Item 1. BUSINESS:
Company
Overview:
MFIC Corporation (MFIC or the Company), through its wholly-owned
subsidiaries, Microfluidics Corporation (Microfluidics Division) and
MediControl Corporation (MediControl), as well as its other operating division,
Morehouse-COWLES, specializes in producing and marketing a broad line of fluid
materials processing systems used for a variety of grinding, dispersing,
milling, and blending applications across a variety of industries and for use
in numerous applications within those industries. Microfluidizer®
high shear fluid processor systems are produced at the Microfluidics Division,
while high shear dispersers, dissolvers, colloid mills, horizontal media mills,
vertical media mills, and grinding media are either produced or sold by the
Morehouse-COWLES Division.
Microfluidizer® fluid processing equipment, produced by the
Company’s Microfluidics Division, is used to formulate stable emulsions,
dispersions, and liposomes, and is used in general for deagglomeration and for
cell disruption for the biotech industry. Emulsions are found in a broad
variety of common products, including processed foods, pharmaceuticals, and
specialty coatings such as photographic films. Dispersions are often employed
in products such as pharmaceuticals, inks, pigments and coatings. The Company believes that the processing
technique of the Microfluidizer® equipment enhances the stability
and consistency of emulsions and dispersions due to the equipment’s unique
ability to consistently produce uniform micron and sub micron scale particles
in many applications. Liposomes, which
are biodegradable cell-like structures, are used to encapsulate medications or
nutrients, and are typically used in cosmetic or pharmaceutical products. In addition, Microfluidizer®
equipment is used in biotechnology applications to harvest, through cell
disruption, the cultivated product contents of plant and animal cells.
The Company’s product lines are used to create stable emulsions and
dispersions through deagglomeration and particle size reduction. These
formulations may be liquid/liquid or liquid/solid formulations and are
generally prepared in quantities ranging from one gallon to several thousand
gallons in an industrial environment. In
connection with the processing of emulsions and dispersions, the various pieces
of equipment in the product lines of the Morehouse-COWLES Division may be used
in preparatory steps prior to introduction of the product into the
Microfluidizer® system for further processing.
The Company’s product lines are diversified and certain equipment is
used independent of the Microfluidizer® equipment in the preparation
of many industrial fluid formulations where the desired product characteristics
do not require the sub-micron size of particles created by Microfluidizer®
processing.
While the Microfluidizer® equipment is generally used in the
processing of high value-added end-products that require extremely small
particle sizes, the Company’s other product lines are used in broader, high
volume, lower value-added applications requiring less stringent particle size
reduction.
The combination of product lines result in one of the broadest
offerings of fluid processing equipment in the materials processing
market. The Company, in late 1998 and
early 1999, integrated its then existing three divisions such that its
corporate marketing and sales group was responsible for the marketing and sales
of the products for all divisions. The acquisition of the Epworth Mill and
Morehouse-COWLES divisions in 1998 and the consolidation of marketing and sales
personnel into one group enabled the Company to sell stand-alone pieces of
equipment to smaller companies that require only limited processing capability,
as well as integrated systems or multiple pieces of equipment from more than
one division to larger customers that have a variety of fluid processing
requirements.
The Company was incorporated in Delaware in 1983. The Company, formerly
named Biotechnology Development Corporation, changed its name effective
June 8, 1993 to Microfluidics International Corporation, and again changed
its name effective July 12, 1999 to MFIC Corporation. Its principal executive
offices are located at 30 Ossipee Road, in Newton, Massachusetts,
02464-9101 and its telephone number is (617) 969-5452.
Microfluidizer® and Zinger® are trademarks of the
Company, which have been registered with the United States Patent and Trademark
Office. Morehouse-COWLES™
and Microfluidicsä
are trademarks of the Company for which registration applications have been
filed with the United States Patent and Trademark Office. All other trademarks or trade names referred
to herein are the property of their respective owners.
The Technology:
The Company’s Microfluidizer® materials processor device is
based on patents and related technology that were licensed by the Company from
Arthur D. Little & Co. in 1983 and subsequently purchased by the
Company in 1985. The Company holds two United States patents related to the
apparatus and process used to intimately mix liquids and disperse particulate
solids in microemulsions.
The Company’s Microfluidizer® processor technology is used
in materials processing and product formulation to mix materials that are
normally very difficult to mix. The Microfluidizer® processor
technology allows manufacturers in the chemical, pharmaceutical, biotechnology,
cosmetic, and food processing industries to produce higher quality products
with better characteristics on a more consistent basis than with other
blending, mixing, or homogenizing techniques. Additionally, the equipment is
used for cell disruption to harvest the cultivated contents of animal and/or
plant cells and for liposomal encapsulation of materials for the cosmetics
biotech/ biopharma industry.
Prior to October 1, 2000, the Company’s Epworth Mill Division products
consisted of ball mills and horizontal media mills. The division was also
engaged in the sale and distribution of grinding media. The division’s ball mills are used in coarse
grinding application of liquid slurries such as ore from mines or coarse
slurries of material that will later be processed into finer slurries. The ball mills use large media in a
horizontal rotating cylindrical vessel to crush and grind the product being
processed. The patented Zinger® horizontal media mill utilizes a
unique design for grinding and dispersing solid materials in a liquid carrying
medium. The design is based upon
established rotating, horizontal shaft technology but adds the unique
capability of enhanced mechanical activity between the grinding media and the
product formulation. The enhanced
mechanical activity is achieved through a unique combination of specially
designed rotors and containment vessels.
In comparison to traditional horizontal media mills, the Zinger media
mill technology has demonstrated significantly improved productivity in terms
of greater volumes of product processed at acceptable quality than the
comparably sized and priced horizontal media mills. On July 24, 2000, the
Company announced that it would transfer the manufacturing and sale of its
Zinger® horizontal media mills from its Michigan-based Epworth Mill
Division to the Morehouse-COWLES Division plant in Fullerton, California. The
transfer began on October 1, 2000, and was completed in the fourth quarter of
fiscal 2000.
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 April 13, 2001 the Company concluded the sale of the operation for
$200,000 in cash and a promissory note, which resulted in a loss on the sale of
the Ball Mill assets of approximately $53,000.
The Company’s Morehouse-COWLES Division manufactures grinding and
dispersing equipment used mainly in the coatings and ink industries. The
products include high-speed
dissolvers, dispersers,
stone mills, and vertical and horizontal media mills. As one of the early
inventors of dispersers, dissolvers, colloid mills, and media mills, the one
hundred-year-old COWLES name is an industry-accepted symbol of quality,
reliable products.
Commercial Applications:
The Microfluidizer® equipment can be used to mix and formulate
stable emulsions, dispersions and liposomes, and for cell disruption.
Emulsions are homogenous mixtures of oil and water components (or other
normally immiscible components), which, if mixed properly, do not readily
separate. Emulsions comprise many
products, such as food additives, medicines (including injectable drugs),
photographic films, and polymers. The
Company believes that, generally, an emulsion processed with Microfluidizer®
equipment will exhibit improved stability and require reduced concentrations of
costly emulsifying agents that are otherwise needed to enhance product
stability.
Dispersions are mixtures of fine solids suspended in liquid so that the
two do not separate readily after processing.
Similar to emulsions, dispersions are used in a variety of consumer and
industrial products, including pigments for medicines (including injectable
drugs), paints and inks, iron oxide for magnetic tapes and mascara,
phosphorescent coatings for TV screens and fluorescent lamps, barium titanate
for capacitors, toners and inks.
Liposomes are biodegradable cell-like structures, formed from materials
such as cholesterol and lecithin, which can be used to encapsulate medications
or nutrients. Pharmaceutical and
cosmetic manufacturers use liposomes as a delivery system to target active
ingredients for specific anatomical sites and to prolong their efficacy. To date, liposomes have been used
commercially in two applications, of medical diagnostic agents and
cosmetics. Applications include the encapsulation
of dye to be used as a marker in medical diagnostic tests and the encapsulation
of ingredients for deeper skin penetration, or time release control, as well as
pharmaceutical, food and specialized agricultural applications.
In the biotechnology industry, Microfluidizer® equipment is
currently used to harvest, by cell rupture, the contents of plant or animal
cells. The precision with which the
Microfluidizer® equipment can be used to break up materials allows
the encapsulating cell wall to be ruptured without damage to or contamination
of the cell contents. As a result, the Microfluidizer® equipment
minimizes the amount and presence of cell wall debris, thus resulting in
maximum yields.
The Microfluidizer® equipment is generally used in commercial
applications where a scientist, formulator or chemist is trying to develop or
improve a product formulation for an expensive, high value-added end product.
Microfluidizer® equipment is initially employed in a research
laboratory, with the equipment subsequently being used in scaleup to pilot
scale production of new or improved products, and ultimately, for full
production scale volumes as the improved
product comes to market. From
laboratory to production, the volume of product processed range from less than
one-half liter per minute to 200 liters per minute.
The Company also manufactures products that are generally used for
blending, mixing, deagglomeration and dispersion of paints and coatings, inks,
adhesives, sealants, and pigment dispersions. These applications tend to be
less technically demanding, the formulations are less expensive to produce and
the volumes of product produced are large.
The Products:
The
Company currently manufactures and markets the following lines of equipment:
The HC Series: The HC Series, also known as “Homogenizers,” is a
laboratory-scale series of equipment that is intended to impart moderate levels
of energy into a customer’s product with greater flow rates than the more
energy intensive Microfluidizer® devices. Operating pressures of
products in the Company’s HC Series can range from under 500 psi to as
high as 8,000 psi, and will process as much as two liters of fluid per
minute.
The M-110 Series: The M-110 Series, a laboratory product line, is designed
primarily for research and development applications. Standard models can
operate at pressures as high as 25,000 psi and have a flow rate that exceeds
one-half liter of product per minute.
The most recent introduction in this line is the M-110EHI model designed
for “non-sanitary” industrial applications such as paint, coatings, pigments
and other chemical/industrial applications.
