<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
-------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-------------------
Commission File Number: 0-11625
MICROFLUIDICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2793022
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
30 Ossipee Road, P.0. Box 9101
Newton, Massachusetts 02464-9101
- -------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 969-5452
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
----- -----
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. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant (without admitting that any person whose shares are not included in
determining such value is an affiliate), based upon the closing sale price of
the Common Stock on March 25, 1999 as reported on the Nasdaq National Market was
$2,809,064.
The number of shares outstanding of the registrant's Common Stock as of March
25, 1999 was 6,061,307 shares.
<PAGE>
Microfluidics International Corporation
Part II, Item 8 to the Microfluidics International Corporation's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission on April
15, 1999 for the fiscal year ended December 31, 1998, is hereby deleted and
replaced with Part II, Item 8 included in this Amendment No. 1. In addition a
consent of PricewaterhouseCoopers LLP is hereby added to Item 14(a)(3) of this
Amendment No. 1.
<PAGE>
-25-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and its
Subsidiaries appear on the following pages of this Form 10-K.
Page
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3 & F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
<PAGE>
-33-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1.) Consolidated Financial Statements.
The following Consolidated Financial Statements are included in
Item 8:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors
Report of Independent Accountants
(a)(2.) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
(a)(3.) List of Exhibits.
Exhibit
Number Description of Exhibit
------ ----------------------
3.3(a) Certificate of Incorporation for the Company, as amended (filed as
Exhibit 2A to Registration Statement No. 0-11625 on Form 8-A and
incorporated herein by reference).
<PAGE>
-34-
3.3(b) Amended and Restated By-Laws for the Company (filed as
Exhibit 3.3(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 and incorporated herein by
reference).
** 3.10(a) 1987 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 and
incorporated herein by reference).
** 3.10(b) 1988 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference).
3.10(c) 1989 Non-Employee Directors Stock Option Plan (filed as Exhibit
10.1 to the Company's registration statement on Form S-8 filed
October 22, 1996 and incorporated herein by reference).
3.10(d) Loan Agreement between The First National Bank of Boston and
Microfluidics International Corporation dated as of December 10,
1993 (filed as Exhibit 10.2 to Form 8-K filed on December 27, 1993
and incorporated herein by reference.
3.10(e) Lease for 30 Ossipee Road, Newton Massachusetts dated May 23, 1997
between Microfluidics International Corporation and J. Frank
Garrity, Trustee of 1238 Chestnut Street Trust under Declaration of
Trust dated May 23, 1969, recorded with Middlesex South Registry of
Deeds in Book 11682, Page 384 (filed as Exhibit 3.10a to the
Company's Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated herein by reference).
3.10(f) Letter of Understanding between Microfluidics International
Corporation and Worcester Polytechnic Institute dated as of April 3,
1992 (filed as Exhibit 3.10(f) to the Company's Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference).
3.10(g) Agreement between Microfluidics International Corporation and
Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit
3.10(g) to the Company's Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference) with
amendements dated September 1, 1994 and March 31, 1995.
3.10(h) Amendement to agreement dated September 1, 1994 between
Microfluidics International Corporation and Catalytica, Inc. dated
as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's
Form 10-K for the fiscal year ended December 31, 1993, and
incorporated herein by reference).
<PAGE>
-35-
3.10(i) Amendment to agreement dated March 31, 1995 between Microfluidics
International Corporation and Catalytica, Inc. dated as of
October 18, 1993 (filed as Exhibit 3.10(g) to the Company's
Form 10-K for the fiscal year ended December 31, 1993, and
incorporated herein by reference).
3.10(j) License Agreement among Microfluidics International Corporation,
Worcester Polytechnic Institute and Catalytica, Inc. dated as of
October 18, 1993 (filed as Exhibit 3.10(h) to the Company's Form
10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
** 3.10(k) Agreement, dated July 27, 1995, between Microfluidics International
Corporation and Michael T. Rumley (filed as Exhibit 3.10(i) to the
Company's Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
** 3.10(l) Letter, dated August 15, 1995, from Microfluidics International
Corporation to Michael T. Rumley (filed as Exhibit 3.10(j) to the
Company's Form 10-K for fiscal year ended December 31, 1995 and
incorporated hereby reference).
** 3.10(m) Letter, dated December 31, 1995 from Microfluidics International
Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(k) to the
Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
3.10(n) Warrant for the Purchase of Shares of Common Stock, dated July 14,
1993, in favor of Ladenburg, Thalmann & Co. Inc. (filed as
Exhibit 3.10(l) to the Company's Form 10-K for fiscal year ended
December 31, 1996 and incorporated herein by reference).
** 3.10(o) Letter, dated December 31, 1996, from Microfluidics International
Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(o) to the
Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
3.10(p) Agreement between Microfluidics International Corporation and
Catalytica, Inc. dated January 1, 1995 regarding participation in
and management of the Advanced Technology Program (ATP) (filed as
Exhibit 3.10(p) to the Company's Form 10-K for fiscal year ended
December 31, 1996 and incorporated herein by reference).
3.10(q) Consulting Agreement with James Little (filed as Exhibit 3.10(q) to
the Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
3.10(r) Subsidiaries of the Registrant (filed as Exhibit 3.21 to the
Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
<PAGE>
-36-
3.10(s) Letter dated December 31, 1997, from Microfluidics International
Corporation** to Irwin J. Gruverman and G & G Diagnostics Corp.
3.10(t) 1988 Stock Plan as amended (filed as Exhibit 10(a) to the Company's
Form 10-Q for the quarterly period ended March 31, 1997 and
incorporated herein by reference.
3.10(u) Asset Purchase Agreement dated as of June 19, 1998, by and among the
Company, Epworth Manufacturing Company and Morehouse-COWLES, Inc.
