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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to___________
Commission file number 0-11625
------------------------------
MFIC CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 04-2793022
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
30 Ossipee Road, P.O. Box 9101, Newton, Massachusetts 02464
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(617)969-5452
-------------
(Registrant's Telephone Number, Including Area Code)
Microfluidics International Corporation
-------------------------------------------
(Former name, if changed since last report)
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. Yes X No __
-
Registrant had 6,061,304 shares of Common Stock, par value $.01 per share,
outstanding on August 8, 1999.
1
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MFIC CORPORATION
----------------
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 3
1999 (unaudited) and December 31, 1998
Consolidated Statements of Income (loss) 6
for the three and six months ended
June 30,1999 and June 30,1998 (unaudited)
Consolidated Statements of Cash Flows for 7
six months ended June 30, 1999
and June 30, 1998 (unaudited)
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of 12
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
ITEM 4. Submission of matters to a vote of 21
security holders
ITEM 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MFIC CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30, 1999 December 31,1998
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 173,872 $ 550,713
Marketable securities 10,080
Accounts receivable(less
allowance for doubtful accounts
of $63,138 and $100,000 at June
30, 1999 and December 31, 1998,
respectively) 2,208,443 2,284,840
Other receivables 25,847 84,845
Accounts Receivable-
Related party 19,000 24,417
Inventory 4,322,418 4,450,926
Prepaid expenses 232,108 164,528
---------- ----------
Total current assets 6,981,688 7,570,349
Equipment and leasehold
improvements, at cost
Furniture, fixtures and
office equipment 443,361 436,447
Machinery and equipment 838,833 893,388
Leasehold improvements 310,563 310,563
---------- ----------
1,592,757 1,640,398
Less:accumulated
depreciation
and amortization (752,811) (644,065)
---------- ----------
839,946 996,333
Goodwill (net of accumulated
amortization of $354,329 at
June 30, 1999, and $154,329
at December 31, 1998,
respectively) 5,830,356 6,010,130
</TABLE>
3
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<TABLE>
<S> <C> <C>
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$445,429 at June 30, 1999 and
$423,470 at
December 31, 1998,respectively) 101,251 123,210
----------- -----------
Total assets $13,753,241 $14,700,022
=========== ============
</TABLE>
(See notes to consolidated financial statements)
4
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MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
<TABLE>
<CAPTION>
June 30, 1999 December 31,1998
------------- ----------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 1,565,212 $ 1,179,163
Accrued compensation 104,989 177,155
Customer advances 354,834 166,136
Current portion of long term debt 150,000 125,000
Line of credit 3,616,751 4,347,782
----------- -----------
Total current liabilities 5,791,786 5,995,236
Long-term debt, net of
current portion 625,000 675,000
Stockholders' equity
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
6,061,307 and 6,056,983 shares
issued and outstanding at June 30,
1999 and at December 31,1998
respectively 60,613 60,570
Additional paid-in-capital 12,494,839 12,491,423
Accumulated deficit (4,544,890) (3,865,800)
Accumulated other comprehensive
income 10,080
Less: Treasury Stock, at cost,
242,719 and 235,219 shares at June 30,
1999 and December 31,
1998 respectively (674,107) (666,487)
----------- -----------
Total stockholders' equity 7,336,455 8,029,786
----------- -----------
Total liabilities and
stockholders' equity $13,753,241 $14,700,022
=========== ===========
</TABLE>
(See notes to consolidated financial statements)
5
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MFIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
----------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
1998 1999 1998 1999
-------- --------- --------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,732,309 $ 3,342,517 $ 3,543,974 $ 5,939,639
Cost of goods sold 709,461 1,816,335 1,735,992 3,481,867
-------------- ------------ ----------- -----------
Gross profit on
revenues 1,022,848 1,526,182 1,807,982 2,457,772
Operating expenses:
Selling 415,661 711,815 862,920 1,309,313
Research and
development 192,700 195,826 344,903 435,199
General and
administrative 364,104 559,982 592,206 1,200,837
-------------- ------------ ----------- -----------
Total operating
expenses 972,465 1,467,623 1,800,029 2,945,349
Income (loss) from
operations 50,383 58,559 7,953 (487,577)
Interest income 37,884 2,434 84,596 5,823
Gain on sale of
marketable securities 11,864
Interest expense (110,857) (209,200)
Net Income (Loss) $ 88,267 ($49,864) $ 92,549 ($ 679,090)
============== ============ =========== ===========
Basic Earnings per share:
Average shares
outstanding: basic 4,925,390 5,816,930 4,923,180 5,816,426
Net income (loss) per
share $ .02 $ (.01) $ .02 $ (.12)
============== ============ =========== ===========
Diluted Earnings per share:
Average shares
outstanding: diluted 5,023,410 5,816,930 5,025,620 5,816,426
Net income (loss) per
share $ .02 $ (.01) $ .02 $ (.12)
============== ============ =========== ===========
</TABLE>
(See notes to consolidated financial statements
6
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MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Six months ended
----------------
June 30,
1998 1999
---- ----
<S> <C> <C>
Cash flows from (used in)operating activities:
Net income (Loss) $ 92,549 ($679,090)
Reconciliation of net income to cash used by
operating activities:
Depreciation and amortization 54,960 352,676
Gain on sale of fixed assets (30,722)
Bad debt expense (income) 15,000 (36,862)
Effects of changes in operating working capital items:
Trade and other receivables (115,368) 177,674
Inventories 273,230 128,508
Prepaid expenses (69,112) (67,580)
Current liabilities (612,740) 502,581
----------- ---------
Net cash(used by) provided by operating
activities: (361,481) 347,185
Cash flows used in investing activities:
Proceeds from sale of fixed assets: 102,730
Purchase of capital equipment (48,844) (46,338)
----------- ---------
Net cash from (used in)
investing activities (48,844) 56,392
Cash flows from (used in) financing activities:
Excess of cost over assets purchased (Goodwill) (20,226)
Proceeds from issuance of Common Stock 32,583 3,459
Treasury stock purchased (7,620)
Paydown of subordinated debt (25,000)
Paydown on line of credit (731,031)
----------- ---------
Net cash from used in financing activities 32,583 (780,418)
Net increase (decrease)in cash (377,742) (376,841)
Cash and cash equivalents at beginning
of period 4,083,214 550,713
----------- ---------
Cash and cash equivalents at end
of period $ 3,705,472 $173,872
=========== =========
</TABLE>
(See notes to consolidated financial statements)
7
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MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for the six months ended June 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS) is computed by dividing net income
(loss)available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock, unless the effects of dilution would be anti-dilutive.