The M-110EHI includes an on-board hydraulic pump system for high
performance “lab scale” micro-mixing at processing pressures up to 25,000 psi
and flow rates up to 450 ml/min and has numerous standard features and options
such as an explosive-proof model.
The M-140 Series: The M-140K, introduced in June of 1994, is a laboratory-scale
unit developed for customers in the chemical, biotechnology, pharmaceutical,
cosmetic and food processing industries that require elevated operating
pressures and higher shear forces to achieve better performance. The M-140K can achieve operating pressures up
to 40,000 psi. The M-140K has a built-in hydraulic system and utilizes a
bi-directional intensifier pump that provides a highly uniform pressure
profile. It has been designed with many accessories and options including an
explosion proof motor, control package, and solvent seal quench.
The M-210 Series: The M-210 Series is a pilot unit and is primarily marketed to
pharmaceutical, cosmetic and food product manufacturers who have created a
successful new or improved formulation on the M-110 Series unit and would like
to increase their productive capacity.
The M-210 Series unit is typically used for testing formulations at
greater volume levels before initiating full-scale production. For some
customers (such as pharmaceutical product manufacturers), the M-210 Series may
have the capacity to function as a production unit.
The M-610 Series: The M-610 Series consists of custom-built
models used for large-scale production.
These units have flow rates of up to 19 gallons per minute and generate
operating pressures up to 40,000 psi.
The M-700 Series: The M-700 Series was introduced at the end
of fiscal 1998 and was originally designed, engineered, and constructed for use
in “rugged” industrial environments such as coatings, paints and pigments
research and manufacturing. The M-700
Series products will use components especially designed to withstand such
hazards as dust, grease, and water spray.
Through use of our own proprietary designed intensifier pump and other
components, the system is also more cost-effective, resulting in list price
reductions of 30% and more.
The M-700 Series equipment is available in a variety of configurations
and flow rates depending upon motor size and the number of intensifier pumps. The M-7250-20 is a 50 H.P. machine with 2 intensifier pumps with
a maximum operating pressure of 30,000 psi. It achieves flow rates and
productive capacity exceeding that of the M-210 series and is, therefore,
considered by the Company to be a large-scale production unit. The 700 series incorporates the same “clean
in place” design present on the 210 and 610 series systems. Between fiscal 2000 and the end of fiscal 2001,
the Company manufactured and shipped four sterile M-700 machine designed for
use in the pharmaceutical industry.
Stone Mills:
Stone Mills are utilized for processing chemicals, food products and
minerals where the user desires to reduce particles to 15-25 microns in size
and where the capital equipment costs must be minimized.
Vertical Media
Mills: Vertical
Media Mills are used in connection with batches or continuous milling of
products in a wide variety of industries including chemical, agricultural,
cosmetics and food. Batch sizes
typically range from 2 to 60 gallons with throughput capacities of 2 to 900
gallons per hour.
Single Shaft
Dissolvers and Dispersers: Single Shaft Dissolvers and Dispersers are available in a variety of
sizes to meet demand from laboratory to full production volume. Generally, these dissolvers and dispersers
are used in lower cost products, at viscosities up to 50,000 centipoise that
require blending, mixing, deagglomeration and dispersion.
Multi-shaft
Dissolvers and Dispersers: Multi-shaft Dissolvers and Dispersers are available in a variety of sizes
to meet demand from laboratory to full production volume. Generally these dissolvers and dispersers
are used for high viscosity products up to 2 million centipoise.
Customized Units: To meet larger production volume
requirements or specialized applications, the division provides customized
single and multi-shaft dissolvers and dispersers on a specialized quotation
basis.
Zinger®
Horizontal
Media Mills: This media milling equipment is available in
the following sizes that process products in volumes ranging from one-quarter
liter to 60 liter batches or on a continuous basis.
• The XL Series: The XL Series equipment is used in laboratory
environments and has processing vessel sizes from 0.33 liters to 1.25 liters.
• The SV Series: The SV Series equipment is used in pilot scale
environments and has processing vessel sizes from 1.35 to 5.1 liters.
• The LV Series: The LV Series equipment is used in production
environments and has processing vessel sizes from 7.3 to 38 liters.
Distribution of Grinding Media - The Company is one of the largest
distributors of grinding media in the United States. Sale and distribution of
grinding media includes a wide variety of grinding media from media producers
around the world. The media are used as
consumables in mixers produced by the Company as well as by competitors. Media
types include all currently used materials in the industry including glass,
ferrous, stone, steel shot, and ceramic.
Marketing and
Sales:
The Company’s
marketing and sales activities are conducted through a corporate marketing and
sales group that is responsible for the worldwide marketing and sales of all
products.
Marketing programs
include advertising, direct mail, seminars, trade shows and telemarketing. In
addition, the Company has an active program of field demonstrations, as well as
demonstrations to potential users in the Company’s applications laboratories
located in Newton, Massachusetts, Fullerton, California, and Lampertheim, Germany.
International distributors and sales agents are supported with trade
advertising, collateral literature and trade show materials. The distributors also advertise directly on
their own behalf and attend regional and international trade shows. As an aid to the marketing and sales
activity for the equipment, the Company provides prospective customers with
access to its testing laboratories. These laboratories provide free processing
and particle size and distribution analysis of a prospective customer’s sample
formulation. Additionally, a prospective customer may pay for subsequent
laboratory time and services on a fee for services basis, which includes
equipment rentals.
The Company sells
its divisions’ equipment in the United States through a network of independent
manufacturer’s representative firms who are managed by the Company’s regional
sales managers. In Canada, the Company has an exclusive distributor for the
Microfluidics product line. In Europe, the Company sells its equipment through
a network of independent regional sales agents and distributors who are managed
by the Company’s European Sales Manager.
In Asia and the Pacific Rim, the Company sells through a network of
distributors and
independent
manufacturer’s representative firms. Customers in other geographical regions
are assisted directly by Company sales staff.
Customers:
The users of the
Company’s systems are in various industries, including the chemical,
pharmaceuticals, food, cosmetic and biotechnology industries. No customer accounted for more than 10% of
the Company’s revenues in 2001, 2000, or 1999.
Competition:
The Microfluidizer®
equipment product line of high shear processors has direct competition in its
major markets, including pharmaceutical and coatings/chemical applications, but
management believes that the Company’s products have larger installed bases and
competitive performance advantages over products of our competitors. The Company believes that the Microfluidizer®
equipment product line offers the highest shear forces available in the process
equipment market today. In many critical formulations Microfluidizer®
processors produces better quality products for our customers.
The M-700 Series
of fluid processors, together with the M-210 and M-610 product lines, provide
high shear fluid processing capabilities for both sanitary, sterile, and
industrial applications. The Company
believes that the Microfluidizer® product line provides a distinct
advantage over the product lines of our competitors with respect to the
processing of abrasive slurries or solids dispersed in liquids in large part
because of the Company’s unique, wear-resistant, diamond interaction chamber
and the special design of the intensifier pumping system.
Media sales are in
direct competition with a large number of suppliers, including the major source
of the Company’s media materials.
The product lines
of the Morehouse-COWLES Division have direct competition in its major market
segments. The Morehouse-COWLES product
line has strong brand name recognition, a large installed base and a reputation
for high quality, reliable, processing systems. The systems of this division have a very broad market use in a wide
variety of mixing, blending, grinding, and dispersing applications and
therefore have potential for high volume unit shipments.
The patented
Zinger horizontal media mill competes against a well-established group of
competitive mills. The unique design of the Zinger media mill, however, results
in an economic advantage for customers who employ the Zinger media mill because
they are able to process larger volumes of product at lower energy cost while
attaining at least the same quality as produced by competitive mill, and can do
so occupying less floor space. As customers replace older mills or expand their
facilities, they will gain an economic advantage by lowering the processing
costs of their products by using a mill, such as the Zinger media mill, which
more efficiently processes larger quantities of product than competitive mills.
The Company faces,
and will continue to face, intense competition from other companies who
manufacture and sell fluid processing systems used in grinding, mixing, milling
and dispersing applications. The Company is subject to significant competition
from organizations that are pursuing technologies and products that are similar
to the Company’s technology and products. The Company’s future success will
depend in large part on its maintaining a competitive position in the fluid
processing systems field. Rapid
technological development by the Company or others may result in products or
technologies becoming obsolete before the Company recovers the expenses it incurs
in connection with their development.
Products offered by the Company could be made obsolete by less expensive
or more effective technologies. There
can be no assurance that the Company will be able to make the enhancements to
its technology necessary to compete successfully with newly emerging
technologies. The Company expects
competition to intensify in the fluid processing systems field as technical
advances are made and become more widely known.
Research and Development:
The Company’s
research and development efforts are focused on developing new mixing
techniques for the process industries and further enhancing the functionality,
reliability and performance of existing products. Research and development costs were $857,491, $835,136, and
$927,582, in 2001, 2000, and 1999 respectively. The Company continues to pursue
development of the Multi-Stream Mixer Reactor (See Patents and Proprietary
Rights Protection) by working with customers who assist in the development of
the system with both application knowledge and financial support. Patent coverage for this new product has
been obtained in the United States and is in various stages of prosecution in
the other major industrial countries.
Cooperative Research
Arrangements:
The Company
subsidizes research and development activities centered around Microfluidizer®
processing technology at a number of research centers and universities. The Company’s subsidy of these activities
takes the form of substantial reduction or elimination of the customary rental
charges for the Microfluidizer® equipment provided for use. The
Company has, in recent years, subsidized research and development in the
following fields at the following universities: The University of
Massachusetts, Lowell - biotechnology; Lehigh University - polymer chemistry;
Université Laval (Quebec) - food science; Worcester Polytechnic Institute (WPI)
- catalytic chemistry; and Purdue University - pharmaceuticals. In addition to their research activities,
these universities provide the Company with contacts at industrial companies
that may utilize the Microfluidizer® processing technology. Additionally, on occasion, research reports,
technical papers, and doctoral theses may be published, which document the use
of Microfluidizer® technology. Finally, the Company engages in many
informal co-operative development efforts with its’ customers, particularly in
the Microfluidics Division.
