SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported): August 14, 1998
MICROFLUIDICS INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-11625 042793022
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
30 Ossipee Road, Newton, Massachusetts 02464-9101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 969-5452
--------------
Microfluidics International Corporation hereby amends its Current Report
on Form 8-K dated August 14, 1998 ("Current Report") by amending Items 7(a) and
(b) to include the financial statements and proforma financial information
required thereby. As amended, Items 7(a) and (b) are set forth below in their
entirety.
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 14, 1998 (the "Closing Date"), Microfluidics International
Corporation ("MFIC"), a Delaware corporation, purchased substantially all of the
assets (the "Transferred Assets") and assumed certain liabilities of Epworth
Manufacturing Company of South Haven, Michigan ("Epworth") and Morehouse-COWLES,
Inc. of Fullerton, California ("Morehouse", and together with Epworth, the
"Sellers") pursuant to an Asset Purchase Agreement (the "Agreement") dated as of
June 19, 1998 by and among MFIC, Epworth and Morehouse. Messrs. J.B. Jennings
and Bret A. Lewis are the sole stockholders of both Epworth and Morehouse (the
"Principals"). Epworth and Morehouse each manufactures and distributes a product
line of crushing/grinding, mixing, dissolving and dispersion systems for solid
or solids materials processing that are marketed together under the EMCO U.S.A.
trade name. MFIC intends to continue the operations of Epworth and Morehouse,
each as a separate division of MFIC, and to continue the use of the Transferred
Assets to manufacture and distribute crushing/grinding, mixing, dissolving and
dispersion systems. The Transferred Assets included cash and cash equivalents,
accounts and notes receivables, inventories, machinery and equipment,
intellectual property rights, furniture and fixtures and leasehold interests and
improvements.
In accordance with the Agreement, MFIC paid or delivered to the Sellers
the following as consideration for the purchase price of the Transferred Assets
(the "Purchase Price"): (i) $5,508,480 in cash, (ii) two subordinated promissory
notes in the aggregate principal amount of $800,000 (the "Promissory Notes"),
and (iii) 900,000 shares of MFIC's restricted common stock, $.01 par value per
share, subject to the restrictions set forth in a Stockholders Agreement among
MFIC and the Principals dated August 14, 1998 (the "Stockholders Agreement").
MFIC also incurred approximately $500,000 in expenses. In addition, MFIC assumed
approximately $1,930,000, which amount was comparable to the accounts payable
and accrued liabilities set forth on the Sellers' balance sheets as of December
31, 1997 (the "Assumed Liabilities"), certain of which were also paid on the
Closing Date. The consideration paid by MFIC for the Transferred Assets was
determined through arms-length negotiations between MFIC and the Sellers.
The Agreement provides that the Purchase Price may be subject to a post-
closing reduction based upon the comparison of (a) the net book value of the
Transferred Assets less the Assumed Liabilities as of September 30, 1998 as
reflected on the unaudited balance sheet of MFIC to (b) the net book value of
the Transferred Assets less the Assumed Liabilities as of June 30, 1998 as
reflected on the audited balance sheets of the Sellers.
MFIC paid $1,897,509 from its working capital and borrowed $4,096,050.44
from Comerica Bank, its primary lender, in order to finance the purchase and
payoff certain of the Assumed Liabilities. The revolving loan, security and
ancillary agreements with Comerica Bank (the "Revolving Loan Agreement") provide
up to $5,000,000 in loans with monthly interest payments and the outstanding
principal amount due on September 1, 2001. The line of credit
3
expires on September 1, 2001. The current outstanding principal balance under
the Revolving Loan Agreement is $4,096,050.44 and bears interest at a rate of
7.625% per annum.
Effective on the Closing Date, MFIC expanded its Board of Directors from
four to six members and appointed the Principals to fill the resulting
vacancies. Subject to the terms and conditions set forth in the Agreement, MFIC
agreed to use reasonable efforts to cause the nomination of the Principals as
directors of MFIC at the 1999 annual meeting of its shareholders. Thereafter,
subject to the terms and conditions set forth in the Agreement, MFIC agreed to
use its reasonable efforts to continue to support the nomination of the
Principals as directors of MFIC at subsequent annual meetings of its
shareholders.