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MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORY
The components of inventories on the following dates were:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
<S> <C> <C>
Raw Material $1,969,966 $1,875,881
Work in Progress 1,184,939 1,075,711
Finished Goods 1,167,513 1,499,334
---------- ----------
Total $4,322,418 $4,450,926
========== ==========
</TABLE>
4. TAXES
The Company has a federal net operating tax loss carryforward of
approximately $3,844,000 and research and development tax credit carryforwards
of approximately $188,000 expiring at various dates beginning in 2001 through
2018. Ownership changes may result in future limitations on the utilization of
net operating losses and research and development tax credit carryforwards.
Based on the financial results known at December 31, 1998, the Company has
established a full valuation allowance against a deferred tax asset due to the
uncertainty of earning sufficient taxable income to realize the benefit of these
assets.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2001. SFAS No. 133
significantly modifies accounting and reporting Standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
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6. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the three and six months ended
June 30 and March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three and six months ended
June 30 March 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Other comprehensive income:
Reclassification adjustment for gains
Included in net income $ 0 $6,315 $ 0 $6,315
------ ------ ------ ------
Other comprehensive income $ 0 $6,315 $ 0 $6,315
====== ====== ======= ======
</TABLE>
The accumulated other comprehensive income balance is as follows at June 30,
1999.
Unrealized loss
On Securities
Beginning balance $ 10,080
Reclassification adjustment
for gains included in net
Income (10,080)
--------
Ending balance $ 0
========
These amounts have not been tax affected due to the availability of Net
Operating Loss carryforwards to offset the unrealized gains.
7. SUBORDINATED DEBT AND LINE OF CREDIT
In August 1998, the Company purchased substantially all of the assets and
assumed certain liabilities of two corporations. As part of the
transaction, the Company delivered to the sellers two subordinated
promissory notes in the aggregate principal amount of $800,000; one for
$300,000 and the other for $500,000. The $300,000 note has interest
10
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due quarterly, at 10% per annum, with principal payments of twelve equal
installments of $25,000 each, commencing on September 30, 2001. The
$500,000 note has interest due quarterly at 10% per annum, with principal
payments of twenty equal installments of $25,000, each commencing
December 31, 1998.
The Company originally borrowed $4,096,050 from Comerica Bank, its primary
lender, in order to finance the purchase and payoff certain of the assumed
liabilities. The revolving loan, security and ancillary agreements with
Comerica Bank (the "Loan Agreement") provided up to $5,000,000 in loans at
a rate of prime minus 5/8% with monthly interest payments and the
outstanding principal amount due on September 1, 2001. The line of credit
was secured by substantially all the assets of the Company. The outstanding
principal balance at December 31, 1998 under the Loan Agreement was
$4,347,782 and bore interest at a rate of 7.125% per annum. The outstanding
principal balance at June 30, 1999 was $3,616,751, and bore interest at a
rate of 9% per annum.
In 1998, the Company incurred a net loss of approximately $1,505,000 and
was not in compliance with certain covenants of the Loan Agreement.
Accordingly, the Company reclassified all amounts due to current
liabilities. On March 23, 1999, the Company's lender advised the Company
that it was in default of the Loan Agreement and instructed the Company to
cease all payments on the Subordinated Promissory Notes. The lender also
purported to reduce the line of credit to $4,000,000. Until May 5, 1999,
the Company functioned under a standstill agreement. These matters raise
substantial doubt about the Company's ability to continue as a going
concern.
On May 5, 1999, the Company and its lender executed a forbearance agreement
(the "Forbearance Agreement") to the Loan Agreement. The interest rate
under the Forbearance Agreement is the prime rate plus 1%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." In addition, management has
developed and is executing a plan to return to profitability and positive
cash flow. The plan includes renegotiating the terms of the Loan Agreement,
if possible, seeking to obtain sufficient new capital or subordinated debt,
manufacturing cost reduction programs, reductions in the number of
personnel at all three Company locations, reduction in discretionary
spending and salaries for key officers and combining the salesforce for all
product lines. On July 28, 1999, the Company and Comerica Bank executed an
extension to the Forbearance Agreement with essentially the same terms,
except that the line of credit has been reduced initially from $4,000,000
to $3,900,000, with further reductions of $10,000 per week until the
Forbearance Agreement expires on September 30, 1999.
There can be no assurance that the Company will be successful in its
attempt to execute its plan to return to profitability and positive
11
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cash flow. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
MFIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. RESULTS OF OPERATIONS
As discussed in Note 7 to these financial statements, in August, 1998, the
Company acquired the assets and assumed certain liabilities of two businesses,
Morehouse-COWLES and Epworth Manufacturing Company. These acquisitions were
accounted for as a purchase. Accordingly, in the accompanying financial
statements, the results of operations and cash flows include Morehouse-COWLES
and Epworth Manufacturing for the 1999 periods but do not include them for the
1998 comparative periods.
Total Company revenues for the quarter ended June 30, 1999 were $3,342,517,as
compared to revenues of $1,732,309 in the corresponding period last year,
representing an increase of $1,610,208, or 93%. For the six month period ended
June 30, 1999, revenues increased $2,395,665, or 68%, to $5,939,639 from
$3,543,974 for the first six months of 1998. The increase in revenue for the
three months ended June 30, 1999 is primarily due to the $1,919,000 in
additional revenue generated by the Company's Epworth Mill and Morehouse-COWLES
Divisions, divisions that the Company did not acquire until the third quarter of
1998, offset by a decrease in sales by the previously sole operating division of
the Company, the Microfluidics Division of $309,000. The increase in revenue for
the six month period ended June 30, 1999 is due to the $3,430,000 in additional
revenues generated by the Company's Epworth Mill and Morehouse-COWLES divisions,
offset by a decrease in sales by the previously sole operating division of the
Company, the Microfluidics Division, of approximately $1,034,000.
For the Microfluidics Division, North American sales for the three month period
ended June 30, 1999 decreased to $992,479, a decrease of $156,224, or 14%, as
compared to North American sales of $1,148,703 for the three months ended June
30, 1998. This decrease in North American sales was principally due to a
decrease in the sale of machines compared to the three months ended June 30,
1998. Foreign sales were $431,101 for the three months ended June 30, 1999
compared to $583,606 for the three months ended June 30, 1998, a decrease of
approximately $153,000, or 26%. This decrease in foreign sales was due to a
decrease in the sale of machines.