In addition to
providing subsidies, the Company has, in the past, entered into a research
arrangement with Worcester Polytechnic Institute (WPI). The Company has supported research and
development at WPI since 1988. In 1992,
the Company entered into a cooperative venture
with WPI to develop,
patent and license for WPI, for its commercial applications, the Microfluidizer®
process technology in the following fields: (i) the production of
catalysts used in chemical and petroleum processing; (ii) the manufacture
of advanced ceramic materials; and (iii) the destruction of volatile
organic compounds and other organic contaminants in process waste water. The
Company and WPI applied for United States and foreign patents in 1992 and 1993,
respectively, which cite the Microfluidizer® processing technology
as enabling the above process technologies. The two applied-for United States
patents were both granted and issued to WPI in the United States in 1995. In
1996 one applied for patent was granted to WPI in France for European entry in
the Patent Cooperation Treat (PCT) countries. Patent issuance for these process
technologies in several other foreign jurisdictions is either pending or is in
the latter stages of prosecution. The program is inactive at this time.
Patents and Proprietary
Rights Protection:
To protect its
proprietary rights, the Company relies on a combination of U.S. patent and
trademark laws, trade secrets, confidentiality agreements, contractual
provisions and technical means. In the event of patent infringement or breach
of confidentiality, there can be no assurance that these measures will be
adequate or that the Company will have sufficient resources to prosecute or
prevail in an action against a third party.
In addition, the Company has not sought patent or trademark protection
for its Microfluidizer® equipment’s interaction chamber in any
country other than the United States and, as such, its proprietary rights are
not subject to the protection of patent or trademark laws of foreign countries
where the Company’s equipment is sold.
The Company’s Microfluidizer® equipment process patent
expires on March 13, 2007 and its device patent expires on August 6,
2002. In 1997 the Company completed development of a novel adaptation of its
Microfluidizer® equipment - a Multi-Stream High Pressure Mixer
Reactor. In August 1997, the Company
filed a patent application for the device and its processes with the United
States Patent and Trademark Office, (USPTO), and filed a Patent Cooperation
Country (PCT) application on May 5, 1998. In July and November 2000, the USPTO issued
to the Company notices of allowances of utility patent claims regarding the
Multiple Stream High Pressure Mixer/Reactor and the use thereof. The Company’s
Zinger horizontal media mill is protected by a United States patent granted
June 5, 1997.
Manufacturing:
At present, the
Microfluidics Division subcontracts the manufacture of many of the components
of its equipment to third parties, with the Company undertaking the remaining
fabrication, assembly and performance testing.
The Division has selected certain primary suppliers based upon pricing
terms and the quality of their products.
The Company believes that there are adequate available alternate
manufacturing sources and suppliers for their components and raw materials
requirements.
The Morehouse-COWLES
Division performs a significant portion of machining and assembly operations at
its respective manufacturing location.
Certain specialty components of the systems
are provided by outside
contractors. The Company believes that there are adequate available alternate
contractors to provide the division with specialty components.
The loss of any
primary supplier could have a material, adverse effect on the Company’s
business, financial condition, or results of operations.
Government Regulation:
Certain of the
Company’s customers utilize the Company’s equipment in processes and production
that are subject to governmental regulation. For example, the manufacturing and
marketing of pharmaceutical products requires the approval of the Food and Drug
Administration (FDA) within the United States and of comparable agencies in
foreign countries. The FDA has
established mandatory procedures, safety standards and protocols that apply to
the manufacture, clinical testing and marketing of new pharmaceutical products
in the United States. The process of
seeking and obtaining FDA approval of a new product often takes a number of
years and often involves the expenditure of substantial resources. The FDA approval process contributes to the
extremely long lead times that are attendant to manufacturing equipment orders
for these applications.
Further, in
addition to product approvals, the FDA imposes requirements as to manufacturing
practices, record keeping and reporting (Good Manufacturing Practices or GMP).
GMP-regulated companies are subject to inspections by the FDA (inclusive of
Microfluidizer® equipment) and product approvals may be withdrawn if
GMP are not met.
At present, the
Company’s customers include companies who are making FDA approved drugs and
preparations for external use and companies who utilize Microfluidizer®
equipment for the formulation or production of FDA approved parenteral
(injectable) drugs or compounds.
For the Company’s
equipment entering Europe, CE compliance (Regulatory Compliance with European
Safety Standards) is required.
Various laws,
regulations and recommendations relating to safe working conditions, laboratory
practices and the purchase, storage, movement, import and export, use and
disposal of harmful or potentially harmful substances that may be used in
connection with the Company’s research work are, or may, be applicable to its
activities. These laws include, among
others, the United States Atomic Energy Act, the Clean Air Act, the Clean Water
Act, the Occupational Safety and Health Act, the National Environmental Policy
Act, the Toxic Substances Control Act, the Resource Conservation and Recovery
Act, national restrictions on technology transfer, import, export and customs
regulations and other present and possible future local, state or Federal
regulation. The extent of adverse
governmental regulation which might result from future legislation or
administrative action cannot be accurately predicted. Certain agreements that may be entered into by the Company
involving exclusive license rights may also be subject to national or
supranational antitrust regulatory control, the effect of which cannot be
predicted.
Backlog:
The Company’s
sales order backlog of accepted and unfilled orders at March 15, 2002, and
March 16, 2001 was approximately $3,337,000 and $3,281,000, respectively.
Backlog as of any particular date should not be relied upon as indicative of
the Company’s net revenues for any future period.
Employees:
The Company has
approximately 72 full-time employees as of March 15, 2002. None of the Company’s employees are covered
by a collective bargaining agreement, and the Company considers its relations
with its employees to be satisfactory.
The Company believes that its future success will depend in large part
on its ability to attract and retain highly skilled employees.
Item 2.
Item 2. PROPERTIES
The Company’s
corporate headquarters are in Newton, Massachusetts. The Company also maintains other locations in South Haven,
Michigan, Fullerton, California and a sales office in Lampertheim,
Germany. The Company rents
approximately 127,000 square feet of offices, production and research and
development facilities at these locations for administrative, development and
production activities. A portion of space is sublet to other non-affiliated
companies for a total of $84,000 per annum. The lease terms expire at various
times through August 2006. The Company has the option to extend the leases for
up to five additional years. The
Company believes these facilities will be adequate for operations for the next
several years.
Item 3.
Item 3. LEGAL
PROCEEDINGS
The Company is not
a party to any material legal proceedings.
Item 4.
Item 4. SUBMISSION OF
MATTERS TO VOTE OF SECURITY HOLDERS
No matters were
submitted to a vote of the Company’s security holders during the quarter ended
December 31, 2001.
PART II
Item 5.
Item 5. MARKET FOR
REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s
Common Stock is traded on the Over the Counter Bulletin Board under the symbol
MFIC. The following table sets forth
the range of quarterly high and low bid quotations for the last two fiscal years,
as furnished by the National Association of Securities Dealers Automated
Quotation System. The quotations
represent interdealer quotations without adjustment for retail markups,
markdowns, or commissions, and may not necessarily represent actual transactions.
As of March 15,
2002, there were approximately 380 holders of record of the Company’s Common
Stock.
The Company has
never paid any cash dividends on its Common Stock and presently anticipates
that no dividends on its Common Stock will be declared in the foreseeable
future. The Company’s current policy is to retain all of its earnings to
finance future growth. In addition, pursuant to loan covenants contained in the
Company’s loan agreement with its commercial leader, the Company may not pay
dividends without the commercial lender’s prior approval.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The selected
financial information presented below is derived from the audited consolidated
financial statements of the Company for each of the five years in the period
ended December 31, 2001. The information set forth below should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and related
Notes included elsewhere in this Form 10-K.
As discussed in
Note 6 to the accompanying financial statements, in August 1998, the Company
acquired the assets and assumed certain liabilities of two businesses,
Morehouse-COWLES, Inc. 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 Mill subsequent to August 14, 1998.
Selected
Statement of Operations Data
Selected Balance Sheet Data
Item 7.
Item 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FACTORS AND CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
Management believes that this report contains
forward-looking statements that are subject to certain risks and uncertainties
including statements relating to the Company’s plan to achieve full sales/marketing
and operational integration of its divisions, to achieve revenue growth, to
maintain and/or increase operating profitability, and to attain net income
profitability. Such statements are based on management’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) the ability to manage the integration of the Company’s
divisions into a cohesive operation and the attainment of successful operating
results of such integrated operations, (ii) whether the performance advantages
of the Company’s Microfluidizer® or Zinger® materials
processing equipment will be realized commercially or that a commercial market
for the equipment will continue to develop, and (iii) 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.
Results
of Operations
Fiscal
2001 Compared to Fiscal 2000
Total revenues for the year ended December
31, 2001 were $15,511,014 as compared to revenues of $15,725,695 for the year
ended December 31, 2000, representing a decrease of $214,681, or 1%. This
decrease in revenues was the result of a decrease in sales by the
Morehouse-COWLES Division of the Company of approximately $1,390,000, a
decrease in sales at the Epworth Mill Division of approximately $1,442,000 (due
to a cessation of operations of the Ball Mill repair business), offset by an
increase of approximately $2,617,000 in additional revenue generated by the
Company’s Microfluidics Division.
North American sales for the year ended
December 31, 2001 decreased to approximately $10,630,000, or 7%, as compared to
North American sales of approximately $11,386,000 for the year ended December
31, 2000. This decrease in North
American sales was principally due to a decrease in the sale of machines. Foreign sales were approximately $4,881,000
for the year ended December 31, 2001 compared to $4,340,000 for the year ended
December 31, 2000, an increase of $541,000 or 12%. This increase in foreign
sales was principally due to an increase in the sale of machines.
