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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to___________
Commission file number 0-11625
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MFIC CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-2793022
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
30 Ossipee Road, P.O. Box 9101, Newton, Massachusetts 02464
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(Address of Principal Executive Offices) (Zip Code)
(617)969-5452
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(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 6,061,304 shares of Common Stock, par value $.01 per share,
outstanding on November 12, 1999.
MFIC CORPORATION
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INDEX
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 3
1999 (unaudited) and December 31, 1998
Consolidated Statements of Income (Loss) 6
for the three and nine months ended
September 30,1999 and September 30,1998
(unaudited).
Consolidated Statements of Cash Flows for 7
nine months ended September 30, 1999 and
September 30,1998 (unaudited)
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of 12
Financial Condition and Results of
Operations
ITEM 3. Quantitative and Qualitative Disclosures 21
About Market Risk
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 22
ITEM 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MFIC CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, 1999 December 31,1998
------------------ ----------------
(unaudited)
ASSETS
Cash and cash equivalents $ 180,536 $ 550,713
Marketable securities 10,080
Accounts receivable (less allowance
for doubtful accounts of $65,321 and
$100,000 at September 30, 1999 and
December 31,1998, respectively) 2,594,541 2,284,840
Other receivables 21,583 84,845
Accounts Receivable-
Related party
18,462 24,417
Inventory 4,163,677 4,450,926
Prepaid expenses 296,530 164,528
---------- ----------
Total current assets 7,275,329 7,570,349
Equipment and leasehold improvements,
at cost
Furniture, fixtures and
office equipment 441,104 436,447
Machinery and equipment 853,250 893,388
Leasehold improvements 310,563 310,563
---------- ----------
1,604,917 1,640,398
Less: accumulated
depreciation and amortization (820,063) (644,065)
---------- ----------
784,854 996,333
3
Goodwill (net of accumulated amortization of
$454,329 at September 30, 1999 and $154,329
at December 31, 1998, respectively) 5,730,236 6,010,130
Patents, licenses and other intangible
assets (net of accumulated amortization of
$456,409 at September 30, 1999 and $423,470
at December 31, 1998, respectively) 90,271 123,210
---------- ----------
Total assets $13,880,690 $14,700,022
=========== ===========
(See notes to consolidated financial statements)
4
MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
---------------------------------------
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $1,658,228 $1,179,163
Accrued compensation 98,804 177,155
Customer advances 466,840 166,136
Current portion of long term debt 175,000 125,000
Line of credit 3,624,266 4,347,782
---------- ----------
Total current liabilities 6,023,138 5,995,236
Long-term debt, net of
current portion 600,000 675,000
Stockholders' equity Common Stock,
par value $.01 per share, 20,000,000
shares authorized; 6,061,307 and
6,056,983 shares issued and outstanding
at September 30, 1999 and at December 31,
1998, respectively 60,613 60,570
Additional paid-in-capital 12,494,839 12,491,423
Accumulated deficit (4,623,793) (3,865,800)
Accumulated other comprehensive
income 10,080
Less: Treasury Stock, at cost, 242,719 and
235,219 shares at September 30, 1999
and December 31, 1998, respectively (674,107) (666,487)
---------- ----------
Total stockholders' equity 7,257,552 8,029,786
---------- ----------
Total liabilities and
stockholders' equity $13,880,690 $14,700,022
=========== ===========
(See notes to consolidated financial statements)
5
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
----------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Revenues $3,692,425 $2,306,310 $9,632,064 $5,855,284
Cost of goods sold 1,999,434 1,319,856 5,481,301 3,055,848
---------- ---------- ---------- ----------
Gross profit on revenues 1,692,991 986,454 4,150,763 2,799,436
Operating expenses:
Selling 740,862 617,728 2,050,175 1,480,648
Research and development 246,096 271,126 681,295 616,029
General and administrative 665,099 457,030 1,865,936 1,049,236
---------- ---------- ---------- ----------
Total operating expenses 1,652,057 1,345,884 4,597,406 3,145,913
Income (Loss) from operations 40,934 (359,430) (446,643) (346,477)