12
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For the Microfluidics Division, North American sales for the six month period
ended June 30, 1999 decreased to $1,831,652, a decrease of $426,152, or 19% as
compared to North American sales of $2,257,804 for the six months ended June 30,
1998. This decrease in North American sales was principally due to a decrease
in the sale of machines compared to the six months ended June 30, 1998. Foreign
sales were $678,033 for the six months ended June 30, 1999 compared to
$1,286,170 for the six months ended June 30, 1998, a decrease of approximately
$608,000 or 47%. This decrease in foreign sales was due to a decrease in the
sale of machines.
Cost of goods sold for the three months ended June 30, 1999 was $1,816,335, or
54% of revenue, compared to $709,461, or 41% of revenue, for the same period
last year. For the six month period ended June 30, 1999, cost of goods sold
increased to $3,481,867, or 59% of revenue, from $1,735,992 or 49% of revenue,
for the comparable period in 1998.
The increase in cost of goods sold in absolute dollars for the three months
ended June 30, 1999, reflects the increase in sales generated by the Epworth
Mill and Morehouse-COWLES operating divisions of the Company, offset by a
decrease in sales of machines by the Microfluidics Division of the Company. For
the Microfluidics Division of the Company, for the three month period ended June
30, 1999, cost of goods sold was $539,259, or 38% of division sales, compared to
$709,461 or 41% of sales for the three months ended June 30, 1998. The decrease
in cost of goods sold was primarily due to reduced machine sales in both North
America and Europe.
The increase in cost of goods sold in absolute dollars for the six months ended
June 30, 1999, reflects the increase in sales generated by the Epworth Mill and
Morehouse-COWLES operating divisions of the Company, offset by a decrease in
sales of machines by the Microfluidics Division of the Company. For the
Microfluidics Division of the Company, for the six month period ended June 30,
1999, cost of goods sold was $946,780 or 38% of division sales, compared to
$1,735,992 or 49% of sales for the six months ended June 30, 1998. The decrease
in cost of goods sold was due to reduced machine sales in both Europe and North
America.
The Company's three major product lines have different profit margins, as well
as multiple profit margins within each product line. In the course of the
periods compared, there may be significant changes in the cost of revenues as a
percentage of revenue depending on the mix of product sold. Also, the cost of
sales as a percent of revenue will differ between laboratory and pilot plant
units sold, due to the difference in costs between air driven and electric-
hydraulic units.
Total operating expenses for the three months ended June 30, 1999 were
$1,467,623 or 44% of revenue, as compared to $972,465 or 56% of revenue for the
same period last year, which is an increase of $495,158 or 51%. Operating
expenses for the six months ended June 30, 1999 were $2,945,349 or 50% of
revenue, as compared to $1,800,029 or 51% of revenue, for the same period last
13
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year, an increase of $1,145,320 or 64%.
Research and development expenses for the three months ended June 30, 1999 were
$195,826 compared to $192,700 for the three months ended June 30, 1998, an
increase of $3,126 or 2%. Excluding research and development expenses
attributable to the new operating divisions of the Company that approximated
$79,000, the decrease in research and development expenses was primarily due to
a decrease in payroll costs of approximately $34,000 and design development
expenses of approximately $21,000.
Research and development expenses for the six months ended June 30, 1999 were
$435,199 compared to $344,903 for the six months ended June 30, 1998, an
increase of $90,296 or 26%. Excluding design development expenses attributable
to the new operating divisions of the company that approximated $186,000, the
decrease in research and development expenses was primarily due to decreases in
payroll costs of approximately $59,000, and research and development costs of
approximately $21,000.
Selling expenses for the three months ended June 30, 1999 increased $296,154 or
71%, compared to the three months ended June 30, 1998, from $415,661 to
$711,815. For the three months ended June 30, 1999, excluding selling expenses
of approximately $228,000 attributable to the new divisions of the Company,
selling expenses increased by approximately $68,000 from $415,661 to $483,666
due primarily to commissions of approximately $64,000.
Selling expenses for the six months ended June 30, 1999 increased approximately
$446,000 or 52% compared to the six months ended June 30, 1998, from $862,920 to
$1,309,313. For the six months ended June 30, 1999, excluding selling expenses
of approximately $435,000 attributable to the new divisions of the Company,
selling expenses increased by approximately $11,000, from $862,920 to $874,273.
For the three months ended June 30, 1999, general and administrative expenses
increased by approximately $196,000, or 54%, from $364,104 to $559,982.
Excluding expenses attributable to the new operating divisions of the Company of
approximately $200,000 for the three months ended June 30, 1999, general and
administrative expenses decreased by approximately $4,000 for the three months
ended June 30, 1999, principally due to amortization of Goodwill of $100,000 and
an increase in professional fees of approximately $16,000, offset by a decrease
in corporate overhead of approximately $116,000.
For the six months ended June 30, 1999, general and administrative expenses
increased by approximately $609,000, or 103%, from $592,206 to $1,200,837.
Excluding expenses attributable to the new operating divisions of the Company of
approximately $464,000 for the three months ended June 30, 1999, general and
administrative expenses increased approximately $145,000 for the six months
ended June 30, 1999 principally due to the amortization of Goodwill of $200,000,
an increase in professional fees of approximately $50,000, offset by a decrease
in corporate overhead of $116,000.
14
<PAGE>
Interest income for the three months ended June 30, 1999 decreased to $2,434
compared to $37,884 for the three months ended June 30, 1998, a decrease of
approximately $35,000 or 94%. The decrease is due to a reduction in the amount
of cash available to invest.
Interest income for the six months ended June 30, 1999 decreased to $5,823
compared to $84,596 for the six months ended June 30, 1998, a decrease of
approximately $79,000 or 93%. The decrease is due to a reduction in the amount
of cash available to invest.
Interest expense in 1999 is due entirely to indebtedness under the subordinated
promissory notes and line of credit incurred in August 1998 in connection with
the acquisitions of Morehouse-COWLES and Epworth Manufacturing.
2. LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition of the Epworth Mill and Morehouse-COWLES Divisions,
the Company had financed its operations primarily through the use of cash and
cash equivalents on hand and cash flows from operations. The Company generated
cash of $347,185 and utilized cash of $361,481 from operations for the six
months ended June 30, 1999 and 1998, respectively. For the first six months of
1999, this amount was principally the result of funding the Company's net loss
from operations, (net of depreciation and amortization), an increase in current
liabilities, and decreases in inventories and trade and other receivables,
offset by an increase in prepaid expenses. For the first six months of 1998,
this amount was principally the result of net income from operations, a decrease
in current liabilities and a decrease in inventories, offset by an increase in
trade and other receivables.
The Company generated cash of $56,392 and utilized cash of $48,844 for investing
activities for the six months ended June 30, 1999 and 1998, respectively. Cash
generated for 1999 reflected the sale of fixed assets. Net cash used for
investing activities in each period related to the purchase of capital
equipment. As of June 30, 1999, the Company had no material commitments for
capital expenditures.
