FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(x)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31,2001
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
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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 7,366,667 shares of Common Stock, par value $.01 per share,
outstanding on May 8, 2001.
MFIC CORPORATION
INDEX PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2001
and March 31, 2000 5
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2001 and
March 31, 2000 7
Notes to Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 20
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 21
Exhibit Index 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MFIC CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------ ----------------------- ----------------------------------
ASSETS March 31, 2001 December 31,
(Unaudited) 2000
------------------------------------------------------------------
------------------------------------------------------------------ ----------------------- ----------------------------------
Current Assets:
------------------------------------------------------------------ ----------------------- ----------------------------------
Cash and cash equivalents $111,167 $286,355
------------------------------------------------------------------ ----------------------- ----------------------------------
Accounts receivable (less
allowance for doubtful accounts
of $55,570 at March 31, 2001 and December 31, 2000)
3,394,647 2,862,489
------------------------------------------------------------------ ----------------------- ----------------------------------
Other receivables 529 3,490
------------------------------------------------------------------ ----------------------- ----------------------------------
Accounts receivable-related party 9,700 18,525
------------------------------------------------------------------ ----------------------- ----------------------------------
Inventories 4,000,465 4,023,240
------------------------------------------------------------------ ----------------------- ----------------------------------
Prepaid expense 173,006 223,100
------------------------------------------------------------------ ----------------------- ----------------------------------
Other current assets 69,200 137,752
------------------------------------------------------------------ ----------------------- ----------------------------------
Assets held for sale 213,142
------------------------------------------------------------------ ----------------------- ----------------------------------
Advances 104,007 --
------------------------------------------------------------------ ----------------------- ----------------------------------
Total current assets 8,075,863 7,554,951
------------------------------------------------------------------ ----------------------- ----------------------------------
Property
------------------------------------------------------------------ ----------------------- ----------------------------------
Furniture, fixtures and office equipment
438,507 438,507
------------------------------------------------------------------ ----------------------- ----------------------------------
Machinery and equipment 568,740 579,617
------------------------------------------------------------------ ----------------------- ----------------------------------
Leasehold improvements 213,255 211,660
------------------------------------------------------------------ ----------------------- ----------------------------------
1,220,502 1,229,784
------------------------------------------------------------------ ----------------------- ----------------------------------
Less: accumulated depreciation and amortization
(698,733) (654,828)
------------------------------------------------------------------ ----------------------- ----------------------------------
Net property 521,769 574,956
------------------------------------------------------------------ ----------------------- ----------------------------------
Assets held for sale 213,142
------------------------------------------------------------------ ----------------------- ----------------------------------
Goodwill (net of accumulated amortization
of $1,087,050 at March 31, 2001, and $981,050 at
December 31, 2000 5,077,409 5,183,409
------------------------------------------------------------------ ----------------------- ----------------------------------
Patents, licenses and other
intangible assets (net of
accumulated amortization of
$590,796 at March 31, 2001 and
$567,321 at December 31, 2000) 94,302 117,777
------------------------------------------------------------------ ----------------------- ----------------------------------
Total assets $13,769,343 $13,644,235
=========== ============
------------------------------------------------------------------ ----------------------- ----------------------------------
(See notes to consolidated financial statements)
3
MFIC CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
-------------------------- ----------------------------
March 31, 2001 December 31,
(Unaudited) 2000
-------------------------- ----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
------------------------------------------------------------------------------------------------ ---------------------------
Accounts payable $1,446,839 $1,816,086
------------------------------------------------------------------------------------------------- ---------------------------
Accrued expenses 318,587 105,366
------------------------------------------------------------------------------------------------- ---------------------------
Accrued interest - related party 65,168 70,085
------------------------------------------------------------------------------------------------- ---------------------------
Accrued compensation and vacation pay 88,409 157,971
------------------------------------------------------------------------------------------------- ---------------------------
Customer advances 334,741 623,184
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Current portion of long term debt-related party
75,000 62,500
------------------------------------------------------------------------------------------------- ---------------------------
Current portion of note payable 95,004 95,004
------------------------------------------------------------------------------------------------- ---------------------------
Line of credit 2,891,866 2,724,015
------------------------------------------------------------------------------------------------- ---------------------------
Total current liabilities 5,315,614 5,654,211
------------------------------------------------------------------------------------------------- ---------------------------
Long term debt, net of current portion-related party 218,750 237,500