(filed as Exhibit 2.1 to Schedule 13D of Bret A. Lewis, File No.
005-35850, and incorproated herein by reference).
3.10(v) Stockholders Agreement dated August 14, 1998, by and among the
Company, J.B. Jennings and Bret A. Lewis (filed as exhibit 2.2 to
Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated
herein by reference).
3.10(w) $500,000 Subordinated Promissory Note issued by the Company to
Epworth Manufacturing Company (filed as Exhibit 99.1 to the
Company's Form 8-K on August 27, 1998, File No. 000-11625, and
incorporated herein by reference).
3.10(x) $300,000 Subordinated Promissory Note issued by the Company to
Epworth Manufacturing Company (filed as exhibit 99.2 to the
Company's Form 8-K on August 27, 1998, File No. 000-11625, and
incorporated herein by reference).
3.10(y) Revolving credit loan between Comerica Bank and the Company dated
August 12, 1998 (Filed as Exhibit 10.1 to the Company's form 10-Q
for the quarterly period ended September 30, 1998 and incorporated
herein by reference).
3.10(z) Letter dated December 31, 1998 from Microfluidics International
Corporation to Irwin J. Gruverman.
23(a) Consent of Deloitte & Touche LLP.
*23(b) Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.
- ----------------
*Filed herewith
**Management contracts or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
<PAGE>
-37-
(b) Reports on Form 8-K.
On October 28, 1998, the Company filed Amendment No. 2 on Form 8K/A
amending the previous filings of August 27, 1998 and September 11,
1998 to include pro forma financial statements required in connection
with the Company's acquisition of substantially all of the assets of
Epworth Manufacturing Company and Morehouse-COWLES, Inc.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the Exhibits listed
in Item 14(a)(3) as set forth above.
(d) Financial Statement Schedules.
See (a)(2) above.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and
Stockholders of Microfluidics
International Corporation:
We have audited the accompanying consolidated balance sheets of Microfluidics
International Corporation and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, comprehensive income (loss),
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Microfluidics International Corporation and Subsidiaries as of December 31, 1998
and 1997, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note N to the
consolidated financial statements, the Company incurred a net loss of
approximately $1,505,000 in 1998 and was not in compliance with certain
covenants of its revolving credit loan agreement. The Company's lender has
declared the loan in default. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note N. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 23, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Stockholders of Microfluidics
International Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for Microfluidics International Corporation
and Subsidiaries for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Microfluidics
International Corporation and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1997
F-2
<PAGE>
/1/MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 550,713 $4,083,214
Marketable securities 10,080 55,638
Accounts receivable, less allowance of $100,000
and $40,000 in 1998 and 1997, respectively 2,284,840 1,396,088
Other receivables 84,845 122,550
Accounts receivable related party 24,417 18,439
Inventories 4,450,926 2,436,938
Prepaid expenses 164,528 26,764
----------- ----------
Total current assets 7,570,349 8,139,631
Equipment and Leasehold Improvements, at cost
Furniture, fixtures and office equipment 436,447 335,467
Machinery and equipment 893,388 261,592
Leasehold improvements 310,563 125,322
----------- ----------
1,640,398 722,381
Less: Accumulated depreciation and amortization (644,065) (570,555)
----------- ----------
996,333 151,826
Goodwill (net of accumulated amortization of 6,010,130
$154,329)
Patents, Licenses and Other Intangible assets-(net of
accumulated amortization of $423,470 in 1998
and $379,549 in 1997) 123,210 167,131
Deferred Income Taxes 413,630
----------- ----------
Total assets $14,700,022 $8,872,218
=========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and other accrued expenses $ 1,158,999 $ 939,796
Accrued interest related party 20,164
Accrued compensation 78,488 76,269
Accrued vacation pay 98,667 37,294
Customer advances 166,136 280,716
Line of credit 4,347,782
Current portion of long term debt related party 125,000
------------ ------------
Total current liabilities 5,995,236 1,334,075
Long term debt, net of current portion - related party 675,000
Commitments and contingencies
Stockholders' Equity
Common Stock, par value $.01 per share,
20,000,000 shares authorized; 6,056,983
and 5,136,804 shares issued and outstanding
at December 31, 1998 and 1997,
respectively 60,570 51,368
Additional paid-in capital 12,491,423 10,442,840
Accumulated deficit (3,865,800) (2,360,359)
Accumulated other comprehensive income 10,080 55,638
Less: Treasury Stock, at cost, 235,219 and 220,719
shares in 1998 and 1997, respectively (666,487) (651,344)
----------- -----------
Total stockholders' equity 8,029,786 7,538,143
----------- -----------
Total liabilities and stockholders' equity $14,700,022 $ 8,872,218
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 8,869,679 $ 7,105,706 $ 6,273,768
Cost of goods sold 4,954,826 3,265,593 2,847,224
Research and development 935,880 459,240 450,477
Selling, general and administrative 4,077,436 2,977,577 2,625,184
----------- ---------- ----------
Total cost and expenses 9,968,142 6,702,410 5,922,885
----------- ---------- ----------
Income (loss) from operations (1,098,463) 403,296 350,883
Interest expense (149,043)
Interest income 119,492 159,256 100,612
Other income 50,012 50,009
Gain on sale of investments 36,203 91,863
----------- ---------- ----------
Income (loss) before income taxes (1,091,811) 704,427 501,504
Income tax benefit (provision) (413,630) 403,630
----------- ---------- ----------
Net income (loss) $(1,505,441) $ 1,108,057 $ 501,504
=========== =========== ==========
Basic earnings per share:
Average shares outstanding:basic 5,296,923 4,914,722 4,941,711
=========== =========== ==========
Net income (loss) per share $ (.28) $ .23 $ .10
=========== =========== ==========
Diluted earnings per share:
Average shares outstanding:diluted 5,296,923 4,966,998 4,948,506