Mr. Jennings will be the president of the MFIC's newly created Morehouse-
COWLES Division and Mr. Lewis will be the president of MFIC's newly created
Epworth Mill Division.
The description contained herein of the transaction is qualified in its
entirety by reference to the Agreement (Exhibit 2), Stockholders Agreement
(Exhibit 4), Promissory Notes (Exhibit 99.1 and Exhibit 99.2) and press release
(Exhibit 99.3), copies of which are attached hereto and incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of business acquired.
-----------------------------------------
Audited combined financial statements of Epworth Manufacturing
Company, Inc. and Morehouse-Cowles, Inc. as of December 31, 1997 and
1996 and for the years then ended, which have been audited by
independent auditors Deloitte & Touche LLP, whose report thereon is
also included herein. Unaudited combined financial statements of
Epworth Manufacturing Company, Inc. and Morehouse-Cowles, Inc. as of
and for the six months ended June 30, 1998, and related notes
thereto.
(b) Pro forma financial information.
-------------------------------
Unaudited pro forma condensed consolidated balance sheet as of
June 30, 1998 and unaudited pro forma consolidated statements of
operations for the six months ended June 30, 1998 and the year ended
December 31, 1997.
(c) Exhibits.
--------
The following exhibits are filed as part of this report pursuant to Item
601 of Regulation S-K:
Exhibit
Number Description
------ -----------
*2 Asset Purchase Agreement dated as of June 19, 1998, by
and among MFIC, Epworth and Morehouse (Filed as Exhibit 2.1
to Schedule 13D of Bret A. Lewis, File No. 005-35850, and
incorporated herein by reference).
*4 Stockholders Agreement dated August 14, 1998, by and
among MFIC and the Principals (Filed as Exhibit 2.2 to
Schedule 13D of Bret A. Lewis, File No. 005-35850, and
incorporated herein by reference).
23 CONSENT OF DELOITTE & TOUCHE LLP.
*99.1 $500,000 Subordinated Promissory Note issued by MFIC
to Epworth.
*99.2 $300,000 Subordinated Promissory Note issued by MFIC
to Epworth.
*99.3 Press Release issued by MFIC on August 20, 1998.
- --------------------
*Previously filed with Form 8-K filed August 27, 1998 (File No. 000-11625).
4
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Epworth Manufacturing Company, Inc. and
Morehouse - Cowles, Inc.:
We have audited the accompanying combined balance sheets of Epworth
Manufacturing Company, Inc. and Morehouse - Cowles, Inc. (collectively, the
"Company"), both of which are under common ownership and common management, as
of December 31, 1997 and 1996, and the related combined statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Company at December 31, 1997
and 1996, and the combined results of its operations and its combined cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 30, 1998
(except for Note 12, as to which the date is August 14, 1998)
5
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash $ 144,668 $ 114,924
Accounts receivable, net of allowance for doubtful
accounts of $26,700 and $30,000, respectively 1,366,557 1,573,405
Accounts receivable - related parties 13,363 18,616
Inventories 3,143,392 2,581,380
Prepaid expenses and other 62,103 102,518
------------- -------------
Total current assets 4,730,083 4,390,843
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, Net 675,836 650,113
OTHER ASSETS, Net 238,895 268,647
ADVANCE TO SHAREHOLDERS 115,465 105,935
------------- -------------
TOTAL ASSETS $ 5,760,279 $ 5,415,538
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Borrowings under line of credit $ 250,000 $ 131,267
Accounts payable - trade 1,228,047 967,671
Accrued liabilities 503,364 381,367
Accrued interest - related party 80,587 38,516
Customer deposits 200,277 608,811
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Total current liabilities 2,262,275 2,127,632
------------- -------------
DUE TO SHAREHOLDERS 449,960 449,960
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 6,100 6,100
Paid-in capital 2,490,514 2,490,514
Retained earnings 551,430 341,332
------------- -------------
Total shareholders' equity 3,048,044 2,837,946
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,760,279 $ 5,415,538
============= =============
See notes to combined financial statements.
