<PAGE>
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 September 30, 2000
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)
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Delaware 04-2793022
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
---------------------------- Identification No.)
of Incorporation or organization)
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)
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 7,588,948 shares of Common Stock, par value $.01 per share,
outstanding on November 8, 2000.
1
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MFIC CORPORATION
----------------
INDEX
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<TABLE>
<CAPTION>
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PART I. FINANCIAL INFORMATION PAGE NUMBER
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<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and
September 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows for nine
months ended September 30, 2000 and September 30,
1999 (unaudited) 7
Notes to Consolidated Financial Statements 9
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ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13
ITEM 3. Quantitative and Qualitative Disclosures 18
about Market Risk.
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PART II. OTHER INFORMATION
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ITEM 1. Legal Proceedings 19
ITEM 2. Changes in Securities and Use of Proceeds 19
ITEM 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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</TABLE>
2
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PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
ITEM 1.
MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,111 $ 196,172
-------------------------------------------------------------------------------------------
Accounts receivable (less allowance for doubtful
accounts of $123,601 and $65,321 at September 30,
2000 and December 31, 1999, respectively) 2,355,158 2,710,684
-------------------------------------------------------------------------------------------
Other receivables 36,750 108,607
-------------------------------------------------------------------------------------------
Accounts Receivable - Related Party 20,258 23,252
Inventory 4,223,880 3,477,123
-------------------------------------------------------------------------------------------
Prepaid expenses 197,637 143,252
Other current assets 69,979
-------------------------------------------------------------------------------------------
Total current assets 6,919,773 6,659,090
----------- -----------
-------------------------------------------------------------------------------------------
Equipment and leasehold improvements
-------------------------------------------------------------------------------------------
Furniture, fixtures and office equipment 460,067 461,852
-------------------------------------------------------------------------------------------
Machinery and equipment 785,893 929,330
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Leasehold improvements 327,716 310,563
----------- -----------
-------------------------------------------------------------------------------------------
Net equipment and leasehold improvements 1,573,676 1,701,745
-------------------------------------------------------------------------------------------
Less: accumulated depreciation & amortization (883,225) (859,875)
----------- -----------
-------------------------------------------------------------------------------------------
690,451 841,870
-------------------------------------------------------------------------------------------
Goodwill (net of accumulated amortization of $874,902
at September 30, 2000 and $554,329 at December 31,
1999, respectively) 5,289,557 5,610,130
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Patents, licenses and other intangible assets (net of
accumulated amortization of $540,197 at September
30, 2000 and $467,389 at December 31, 1999, 141,542 116,226
respectively ----------- -----------
-------------------------------------------------------------------------------------------
Total assets $13,041,323 $13,227,316
=========== ===========
</TABLE>
(See notes to unaudited consolidated financial statements)
3
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MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(unaudited)
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
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Accounts payable and accrued expenses $ 1,638,881 $ 1,480,220
--------------------------------------------------------------------------------------------
Accrued interest - related party 77,821 77,500
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Accrued compensation 80,958 119,712
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Customer advances 584,319 537,958
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Current portion of long term debt--related party 50,000
Current portion of note payable 95,004
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Line of credit 2,400,182 3,075,815
----------- -----------
--------------------------------------------------------------------------------------------
Total current liabilities 4,927,165 5,291,205
Note payable - net of current portion 332,494
Long term debt - net of current portion - related
Party. 250,000 775,000
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Common Stock, par value $.01 per share, 20,000,000
shares authorized; 7,588,948 and 6,061,307 shares
issued and outstanding at September 30, 2000 and
at December 31, 1999, respectively
75,889 60,613
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Additional paid-in-capital 12,891,904 12,494,839
--------------------------------------------------------------------------------------------
Accumulated deficit (4,762,022) (4,720,234)
--------------------------------------------------------------------------------------------
Less:Treasury Stock, at cost, 242,719 and 235,219
shares at September 30, 2000 and December 31,
1999, respectively (674,107) (674,107)
----------- -----------
--------------------------------------------------------------------------------------------
Total stockholders' equity 7,531,664 7,161,111
----------- -----------
--------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $13,041,323 $13,227,316
=========== ===========
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--------------------------------------------------------------------------------------------
</TABLE>