=========== =========== ==========
Net income (loss) per share $ (.28) $ .22 $ .10
=========== =========== ==========
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE (LOSS) INCOME
NET INCOME (LOSS) $(1,505,441) $ 1,108,057 $ 501,504
Unrealized depreciation on
marketable securities (45,558) (11,799) --
----------- ----------- ----------
Comprehensive Income (Loss) $(1,550,999) $ 1,096,258 $ 501,504
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss) $(1,505,441) $1,108,057 $ 501,504
Reconciliation of net income (loss) to net cash
(used) provided by operations:
Depreciation and amortization 321,251 105,383 95,101
Issuance of common stock for employee compensation 30,000 24,000
Bad debt expense 30,000 19,877 10,000
Gain on sale of investments (36,203) (91,863)
Income tax (benefit) provision 413,630 (403,630)
Increase (decrease) in cash due to change in
(net of acquistions):
Receivables and other receivables 391,768 102,852 111,214
Inventories 766,258 (145,170) 164,621
Prepaid expenses (48,615) (4,906) 40,295
Current liabilities (1,592,042) 569,274 67,896
----------- ---------- ----------
Net cash (used) provided by operations (1,259,394) 1,289,874 1,014,631
Cash flows from (used by) investing activities:
Proceeds from sale of investments 36,203 91,863
Excess of cost over assets purchased (goodwill) (3,339,459)
Business assets acquired, net of cash received (3,102,216)
Purchase of fixed assets and leasehold improvements (233,062) (68,439) (21,636)
----------- ---------- ----------
Net cash from (used) provided by investing activities (6,638,534) 23,424 (21,636)
Cash flows from financing activities:
Proceeds from line of credit 4,347,782
Issuance of common stock under employee stock
purchase plan 7,724 21,788 21,861
Issuance of common stock under stock option
plan 25,061 16,964 9,663
Treasury stock purchased (15,143) ( 55,390) (141,383)
----------- ---------- ----------
Net cash (used) provided by financing activities 4,365,424 (16,638) (109,859)
Net increase (decrease) in cash and cash
equivalents (3,532,504) 1,296,660 883,136
Cash and cash equivalents at beginning of year 4,083,214 2,786,554 1,903,418
----------- ---------- ----------
Cash and cash equivalents at end of year $ 550,710 $4,083,214 $2,786,554
=========== ========== ==========
Supplemental disclosure of cash flow information:
Assets acquired in exchange for notes and
common stock $ 2,825,000
===========
Cash paid for interest $ 100,861 0 0
=========== ========== ==========
Cash paid for corporate taxes 0 0 0
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Number of Common Other - Number of
Shares of Stock at Additional Comprehen- Shares of
Common par paid-in Accumul- sive Treasury Treasury
Stock value capital lated deficit Income Stock Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,058,203 $50,582 $10,319,350 $ (3,969,920) $ 83,640 107,019 $ (454,571) $6,029,081
- -----------------------------------------------------------------------------------------------------------------------------
Change in unrealized
depreciation on
marketable securities (16,203) (16,203)
Stock options exercised 6,550 66 9,597 9,663
Stock in lieu of salary 16,000 160 23,840 24,000
Proceeds from employee stock
purchase plan 14,028 140 21,721 21,861
Treasury stock 85,100 (141,383) (141,383)
Net income 501,504 501,504
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,094,781 50,948 10,374,508 (3,468,416) 67,437 192,119 (595,954) 6,428,523
- -----------------------------------------------------------------------------------------------------------------------------
Change in unrealized
depreciation on
marketable securities (11,799) (11,799)
Stock options exercised 9,175 91 16,873 16,964
Stock in lieu of salary 20,000 200 29,800 30,000
Proceeds from employee stock
purchase plan 12,848 129 21,659 21,788
Treasury stock 28,600 (55,390) (55,390)
Net income 1,108,057 1,108,057
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 5,136,804 51,368 10,442,840 (2,360,359) 55,638 220,719 (651,344) 7,538,143
- -----------------------------------------------------------------------------------------------------------------------------
Change in unrealized
depreciation on
marketable securities (45,558) (45,558)
Stock options exercised 16,250 163 24,898 25,061
Proceeds from employee
stock purchase plan 3,929 39 7,685 7,724
Issuance of stock in
conjunction with
purchase of Epworth
and Morehouse
Divisions 900,000 9,000 2,016,000 2,025,000
Treasury stock 14,500 (15,143) (15,143)
Net Loss (1,505,441) (1,505,441)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,056,983 $60,570 $12,491,423 $ (3,865,800) $ 10,080 235,219 $(666,487) $8,029,786
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
MICROFLUIDICS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1. Consolidation
The consolidated financial statements of Microfluidics International
Corporation ("the Company") include the accounts of the Company and
its wholly owned subsidiaries, Microfluidics Corporation ("MFC") and
MediControl Corporation ("MediControl").
All significant intercompany transactions have been eliminated.
2. Cash Equivalents
The Company considers securities with maturities of three months or
less, when purchased, to be cash equivalents.
3. Marketable Securities
The Company's marketable securities are categorized as available for
sale securities as defined by the Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). Unrealized holding gains and losses are
included as a component of accumulated other comprehensive income
until realized. For the purpose of computing realized gains and
losses, cost is identified on a specific identification basis.
4. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
F-8
<PAGE>
5. Equipment and Leasehold Improvements
The Company's equipment and leasehold improvements are recorded at
cost. Depreciation is computed on the straight-line method, based
upon useful lives of three to five years. Leasehold improvements are
amortized on the straight-line method based upon the shorter of the
estimated useful lives or remaining life of the lease. Expenditures
for maintenance and repairs are expensed as incurred. Upon retirement
or sale of property and equipment, the cost of the disposed asset and
the related accumulated depreciation are removed from the accounts and
any resulting gain, or loss is credited or charged to operations.