For financing activities, the Company used cash of $780,418 for the six months
ended June 30,1999, consisting primarily of payments on the line of credit,
payments of subordinated debt, and the purchase of treasury stock. The Company
generated cash from financing activities from the issuance of Common Stock of
$32,583 in 1998 pursuant to the exercise of stock option agreements pursuant to
the Company's employee stock purchase plan and stock option plan.
The cash and cash equivalents balance of the Company was $173,872 at June
15
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30, 1999, a decrease of $376,841 from the December 31, 1998 balance of $550,713.
In 1998, the Company incurred a net loss of approximately $1,505,000 and was not
in compliance with certain covenants of its Revolving Credit Loan Agreement with
Comerica Bank ("Loan Agreement"). On March 23, 1999, Comerica Bank advised the
Company that the company was in default of the Loan Agreement and instructed the
Company to cease all payments on the Subordinated Promissory Notes. The lender
also purported to reduce the line of credit to $4,000,000. The Company had been
functioning under a standstill agreement until May 5, 1999. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
On May 5, 1999, the Company and Comerica Bank executed a forbearance agreement
(the "Forbearance Agreement") to the Loan Agreement, pursuant to which Comerica
Bank agreed to forbear the Company's defaults until July 15, 1999 (the
"Forbearance Period"), subject to earlier termination in certain circumstances.
In addition, the line of credit under the Loan Agreement was reduced from
$5,000,000 to $4,000,000, of which $1,000,000 represents an over-formula amount
(the "Over-Formula Amount"). The interest rate under the Loan Agreement is the
prime rate (as defined in the Loan Agreement) plus one percent. The Company has
also agreed to pay the lender each month an "over-formula fee" of annualized
eight percent of the Over-Formula Amount. To induce Comerica Bank to enter into
the Forbearance Agreement, the Company agreed to use its best efforts to procure
sufficient new capital or subordinated debt on reasonable terms and conditions
in order to eliminate the Over-Formula Amount and to prevent any further
defaults. On July 28, 1999 the Company and Comerica Bank agreed to an extension
of the Forbearance Period until September 30, 1999. The Over-Formula Amount was
reduced to $900,000 initially, with further reductions of $10,000 per week.
There can be no assurance that the Company and Comerica Bank will enter into any
further extensions to the Forbearance Period or that such extension will be on
terms suitable to the Company. There can also be no assurance that the Company
will be able to raise sufficient new capital or subordinated debt on reasonable
terms or at all.
On July 2, 1999, the Company and Irwin J. Gruverman, the Company's Chairman of
the Board and Chief Executive Officer entered into an agreement whereby the
Company has the right, until October 1, 1999, to sell to Mr. Gruverman, and Mr.
Gruverman has the obligation to purchase from the Company, $300,000 of the
Company's Common Stock or such lesser amount as the Board of Directors of the
Company may determine to sell, at a purchase price equal to $0.42 per share
(Eighty percent (80%) of the average closing price of the Company's Common Stock
over the thirty trading days prior to July 2, 1999.) Mr. Gruverman, in his sole
discretion, has the option to purchase a lesser amount of shares of Common
Stock, but in no event less than $250,000 of shares. The Company's right to
exercise this right is conditioned upon the Company's prior or simultaneous
closing of a credit facility with an institutional lender or lenders in an
amount providing advance formula availability of not less than $4.3 million, or
such lesser amount as Mr. Gruverman shall reasonably deem to be adequate and
sufficient
16
<PAGE>
for the Company's projected financial needs.
As consideration for Mr. Gruverman's obligation, the Company granted Mr.
Gruverman a common stock purchase warrant to purchase 100,000 shares of the
Company's Common Stock at $0.52 per share (the average closing price of the
Company's Common Stock over the thirty trading days prior to July 2, 1999). The
warrant expires on July 2, 2004.
Assuming that there is no significant change in the Company's business, the
Company believes that cash flows from operations, together with existing cash
balances, will be sufficient to meet its working capital requirements for at
least the next six months, provided the line of credit is maintained with the
lender or alternative financing is available.
In view of the fact that the above financial results reflect the combined
operations of the Company only for the period January 1, 1999 to June 30, 1999,
the Company believes that period-to-period comparisons of operating results are
not necessarily meaningful and should not be relied upon as an indication of
future performance.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2001. SFAS No. 133
significantly modifies Accounting and Reporting Standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
17
<PAGE>
4. YEAR 2000 DISCLOSURE
The "Year 2000 problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs may
recognize a year that ends in "00" as the year 1900 rather than the year 2000.
This could result in a significant disruption of operations and an inability to
process certain transactions.
STRATEGIC PLAN
The Company has been engaged in an assessment of its internal information
technology systems. The Company contacted providers of its internal technology
systems and it was determined that, because its computer applications use four
digits to identify a year in the field date, the Company's information
technology systems were in fact internally compliant with Year 2000
requirements. The Company had reviewed proposals for a full compliance audit of
the Company's network systems and its components. Such an audit had been
completed on the network systems and applications. As a result of the audit,
the Company has begun implementation of a plan to replace its current network
hardware and operating system. Although the Company expected to have all
system-wide applications fully compliant by April 30, 1999, due to unanticipated
delays, the Company now expects to have all system-wide applications fully
compliant by September 30, 1999. With respect to the Company's non-information
technology systems, the Company is aware that some of the equipment that the
Company leases may not be Year 2000 compliant. While it is understood by the
Company that the potential effect on results of operations could be serious and
could have a material adverse affect on the Company's business or financial
condition, at this time management has not determined the entire potential level
of risk associated with its non-compliant non-information technology systems and
has not yet formulated a plan for remediating such problems.
In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include financial institutions, vendors, payroll service
providers, distributors, customers, and equipment manufacturers. If any of
these third parties encounter Year 2000 problems, it could have a potentially
significant outcome on the ability of the Company to effectively continue its
normal daily operations.
The initial stage included the distribution of inquiry letters to its most
significant third parties. The Company is now in the process of completing a
subsequent internal evaluation of the responses received. Upon learning that
certain third parties are not Year 2000 compliant, the Company may be required
to manually process transactions, delay vendor payments and/or issue manual
checks to employees in place of direct deposits. These processes, if necessary,
would be a part of the second stage -
18
<PAGE>
implementation, in which the Company would correct and/or replace any vendor
software that is not Year 2000 compliant, as soon as it is feasible.
COSTS
There have been no historical costs incurred to date by the Company related to
Year 2000 compliance. As stated above, the Company expects to complete its Year
2000 strategic plan by the end of the third quarter of 1999. The total cost of
implementing the plan is not expected to exceed $75,000. Any costs associated
with such plan have been incorporated into the Company's 1999 budgeting process.