6
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
NET SALES $ 11,718,621 $ 8,225,405
COST OF GOODS SOLD 7,982,431 6,015,693
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GROSS PROFIT 3,736,190 2,209,712
OPERATING EXPENSES 3,164,092 2,086,001
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INCOME FROM OPERATIONS 572,098 123,711
------------ -----------
OTHER INCOME (EXPENSE):
Interest income 11,867 9,901
Interest expense (63,177) (45,826)
Demonstration equipment rental 40,198 3,175
Gain on disposal of fixed assets, net 31,736 22,695
Other 50,676 37,109
------------ -----------
Total other income 71,300 27,054
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NET INCOME $ 643,398 $ 150,765
============= ============
PRO FORMA (See Note 2):
Historical income before taxes $ 643,398 $ 150,765
Pro forma taxes on income 257,000 60,000
------------ -----------
PRO FORMA NET INCOME $ 386,398 $ 90,765
============= ============
See notes to combined financial statements.
7
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
BALANCE, JANUARY 1, 1996 $ 4,700 $ 41,250 $ 440,277 $ 486,227
Acquisition of Morehouse (Note 1) 1,400 2,449,264 - 2,450,664
Net income - - 150,765 150,765
Distributions to shareholders - - (249,710) (249,710)
------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1996 6,100 2,490,514 341,332 2,837,946
Net income - - 643,398 643,398
Distributions to shareholders - - (433,300) (433,300)
------- ---------- ---------- ---------
BALANCE, DECEMBER 31, 1997 $ 6,100 $ 2,490,514 $ 551,430 $3,048,044
======= =========== =========== ==========
See notes to combined financial statements.
8
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 643,398 $ 150,765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 207,754 124,347
Gain on sale of fixed assets (31,736) -
Increase (decrease) due to change in:
Accounts receivable 206,848 (545,547)
Accounts receivable - related parties 5,253 353
Inventories (562,012) 1,201
Prepaid expenses and other 40,415 (51,806)
Accounts payable - trade 260,376 552,216
Accrued liabilities 121,997 (25,575)
Customer deposits (408,534) (202,562)
Accrued interest - related party 42,071 24,492
------------ ------------
Net cash provided by operating activities 525,830 27,884
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of leasehold improvements and equipment (232,709) (70,541)
Proceeds from sale of equipment 60,720 -
Advance to shareholders (9,530) (105,935)
Cash acquired in Morehouse acquisition - 40,832
------------ ------------
Net cash used for investing activities (181,519) (135,644)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (433,300) (249,710)
Net borrowings on line of credit 118,733 131,267
------------ ------------
Net cash used for financing activities (314,567) (118,443)
------------ ------------
NET INCREASE (DECREASE) IN CASH 29,744 (226,203)
CASH, BEGINNING OF YEAR 114,924 341,127
------------ ------------
CASH, END OF YEAR $ 144,668 $ 114,924
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Fair value of net assets of Morehouse - Cowles
contributed to the Company, net of cash $ - $ 2,409,832
============ ============
Interest paid $ 22,000 $ 20,400
============ ============
See notes to combined financial statements.
9
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying combined financial statements
include the balance sheets, statements of income, shareholders' equity, and
cash flows of Epworth Manufacturing Company, Inc. ("Epworth") and
Morehouse -Cowles, Inc. ("Morehouse") (collectively, the "Company"). Both
companies have common ownership and, accordingly, the two companies have
been combined in the accompanying financial statements. All significant
intercompany balances have been eliminated.
ACQUISITION - On June 15, 1996, the shareholders of Epworth acquired all of
the outstanding stock of Morehouse from Summa Industries for approximately
$2,410,000, net of cash acquired. The purchase price, which approximated
historical book value, was allocated to the assets acquired and liabilities
assumed using estimated fair values at the date of acquisition.
The accompanying financial statements include the results of operations of
Morehouse from the date it became part of the combined group (date of
acquisition). For the period January 1, 1996 to June 15, 1996, Morehouse
had net sales and gross profit of approximately $2,900,000 and $809,000,
respectively.
BUSINESS - The Company manufactures and distributes machinery and equipment
used for mixing, dispersion and/or particle size reduction of solids used
by chemical processing industries, foods, pharmaceuticals, paints, inks or
other coating applied to a substrate. In addition, the Company sells
grinding media used in the equipment that it manufactures.
INVENTORIES - Inventories are stated at the lower of cost or market with
cost being determined on the first-in, first-out ("FIFO") method.
