above are omitted because they are either not required or not applicable or the required information is shown in the financial statements or notes thereto. The above financial schedule does not include discontinued operations. (b) Reports on Form 8-K ------------------- No reports on Form 8-K have been filed by the Company during the last quarter of the year ended June 27, 1998. (c) Exhibits -------- 3.1 Restated Articles of Organization of the Registrant (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-18 (Registration No. 2-72394-B), filed May 19, 1981 (the "1981 Registration Statement"). 3.2 Articles of Amendment, filed November 19, 1980, increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 2.2 to the 1981 Registration Statement). 3.3 Articles of Amendment, filed February 19, 1981, further increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 2.3 to the 1981 Registration Statement). 3.4 Articles of Amendment, filed November 21, 1985, further increasing the authorized shares of Common Stock (incorporated by reference to Exhibit 4E to the Registrant's Registration Statement on Form S-2 (Registration No. 33-1000), filed October 18, 1985). 3.5 Articles of Amendment, filed November 25, 1987, eliminating certain liabilities of directors and reducing the vote required to effect certain corporate actions (incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the year ended 6/30/88). 3.6 Articles of Amendment, filed November 14, 1989, effecting reverse stock split and amending terms of Preferred Stock (incorporated by reference to Exhibit 3.6 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-33736), filed March 5, 1990 (the "1990 Registration Statement"). 3.7 By-Laws of the Registrant (incorporated by reference to Exhibit 4G to the Registrant's Form 10K for the year ended 6/30/90). 3.8 Certificate of Vote of Directors Establishing the Series A Junior Participating Cumulative Preferred Stock, par value $.001 per share, dated August 3, 1994.(1) 4.1 Shareholder Rights Agreement, dated as of August 3, 1994, between the Registrant and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to Registrant's current report on Form 8-K dated August 3, 1994).(1) 10.1 Revolving Loan and Security Agreement, dated June 30, 1994, by and among the Registrant and Bank of New Hampshire. 10.2 Letter of Credit Reimbursement Agreement, dated June 30, 1994 made by Ferrofluidics Corporation in favor of Bank of New Hampshire.(1) 10.3 Guarantee Agreement, dated June 30, 1994, between the Registrant, the Business Finance Authority of the State of New Hampshire and Bank of New Hampshire.(1) 10.4 Interbank Letter of Credit Agreement, dated June 30, 1994, between Bank of New Hampshire, a New Hampshire trust company and BayBank, a Massachusetts trust company.(1) 10.5 Master Term Note, dated June 30, 1994, by and among the Registrant and Bank of New Hampshire.(1) 56 10.6 Ferrofluidics Corporation Amended and Restated 1994 Restricted Stock Plan.(3) 10.7 Stipulation of Settlement, dated June 23, 1994, In re Ferrofluidics Corporation Securities Litigation, Civil Action No. 93-11976PBS, United States District Court, District of Massachusetts.(1) 10.8 Order and Final Approval of Settlement and Final Judgment, dated August 19, 1994, In re Ferrofluidics Corporation Securities Litigation, Civil Action No. 93-11976PBS, United States District Court, District of Massachusetts.(1) 10.9 Release and Settlement Agreement, dated April 13, 1994, between the Registrant and Molecular BioQuest, Incorporated.(1) 10.10 Consent and Undertaking of Ferrofluidics Corporation, dated June 20, 1997, In re the matter of the Securities and Exchange Commission vs. Ferrofluidics Corporation, et al, United States District Court, Southern District of New York.(4) 10.11 Amendment Agreement, dated December 23, 1987, to 1985 Letter of Credit Reimbursement Agreement and 1984 Letter of Credit Reimbursement Agreement between the Registrant and Fleet National Bank (incorporated by reference to Exhibit 10I to the Registrant's Form 10-K for the year ended 6/30/89). 10.14 Loan and Trust Agreement, dated September 1, 1984, among the Registrant, The Industrial Development Authority of the State of New Hampshire and State Street Bank and Trust Company, as Trustee (incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1984). 10.15 Assignment, Assumption and Amendment Agreement, dated June 18, 1991, by and among the Registrant, Chase Manhattan Capital Markets Corporation and Fleet Norstar Securities, Inc. (incorporated by reference to Exhibit 1000 to the Registrant's Form 10-K for the year ended 6/30/91). 10.16 Amendment Agreement, dated October 13, 1990, to 1984 Letter of Credit Reimbursement Agreement and 1985 Letter of Credit Reimbursement Agreement (incorporated by reference to Exhibit 10ZZ to the Registrant's Form 10-K for the year ended 6/30/90). 10.17 Escrow, Pledge and Security Agreement dated January 31, 1991, made by the Registrant in favor of State Street Bank and Trust Company, as Trustee, and Fleet National Bank (incorporated by reference to Exhibit 10.36 to the 1991 Registration Statement). 10.19 Amended and Restated Employment Agreement, dated May 17, 1996, between the Registrant and Salvatore J. Vinciguerra.(3) 10.20 Consulting Agreement, dated May 1, 1997, between the Registrant and Paul F. Avery, Jr.(4) 10.21 License Agreement, dated February 27, 1987, between the Registrant, Ferrofluidics GmbH and Ferrofluidics, Ltd. (incorporated by reference to the Exhibit to the Registrant's Form 8-K dated 5/13/87). 10.22 Deed relating to repayment of a promissory note dated August 25, 1994 by and among the Registrant, Rumpack Limited and Arbuthnot Latham and Co., Ltd.(1) 10.23 Release and discharge of certain guarantees and debentures and a Stock Pledge Agreement dated August 25, 1994 by and among the Registrant and Rumpack Limited and Arbuthnot Latham and Co., Ltd.(1) 10.24 Ferrofluidics Corporation Amended and Restated 1995 Stock Option and Incentive Plan.(3) 10.25 Ferrofluidics Corporation Amended and Restated 1995 Nonqualified Stock Option Plan.(3) 57 10.26 Employment Agreement, dated September 23, 1996, between the Registrant and William B. Ford.(4) 10.27 First Amendment to Note and Loan Agreement, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.28 Amended Master Term Note, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.29 Amendment to Mortgage, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.30 Amendment to Assignment of Leases, dated December 3, 1996, by and between the Registrant and Bank of New Hampshire.(4) 10.35 Form of Stock Purchase Agreement between the Registrant and certain Selling Stockholders (incorporated by reference to Exhibit 10.53 to Amendment No. 1, filed April 9, 1992, to the Registrant's Registration Statement on Form S-3 (Registration No. 33-46888), filed April 1, 1992 (the "April 1992 Registration Statement"). 10.36 Form of Stock Purchase Agreement between the Registrant and certain Selling Stockholders (incorporated by reference to Exhibit 10.54 to Amendment No. 2, filed April 30, 1992, to the April 1992 Registration Statement). 10.37 Form of Stock Purchase Agreement between the Registrant and certain Selling Stockholders (incorporated by reference to Exhibit 10.55 to Amendment No. 2 to the April 1992 Registration Statement). 10.55 Termination Agreement, dated November 25, 1993, between Registrant and Fuji Seiki, Inc. for the purpose of termination of The Patent, Technical Information and Trademark License Agreement, dated March 30, 1993, between the Registrant and Fuji Seiki, Inc.(4) 10.56 Preferred Vendor Agreement, dated November 30, 1993, between the Registrant and Fuji Seiki, Inc.(4) 10.57 Patent, Technical Information and Trademark License Agreement, dated November 30, 1993, between the Registrant and Fuji Seiki, Inc.(4) 10.58 Agreement, dated March 8, 1993, among the Registrant, Fuji Seiki, Inc., VSE Austria GmbH, and AP&T GmbH for the purchase of 80% of VSE GmbH by AP&T GmbH.(4) 10.59 Letter Agreement, dated September 15, 1993, between the Registrant and Dr. Ronald Moskowitz concerning Dr. Moskowitz' retirement from Ferrofluidics.(4) 10.62 Indemnification Agreement, dated October 1, 1993, between the Registrant and Alvan F. Chorney.(4) 10.63 Indemnification Agreement, dated October 1, 1993, between the Registrant and Stephen P. Morin.(2) 10.64 Severance Agreement dated October 1, 1993, between the Registrant and Alvan F. Chorney.(4) 10.66 Amended and Restated Insurance Loan Agreement, dated June 30, 1991, between the Registrant and Ronald Moskowitz (incorporated by reference to Exhibit 10R to the Registrant's Form 10-K for the year ended 6/30/91). 10.67 Amended and Restated Insurance Loan Agreement, dated May 31, 1989, between the Registrant and Frank Bloom (incorporated by reference to Exhibit 10.37 to the 1990 Registration Statement). 58 10.68 Form of Common Stock Purchase Warrant -- directors and key employees (incorporated by reference to Exhibit 10T to the Registrant's Form 10-K for the year ended 6/30/88). 10.69 Form of Common Stock Purchase Warrant -- employees (incorporated by reference to Exhibit 10U to the Registrant's Form 10-K for the year ended 6/30/88). 10.70 1984 Non-Qualified Stock Option Plan, as amended through December 15, 1992.(4) 10.71 1983 Employee Stock Purchase Plan, as amended through December 14, 1990 (incorporated by reference to Exhibit 4 to Post-Effective Amendment No. 1, filed January 23, 1991, to the Registrant's Registration Statement on Form S-8 (Registration No. 2-95090)). 10.72 Settlement Agreement and Release, dated June 30, 1993, between Nippon Ferrofluidics Corporation, Akira Yamamura, Koichi Goto, Yoshitada Akahori, Tadao Ishizawa, Atsumi Nakamura, Nobuo Yamamura, past and present members of NFC's Board of Directors and the Registrant.(4) 10.73 Stock Subscription Agreement, dated June 30, 1993 between the Registrant and Nippon Ferrofluidics Corporation pursuant to the acquisition of Nippon Ferrofluidics Corporation Common Stock by Ferrofluidics.(4) 10.74 Superseding 1993 Fluids License Agreement, dated June 30, 1993, between the Registrant and Nippon Ferrofluidics Corporation.(4) 10.75 Asset Purchase Agreement, dated September 23, 1998, by and between the Registrant and General Signal Technology Corporation.(5) 10.76 Employment Agreement, dated June 3, 1998, between the Registrant and Paul F. Avery, Jr.(5) 21 Subsidiaries of the Registrant(5) 23 Consent of Ernst & Young LLP(5) 27.1 Financial Data Schedule for 1998(5) 27.2 Financial Data Schedule for 1997, as restated(5) 27.3 Financial Data Schedule for 1996, as restated(5)
1 Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994. 2 Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993. 3 Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 4 Incorporated by reference to the designated exhibit of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 28, 1997. 5 Filed herewith. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorize, this 8th day of October, 1998. Ferrofluidics Corporation By: /s/ Paul F. Avery, Jr. -------------------------------------- Paul F. Avery, Jr. President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
Signatures Title Dated signed - ---------- ----- ------------ /s/ Paul F. Avery, Jr. President, Chief Executive Officer and 10/8/98 - ------------------------------- Chairman of the Board (Principal Paul F. Avery, Jr. Executive Officer) /s/ William B. Ford Vice President and Chief Financial 10/8/98 - ------------------------------- Officer (Principal Financial Officer) William B. Ford /s/ Stephen B. Hazard Director 10/8/98 - ------------------------------- Stephen B. Hazard /s/ Dean Kamen Director 10/8/98 - ------------------------------- Dean Kamen /s/ Howard F. Nichols Director 10/8/98 - ------------------------------- Howard F. Nichols /s/ Robert P. Rittereiser Director 10/8/98 - ------------------------------- Robert P. Rittereiser /s/ Dennis R. Stone Director 10/8/98 - ------------------------------- Dennis R. Stone