In addition while the Company cannot predict what impact the Year 2000 problem
may have on third parties, it does not currently believe that it will incur
material costs in the implementation stage of resolving potential Year 2000
problems of third parties with whom it interacts.
RISKS
Until the implementation stage of the Company's strategic plan is complete, the
Company cannot accurately assess the potential risks associated with non-
compliance of its non-information technology systems or external third parties.
While it is understood by the Company that the potential effect on results of
operations could be serious and could have a material adverse affect on the
Company's business or financial condition, at this time management has not
determined the entire potential level of risk.
CONTINGENCY PLAN
At the present time, a contingency plan has not been developed. The Company
will continue to monitor the need for a contingency plan based on the results of
its Year 2000 compliance strategic plan.
5. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements
that are subject to certain risks and uncertainties. These forward-looking
statements include statements regarding the Company's liquidity, the ability of
the Company to enter into an extension of the Forbearance Period, the ability of
the Company to raise sufficient new capital or subordinated debt and the
Company's Year 2000 readiness. Such statements are based on management's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are not
limited to actions of the Company's current and future lenders, the failure of
the Company to meet its obligations under the Forbearance Agreement, the failure
of the Company to successfully negotiate an extension to the Forbearance
Agreement on commercially reasonable terms, if at all, or to enter into a new
credit
19
<PAGE>
facility on acceptable terms, if at all; the development of competing or
superior technologies and products from other manufacturers, many of which have
substantially greater financial, technical and other resources than the Company;
the cyclical nature of the materials processing industry which has historically
negatively affected the Company's sales of Microfluidizer equipment during
industry downturns and which could do so in the future; and general economic
conditions.
20
<PAGE>
MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 25, 1999, the Company held its annual meeting of its stockholders.
The following matters were voted on at the annual meeting:
1. The election of, Irwin J. Gruverman, Vincent B. Cortina, Michael A.
Lento and James N. Little, as directors of the Company;
2. A proposal to amend the Company's Certificate of Incorporation to
change the name of the Company from Microfluidics International
Corporation to MFIC Corporation.
3. A proposal to increase by 150,000 shares the aggregate number of
shares reserved for issuance under the Company's 1986 Employee Stock
Purchase Plan.
4. The ratification of the appointment of Deloitte & Touche LLP as
auditors for the Company for the fiscal year ending December 31, 1999.
The following chart shows the number of votes cast for or against, as well
as the number of abstentions and broker nonvotes, as to each matter voted on at
the special meeting:
<TABLE>
<CAPTION>
Matter For Against Abstain Broker Nonvotes
----- --- ------- ------- ---------------
<S> <C> <C> <C> <C>
Election of Mr. Gruverman 4,620,040 1,080,773 N/A N/A
Election of Mr. Cortina 5,043,719 663,094 N/A N/A
Election of Mr. Lento 4,593,348 1,113,465 N/A N/A
Election of Mr. Little 5,043,719 663,094 N/A N/A
Proposal to amend Company's
Certificate of Incorporation 5,583,384 138,359 14,570 N/A
Proposal to increase
Number of Shares reserved
for Employee Stock
Purchase Plan. 5,380,368 282,711 43,734 N/A
Appointment of Deloitte &
Touche LLP 5,221,779 27,071 457,963 N/A
</TABLE>
21
<PAGE>
MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 Forbearance agreement between the Registrant and
Comerica Bank dated May 5, 1999.
Exhibit 11 Statement regarding computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements 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 authorized.
MFIC CORPORATION
/s/ Michael A. Lento
---------------------
Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: August 16, 1999
23
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.1 Forbearance Agreement by and between the Registrant and
Comerica Bank dated May 5, 1999.
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
May 5, 1999
Mr. Irwin J. Gruverman
Chairman and Chief Executive Officer
Microfluidics International Corporation
30 Ossipee Road
Newton, MA 02464-9101
RE: FINANCING ARRANGEMENTS AMONG COMERICA BANK
("COMERICA") AND MICROFLUIDICS INTERNATIONAL
CORPORATION ("BORROWER")
Dear Mr.Gruverman:
Please refer to any and all documents, instruments and agreements executed in
connection with the financing arrangements from Comerica to Borrower,
(collectively, the "Loan Documents"). The Loan Documents include, without
limitation, a Revolving Credit Loan Agreement and a Revolving Credit Note to
Comerica in the original amount of $5,000,000 (reduced to $4,000,000, on March
23, 1999), both dated August 12, 1998, (together, the "Loan Agreement"), and a
Security Agreement dated August 12, 1998 (the "Security Agreement") granting
Comerica a continuing security interest in substantially all of its assets (the
"Collateral"). On August 14, 1998, Borrower executed two Subordinated Promissory
Notes (the "Subordinated Notes") to Epworth Manufacturing Company, Inc.
("Epworth") in the amounts of $300,000 and $500,000, respectively. On August 12,
1998, Epworth executed a Subordination Agreement in favor of Comerica (the
"Subordination Agreement").
All amounts due from Borrower to Comerica, whether now or in the future,
contingent, fixed, primary and/or secondary, including, but not limited to,
principal, interest, inside and outside counsel fees, audit fees, costs,
expenses and any and all other charges provided for in the Loan Documents shall
be known, in the aggregate, as the "Debt". All capitalized terms not defined in
this letter agreement ("Agreement") shall have the meanings described in the
Loan Documents.
As of March 29, 1999, the Debt includes Principal of $3,745,431.84, and Interest
of $21,570.24, for a total of $3,767,002.08. These amounts are exclusive of
interest accruing after March 29, 1999, costs and expenses (including, but not
limited to, fees of inside and outside auditors, appraisers and counsel).
We have reviewed the preliminary 1998 financial statements which showed a loss
of $1,072,098, resulting in a violation of the Loan Documents, including but not
limited to the Borrower's Tangible Effective Net Worth Covenant.
<PAGE>
Comerica accelerated payment of all of the Debt from Borrower in Comerica's
letter dated March 23, 1999. The Debt remains unpaid. Comerica hereby demands
payment in full of all of the Debt unless this Agreement is timely executed.
Subject to Borrower's timely, written acceptance of the following conditions,
Comerica is willing to forbear until July 15, 1999, subject to earlier
termination as provided below, from further action to collect the Debt, which
shall be called the "Forbearance Period," although the parties intend to work
toward an extension of this Agreement.