Interest income 1,514 36,376 7,337 115,972
Gain on sale of marketable securities 11,864
Interest expense (121,351) (40,904) (330,551) (40,904)
---------- ---------- ---------- ----------
Net Income (Loss) $ (78,903) $ (363,958) $ (757,993) $ (271,409)
========== ========== ========== ==========
Basic earnings per share:
Average shares outstanding: basic 5,818,588 5,032,189 5,818,588 5,129,015
Net income (loss) per share $(.01) $(.07) $(.13) $(.05)
===== ===== ===== =====
Diluted earnings per share:
Average shares outstanding: diluted 5,818,588 5,032,189 5,818,588 5,129,015
Net income (loss) per share $(.01) $(.07) $(.13) $(.05)
===== ===== ===== =====
(See notes to consolidated financial statements)
6
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
Nine months ended
---------------------------
Sept. 30,
1999 1998
----------- -----------
Cash flows from (used in)operating activities:
Net income (Loss) $ (757,993) $ (271,409)
Reconciliation of net income to cash used by
operating activities:
Depreciation and amortization 521,086 161,651
Gain on sale of fixed assets (31,549)
Bad debt expense (income) (34,679) 23,000
Effects of changes in operating working capital items:
Trade and other receivables (205,805) 636,912
Inventories 287,249 464,485
Prepaid expenses (132,002) (105,620)
Current liabilities 701,418 (1,672,395)
----------- -----------
Net cash(used by) provided by operating
activities: 347,725 (763,376)
Cash flows used in investing activities:
Proceeds from sale of fixed assets: 110,860
Excess of cost over assets purchased (Goodwill) (20,106) (3,286,952)
Business assets acquired net of cash (3,102,216)
Purchase of capital equipment (55,979) (63,517)
----------- -----------
Net cash from (used in)
investing activities 54,881 (6,452,685)
Cash flows from (used in) financing activities:
Proceeds from borrowings to finance
acquisition 4,096,050
Proceeds from issuance of common stock 3,459 32,785
Treasury stock purchased (7,620)
Paydown of subordinated debt (25,000)
Paydown on line of credit (723,516)
----------- -----------
Net cash from (used in) financing activities (772,783) 4,128,835
Net increase (decrease)in cash (370,177) (3,087,226)
Cash and cash equivalents at beginning
of period 550,713 4,083,214
----------- -----------
Cash and cash equivalents at end
of period $ 180,536 $ 995,988
=========== ===========
Assets acquired in exchange for
notes and common stock $ 2,825,000
===========
(See notes to consolidated financial statements)
7
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, 1999 and 1998 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS) is computed by dividing net income
(loss)available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock, unless the effects of dilution would be anti-dilutive.
8
MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORY
The components of inventories on the following dates were:
September 30, 1999 December 31, 1998
Raw Material $2,108,539 $1,875,881
Work in Progress 743,889 1,075,711
Finished Goods 1,311,249 1,499,334
---------- ----------
Total $4,163,677 $4,450,926
========== ==========
4. TAXES
The Company has a federal net operating tax loss carryforward of
approximately $3,844,000 and research and development tax credit carryforwards
of approximately $188,000 expiring at various dates beginning in 2001 through
2018. Ownership changes may result in future limitations on the utilization of
net operating tax losses and research and development tax credit carryforwards.
Based on the financial results known at December 31, 1998, the Company has
established a full valuation allowance against a deferred tax asset due to the
uncertainty of earning sufficient taxable income to realize the benefit of these
assets.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2001. SFAS No. 133
significantly modifies accounting and reporting Standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
9
6. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the nine months ended September
30, 1999 and 1998 are as follows:
Nine months ended
September 30
1999 1998
---- ----
Other comprehensive income:
Reclassification adjustment for gains
Included in net income $ 0 $10,614
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Other comprehensive income $ 0 $10,614
===== =======
The accumulated other comprehensive income balance is as follows at September
30, 1999.
Unrealized gain
On Securities
Beginning balance $10,080
Reclassification adjustment
for gains included in net
Income (10,080)
--------
Ending balance $ 0
========
These amounts have not been tax affected due to the availability of net
operating loss carryforwards to offset the unrealized gains.