60 FERROFLUIDICS CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years Ended June 27, 1998, June 28, 1997 and June 30, 1996
Balance at Charges Balance at Beginning To Deductions End of of Period Expenses And Other (1) Period --------- -------- ------------- ---------- 1998 Reserve for doubtful accounts - trade $199,000 $185,000 $55,000 $329,000 ========= ======== ======== ======== 1997 Reserve for doubtful accounts - trade $320,000 $50,000 $171,000 $199,000 ========= ======== ======== ======== 1996 Reserve for doubtful accounts - trade $357,000 $28,000 $65,000 $320,000 ========= ======== ======== ========
(1) Uncollectible accounts written off, net of recoveries. 61 EX-10.75 2 ASSET PURCHASE AND SALE AGREEMENT ASSET PURCHASE AND SALE AGREEMENT Dated as of September 23, 1998 By and Between FERROFLUIDICS CORPORATION As Seller and GENERAL SIGNAL TECHNOLOGY CORPORATION As Buyer TABLE OF CONTENTS
Page 1. TERMS OF PURCHASE AND SALE.................................................. 1 1.1 Purchase and Sale of Assets............................................ 1 1.2 Excluded Assets........................................................ 2 1.3 No Assumption of Liabilities........................................... 3 1.4 Purchase Price......................................................... 3 1.5 Payment of Purchase Price.............................................. 3 1.6 Allocation of Purchase Price........................................... 3 1.7 Information............................................................ 3 1.8 Instruments of Transfer and Conveyance................................. 4 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER................................ 4 2.1 Corporate Organization................................................ 4 2.2 Authorization, Binding Obligation .................................... 4 2.3 No Violations or Defaults ............................................ 4 2.4 Assets of the Division ............................................... 5 2.5 Title and Authority................................................... 5 2.6 Intellectual Property Rights.......................................... 5 2.7 Authorization and Compliance with Laws ............................... 7 2.8 Personnel ............................................................ 7 2.9 Litigation ........................................................... 7 2.10 Insurance ............................................................ 7 2.11 Customers ............................................................ 7 2.12 Ordinary Course of Business .......................................... 8 2.13 Hazardous Materials .................................................. 8 2.14 Finder's Fee.......................................................... 8 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER ................................ 8 3.1 Corporate Organization................................................ 8 3.2 Authorization; Binding Obligation .................................... 8 3.3 No Violations or Defaults............................................. 8 3.4 Finder's Fee ......................................................... 9 4. CLOSING..................................................................... 9 4.1 The Closing........................................................... 9 - i - TABLE OF CONTENTS (continued) Page 4.2 Conditions to Buyer's Obligation to Closing........................... 9 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION ............................................................ 10 5.1 Survival of Representations and Warranties............................ 10 5.2 Buyer's Right to Indemnification...................................... 10 5.3 Limitation on Indemnity Obligations of the Seller..................... 10 5.4 Seller's Right to Indemnification..................................... 10 5.5 Indemnification Procedure............................................. 11 6. TRADEMARK LICENSE .......................................................... 11 7. EMPLOYEES .................................................................. 11 8. MEMC ELECTRONICS PURCHASE ORDERS............................................ 12 9. POST-CLOSING COVENANTS...................................................... 13 9.1 Return of Seller's Proprietary Materials and Property by Non-Continuing Employees............................................................. 13 9.2 Right to Use Intellectual Property and Equipment Post-Closing ........ 13 9.3 Seller's Covenant of Non-Disclosure and Non-Competition............... 13 9.4 Maintenance of Insurance.............................................. 15 9.5 Enforcement of Third Party Non-Disclosure and Non-Competition Agreements............................................................ 15 9.6 Warranties............................................................ 15 9.7 Maintenance of Supplies, Inventory and Equipment Post Closing......... 15 9.8 New Orders............................................................ 15 9.9 Facilities ........................................................... 16 9.10 Access to Employees................................................... 16 9.11 Pullthrough Seals .................................................... 16 9.12 Assignment of Crystal Puller Vision System License ................... 16 9.13 Further Assurances.................................................... 16 10. DEFINITIONS................................................................. 16 10.1 Affiliate............................................................. 17 10.2 Code.................................................................. 17 10.3 Person................................................................ 17 10.4 Environmental Law..................................................... 17 - ii - TABLE OF CONTENTS (continued) Page 10.5 Hazardous Material.................................................... 17 10.6 Benefit Arrangement................................................... 17 10.7 Employee Benefit Plan ................................................ 18 10.8 ERISA ................................................................ 18 11. MISCELLANEOUS PROVISIONS ................................................... 18 11.1 Entire Agreement...................................................... 18 11.2 Governing Law......................................................... 18 11.3 Non-Waiver............................................................ 18 11.4 Severability.......................................................... 18 11.5 Amendments............................................................ 19 11.6 Successors............................................................ 19 11.7 Notices .............................................................. 19 11.8 Assignment............................................................ 19 11.9 Interpretation; Syntax ............................................... 19 11.10 Transactional Costs .................................................. 20
- iii - ASSET PURCHASE AND SALE AGREEMENT --------------------------------- THIS ASSET PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered into effective as of the 23rd day of September, 1998 (the "Effective Date"), by and between FERROFLUIDICS CORPORATION, a Massachusetts corporation (the "Seller"), and GENERAL SIGNAL TECHNOLOGY CORPORATION, a Delaware corporation (the "Buyer"). WITNESSETH: WHEREAS, subject to the terms and conditions hereinafter set forth, the Seller wishes to sell and transfer to the Buyer certain of the assets of the Seller's Systems Division (the "Division"), which engages in the crystal growing furnace business (the "Business"), and the Buyer wishes to purchase and acquire from the Seller such assets. NOW, THEREFORE, in order to consummate said purchase and sale, and in consideration of the mutual representations, warranties, promises, covenants and conditions set forth in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. TERMS OF PURCHASE AND SALE 1.1 Purchase and Sale of Assets. Except as provided in Section 1.2 hereto, the Seller agrees to sell, convey, transfer, assign and deliver to the Buyer, and the Buyer agrees to purchase and acquire from the Seller, free and clear of any pledge, lien, option, security interest, mortgage, encumbrance, purchase rights, claims or any other limitations or restrictions whatsoever (collectively, "Encumbrances") and for the Purchase Price specified in Section 1.4 hereof, all of the Seller's right, title and interest in and to all assets, rights and contracts which are related solely to the Division, including, but not limited to, those items listed below (collectively, the "Assets"): (a) Subject to Section 9.12 hereto, all of the Seller's intellectual property relating solely to the Division (the "Intellectual Property"), including without limitation, the Intellectual Property listed on Schedule 1.1 (a) hereto. Notwithstanding anything contained herein to the contrary, it is agreed and understood by the parties hereto that the Intellectual Property does not include any rights whatsoever to any patents, patent applications, trade secrets, know-how, inventions, licenses, drawings, research protocols, marketing studies or any other technical information or technology owned or possessed by the Seller and relating to or used or held for use in the manufacturing and marketing of (i) Ferrofluids (the "Ferrofluids Business"), (ii) magnetic fluid seals and sealing subsystems (the "Sealing Business") or (iii) components for thin film deposition devices (the "Film Business"); (b) All of the Seller's inventory, in-house and at suppliers, (including all CZ60, CZ120, CZ150 and CZ300 (including feeders) and Vertical Bridgeman Furnaces), other than one completed CZ-300 crystal growing furnace and certain inventory and supplies retained by the Seller to fulfill customer orders in backlog as of the Closing Date, including without limitation, the inventory listed on Schedule 1.1(b) hereto; (c) All of the Seller's unfulfilled customer orders in backlog, which are listed on Schedule 1.1(c) hereto, remaining as of December 31, 1998, other than the purchase orders C.O. # S000256 and C.O. # S0001311 of MEMC Electronic Materials, Inc.; (d) To the extent that such covenants are assignable, all covenants of non-disclosure and non-competition executed or running in favor of the Seller or previously assigned to the Seller with respect to the Division or the Assets, as described or in the copies of such covenants as are attached to Schedule 1.1(d) hereto; (e) Copies of all of the Seller's customer correspondence and account histories relating to or used in the Division, including, without limitation, such information contained in sales office and engineering files; (f) All of the Seller's fixed assets used exclusively in the Division listed on Schedule 1.1(f) hereto (the "Equipment"); (g) All tapes, adhesives, lubricants, fasteners, electrical and mechanical hardware and all other materials treated as an expense in the course of the manufacture, assembly, testing, alignment, calibration, installation and operation of the Division products and purchasing information for same; (h) All of Seller's drawings, sketches, diagrams and all other forms of formal and informal documentation relating exclusively to the construction, operation and maintenance of the Division products in all existing storage formats; (i) All of the Seller's Manufacturing Information System files, data and documentation in electronic and physical hard copy media relating exclusively to the Division, including but not limited to, part master file, bills of materials, purchase part specifications, open and closed engineering change order and change request, sales order demand history, actual/standard costing vendor master, vendor/manufacture cross reference, part extended description, purchase order history and/or receipt history files; (j) All of the Seller's existing written procedures, process knowledge, notes, sketches, wiring lists, and marked drawings documented either formally or informally in all existing storage media, relating exclusively to Engineering, Sales, Customer Service, Manufacturing, Quality, Inspection, Production and Inventory Control, Purchasing, Test, Installation, Field Service, Process Development and other activities within the scope of the Division developed by the Division or other personnel; and (k) The right to use the "Ferrofluidics" name and the model numbers of the Seller's products produced in the Division, only to the extent described in Section 6 hereto. 