1. Borrower acknowledges the Debt as set out in the Loan Documents, the
Subordination Agreement, the amount of the Debt as stated above, and
represents that the Borrower is currently in default under Paragraphs 6.13;
7.4.1; 7.4.4; 7.5; 7.6; 7.8; 7.10 and 9.1.3 of the Loan Documents (the
"Existing Defaults.") Any new or additional default under those or any
other provisions of the Loan Documents or this Agreement, other than the
Existing Defaults, shall be deemed a "Further Default" unless cured within
fifteen (15) calendar days after written notice of default is transmitted
to the Borrower by the Bank, via facsimile, provided that the Further
Default is not a diversion of funds or a failure to make a payment to
Comerica, for which there shall be no cure period.
2. Future administration of the Debt and the financing arrangements among
Comerica, and Borrower shall continue to be governed by the covenants, terms
and conditions of the Loan Documents, which are incorporated by this
reference, except to the extent that the Loan Documents have been
superseded, amended, modified or supplemented by this Agreement or are
inconsistent with this Agreement, then this Agreement shall govern.
3. Borrower acknowledges Comerica is under no obligation to advance funds or
extend credit to Borrower pursuant to the Loan Documents, or otherwise,
except as provided by this Agreement.
4. Consistent with the terms of the Subordination Agreement, the Borrower will
not make any further payments on the Subordinated Notes until the Debt is
repaid to Comerica or Comerica gives written notice to the Borrower that
such payments may resume. Except as provided in Paragraph 17 and as to the
"reimbursements" identified in Exhibit E, 100% of Borrowers cash inflows and
cash on deposit with Comerica will be applied to the Debt. Subject to
maintaining an "Advance Formula" (defined below) equal to or greater than
the balance owing on the Debt, and provided there is no Further Default
under the terms of this Agreement, and no Further Default under the Loan
Documents, Comerica agrees to continue to advance to Borrower under the Loan
Agreement, in accordance with the Loan Documents as modified by this
Agreement, through the Forbearance Period. On March 23, 1999, the maximum
amount available under the Loan Agreement was reduced to $4,000,000.
5. Each borrowing request or Accounts Receivable collection must be accompanied
by an accounts receivable report and a Borrowing Base Certificate, in form
-2-
<PAGE>
satisfactory to Comerica, with a minimum of one report and Certificate per
week. Conditioned upon receipt of such accounts receivable reports,
Borrowing Base Certificates, and the audits and appraisals requested by
Comerica, the Advance Formula will be equal to the sum of: (i) 75% of
"Eligible Accounts", as defined in Exhibit A, except that Foreign Accounts,
as defined in Exhibit A, up to $450,000 shall also be Eligible Accounts;
plus (ii) 50% of the net book value of Borrower's fixed assets, not to
exceed $650,000; plus (iii) the lower of $1,150,000 or 25% of the net book
value of Borrower's "Inventory" as defined in Exhibit B, which Borrower
represents and warrants, as of the date of each weekly Borrowing Base
Certificate report; plus (iv) $1,000,000 (the "Over-Formula Amount"). Any
time the balance on the Debt exceeds the Advance Formula, no advances will
be allowed.
6. The Loan Agreement shall be modified as follows:
A. The Borrower's revolving line of credit under the Loan Agreement
was reduced to $4,000,000 on March 23, 1999. The Revolving Credit
Agreement is hereby amended to reflect the reduced line of credit.
B. On the 1st day of each month hereafter during the Forbearance
Period, Borrower shall pay to Comerica in advance, an "Over-Formula
Fee" of eight percent (8%) per annum of the "Over-Formula Amount",
as of the 1st day of each month during the Forbearance Period,
which shall be in addition to other amounts due Comerica. On the
date of execution of this Agreement, Borrower shall pay the sum of
$6,666.67 to Comerica for the month of May, 1999.
7. Except as otherwise permitted herein, Borrower acknowledges and agrees it
shall hold in express trust for Comerica, without any additional personal
liability beyond that currently provided by the Loan Documents, if any, for
Borrower's officers and directors, and immediately surrender in the form
received, all of its cash inflows to Comerica, by depositing such inflows
into a Lock Box or Lock Boxes as identified in Section 6(e) of the Security
Agreement and approved by Comerica, which shall be referred to as the "Cash
Collateral Account".
8. Interest on the Debt shall accrue at Comerica's "prime rate" (as defined in
the Loan Documents) plus one percentage point (1.0%) and shall be due and
payable on the 1st day of each and every month, effective as of the date of
this Agreement, and upon the occurrence of a Further Default under the terms
of this Agreement or the Loan Documents, then the Debt shall accrue interest
at the rate otherwise provided in this Paragraph plus three percentage
points (3%). These amounts shall be in addition to the Over-Formula Fee
defined above.
9. Borrower acknowledges and agrees the Loan Documents presently provide for
and they shall reimburse for any and all costs and expenses of Comerica,
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<PAGE>
including, but not limited to, all inside and outside counsel fees of
Comerica whether in relation to drafting, negotiating or enforcement or
defense of the Loan Documents or this Agreement, including any preference
or disgorgement actions as defined in this Agreement, and all of Comerica's
internal or external audit and appraisal fees, incurred in connection with
the Debt, Comerica's administration of the Debt, and/or any efforts of
Comerica to collect or satisfy all or any part of the Debt. Borrower shall
immediately reimburse Comerica for all of Comerica's costs and expenses
upon Comerica's incurring them or upon demand.
10. Loan payments, interest on the Debt, loan administration expenses,
including, but not limited to, all fees and expenses of Comerica's inside
and outside counsel, appraisers and auditors, may be charged directly to
Borrower's checking account maintained with Comerica. Comerica will give
Borrower two (2) business days written notice prior to charging loan
administration expenses to Borrower's checking account. Comerica will
provide copies of all such invoices and bills to Borrower.
11. Except for the accounts identified in Exhibit C, Borrower will maintain all
accounts with Comerica and, except as provided in Paragraph 17 and the
"Reimbursements" described in Exhibit E, will not deposit any funds with
any financial institution other than Comerica. Borrower will apply
sufficient funds currently on deposit at another financial institution, to
the extent then on deposit, to the Debt to eliminate any amount exceeding
the formula set forth in paragraph 5, upon execution of this Agreement.