------------------------------------------------------------------------------------------------- ---------------------------
Term note, net of current portion 284,992 308,743
------------------------------------------------------------------------------------------------- ---------------------------
Notes payable, other 350,000 350,000
------------------------------------------------------------------------------------------------- ---------------------------
Stockholders' equity:
Common stock, par value $.01 per share, 20,000,000 shares authorized;
7,627,116 and 7,588,948 shares issued at March 31, 2001 and
at December 31, 2000, respectively 76,271 75,889
---------------------------------------------------------------------- ------------------------- ---------------------------
---------------------------------------------------------------------- ------------------------- ---------------------------
Additional paid-in-capital 12,907,704 12,891,904
---------------------------------------------------------------------- ------------------------- ---------------------------
Accumulated deficit (4,696,287) (5,193,342)
---------------------------------------------------------------------- ------------------------- ---------------------------
---------------------------------------------------------------------- ------------------------- ---------------------------
Less: Treasury stock, at cost, 260,446 and 250,219 shares at March 31,
2001 and December 31, 2000, respectively (687,701) (680,670)
---------------------------------------------------------------------- ------------------------- ---------------------------
Total stockholders' equity 7,599,987 7,093,781
---------------------------------------------------------------------- ------------------------- ---------------------------
Total liabilities and stockholders' equity $13,769,343 $13,644,235
=========== ===========
---------------------------------------------------------------------- ------------------------- ---------------------------
(See notes to consolidated financial statements)
4
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------
Three months ended
March 31,
---------------------------------------------------
(Unaudited)
---------------------------------------------------
2001 2000
--------------------------------------------------------------------- ------------------------ --------------------
Revenues $4,449,624 $3,732,919
--------------------------------------------------------------------- ------------------------ --------------------
Cost of goods sold 2,222,538 1,981,050
--------------------------------------------------------------------- ------------------------ --------------------
Gross profit on revenues 2,227,086 1,751,869
--------------------------------------------------------------------- ------------------------ --------------------
--------------------------------------------------------------------- ------------------------ --------------------
Operating expenses:
--------------------------------------------------------------------- ------------------------ --------------------
Research and development 175,736 186,132
--------------------------------------------------------------------- ------------------------ --------------------
Selling 696,653 724,699
--------------------------------------------------------------------- ------------------------ --------------------
General and administrative 775,117 699,692
--------------------------------------------------------------------- ------------------------ --------------------
--------------------------------------------------------------------- ------------------------ --------------------
Total operating expenses 1,647,506 1,610,523
--------------------------------------------------------------------- ------------------------ --------------------
--------------------------------------------------------------------- ------------------------ --------------------
Income from operations 579,580 141,346
--------------------------------------------------------------------- ------------------------ --------------------
Interest income -- 246
--------------------------------------------------------------------- ------------------------ --------------------
Interest expense 82,525 90,186
--------------------------------------------------------------------- ------------------------ --------------------
Net income before income taxes and extraordinary item 497,055 51,406
--------------------------------------------------------------------- ------------------------ --------------------
Income tax provision -- --
--------------------------------------------------------------------- ------------------------ --------------------
Net income before extraordinary item 497,055 51,406
--------------------------------------------------------------------- ------------------------ --------------------
--------------------------------------------------------------------- ------------------------ --------------------
Gain on subordinated debt restructuring -- 194,500
--------------------------------------------------------------------- ------------------------ --------------------
Net income (loss) $497,055 $245,906
======== ========
--------------------------------------------------------------------- ------------------------ --------------------
5
--------------------------------------------------------------------------- ------------------ --------------------
Weighted average number of common and common equivalent shares outstanding:
--------------------------------------------------------------------------- ------------------ --------------------
Basic 7,366,670 6,350,428
--------------------------------------------------------------------------- ------------------ --------------------
Diluted 7,593,936 6,399,177
--------------------------------------------------------------------------- ------------------ --------------------
--------------------------------------------------------------------------- ------------------ --------------------
Basic amounts per common share
--------------------------------------------------------------------------- ------------------ --------------------
--------------------------------------------------------------------------- ------------------ --------------------
Net income per share before extraordinary gain $0.07 $0.01
--------------------------------------------------------------------------- ------------------ --------------------
--------------------------------------------------------------------------- ------------------ --------------------
Extraordinary gain per share -- 0.03
--------------------------------------------------------------------------- ------------------ --------------------
Basic net income per share $0.07 $0.04
--------------------------------------------------------------------------- ------------------ --------------------
--------------------------------------------------------------------------- ------------------ --------------------