Total cost of goods sold for
2001 was $8,897,755 or 58% of revenue, as compared to $8,688,465 or 55% of
revenue for 2000. The increase in cost
of goods sold reflects primarily the increase in sales generated by the
Microfluidics operating division of the Company, offset by a decrease in cost
of goods sold by the Morehouse-COWLES and Epworth Mills operating
divisions. 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. Also, the cost of sales as a percent of
revenue will differ between laboratory and pilot plant units sold, due to the
difference in costs between air driven and electric-hydraulic units.
Total operating expenses for 2001 were
$6,830,581 or 44% of revenue, as compared to $7,104,600 or 45% of revenue for
2000, which is a decrease of $274,019 or 4%.
Research and development expenses for 2001
were $857,491 compared to $835,136 for 2000, an increase of $22,355 or 3%. The increase in research and development
expenses is primarily due to an increase in payroll and related costs of
approximately $157,000, partially offset by a decrease in amortization costs of
approximately $60,000, a decrease in outside contract services of approximately
$44,000, and a reduction of expenses at the Epworth Mill Division of
approximately $49,000, due to the transfer of the division’s operations in
October of 2000.
Sales and Marketing expenses for 2001
decreased approximately $433,000, from $3,482,866 in 2000 to $3,049,418 or 12%.
The decrease was due principally to the reduction of selling expenses at the
Epworth Mills Division of approximately $287,000, a decrease in commission
expense of approximately $138,000, and decreases in consultant expenses of
approximately $48,000, partially offset by increases of approximately $41,000
in demonstration cost expenses.
General and
administrative expenses for 2001 increased by approximately $137,000, from
$2,786,598 for the year ended December 31, 2000, to $2,923,672, or 5%. The increase in general and administrative
expenses is primarily due to an increase in payroll costs of approximately $152,000, and
an increase in grinding media sales costs of approximately $169,000, partially
offset by a reduction of general and administrative costs of approximately
$167,000 at the Epworth Mill Division, due to the sale of the business, and a
decrease in professional fees of approximately $40,000.
Interest expense for 2001 decreased from
$350,486 in 2000 to $261,754, a decrease of $88,732, or 25%. The decrease was due primarily to a
reduction in the interest rate paid, partially offset by the increase in debt
due to the transaction with J.M. Huber Corporation.
Interest income for 2001 increased to $7,032
from $248 for 2000, an increase of
$6,784. The increase is due to
interest earned on the note receivable arising from the sale of the Ball Mill
operation.
Fiscal
2000 Compared to Fiscal 1999
Total revenues for the year ended December
31, 2000 were $15,725,695 as compared to revenues of $14,083,216 for the year
ended December 31, 1999, representing an increase of $1,642,479 or 12%.
North American
sales for the year ended December 31, 2000 increased to approximately
$11,386,000, a 12% increase as compared to North American sales of
approximately $10,126,000 for the year ended December 31, 1999. This increase in North American sales was
principally due to an increase in the sale of machines. Foreign sales were approximately $4,340,000
for the year ended December 31, 2000 compared to $3,898,000 for the year ended
December 31, 1999, an increase of approximately $442,000 or 11%. This increase
in foreign sales was principally due to an increase in the sale of machines
compared to 1999.
Total cost of goods sold for 2000 was
$8,688,465 or 55% of revenue, as compared to $7,990,398 or 57% of revenue for
1999. The increase in cost of goods
sold in absolute dollars reflects the increase in sales principally generated
by the Microfluidics division of the Company, offset by a decrease in cost of
goods sold by the Epworth Mill Division. The decrease in cost of goods sold was
due to reduced sales at the Epworth Mill Division due to the Company ceasing
operations of the Ball Mill repair business on September 30, 2000. 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. Also, the cost of
sales as a percent of revenue will differ between laboratory and pilot plan
units sold, due to the difference in costs between air driven and
electric-hydraulic units.
Total operating expenses for 2000 were
$7,104,600, or 45% of revenue, as compared to $6,426,906, or 46% of revenue,
for 1999, which is an increase of $677,694, or 11%.
Research and development expenses for 2000 were
$835,136 compared to $927,582 for 1999, a decrease of $92,446, or 10%. The
decrease in research and development expenses is primarily due to a decrease in
payroll costs of approximately $40,000, and a decrease in general research and
development expenses of approximately $52,000.
Sales and marketing expenses for 2000
increased approximately $548,198 or 19% from $2,934,668 to $3,482,866. The
increases were due principally to increases in outside commissions of
approximately $295,000, payroll and related expenses of approximately $205,000,
an increase in advertisement expenses of approximately $88,000, partially offset by a decrease in
printing costs of approximately $21,000, and other general cost reductions of
$19,000.
For the year ended December 31, 2000, general
and administrative expenses increased by approximately $222,000, from
$2,564,656 for the year ended December 31, 1999, to $2,786,598, or 9%. The
increase in general and administrative expenses was principally due to an
increase in corporate overhead of approximately $93,000, amortization of
goodwill costs of approximately $36,000, professional fees of approximately
$34,000, and other cost increases of $59,000.
Interest expense for 2000 decreased to
$350,486 from $542,045 for 1999, a decrease of $191,559, or 35%. The decrease
was due to a decrease in borrowings, the impact of the debt restructuring, and
a decrease in the interest rates charged the Company.
Interest income for 2000 decreased to $248
from $9,835 for 1999, a decrease of
$9,587 or 97%. The decrease for 2000 was due to the amount of cash
available to invest as a result of the line of credit lockbox arrangement with
National Bank of Canada described in note 7.
As a result of a debt restructuring and
refinancing, the Company recorded an extraordinary gain of approximately
$195,000 in the first quarter of fiscal 2000.
On July 24, 2000, the Company announced that
it would transfer the sales and manufacturing of its line of Zinger ® horizontal
media mills from its Michigan-based Epworth Mill Division to the
Morehouse-COWLES plant in Fullerton, California. The transfer began on October
1, 2000 and did not have a material impact on the profitability of the Company.
Simultaneously, the Company ceased operations of the Ball Mill repair business
and decided to sell its Ball Mill product line. On March 19, 2001, the Company reached an agreement to sell the
Ball Mill operation for $200,000 in cash and notes. The assets held for sale are separately classified in the balance
sheet at December 31, 2000.
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® 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. The Company may prepay
the note through April 2001, with the note being discharged for $300,000 plus
accrued and unpaid interest. Huber has transferred all interest in the seven
Media Mills to the Company, and shipped the equipment to the Company for
reconditioning and resale. The Company recorded a loss on this transaction of
$250,000. The loss is included in other
expense in the consolidated statement of operations.
The Company had a sales backlog of $3,281,000
and $3,371,000 at March 16, 2001 and March 16, 2000, respectively.
At December 31, 2000 the Company had a
near-record backlog, with orders and order inquiry levels, especially for
Microfluidizer production equipment, at a very strong level. This activity
combined with ongoing business activity trends and reduced financing costs make
improvement in operations likely for the foreseeable quarters in 2001. Management
believes that in 2001 the Company should experience growth in revenues,
realization of improved operating performance, and attainment of net
profitability.
QUARTERLY
RESULTS OF OPERATIONS
The following table sets forth, for the
periods presented, certain data from our consolidated statements of
operations. In the opinion of our
management, the unaudited quarterly consolidated statement of operations data
have been prepared on substantially the same basis as our audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods presented.
This information should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K. The operating results in
any quarter are not necessarily indicative of the results that may be expected
for any future period.
Summarized unaudited quarterly financial data
are as follows:
As a result of a
debt restructuring and refinancing, the Company recorded an extraordinary gain
of approximately $195,000 in the first quarter of fiscal 2000.
As a result of a settlement reached with J.M.
Huber Corporation in the third quarter of fiscal 2000, the Company incurred a
loss of approximately $250,000.
LIQUIDITY
AND CAPITAL RESOURCES
The Company generated cash of $297,127 in
2001, $80,718 in 2000, and $970,442 in 1999.
In 2001, the Company’s principal operating cash requirements were to
fund its net loss from operations, increase in other assets, and decreases in
current liabilities, offset by a decrease in trade and other receivables,
inventories, and prepaid expenses. In
2000, the Company’s principal operating cash requirements were to fund its net
loss from operations, increases in inventories, trade and other receivables, and
prepaid expenses, offset by a decrease in current liabilities. In 1999, the
Company’s principal operating cash requirements were to fund its net loss from
operations, an increase in accounts receivables, offset by decreases in
inventory and an increase in current liabilities.
Net cash used by investing activities for
2001 resulted from the sale of assets from the Ball Mill operation offset by
the issuance of a note receivable in connection with the sale of the Ball Mill
operation, and the purchase of fixed assets, partially offset by the sale of
fixed assets. As of December 31, 2001,
the Company had no material commitments for capital expenditures. Net cash used by investing activities of
$27,673 in 2000 consisted of the proceeds from the sale of assets of $152,989,
offset by the purchase of capital equipment of $180,662. The Company’s
sale of assets principally related to used
equipment. The Company used cash of $23,855 for investing activities in 1999.
Net cash used in investing activities included the proceeds from the sale of
assets, net of the purchase of capital equipment.
For financing activities, the Company used
cash of $387,235 in 2001, generated cash of $37,138 in 2000, and used cash of
$1,301,128 in 1999. Cash used in 2001 reflected the payments on the line of
credit, line of credit term note, and subordinated debt, partially offset by
the proceeds from the issuance of common stock. In 2000, cash was generated from the proceeds of stock issued,
from the proceeds of both a line of credit and a term note from a refinancing,
and was used to pay down a previous line of credit, and pay fees in connection
with obtaining the line of credit. In 1999 cash was used to pay down the line
of credit, and purchase treasury stock, and was offset in part by the issuance
of stock under the employee stock option plan.
The cash and cash equivalents balance at
December 31, 2001 was $87,386, a decrease of $198,969 from the
December 31, 2000 balance of $286,355. At December 31, 2001, the Company
maintained a line of credit and a term loan (collectively the Credit Facility)
with National Bank of Canada (the Lender).