CONCENTRATIONS OF CREDIT RISK - The Company's financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and
trade accounts receivable. The Company maintains its cash in bank deposit
accounts at high credit quality financial institutions. The balances, at
times, may exceed federally insured limits. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes
that its trade accounts receivable credit risk exposure is limited.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment and leasehold
improvements are stated at cost. Depreciation is calculated primarily
by use of the straight-line method of depreciation based on the
estimated useful lives of the fixed assets, ranging from three to
fifteen years. The Company periodically evaluates the recoverability
of equipment and leasehold improvements based upon estimated future
cash flows.
OTHER ASSETS - Other assets, and the related lives over which they are
amortized, include goodwill (15 years), noncompete agreement (2
years), patents and other (15 years), and loan commitment fees (5
years).
INCOME TAXES - The Company, with the consent of its shareholders, has
elected to be an S Corporation under the Internal Revenue Code.
Instead of paying corporate income taxes, the stockholders of an S
Corporation are taxed individually on their proportionate share of the
Company's taxable income. Therefore, no liability for federal income
taxes has been included in the combined balance sheets. State income
taxes are provided based on statutory rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value
of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. The carrying amounts of cash, accounts
receivable, accounts payable and accrued expenses approximate fair
value because of their short-term nature. The carrying amounts of the
Company's amounts due to shareholders and borrowings under lines of
credit approximate fair value. Advances due from shareholders are
noninterest bearing.
2. PRO FORMA INCOME STATEMENT INFORMATION
PRO FORMA NET INCOME - The pro forma income statement information
reflects what the effects on historical net income would have been if
the Company had not elected to be taxed as a Subchapter S Corporation.
The adjustments include a provision for state and federal income taxes
at an effective rate of approximately 40%, as if the Company was
subject to such taxes.
3. INVENTORIES
Inventories consisted of the following components at December 31:
1997 1996
Raw materials $ 1,483,849 $ 1,457,581
Work in process 461,076 559,161
Finished goods 1,198,467 564,638
----------- -----------
Total $ 3,143,392 $ 2,581,380
=========== ============
11
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at
December 31:
1997 1996
Leasehold improvements $ 151,985 $ 136,220
Machinery and equipment 544,076 486,476
Demonstration equipment 390,998 301,819
Office furniture and equipment 173,746 166,703
Automobiles and other 20,223 20,223
----------- ------------
1,281,028 1,111,441
Less accumulated depreciation 605,192 461,328
----------- ------------
Equipment and leasehold improvements, net $ 675,836 $ 650,113
=========== ============
5. OTHER ASSETS
Other assets consisted of the following at December 31:
1997 1996
Goodwill, net of accumulated amortization of $49,398 and $35,612,
respectively $ 157,383 $ 171,169
Patent and other, net of accumulated amortization of $68,366
and $54,841, respectively 72,729 85,357
Loan commitment fees, net of accumulated amortization of $8,130
and $4,792, respectively 8,783 12,121
--------- ---------
Other assets, net $ 238,895 $ 268,647
6. LINE OF CREDIT
The Company had a $500,000 line-of-credit agreement with a bank. At
December 31, 1997, $250,000 of borrowings were outstanding under this
agreement (an additional $250,000 was available for additional
borrowings) which bears interest at 1/4% under prime (8.5% at December
31, 1997). This agreement is collateralized by accounts receivable,
inventories and equipment. This agreement expires on December 31, 1998.
12
7. DUE TO/FROM SHAREHOLDERS
Due to shareholders consisted of the following at December 31:
Note payable - B2 Enterprises, Inc. (a related party owned by shareholders);
interest accrues at 9.35% per annum; no formal repayment terms have been
established. Unsecured. $ 304,000
Note payable - shareholders; interest accrues at 9.35% per annum; no formal
repayment terms have been established. Unsecured. 145,960
---------
Due to shareholders $ 449,960
=========
The $115,465 advance to shareholders at December 31, 1997 is
noninterest bearing and no formal repayment terms have been
established.
See Note 12.
8. RELATED-PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company was owed $13,363 and
$18,616, respectively, by JLJ Properties, Inc. JLJ Properties, Inc. is
owned by the Company's shareholders.