Diluted amounts per common share:
--------------------------------------------------------------------------- ------------------ --------------------
--------------------------------------------------------------------------- ------------------ --------------------
Net income per share before extraordinary gain $0.07 $0.01
--------------------------------------------------------------------------- ------------------ --------------------
Extraordinary gain per share -- 0.03
--------------------------------------------------------------------------- ------------------ --------------------
Diluted net income per share $0.07 $0.04
--------------------------------------------------------------------------- ------------------ --------------------
--------------------------------------------------------------------------- ------------------ --------------------
(See notes to consolidated financial statements)
6
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------
Three months ended March 31,
---------
(Unaudited)
2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operations:
----------------------------------------------------------------------------------- ----------------------- -----------------
Net income $497,055 $245,906
----------------------------------------------------------------------------------- ----------------------- -----------------
Reconciliation of net income to cash flows from operations
----------------------------------------------------------------------------------- ----------------------- -----------------
Depreciation and amortization 188,702 196,624
----------------------------------------------------------------------------------- ----------------------- -----------------
Extraordinary gain on debt restructuring -- (194,500)
----------------------------------------------------------------------------------- ----------------------- -----------------
Gain on sale of fixed assets (16,434) (6,124)
----------------------------------------------------------------------------------- ----------------------- -----------------
Bad debt expense -- 15,000
----------------------------------------------------------------------------------- ----------------------- -----------------
Increase (decrease) in cash due to change in:
----------------------------------------------------------------------------------- ----------------------- -----------------
Trade and other receivables (520,372) 22,834
----------------------------------------------------------------------------------- ----------------------- -----------------
Inventories 22,775 (340,497)
----------------------------------------------------------------------------------- ----------------------- -----------------
Prepaid expenses 50,094 (92,983)
----------------------------------------------------------------------------------- ----------------------- -----------------
Other current assets (35,455)
----------------------------------------------------------------------------------- ----------------------- -----------------
Current liabilities (518,948) 591,595
----------------------------------------------------------------------------------- ----------------------- -----------------
Net cash (used from) provided by operations (332,583) 438,455
----------------------------------------------------------------------------------- ----------------------- -----------------
Cash flows from investing activities
----------------------------------------------------------------------------------- ----------------------- -----------------
Proceeds from sales of fixed assets 22,125 18,820
----------------------------------------------------------------------------------- ----------------------- -----------------
Purchase of capital equipment (11,731) (41,816)
----------------------------------------------------------------------------------- ----------------------- -----------------
Net cash provided by (used for) investing activities 10,394 (22,996)
----------------------------------------------------------------------------------- ----------------------- -----------------
Cash flows from financing activities:
----------------------------------------------------------------------------------- ----------------------- -----------------
Payment of subordinated debt-related party (6,250)
----------------------------------------------------------------------------------- ----------------------- -----------------
Payments on term note (23,751)
----------------------------------------------------------------------------------- ----------------------- -----------------
Net proceeds from National Bank of Canada line of credit 167,851 2,009,959
----------------------------------------------------------------------------------- ----------------------- -----------------
Payment on Comerica line of credit (3,075,815)
----------------------------------------------------------------------------------- ----------------------- -----------------
Proceeds from term note 475,000
----------------------------------------------------------------------------------- ----------------------- -----------------
Paydown in connection with debt refinancing (99,750)
----------------------------------------------------------------------------------- ----------------------- -----------------
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 9,151 3,405
----------------------------------------------------------------------------------- ----------------------- -----------------
7
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
------------------------------
Three months ended
March 31,
----------
(Unaudited)
2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 147,001 (495,201)
----------------------------------------------------------------------------------------- ------------------ -----------------
Net decrease in cash and cash equivalents (175,188) (79,742)
----------------------------------------------------------------------------------------- ------------------ -----------------
Cash and cash equivalents at beginning of period 286,355 196,172
----------------------------------------------------------------------------------------- ------------------ -----------------
----------------------------------------------------------------------------------------- ------------------ -----------------
Cash and cash equivalents at end of period $111,167 $116,430
======== ========
----------------------------------------------------------------------------------------- ------------------ -----------------
----------------------------------------------------------------------------------------- ------------------ -----------------
8
MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America, ("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 three months ended March 31, 2001 and 2000 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, 2000.