The line of credit facility provides for a maximum borrowing of
$4,000,000. As of December 31, 2001 and March 15, 2002, the Company had
borrowings of $2,535,792 and $2,269,345, respectively. On January 16, 2002, the United States
portion of the Lender’s loan portfolio was sold to PNC Bank (The Successor Lender.) The Company’s loans, terms, and conditions
are the same with the Successor Lender, as they were with the Lender.
Under the terms of the line of credit with
the Successor Lender, the Company is subject to a number of restrictions that
impact the Company’s use of funds. The
Company is limited to acquisition of property of $200,000 per year or less,
cannot pay dividends, and must maintain certain financial covenants as
defined. In addition, the Company is
required to maintain a lockbox arrangement with the Successor Lender, and all
cash receipts are included in the lockbox and are applied against the
outstanding line of credit. As
discussed in Note 7 to the consolidated financial statements, the Company was
in violation of all covenants of the Credit Facility as of December 31,
2001. At December 31, 2000, except for
the debt service and maximum capital expenditures covenants, the Company was in
violation of the same covenants. The
Company received a waiver from the Successor Lender and the Lender as of both
December 31 2001, and December 31, 2000, respectively, but is required to meet
such covenants thereafter. As indicated in Note 7, the Company determined that
violations of the tangible net worth and liabilities to worth ratio covenant
occurred for the quarter ended March 31, 2001.
The Company obtained a waiver for these violations from the Lender. 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. On March 29, 2002, the Company and the Successor
Lender set new covenants for fiscal 2002. Borrowings outstanding under the
Credit Facility are secured by a collateral pledge to the lender of
substantially all of the assets of the Company. Management of the Company is executing plans for a return to
profitability, including the recent reorganization of its Morehouse-COWLES
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 existing cash balances, will be sufficient to meet
its working capital and debt service requirements for at least the next twelve
months.
NASDAQ DELISTING
The Company’s Common Stock was listed on the
NASDAQ National Market (the National Market) under the symbol MFIC. The Company was notified by the National
Market that, as of October 9, 1998, the Company was not in compliance with the
National Market requirements for the continued listing of its Common Stock
because the public float of the Common Stock was less than $5,000,000 for more
than thirty consecutive days. NASDAQ
calculates the market value of a Company’s common stock by multiplying the
closing bid price of the stock by the number of shares held by
non-affiliates. The Company estimated
that 4,494,502 shares were currently held by non-affiliates. The notice from
the National Market further stated that the Company’s Common Stock would be
delisted as of January 18, 1999 if the public float was not $5,000,000 or more
for a period of ten consecutive trading days during the ninety-day period from
October 19, 1998 to January 17, 1999. Further, as of September 30, 1998, the
Company fell below another of the National Market’s continued listing requirements
- its net tangible assets (total assets minus goodwill) had fallen below
$4,000,000 to $3,251,953. Finally on
March 11, 1999, the National Market notified the Company that the Company was
not in compliance with the minimum bid price requirement. As of March 24, 1999, the Company had still
not satisfied any one of the three foregoing requirements. The Company requested a hearing before the
National Market to request a “phase-down” to the NASDAQ SmallCap Market. This meeting took place on March 19, 1999.
The Company’s request was not granted and on April 23, 1999 the Company’s stock
was delisted from the National Market. The Company is currently listed on the
Over the Counter Bulletin Board. The liquidity of such securities may be
impaired not only in the number of shares that could be bought and sold, but
also through delays in the timing of transactions, reductions in securities
analysts’ and media coverage of the Company, and lower prices than might
otherwise be attained.
NEW
ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations.
SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The
Company does not believe that the adoption of SFAS No. 141 will have a
significant impact on its financial statements.
In June 1998, the Financial Accounting
Standard's Board (FASB) issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. As amended in June 1999, the statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. In June 2000, the FASB issued
SFAS No. 138, which is a significant amendment to SFAS No. 133. SFAS No.133 and its amendments establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively, the
derivatives) and for hedging activities.
The EITF has also issued a number of derivative-related tentative and
final consensuses. These statements do
not have an impact on its consolidated position or results of operations.
In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, which is effective January 1, 2002.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill, and the identification of reporting units for
purposes of assessing potential future impairment of goodwill. SFAS No. 142 also requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company has made an assessment of the goodwill valuation, and
based on this assessment will take a charge of approximately $2,700,000 in the
first quarter ended March 31, 2002 for the impairment.
In October 2001, the FASB issued SFAS No.
144, Accounting for the Impairment or
Disposal of Long-lived Assets, which is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
years. This SFAS develops one
accounting model for long-lived assets that are to be disposed of by sale as
well as addressing the principal implementation issue. The Company does not expect the adoption of
this statement to have a material impact on its financial statements.
In December 1999 the Securities and Exchange
Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, “Revenue
Recognition in Financial Statements.” This SAB clarifies certain elements of
revenue recognition. Since December, the SEC has issued several amendments that
postponed the implementation date until the fourth quarter of fiscal 2000. The
implementation of the SAB did not have a material impact on the Company’s
Financial Statements.
ITEM 7A
ITEM 7A QUANTITATIVE
AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
The Company’s financial instruments are
generally not subjected to changes in market value as a result of changes in
interest rates due to the short maturities of the instruments. 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 does not have significant
exposure to fluctuations in foreign exchange rates.
The Company had approximately $2,785,000 of
variable rate borrowings outstanding under its revolving credit agreement at
December 31, 2001. A hypothetical 10%
adverse change in interest rates for this variable rate debt would have had an
approximate $15,000 negative effect on the Company’s earnings and cash flows on
an annual basis.
For additional information about the Company’s
financial instruments, see Note 7 and Note 13.
Item 8.
Item 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial
Statements of the Company and its Subsidiaries appear on the following pages of
this Form 10-K.
Report of Independent Auditors
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for
the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for
the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended December 31, 2001, 2000 and
Notes to Consolidated Financial Statements
(b)
Reports on Form 8-K.
The Company
filed a current report on Form 8-K regarding changes in its certifying
accountant dated October 29, 2001.
(c)
Exhibits.
The Company
hereby files as part of this Form 10-K the Exhibits listed in
Item 14(a)(3) as set forth above.
(d)
Financial Statement Schedules.
See (a)(2)
above.
REPORT OF
INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of MFIC Corporation:
We have audited the accompanying consolidated
balance sheet of MFIC Corporation and Subsidiaries as of December 31, 2001, and
the related consolidated statement of operations, changes in stockholders’
equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed
in the index at Item 14 (a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. The financial statements of
MFIC Corporation and Subsidiaries as of December 31, 2000, were audited by
other auditors whose report dated March 29, 2001 expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of MFIC Corporation and Subsidiaries as of December 31,
2001, and the results of their operations and their cash flows for the year
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the information
set forth therein.
BROWN & BROWN LLP
Boston, Massachusetts
Feburary 27, 2002, except for Note 7, as to
which the date is March 29, 2002
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of MFIC Corporation:
We have audited
the accompanying consolidated balance sheet of MFIC Corporation and
Subsidiaries as of December 31, 2000, and the related consolidated statements
of operations, changes in stockholders’ equity, and cash flows for each of the
two years in the period ended December 31, 2000. Our audit also included the
financial statement schedule listed in the index at Item 14 (a)(2) for each of
the two years in the period ended December 31, 2000. These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements and financial statement schedule based on our
audits.
We conducted our
audits in accordance with auditing standards generally accepted in the United
States of America. 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,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of MFIC Corporation and Subsidiaries
as of December 31, 2000, and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such
financial statement schedule referred to above for each of the two years in the
period ended December 31, 2000, when considered in relation to the basic 2000
and 1999 consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 29, 2001, except for Note 7, as to
which the date is April 13, 2001
MFIC
CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
MFIC
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an
integral part of these consolidated financial statements.
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying
notes are an integral part of these consolidated financial statements.
MFIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
The accompanying
notes are an integral part of these consolidated financial statements.
MFIC CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
MFIC Corporation (MFIC or the Company),
through its wholly-owned subsidiaries, Microfluidics Corporation
(Microfluidics) and MediControl Corporation (MediControl), as well as its
operating divisions, Morehouse-COWLES and Microfluidics, specialize in
producing and marketing a broad line of proprietary fluid materials processing
systems used for a variety of grinding, mixing, milling, and blending
applications across a variety of industries and for use in numerous
applications within those industries. Microfluidizer® materials
processor systems are produced at the Microfluidics Division, while dispersers,
dissolvers, colloid mills, horizontal media and vertical media mills are
produced at the Morehouse-COWLES Division.
The Morehouse-COWLES Division also sells and distributes grinding media.
Principles
of Consolidation
The consolidated financial statements of the
Company include the accounts of the Company and its wholly owned subsidiaries,
(Microfluidics) and MediControl.
All significant intercompany transactions and
balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
Untied States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results
could differ from those estimates.
Revenue
Recognition
Revenue from the sale of machines and spare
parts is generally recognized upon shipment of the product or when the earnings
process is complete. Rental income for
the lease of equipment is recognized on a straight-line basis over the term of
the lease agreement. Rental income and
equipment sales are classified in revenues in the consolidated statement of
operations.
Cash
and Cash Equivalents
The Company considers all highly liquid
securities with maturities of 90 days or less, at the time of acquisition, to
be cash equivalents.
Inventories
Inventories consist of material, labor and
manufacturing overhead and are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
The Company periodically reviews quantities
of inventory on hand and compares these amounts to expected usage of each
particular product line. The Company
records a charge to cost of goods sold, by any amounts required to reduce the
carrying value to net realizable value.
Assets
Held for Sale
Assets held for sale consist of inventory and
fixed assets which were sold in connection with the Company’s sale of its Ball
Mill repair business during 2001.
Property
and Equipment
The Company’s property and equipment is
recorded at cost. Depreciation is computed using the straight-line method,
based upon useful lives of 3 to
7 years. Leasehold improvements are
amortized using the straight-line method based upon the shorter of the
estimated useful lives or remaining life of the lease. Expenditures for
maintenance and repairs are expensed as incurred. Upon retirement or sale of property and equipment, the cost of
the disposed asset and the related accumulated depreciation are removed from
the accounts and any resulting gain, or loss is credited or charged to
operations.
