<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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)
Delaware 04-2793022
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification No.)
30 Ossipee Road, P.O. Box 9101, Newton, Massachusetts 02464
-----------------------------------------------------------
(Address of principal Executive Offices) (Zip Code)
617-969-5452
------------
(Registrant's Telephone Number, Including Area Code)
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 August 8, 2000.
1
<PAGE>
MFIC CORPORATION
----------------
INDEX
-----
--------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION PAGE NUMBER
--------------------------------------------------------------------------------
ITEM 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2000 and June 30, 1999
(unaudited) 5
Consolidated Statements of Cash Flows for six months
ended June 30, 2000 and June 30, 1999 (unaudited) 7
Notes to Consolidated Financial Statements 9
--------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 12
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk. 16
--------------------------------------------------------------------------------
PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities and Use of Proceeds 17
ITEM 4. Submission of matters to a vote of security 17
holders.
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index
--------------------------------------------------------------------------------
2
<PAGE>
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
ITEM 1.
MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(unaudited) 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 103,428 $ 196,172
-------------------------------------------------------------------------------------------
Accounts receivable (less allowance for doubtful
accounts of $116,601 and $65,321 at June 30, 2000
and December 31, 1999, respectively) 2,499,298 2,710,684
-------------------------------------------------------------------------------------------
Other receivables 81,894 108,607
-------------------------------------------------------------------------------------------
Accounts Receivable - Related Party 34,656 23,252
Inventory 4,154,909 3,477,123
-------------------------------------------------------------------------------------------
Prepaid expenses 283,368 143,252
Other current assets 64,852
-------------------------------------------------------------------------------------------
Total current assets 7,222,405 6,659,090
----------- -----------
-------------------------------------------------------------------------------------------
Equipment and leasehold improvements
-------------------------------------------------------------------------------------------
Furniture, fixtures and office equipment 469,411 461,852
-------------------------------------------------------------------------------------------
Machinery and equipment 945,228 929,330
-------------------------------------------------------------------------------------------
Leasehold improvements 317,851 310,563
----------- -----------
-------------------------------------------------------------------------------------------
Net equipment and leasehold improvements 1,732,490 1,701,745
-------------------------------------------------------------------------------------------
Less: accumulated depreciation & amortization (968,546) (859,875)
----------- -----------
-------------------------------------------------------------------------------------------
763,944 841,870
-------------------------------------------------------------------------------------------
Goodwill (net of accumulated amortization of $770,781
at June 30, 2000 and $554,329 at December 31, 1999,
respectively) 5,393,648 5,610,130
-------------------------------------------------------------------------------------------
Patents, licenses and other intangible assets (net of
accumulated amortization of $ 515,941 at June 30,
2000 and $467,389 at December 31, 1999, respectively 160,444 116,226
----------- -----------
-------------------------------------------------------------------------------------------
Total assets $13,540,441 $13,227,316
=========== ===========
</TABLE>
(See notes to unaudited consolidated financial statements)
3
<PAGE>
MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
(unaudited)
--------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 1,426,583 $ 1,480,220
--------------------------------------------------------------------------------------------
Accrued interest - related party 82,834 77,500
--------------------------------------------------------------------------------------------
Accrued compensation 85,580 119,712
--------------------------------------------------------------------------------------------
Customer advances 653,936 537,958
--------------------------------------------------------------------------------------------
Current portion of long term debt--related party 37,500
Current portion of note payable 95,004
--------------------------------------------------------------------------------------------
Line of credit 2,696,183 3,075,815
----------- -----------
--------------------------------------------------------------------------------------------
Total current liabilities 5,077,620 5,291,205
Note payable - net of current portion 356,245
Long term debt - net of current portion - related
party. 262,500 775,000
--------------------------------------------------------------------------------------------
Common Stock, Stockholders' equity par value $.01 per share,
20,000,000 shares authorized; 7,574,129 and
6,061,307 shares issued and outstanding at
June 30, 2000 and at December 31, 1999, respectively 75,741 60,613
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Additional paid-in-capital 12,888,116 12,494,839