7. SUBORDINATED DEBT AND LINE OF CREDIT
In August 1998, the company purchased substantially all of the assets and
assumed certain liabilities of two corporations. As part of the
transaction, the Company delivered to the sellers two subordinated
promissory notes in the aggregate principal amount of $800,000; one for
$300,000 and the other for $500,000. The $300,000 note has interest due
quarterly, at 10% per annum, with principal payments of twelve
10
equal installments of $25,000 each commencing on September 30, 2001. The
$500,000 note has interest due quarterly at 10% per annum, with principal
payments of twenty equal installments of $25,000 each commencing December
31, 1998.
The Company originally borrowed $4,096,050 from Comerica Bank, its primary
lender, in order to finance the purchase and pay off certain of the assumed
liabilities. The revolving loan, security and ancillary agreements with
Comerica Bank (the"Revolving Loan Agreement" provided up to $5,000,000 in
loans at a rate of prime minus 5/8% with monthly interest payments and the
outstanding principal amount due on September 1, 2001. The line of credit
was secured by substantially all the assets of the Company. The outstanding
principal balance at December 31, 1998 under the Revolving Loan Agreement
was $4,347,782 and bore interest at a rate of 7.125% per annum. The
outstanding principal balance at September 30, 1999 was $3,624,266, and
bore interest at a rate of 9.25% per annum.
In 1998, the Company incurred a net loss of approximately $1,505,000 and
was not in compliance with certain covenants of the Revolving Loan
Agreement. Accordingly, the Company reclassified all amounts due to
current liabilities. On March 23, 1999, the Company's lender advised the
Company that it was in default of the Revolving Loan Agreement and
instructed the Company to cease all payments on the Subordinated Promissory
Notes. The lender reduced the line of credit to $4,000,000. Until May 5,
1999, the Company functioned under a standstill agreement. These matters
raise substantial doubt about the Company's ability to continue as a going
concern.
On May 5, 1999, the Company and its lender executed a forebearance
agreement to the Revolving Loan Agreement. The interest rate under the
Revolving Loan Agreement is, as modified by the forebearance agreement, the
prime rate plus 1%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources." In
addition, management has developed and is executing a plan to return to
profitability and positive cash flow. The plan includes renegotiating the
terms of the Revolving Loan Agreement, if possible, seeking to obtain
sufficient new capital or subordinated debt, manufacturing cost reduction
programs, reductions in the number of personnel at all three Company
locations, reduction in discretionary spending and salaries for key
officers and combining the salesforce for all product lines. On July 28,
1999, the Company and Comerica executed an extension to the forbearance
agreement with essentially the same terms, except that the line of credit
was further reduced initially from $4,000,000 to $3,900,000, with further
reductions of $10,000 per week until the forbearance agreement expired on
September 30, 1999. The forebearance agreement was subsequently extended
until October 31, 1999, again with reductions of $10,000 per week. On
November 12, 1999, the agreement was extended until November 30, 1999, with
reductions of $10,000 per week. As of September 30, 1999, the available
line of credit was $3,800,000.
11
These matters raise substantial doubt about the Company's ability to
continue as a going concern. There can be no assurance that the Company
will be successful in its attempt to execute its plan to return to
profitability and positive cash flow, or that the Company will be able to
negotiate a loan agreement on acceptable terms with Comerica or an
alternate lender as of November 30, 1999, when the forebearance agreement
with Comerica expires. See Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Liquidity and Capital
Resources The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
MFIC CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. RESULTS OF OPERATIONS
As discussed in Note 7 to the accompanying financial statements, in August 1998,
the Company acquired the assets and assumed certain liabilities of two
businesses, Morehouse-COWLES and Epworth Manufacturing Company. These
acquisitions were accounted for as a purchase. Accordingly, in the accompanying
financial statements, the results of operations and cash flows include
Morehouse-COWLES and Epworth Manufacturing for the 1999 periods but do not
include them for periods prior to August 15, 1998.