The Company rents manufacturing and warehouse facilities from B2
Enterprises, Inc. (a related party) for approximately $9,500, payable
monthly. Additionally, the Company is responsible for all insurance,
taxes and maintenance on such facilities. The Company is a tenant-at-
will.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its Fullerton, California, operating facility under
a noncancellable operating lease. Minimum lease payments are as follows
for the years ended December 31:
1998 $ 48,000
1999 48,000
2000 48,000
2001 66,000
2002 66,000
Thereafter 264,000
13
10. SHAREHOLDERS' EQUITY
Shareholders' equity consisted of the following at December 31:
1997 MOREHOUSE EPWORTH COMBINED
Morehouse common stock - authorized,
10,000,000 shares, $0.001 par value;
1,400,000 shares issued and outstanding $ 1,400 $ - $ 1,400
Epworth common stock - authorized, 1,000
shares, $100 par value; 47 shares issued and
outstanding - 4,700 4,700
Additional paid-in capital 2,368,677 121,837 2,490,514
Retained earnings (deficit) (55,852) 607,282 551,430
----------- --------- -----------
$ 2,314,225 $ 733,819 $ 3,048,044
=========== ========== ===========
1996
Morehouse common stock - authorized,
10,000,000 shares, $0.001 par value;
1,400,000 shares issued and outstanding $ 1,400 $ - $ 1,400
Epworth common stock - authorized, 1,000
shares, $100 par value; 47 shares issued and
outstanding - 4,700 4,700
Additional paid-in capital 2,368,677 121,837 2,490,514
Retained earnings (deficit) (109,838) 451,170 341,332
----------- --------- -----------
$ 2,260,239 $577,707 $ 2,837,946
=========== ========== ===========
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) and profit sharing plan (the "Plan") covering
substantially all full-time employees. The Plan calls for the Company to
provide matching contributions of 10% on the employees' elective deferrals
up to 6% of eligible compensation, and provides for discretionary
contributions relative to profit sharing. Expense associated with the Plan
was approximately $46,000 and $71,000 for the years ended December 31, 1997
and 1996, respectively.
12. SUSBSEQUENT EVENT
On August 14, 1998, substantially all of the assets and liabilities of the
Company were sold. On June 30, 1998, in connection with the sale, $34,395 of
notes payable were forgiven by the noteholders and contributed to additional
paid-in capital. The balance of the notes payable, net of the advance to
shareholders, was paid in full.
* * * * * *
14
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
UNAUDITED COMBINED BALANCE SHEET
JUNE 30, 1998
ASSETS
Current Assets:
Cash 82,387
Accounts receivable 1,293,726
Inventory 2,798,752
Prepaid expense 87,743
-------------
Total current assets 4,262,608
Equipment and improvements, net 709,139
Other assets, net 323,727
Advance to shareholders 115,565
-------------
TOTAL ASSETS 5,411,039
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings under line of credit 450,000
Accounts payable and accrued expenses 1,490,523
Customer advances 343,385
-------------
Total current liabilities 2,283,908
Due to shareholders 415,565
Stockholders' Equity
Common stock 6,100
Additional paid in capital 2,490,514
Retained earnings 214,952
-------------
Total stockholders' equity 2,711,566
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 5,411,039
=============
15
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
UNAUDITED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
Revenues 4,608,206
Cost of goods sold 3,134,892
--------------
Gross profit 1,473,314
Operating expenses 1,598,695
--------------
Loss from operations (125,381)
Interest income 1,976
Interest expense (15,510)
Other income (expense) 49,747
--------------
Loss before taxes (89,168)
Income taxes 4,542
--------------
Net loss (93,710)
==============
16
EPWORTH MANUFACTURING COMPANY, INC. AND
MOREHOUSE - COWLES, INC.
UNAUDITED COMBINED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (93,710)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 112,242
Increase (decrease) due to change in:
Accounts receivable 86,194
Inventories 344,640
Prepaid expenses and other (25,640)
Other assets (112,500)
Accounts payable - trade (286,269)
Accrued liabilities (35,206)
Customer deposits 143,108
-------------
Net cash provided by operating activities 132,859
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of leasehold improvements and equipment (117,878)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders (277,262)
Net borrowings on line of credit 200,000
-------------
Net cash used for financing activities (77,262)
NET DECREASE IN CASH (62,281)
CASH, BEGINNING OF PERIOD 144,668
-------------
CASH, END OF PERIOD 82,387
=============
SUPPLEMENTAL CASH FLOW INFORMATION
Forgiveness of Indebtedness 34,395
=============
17
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS OF EPWORTH MANUFACTURING
COMPANY, INC. AND MOREHOUSE-COWLES, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998
(A) BASIS OF PRESENTATION: The accompanying unaudited combined financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial statements. 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, 1998 are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the combined financial statements and
related notes thereto for the year ended December 31, 1997.