1.2 Excluded Assets. The parties to this Agreement expressly understand and agree that the Seller is not selling, assigning, transferring or conveying to the Buyer any asset not listed in Section 1.1 or the Schedules thereto, including without limitation, the following assets (collectively, the "Excluded Assets"): 2 (a) Any and all assets, tangible or intangible, used or held for use in, or relating to the Ferrofluids Business, the Sealing Business or the Film Business or otherwise not exclusively used in the Division; (b) Any accounts receivable of the Seller arising out of the sale and delivery of goods and services, whether or not in respect of the Division or the Assets; (c) Any cash on hand or in bank accounts or cash equivalents; (d) Any insurance policies; (e) Any of the Seller's right, title and interest in any real estate, or (f) Any of the Seller's permits, licenses, certificates, approvals, registrations and authorizations relating to or used in the Division. 1.3 No Assumption of Liabilities. The Buyer does not assume and shall not be liable for any of the debts, obligations, liabilities, losses, damages, claims, deficiencies, costs and expenses (including, but not limited to, the amount of any settlement and all reasonable legal and other expenses incurred in connection with the investigation, prosecution or defense of the matter) of any nature whatsoever of the Seller, its stockholders or the Division in existence or relating to events or matters in existence (including the customer orders in backlog as of the Closing Date to be fulfilled by the Seller), or the conduct of the Division or the ownership, use, operation, acquisition or disposition of the Assets, on or before the Closing Date, or relating to the transactions contemplated hereby and the Seller shall indemnify the Buyer with respect to all such liabilities as set forth in Section 5.2 hereto. 1.4 Purchase Price. In full consideration of the Seller's performance of this Agreement and the sale, assignment, transfer, conveyance and delivery of the Assets, the Buyer shall pay to the Seller Ten Million Eight Hundred Thousand Dollars ($10,800,000) (the "Purchase Price"). 1.5 Payment of Purchase Price. The Purchase Price will be payable by the Buyer at the Closing to or on behalf of the Seller, by wire transfer of immediately available funds to the following account of the Seller: The Bank of New Hampshire, ABA#O11400071, for credit to Ferrofluidics Corporation, Account No. 206808021. 1.6 Allocation of Purchase Price. The Seller and the Buyer agree that the Purchase Price shall be allocated among the Assets and the Non-Competition Covenant set forth in Section 9.3(b) in accordance with their fair market values set forth in the attached Schedule 1.6, and that each party shall report such amounts on all Federal and state income tax returns in accordance with such allocation. 1.7 Information. The Seller and the Buyer each shall cooperate with the other after the Closing Date by providing without additional consideration and promptly upon request, copies of such records and other information regarding the Assets and the Division as may reasonably be requested from time to time by the other party, and in particular as is necessary for the preparation or audit of its Federal, state and local income and other tax returns, third party and reimbursement filings, audits, disputes, refund claims and other valid business purposes. 3 1.8 Instruments of Transfer and Conveyance. The sale, conveyance, transfer, assignment and delivery of the Assets, as provided in this Agreement and in the documents, instruments and certificates delivered in connection herewith or pursuant hereto (collectively, the "Operative Documents"), shall be effected by delivery by the Seller at the Closing of such deeds, bills of sale, endorsements, assignments, certificates, drafts, checks or other instruments of transfer and conveyance (collectively, the "Transfer Documents") as the Buyer and its counsel shall reasonably deem appropriate or desirable. The Seller agrees that it will, from time to time on and after the Closing Date, upon the Buyer's reasonable request and at its expense, promptly perform, execute, seal, acknowledge, deliver and file, and cause to be performed, executed, sealed, acknowledged, delivered and filed, all such further acts, deeds, certificates, assignments, transfers, conveyances, powers of attorney, assurances and other documents as may reasonably be requested by the Buyer to perfect the transfer of the Assets and to carry out the terms of the Operative Documents, provided that they are consistent with the Operative Documents. 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER As a material inducement to the Buyer to enter into each of the Operative Documents and the transactions contemplated thereunder, the Seller represents and warrants to the Buyer, such representations and warranties to be true and correct on the date hereof, as follows: 2.1 Corporate Organization. The Seller is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Massachusetts and has the power to own, lease and operate its properties and to carry on its business as now conducted. The Seller is duly qualified to do business as a foreign corporation in those jurisdictions, and the Seller is licensed or qualified to conduct its business or own its property in those jurisdictions where the failure to be so licensed or qualified would have a material adverse effect on the Division. 2.2 Authorization, Binding Obligation. The execution and delivery of the Operative Documents, the Transfer Documents and of each document, instrument and certificate required thereby, and the consummation of the transactions contemplated thereby, have been duly authorized by all requisite corporate action of the Seller. The Seller has the right, power, and authority to execute, deliver, and perform the Operative Documents, the Transfer Documents and each document, instrument and certificate required thereby or delivered in connection therewith, and the transactions contemplated thereby; and each Operative Document, Transfer Document and each document, instrument and certificate required thereby or delivered in connection therewith constitutes the legally valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or reorganization laws, or other laws relating to or affecting the availability of the remedy of specific performance or equitable principles of general application. 2.3 No Violations or Defaults. Except as disclosed on Schedule 2.3, the execution, delivery and compliance with and performance by the Seller of the Operative Documents, the Transfer Documents and each document, instrument and certificate delivered in connection therewith do not and will not (i) violate the Articles of Organization or By-laws of the Seller or any law, statute, rule, regulation, order, judgment or decree to which the Seller is subject; (ii) conflict with, or result in or constitute a default under, or breach or violation of, or grounds for termination of, or an event which, with notice or the lapse of time, or both, would constitute a default under, or breach or violation of, or grounds for termination of, any agreement or instrument to which the Seller is a party or by which 4 the Seller or any of the Assets may be bound, the termination of which would materially adversely affect the Division or the Assets; (iii) result in the creation or imposition of any Encumbrance upon any of the Assets; (iv) require any approval or consent of any person under the organizational documents of the Seller or any contract, agreement or other instrument to which the Seller is a party or by which the Seller or the Assets are bound or to which the Seller or the Assets are subject, the lack of which approval or consent would materially adversely affect the Division; or (v) result in the termination, modification or cancellation of or any requirement to transfer to the Buyer of any license, permit, franchise, governmental authorization, permit, contract, clearance or approval, the absence of which would materially adversely affect the Division. 2.4 Assets of the Division. Except as disclosed on Schedule 2.4, the Intellectual Property constitutes all the material patents, patents pending, applications for patents, trademark registrations, applications for trademark registrations, tradenames, service marks, copyright registrations or applications; technical documentation, prints, drawings, specifications and notes thereto; trade secrets, know-how, show-how, manufacturing methods and processes, and all licenses, claims, studies and undertakings related thereto that are used in the operation of the Division. 2.5 Title and Authority. The Seller has good and marketable title to the Assets and has full legal right, power, and authority to sell, assign, transfer and deliver the Assets free and clear of all Encumbrances. All of the Assets are free and clear of all Encumbrances. 2.6 Intellectual Property Rights. (a) Except as listed in Schedule 2.6(a) attached hereto: (i) the Seller, to the best of its knowledge, owns or has the right to use, free and clear of any payment, encumbrance, title defect, lien or claim of ownership by any third party, such Intellectual Property as is necessary to operate the Division as now being operated and, to the best of Seller's knowledge, is not infringing upon or in conflict with the asserted rights of others in such Intellectual Property and is not making unauthorized use of any confidential information or trade secrets of any other person; and (ii) there are no written claims or demands of any other person, firm, corporation or business entity pertaining to any of the Intellectual Property and no proceedings have been instituted which challenge any of the rights of the Seller in respect thereto. The Seller, to the best of its knowledge, has the right to use, free and clear of claims or rights of others, designs, manufacturing or other processes and documentation therefore, computer software, systems, data compilations, research results and other information required for or incident to the Division as presently conducted. (b) All Intellectual Property owned by Seller is freely transferable to Buyer. All licenses or other agreements under which Seller is granted rights in Intellectual Property are in full force and effect, there is no material default by any party thereto and, except as set forth on Schedule 2.6(b), all of Seller's rights thereunder are freely assignable or, where not freely assignable, consent for such assignment to Buyer has been obtained. The Seller hereby agrees that it will execute the requisite assignment documents, and will comply with any contract provisions governing the transfer of any of the Intellectual Property being transferred hereby, to legally transfer ownership of the Intellectual Property being purchased hereby to the Buyer. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer. (c) All licenses or other agreements under which Seller has granted rights to others in Intellectual Property owned or licensed by Seller are listed in Schedule 2.6(c). All of said 5 licenses or other agreements are in full force and effect, there is no material default by any party thereto, and, except as set forth on Schedule 2.6(c), all of Seller's rights thereunder are freely assignable. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer. (d) The Seller represents that, to the best of its knowledge, there are currently no claims, actions, suits, or proceedings, either pending or threatened against the Seller or its Affiliates alleging that any of the Intellectual Property being transferred hereby infringes any patents, or violates any other intellectual property rights, of any third parties, or alleging that any of the Intellectual Property being transferred hereby are invalid or unenforceable. (e) The Seller represents that it has no knowledge, or reason to believe, that the past or present conduct of any third parties infringes, or otherwise violates, any of the Intellectual Property rights being transferred hereby. (f) The Seller represents that it has not alleged infringement, or any other violations, of any of the Intellectual Property being transferred hereby by any third parties; that the Seller has not sent any communication(s) to a third party requesting that such third party cease and desist conduct based on potential violation(s) of any of the Intellectual Property being transferred hereby; and that the Seller has not sent any communication(s) to a third party suggesting or implying that such third party needs to enter into a license agreement under any of the Intellectual Property being transferred hereby. (g) The Seller represents that none of the Intellectual Property being transferred hereby is the subject of any judgment(s), order(s), or other ruling(s) that would limit the Buyer's use of such property. (h) The Seller, to the best of its knowledge, represents that it has not engaged in any conduct, or omitted to perform any act, the result of which could invalidate, or adversely affect the enforceability of, any of the Intellectual Property being transferred hereby. (i) With regard to any issued U.S. patents, and any pending U.S. patent applications, being transferred hereby, the Seller represents that, to the best of its knowledge, it has disclosed to the U.S. Patent Office all prior art, which is material to the patentability of the claims of each such patent and patent application, that was known to the Applicants (including the Seller, the inventors, and the Seller's and/or inventors' representatives) during the prosecution of each such patent and patent application; that it has disclosed the best mode for carrying out the invention(s) claimed in each such patent and patent application known to the inventors at the time of initial filing for each such patent, or of each such patent application; and that it has paid all required fees and performed all required acts necessary for maintaining each such patent and patent application. (j) The Seller represents and warrants that, to the best of its knowledge, any trade secrets being transferred hereby were developed by the Seller and its employees under appropriate secrecy safeguards, are not generally known in the field of silicon crystal growing or semiconductor processing, have been used for commercial advantage, have been maintained by the Seller subject to appropriate secrecy safeguards, and lend a competitive advantage over those without knowledge of such trade secrets. 6 (k) Subject to Section 9.2 hereof, the Seller shall continue to maintain any trade secrets transferred hereby under the appropriate secrecy safeguards, and, after such transfer, shall cease the use of any such trade secrets, until such time as they become publicly known or available through no unauthorized acts or conduct of the Seller. Notwithstanding the foregoing, information, such as customer lists and materials specifications, which directly pertains to the Seller's existing Sealing Business shall continue to be available to the Seller after the transfer of such trade secrets. (l) The Seller shall use its commercially reasonable efforts to obtain all governmental or regulatory approvals, consents, or grants, and make or cause to be made (or use its best efforts to assist the Buyer in making) any declarations, filings, and registrations with governmental or regulatory authorities (including those necessary for continued prosecution of any pending patent applications, and necessary for any subsequent reissue or reexamination proceedings concerning any of the patents, being transferred hereby), which are necessary to consummate the transactions contemplated herein. 2.7 Authorization and Compliance with Laws. The Seller represents that it presently holds all permits, licenses, certificates, approvals, registrations and authorizations (collectively, the "Permits") necessary for the ownership of the Assets, excepting only Permits the absence of which would not materially adversely affect the Assets, and which can be obtained without additional material cost. To the Seller's best knowledge, the Seller has not violated and is in full compliance with all applicable law and regulations, including all laws and regulations relating to employment, occupational safety and environmental matters. 2.8 Personnel. There are no agreements by or on behalf of the Seller with any union, trade association or other employee representative organization with respect to the employees of the Division. 2.9 Litigation. Except as set forth on the attached Schedule 2.9, with respect to the Division or the Assets, the Seller has no knowledge or actual notice of any legal actions, suits, proceedings or arbitrations pending against the Seller nor of any claims, controversies or investigations pending or threatened against the Seller, and the Seller is not a party to or subject to any judgment, order, writ, injunction or decree materially adversely affecting the Division, or encumbering the Assets. 2.10 Insurance. The Seller represents that it has had, and currently has general liability and product liability insurance covering its operations through the policies listed in Schedule 2.10. The Seller represents that such policies are in full force and effect, all premiums due thereon have been paid, and that the Seller has complied in all material respects with the provisions of such policies. The Seller has not recalled, at any time, any of the products still produced by the Seller in the Division. 2.11 Customers. Except as set forth in Schedule 2.11, to the best of the knowledge of the Seller, no material customer has canceled or otherwise terminated, or threatened in writing to cancel or otherwise terminate, its relationship with the Division or has during the past 12 months decreased materially, or threatened in writing to decrease materially, its orders to the Division, primarily because of issues of product quality. The Seller will provide the Buyer with copies of all warranty claims and written customer complaints concerning product quality received by the Seller with respect to the Division within the previous three years from the date hereof. The Seller 7 acknowledges that the Buyer has not had the opportunity to contact the Seller's customers of the Division. 2.12 Ordinary Course of Business. Since June 30, 1998 and continuing through the Closing Date, the Division has been carried on only in the normal and ordinary course and the Seller has maintained its books of account and records relating to the Division in its usual, regular and ordinary manner. 2.13 Hazardous Materials. The Seller has not used Hazardous Materials in connection with the Division and is not required pursuant to any Environmental Law to report any inventory or release of Hazardous Material in connection with the Division. 2.14 Finder's Fee. The Seller has no liability or obligation to pay any fees or commissions to broker, finder or agent relating to or in connection with the transactions contemplated by the Operative Documents, for which the Buyer could become liable or obligated. 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER As a material inducement to the Seller to enter into each of the Operative Documents and the transactions contemplated thereunder, the Buyer hereby represents and warrants to the Seller, such representation and warranties to be true and correct on the date hereof, as follows: 3.1 Corporate Organization. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the power to own and operate its properties and carry on its business as now conducted and as contemplated by the transactions which are the subject of the Operative Documents. 3.2 Authorization; Binding Obligation. The execution and delivery of the Operative Documents, the Transfer Documents and of each document, instrument and certificate required thereby, and the consummation of the transactions contemplated thereby, have been duly authorized by all requisite corporate action of the Buyer. The Buyer has the right, power, and authority to execute, deliver, and perform the Operative Documents, the Transfer Documents and each document, instrument and certificate required thereby or delivered in connection therewith, and the transactions contemplated thereby; and each Operative Document, Transfer Document and each document, instrument and certificate required thereby or delivered in connection therewith constitutes the legally valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or reorganization laws, or other laws relating to or affecting the availability of the remedy of specific performance or equitable principles of general application. 3.3 No Violations or Defaults. The execution, delivery and compliance with and performance by the Buyer of the Operative Documents and each document, instrument and certificate delivered in connection therewith do not and will not: (i) violate the Articles of Organization or By-laws of the Buyer or any law, statute, rule, regulation, order, judgment or decree to which the Buyer is subject; (ii) conflict with, or result in or constitute a default under, or breach or violation of, or grounds for termination of, or an event which, with notice or the lapse of time, or both, would constitute a default under, or breach or violation of, or grounds for termination of, any agreement or instrument to which the Buyer is a party or by which the Buyer may be bound; or (iii) 8 require any approval or consent of any person or entity under the organizational documents of the Buyer or any contract, agreement or other instrument to which the Buyer is a party or by which the Buyer is bound or to which the Buyer is subject. 3.4 Finder's Fee. The Buyer has no liability or obligation to pay any fees or commissions to any broker, finder or agent relating to or in connection with the transactions contemplated by the Operative Documents, for which the Seller could become liable or obligated. 4. CLOSING 4.1 The Closing. The purchase and sale hereunder shall take place at a closing (the "Closing") to be held at the offices of Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109 on September 23, 1998 (the "Closing Date"), or on such other date and at such other time as may be mutually agreed upon by the Buyer and the Seller. 