2. EARNINGS PER SHARE
Basic net income per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted net income per share (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 2001,
1,339,925 shares were excluded because the effect of such options would be
anti-dilutive. For 2000, 1,725,482 shares were excluded because the effect would
be anti-dilutive.
9
MFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
The components of inventories on the following dates were:
------------------------------------- ---------------------------- ----------------------------------
March 31, 2001 December 31, 2000
------------------------------------- ---------------------------- ----------------------------------
Raw Material $2,781,607 $2,670,155
------------------------------------- ---------------------------- ----------------------------------
Work in Progress 233,461 473,095
------------------------------------- ---------------------------- ----------------------------------
Finished Goods 985,397 879,990
------------------------------------- ---------------------------- ----------------------------------
Total $4,000,465 $4,023,240
========== ==========
------------------------------------- ---------------------------- ----------------------------------
4. TAXES
The Company has a federal net operating loss tax (NOL) carryforward of
approximately $4,695,000 and research and development tax credit carryforwards
of approximately $172,000 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 March 31, 2001, the Company has
established a 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 ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended to be effective for fiscal years beginning after June 15, 2000 by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 133 requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The standard was effective for
the Company on January 1, 2001. In June, 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of SFAS No. 133." The standard
10
clarifies certain elements of SFAS No. 133. The implementation of SFAS No.
133 did not have an impact on the Company's financial statements.
11
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 at a per share price of $1.00.
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.
12
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 March 31, 2001 the revolving line of
credit had an interest rate of 8.5% per annum, and the term note has an interest
rate of 8.75%. 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.
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.
The Credit Facility includes restrictive financial and non-financial covenants.
The covenants include prohibition from paying dividends and limits capital
expenditures to $200,000 per year. In addition, the financial covenants include
quarterly calculations of tangible net worth, liabilities to worth ratio, net
income, and debt service coverage. The Credit Facility also contains a
subjective acceleration clause and a lock-box arrangement, whereby remittances
from the Company's customers reduce the outstanding amount of the Revolving
Credit Line.
At December 31, 2000, the Company was in violation of the tangible net worth,
liabilities to worth ratio, and net income covenants. The Company had received a
waiver of these violations from the Lender as of December 31, 2000, but is
required to meet such covenants thereafter. Due to the subjective acceleration
clause, and the lock-box arrangement, the Revolving Credit Line is classified as
a current liability in the Consolidated Balance Sheet.
13
At March 31, 2001, the outstanding balance on the Revolving Credit Line was
$2,891,866, and the balance outstanding on the term loan was $379,996.
The Company notified the National Bank of Canada that it was in violation of the
tangible net worth and liabilities to worth ratio covenants contained in the
Credit Facility for the quarter ended March 31, 2001. On April 13, 2001, the
Company received a waiver of these violations from the National Bank of Canada,
but is required to meet all covenant requirements thereafter. As a result of the
waiver and management's expectations of future compliance, the non-current
portion of the term promissory Note has been classified as a non-current
liability.
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.