12. In addition to all reporting currently required by the Loan Documents,
during the Forbearance Period, Borrower shall promptly provide Comerica
with: (i) a detailed summary of Borrower's accounts payable and accounts
receivable as of the last day of each month showing which accounts payable
and accounts receivable are up to 30, 31 to 60, 61 to 90, and 91 days or
more past the invoice date and listing the names and addresses of creditors
and account debtors, as applicable, by the 15th of the following month;
(ii) promptly after receiving notice of the occurrence of any Event of
Default, the commencement of any material litigation against the Borrower,
or any development in the business or affairs of the Borrower which has
resulted in or which is likely in the reasonable judgement of the Borrower
to result in a material adverse change in the business, properties,
operations or condition, financial or otherwise of the Borrower, a
statement of the chief executive, chief operating officer or chief
financial officer of the Borrower setting forth details of such Event of
Default or Default or such event or condition or such litigation and the
action which the Borrower has taken and propose to take with respect
thereto; (iii) as soon as available and in any event within thirty (30)
days after the end of each month of each fiscal year, the consolidated
balance sheet of the Borrower as of the end of such month, and the related
statement of income, retained earnings and changes in financial position
for the period commencing at the end of the previous fiscal year and ending
with the end of such month, all in reasonable detail and duly certified
(subject to year-end adjustments) by the President or Controller of the
Borrower as having been
-4-
<PAGE>
prepared in accordance with generally accepted accounting principles,
together with a certificate of the chief executive officer of the Borrower
stating that no new Event of Default or Default has occurred and is
continuing or, if a new Event of Default or a Default has occurred and is
continuing, a statement setting forth the details thereof and the action
which has been taken and proposes to take with respect thereto; (iv)
financial statements of the Borrower in form and reporting basis
satisfactory to Comerica, not later than ninety (90) days after the close
of each fiscal year of the Borrower, beginning with the fiscal year ended
December 31, 1998, on a consolidated and consolidating basis containing the
balance sheet of the Borrower as of the close of each such fiscal year,
statements of income and retained earnings and a statement of cash flows
for each such fiscal year, and such other comments and financial details as
are usually included in similar reports, prepared by an independent
certified public accountant of recognized standing selected by the Borrower
and acceptable to Comerica containing opinions as to the fairness of the
statement so presented for the fiscal year ended December 31, 1998, and
thereafter, on an audited basis; (v) promptly after receiving or becoming
aware there has occurred a Reportable Event: (a) a copy of any notice of
intent to terminate any Plan of the Borrower or any ERISA Affiliate filed
with the PBGC, (b) a statement of the chief financial officer of the
Borrower setting forth the details of the occurrence of any Reportable
Event with respect to any such Plan, (c) a copy of any notice that the
Borrower, or any ERISA Affiliate may receive from the PBGC relating to the
intention of the PBGC to terminate any such Plan or to appoint a trustee to
administer any such Plan, or (d) a copy of any notice of failure to make a
required installment or other payment within the meaning of Section 412(n)
of the Code or Section 302(f) of ERISA with respect to any such Plan; (vi)
upon execution of this Agreement, a Borrowing Base Certificate, in form,
reasonably satisfactory to Comerica; (vii) monthly cash flow and operating
forecasts for the remainder of 1999 upon execution of this Agreement and
continuing monthly thereafter; (viii) copies of all paid personal property
tax receipts within 15 days of the due date for the personal property
taxes; (ix) certification of the status of all tax liabilities and payments
by the 15th day of each month, showing state sales taxes, state
unemployment taxes, state and federal withholding taxes, and state and
federal income taxes; (x) proof of insurance with Comerica named as loss
payee for all collateral, and proof that Borrower has obtained a lender
loss payable endorsement to Comerica, within ten (10) days from the date of
execution of this agreement; (xi) within thirty (30) days of each month
end, a Covenant Compliance Certificate, certified by its President or
Controller; and (xii) such other information respecting the business,
properties, operations or condition, financial or otherwise, of the
Borrowers as Comerica may from time to time reasonably request.
13. Borrower will permit Comerica to conduct periodic accounts receivable and
inventory audits using auditors acceptable to Comerica at times reasonably
requested by Comerica and will maintain Inventory in which Comerica holds a
first security interest of not less than $2,000,000 on a cost basis.
-5-
<PAGE>
14. Borrower acknowledges and agrees the Loan Documents presently provide and
it will permit Comerica, to conduct such fair market value appraisals,
inspections, and/or testing that Comerica deems necessary, on any and all
property upon which Comerica may hold a lien securing the Debt, and the
cost of such appraisals, inspections, and testing are part of the costs and
expenses for which the Borrower must reimburse Comerica. In addition,
Borrower will permit appraisals of all machinery and equipment to be
conducted by an appraiser suitable to Comerica on or before May 7, 1999.
15. To the extent any payment received by Comerica is deemed a preference,
fraudulent transfer or otherwise by a court of competent jurisdiction which
requires the Comerica to disgorge such payment then, such payment will be
deemed to have never occurred and the Debt will be adjusted accordingly.
Interest will not begin accruing on such repayments until funds are
actually disbursed by Comerica.
16. This Agreement shall be governed and controlled in all respects by the laws
of the State of Michigan, without reference to its conflict of law
provisions, including interpretation, enforceability, validity and
construction.
17. To induce Comerica to enter into this Agreement, Borrower has stated that
it intends and agrees to use its best efforts to procure sufficient new
capital or subordinated debt on reasonable terms and conditions to
eliminate the "Over-Formula Amount" and prevent any Further Defaults in
their financial covenants to Comerica (the "Capital Solicitation"). (A
conversion of existing subordinated debt to equity shall not be considered
new capital.) Consistent with the first sentence of this Paragraph,
Borrower will provide Comerica with a detailed written outline of the terms
of its proposed Capital Solicitation, including a timetable for the key
steps of the Capital Solicitation, within 30 days of the date of this
Agreement and will provide preliminary results of the Capital Solicitation
to Comerica within 60 days of this Agreement.
18. Borrower acknowledges and agrees that Comerica possesses a valid and
perfected security interest in substantially all of its assets, including
but not limited to Borrower's accounts receivable, equipment, inventory,
and general intangibles, as recognized by the Security Agreement and all
UCC filings.
19. Comerica anticipates that discussions addressing the Debt may take place in
the future. During the course of such discussions, Comerica and Borrower
may touch upon and possibly reach a preliminary understanding on one or
more issues prior to concluding negotiations. Notwithstanding this fact and
absent an express written waiver by Comerica, Comerica will not be bound by
an agreement on any individual issues unless and until an agreement is
reached on all issues and such agreement is reduced to writing and signed
by Borrower, and Comerica. As such, the parties agree that they may not
reasonably rely on any oral agreements.
-6-
<PAGE>
20. As of March 31, 1999, there are no offers other than those contained in
this Agreement outstanding from Comerica to Borrower. Any prior offers by
Comerica, whether oral or written are hereby rescinded in full. There are
no oral agreements between Comerica and Borrower and any agreements
concerning the Debt are expressed only in the existing Loan Documents. The
duties and obligations of Borrower and Comerica shall be only as set forth
in the Loan Documents and this Agreement when executed by all parties.