(See notes to unaudited consolidated financial statements)
4
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MFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $3,949,071 $ 3,692,425 $11,633,969 $9,632,064
--------------------------------------------------------------------------------------------------------
Cost of goods sold 2,076,784 1,999,434 6,263,459 5,481,301
---------- ----------- ----------- ----------
--------------------------------------------------------------------------------------------------------
Gross profit 1,872,287 1,692,991 5,370,510 4,150,763
--------------------------------------------------------------------------------------------------------
Operating expenses:
Selling 1,005,046 740,862 2,555,884 2,050,175
--------------------------------------------------------------------------------------------------------
Research and development 207,589 246,096 604,883 681,295
--------------------------------------------------------------------------------------------------------
General and administrative 698,566 665,099 2,003,592 1,865,936
---------- ----------- ----------- ----------
--------------------------------------------------------------------------------------------------------
Total operating expenses 1,911,201 1,652,057 5,164,359 4,597,406
---------- ----------- ---------- ----------
--------------------------------------------------------------------------------------------------------
(Loss) income from operations (38,914) 40,934 206,151 (446,643)
--------------------------------------------------------------------------------------------------------
Other Expense (200,000) - (200,000) -
--------------------------------------------------------------------------------------------------------
Interest income - 1,514 248 7,337
--------------------------------------------------------------------------------------------------------
Gain on sale of marketable
securities - 11,864
--------------------------------------------------------------------------------------------------------
Interest expense (77,434) (121,351) (242,687) (330,551)
--------------------------------------------------------------------------------------------------------
Net loss before income taxes and - - - -
--------------------------------------------------------------------------------------------------------
Extraordinary item (316,348) (78,903) (236,288) (757,993)
---------- ----------- ----------- ----------
--------------------------------------------------------------------------------------------------------
Income tax provision - - - -
--------------------------------------------------------------------------------------------------------
Net loss before extraordinary
item (316,348) (78,903) (236,288) (757,993)
---------- ----------- ----------- ----------
--------------------------------------------------------------------------------------------------------
Gain on subordinated debt
restructuring 194,500
--------------------------------------------------------------------------------------------------------
Net loss $ (316,348) $ (78,903) $ (41,788) $ (757,993)
========== =========== ============ ==========
</TABLE>
5
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<TABLE>
<S> <C> <C> <C> <C>
Weighted average number of
common and common equivalent
shares outstanding:
Basic 7,346,229 5,818,588 7,008,226 5,818,588
----------------------------------------------------------------------------------------------------
Diluted 7,346,229 5,818,588 7,008,226 5,818,588
----------------------------------------------------------------------------------------------------
Basic amounts per common
share: Net loss per share
before extraordinary gain $(.04) $(.01) $(.03) $(0.13)
----------------------------------------------------------------------------------------------------
Extraordinary gain per share $.00 $.00 $.03 $0.00
---- ---- ---- -----
----------------------------------------------------------------------------------------------------
Basic net income (loss) per
share: $(.04) $(.01) $.00 $(0.13)
----------------------------------------------------------------------------------------------------
Diluted amounts per common
share: Net loss per share
before extraordinary gain $(.04) $(.01) $(.03) $(0.13)
----------------------------------------------------------------------------------------------------
Extraordinary gain per share $.00 $.00 $.03 $.00
---- ---- ---- ----
----------------------------------------------------------------------------------------------------
Diluted net (loss) income per
share $(.04) $(.01) $.00 $(0.13)
===== ===== ==== ======
----------------------------------------------------------------------------------------------------
</TABLE>
(See notes to unaudited consolidated financial statements)
6
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MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
(unaudited) (unaudited)
<S> <C> <C>
-----------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
-----------------------------------------------------------------------------------------------
Net (loss) $ (41,788) $(757,993)
-----------------------------------------------------------------------------------------------
Reconciliation of net loss to cash (used in)
provided by operating activities:
-----------------------------------------------------------------------------------------------
Depreciation and amortization 542,378 521,086
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Legal settlement 200,000
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Extraordinary gain on debt restructuring (194,500)
-----------------------------------------------------------------------------------------------
Gain on sale of fixed assets (81,752) (31,549)
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Bad debt expense (income) 58,280 (34,679)
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Effects of changes in operating working capital
items: Decrease (Increase) in trade and other 315,097 (205,805)
receivables
-----------------------------------------------------------------------------------------------
(Increase) decrease in inventories $ (746,757) $ 287,249
-----------------------------------------------------------------------------------------------
Increase in prepaid expenses (54,385) (132,002)
-----------------------------------------------------------------------------------------------
(Decrease) Increase in current liabilities (43,911) 701,418
=========== =========
-----------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (47,338) 347,725