Depreciation
expense totaled $209,523, $278,201, and $249,029 for the years ended December
31, 2001, 2000, and 1999, respectively.
Patents,
Licenses, Other Intangible Assets and Goodwill
Patents, patent applications, rights, and
goodwill are stated at acquisition cost. Amortization is recorded using the
straight-line method over the shorter of the legal lives or useful life of the
patents. Goodwill is being amortized
over 15 years. Patents, licenses and
other intangible assets are being amortized over a period of 3 to 17 years.
Impairment
of Long-Lived Assets
At each balance sheet date, the Company
assesses whether there has been an impairment in the value of long-lived assets
by determining whether projected undiscounted cash flows generated by the
applicable asset exceeds its net carrying value as of the assessment date. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company’s average cost of funds. As of December
31, 2001, 2000 and 1999 there were no such impairments.
Comprehensive
Income (Loss)
Statement of Accounting Financial Standards
(SFAS) No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Comprehensive income (loss) is the same as the reported
net loss for all periods presented.
Research and Development Expenses
The Company charges research and development
expenses to operations as incurred.
Earnings
(Loss) per Share
Basic and diluted net loss per
share is presented in conformity with SFAS No. 128, Earnings per Share, for all
periods presented. In accordance with
SFAS No. 128, basic and diluted net loss per common share was determined by
dividing net loss applicable to common stockholders by the weighted average
number of common shares outstanding during the period. Options to purchase 1,612,980, 1,761,575 and
1,303,731 shares of common stock were outstanding for the years ended 2001,
2000 and 1999, respectively. Basic and diluted net loss per share are the same
for all periods presented because all outstanding common stock equivalents have
been excluded as they are antidilutive.
Fair
Value of Financial Instruments
The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximates fair value due to the short term nature of these accounts. The
Company’s bank debt, because it carries a variable interest rate, is stated at
its approximate fair market value. The Company’s subordinated debt bears
interest at 10%, which approximates fair market value.
New
Accounting Pronouncements
In June 1998, the Financial Accounting
Standard's Board (FASB) issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. As amended in June 1999, the statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. In June 2000, the FASB issued
SFAS No. 138, which is a significant amendment to SFAS No. 133. SFAS No.133 and its amendments establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively, the
derivatives) and for hedging activities.
The EITF has also issued a number of derivative-related tentative and
final consensuses. These statements do
not have an impact on its consolidated position or results of operations.
In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.
The Company does not believe that the adoption of SFAS No. 141 will have
a significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets,
which is effective January 1, 2002. SFAS No. 142 requires, among other things,
the discontinuance of goodwill amortization.
In addition, the standard includes provisions for the reclassification
of certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill, and the identification of
reporting units for purposes of assessing potential future impairment of
goodwill. SFAS No. 142 also requires
the Company to complete a transitional goodwill impairment test six months from
the date of adoption. The Company has made an assessment of the goodwill valuation,
and has determined that the Company will take a charge of approximately
$2,700,000 in the first quarter ended March 31, 2002.
In October 2001, the FASB issued SFAS No.
144, Accounting for the Impairment or
Disposal of Long-lived Assets, which is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
years. This SFAS develops one
accounting model for long-lived assets that are to be disposed of by sale as
well as addressing the principal implementation issue. The Company does not expect the adoption of
this statement to have a material impact on its financial statements.
In December 1999 the Securities and Exchange
Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This SAB clarifies certain elements of revenue recognition. Since December, the
SEC has issued several amendments that postponed the implementation date until
the fourth quarter of fiscal 2000. The implementation of SAB No. 101 did not
have a material impact on the Company’s Financial Statements.
Reclassifications
Certain fiscal 1999 and 2000 amounts have
been reclassified to conform with fiscal 2000 and 2001 presentations.
Note 2 SEGMENT,
GEOGRAPHIC AND ENTERPRISE-WIDE REPORTING
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires companies to report selected
information about operating segments, as well as enterprise-wide disclosures
about products, services, geographic areas and major customers. Operating segments are determined based on
the way management organizes its business for making operating decisions and
assessing performance. The Company’s
chief decision-maker, as defined under SFAS No. 131, is the chairman and chief
executive officer. The Company has determined that it conducts its operations
in one business segment: the development, manufacture, marketing and sale of
process and formulation equipment. The
Company’s sales are primarily to companies with processing needs in the chemical,
pharmaceutical, food, cosmetic, and biotechnology industries. The Company conducts its business primarily
in the United States of America. The
Company has less than 1% of total assets overseas. As a result, the financial
information disclosed herein
represents all of the material financial information related to the Company’s
principal operating segment.
Approximate sales to customers outside North
America are broken out, by major foreign markets, as follows:
No customer
accounted for over 10% of the Company’s revenues in 2001, 2000 and 1999.
Note 3 MARKETABLE
SECURITIES
At December 31, 2001 and 2000, the Company
did not hold investments in marketable securities. In 1999, the Company sold 6,720 shares of Cardiotech
International, Inc. at a gain of $11,864.
Note 4 INVENTORY
The components of inventories are as follows
at December 31:
Note 5 INTANGIBLES AND OTHER ASSETS
The Company purchased the rights and title of
certain liposome and microemulsion technology devices from Arthur D. Little in
1985. The unamortized license fee and patent are included in intangible
assets and are being amortized using the straight line method over the useful
life of the patent, which is 17 years.
In 1995, the Company capitalized $96,680 of patent costs related to a
cooperative research venture.
Amortization of these assets charged to expense was $24,576 in 2001,
$42,269 in 2000, and $43,920 in 1999.
In 2001, the Company capitalized $64,528 of costs related to the
Multi-Stream Mixer Reactor patent, which is being amortized over a 17-year
period, beginning in the last quarter of 2001.
Amortization of these costs in 2001 amounted to $950.
Costs incurred in connection with the debt
refinancing that occurred on February 28, 2000 are being amortized over three
years, the initial term of the line of credit.
The total of such costs was approximately $207,000. Amortization of these costs amounted to $69,204 in 2001 and $57,663 in 2000,
respectively.
Note 6 ACQUISITIONS
On August 14, 1998 (the Closing Date) MFIC
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 were 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
were marketed together under the EMCO U.S.A. trade name.
In accordance with the Agreement, MFIC paid
or delivered to the Sellers the following as consideration for 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, $0.01 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 in accounts payable and accrued liabilities. The
acquisition has been accounted for under the purchase method of accounting.
The amount paid in excess of the identified
fair market value of the assets purchased less liabilities assumed has been
allocated to goodwill. This amount is
being amortized over a 15-year period, which the Company determined to be the
useful life.
Note 7 DEBT
Long-term debt as of the following dates
consisted of:
Subordinate Notes Payable
The subordinated note is payable to Lake
Shore Industries Inc. See Note 13 for further explanation of the note to Lake
Shore Industries Inc.
Notes Payable
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® 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 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 2000. At December 31, 2001,
the Company reviewed the carrying value of this equipment and as a result,
determined that the value was approximately $80,000, resulting in a further
charge of $120,000 to operations.
Line of Credit
From August 1998 to February 28, 2000, the
Company operated under a revolving loan and security agreement with Comerica
Bank. The outstanding balance was $3,075,815 at December 31, 1999, bearing
interest at 12.25%. Since May 5, 1999,
the Company had operated under a forbearance agreement to the Comerica Bank
loan agreement, which restricted the level of borrowings, and prohibited the
Company from paying dividends.
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 (together 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
(0.50%). 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 (4.75% at December 31, 2001) plus three quarters of one percent
(0.75%). 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 also pledged to the Lender all shares
of Microfluidics Corporation owned by the Company. From the proceeds of the initial loan, the Company repaid the
outstanding balance owed to Comerica Bank of approximately $2,585,000. On January 16, 2002, the United States
portion of National Bank of Canada’s operations and its loan portfolio was sold
to PNC Bank, the Successor Lender.
As one of the Lender’s conditions precedent
to the closing of the Finance Facility, the Company’s Chairman, Irwin
Gruverman, at the closing of the Credit Facility purchased, for $250,000, 1,000,000 shares of restricted
Common Stock of the Company. This purchase was approved by the Company’s Board
of Directors on December 30, 1999.
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.
After review of the results as of and for the
quarter ended March 31, 2001, 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 was classified as a non-current liability, as of December 31,
2000.
At both December 31, 2001 and December 31,
2000, the Company was not in compliance with the tangible net worth,
liabilities to worth ratio, and net income covenants. The Company was also in violation of the debt service covenant at
December 31, 2001. The Company has received a waiver of these violations from
the Lender for the December 31, 2000 non-compliance, and a waiver from the
Successor Lender for the
year ended December 31, 2001, but is required
to meet all covenant requirements thereafter.
On March 29, 2002, The Company and the Successor Lender agreed on a
revised set of covenants for fiscal 2002.
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. At December 31, 2001, the
outstanding balance on the Revolving Credit Line was $2,535,792, having an
interest rate of 5.5%. The balance outstanding on the term loan was $248,743,
at an interest rate of 5.75%.
Management’s
Plans
As discussed above, the Company violated the
tangible net worth, liabilities to worth ratio and net income covenants of the
Credit Facility at both December 31, 2001 and December 31, 2000, and the debt
services covenant at December 31, 2001.
The Company’s ability to continue planned operations is dependent upon
access to financing under the Credit Facility, which is potentially impacted by
the Company’s ability to achieve future compliance with the financial
covenants. On March 29, 2002, the
Company and the Successor Lender agreed on a new set of covenants for fiscal
year 2002. It is expected by management
that the Company will be in compliance with the revised covenants. Borrowings outstanding under the Credit
Facility are secured by a collateral pledge to the Lender of substantially all
of the assets of the Company.