4.2 Conditions to Buyer's Obligation to Closing. The obligation of the Buyer to consummate the transactions contemplated by this Agreement is subject to satisfaction of the following conditions, on or prior to the Closing Date. (a) The Seller shall deliver a General Assignment and Bill of Sale in the form attached hereto as Exhibit A executed by the Seller, and such other Transfer Documents and agreements as the Buyer deems reasonably necessary to effectuate the transfer of the Assets to the Buyer and to vest good and marketable title to the Assets in the Buyer, free and clear of all Encumbrances, including those documents designated herein for delivery by the Seller and provided for as Schedules and/or Exhibits hereto and thereto; (b) The Seller shall deliver corporate resolutions of the Seller, certified as of the Closing Date by an officer of the Seller, authorizing the Seller to undertake the transactions contemplated by the Operative Documents and authorizing the Seller's signatories to execute the Operative Documents, the Transfer Documents and each document, instrument and certificate contemplated thereunder, such resolutions having been duly adopted and being in full force and effect on the Closing Date; (c) The Seller shall deliver Non-Competition Agreement executed by Paul F. Avery, Jr. pursuant to Section 9.3(b) hereto; and (d) The Seller shall have caused the Bank of New Hampshire (the "Bank") to deliver documentation satisfactory to the Buyer, pursuant to which the Bank shall have covenanted to the release of the Assets as collateral upon the Closing, pursuant to (i) a certain Revolving Loan and Security Agreement by and between the Seller and the Bank, dated June 24, 1994, (ii) a $800,000 installment note to the Bank expiring January 25, 2001, and (iii) a $1,500,000 promissory note to the Bank due November 26, 1998, and the termination of any financing statements in connection therewith. 9 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 5.1 Survival of Representations and Warranties. All the representations and warranties contained in the Operative Documents and in the Schedules and Exhibits thereto shall survive the execution and delivery of and the Closing under the Operative Documents for a period of twenty-four (24) months. 5.2 Buyer's Right to Indemnification. The Seller hereby agrees to indemnify and hold harmless the Buyer its officers, employees, agents, successors and assigns from and against (i) any and all losses, obligations, liabilities, damages, claims, deficiencies, costs and expenses (including, but not limited to, the amount of any settlement and all reasonable legal and other expenses incurred in connection with the investigation, prosecution or defense of the matter), which may be asserted against or sustained or incurred by the Buyer in connection with, arising out of, or relating to (a) any events or matters in existence (including the customer orders in backlog as of the Closing Date to be fulfilled by the Seller), or the conduct of the Division or the ownership, use, operation, acquisition or disposition of the Assets, on or before the Closing Date (the "Pre-Closing Liabilities"), (b) any inaccuracy in, misrepresentation or breach of any of the representations, warranties, agreements and covenants made by the Seller in the Operative Documents or in any Schedule or Exhibit thereto; and (ii) any and all costs and expenses (including, but not limited to, reasonable legal expenses) incurred by the Buyer in connection with the enforcement of its rights under the Operative Documents. 5.3 Limitation on Indemnity Obligations of the Seller. (a) Notwithstanding anything to the contrary in this Agreement, and except as set forth in Section 5.3 (b) below, the Buyer shall not be entitled to indemnification pursuant to Section 5.2 hereto until the aggregate amount of all amounts paid and all other damages and losses of any kind suffered by the Buyer exceeds $50,000, whereupon the Buyer shall be entitled to indemnification pursuant to such Section 5.2 for all such amounts paid, damages and losses exceeding $50,000 in the aggregate up to an aggregate total amount of $2,000,000 indemnity under said Section 5.2. (b) The limitations set forth in Section 5.3 (a) above shall not apply to any amounts paid and other damages and losses suffered arising out of, based upon or resulting from any, (i) Pre-Closing Liabilities or (ii) costs and expenses (including, but not limited to, reasonable legal expenses) incurred by the Buyer in connection with the enforcement of its rights under the Operative Documents. 5.4 Seller's Right to Indemnification. The Buyer hereby agrees to indemnify and hold harmless the Seller from and against (i) any and all losses, obligations, liabilities, damages, claims, deficiencies, costs and expenses (including, but not limited to, the amount of any settlement and all reasonable legal and other expenses incurred in connection with the investigation, prosecution or defense of the matter), which may be asserted against or sustained or incurred by the Seller in connection with, arising out of, or relating to any inaccuracy in, misrepresentation or breach of any of the representations, warranties, agreements and covenants made by the Buyer in the Operative Documents or in any Schedule or Exhibit thereto; and (ii) any and all costs and expenses (including, but not limited to, reasonable legal expenses) incurred by the Seller in connection with the enforcement of its rights under the Operative Documents. 10 5.5 Indemnification Procedure. Any party claiming any right of indemnification under the Operative Documents ("Indemnified Party"), including any rights as a result of a third party's claim or threatened claim against the Indemnified Party (a "Third Party Claim"), shall promptly notify the other party ("Indemnifying Party") pursuant to the provisions hereof, specifying the nature of the claim and the amount or the estimated amount thereof, and giving notice of any fact upon which the Indemnified Party intends to base a claim for indemnification hereunder (a "Claim Notice"). In the case of a Third Party Claim, the Indemnifying Party shall have thirty (30) days (or, if shorter, a period to a date not less than the date when a responsive pleading or other document is required to be filed giving effect to any available extension) (the "Notice Period") to notify the Indemnified Party (a) whether or not it disputes its liability for indemnification of the Third Party Claim and (b) if liability is not disputed, whether or not it desires to defend the Indemnified Party. If the Indemnifying Party elects to defend by appropriate proceedings, such proceedings shall be promptly settled or prosecuted to a final conclusion in such a manner as is reasonably calculated to avoid any risk of damage to the Indemnified Party or the Assets; and all costs and expenses of such proceedings and the amount of any judgment or settlement shall be paid by the Indemnifying Party. If the Indemnifying Party has disputed its liability for the Third Party Claim, as provided above, the Indemnified Party shall have the right to control the defense or settlement of such action, in its discretion, and shall be reimbursed by the Indemnifying Party for the costs and expenses of such defense if it shall thereafter be found that such Third Party Claim was subject to indemnification by the Indemnifying Party hereunder. In the event that the Indemnified Party should have a claim for indemnification hereunder which does not involve a Third Party Claim being asserted against it or sought to be collected by a third party, the Indemnified Party shall promptly send a Claim Notice with respect to such claim to the Indemnifying Party, such notice containing a statement that the Indemnifying Party must notify the Indemnified Party within one hundred and twenty (120) days if it disputes the claim, or pay the claim if it does not provide such notice. If the Indemnifying Party does not notify the Indemnified Party within one hundred and twenty (120) days following its receipt of such Claim Notice that it disputes such claim, the Indemnifying Party shall pay the amount thereof to the Indemnified Party. 6. TRADEMARK LICENSE. Effective as of the Closing Date and until the fifth (5th) anniversary of the Closing Date, the Buyer and its affiliates shall have the exclusive, royalty free right and license to use the trade name "Ferrofluidics Crystal Growing Systems" and the model numbers of the Seller's products produced in the Division, solely for the purposes of identifying those products formerly produced by the Seller in the Division as then currently being produced by the Buyer. Nonetheless, the Buyer shall have the perpetual right to represent that it has acquired the Division from the Seller. All other uses of the "Ferrofluidics" name, including without limitation, any name that includes "Ferro," "Ferrofluid," "Ferrofluidic," "Ferromedic," or "FerroSound," by the Buyer or any of its affiliates, whether now existing or hereinafter arising, shall be strictly prohibited. The Buyer shall not use such name and model numbers in such a manner so as to give the impression that the Buyer is in fact the Seller or has acquired or become the corporate successor of the Seller. 7. EMPLOYEES (a) The Seller's employees or independent contractors listed on Schedule 7 are those employees or independent contractors whose services or responsibilities relate to the Division 11 (collectively, the "Division Workers"). Except as provided below, the Seller shall continue to retain the Division Workers' services following the Closing Date until at least December 31, 1998; provided, however, that the Seller may terminate a Division Worker's services during such period (i) for cause upon providing at least three business days prior written notice to the Buyer or (ii) at such time as the Seller determines the services of such Division Worker are no longer needed by the Seller upon providing at least ten days prior written notice Buyer. The Buyer shall have the right, but not the obligation, to employee such Division Worker after terminating employment with the Seller. The Seller shall be exclusively responsible to provide compensation and benefits to Division Workers for all periods of engagement with the Seller, including but not limited to accrued vacation, bonuses, overtime, welfare coverage and retirement benefits, and shall discharge these obligations for Division Workers retained by the Buyer under Section 7(b) below pursuant to existing plan terms and applicable legal requirements. Any other liabilities, costs and expenses relating to services provided at any time by Division Workers while employed by the Seller, including but not limited to workplace injuries and worker negligence, other than with respect to services provided to or on behalf of the Buyer, shall not be the Buyer's responsibility. (b) The Buyer shall employ at least ten Division Workers chosen in its sole discretion after termination by the Seller. If the Buyer offers employment or a consulting arrangement to a Division Worker, the Seller shall (i) terminate the Division Worker's services and (ii) pay any termination related expenses, if any. The Seller shall encourage the Division Workers who are offered employment by the Buyer to accept such employment with the Buyer. The Seller shall assume exclusive responsibility for paying all termination related expenses, if any, triggered in connection with this Agreement. (c) The Seller will refrain and will use its best efforts to cause its Affiliates to refrain from offering employment or other engagements to Division Workers from the Closing Date through December 31, 1998, without the prior written consent of the Buyer. Thereafter, the Seller or any Affiliate may offer employment to any Division Worker who is not offered or did not accept employment with the Buyer prior to January 1, 1999. The Seller agrees to provide the Buyer, in a complete, diligent and timely manner after the Closing Date all information regarding the Division Workers as the Buyer may reasonably request, including but not limited to compensation, service and other information as may be appropriate or useful in determining to whom and on what terms it will extend offers of employment or other engagements, provided, however, that the Buyer shall not request the Seller to provide and the Seller shall not provide the Buyer with any recommendations or opinions with respect to which Division Workers the Buyer should extend such offers of employment. The Seller shall make Division Workers reasonably available for the Buyer solicitation from the Closing Date to December 31, 1998. (d) Nothing herein, express or implied, is intended to confer on any Division Worker or his or her legal or other representatives or beneficiaries any rights or remedies of any nature or kind whatsoever under or by reason of this Agreement including, without limitation, any right to continued employment or to any severance or other benefits from the Seller, the Buyer or any of their respective Affiliates. 