--------------------------------------------------------------------------------------------
Accumulated deficit (4,445,674) (4,720,234)
--------------------------------------------------------------------------------------------
Less:Treasury Stock, at cost, 242,719 and 235,219
shares at June 30, 2000 and December 31, 1999,
respectively (674,107) (674,107)
----------- -----------
--------------------------------------------------------------------------------------------
Total stockholders' equity 7,844,076 7,161,111
----------- -----------
--------------------------------------------------------------------------------------------
Total liabilities and stockholders equity $13,540,441 $13,227,316
=========== ===========
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
(See notes to unaudited consolidated financial statements)
4
<PAGE>
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $3,951,979 $3,342,517 $7,684,898 $5,939,639
-----------------------------------------------------------------------------------------------------
Cost of goods sold 2,205,625 1,816,335 4,186,675 3,481,867
---------- ---------- ---------- ----------
-----------------------------------------------------------------------------------------------------
Gross profit on revenues 1,746,354 1,526,182 3,498,223 2,457,772
-----------------------------------------------------------------------------------------------------
Operating expenses:
Selling 826,139 711,815 1,550,838 1,309,313
-----------------------------------------------------------------------------------------------------
Research and development 211,162 195,826 397,294 435,199
-----------------------------------------------------------------------------------------------------
General and administrative 605,334 559,982 1,305,026 1,200,837
---------- ---------- ---------- ----------
-----------------------------------------------------------------------------------------------------
Total operating expenses 1,642,635 1,467,623 3,253,158 2,945,349
-----------------------------------------------------------------------------------------------------
Income (loss) from operations 103,719 58,559 245,065 (487,577)
-----------------------------------------------------------------------------------------------------
Interest income 2 2,434 248 5,823
-----------------------------------------------------------------------------------------------------
Gain on sale of marketable
securities 11,864
-----------------------------------------------------------------------------------------------------
Interest expense (75,067) (110,857) (165,253) (209,200)
-----------------------------------------------------------------------------------------------------
Net income (loss) before
Extraordinary item 28,654 (49,864) 80,060 (679,090)
Gain on subordinated debt
restructuring 194,500
----------
-----------------------------------------------------------------------------------------------------
Net income (loss) before taxes 28,654 (49,864) 274,560 (679,090)
Income tax provision
---------- ---------- ---------- ----------
Net income (loss) $ 28,654 $ (49,864) $ 274,560 $ (679,090)
========== ========== ========== ==========
</TABLE>
5
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of
common and common equivalent
shares outstanding:
Basic 7,331,410 5,816,930 6,827,136 5,816,426
--------------------------------------------------------------------------------------------------
Diluted 7,647,285 5,816,930 7,162,188 5,816,426
--------------------------------------------------------------------------------------------------
Basic amounts per common
share: Net income (loss) per
share before extraordinary
gain $.00 $(.01) $0.01 $(0.12)
--------------------------------------------------------------------------------------------------
Extraordinary gain per share
$.00 $.00 0.03 0.00
---- ----
--------------------------------------------------------------------------------------------------
Basic net income (loss) per
share: $.00 $(.01) $0.04 $(.012)
--------------------------------------------------------------------------------------------------
Diluted amounts per common
share: Net income (loss) per
share before extraordinary
gain $.00 $(.01) $0.01 $(.012)
--------------------------------------------------------------------------------------------------
Extraordinary gain per share $.00 $.00 0.03 0.00
---- ----- ----- ------
--------------------------------------------------------------------------------------------------
Diluted net income (loss) per
share $.00 $(.01) $0.04 $(0.12)
==== ===== ===== ======
--------------------------------------------------------------------------------------------------
</TABLE>
(See notes to unaudited consolidated financial statements)
6
<PAGE>
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
-----------------------------------------------------------------------------------------------
Net income (loss) $ 274,560 $(679,090)
-----------------------------------------------------------------------------------------------
Reconciliation of net income (loss) to cash provided
by operating activities:
-----------------------------------------------------------------------------------------------
Depreciation and amortization 384,450 352,676
-----------------------------------------------------------------------------------------------
Extraordinary gain on debt restructuring (194,500)
-----------------------------------------------------------------------------------------------
Gain on sale of fixed assets (559) (30,722)
-----------------------------------------------------------------------------------------------
Bad debt expense (income) 51,280 (36,862)
-----------------------------------------------------------------------------------------------
Effects of changes in operating working capital
items: (Increase) decrease in trade and other 118,415 177,674