6. Patents, Licenses, and Other Intangible Assets
Patents, patent applications, rights and goodwill are stated at
acquisition cost. Amortization is recorded using the straight-line
method over the shorter of the legal lives or useful life of the
assets. The Company periodically reviews the carrying value of
intangible assets and impairments are recognized if the expected
future operating cash flows derived from such intangible assets is
less than their carrying value.
7. Income Taxes
The Company provides for income taxes based on the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," which requires recognition of deferred
tax assets and liabilities based on the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based upon the difference between the
financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to be reversed. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized as
income or loss in the period that includes the enactment date.
8. Revenue Recognition
Product sales and related cost of sales are reflected in income when
goods are shipped.
9. Comprehensive Income (Loss)
In June, 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS 130, "Reporting Comprehensive Income". SFAS 130 requires
that certain components of stockholders' equity from non owner sources
be identified as "Other Comprehensive Income." For the years ended
December 31, 1998 and December 31, 1997, the Company's comprehensive
income (loss) was comprised of the impact of changes in unrealized
depreciation on marketable securities and net income.
F-9
<PAGE>
10. Earnings (Loss) per Share
Basic Earnings Per Share (EPS) is computed by dividing net income
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 contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock.
A reconciliation of the numerators and denominators of the basic and
diluted EPS computations is shown below. Options to purchase 354,910,
893,873, and 1,074,105, shares of common stock were outstanding for
the years ended 1998, 1997 and 1996, respectively, but were excluded
from the computation of diluted EPS because the options' exercise
price was greater than the average market price of common shares. All
options outstanding during 1998 were excluded from the computation of
diluted EPS because the effect of such options would have been
antidilutive.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average Shares
Outstanding: Basic 5,296,923 4,914,722 4,941,711
========= ========= =========
Basic Earnings per Share:
Net income (loss) per share $ (.28) $ .23 $ .10
========= ========= =========
Weighted average Shares Outstanding: Basic 5,296,923 4,914,722 4,941,711
Effect of Dilutive stock options -- 52,276 6,795
--------- --------- ---------
Average Shares Outstanding: Diluted 5,296,923 4,966,998 4,948,506
========= ========= =========
Net income (loss) per share $ (.28) $ .22 $ .10
========= ========= =========
</TABLE>
11. Use of Estimates
The process of preparing consolidated financial statements in
conformity with generally accepted accounting principles requires the
use of estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
12. 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, 2000. 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.
F-10
<PAGE>
13. Fair Value of Financial Instruments
Marketable securities are carried at fair value, based on quoted
market prices, in the accompanying consolidated balance sheets. The
carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximates fair value due
to the short term nature of these accounts. The carrying value of the
Company's debt obligations also approximate fair value.
14. Certain 1997 Amounts have been reclassified to conform with the 1998
presentations
B. INDUSTRY SEGMENT AND MAJOR CUSTOMERS:
The Company has one business segment: the development, manufacture,
marketing and sale of process and formulation equipment. The Company's
sales are primarily to companies with processing needs in the
chemical, pharmaceutical, food, cosmetic, and biotechnology
industries.
Mizuho Industrial Co. Ltd. (a distributor) accounted for 8% of
revenues in 1998, 20% of revenues in 1997 and 17% of revenues in 1996.
Another customer (Avon Products, Inc.) accounted for 8% of revenues in
1998. One other distributor (Inland Machinery Manufacturing, Ltd.)
accounted for 8% of revenues in 1998, 6% of revenues in 1997, and 10%
of revenues in 1996. A reduction or delay in orders from Mizuho or
other significant customers could have a material adverse effect on
the Company's business, financial condition, or results of operations.
Sales in Europe were approximately $832,000, $1,453,000, and $772,000,
and sales in Asia were approximately $924,000, $1,582,000, and
$1,288,000 in 1998, 1997 and 1996, respectively, of the total
revenues.
C. MARKETABLE SECURITIES:
At December 31, 1998 and 1997, respectively, the Company held 0 and
3,940 shares of PolyMedica Industries, Inc., a publicly traded
company, at zero cost through its wholly owned subsidiary MediControl.
The Company also, as a result of a spinoff by PolyMedica Industries,
Inc., held 6,720 shares in another publicly traded company, Cardiotech
International, Inc. The total market value of these marketable
securities at December 31, 1998 and 1997 was $10,080 and $55,638,
respectively.
In both 1998 and 1997, the Company sold shares of PolyMedica
Industries, Inc. (3,940 in 1998 and 10,000 in 1997), at a gain of
$36,203 and $91,863 respectively.
D. INVENTORY
The components of inventories are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials $1,875,881 $1,277,094
Work in process 1,075,711 649,946
Finished goods 1,499,334 509,898
---------- ----------
$4,450,926 $2,436,938
========== ==========
</TABLE>
E. PATENTS, LICENSES AND OTHER INTANGIBLE ASSETS
The Company purchased the rights and title of certain liposome and
microemulsion technology devices from Arthur D. Little in 1985. The
unamortized license fee and patent are included in intangible assets
and are being amortized using the straight line method over the useful
life of the patent, 17 years. Patents and other intangible assets
were purchased in 1991 as a result of a share exchange by MediControl
stockholders. These patents and other intangible assets were being
amortized using the straight line method over five years. In
addition, in 1995, the Company capitalized $96,680 of patent costs
related to the cooperative-venture described in Note L. Amortization
charged to expense was $43,920 in 1998, 1997, and 1996.