-----------------------------------------------------------------------------------------------
Cash flows provided by investing activities:
-----------------------------------------------------------------------------------------------
Proceeds from sales of fixed assets 152,989 110,860
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Excess of cost over assets purchased (Goodwill) (20,106)
-----------------------------------------------------------------------------------------------
Purchase of equipment and leasehold improvements (68,815) (55,979)
========= =========
-----------------------------------------------------------------------------------------------
Net cash provided by investing activities 84,174 34,775
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Cash flows used in financing activities:
-----------------------------------------------------------------------------------------------
Payment of subordinated debt (25,000)
-----------------------------------------------------------------------------------------------
Net proceeds from new line of credit 2,400,182
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Repayment of old line of credit (3,075,815) (723,516)
-----------------------------------------------------------------------------------------------
Proceeds from term note 475,000
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Payment on term note (47,502)
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Payment in connection with debt refinancing (168,103)
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Lease termination payment in connection with debt
refinancing (58,000)
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Issuance of restricted common stock 250,000
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Issuance of common stock under employee stock
purchase plan 7,341 3,459
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Treasury stock purchased (7,620)
-----------------------------------------------------------------------------------------------
Net cash used in financing activities (216,897) (752,677)
-----------------------------------------------------------------------------------------------
Net decrease in cash (180,061) (370,177)
-----------------------------------------------------------------------------------------------
</TABLE>
7
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<TABLE>
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<S> <C> <C>
Cash and cash equivalents at beginning of period 196,172 550,713
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,111 $ 180,536
-----------------------------------------------------------------------------------------------
</TABLE>
Supplemental schedule of noncash financing activities
The Company restructured $775,000, plus interest, of subordinated debt at the
February 28, 2000 closing of its new loan facility and settled various other
liabilities as discussed in Note 6, resulting in an extraordinary gain of
$194,500. In connection with the restructuring, the following noncash financing
activities occurred:
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------
Settlement of restructured subordinated debt (including accrued interest) $ 852,500
----------------------------------------------------------------------------------------------
Issuance of common stock in connection with debt restructuring (155,000)
----------------------------------------------------------------------------------------------
Issuance of subordinated debt (including interest) (388,000)
----------------------------------------------------------------------------------------------
Accounts receivable write-off settled in connection with debt restructuring (57,000)
----------------------------------------------------------------------------------------------
</TABLE>
(See notes to unaudited consolidated financial statements)
8
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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 nine months ended September 30, 2000 and 1999 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, 1999.
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
2. EARNINGS (LOSS) PER SHARE
Basic earnings 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 contracts 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. For 1999,
1,303,731 shares were outstanding and excluded because the effect of such
options would have been anti-dilutive. For 2000, 1,856,137 shares were
outstanding and excluded because the effect would have been anti-dilutive.
3. INVENTORY
The components of inventories on the following dates were:
---------------------------------------------------------------------------
September 30, 2000 December 31, 1999
---------------------------------------------------------------------------
Raw Material $2,596,514 $2,070,913
---------------------------------------------------------------------------
Work in Progress 481,277 320,151
---------------------------------------------------------------------------
Finished Goods 1,146,089 1,086,059
---------- ----------
---------------------------------------------------------------------------
Total $4,223,880 $3,477,123
========== ==========
---------------------------------------------------------------------------
9
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4. TAXES
The Company has a federal net operating tax loss carryforward of approximately
$4,698,000 and research and development tax credit carryforwards of
approximately $186,000 expiring at various dates beginning in 2001 through 2019.
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, 1999, 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. Therefore, the Company increased the valuation allowance by $323,096 in
1999.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended to be effective for fiscal years beginning after June 15, 2000 by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral
of the Effective Date of FASB Statement No. 133". SFAS No 133 requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The standard is effective for the
Company on January 1, 2001. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133". The standard clarifies certain elements
of SFAS No. 133. Management believes that the implementation of SFAS No. 133
will not have a material impact on the Company's financial statements.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that postponed the
implementation date until the fourth quarter of fiscal 2000. Management
currently believes that the implementation of the SAB will not have a material
impact on the Company's financial statements.