Management of the Company is executing plans
for a return to profitability; however, there can be no assurance that the
Company will be successful in implementing these plans.
Note 8 EMPLOYEE
BENEFIT PLANS
The Company offers a 401(k) profit-sharing
plan (the 401K Plan), to its employees.
All Company and related entity employees who are eighteen years of age
and have completed one hour of service are eligible to participate in the 401K
Plan. Employees may contribute from 1%
to 20% of their compensation. The
Company’s contribution is discretionary, with contributions made from time to
time as management deems advisable. The Company has made no matching
contributions during 2001, 2000, and 1999.
The Company also instituted a cafeteria plan in 1992, giving the
employees certain pre-tax advantages on specific payroll deductions.
Note 9 INCOME TAXES
The Company accounts for income
taxes under SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or
liabilities are computed based on the differences between the financial
statement and income tax bases of assets and liabilities using the enacted tax
rates. Deferred income tax expense or
credits are based on changes in the asset or liability from period to
period. At December 31, 2001, the
Company had net operating loss and research tax credit carryforwards of
approximately $5,174,000 and $172,000, respectively, for financial reporting
purposes, which may be used to offset future taxable income.
The components of the net
deferred tax asset with the approximate income tax effect of each type of
carryforward, credit and temporary difference are as follows:
The Company has recorded a full
valuation allowance against its deferred tax assets because, based on the
weight of available evidence, the Company believes it is more likely than not
that the deferred tax assets will not be realized in the near future. The carryforwards expire from 2002 through
2021 and are subject to review and possible adjustment by the Internal Revenue
Service. The Internal Revenue Code
contains provisions that may limit the net operating loss and research tax
credit carryforwards in the event of certain changes in the ownership interests
of significant stockholders.
Note 10 STOCKHOLDERS’
EQUITY
The Company
adopted the 1988 Stock Plan (The Plan) as the successor plan to the 1987 Stock
Plan, which, as amended at th 1997 stockholders’ meeting, authorizes the grant
of Stock Rights for up to 2,350,000 shares of common stock and the 1989
Non-Employee Director Stock Option Plan which, as amended at the 1996
stockholders’ meeting, authorizes the grant of nonqualified stock options for
up to 500,000 shares of common stock.
Stock Option Plan
Options granted under the Plan vest over a
three-to-five-year period and expire 10 years from the grant date. At December 31, 2001, 583,082 shares were
available for future grant under the Plan.
Information with respect to activity under the Plan is
as follows:
The following table summarizes information relating to
currently outstanding and exercisable stock options as of December 31, 2001:
Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation
plan under APB Opinion No. 25. SFAS No.
123,
Accounting for Stock-Based Compensation, establishes the
fair-value-based method of accounting for stock-based compensation plans. The Company has adopted the disclosure-only
alternative for options granted to employees and Directors under SFAS No. 123,
which requires disclosure of the pro forma effects on earnings as if SFAS No.
123 had been adopted, as well as certain other information.
The Company has computed the pro forma disclosures
required under SFAS No. 123 for all stock options granted to employees and
Directors of the Company as of December 31, 2001, 2000 and 1999 using the
Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used for the years ended December 31,
2001, 2000 and 1999 are as follows:
The effect of applying SFAS No. 123 would be as follows:
Warrants
On September 23, 1999, the Chief Executive officer of the Company,
Irwin J. Gruverman, was granted warrants to purchase up to 100,000 shares of
the Company's common stock at a per share price of $0.52 a share, having an
expiration date of July 2, 2004. As of December 31, 2001, there were 100,000
warrants outstanding.
Employee Stock Purchase Plan
The
Company has an employee stock purchase plan (the Purchase Plan). Under the Purchase Plan, participants are
granted options to purchase the Company’s common stock twice a year at the
lower of 85% of market value at the beginning or end of each period.
Calculation of the number of options granted, and subsequent purchase of these
shares, is based upon voluntary payroll deductions during each six month
period. The number of options granted to each employee under this plan is
limited to a maximum amount of 1,000 shares for each six-month period. The
number of shares issued pursuant to this plan totaled 30,658, 27,641 and 4,324
in 2001, 2000 and 1999, respectively.
Note 11 COMMITMENTS
The Company leases its facilities under non-cancelable operating
leases expiring through August 2006.
Future minimum rental payments under the operating leases at December
31, 2001 are approximately as follows:
Rent expense for 2001,
2000, and 1999 was approximately $415,000, $405,000, and $499,000, respectively.
Note 12 RELATED PARTY TRANSACTIONS
During 2001, 2000, and
1999, the Company and G&G Corporation (G&G), an entity controlled by
Mr. Gruverman, the Company’s Chairman, entered into an arrangement whereby
G&G reimbursed the Company for certain administrative expenses incurred for
services performed by the Company. The
Company was reimbursed approximately
$30,407, $75,780, and $79,291 by G&G during 2001, 2000, and 1999,
respectively. At December 31, 2001, 2000, and 1999, G&G owed the Company
$0, 18,525 and $23,252 respectively.
As discussed in Notes 6
and 7, the Company owed the former Principals of Morehouse and Epworth
$237,500, $300,000 and $775,000 at December 31, 2001, 2000, and 1999,
respectively. Interest expense on the subordinated debt for 1999 was
$77,500. Interest capitalized on the
$300,000 note in connection with the Settlement Agreement discussed in Note 13
amounted to $88,750 and is being amortized over 5 years. Total payments in 2001 and 2000 were $25,449
and $17,916, respectively.
Note 13 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 sets 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). In connection with the
closing of the Credit Facility, and pursuant to a Settlement Agreement dated
January 17, 2000 with the Company’s subordinated debt holders, the subordinated
debt of the Company was restructured in the following manner. The outstanding
August 14, 1998 $500,000 subordinated promissory note, having a remaining
$475,000 principal balance together with accrued interest at the Closing Date
in the approximate amount of $77,500, and accrued interest on the August 14,
1998 $300,000 subordinated note were converted to 500,000 shares of MFIC
restricted common stock (the Conversion Shares). The fair market value of the
Company’s Common Stock on the date of the Agreement In Principle was $0.31 per
share. MFIC was granted the right for a
three-year period to repurchase the Conversion Shares at a purchase price of
$1.75 per share. The August 14, 1998
$300,000 subordinated note was replaced with a new $300,000 subordinated
promissory note dated February 28, 2000 (the 2000 Subordinated Note). The 2000 Subordinated Note has a maturity
date of February 28, 2005 and bears interest at a rate of ten percent (10%) per
annum. The note is payable interest only in its first year and then is payable
in equal quarterly installments of principal together with outstanding interest
thereon until maturity.
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.
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.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the
Company required under this item is incorporated herein by reference to the
Company’s definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company’s fiscal year ended December 31, 2001.
Item 11.
Item 11. EXECUTIVE
COMPENSATION
The information required under this item is incorporated herein by
reference to the Company’s definitive proxy statement pursuant to
Regulation 14A, to be filed with the Commission not later than
120 days after the close of the Company’s fiscal year ended
December 31, 2001.
Item 12.
Item 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the Company’s definitive proxy statement pursuant to
Regulation 14A, to be filed with the Commission not later than
120 days after the close of the Company’s fiscal year ended December 31,
2001.
Item 13.
Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the Company’s definitive proxy statement pursuant to
Regulation 14A, to be filed with the Commission not later than
120 days after the close of the Company’s fiscal year ended
December 31, 2001.
PART
IV
Item
14.
Item
14. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1.) Consolidated Financial Statements.
The following Consolidated Financial Statements are included in
Item 8:
Consolidated
Balance Sheets as of December 31, 2001 and 2000
Consolidated
Statements of Operations for the years ended December 31, 2001, 2000, and
Consolidated
Statements of Cash Flows for the years ended December 31, 2001, 2000, and
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
Reports of Independent Auditors
(a)(2.) Financial Statement Schedules.
The following Consolidated Financial
Statement Schedule of the Registrant is filed as part of this report:
Schedule II - Valuation and Qualifying
Accounts and Reserves
(a)(3.) List of Exhibits.
Exhibit
Index
Exhibit
Number
Description of Exhibit
3(a)
Certificate of
Incorporation for the Company, as amended (filed as Exhibit 2A to
Registration Statement No. 0-11625 on Form 8-A and as Exhibit 3.1(a) to the
Company’s Report on Form 10-Q for the quarterly period ended September 30,
1999 and incorporated herein by reference).
3(b)
Amended and Restated By-Laws for the Company (filed
as Exhibit 3.3(b) to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 and incorporated herein by reference).
10.1
1987 Stock Plan (filed
as Exhibit 10(g) to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 1987 and incorporated herein by reference).
10.2
1988 Stock
Plan (filed as Exhibit 10(g) to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 1988 and incorporated herein by
reference).
10.3
Non-Employee Directors Stock Option Plan (filed as Exhibit 10.1 to the
Company’s registration statement on
Form S-8 filed October 22,1996 and incorporated herein by reference).
10.4
Lease for 30
Ossipee Road, Newton, Massachusetts dated May 23, 1997 between Microfluidics
International Corporation and J. Frank Gerrity, Trustee of 1238 Chestnut
Street Trust under Declaration of Trust dated May 23, 1969, recorded with
Middlesex South Registry of Deeds in Book 11682, Page 384 (filed as Exhibit
3.10(a) to the Company’s form 10-Q for the quarterly period ended June 30,
1997 and incorporated herein by reference).
10.5
Letter of
Understanding between Microfluidics International Corporation and Worcester
Polytechnic Institute dated as of April 3, 1992 (filed as
Exhibit 3.10(f) to the Company’s Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by reference).
10.6
Agreement
between Microfluidics International Corporation and Catalytica, Inc. dated as
of October 18, 1993 (filed as Exhibit 3.10(g) to the Company’s
Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference) with amendments dated September 1, 1994 and
March 31, 1995.
10.7
Amendment to
agreement dated September 1, 1994 between Microfluidics International
Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as
Exhibit 3.10(g) to the Company’s Form 10-K for the fiscal year ended December
31, 1993, and incorporated herein by reference).