14
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. NOTE PAYABLE, OTHER
In a letter dated June 16, 2000, J.M. Huber Corporation ("Huber") informed MFIC
Corporation that it purportedly was revoking its acceptance of seven model LV-40
Zinger(R) horizontal media mills that Huber had purchased from MFIC's Epworth
Mill Division in 1998. The notice of revocation was accompanied by a claim for
the repayment of the full purchase price of $384,948 and for incidental and
consequential damages as a result of alleged breaches of express and implied
warranties in the amount of $2,790,350. The Company denied any liability. At the
request of Huber and as an accommodation, the Company, in both 2000 and 1999
performed certain services which, the Company believed, were accepted by Huber
as a cure for problems encountered by Huber with the performance of this
equipment. On October 20, 2000, the Company entered into a settlement agreement
with Huber pursuant to which, the Company paid $100,000 to Huber upon execution
of the agreement, and executed a promissory note for $350,000 payable two years
from the execution date, with interest payable quarterly in arrears at 10% per
annum. Huber has transferred all interest in the seven Media Mills to the
Company, and shipped the equipment to the Company for reconditioning and resale.
The Company recorded a loss on this transaction of $250,000 in the year ended
December 31, 2000.
8. SUBSEQUENT EVENTS
On September 30, 2000, the Company ceased operations of the Ball Mill repair
business and decided to sell its Ball Mill operation conducted at the Epworth
Mill Division through a broker. On March 19, 2001, the Company reached an
agreement to sell the operation for $200,000 in cash and notes. On April 26,
2001, the sale was finalized, which resulted in a loss on the sale of the ball
mill assets of approximately $13,000.
15
MFIC CORPORATION
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 March 31, 2001 were $4,449,624, as
compared to revenues of $3,732,919 for the three months ended March 31, 2000,
representing an increase of $716,705, or 19%. The increase during this period is
due to an increase in sales of machines of approximately $1,064,000, offset by a
decrease in sales of parts and repairs of approximately $347,000.
Cost of goods sold for the three months ended March 31, 2001 was $2,222,538 or
50% of revenue, compared to $1,981,050 or 53% of revenue, for the three months
ended March 31, 2000. The increase in cost of goods sold in absolute dollars for
the three months ended March 31, 2001, reflects the overall increase in sales.
The decrease in cost of goods sold as a percentage of revenue was attributable
to higher gross margins on sales of machines. 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 March 31, 2001 were
$1,647,506 or 37% of revenue, as compared to $1,610,523 or 43% of revenue, for
the three months ended March 31, 2000 which is an increase of approximately
$37,000 or 2%.
Research and development expenses for the three months ended March 31, 2001 were
$175,736 compared to $186,132 for the three months ended March 31, 2000, a
decrease of $10,396 or 6%. The decrease in research and development expenses was
primarily due to the reduction of expenses of approximately $16,000 at the
Epworth Mill Division operation, due to the transfer of the division's
engineering operations to the Morehouse-COWLES Division in October of Fiscal
2000.
Selling expenses for the three months ended March 31, 2001 decreased
approximately $28,000 or 4%, compared to the three months ended March 31, 2000
from $724,699 to $696,653. The decrease is primarily attributable to decreases
in both consulting and travel expenses of approximately $12,000 each, and the
reduction in selling expenses of approximately $86,000 at the Epworth Mill
16
Division, offset by an increase in commissions of approximately $79,000, and an
increase in advertising expenses of approximately $17,000.
For the three months ended March 31, 2001, general and administrative expenses
increased by approximately $75,000 from $699,692 to $775,117. The increase in
general and administrative expenses is principally due to an increase in
professional fees of approximately $51,000 and an increase in payroll expenses
of approximately $81,000, partially offset by a decrease of approximately
$62,000 caused by the shutdown of the Epworth Mill Division.
Interest expense for the three months ended March 31, 2001 decreased $7,661 or
8%, to $82,525 from $90,186 for the three months ended March 31, 2000. The
decrease is due to a reduction in the interest rate paid as a result of the
refinancing in February, 2000.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $332,583 and generated cash of $438,455 from operations
for the three months ended March 31, 2001 and 2000, respectively. For the three
months ended March 31, 2001, the Company's principal operating cash requirements
were to fund its increase in receivables and decrease in current liabilities,
offset by a decrease in prepaid expenses and net income from operations. For the
three months ended March 31, 2000, the Company's principal operating cash
requirements were to fund its' increase in inventories and prepaid expenses,
offset by an increase in current liabilities, and net income from operations.