10
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6. SETTLEMENT AGREEMENT& DEBT RESTRUCTURING AND REFINANCING
On December 20, 1999 the Company signed an agreement in principle (the
"Agreement In Principle") with J.B. Jennings and Bret A. Lewis, the former
owners of the Epworth Mill and Morehouse-COWLES businesses (the "Sellers"), Lake
Shore Industries, Inc., and JLJ Properties, Inc., entities owned and controlled
by the Sellers. The Agreement In Principle set forth understandings among the
parties concerning restructuring of the Company's subordinated debt and
resolution of various disputes. On January 17, 2000 a definitive settlement
agreement incorporating these subject matters was executed between the parties
(the "Settlement Agreement"). Pursuant to this Settlement Agreement, Seller's
subordinated loans totaling $775,000 and accrued interest thereon would be
restructured upon the closing of a new senior loan facility. Such restructuring
included all outstanding and unpaid interest and setoffs to such notes provided
for under the terms of the August 14, 1998 Asset Purchase Agreement. At such
closing $500,000 of this debt would be converted to 500,000 shares of Common
Stock.
The Company retained the right to repurchase such shares for a 3 year period at
a per share price of $1.75. The remaining $300,000 would be structured as a new
subordinated promissory note with annual interest at 10%, with interest only
being paid in the first year, and the principal together with interest then
being amortized over 4 years starting in the second year. A disputed lease
between the Company and one of the Seller's entities for property located in
South Haven, Michigan, which was the subject of a suit to terminate filed by the
Company, was voluntarily dismissed in return for the payment by the Company of a
total of $58,000. The initial payment in the amount of $30,000 was paid on
January 17, 2000 upon execution of the Settlement Agreement and the balance on
February 28, 2000. The Company dismissed with prejudice by joint stipulation its
lawsuit to terminate the lease. The Company and the Sellers executed a mutual
release of liability related to the August 14, 1998 Asset Purchase Agreement.
SENIOR DEBT FINANCING
On February 28, 2000 (the "Closing Date") the Company entered into a revolving
credit and term loan agreement with National Bank of Canada (the "Lender")
providing the Company with a $4,475,000 three-year revolving credit and term
loan facility (the "Credit Facility").
The Credit Facility is comprised of: (i) a $4 million three year revolving line
of credit ("Revolving Credit Line") with advances thereunder bearing interest at
a rate equal to the prime rate (the "Prime Rate" for United States borrowings
from the National Bank of Canada as publicly announced from time to time) plus
one-half percent (.50%). All borrowings under the Revolving Credit Line are
evidenced by a $4 million promissory note having a maturity date of February 28,
2003 (the "Revolving Note"), and (ii) a $475,000 term promissory note, amortized
over a five year period but having a maturity date of February 28, 2003 and
bearing interest at a rate equal to the Prime Rate plus three quarters of one
percent (.75%). As of September 30, 2000 the revolving line of credit had an
interest rate of 10% per annum, and the term note has an interest rate of
10.25%. Loans under the Credit Facility are secured by a collateral pledge to
the Lender of
11
<PAGE>
substantially all the assets of the Company and its subsidiaries. The Company's
Microfluidics Corporation subsidiary has guaranteed the Company's obligations to
the Lender under the Credit Facility. The Company has pledged to the Lender all
shares of Microfluidics Corporation owned by the Company.
From the proceeds of the initial loan, the Company repaid the outstanding
balance owed to Comerica Bank of approximately $2,585,000, as of February 28,
2000.
As one of the Lender's conditions precedent to the closing of the Credit
Facility, the Company's Chairman, Irwin Gruverman, made at the closing of the
Credit Facility a $250,000 purchase of restricted Common Stock of the Company.
Pursuant to an agreement with the Company approved by the Company's Board of
Directors on December 30, 1999, Mr. Gruverman paid $.25 per share for his stock
purchase and received 1,000,000 MFIC restricted shares of Common Stock.
In connection with the closing of the Credit Facility, and pursuant to a
Settlement Agreement dated January 17, 2000 with the Company's subordinated debt
holders, the subordinated debt of the Company was restructured in the following
manner. The outstanding August 14, 1998 $500,000 subordinated promissory note,
having a remaining $475,000 principal balance together with accrued interest at
the Closing Date in the approximate amount of $77,500, and accrued interest on
the August 14, 1998 $300,000 subordinated note were converted to 500,000 shares
of MFIC restricted common stock (the "Conversion Shares"). The fair market value
of the Company's Common Stock on the date of the Agreement In Principle was
$0.31 per share. MFIC was granted the right, for a three-year period, to
repurchase the Conversion Shares at a purchase price of $1.75 per share. The
August 14, 1998 $300,000 subordinated note was replaced with a new $300,000
subordinated promissory note dated February 28, 2000 (the "2000 Subordinated
Note"). The 2000 Subordinated Note has a maturity date of February 28, 2005 and
bears interest at a rate of ten percent (10%) per annum. The note is payable
interest only in its first year and then is payable in equal quarterly
installments of principal together with outstanding interest thereon until
maturity.