8. MEMC ELECTRONICS PURCHASE ORDERS. As of December 31, 1998, to the extent the purchase orders C.O. # S000256 and C.O. # S0001311 from MEMC Electronic Materials, Inc. (the "MEMC Purchase Orders") have not been fulfilled by the Seller, the Seller shall place a purchase order with the Buyer (the "Seller Purchase Order") to manufacture those products not yet 12 delivered by the Seller under the MEMC Purchase Orders. The MEMC Purchase Orders shall remain the property of the Seller and the Seller shall have the full responsibility to bill and collect the MEMC Purchase Orders and provide all services required under the warranty of such products. The Seller Purchase Order placed with the Buyer by the Seller shall be priced according to the following formula: P = (CSP-SC-$10,000) x 0.5, where P is the price per machine paid to the Buyer, CSP is the price per machine charged to the customer (including options, if any) and SC is the standard cost of the machine (including options, if any) as recorded in the Seller's cost accounting system. Upon receipt of written notice from the Buyer as described below, the Seller shall, commencing on November 30, 1999, use its commercially reasonable efforts to obtain the consent of MEMC Electronic Materials, Inc. ("MEMC") to the assignment of the MEMC Purchase Orders to the Buyer; provided, however, that in the event the Seller obtains such consent prior to December 31, 1999, such assignment shall not become effective until December 31, 1999. If the Buyer intends to acquire the MEMC Purchase Orders, the Buyer shall provide the Seller with written notice to such effect no later than November 30, 1999. 9. POST-CLOSING COVENANTS 9.1 Return of Seller's Proprietary Materials and Property by Non-Continuing Employees. The Seller hereby agrees that it will cause any of its employees who do not continue their employment with the Buyer to return to the Seller (for the benefit of the Buyer) forthwith following the Closing all proprietary information and property of the Seller in such employees' possession or control. 9.2 Right to Use Intellectual Property and Equipment Post-Closing. From the Closing Date, the Buyer hereby agrees that the Seller shall have the right to utilize at no cost to the Seller, the Intellectual Property and the Equipment to the extent, and only to such extent, reasonably necessary for the Seller (i) to fulfill customer orders in backlog as of the Closing Date until December 31, 1998 and (ii) to fulfill its warranty obligations with respect to products relating to the Division sold or produced by the Seller on or before December 31, 1998 or sold pursuant to purchase orders C.O. #S000256 and C.O. #S0001311. The Seller hereby agrees that it shall not utilize the Assets other than pursuant to this Section 9.2 and Section 9.8 for any reason whatsoever. If the inventory retained by the Seller is insufficient for the Seller to fulfill the customer orders in backlog as of the Closing Date, the Buyer shall have no obligation to provide inventory to the Seller and the Seller shall be fully responsible for procuring such inventory. 9.3 Seller's Covenant of Non-Disclosure and Non-Competition. The Seller acknowledges that the success of the business of the Buyer (including without limitation after giving effect to the sale and transfer of the Assets to the Buyer at the Closing) depends upon both the absence of competition from the Seller and Paul F. Avery, Jr., and the continued preservation of the confidentiality of certain information possessed by the Seller and Paul F. Avery, Jr., that an absence of such competition and the preservation of the confidentiality of such information is an essential premise of the bargain between the Seller and the Buyer, and that the Buyer would be unwilling to enter into this Agreement in the absence of this Section 9.3. Accordingly, the Seller hereby agrees with the Buyer as follows: (a) Confidentiality Covenant. Neither the Seller nor Paul F. Avery, Jr. will, at any time, directly or indirectly, without the prior written consent of the Buyer, disclose or use, in any way harmful to the business, operations, assets, prospects or condition, financial or otherwise, of the 13 Buyer, or otherwise contrary to the interests of the Buyer, any proprietary or Confidential Information (as defined below) involving or relating to the Division past, present or future, actual or prospective; provided, however, that such information shall not include any information known generally to the public (other than as a result of disclosure in violation hereof by the Seller or Paul F. Avery, Jr.); and provided, further, that the provisions of this Section 9.3(a) shall not prohibit any disclosure required by law in connection with any judicial or administrative proceeding or inquiry. "Confidential Information" includes, but is not limited to, information relating to the Division which is not generally known to those outside of the Division relating to (i) the business, conduct or operations of the Division, (ii) any materials, apparatus, processes, methods, ways of business, programs, formulae, technology, research, development, or Intellectual Property, (iii) any customer lists, or customer requirements and preferences (iv) any supplier lists or supplier requirements and preferences, (v) financial information or business plans, or (vi) any other information about or generated by the Seller which could, if disclosed, be useful to any competitors of the Division. Notwithstanding the foregoing, it shall not be a violation of this Section 9.3(a) for the Seller to disclose or use Confidential Information, in the ordinary course of business, in connection with (i) the fulfillment of its customer orders for the sale of products or services relating to the Division existing as of the Closing Date on or before December 31, 1998, (ii) the performance of its warranty obligations with respect to products relating to the Division sold or produced by the Seller on or before December 31, 1998 or sold pursuant to customer orders C.O. #S000256 and C.O. #S0001311, (iii) the acceptance of orders for and perform repair work relating to rotary feedthroughs with magnetic fluid sealing, and (iv) manufacturing and selling products, providing services or conducting any other type of activity relating to the Ferrofluids Business, the Sealing Business, the Film Business, to or with any customer, without exception. This Confidentiality covenant shall survive the Closing. (b) Non-Competition Covenant. For a period of five (5) years following the Closing Date (the "Non-Competition Term"), neither the Seller nor Paul F. Avery, Jr. shall, directly or indirectly, (i) develop, acquire, own, manage, operate, control or participate directly or indirectly in any manner in the acquisition, ownership, management, operation or control of, or be connected as an officer, employee, partner, director, principal, consultant, agent or otherwise with, or have any financial interest in, or aid or assist anyone else in the conduct of, any business, venture or activity relating to or involving the Business regardless of location (including the provision of replacement or spare parts relating to the Business), (ii) recruit or otherwise seek to induce any employee of the Buyer to terminate his or her employment or violate any agreement with or duty to the Buyer or hire any such employee, (iii) solicit or encourage any Person who is a customer or supplier of the Buyer to terminate its relationship with the Buyer, or (iv) encourage any of the Division Workers to take up employment with any Person whose activities, products or services are competitive with those of the Kayex division of the Buyer. Notwithstanding the foregoing, it shall not be a violation of this Section 9.3(b) for the Seller to, during the Non-Competition Term, (i) fulfill its customer orders for the sale of products or services relating to the Division existing as of the Closing Date on or before December 31, 1998, (ii) perform its warranty obligations with respect to products relating to the Division sold or produced by the Seller on or before December 31, 1998 or sold pursuant to customer orders C.O. #S000256 and C.O. #SOOO1311, (iii) accept orders for and perform repair work relating to rotary feedthroughs with magnetic fluid sealing, and (iv) manufacture and sell products, provide services or conduct any other type of activity relating to the Ferrofluids Business, the Sealing Business, the Film Business, to or with any customer, without exception. This Non-Competition Covenant shall survive the Closing. As a condition precedent to the Buyer's obligation to close under this Agreement, Paul F. Avery, Jr. shall deliver to the Buyer at Closing a Non- 14 Competition Agreement incorporating the foregoing terms, in substantially the form of Exhibit B attached hereto. (c) Enforcement. The Seller acknowledges and agrees that, because the legal remedies of the Buyer may be inadequate in the event of a breach of, or other failure to perform, any of the covenants and obligations set forth in this Section 9.3, the Buyer may, in addition to obtaining any other remedy or relief available to it (including without limitation consequential and other damages at law), enforce this Section 9.3 by injunction and other equitable remedies. The Seller also acknowledges and agrees that no breach by the Buyer of, or other failure by the Buyer to perform, any of the covenants and obligations of the Buyer under this Agreement or otherwise shall relieve the Seller of its obligations under this Section 9.3. (d) Severability; etc. The parties agree that the provisions set forth in this Section 9.3, including without limitation as to duration and geographic scope, are reasonable to protect the legitimate interests of the Buyer and the good will of the Division after the purchase of the Assets by the Buyer. The provisions of this Section 9.3 are severable, and in the event that any provision hereof should, for any reason, be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof, and such invalid or unenforceable provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent compatible with, and possible under, applicable law. 9.4 Maintenance of Insurance. The Seller agrees that it will maintain for a period of three years product liability insurance in an amount customarily carried by Persons engaged in the Business. 