The Company generated cash of $10,394 and used cash of $22,996 for investing
activities for the three months ended March 31, 2001 and 2000, respectively. Net
cash provided by investing activities for the three months ended March 31, 2001
included proceeds from the sale of fixed assets, offset by the purchase of
capital equipment. Net cash used by investing activities for the three months
ended March 31, 2000 consisted of the proceeds from the sale of fixed assets
offset by the purchase of capital equipment. As of March 31, 2001, the Company
had no material commitments for capital expenditures.
The Company generated cash of $147,001 for the three months ended March 31,
2001, consisting of proceeds from the line of credit, and proceeds from the
issuance of common stock, offset by payments of both the term note and
subordinated debt. The Company used cash of
17
$495,201 for the three months ended March 31, 2000, consisting of the proceeds
from the refinancing of the line of credit, and proceeds from the issuance of
common stock offset by the repayment of the previous line of credit.
As of March 31, 2001, the Company had $111,167 in cash and cash equivalents,
compared to $286,355 as of December 31, 2000.
On February 28, 2000, the Company entered into a revolving credit and term loan
agreement (the "Credit Facility") with National Bank of Canada (the "Bank"),
providing the Company with a $4,475,000 three-year revolving credit and term
loan facility.
As discussed in Note 6 to the accompanying financial statements, the Company
notified the bank that it was in violation of the tangible net worth and
liabilities to worth ratio covenants contained in the Credit Facility for the
quarter ended March 31, 2001. On April 13, 2001, the Company received a waiver
of these violations from the Bank, but is required to meet all covenant
requirements thereafter. The Company`s ability to continue planned operations
is dependent upon access to financing under its Credit Facility, which is
potentially impacted by the Company's ability to achieve future compliance with
the financial covenants. Given the terms of the financial covenants and
historical results, it is at least reasonably possible that the Company will be
in violation of the financial covenants in the future. Management of the Company
is executing plans for a return to profitability, including the recent
reorganization of its Epworth Mill Division and the concentration of
manufacturing operations in an effort to improve costs and marketing leverage;
however, there can be no assurance that the Company will be successful in
implementing these plans.
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
term loan Facility, and the existing cash balances, will be sufficient to meet
its working capital requirements for at least the next twelve months.
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3. NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, The Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended to be effective for fiscal years beginning after June 15, 2000 by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 133 requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The standard is effective for the
Company on January 1, 2001. In June, 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of SFAS No. 133." The standard clarifies certain elements of SFAS
No. 133. The implementation of SFAS No. 133 did not have a material impact on
the Company's financial statements.
4. BUSINESS OUTLOOK
The Company believes that this report may contain forward-looking statements
that are subject to certain risks and uncertainties including statements to
achieve revenue growth, to maintain and/or increase operating profitability, and
to attain net income profitability. Such statements are based on the Company's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results achieved by the Company to differ materially
from those described in the forward-looking statements. The Company cautions
investors that there can be no assurance that the actual results or business
conditions will not differ materially from those projected or suggested in such
forward-looking statements as a result of various factors, including but not
limited to, the following risks and uncertainties: (i) whether the performance
advantages of the Company's Microfluidizer(R) or Zinger(R) materials processing
equipment will be realized commercially or that a commercial market for the
equipment will continue to develop, and (ii) whether the Company will have
access to sufficient working capital through continued and improving cash flow
from sales and ongoing borrowing availability, the latter being subject to the
Company's ability to comply with the covenants and terms of the Company's loan
agreement with its senior lender.
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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's fixed rate debt is not exposed to cash flow or interest
rate changes but is exposed to fair market value changes in the event of
refinancing this fixed rate debt.
The Company had approximately $3,272,000 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 $8,200
negative effect on the Company's earnings and cash flows on a quarterly basis.
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MFIC CORPORATION
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Statement regarding computation of Per Share Earnings
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MFIC CORPORATION
/s/ Irwin J. Gruverman
----------------------
Irwin J. Gruverman
Chief Executive Officer
(Principal Executive Officer)
Date: May 11,2001
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