As a result of the debt restructuring and refinancing, the Company recorded an
extraordinary gain of approximately $195,000 in the first quarter of fiscal
2000.
7. RESTRUCTURING - TRANSFER OF MANUFACTURING HORIZONTAL MEDIA MILLS FROM
MICHIGAN PLANT TO CALIFORNIA PLANT
On July 24, 2000, the Company announced that it would transfer the manufacturing
of its line of Zinger(R) horizontal media mills from its Michigan-based Epworth
Mill Division to the Morehouse-COWLES plant in Fullerton, California. The
transfer began on October 1, 2000, and it is expected that there will be no
material effect on the profitability of the Company.
The Company decided to sell its Ball Mill operation through a broker. The
Company ceased operations of the Ball Mill repair business on September 30,
2000. It is expected that the sale of the operation will have no material effect
on the profitability of the Company.
8. LEGAL SETTLEMENT
In a letter dated June 16, 2000 J. M. Huber Corporation ("Huber") informed
MFIC Corporation that it purportedly was revoking its acceptance of seven model
LV-40 Zinger(R) horizontal media mills that Huber had purchased from MFIC's
Epworth Mill Division in 1998. The notice of revocation was accompanied by a
claim for the repayment of the full purchase price of $384,948 and for
incidental and consequential damages as a result of alleged breaches of express
and implied warranties in the amount of $2,790,350. The Company denied any
liability. At the request of Huber and as an accommodation, the Company, in both
1999 and 2000 performed certain services which, the Company believes, were
accepted by Huber as a cure for problems encountered by Huber with the
performance of such equipment.
On October 20, 2000, the Company entered into an agreement with Huber pursuant
to which, the Company paid $100,000 to Huber upon execution of the agreement,
and executed a term purchase money promissory note for $350,000 payable two
years from the execution date, with interest payable quarterly in arrears at
10% per annum. The Company may prepay the note through February 2001, with the
note being discharged for $300,000 plus accrued and unpaid interest. Huber has
transferred all interest in the seven Media Mills to the Company, and will ship
the equipment to the Company for reconditioning and resale. The Company
estimates a loss on this transaction of approximately $200,000. As a result of
this settlement, the Company has recorded a charge of $200,000 for the quarter
ended September 30, 2000.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. RESULTS OF OPERATIONS
Total Company revenues for the quarter ended September 30, 2000 were $3,949,071,
as compared to revenues of $3,692,425 in the corresponding period last year,
representing an increase of $256,646, or 7%. For the nine month period ended
September 30, 2000, revenues increased $2,001,905, or 21%, to $11,633,969 from
$9,632,064 for the first nine months of 1999. The increase in revenue for the
three months ended September 30, 2000 is primarily due to an increase in the
sale of spare parts of approximately $212,000. The increase in revenue for the
nine month period ended September 30, 2000 is due primarily to an increase in
the sale of machines of approximately $1,360,000, and an increase in the sale of
spare parts of approximately $689,000.
Cost of goods sold for the three months ended September 30, 2000 was $2,076,784,
or 53% of revenue, compared to $1,999,434, or 54% of revenue, for the same
period last year. For the nine month period ended September 30, 2000, cost of
goods sold was $6,263,459, or 54% of revenue. For the comparable period in
1999, costs of goods sold was $5,481,301, or 57% of revenue. The increase in
cost of goods sold in absolute dollars for both the three and nine months ended
September 30, 2000, reflects the increase in sales generated.
The Company's 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.
Total operating expenses for the three months ended September 30, 2000 were
$1,911,201 or 48% of revenue, as compared to $1,652,057 or 45% of revenue for
the same period last year, which is an increase of $259,144 or 16%. Operating
expenses for the nine months ended September 30, 2000 were $5,164,359 or 44% of
revenue, as compared to $4,597,406 or 48% of revenue, for the same period last
year, an increase of $566,953 or 12%.