F. ACQUISITION OF ASSETS
On August 14, 1998, (the "Closing Date"), the Company purchased
substantially all of the assets (the "Transferred Assets") and assumed
certain liabilities of Epworth Manufacturing Company of South Haven,
Michigan ("Epworth") and Morehouse-COWLES, Inc. of Fullerton,
California ("Morehouse" and together with Epworth, the "Sellers")
pursuant to an Asset Purchase Agreement (the "Agreement") dated as of
June 19, 1998 by and among the Company, Epworth and Morehouse. Messrs.
J.B. Jennings and Bret A. Lewis are the sole stockholders of both
Epworth and Morehouse (the"Principals"). Epworth and Morehouse each
manufactures and distributes a product line of crushing/grinding,
mixing, dissolving and dispersion systems for solid or solids
materials processing that are marketed together under the EMCO U.S.A.
trade name. The Company intends to continue the operations of Epworth
and Morehouse, each as a separate division of the Company, and to
continue the use of the Transferred Assets to manufacture and
distribute crushing/grinding, mixing, dissolving and dispersion
systems. The Transferred Assets included cash and cash equivalents,
accounts and notes receivables, inventories, machinery and equipment,
intellectual property rights, furniture and fixtures and leasehold
interests and improvements.
F-11
<PAGE>
In accordance with the Agreement, the Company paid or delivered to the
Sellers the following as consideration for the purchase price of the
Transferred Assets (the "Purchase Price"): (i) $5,508,480 in cash,
(ii) two subordinated promissory notes in the aggregate principal
amount of $800,000 (the "Promissory Notes") and (iii) 900,000 shares
(a value of $2,025,000) of the Company's restricted common stock,
$.01 par value share, subject to the restrictions set forth in a
stockholders agreement among MFIC and the Principals dated August 14,
1998 (the "Stockholders Agreement"). The Company also incurred
approximately $500,000 in expenses. In addition, the Company assumed
approximately $1,930,000 which amount was comparable to the accounts
payable and accrued liabilities set forth on the Sellers' balance
sheets as of December 31, 1997 (the "Assumed Liabilities"), certain of
which were also paid on the Closing Date. The consideration paid by
the Company for the Transferred Assets was determined through arms-
length negotiations between the Company and the Sellers. The
acquisition has been accounted for under the purchase method of
accounting.
As a result of the acquisition, the Company paid an amount in excess
of the fair market value of the assets purchased less liabilities
assumed (goodwill). This amount is to be amortized over a fifteen year
period, which the Company determined to be the proper term.
If the acquisition had occurred as of January 1, 1997, pro-forma
information for the years ended December 31, 1998 and 1997 would be as
follows:
<TABLE>
<CAPTION>
Years ended
December 31
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenues $14,719,874 $18,824,327
=========== ===========
Net Income (loss) $(2,066,436) $ 938,455
=========== ===========
Earnings (loss) per share:
Basic: $ (.39) .16
=========== ===========
Diluted: $ (.39) .16
=========== ===========
</TABLE>
G. SUBORDINATED DEBT AND LINE OF CREDIT
The Company delivered to Jennings and Lewis (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 due quarterly, at 10% per annum, with principal
payments of twelve equal installments of $25,000 each commencing
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 paid $1,897,509 from its working capital and 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 "Revolving Loan Agreement") provide 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 is secured by substantially all the assets of the Company.
During the period the line of credit is outstanding the Company may
not pay any dividends to stockholders.The line of credit expires on
September 1, 2001. The outstanding principal balance at December 31,
1998 under the Revolving Loan Agreement is $4,347,782 and currently
bears interest at a rate of 7.125% per annum.
At December 31, 1998, the Company was not in compliance with certain
covenants of the Revolving Loan Agreement and, accordingly, has
reclassified all amounts due to current liabilities. See Note N for
further information.
F-12
<PAGE>
H. EMPLOYEE BENEFITS
Effective January 1, 1990, the Company offered a 401(k) profit-sharing
plan (the "Plan"), to its employees. All Company and related entity
employees who are eighteen years of age and have completed one hour of
service are eligible to participate in the Plan. Employees may
contribute from 1% to 20% of their compensation. Until 1997, the
Company's contribution was discretionary, with contributions made from
time to time as management deemed advisable. The Company made matching
contributions of $23,842 and $17,466 in 1998 and 1997, respectively,
and no matching contributions during 1996. Plan administration
expenses of $3,464, $1,500, and $3,564 were incurred by the Company in
1998, 1997, and 1996, respectively. The Company instituted a cafeteria
plan in 1992, giving the employees certain pre-tax advantages on
specific payroll deductions.
I. INCOME TAXES
The provision (benefit) for income taxes for the years ended are as
follows:
<TABLE>
<CAPTION>
Federal State Total
<S> <C> <C> <C>
December 31, 1998:
Current $ 0 $ 0 $ 0
Deferred 351,630 62,000 413,630
--------- -------- ---------
Total $ 351,630 $ 62,000 $ 413,630
========= ======== =========
December 31, 1997:
Current $ 9,544 $ 456 $ 10,000
Deferred (365,482) (48,148) (413,630)
--------- -------- ---------
Total $(355,938) $(47,692) $(403,630)
========= ======== =========
December 31, 1996:
Current $ - $ - $ -
Deferred - - -
--------- -------- ---------
Total $ 0 $ 0 $ 0
========= ======== =========
</TABLE>
F-13
<PAGE>
The approximate tax effect of each type of temporary difference and operating
loss carryforward is as follows at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss $ 1,277,669 $ 1,015,976 $ 1,012,386
Research and development credit 188,159 183,344 183,344
Inventory capitalization 306,343 172,773 144,063
Accruals and allowances 79,467 74,518 31,348
Marketable securities (4,032) (22,255) (26,975)
Depreciation and amortization (2,034) (10,726) (15,338)
------------ ------------ ------------
Net deferred tax asset before
valuation allowance 1,845,692 1,413,630 1,328,828
Valuation allowance 1,845,692 (1,000,000) (1,328,828)
------------ ------------ ------------
Net deferred tax asset after
valuation allowance $ 0 $ 413,630 $ 0
============ ============ ============
</TABLE>
The Company has a federal net operating loss tax (NOL) 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 valuation allowance against the deferred tax asset
due to the uncertainty of earning sufficient taxable income to realize
the benefit of these assets. Therefore the Company has increased the
valuation allowance by $845,692 in 1998. Due to profitable operations
both in 1997 and 1996, respectively the Company decreased the
valuation allowance by $328,828 and $114,716.