21. All notices, requests and demands required to be given hereunder, shall be
in writing and shall be deemed to have been duly given upon the date of
service if served personally or by facsimile transmission upon the party
for whom intended, or if mailed, by first class, registered or certified
mail, return receipt requested, postage prepaid, upon three (3) days after
the date of such mailing, to such party at its address as shown below or
otherwise hereafter designated by such party in writing:
If to Comerica: Mr. Jeffrey M. Beard
P.O. Box 75000
Detroit, MI 48275-3205
Facsimile: (313) 222-5706
Copy to: Robert E. Lee Wright
Miller, Canfield, Paddock and Stone, P.L.C.
1200 Campau Square Plaza
99 Monroe Avenue
Grand Rapids, MI 49503
Facsimile: (616) 776-6322
If to Borrower: Michael A. Lento
30 Ossipee Road
Newton, MA 02464-9101
Facsimile: (617) 965-1213
Copy to: Richard E. Mikels
Kevin J. Walsh
Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Facsimile: (617) 542-2241
22. Borrower agrees to execute any and all additional or supplemental
documentation, and provide such further assistance and assurances as
Comerica may require, in Comerica's sole and absolute discretion, to give
full effect of the terms, conditions and intentions of this Agreement.
-7-
<PAGE>
23. This Agreement may be executed in counterparts and facsimiles and the
counterpart, when properly executed and delivered by the signing deadline,
will constitute a fully executed complete agreement.
24. The parties submit to the jurisdiction and venue of the circuit court for
the County of Kent, State of Michigan or, if original jurisdiction can be
established, the United District Court for the Western District of Michigan
with respect to any action arising, directly or indirectly, out of this
Agreement or the performance or breach of this Agreement. The parties
stipulate that the venues referenced in this Agreement are convenient.
25. Time is of the essence in the performance of each and every provision of
this Agreement. Comerica expressly reserves the right to exercise any or
all rights and remedies provided under the Loan Documents and applicable
law except as modified herein. Comerica's failure to immediately exercise
such rights and remedies shall not be construed as a waiver or modification
of those rights or an offer of forbearance.
26. This Agreement will inure to the benefit of Comerica and all its past,
present and future parents, subsidiaries, affiliates, predecessors and
successor corporations and all of their subsidiaries and affiliates. This
Agreement is solely for the benefit of the parties hereto in connection
with the matters contemplated by the Agreement and may not be relied upon
for any other purpose or by any other person or entity for any purpose
without the prior written consent of Comerica.
27. BORROWER AND COMERICA ACKNOWLEDGE AND AGREE THAT THE RIGHT TO TRIAL BY JURY
IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT, THE LOAN
DOCUMENTS OR THE LIABILITIES.
28. BORROWER, IN EVERY CAPACITY, INCLUDING, BUT NOT LIMITED TO, AS
SHAREHOLDERS, PARTNERS, OFFICERS, DIRECTORS, INVESTORS AND/OR CREDITORS OF
BORROWER, OR ANY ONE OR MORE OF THEM, HEREBY WAIVE, DISCHARGE AND FOREVER
RELEASE COMERICA, COMERICA'S EMPLOYEES, OFFICERS, DIRECTORS, ATTORNEYS,
STOCKHOLDERS AND SUCCESSORS AND ASSIGNS, FROM AND OF ANY AND ALL CLAIMS,
CAUSES OF ACTION, DEFENSES, COUNTERCLAIMS OR OFFSETS AND/OR
-8-
<PAGE>
ALLEGATIONS BORROWER MAY HAVE OR MAY HAVE MADE OR THAT ARE BASED ON FACTS
OR CIRCUMSTANCES ARISING AT ANY TIME UP THROUGH AND INCLUDING THE DATE OF
THIS AGREEMENT, WHETHER KNOWN OR UNKNOWN, AGAINST ANY OR ALL OF COMERICA,
COMERICA'S EMPLOYEES, OFFICERS, DIRECTORS, ATTORNEYS, STOCKHOLDERS AND
SUCCESSORS AND ASSIGNS.
29. Borrower shall properly execute this Agreement and deliver it to the
undersigned by no later than 5:00 p.m. on May 7, 1999.
30. Comerica reserves the right to terminate its forbearance prior to the
expiration of the Forbearance Period, in the event of: (a) any Further
Default under the Loan Documents or this Agreement not cured pursuant to
Paragraph 1; (b) material deterioration in Comerica's collateral position
beyond that forecast by the operating forecasts set forth in Exhibit D; (c)
net losses, after all expenses, including amortization, depreciation,
interest and taxes, exceed: $265,000 in April, 1999 or $325,000 in May,
1999 or net profit after all expenses, including amortization,
depreciation, interest and taxes, is less than $100,000 in June 1999; or
(d) Comerica, for any reason, reasonably believes that the prospect of
payment or performance is impaired.
Very truly yours,
/s/ Michael J. VanDiepenbos
Michael J. VanDiepenbos
Assistant Vice President
ACKNOWLEDGED AND AGREED:
Microfluidics International Corporation
By: /s/ Irwin J. Gruverman
_________________________________________ Date:
Irwin J. Gruverman
Its: Chairman of the Board and
Chief Executive Officer
-9-
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1998 1999
---- ----
<S> <C> <C>
Weighted average shares outstanding: 4,923,180 5,816,426
========== ==========
Net income (loss) 92,549 $ (679,090)
========== ==========
Basic net income (loss) per share $ .02 $ (.12)
========== ==========
Effect of dilutive stock
options 102,440 0
========== ==========
Average shares outstanding:
Diluted 5,025,620 5,816,426
========== ==========
Diluted net income (loss) per share $ .02 $ (.12)
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 173,872
<SECURITIES> 0
<RECEIVABLES> 2,203,290
<ALLOWANCES> (63,138)
<INVENTORY> 4,322,418
<CURRENT-ASSETS> 6,981,688
<PP&E> 1,592,757
<DEPRECIATION> (752,811)
<TOTAL-ASSETS> 13,753,241
<CURRENT-LIABILITIES> 5,791,786
<BONDS> 0
0
0
<COMMON> 60,613
<OTHER-SE> 7,275,842
<TOTAL-LIABILITY-AND-EQUITY> 13,753,241
<SALES> 5,939,639
<TOTAL-REVENUES> 5,939,639
<CGS> 3,481,867
<TOTAL-COSTS> 6,427,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209,200
<INCOME-PRETAX> (679,090)
<INCOME-TAX> 0
<INCOME-CONTINUING> (679,090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (679,090)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