(B) INVENTORY: Inventories consisted of the following at June 30, 1998:
Raw materials 1,199,607
Work in process 450,216
Finished goods 1,148,929
Total 2,798,752
(C) INCOME TAXES: Pro forma income taxes (credit) have not been provided due to
the net loss.
18
MICROFLUIDICS INTERNATIONAL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
PRO FORMA PRO FORMA
MFIC A EMCO B ADJUSTMENTS COMBINED
ASSETS
Current Assets:
Cash and cash equivalents 3,705,472 82,387 (1,862,566)C 1,925,293
Marketable securities 48,483 48,483
Accounts receivable 1,563,966 1,293,726 2,857,692
Other receivables 73,479 73,479
Inventory 2,163,708 2,798,752 4,962,460
Prepaid expense 95,876 87,743 183,619
------------- ------------ --------------- --------------
Total current assets 7,650,984 4,262,608 (1,862,566) 10,051,026
Equipment and improvements, net 167,670 709,139 876,809
Other assets, net 145,171 323,727 (324,000)C 6,290,898
6,146,000 C
Deferred income taxes 413,630 413,630
Advance to shareholders 115,565 (115,565)C
------------- ------------ --------------- --------------
TOTAL ASSETS 8,377,455 5,411,039 3,843,869 17,632,363
============= ============ =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings under line of credit 450,000 (450,000)C
Current portion - long term debt 75,000 E 75,000
Accounts payable and accrued expenses 710,233 1,490,523 500,000 C 2,700,756
Customer advances 11,104 343,385 354,489
------------- ------------ --------------- --------------
Total current liabilities 721,337 2,283,908 125,000 3,130,245
Long term debt 4,821,000 E 4,821,000
Due to shareholders 415,565 (415,565)C
Stockholders' Equity
Common stock 51,570 6,100 9,000 C 60,570
(6,100)D
Additional paid in capital 10,475,221 2,490,514 (2,490,514)D 12,491,221
2,016,000 C
Retained earnings (accumulated deficit) (2,267,812) 214,952 (214,952)D (2,267,812)
Unrealized appreciation on marketable securities 48,483 48,483
Less treasury stock (651,344) (651,344)
------------- ------------ --------------- --------------
Total stockholders' equity 7,656,118 2,711,566 (686,566) 9,681,118
------------- ------------ --------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,377,455 5,411,039 3,843,869 17,632,363
============= ============ =============== ==============
19
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(A) Represents the condensed balance sheet for Microfluidics International
Corporation (MFIC) derived from the balance sheet presented in the Report
on Form 10Q for the six months ended June 30, 1998.
(B) Represents the condensed historical combined balance sheet of Epworth
Manufacturing Company, Inc. and Morehouse-Cowles, Inc. (collectively
"EMCO") as of June 30, 1998.
(C) The acquisition will be accounted for under the purchase method of
accounting. The Company has not yet determined the final allocation of the
purchase price, and accordingly, the amount shown below may differ from the
amount ultimately determined.
The unallocated excess of purchase price over net assets acquired will be
amortized over 15 years and is determined as follows:
Purchase Price:
Cash paid 5,508,000
Notes issued 800,000
Value of 900,000 shares of the Company's common stock issued 2,025,000
Fees and expenses related to the acquisition 500,000
---------
8,833,000
---------
Allocation:
Historical assets and liabilities 2,711,000
Adjustments - shareholder indebtedness canceled 300,000
Revaluation of identifiable intangibles -324,000
---------
2,687,000
---------
Unallocated excess of purchase price over net assets acquired 6,146,000
---------
(D) Eliminate existing stockholders' equity.
(E) Borrowings of the Company in order to finance the purchase, including
$800,000 note issued to sellers as discussed in Note C above.