Selling expenses for the three months ended September 30, 2000 increased
$264,184 or 36%, compared to the three months ended September 30, 1999, from
$740,862 to $1,005,046. The principal increases in selling expenses were due to
increases in commissions of approximately $170,000, payroll costs of $40,000,
and advertising of $29,000.
13
<PAGE>
Selling expenses for the nine months ended September 30, 2000 increased
approximately $505,709 or 25% compared to the nine months ended September 30,
1999, from $2,050,175 to $2,555,884. The increases were due principally to
increases of $245,000 in commission expenses, $104,000 in payroll costs, $46,000
in consulting expense, and $37,000 in advertising expense.
Research and development expenses for the three months ended September 30, 2000
were $207,589 compared to $246,096 for the three months ended September 30, 1999
a decrease of $38,507 or 16%. The decrease in research and development expenses
was primarily due to a decrease in payroll costs of approximately $12,000, and a
decrease in general research and development expenses of approximately $20,000.
Research and development expenses for the nine months ended September 30, 2000
were $604,883 compared to $681,295 for the nine months ended September 30, 1999,
a decrease of $76,412 or 11%. The decrease in research and development expenses
was primarily due to a decrease in payroll costs of approximately $47,000, and a
decrease in general research and development costs of approximately $21,000.
For the three months ended September 30, 2000, general and administrative
expenses increased by approximately $33,000, or 5%, from $665,099 to $698,566.
The increase in general and administrative expenses is principally due to an
increase in payroll and related costs of approximately $67,000, offset by
a decrease in professional fees of approximately $31,000.
For the nine months ended September 30, 2000, general and administrative
expenses increased by approximately $138,000, or 7%, from $1,865,936 to
$2,003,592. The increase in general and administrative expenses is principally
due to an increase in professional fees of approximately $52,000, and an
increase in corporate overhead of $66,000.
Other expenses for both the three and nine month period ended September 30,
2000, relates to the estimated loss on the transaction with J.M. Huber
Corporation. See Note 8, Legal Settlement, for further explanation of the
settlement.
Interest income for the three months ended September 30, 2000 decreased to $0
compared to $1,514 for the three months ended September 30, 1999, a decrease of
$1,514. The decrease is due to a reduction in the amount of cash available to
invest.
Interest income for the nine months ended September 30, 2000 decreased to $248
compared to $7,337 for the nine months ended September 30, 1999, a decrease of
approximately $7,100 or 97%. The decrease is due to a reduction in the amount
of cash available to invest.
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Interest expense for the three months ended September 30, 2000 decreased
approximately $44,000 or 36%, to $77,434 compared to $121,351 for the three
months ended September 30, 1999. The decrease is due to a reduction in the
interest rate as a result of the restructuring and refinancing, and in the
reduction of the overall level of debt outstanding.
Interest expense for the nine months ended September 30, 2000 decreased
approximately $88,000, or 27%, to $242,687 from $330,551 for the nine months
ended September 30, 1999. The decrease is due both to a reduction of the
interest rate as a result of the restructuring and refinancing of the debt, and
the overall reduction of the level of debt outstanding.
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2. LIQUIDITY AND CAPITAL RESOURCES
The Company utilized cash of $47,338 and generated cash of $347,725 from
operations for the nine months ended September 30, 2000 and 1999, respectively.
For the first nine months of 2000, this amount was principally the result of the
Company's net loss from operations, (net of depreciation, amortization and the
extraordinary gain from the debt restructuring) a decrease in trade and other
receivables and current liabilities, offset by an increase in inventory and
prepaid expenses, and the legal settlement with J. M. Huber Corporation. For the
first nine months of 1999, this amount was principally the result of funding the
net loss from operations, an increase in prepaid expenses and trade and other
receivables, offset by an increase in current liabilities and a decrease in
inventories.
The Company generated cash of $84,174 and $34,775 from investing activities for
the nine months ended September 30, 2000 and 1999, respectively. In both 2000
and 1999, cash was generated from the sale of fixed assets and was partially
offset by the purchase of fixed assets. As of September 30, 2000, the Company
had no material commitments for capital expenditures.
For financing activities, the Company used cash of $216,897 for the nine months
ended September 30, 2000, consisting of proceeds from the refinancing of the
line of credit and proceeds from the issuance of Common stock, offset by the
payment of the previous line of credit. The Company used cash in 1999,
principally to pay down the line of credit.
The cash and cash equivalents balance of the Company was $16,111 at September
30, 2000, a decrease of $180,061 from the December 31, 1999 balance of $196,172.