The following schedule reconciles the difference between the federal
income tax rate and the effective income tax rate for the years ended
December 31,
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Federal income tax rate (34.0)% 34.0% 34.0%
State income tax net (6.0) 6.0 -
Permanent differences .4 0.7 2.7
Unbenefitted NOL -- (36.7)
Change in valuation allowance 77.5 (98.0) -
------- ------ ------
Total effective tax rate 37.9% (57.3)% 0%
======= ====== ======
</TABLE>
F-14
<PAGE>
J. STOCKHOLDER'S EQUITY:
The Company adopted the 1988 Stock Plan as the successor plan to the
1987 Stock Plan, which, as amended at the 1997 stockholder's meeting,
authorizes the grant of Stock Rights for up to 2,350,000 shares of
Common Stock and the 1989 Non-Employee Director Stock Option Plan
which, as amended at the 1996 stockholders' meeting, authorizes the
grant of nonqualified stock options for up to 500,000 shares of common
stock.
Additionally, the Company has an employee stock purchase plan. Under
the employee stock purchase plan, participants are granted options to
purchase the Company's common stock twice a year at the lower of 85%
of market value at the beginning or end of each period. Calculation of
the number of options granted, and subsequent purchase of these
shares, is based upon voluntary payroll deductions during each six
month period. The number of options granted to each employee under
this plan, is limited to a maximum amount of 1000 for each six month
period. The number of shares issued pursuant to this plan totaled
3,929 in 1998, 12,848 in 1997 and 14,028 in 1996.
The Company applies APB Opinion No. 25 and related interpretations
in accounting for its plans. FASB Statement No. 123 "Accounting For
Stock-Based Compensation"("SFAS 123") was issued by the FASB in 1995
and, if fully adopted, changes the method for recognition of cost on
plans similar to those of the Company. Adoption of SFAS 123 is
optional. Proforma disclosures as if the Company adopted the cost
recognition requirements under SFAS 123 are presented below.
The Company's stock option plans provide for the granting of
nonqualified stock options that (i) are granted at prices which equate
to or are above the market value of the stock on the date of the
grant; (ii) vest ratably over a three and one half to four year
service vesting period and (iii) expire ten years subsequent to award.
A summary of the status of the Company's stock options as of December
31, 1998, 1997, and 1996 and changes during the year ended on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Wgtd. Avg. Wgtd Avg. Wgtd. Avg.
Shares Exer. Price Shares Exer. Price Shares Exer Price
---------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, at beginning
of year 946,150 $2.37 1,080,900 $2.62 996,600 $3.09
Option shares:
Granted 1,701,625 1.34 114,000 1.75 369,300 1.65
Exercised 16,250 1.54 45,175 1.44 6,550 1.48
Cancelled 1,214,938 2.38 203,575 2.57 278,450 3.12
---------- ----- --------- ----- --------- -----
Outstanding, at end of year 1,416,587 $1.15 946,150 $2.37 1,080,900 $2.62
========== ===== ========= ===== ========= =====
</TABLE>
In October, 1998 the Board of Directors approved a vote to reprice
1,591,225 employee stock options. The options were originally issued
between January 1990 through January 1998 and had original grant
prices ranging between $1.16 and $6.25. The grant price for these
options was lowered to $1.13 which reflects the market value of the
stock as of the reprice date. The repriced options vest over either
a three or four year period, depending upon when the original
grants were issued. No compensation expense is required to be
recorded.
<TABLE>
<CAPTION>
The table below summarizes options outstanding and exercisable at, December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------------------
Weighted
Average Weighted Exercisable Weighted
Remaining Average As of Average
Range of Number of Contractual Exercise December 31, Exercise
Exercise Price Options Life Price 1998 Price
------------------ --------------- -------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
1.00-2.25 1,411,387 8.5 $ 1.17 349,710 $ 1.16
2.26-5.88 5,200 .6 3.53 5,200 3.53
--------------- -------------- -------------- ------------------ ----------------
Total 1,416,587 8.5 $ 1.15 354,910 $ 1.19
--------------- -------------- -------------- ------------------ ----------------
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Price Range of Outstanding Options at Year End $ 1.00-5.88 $1.47-6.25 $1.16-7.44
Options Exercisable at Year End 354,910 522,000 496,763
----------- ---------- ----------
Options Available for Future Grant 766,438 1,253,125 582,550
=========== ========== ==========
Weighted Average Fair Value of Options
Granted During the Year $ 1.22 $ 0.84 $ 0.88
----------- ---------- ----------
</TABLE>
The fair value of each option granted during 1998, 1997 and 1996 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (i) dividend yield of 0%; (ii) expected volatility of
146%; (iii) risk-free interest rate of 5.25% in 1998, 5.51% in 1997, and 4.50%
in 1996 and (iv) expected life of five years in 1998 and 1997, and four years
for 1996.