Total Company revenues for the quarter ended September 30, 1999 were
$3,692,425,as compared to revenues of $2,306,310 in the corresponding period
last year, representing an increase of $1,386,115, or 60%. For the nine month
period ended September 30, 1999, revenues increased $3,776,780, or 65%, to
$9,632,064 from $5,855,284 for the first nine months of 1998. The increase in
revenue for the three months ended September 30, 1999 is due to the $771,000 in
additional revenue generated by the Company's Epworth Mill and Morehouse-COWLES
divisions, divisions that the Company did not acquire until the third quarter of
1998, and by an increase in sales by the previously sole operating division of
the Company, the Microfluidics division, in the amount of $610,000. The
increase in revenue for the nine month period ended September 30, 1999 is due to
the $4,201,000 in additional revenues generated by the Company's Epworth Mill
and Morehouse-COWLES divisions, offset by a decrease in sales by the previously
sole operating division of the Company, the Microfluidics division, of
approximately $424,000.
12
For the Microfluidics division, North American sales for the three month period
ended September 30, 1999 decreased to $960,515, a decrease of $18,733, or 2%, as
compared to North American sales of $979,248 for the three months ended
September 30, 1998. This decrease in North American sales was principally due
to a decrease in the sale of machines compared to the three months ended
September 30, 1998. Foreign sales were $752,396 for the three months ended
September 30, 1999 compared to $123,756 for the three months ended September 30,
1998, an increase of approximately $629,000, or 5%. This increase in foreign
sales was due primarily to an increase in the sale of machines.
For the Microfluidics division, North American sales for the nine month period
ended September 30, 1999 decreased to $2,792,167, a decrease of $444,885, or 14%
as compared to North American sales of $3,237,052 for the nine months ended
September 30, 1998. This decrease in North American sales was principally due
to a decrease in the sale of machines compared to the nine months ended
September 30, 1998. Foreign sales were $1,430,249 for the nine months ended
September 30, 1999 compared to $1,409,926 for the nine months ended September
30, 1998, an increase of approximately $20,000 or 1%.
Cost of goods sold for the three months ended September 30, 1999 was $1,999,434,
or 54% of revenue, compared to $1,319,856, or 57% of revenue, for the same
period last year. For the nine month period ended September 30, 1999, cost of
goods sold increased to $5,481,301, or 57% of revenue, from $3,055,848 or 52% of
revenue, for the comparable period in 1998.
The increase in cost of goods sold in absolute dollars for the three months
ended September 30, 1999, reflects the increase in sales generated by the
Epworth Mill and Morehouse-COWLES operating divisions of the Company. For the
Microfluidics division of the Company, for the three month period ended
September 30, 1999, cost of goods sold was $600,906, or 35% of division sales,
compared to $489,036 or 44% of sales for the three months ended September 30,
1998. The increase in cost of goods sold was primarily due to an increase in
machine sales in Europe.
The increase in cost of goods sold in absolute dollars for the nine months ended
September 30, 1999, reflects the increase in sales generated by the Epworth Mill
and Morehouse-COWLES operating divisions of the Company, offset by a decrease in
sales of machines by the Microfluidics division of the Company. For the
Microfluidics division of the Company, for the nine month period ended September
30, 1999, cost of goods sold was $1,547,686 or 37% of division sales, compared
to $2,225,028 or 48% of sales for the nine months ended September 30, 1998. The
decrease in cost of goods sold was due both to reduced machine sales in North
America, and a change in the product mix of machines sold.
The Company's three major product lines have different profit margins, as well
as multiple profit margins within each product line. In the course of the
periods compared, there may be significant changes in the cost of revenues as a
percentage of revenue depending on the mix of product sold.
13
Total operating expenses for the three months ended September 30, 1999 were
$1,652,057 or 44% of revenue, as compared to $1,345,884 or 58% of revenue for
the same period last year, which is an increase of $306,173 or 23%. Operating
expenses for the nine months ended September 30, 1999 were $4,597,406 or 48% of
revenue, as compared to $3,145,913 or 54% of revenue, for the same period last
year, an increase of $1,451,493 or 46%.