receivables
-----------------------------------------------------------------------------------------------
(Increase) decrease in inventories (677,786) 128,508
-----------------------------------------------------------------------------------------------
(Increase) decrease in prepaid expenses (140,116) (67,580)
-----------------------------------------------------------------------------------------------
Increase (decrease) in current liabilities 23,043 502,581
----------- ---------
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (161,213) 347,185
-----------------------------------------------------------------------------------------------
Cash flows provided by (used in) investing activities:
-----------------------------------------------------------------------------------------------
Proceeds from sales of fixed assets 30,820 102,730
-----------------------------------------------------------------------------------------------
Excess of cost over assets purchased (Goodwill) (20,226)
-----------------------------------------------------------------------------------------------
Purchase of equipment and leasehold improvements (71,751) (46,338)
----------- ---------
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (40,931) 36,166
-----------------------------------------------------------------------------------------------
Cash flows used in financing activities:
-----------------------------------------------------------------------------------------------
Payment of subordinated debt (25,000)
-----------------------------------------------------------------------------------------------
Proceeds from new line of credit 2,696,183
-----------------------------------------------------------------------------------------------
Repayment of line of credit (3,075,815) (731,031)
-----------------------------------------------------------------------------------------------
Proceeds from term note 475,000
-----------------------------------------------------------------------------------------------
Paydown on term note (23,751)
-----------------------------------------------------------------------------------------------
Paydown in connection with debt refinancing (157,622)
-----------------------------------------------------------------------------------------------
Lease termination payment in connection with debt
refinancing (58,000)
-----------------------------------------------------------------------------------------------
Issuance of restricted common stock 250,000
-----------------------------------------------------------------------------------------------
Issuance of common stock under employee stock
purchase plan 3,405 3,459
-----------------------------------------------------------------------------------------------
Treasury stock purchased (7,620)
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 109,400 (760,192)
-----------------------------------------------------------------------------------------------
Net (decrease)in cash (92,744) (376,841)
-----------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents at beginning of period 196,172 550,713
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $103,428 $173,872
-----------------------------------------------------------------------------------------------
</TABLE>
Supplemental schedule of noncash financing activities
The Company restructured $775,000, plus interest, of subordinated debt at the
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
<PAGE>
MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally-accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the six months ended June 30, 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 excluded because the effect of such options would be anti-
dilutive. For 2000, 1,267,381 shares were excluded because the effect would be
anti-dilutive.
3. INVENTORY
The components of inventories on the following dates were:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------------------------------------------------------
<S> <C> <C>
Raw Material $2,723,379 $2,070,913
---------------------------------------------------------------------------
Work in Progress 262,940 320,151
---------------------------------------------------------------------------
Finished Goods 1,168,590 1,086,059
---------- ----------
---------------------------------------------------------------------------
Total $4,154,909 $3,477,123
========== ==========
---------------------------------------------------------------------------
</TABLE>
9
<PAGE>
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 PROUNOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's Quarter ended March 31, 2001. SFAS No. 133
significantly modifies accounting and reporting Standards for derivatives and
hedging activities. In June, 1999, the Financial Accounting Standards Board
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 delayed the original implementation date of SFAS No. 133 by one year.
This will require that the Company adopt this statement in fiscal year 2001. In
June, 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133." The impact of SFAS No. 133, if any, on
the company has not yet been determined.
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 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.
10
<PAGE>
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 19, 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
an interest 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 an interest rate equal to the Prime Rate plus
three quarters of one percent (.75%). As of June 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 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 Finance
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 resultantly received 1,000,000 MFIC restricted shares of Common
Stock.