Had compensation cost for the Company's 1998,1997 and 1996 grants for stock-
based compensation plans been determined consistent with SFAS 123, the Company's
net income (loss), and diluted net income (loss) per share for 1998, 1997 and
1996 would approximate the proforma amounts below:
<TABLE>
<CAPTION>
As Reported Proforma
------------ --------
1998 1997 1996 1998 1997 1996
------------ ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income/(Loss) $(1,505,441) $1,108,057 $501,504 $(1,843,511) $1,013,667 $357,235
=========== ========== ======== =========== ========== ========
Diluted Net Income/(Loss)
per Share $ (.28) $ .22 $ .10 $ (.35) $ .20 $ .07
=========== ========== ======== =========== ========== ========
</TABLE>
In connection with financial advisory services rendered to the Company in 1993
the Company granted a warrant to purchase up to 75,000 shares at a per share
purchase price of $4.50 commencing on July 14, 1994 and exercisable until July
14, 1998. The warrant was not exercised by the expiration Date.
At December 31, 1998, the Company has reserved 2,850,000 shares for issuance
under the above mentioned stock plans.
F-16
<PAGE>
K. COMMITMENTS AND CONTINGENCIES:
At December 31, 1998 the Company had operating leases for the rental of its
facilities which require the following minimum payments for the next five
years:
Minimum Payments
----------------
1999 $ 443,080
2000 451,080
2001 321,830
2002 232,080
2003 169,800
==========
Rent expense for 1998, 1997, and 1996 was approximately $282,000, $170,000,
and $150,000, respectively. The current leases are due to terminate at
various times through August 2006.
L. COOPERATIVE VENTURE:
In 1992, the Company formed a cooperative venture with Worcester
Polytechnic Institute to develop, patent, and license for commercial
application the Microfluidizer processing technology in certain fields.
Expenditures for this venture were approximately $ 0 both in 1997 and 1996.
The costs in connection with patent applications of $96,680 have been
included in intangible assets.
In October of 1993, the Company signed a license and research and
development agreement with Catalytica, Inc., as joint licensee, to further
the studies of the venture with Worcester Polytechnic Institute, as
licensor. The Company spent $286,256 and $216,301 in 1997 and
1996,respectively , for this venture. The Company was reimbursed $137,403
and $103,824 in 1997 and 1996, respectively, from a government grant
awarded jointly to Catalytica, Inc. and the Company in relation to this
project. The remainder of the expenditures were included in research and
development expense. The cooperative venture was terminated in 1998.
F-17
<PAGE>
M. RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, the Company and an entity G&G Diagnostics
Corporation (G&G) controlled by Mr. Gruverman, the Company's Chairman,
entered into an arrangement whereby such entity reimbursed the Company for
a portion of certain administrative expenses. The Company was reimbursed
approximately $76,363, $74,125, and $72,610, by G&G during 1998, 1997 and
1996, respectively. At December 31, 1998 and 1997, G&G owed the Company
$24,417 and $18,439 respectively.
As was indicated in Note G, the Company delivered to Jennings and Lewis
(the Sellers), two subordinated promissary notes in the aggregate principal
amount of $800,000, one for $300,000, and the other one for $500,000. The
$300,000 note has interest due quarterly, at 10% per annum, with principal
payments of twelve equal installments of $25,000 each commencing 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.
Interest expense on the subordinated debt (see Note G) for 1998 was
$30,465. A payment of an aggregate of $45,164 was paid to the Noteholders
subsequent to December 31, 1998 consisting of interest of $20,164, and a
principle payment of $25,000.
Amortization of the debt over the next five years and thereafter is as
follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1999 $125,000
2000 100,000
2001 150,000
2002 100,000
2003 100,000
Thereafter 225,000
</TABLE>
The Company rents its Michigan facilities from entities (B-2 Enterprises
Inc. and JLJ Properties, Inc.) controlled by Messrs. Jennings and Lewis.
In 1998, the Company paid these entities approximately $62,280 in rent.
In addition, the Company is responsible for all real estate taxes for the
properties, and to maintain adequate insurance.
N. SUBSEQUENT EVENT AND MANAGEMENT'S PLANS
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 ("Loan Agreement"). 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. The Company is currently functioning under a standstill
agreement that expires on April 19, 1999. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
The Company and its lender are negotiating a forbearance agreement to the
Loan Agreement. 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.
There can be no assurance that the Company will be successful in its
attempt to renegotiate its Loan Agreement on terms acceptable to the
Company and the lender or to execute its plan to return to profitability
and positive cash flow. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On March 11, 1999, the Board of Directors voted to approve an amendment to
the Company's 1986 Employee Stock Purchase Plan (the "ESPP") to increase
the aggregate number of shares of Common Stock which may be offered under
the ESPP from 150,000 to 300,000. This amendment is being submitted for
stockholder approval at the Company's 1999 Annual Meeting of Stockholders.
F-18
<PAGE>
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 authorized, in the city of Newton,
Commonwealth of Massachusetts, on the 16th day of April, 1999.
MICROFLUIDICS INTERNATIONAL CORPORATION
By: /s/ Irwin J. Gruverman
------------------------
Irwin J. Gruverman
Chairman of the Board,
Chief Executive Officer
and Secretary
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
------ ----------------------
3.3(a) Certificate of Incorporation for the Company, as amended (filed as
Exhibit 2A to Registration Statement No. 0-11625 on Form 8-A and
incorporated herein by reference).
3.3(b) Amended and Restated By-Laws for the Company (filed as
Exhibit 3.3(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 and incorporated herein by
reference).
** 3.10(a) 1987 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 and
incorporated herein by reference).
** 3.10(b) 1988 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference).
3.10(c) 1989 Non-Employee Directors Stock Option Plan (filed as Exhibit
10.1 to the Company's registration statement on Form S-8 filed
October 22, 1996 and incorporated herein by reference).