Research and development expenses for the three months ended September 30, 1999
were $246,096 compared to $271,126 for the three months ended September 30,
1998, a decrease of $25,030 or 9%. Excluding research and development expenses
attributable to the new operating divisions of the Company that approximated
$92,000 in 1999 and $86,000 in 1998 the decrease in research and development
expenses was primarily due to a decrease in payroll costs of approximately
$35,000 and design development expenses of approximately $13,000.
Research and development expenses for the nine months ended September 30, 1999
were $681,295 compared to $616,029 for the nine months ended September 30, 1998,
an increase of $65,266 or 11%. Excluding design development expenses
attributable to the new operating divisions of the Company that approximated
$277,000 in 1999 and $86,000 in 1998, the decrease in research and development
expenses was primarily due to decreases in payroll costs of approximately
$94,000, and research and development costs of approximately $34,000.
Selling expenses for the three months ended September 30, 1999 increased
$123,134 or 20%, compared to the three months ended September 30, 1998, from
$617,728 to $740,862. For the three months ended September 30, 1999, excluding
selling expenses of approximately $261,000 attributable to the new divisions of
the Company in 1999 and $165,000 in 1998, selling expenses increased by
approximately $27,000 from $452,735 to $479,933 for the Microfluidics division.
Selling expenses for the nine months ended September 30, 1999 increased
approximately $570,000 or 38% compared to the nine months ended September 30,
1998, from $1,480,648 to $2,050,175. For the nine months ended September 30,
1999, excluding selling expenses of approximately $696,000 attributable to the
new divisions of the Company in 1999 and $165,000 in 1998, selling expenses for
the Microfluidics division increased by approximately $38,000, from $1,315,655
to $1,354,206.
For the three months ended September 30, 1999, general and administrative
expenses increased by approximately $208,000, or 46%, from $457,030 to $665,099.
Excluding expenses attributable to the new operating divisions of the Company of
approximately $190,000 for the three months ended September 30, 1999, and
approximately $164,000 for 1998, general and administrative expenses increased
by approximately $181,000 for the three months ended September 30, 1999,
principally due to amortization of goodwill of $50,000 and an increase in
professional fees of approximately $72,000, and an increase in corporate
overhead of approximately $72,000.
14
For the nine months ended September 30, 1999, general and administrative
expenses increased by approximately $817,000, or 78%, from $1,049,236 to
$1,865,936. Excluding expenses attributable to the new operating divisions of
the Company of approximately $654,000 for the nine months ended September 30,
1999, and $164,000 for 1998, general and administrative expenses increased
approximately $326,000 for the nine months ended September 30, 1999 principally
due to the amortization of goodwill of $250,000, an increase in professional
fees of approximately $122,000, offset by a decrease in corporate overhead of
$47,000.
Interest income for the three months ended September 30, 1999 decreased to
$1,514 compared to $36,376 for the three months ended September 30, 1998, a
decrease of approximately $35,000 or 96%. The decrease is due to a reduction in
the amount of cash available to invest.
Interest income for the nine months ended September 30, 1999 decreased to $7,337
compared to $115,972 for the nine months ended September 30, 1998, a decrease of
approximately $109,000 or 94%. The decrease is due to a reduction in the amount
of cash available to invest.
Interest expense in 1999 is due entirely to indebtedness under the subordinated
promissory notes and line of credit incurred in August 1998 in connection with
the acquisitions of Morehouse-COWLES and Epworth Manufacturing Company.
2. LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition of the Epworth Mill and Morehouse-COWLES divisions,
the Company had financed its operations primarily through the use of cash and
cash equivalents on hand and cash flows from operations. The Company generated
cash of $347,725 and utilized cash of $763,376 from operations for the nine
months ended September 30, 1999 and 1998, respectively. For the first nine
months of 1999, this amount was principally the result of funding the Company's
net loss from operations, (net of depreciation and amortization), an increase in
current liabilities, and decrease in inventories offset by an increase in trade
and other receivables and in prepaid expenses. For the first nine months of
1998, this amount was principally the result of funding the Company's net loss
from operations, an increase in current liabilities and prepaid expenses offset
by an decrease in inventories and trade and other receivables.