9.5 Enforcement of Third Party Non-Disclosure and Non-Competition Agreements. The Seller agrees that it shall strictly enforce those covenants of non-disclosure and non-competition executed or running in favor of the Seller or previously assigned to the Seller with respect to the Business or the Assets that are not assignable to the Buyer, upon the written request of the Buyer to enforce such covenants. The Buyer shall reimburse the Seller for all out-of-pocket expenses related to such enforcement. 9.6 Warranties. The Seller agrees that it shall be responsible for any and all service required by the warranties of those products relating to the Division sold or produced by the Seller on or before December 3l, l998 or sold pursuant to purchase orders C.O. #S000256 and C.O. #S000l3ll. 9.7 Maintenance of Supplies, Inventory and Equipment Post Closing. The Seller agrees that through December 3l, l998 it shall undertake all such commercially reasonable actions to maintain the Equipment and inventory acquired by the Buyer in such working order as that Equipment and inventory was in as of the Closing Date, including the repair thereof, subject to normal wear and tear. 9.8 New Orders. The Seller hereby agrees that it shall not accept any orders for any products or parts related to the Division, after the Closing Date and shall promptly refer all such orders to the Buyer, provided, however, that the Seller may accept orders for (i) the repair of rotary feedthroughs with magnetic fluid sealing and (ii) through the second anniversary of the Closing Date, the sale of the MCZ-300 Crystal Growing Furnace currently on the Seller's production floor. Upon the second anniversary of the Closing Date, the Seller shall transfer the MCZ-300 Crystal Growing Furnace to 15 the Buyer at no additional cost if the Seller has not sold such unit for its fair market value. The Seller agrees that upon the written request of the Buyer it shall ship those parts that are the property of the Buyer pursuant to such written request at the sole expense of the Buyer. The Seller shall provide the Buyer subcontract work on orders referred to the Buyer on or before December 31, 1998 to the extent requested by the Buyer on mutually agreeable terms. 9.9 Facilities. The Seller agrees that it shall not (i) close on the sale of, or (ii) lease the facilities utilized by the Division on or before December 31, 1998 and that it shall operate such facilities in the ordinary course of business so as to prevent damage or theft of the inventory, supplies and equipment acquired by the Buyer remaining at such facilities. 9.10 Access to Employees. The Seller agrees that, to the extent that Division Workers in possession of knowledge or expertise pertaining to the sale, design, manufacture, installation, service or other activity within the scope of the Division remain employed by the Seller following the Closing Date, for a period of two (2) years following the Closing Date, the Seller shall, upon the reasonable request of the Buyer, use its commercially reasonable efforts to make such individuals reasonably promptly available to the Buyer at locations and for durations of time to be mutually agreed upon. The Buyer shall compensate the Seller for costs (including salary and benefits) related to this covenant on a mutually determined basis to the extent that the Buyer utilizes the Seller's employees for a period of one-half day at a time. 9.11 Pullthrough Seals. (a) The Buyer agrees to incorporate the Seller's pullthrough seals into the Buyer's existing grower design, if the Seller makes such pullthrough seals available to the Buyer at a commercially competitive cost. (b) The Buyer agrees to facilitate for a period of two years following the Closing Date the investigation of the use and sale of the Seller's pullthrough seal designs by other operating units of General Signal Corporation, including Lightnin. 9.12 Assignment of Crystal Puller Vision System License. The Seller will use its commercially reasonable efforts to obtain the consent of MEMC to the assignment by the Seller to the Buyer of that certain License Agreement between the Seller and MEMC dated May 28, 1996 with respect to the Crystal Puller Vision System License. 9.13 Further Assurances. Each of the parties hereto after the Closing, upon the request from time to time of any other party hereto and without further consideration, will do each and every act and thing as may be necessary or reasonably requested to consummate the transactions contemplated hereby and to effect an orderly transfer to the Buyer of the Assets, including without limitation executing, acknowledging and delivering assurances, assignments, powers of attorney and other documents and instruments, furnishing information and copies of documents, books and records (including without limitation tax records); filing reports, returns, applications, filings and other documents and instruments with governmental authorities; and cooperating with each other party hereto in exercising any right or pursuing any claim, whether by litigation or otherwise, other than rights and claims running against the party from whom or which such cooperation is requested. 10. DEFINITIONS For purposes of this Agreement: 16 10.1 Affiliate. The term "Affiliate" mean (i) any Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Seller (or other specified Person), (ii) any Person who is or has been within five years of the time in question an officer, director or direct or indirect beneficial holder of at least 5% of any class of the outstanding capital stock of the Seller (or other specified Person), and (iii) any person of which the Seller (or other specified Person) or an Affiliate (as defined in clause (ii) above) thereof shall, directly or indirectly, beneficially own at least 10% of any class of outstanding capital stock or other evidence of beneficial interest. 10.2 Code. The term "Code" shall mean the federal Internal Revenue Code of 1986 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereto, collectively and as from time to time amended and in effect. 10.3 Person. The term "Person" shall mean any individual, partnership, corporation, association, trust, joint venture, unincorporated organization, or entity, and any government, governmental department or agency or political subdivision thereof. 10.4 Environmental Law. The term "Environmental Law" shall mean any environmental or health and safety-related law, regulation, rule, ordinance, or by-law at the federal, state, county, regional, or local level, whether existing as of the date hereof, previously enforced, or subsequently enacted, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. 9601 et seq., the Hazardous Materials Transportation Act, as amended, 49 U.S.C. 5101 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq., the Federal Clean Water Act, as amended, 33 U.S.C. 1251 et seq., the Federal Clean Air Act, as amended, 42 U.S.C. 7401 et seq., the Occupational Safety and Health Act, 29 U.S.C. 651 et seq., similar state and local requirements, any other requirements regulating or in any way pertaining to Hazardous Materials, and any requirements pertaining to environmental or health and safety matters that are set forth in a permit, license, approval, consent, authorization, or order issued by, or an agreement with, a governmental agency or in an order or decision issued by a court. 10.5 Hazardous Material. The term "Hazardous Material" shall mean any pollutant, contaminant, toxic substance, hazardous waste, hazardous material, or hazardous substance, or any oil, petroleum, or petroleum product, as defined in or pursuant to, or which is or becomes prohibited, limited, or regulated under, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. 9601 et seq., the Hazardous Materials Transportation Act, as amended, 49 U.S.C. 5101 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq., the Federal Clean Water Act, as amended, 33 U.S.C. 1251 et seq., the Federal Clean Air Act, as amended, 42 U.S.C. 7401 et seq., the Occupational Safety and Health Act, 29 U.S.C. 651 et seq. or any other Environmental Law. 10.6 Benefit Arrangement. The term "Benefit Arrangement" shall mean any benefit arrangement that is not an Employee Benefit Plan, including (i) any employment or consulting agreement, (ii) any arrangement providing for insurance coverage or workers' compensation benefits, (iii) any incentive bonus or deferred bonus arrangement, (iv) each arrangement providing for termination allowance, severance or similar benefits, (v) any equity compensation plan, (vi) any 17 deferred compensation plan and (vii) each compensation policy and practice maintained by either the Seller or any ERISA Affiliate of either of them covering the employees, former employees, and the beneficiaries of any of them. 10.7 Employee Benefit Plan. The term "Employee Benefit Plan" shall mean any employee benefit plan, as defined in ss.3(3) of ERISA, including any multiemployer plan. 10.8 ERISA. The term "ERISA" shall mean the Federal Employee Retirement Income Security Act of 1974 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereto, collectively and as from time to time amended and in effect. 11. MISCELLANEOUS PROVISIONS 11.1 Entire Agreement. The Operative Documents, together with the Schedules and Exhibits thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous agreements and understandings, whether oral or written, between the parties with respect to the subject matter hereof, and there are no agreements between the parties in connection with the subject matter hereof except as set forth or referred to herein. No alteration or modification of an Operative Document shall be valid unless in writing and executed by each of the parties thereto. 11.2 Governing Law. The Operative Documents shall be governed and interpreted in accordance with, and the rights of the parties shall be determined by, the internal laws of the Commonwealth of Massachusetts, without giving effect to its conflict of law principles. The Operative Documents shall be deemed to have been made in Massachusetts and will be specifically enforceable in any court of competent jurisdiction in Massachusetts. The parties agree to jurisdiction and venue in the federal and state courts within the Commonwealth of Massachusetts for all disputes and enforcement actions under this Agreement. 11.3 Non-Waiver. Failure by any party on any occasion to insist upon strict adherence to any term or provision of an Operative Document shall not be considered a waiver and shall not deprive that party of its right thereafter to enforce that or any other term or provision of such Operative Document. 11.4 Severability. If any provision of an Operative Document shall be declared invalid or illegal for any reason whatsoever, then notwithstanding such invalidity or illegality, the remaining terms and provisions of such Operative Document shall remain in full force and effect in the same manner as if the invalid or illegal provision had not been contained herein, and the parties hereby agree to substitute for the invalid or illegal provision a valid and legal provision which most closely approximates the effect and intent of the invalid or illegal provision. As to any restriction, covenant or agreement contained in any Operative Document which may be unenforceable on account of its scope or duration, such Operative Document shall be deemed to have been automatically amended as if agreed to by the parties thereto on the date of execution thereof to provide for the broadest scope and longest time period that will result in such restriction, covenant or agreement remaining valid, enforceable and binding on the parties. 18 11.5 Amendments. No alteration or modification of the Operative Documents shall be valid unless made in writing and executed by each of the parties hereto. 11.6 Successors. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and to their respective successors and assigns. 