3.10(d) Loan Agreement between The First National Bank of Boston and
Microfluidics International Corporation dated as of December 10,
1993 (filed as Exhibit 10.2 to Form 8-K filed on December 27, 1993
and incorporated herein by reference).
3.10(e) Lease for 30 Ossipee Road, Newton Massachusetts dated May 23,
1997 between Microfluidics International Corporation and J. Frank
Garrity, Trustee of 1238 Chestnut Street Trust under Declaration of
Trust dated May 23, 1969, recorded with Middlesex South Registry of
Deeds in Book 11682, Page 384 (filed as Exhibit 3.10a to the
Company's Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated herein by reference).
3.10(f) Letter of Understanding between Microfluidics International
Corporation and Worcester Polytechnic Institute dated as of April 3,
1992 (filed as Exhibit 3.10(f) to the Company's Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference).
3.10(g) Agreement between Microfluidics International Corporation and
Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit
3.10(g) to the Company's Form 10-K for the fiscal year ended
December 31, 1993 and incorporated herein by reference) with
amendements dated September 1, 1994 and March 31, 1995.
3.10(h) Amendement to agreement dated September 1, 1994 between
Microfluidics International Corporation and Catalytica, Inc. dated
as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's
Form 10-K for the fiscal year ended December 31, 1993, and
incorporated herein by reference).
<PAGE>
3.10(i) Amendment to agreement dated March 31, 1995 between Microfluidics
International Corporation and Catalytica, Inc. dated as of October
18, 1993 (filed as Exhibit 3.10(g) to the Company's Form 10-K for
the fiscal year ended December 31, 1993, and incorporated herein by
reference).
3.10(j) License Agreement among Microfluidics International Corporation,
Worcester Polytechnic Institute and Catalytica, Inc. dated as of
October 18, 1993 (filed as Exhibit 3.10(h) to the Company's Form 10-
K for the fiscal year ended December 31, 1993 and incorporated
herein by reference).
** 3.10(k) Agreement, dated July 27, 1995, between Microfluidics International
Corporation and Michael T. Rumley (filed as Exhibit 3.10(i) to the
Company's Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference).
** 3.10(l) Letter, dated August 15, 1995, from Microfluidics International
Corporation to Michael T. Rumley (filed as Exhibit 3.10(j) to the
Company's Form 10-K for fiscal year ended December 31, 1995 and
incorporated hereby reference).
** 3.10(m) Letter, dated December 31, 1995 from Microfluidics International
Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(k) to the
Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
3.10(n) Warrant for the Purchase of Shares of Common Stock, dated July 14,
1993, in favor of Ladenburg, Thalmann & Co. Inc. (filed as Exhibit
3.10(l) to the Company's Form 10-K for fiscal year ended December
31, 1996 and incorporated herein by reference).
** 3.10(o) Letter, dated December 31, 1996, from Microfluidics International
Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(o) to the
Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
3.10(p) Agreement between Microfluidics International Corporation and
Catalytica, Inc. dated January 1, 1995 regarding participation in
and management of the Advanced Technology Program (ATP) (filed as
Exhibit 3.10(p) to the Company's Form 10-K for fiscal year ended
December 31, 1996 and incorporated herein by reference).
3.10(q) Consulting Agreement with James Little (filed as Exhibit 3.10(q) to
the Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
3.10(r) Subsidiaries of the Registrant (filed as Exhibit 3.21 to the
Company's Form 10-K for fiscal year ended December 31, 1996 and
incorporated herein by reference).
<PAGE>
3.10(s) Letter dated December 31, 1997, from Microfluidics International
Corporation** to Irwin J. Gruverman and G & G Diagnostics Corp.
3.10(t) 1988 Stock Plan as amended (filed as Exhibit 10(a) to the Company's
Form 10-Q for the quarterly period ended March 31, 1997 and
incorporated herein by reference.
3.10(u) Asset Purchase Agreement dated as of June 19, 1998, by and among the
Company, Epworth Manufacturing Company and Morehouse-COWLES, Inc.
(filed as Exhibit 2.1 to Schedule 13D of Bret A. Lewis, File No.
005-35850, and incorproated herein by reference).
3.10(v) Stockholders Agreement dated August 14, 1998, by and among the
Company and J.B. Jennings and Bret A. Lewis (filed as exhibit 2.2 to
Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated
herein by reference).
3.10(w) $500,000 Subordinated Promissory Note issued by the Company to
Epworth Manufacturing Company (filed as Exhibit 99.1 to the
Company's Form 8-K on August 27, 1998, File No. 000-11625, and
incorporated herein by reference.)
3.10(x) $300,000 Subordinated Promissory Note issued by the Company to
Epworth Manufacturing Company (filed as exhibit 99.2 to the
Company's Form 8-K on August 27, 1998, File No. 000-11625, and
incorporated herein by reference).
3.10(y) Revolving credit loan between Comerica Bank and the Company dated
August 12, 1998 (Filed as Exhibit 10.1 to the Company's form 10-Q
for the quarterly period ended September 30, 1998 and incorporated
herein by reference).
3.10(z) Letter Dated December 31, 1998 from MicroFluidics International
Corporation To Irwin J. Gruverman.
23(a) Consent of Deloitte & Touche LLP.
*23(b) Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule.
_____________________
*Filed herewith
**Management contracts or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
<PAGE>
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Microfluidics International Corporation on Form S-8 (File Nos. 33-6300, 33-
19372, 33-38928, 33-38925, 33-86726, 333-14607 and 333-29949) of our report
dated February 12, 1997 on our audit of the consolidated financial statements of
Microfluidics International Corporation for the year ended December 31, 1996,
which report is included in Microfluidics International Corporation Annual
Report on Form 10-K for the year ended December 31, 1998.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 15, 1999