The Company generated cash of $54,881 and utilized cash of $6,452,685 for
investing activities for the nine months ended September 30, 1999 and 1998,
respectively. Cash generated for 1999 reflected the sale of fixed assets. Net
cash used for investing activities for the nine months ended September 30, 1998
included the excess cost of assets purchased in the acquisition of the Epworth
and Morehouse divisions over their fair value, business assets acquired net of
cash, as well as the purchase of capital equipment.
15
Net cash used for investing activities in each period related to the purchase of
capital equipment. As of September 30, 1999, the Company had no material
commitments for capital expenditures.
For financing activities, the Company used cash of $772,783 for the nine months
ended September 30,1999, consisting primarily of payments on the line of credit,
payments of subordinated debt, and the purchase of treasury stock. The Company
generated cash of $4,096,050 from financing activities from the proceeds of
borrowings to finance the acquisition of Epworth Mill and Morehouse-COWLES, and
from the issuance of Common Stock of $32,785 in 1998 pursuant to the exercise of
stock option agreements pursuant to the Company's employee stock purchase plan
and stock option plan.
The cash and cash equivalents balance of the Company was $180,536 at September
30, 1999, a decrease of $370,177 from the December 31, 1998 balance of $550,713.
In 1998, the Company incurred a net loss of approximately $1,505,000 and was not
in compliance with certain covenants of its Revolving Credit Loan Agreement with
Comerica Bank ("Loan Agreement"). On March 23, 1999, Comerica Bank advised the
Company that the Company was in default of the Loan Agreement and instructed the
Company to cease all payments on the Subordinated Promissory Notes which had
been issued to the sellers in connection with the Company's purchase of Epworth
Mill and Morehouse-COWLES. The lender also reduced the Company's line of credit
under the loan agreement to $4,000,000. The Company had been functioning under
a standstill agreement until May 5, 1999.
On May 5, 1999, the Company and Comerica Bank executed a forbearance agreement
(the Forbearance Agreement") to the Loan Agreement, pursuant to which Comerica
Bank agreed to forbear the Company's defaults until July 15, 1999 (the
"Forbearance Period"), subject to earlier termination in certain circumstances.
In addition, the line of credit under the Loan Agreement was reduced from
$5,000,000 to $4,000,000, of which $1,000,000 represents an over-formula amount
(the "Over-Formula Amount"). The interest rate under the Loan Agreement is the
prime rate (as defined in the Loan Agreement) plus one percent. The Company has
also agreed to pay the lender each month an "over-formula fee" of eight percent
of the Over-Formula Amount. To induce Comerica Bank to enter into the
Forbearance Agreement, the Company agreed to use its best efforts to procure
sufficient new capital or subordinated debt on reasonable terms and conditions
in order to eliminate the Over Formula Amount and to prevent any further
defaults. On July 28, 1999 the Company and Comerica Bank agreed to an extension
of the Forbearance Period until September 30, 1999. The over-formula amount was
reduced to $900,000 initially, with further reductions of $10,000 per week. The
agreement was further extended to October 31, 1999, with the line of credit
reduced to $3,800,000, with additional reductions of $10,000 per week. On
November 12, 1999, the forebearance agreement was extended until November 30,
1999, again with reductions of $10,000 per week. There can be no assurance that
the Company and Comerica will enter into any further extensions to the
Forbearance Period or that such extension will be on terms
16
suitable to the Company. There can also be no assurance that the Company will
be able to raise sufficient new capital or subordinated debt on reasonable terms
or at all. If there are no further extensions to the forebearance period, there
can be no assurance that the Company will be able to negotiate a loan agreement
on acceptable terms with Comerica or an alternate lender.
On July 2, 1999, the Company and Irwin J. Gruverman, the Company's Chairman of
the Board and Chief Executive Officer entered into an agreement whereby the
Company has the right, until October 1, 1999, to sell to Mr. Gruverman, and Mr.
Gruverman has the obligation to purchase from the Company, a minimum of $25,000
and a maximum of $300,000 of the Company's Common Stock or such lesser amount as
the Board of Directors of the Company may determine to sell, at a purchase price
equal to $0.42 per share. Mr. Gruverman, in his sole discretion, has the option
to purchase a lesser amount of shares of Common Stock, but in no event less than
$250,000 worth of shares of common stock. The Company's right to exercise this
right is conditioned upon the Company's prior or simultaneous closing of a
credit facility with an institutional lender or lenders in an amount providing
advance formula availability of not less than $4.3 million, or such lesser
amount as Mr. Gruverman shall reasonably deem to be adequate and sufficient for
the Company's projected financial needs.