On February 28, 2000, the Company entered into a revolving credit and term loan
agreement with National Bank of Canada ("Bank"), providing the Company with a
$4,475,000 three-year revolving credit and term loan facility.
Assuming that there is no significant change in the Company's business, the
Company believes that cash flows from operations, together with the credit and
loan facility, and the existing cash balances, will be sufficient to meet its
working capital requirements for a least the next twelve months.
The Company's Credit Facility requires compliance with certain financial
covenants including minimum debt service, tangible net worth, annual net income,
and a maximum leverage ratio. In addition, the Credit Facility limits the
Company's ability to incur debt, make capital expenditures, grant liens, make
investments, or enter into mergers.
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3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended to be effective for fiscal years beginning after June 15, 2000 by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral
of the Effective Date of FASB Statement No. 133". SFAS No. 133 requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The standard is effective for the
Company on January 1, 2001. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133". The standard clarifies certain elements
of SFAS No. 133. Management believes that the implementation of SFAS No. 133
will not have a material impact on the Company's financial statements.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that postponed the
implementation date until the fourth quarter of fiscal 2000. Management
currently believes that the implementation of the SAB will not have a material
impact on the Company's financial statements.
4. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements
that are subject to certain risks and uncertainties including statements to
achieve revenue growth, to maintain and/or increase operating profitability, and
to attain net income profitability. Such statements are based on the Company's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results achieved by the Company to differ materially
from those described in the forward-looking statements. The Company cautions
investors that there can be no assurance that the actual results or business
conditions will not differ materially from those projected or suggested in such
forward-looking statements as a result of various factors, including, but not
limited to, the following risks and uncertainties: (I) whether the performance
advantages of the Company's Microfluidizer(R) or Zinger(R) materials processing
equipment will be realized commercially or that a commercial market for the
equipment will continue to develop, and (ii) whether the Company will have
access to sufficient working capital through continued and improving cash flow
from sales and ongoing borrowing availability, the latter being subject to the
Company's ability to comply with the covenants and terms of the Company's loan
agreement with its senior lender.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's fixed rate debt is not exposed to cash flow or interest rate
changes but is exposed to fair market value changes in the event of refinancing
this fixed rate debt.
The Company had approximately $2,800,000 of variable rate borrowings outstanding
under its revolving credit agreement. A hypothetical 10% adverse change in
interest rates for this variable rate debt would have an approximate $8,000
negative effect on the Company's earnings and cash flows.
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MFIC CORPORATION
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In a letter dated June 16, 2000, J.M. Huber Corporation ("Huber") informed MFIC
Corporation that it purportedly was revoking its acceptance of seven model LV-40
Zinger(R) horizontal media mills that Huber had purchased from MFIC's Epworth
Mill Division in 1998. The notice of revocation was accompanied by a claim for
the repayment of the full purchase price of $384,948 and for incidental and
consequential damages as a result of alleged breaches of express and implied
warranties in the amount of $2,790,350. The Company denied any liability. At
the request of Huber and as an accommodation, the Company, in both 1999 and 2000
performed certain services which, the Company believes, were accepted by Huber
as a cure for problems encountered by Huber with the performance of such
equipment.
On October 20, 2000, The Company entered into an agreement with Huber pursuant
to which, the Company paid $100,000 to Huber upon execution of the agreement,
and executed a term purchase money promissory note for $350,000 payable two
years from the execution date, with interest payable quarterly in arrears at 10%
per annum. The Company may prepay the note through February 2001, with the note
being discharged for $300,000 plus accrued and unpaid interest. Huber has
transferred all interest in the seven Media Mills to the Company, and will ship
the equipment to the Company for reconditioning and resale. The Company
estimates a loss on this transaction of approximately $200,000. As a result of
this settlement, the Company has recorded a charge of $200,000 for the quarter
ended September 30, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Concurrently with the entering into by the Company of its new senior credit
facility with National Bank of Canada (The "Bank") on February 28, 2000 and as
required by the Bank, Irwin Gruverman purchased 1,000,000 shares of the
Company's restricted common stock for $250,000. Also, concurrently with the
bank closing of the credit facility, $475,000 of the Company's subordinated debt
was converted to 500,000 shares of the Company's restricted common stock.
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MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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 September 30, 2000.
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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/ Irwin A.Gruverman
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Irwin A. Gruverman
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Chief Executive Officer
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Date: November 14, 2000
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