11.7 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given if delivered personally, sent by Federal Express or other similar overnight delivery service providing evidence of receipt, or mailed via certified mail, return receipt requested, postage prepaid as follows: (a) If to the Seller: To: Ferrofluidics Corporation 40 Simon Street Nashua, New Hampshire 03061 Attn: Paul F. Avery, Jr. with a copy to: Stuart M. Cable, Esq. Goodwin, Procter & Hoar, LLP Exchange Place Boston, Massachusetts 02109 (a) If to the Buyer: To: Kayex 1000 Millstead Way Rochester, New York 14624 Attn: Kenneth Lally with a copy to: Adolfo R. Garcia, P.C. McDermott, Will & Emery 75 State Street Boston, MA 02109 or to such other address or addresses as either party may from time to time designate in a written notice given in accordance with the provisions hereof. 11.8 Assignment. Neither party may assign this Agreement without the express written consent of the other party. 11.9 Interpretation; Syntax. The section headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. All references made and pronouns used herein shall be construed in the singular or plural, and in such gender as the sense and circumstances require. 19 11.10 Transactional Costs. Each party to the Operative Documents shall be responsible for its own legal, accounting and other consulting services, if any, attendant to the negotiation and drafting of this Agreement and to the transactions contemplated by this Agreement. 20 IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement under seal as of the date first written above. SELLER: FERROFLUIDICS CORPORATION. By: /s/ Paul F. Avery -------------------------------- BUYER: GENERAL SIGNAL TECHNOLOGY CORPORATION By: /s/ Joanne L. Bober -------------------------------- EX-10.76 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), dated June 3, 1998 (the "Effective Date"), 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. 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 President, Chief Executive Officer and Chairman of the Board of Directors, 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 date first set forth above. 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 first anniversary of the Commencement Date (the "Initial Expiration Date"); provided, however, that this Agreement may, by written consent of the Company and Mr. Avery, be extended for a subsequent term not to exceed one (1) year commencing on the Initial Expiration Date (such subsequent period being referred to as the "Subsequent Term"). 3. Capacity and Performance. a. Avery shall be employed by the Company as its President, Chief Executive Officer and Chairman of the Board of Directors, and shall have all powers and duties consistent with those positions, subject to the direction of the Company's Board of Directors. 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 President, Chief Executive Officer and Chairman of the Board 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) subject to subparagraph (1) above, 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 Initial Term and any Subsequent Term, the Company shall pay Avery a base salary at an annual rate (the "Base Salary") equal to $250,000 per year, payable in accordance with the payroll practices of the Company for its executives. b. Matters Concerning Equity Compensation. 2 (1) The Company acknowledges that Avery holds certain options to purchase shares of Common Stock of the Company and holds shares of Common Stock of the Company, in each case previously granted or awarded to him by the Company in connection with his prior service to the Company. The Company and Avery each acknowledge and agree that the Company's and Avery's rights and obligations, if any, in respect of such options and shares of Common Stock shall not be affected, altered or changed in any way as a result of the execution or terms and conditions of this Agreement. (2) On the Effective Date, Avery shall be awarded an option to purchase 75,000 shares of Common Stock of the Company under the Company's 1995 Stock Option and Incentive Plan (the "1995 Plan") to be immediately vested and exercisable in its entirety as of the date hereof. As provided in Section 15 of the 1995 Plan, all of the shares subject to the option described above shall vest upon the occurrence of a "Change of Control" as such term is defined in the 1995 Plan. (3) Notwithstanding any provision to the contrary contained in any other agreement, the restricted stock and the options described in this Section 4b shall be subject to the following termination provisions: (i) Termination Due to Death. If Avery's employment terminates by reason of death, the option granted to Avery pursuant to Section 4b(2) above may thereafter be exercised by Avery's legal representative or legatee until the expiration date of such option. (ii) Termination for Cause. If Avery's employment terminates for Cause (as defined in the 1995 Plan), the option granted to Avery pursuant to Section 4b(2) above shall immediately terminate and be of no further force and effect. (iii) Other Termination. If Avery's employment terminates for any reason other than death or for Cause but including without limitation by reason of Disability, Retirement or without Cause (as such terms are defined in the 1995 Plan), the option granted to Avery pursuant to Section 4b(2) above may thereafter be exercised by Avery until the expiration date of such option. 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 one million dollars ($1,000,000) 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 four (4) weeks of paid vacation, to be taken at such times and intervals as shall be determined by Avery, subject to the reasonable business needs of the Company. 3 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 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, 5d or 5f hereof. Avery shall be entitled to receive as a severance payment an amount equal to (i) the aggregate Base Salary which Avery would have received had he been employed by the Company through the last day of the Initial Term if such termination occurs during the Initial Term, or (ii) the aggregate Base Salary which Avery would have received had he been employed by the Company through the last day of the Subsequent Term if such termination occurs during the Subsequent Term. 4 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, then, notwithstanding any other provision of this Agreement, Avery shall be entitled to receive the amount set forth in Section 5a hereof. (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 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 5 (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: (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 6 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 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. h. Consulting Services. The Company and Avery agree that following the termination of this Agreement pursuant to Section 5e hereof or the expiration of the Initial Term (or Subsequent Term, if any), the Company and Avery shall immediately thereafter enter into an agreement pursuant to which Avery shall be engaged as a consultant to the Company. The terms and conditions of such consultancy shall be identical to those set forth in the Consulting Agreement dated May l, 1997 between the Company and Avery (the "Consulting 7 Agreement"). Notwithstanding the foregoing, upon the engagement of Avery as a consultant as provided by the foregoing, the Company may also request that Avery continue to serve as the Chairman of the Board of Directors. If the Company so requests, and if Avery agrees to so serve, the Company shall pay Avery an annual retainer of $50,000 for such service for so long as Avery serves in such position. Such retainer shall be in addition to any and all payments to be made to Avery under the consulting arrangement discussed above. 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 the address set forth herein or 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 8 supersede all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of Avery's employment, including without limitation, the Consulting Agreement. 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. 13. Headings. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope of or content of any provision of this Agreement. 14. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 15. Governing Law. This is a Massachusetts contract and shall be construed and enforced under and be governed in all respects by the laws of The Commonwealth of Massachusetts, without regard to the conflict of laws principles thereof. [END OF TEXT] 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-21 4 SUBSIDIARIES OF THE FERROFLUIDICS CORPORATION Exhibit 21 Subsidiaries of the Ferrofluidics Corporation As of June 28, 1997
Name Place of Organization - ---- --------------------- Advanced Products and Technologies, GmbH Nurtingen, Germany Advanced Products and Technologies, Ltd.(1) Oxford, England Advanced Products and Technologies, S.A. Madrid, Spain Ferrofluidics Japan Corporation Tokyo, Japan Ferrohydrodynamics Corporation Massachusetts
(1) Effective August 4, 1998, Advanced Products and Technologies, Ltd. changed its name to Ferrofluidics, Ltd. EX-23 5 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-13587) pertaining to the 1995 Stock Option and Incentive Plan, the 1995 Non-Qualified Stock Option Plan, and the 1994 Restricted Stock Plan of Ferrofluidics Corporation of our report dated September 23, 1998, with respect to the consolidated financial statements and schedule of Ferrofluidics Corporation for the year ended June 27, 1998, included in the Annual Report (Form 10-K) for the year ended June 27, 1998. /s/ Ernst & Young LLP Manchester, New Hampshire October 2, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FERROFLUIDICS CORP.'S BALANCE SHEET AS OF JUNE 27, 1998 AND THE RESULTS OF OPERATION FOR THE YEAR ENDED JUNE 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 27, 1998. 0000353286 FERROFLUIDICS CORP. 1 U.S. DOLLARS YEAR JUN-27-1998 JUN-29-1997 JUN-27-1998 1 1,516,000 0 12,412,000 329,000 13,855,000 28,815,000 21,288,000 12,462,000 44,019,000 20,633,000 5,000,000 0 0 36,763,000 (18,562,000) 44,019,000 28,170,000 28,170,000 15,792,000 15,792,000 10,298,000 0 634,000 1,412,000 74,000 1,338,000 (4,810,000) 0 0 (3,472,000) (.56) (.56)
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FERROFLUIDICS CORP.'S BALANCE SHEETS AS OF JUNE 28, 1997 AND THE RESULTS OF OPERATION, AS RESTATED TO REFLECT THE SYSTEMS DIVISION AS DISCONTINUED OPERATIONS, FOR THE YEAR ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 28, 1997. 0000353286 FERROFLUIDICS CORP. 1 U.S. DOLLARS YEAR JUN-28-1997 JUL-01-1996 JUN-28-1997 1 883,000 0 13,808,000 199,000 15,263,000 31,570,000 19,338,000 10,961,000 45,001,000 18,247,000 5,000,000 0 0 36,502,000 (14,921,000) 45,001,000 25,094,000 25,094,000 13,232,000 13,232,000 11,823,000 0 503,000 (545,000) (448,000) (97,000) 1,769,000 0 0 1,672,000 .27 .27
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FERROFLUIDICS CORP.'S BALANCE SHEETS AS OF JUNE 30, 1996 AND THE RESULTS OF OPERATION, AS RESTATED TO REFLECT THE SYSTEMS DIVISION AS DISCONTINUED OPERATIONS, FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1996. 0000353286 FERROFLUIDICS CORP. 1 U.S. DOLLARS YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 1 1,701,000 0 13,077,000 320,000 13,829,000 30,875,000 18,367,000 9,583,000 43,429,000 18,525,000 5,000,000 0 0 35,895,000 (16,193,000) 43,429,000 27,226,000 27,226,000 14,962,000 14,962,000 11,358,000 0 311,000 619,000 121,000 498,000 3,322,000 0 0 3,820,000 .63 .61
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