As consideration for Mr. Gruverman's obligation, the Company granted Mr.
Gruverman a common stock purchase warrant to purchase 100,000 shares of the
Company's Common Stock at $0.52 per share.
In mid-September ,1999, the Company realized that it could not accomplish a
closing of a financing within the October 1, 1999 deadline of Mr. Gruverman's
commitment. Therefore the Company, through its Board of Directors with Mr.
Gruverman abstaining, negotiated and entered into a further agreement with Mr.
Gruverman for his purchase of $250,000 of the Company's Common Stock. The terms
of the September 23, 1999 Stock Purchase Obligation (the "Stock Purchase
Obligation") committed Mr. Gruverman to purchase, at the Company's sole option,
through December 15, 1999 (the "Termination Date"), $250,000 worth of shares of
the Company's restricted Common Stock at a per share purchase price equal to the
lesser of: (i) the average closing price of the Common Stock, or (ii) the
average closing price of the Common Stock for the ten (10) days prior to the
Company's closing of a loan facility with a new senior lender, less a 20%
discount. The Purchase obligation is conditioned upon Company's closing of a
credit facility with an institutional lender, on or by the Termination Date,
with such facility providing advance formula availability of not less than $4.2
million and which provides excess borrowing availability of at least $500,000
above the Company's then current loan payoff liability on its obligations to
Comerica Bank. Such loan availability is to be calculated excluding the proceeds
of Mr. Gruverman's share purchase under the Stock Purchase Obligation.
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Assuming that there is no significant change in the Company's business, the
Company believes that cash flows from operations, together with existing cash
balances, will be sufficient to meet its working capital requirements for at
least the next six months, provided the line of credit is maintained with the
lender.
In view of the fact that the above financial results reflect the combined
operations of the Company only for the period since August 14, 1998, the Company
believes that period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
3. NASDAQ DELISTING
The Company was advised on April 22, 1999 that the Nasdaq Listings
Qualifications Panel determined to delist the Company's common stock from the
Nasdaq national Stock market effective with the close of business April 22,
1999.
This delisting decision means that the Company's securities now trade on the OTC
Bulletin Board of the over-the-counter market. The delisting may make it more
difficult to trade in the Company's common stock or to liquidate an investor's
holdings. Also, such delisting may make it more difficult for the Company to
raise additional capital.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
effective for the Company's quarter ended March 31, 2001. SFAS No. 133
significantly modifies Accounting and Reporting Standards for derivatives and
hedging activities. The impact of SFAS No. 133, if any, on the Company has not
yet been determined.
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5. YEAR 2000 DISCLOSURE
The "Year 2000 problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs may
recognize a year that ends in "00" as the year 1900 rather than the year 2000.
This could result in a significant disruption of operations and an inability to
process certain transactions.
STRATEGIC PLAN
The Company has been engaged in an assessment of its internal information
technology systems. The Company contacted providers of its internal technology
systems and it was determined that, because its computer applications use four
digits to identify a year in the field date, the Company's information
technology systems were in fact internally compliant with Year 2000
requirements. The Company had reviewed proposals for a full compliance audit of
the Company's network systems and its components. Such an audit had been
completed on the network systems and applications. As a result of the audit,
the Company has begun implementation of a plan to replace its current network
hardware and operating system. Although the Company expected to have all
system-wide applications fully compliant by April 30, 1999, due to unanticipated
delays, the Company now expects to have all system-wide applications fully
compliant by mid December, 1999. With respect to the Company's non-information
technology systems, the Company is aware that some of the equipment that the
Company leases may not be Year 2000 compliant. While it is understood by the
Company that the potential effect on results of operations could be serious and
could have a material adverse effect on the Company's business or financial
condition, at this time management has not determined the entire potential level
of risk associated with its non-compliant non-information technology systems and
has not yet formulated a plan for remediating such problems.