11
<PAGE>
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 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 2000.
7. SUBSEQUENT EVENT - 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. It is
expected that there will be no material effect on the profitability of the
Company.
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 June 30, 2000 were $3,951,979, as
compared to revenues of $3,342,517 in the corresponding period last year,
representing an increase of $609,462, or 18%. For the six month period ended
June 30, 2000, revenues increased $1,745,259, or 29%, to $7,684,898 from
$5,939,639 for the first six months of 1999. The increased amount in revenue
for the three months ended June 30, 2000 is due to an increase in the sale of
machines of approximately $644,000. The increase in revenue for the six month
period ended June 30, 2000 is due to an increase in the sale of machines of
approximately $1,342,000, and an increase in the sales of spare parts of
approximately $418,000.
12
<PAGE>
Cost of goods sold for the three months ended June 30, 2000 was $2,205,625, or
56% of revenue, compared to $1,816,335, or 54% of revenue, for the same period
last year. For the six month period ended June 30, 2000, cost of goods sold
increased to $4,186,675, or 54% of revenue, from $3,481,867 or 59% of revenue,
for the comparable period in 1999. The increase in cost of goods sold in
absolute dollars for both the three and six months ended June 30, 2000, reflects
the increase in sales generated by the operating divisions of the Company.
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 June 30, 2000 were
$1,642,635 or 42% of revenue, as compared to $1,467,623 or 44% of revenue for
the same period last year, which is an increase of $175,012 or 12%. Operating
expenses for the six months ended June 30, 2000 were $3,253,158 or 42% of
revenue, as compared to $2,945,349 or 50% of revenue, for the same period last
year, an increase of $307,809 or 10%.
Research and development expenses for the three months ended June 30, 2000 were
$211,162 compared to $195,826 for the three months ended June 30, 1999 an
increase of $15,336 or 8%. The increase in research and development expenses
was primarily due to an increase in payroll costs of approximately $24,000,
partially offset by general research and development expenses of approximately
$9,000.
Research and development expenses for the six months ended June 30, 2000 were
$397,294 compared to $435,199 for the six months ended June 30, 1999, a decrease
of $37,905 or 9%. The decrease in research and development expenses was
primarily due to a decrease in payroll costs.
Selling expenses for the three months ended June 30, 2000 increased $114,324 or
16%, compared to the three months ended June 30, 1999, from $711,815 to
$826,139. The principal increases in selling expenses were due to increases in
commissions of approximately $50,000, payroll costs of $25,000, and consultants
of $15,000.
Selling expenses for the six months ended June 30, 2000 increased approximately
$242,000 or 18% compared to the six months ended June 30, 1999, from $1,309,313
to $1,550,838. The increases were due principally to increases of $108,000 in
commission expenses, $83,000 in payroll costs, and $18,000 in consulting
expense.
For the three months ended June 30, 2000, general and administrative expenses
increased by approximately $45,000, or 8%, from $559,982 to $605,334.The
increase in general and administrative expenses is principally due to an
increase in professional fees of approximately $60,000, an increase in corporate
overhead of approximately $26,000,
13
<PAGE>
offset by a decrease of $20,000 in payroll costs, and a decrease in consultants
of $10,000.
For the six months ended June 30, 2000, general and administrative expenses
increased by approximately $104,000, or 9%, from $1,200,837 to $1,305,026. The
increase in general and administrative expenses is principally due to an
increase in professional fees of approximately $83,000, an increase in corporate
overhead of $56,000, partially offset by a decrease in payroll costs of
approximately $25,000.
Interest income for the three months ended June 30, 2000 decreased to $2
compared to $2,434 for the three months ended June 30, 1999, a decrease of
$2,432. The decrease is due to a reduction in the amount of cash available to
invest.
Interest income for the six months ended June 30, 2000 decreased to $248
compared to $5,823 for the six months ended June 30, 1999, a decrease of
approximately $5,600 or 96%. The decrease is due to a reduction in the amount
of cash available to invest.