20
MICROFLUIDICS INTERNATIONAL CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
PRO FORMA PRO FORMA
MFIC EMCO ADJUSTMENTS COMBINED
Revenues 3,543,974 4,608,206 8,152,180
Cost of goods sold 1,735,992 3,134,892 4,870,884
--------------- -------------- -----------------
Gross profit 1,807,982 1,473,314 3,281,296
Research and development 344,903 344,903
Selling, general and
administrative expenses 1,455,126 1,598,695 194,000 A 3,247,821
--------------- -------------- ---------------- -----------------
Total operating expenses 1,800,029 1,598,695 194,000 3,592,724
--------------- -------------- ---------------- -----------------
Income (loss) from operations 7,953 (125,381) (194,000) (311,428)
Interest income 84,596 1,976 (52,000)B 34,572
Interest expense (15,510) (196,000)B (211,510)
Other income (expense) 49,747 49,747
--------------- -------------- ---------------- -----------------
Income (loss) before taxes 92,549 (89,168) (442,000) (438,619)
Income taxes 4,542 4,542
--------------- -------------- ---------------- -----------------
Net income (loss) 92,549 (93,710) (442,000) (443,161)
=============== ============== ================ =================
Basic income (loss) per share 0.02 (0.08)
Average shares outstanding 4,923,180 C 5,823,180
Diluted income (loss) per share 0.02 (0.08)
Average shares outstanding 5,025,620 C 5,823,180
21
MICROFLUIDICS INTERNATIONAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
PRO FORMA PRO FORMA
MFIC EMCO ADJUSTMENTS COMBINED
Revenues 7,105,706 11,718,621 18,824,327
Cost of goods sold 3,265,593 7,982,431 11,248,024
-------------- --------------- --------------
Gross profit 3,840,113 3,736,190 7,576,303
Research and development 459,240 459,240
Selling, general and
administrative expenses 2,977,577 3,164,092 380,000 A 6,521,669
-------------- --------------- ---------------- --------------
Total operating expenses 3,436,817 3,164,092 380,000 6,980,909
-------------- --------------- ---------------- --------------
Income from operations 403,296 572,098 (380,000) 595,394
Interest income 159,256 11,867 (104,000)B 67,123
Interest expense (63,177) (329,000)B (392,177)
Other income (expense) 141,875 122,610 264,485
-------------- --------------- ---------------- --------------
Income before taxes 704,427 643,398 (813,000) 534,825
Income taxes (benefit) (403,630) 257,000 (257,000)D (403,630)
-------------- --------------- ---------------- --------------
Net income 1,108,057 386,398 556,000 938,455
============== =============== ================ ==============
Basic income per share 0.23 0.16
Average shares outstanding 4,914,722 C 5,814,722
Diluted income per share 0.22 0.16
Average shares outstanding 4,966,998 C 5,866,998
22
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR
ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998
(A) Eliminate amortization of certain previously acquired intangibles of EMCO
and provide for amortization of excess purchase price over net assets
acquired over 15 years.
(B) Effect on interest income and interest expense due to financing of purchase
price from existing cash and additional borrowings.
(C) Represents basic and diluted earnings per share including shares of Company
common stock issued to EMCO shareholders as if issued at the beginning of
the period.
(D) Benefit of MFIC net operating losses used to offset EMCO income.
23
SIGNATURE
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.
MICROFLUIDICS INTERNATIONAL CORPORATION
Date: October 28, 1998 By: /s/ Michael A. Lento
----------------------------------
Michael A. Lento
President and Treasurer
24
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
*2 Asset Purchase Agreement dated as of June 19, 1998, by
and among MFIC, Epworth and Morehouse (Filed as Exhibit 2.1
to Schedule 13D of Bret A. Lewis, File No. 005-35850, and
incorporated herein by reference).
*4 Stockholders Agreement dated August 14, 1998, by and
among MFIC and the Principals (Filed as Exhibit 2.2 to
Schedule 13D of Bret A. Lewis, File No. 005-35850, and
incorporated herein by reference).
23 CONSENT OF DELOITTE & TOUCHE LLP.
*99.1 $500,000 Subordinated Promissory Note issued by MFIC
to Epworth.
*99.2 $300,000 Subordinated Promissory Note issued by MFIC
to Epworth.
*99.3 Press Release issued by MFIC on August 20, 1998.
- ---------------------
*Previously filed with Form 8-K filed August 27, 1998 (File No. 000-11625).