In addition, the Company has developed a strategic plan to estimate the
potential risks related to third parties with whom it has relationships. The
third parties include financial institutions, vendors, payroll service
providers, distributors, customers, and equipment manufacturers. If any of
these third parties encounter Year 2000 problems, it could have a potentially
significant outcome on the ability of the Company to effectively continue its
normal daily operations.
The initial stage included the distribution of inquiry letters to its most
significant third parties. The Company is now in the process of completing a
subsequent internal evaluation of the responses received. Upon learning that
certain third parties are not Year 2000 compliant, the Company may be required
to manually process transactions, delay vendor payments and/or issue manual
checks to employees in place of direct deposits. These processes, if necessary,
would be a part of the second stage--
19
implementation, in which the Company would correct and/or replace any vendor
software that is not Year 2000 compliant, as soon as it is feasible.
COSTS
There have been minimal costs incurred to date by the Company related to Year
2000 compliance. As stated above, the Company expects to complete its Year 2000
strategic plan by mid December 1999. The total cost of implementing the plan is
not expected to exceed $85,000. Any costs associated with such plan have been
incorporated into the Company's 1999 budgeting process. In addition while the
Company cannot predict what impact the Year 2000 problem may have on third
parties, it does not currently believe that it will incur material costs in the
implementation stage of resolving potential Year 2000 problems of third parties
with whom it interacts.
RISKS
Until the implementation stage of the Company's strategic plan is complete, the
Company cannot accurately assess the potential risks associated with non-
compliance of its non-information technology systems or external third parties.
While it is understood by the Company that the potential effect on results of
operations could be serious and could have a material adverse affect on the
Company's business or financial condition, at this time management has not
determined the entire potential level of risk.
CONTINGENCY PLAN
At the present time, a contingency plan has not been developed. The Company
will continue to monitor the need for a contingency plan based on the results of
its Year 2000 compliance strategic plan.
6. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements
that are subject to certain risks and uncertainties. These forward-looking
statements include statements regarding the Company's liquidity, the ability of
the Company to enter into an extension of the Forbearance Period or obtain an
alternate credit facility, the ability of the Company to raise sufficient new
capital or subordinate debt and the Company's Year 2000 readiness. Such
statements are based on management's current expectations and are subject to a
number of factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. Such factors
and uncertainties include, but are not limited to actions of the Company's
current and future lenders, the failure of the Company to meet its obligations
under the Forbearance Agreement, the failure of the Company to successfully
negotiate an extension to the Forbearance Agreement on commercially reasonable
terms, if at all, or to enter into a new credit facility on acceptable terms, if
at all; the
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development of competing or superior technologies and products from other
manufacturers, many of which have substantially greater financial, technical and
other resources than the Company; the cyclical nature of the materials
processing industry which has historically negatively affected the Company's
sales of Microfluidizer equipment during industry downturns and which could do
so in the future; and general economic conditions.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On July 2, 1999, the Company issued a warrant to purchase 100,000 shares of its
common stock, $.01 par value, to Mr. Irwin J. Gruverman, the Company's Chairman
of the Board and Chief Executive Officer. The warrant has an exercise price of
$.52 per share and expires on July 2, 2004. The warrant was issued to Mr.
Gruverman in a private placement exempt from registration under Section 4 (2) of
the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 3.1 (a) Certificate of Amendment of Certificate of
Incorporation
Exhibit 3.1 (b) Warrant for the Purchase of Shares of Common Stock
Exhibit 3.1 (c) Summary of Terms for Common Stock Purchase Obligation
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, 1999.
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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/ Michael A. Lento
---------------------
Michael A. Lento
President and Treasurer
(Principal Financial and Accounting Officer)
Date: November 12, 1999
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EXHIBIT INDEX
Exhibit Description
- ------- -----------
3(i) Certificate of Amendment of
Certificate of Incorporation
11 Statement regarding
computation of per share
earnings.
27 Financial Data Schedule
99.1 Summary of Terms for Common Stock
Purchase Obligation
99.2 Warrant for the Purchase of Shares
of Common Stock.
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