Interest expense for the three months ended June 30, 2000 decreased
approximately $36,000 or 32%, to $75,067 compared to $110,857 for the three
months ended June 30, 1999. The decrease is due to a reduction in the interest
rate paid as a result of the refinancing, and in the reduction of the overall
debt.
Interest expense for the six months ended June 30, 2000 decreased approximately
$44,000, or 21%, to $165,253 from $209,200 for the six months ended June 30,
1999. The decrease is due both to a reduction of the interest rate paid as a
result of the refinancing of the debt, and the overall reduction of the debt.
14
<PAGE>
2. LIQUIDITY AND CAPITAL RESOURCES
The Company utilized cash of $161,213 and generated cash of $347,185 from
operations for the six months ended June 30, 2000 and 1999, respectively. For
the first six months of 2000, this amount was principally the result of the
Company's net income from operations, (net of depreciation, amortization and the
extraordinary gain from the debt restructuring), an increase in current
liabilities, and a decrease in trade and other receivables, offset by an
increase in inventory and prepaid expenses. For the first six months of 1999,
this amount was principally the result of funding the net loss from operations,
an increase in current liabilities and a decrease in inventories in trade and
other receivables.
The Company utilized cash of $40,931 and generated cash of $36,166 for investing
activities for the six months ended June 30, 2000 and 1999, respectively. Cash
used for 2000 reflected the purchase of fixed assets partially offset by the
proceeds from the sale of fixed assets. In 1999, cash was generated from the
sale of fixed assets, partially offset by the purchase of fixed assets. As of
June 30, 2000, the Company had no material commitments for capital expenditures.
For financing activities, the Company generated cash of $109,400 for the six
months ended June 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 $103,428 at June 30,
2000, a decrease of $92,744 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.
15
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2001. SFAS No. 133
significantly modifies Accounting and Reporting Standards for derivatives and
hedging activities. In June, 1999, the Financial Accounting Standards Board
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.133." SFAS
No. 137 delayed the original implementation date of SFAS No. 133 by one year.
This will require that the Company adopt this statement in fiscal year 2001. In
June, 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB statement No. 133." The impact of SFAS No. 133, if any, on
the Company has not yet been determined.
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.
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 $2,700,000 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.
16
<PAGE>
MFIC CORPORATION
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In a letter dated June 16, 2000, J.M. Huber Corporation 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 has denied any liability. At
the request of Huber and as an accommodation, the Company 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. The
Company is currently attempting to resolve the dispute with Huber in a manner
that it believes will not have a material effect.
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 ("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, $475,000 of the Company's subordinated dent was converted to
500,000 shares of the Company's restricted common stock.
MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 27, 2000, the Company held its annual meeting of its stockholders. The
following matters were voted on at the annual meeting:
1. The election of, Irwin J. Gruverman, Vincent B. Cortina, Edward T.
Paslawski, Leo Pierre Roy and James N. Little, as directors of the
Company;
2. The ratification of the appointment of Deloitte & Touche LLP as auditors
for the Company for the fiscal year ending December 31, 2000.
The following chart shows the number of votes cast for or against, as well as
the number of abstentions and broker nonvotes, as to each matter voted on at the
special meeting:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Matter For Against Abstain Broker
Nonvotes
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Election of Mr. Gruverman 6,432,390 110,459 N/A N/A
-----------------------------------------------------------------------------------------------------
Election of Mr. Paslawski 6,495,371 77,478 N/A N/A
-----------------------------------------------------------------------------------------------------
Election of Mr. Cortina 6,473,455 99,394 N/A N/A
-----------------------------------------------------------------------------------------------------
Election of Mr. Roy 6,489,475 83,374 N/A N/A
-----------------------------------------------------------------------------------------------------
Election of Mr. Little 6,473,855 98,994 N/A N/A
-----------------------------------------------------------------------------------------------------
Appointment of Deloitte &
Touche LLP 6,561,799 10,450 600 N/A
-----------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
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 June 30, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFIC CORPORATION
/s/ Michael A. Lento
---------------------
Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: August 14, 2000
19