10.8
Amendment to
agreement dated March 31, 1995 between Microfluidics International
Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as
Exhibit 3.10(g) to the Company’s Form 10-K for the fiscal year ended December
31, 1993, and incorporated herein by reference)
10.9
License
Agreement among Microfluidics International Corporation, Worcester
Polytechnic Institute and Catalytica, Inc. dated as of October 18, 1993
(filed as Exhibit 3.10(h) to the Company’s Form 10-K for the fiscal
year ended December 31, 1993 and
incorporated herein by reference).
10.10
Amendment to
agreement dated September 1, 1994 between Microfluidics International
Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as
Exhibit 3.10(g) to the Company’s Form 10-K for the fiscal year ended December
31, 1993, and incorporated herein by reference).
10.11
Letter,
dated August 15, 1995, from Microfluidics International Corporation to
Michael T. Rumley. (filed as Exhibit 3.10(j) to the Company’s Form 10-K
for fiscal year ended December 31, 1995 and incorporated herein by
reference).
10.12
Letter,
dated December 31, 1995 from Microfluidics International Corporation to Irwin
J. Gruverman. (filed as Exhibit 3.10(k) to the Company’s Form 10-K for fiscal
year ended December 31, 1996 and incorporated herein by reference).
10.13
Warrant for
the Purchase of Shares of Common Stock, dated July 14, 1993, in favor of
Ladenburg, Thalmann & Co. Inc. (filed as Exhibit 3.10(l) to the Company’s
Form 10-K or fiscal year ended
December 31, 1996 and incorporated herein by reference).
10.14
Letter,
dated December 31, 1996, from Microfluidics International Corporation to
Irwin J. Gruverman. (filed as Exhibit 3.10(o) to the Company’s Form 10-K
for fiscal year ended December 31, 1996 and incorporated herein by
reference).
10.15
Agreement
between Microfluidics International Corporation and Catalytica, Inc. dated January
1, 1995 regarding participation in and management of the Advanced Technology Program (ATP). (filed as
Exhibit 3.10(p) to the Company’s Form 10-K for fiscal year ended December 31,
1996 and incorporated herein by reference).
10.16
Consulting Agreement
with James Little. (filed as Exhibit 3.10(q) to the Company’s Form 10-K for
fiscal year ended December 31, 1996 and incorporated herein by reference).
10.17
Supplemental
Agreement between Catalytica Advanced Technologies, Inc. and Microfluidics
International Corporation dated December 31, 1997.
10.18
Letter dated
December 31, 1997, from Microfluidics International Corporation to Irwin J.
Gruverman and G & G Diagnostics Corp.
10.19
1988 Stock
Plan as amended (filed as Exhibit 10(a) to the Company’s Form 10-Q for the
quarterly period ended March 31, 1997 and incorporated herein by reference.
10.20
Asset
Purchase Agreement, dated as of June 19, 1998, by and among the Company,
Epworth Manufacturing Company and Morehouse-COWLES, Inc.(filed as Exhibit 2.1
to Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated herein
by Reference).
10.21
Stockholders
Agreement, dated August 14, 1998, by and among the Company and J.B. Jennings
and Bret A. Lewis (filed as exhibit 2.2 to Schedule 13D of Bret A. Lewis,
File No. 005-35850, and incorporated herein by reference.
10.22
$500,000
Subordinated Promissory Note issued by the Company to Epworth Manufacturing
Company (filed as exhibit 99.2 to the Company’s Form 8-K on August 27, 1998,
File No. 000-11625, and incorporated herein by reference).
10.23
$300,000
Subordinated Promissory Note issued by the Company to Epworth Manufacturing
Company (filed as exhibit 99.2 to the Company’s Form 8-K on August 27, 1998,
File No. 000-11625, and incorporated herein by reference).
10.24
Revolving
credit loan between Comerica Bank and the Company dated August 12, 1998
(filed as Exhibit 10.1 to the Company’s form 10-Q for the quarterly period
ended September 30, 1998 and incorporated herein by reference).
10.25
Letter dated
December 31, 1998 from Microfluidics International Corporation To Irwin J.
Gruverman. (Filed as exhibit 3.10(2)
to the Company’s Annual Report on Form 10-K for fiscal year ended December
31, 1998 and incorporated herein by reference.)
10.26
Revolving
Credit and Term Loan Agreement among MFIC Corporation and National Bank of
Canada dated February 28, 2000. (Filed as exhibit 10.26 to the Company’s
Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)
10.27
Revolving
Credit Note of the Company in favor of National Bank of Canada in the amount
of $4,000,000.00 dated February 28, 2000.
(Filed as exhibit 10.27 to the Company’s Annual Report on Form 10-K
for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.28
Term Note of
the Company in favor of National Bank of Canada in the amount of $475,000.00
dated February 28, 2000. (Filed as
exhibit 10.28 to the Company’s Annual Report on Form 10-K for fiscal year
ended December 31, 2000, and incorporated herein by reference.)
10.29
Security
Agreement of the Company in favor of National Bank of Canada dated February
28, 2000. (Filed as exhibit 10.29 to the Company’s Annual Report on Form 10-K
for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.30
Trademark
and Trademark Applications Security Agreement of the Company in favor of
National Bank of Canada, dated February 28, 2000. (Filed as exhibit 10.30 to the Company’s Annual Report on Form
10-K for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.31
Patent and
Patent Applications Security Agreement of the Company in favor of National
Bank of Canada, dated February 28, 2000. (Filed as exhibit 10.31 to the
Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,
and incorporated herein by reference.)
10.32
Unlimited
Guaranty of Microfluidics Corporation in favor of National Bank of Canada
Dated February 28, 2000. (Filed as
exhibit 10.32 to the Company’s Annual Report on Form 10-K for fiscal year
ended December 31, 2000, and incorporated herein by reference.)
10.33
Stock Pledge
Agreement between the Company and National Bank of Canada dated February 28,
2000. (Filed as exhibit 10.33 to the
Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,
and incorporated herein by reference.)
10.34
Subordination
Agreement among the Company, Lake Shore Industries, Inc. and National Bank of
Canada dated as of February 28, 2000.
(Filed as exhibit 10.34 to the Company’s Annual Report on Form 10-K
for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.35
Subordinated
Promissory Note on the Company in favor of Lake Shore Industries, Inc. in the
amount of $300,000.00 dated February 28, 2000. (Filed as exhibit 10.35 to the Company’s Annual Report on Form
10-K for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.36
Forbearance
Agreements with Comerica. (Filed as exhibit 10.36 to the Company’s Annual
Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated
herein by reference.)
10.37
Settlement
Agreement, dated January 17, 2000 by and among the Company, Bret A. Lewis, J.
B. Jennings, Lake Shore Industries, Inc., and JLJ Properties, Inc., with
$300,000 Subordinated Promissory Note dated February 28, 2000, issued by the
Company to Lake Shore Industries, Inc. (FKA Epworth Manufacturing Company,
Inc). (Filed as exhibit 10.37 to the
Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,
and incorporated herein by reference.)
10.38
Letter,
dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman and
G&G Diagnostics Corp. (Filed as exhibit 10.38 to the Company’s Annual
Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated
herein by reference.)
10.39
Letter,
dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman. (Filed
as exhibit 10.39 to the Company’s Annual Report on Form 10-K for fiscal year
ended December 31, 2000, and incorporated herein by reference.)
10.40
First
Amendment to Revolving Credit and Term Loan Agreement between the Company and
National Bank of Canada dated March 30, 2000. (Filed as exhibit 10.40 to the
Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,
and incorporated herein by reference.)
10.41
Lease
between ABB and Microfluidics dated April 14, 2000 for space at Lampertheim,
Germany. (Filed as exhibit 10.41 to the Company’s Annual Report on Form 10-K
for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.42
Security
Agreement between MFIC Corporation and J.M. Huber Corporation dated October
18, 2000. (Filed as exhibit 10.42 to the Company’s Annual Report on Form 10-K
for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.43
Settlement
agreement between MFIC Corporation and J.M. Huber Corporation dated December
18, 2000. (Filed as exhibit 10.43 to the Company’s Annual Report on Form 10-K
for fiscal year ended December 31, 2000, and incorporated herein by
reference.)
10.44
Termination
agreement between Michael A. Lento and MFIC Corporation dated December 14,
2000. (Filed as exhibit 10.44 to the Company’s Annual Report on Form 10-K for
fiscal year ended December 31, 2000, and incorporated herein by reference.)
10.45
Letter,
dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman and
G&G Diagnostics Corporation. (Filed as exhibit 10.45 to the Company’s
Annual Report on Form 10-K for fiscal year ended December 31, 2000, and
incorporated herein by reference.)
10.46
Letter,
dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman. (Filed
as exhibit 10.46 to the Company’s Annual Report on Form 10-K for fiscal year
ended December 31, 2000, and incorporated herein by reference.)
*10.47
Lease for 30
Ossipee Road, Newton, Massachusetts dated October 19, 2001, between
Microfluidics International Corporation and King Real Estate Corp., Trustee
of 1238 Chestnut Street Trust under Declaration of Trust dated May 23, 1969,
recorded with Middlesex South Registry of Deeds in Book 11682, Page 384.
*10.48
Consulting
agreement with Vincent Cortina dated January 2, 2002.
*10.49
Letter dated
December 31, 2001 from MFIC to Irwin J. Gruverman.
*10.50
Second
Amendment to Revolving Credit and Term Loan Agreement between the Company and
PNC Bank, N.A. dated March 29, 2002.
*23(a)
Consent of
Brown & Brown LLP
*23(b)
Consent of
Deloitte & Touche LLP
*
Filed herewith
** Management contracts or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K pursuant to of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) 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,
in the city of Newton, Commonwealth of Massachusetts, on the 29th
day of March 2002.
Pursuant to the requirements of the
Securities and Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SCHEDULE
II
MFIC CORPORATION
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 2001, 2000, and 1999