-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DuPChq1poHBnBmMm9Eq81QZxX+ikroyB0d1/l2rNonMKaNuw3GcUv3mEoRSzSsvH bkUEqUU6vZROK9bQZtwO6A== 0000912057-01-508701.txt : 20010416 0000912057-01-508701.hdr.sgml : 20010416 ACCESSION NUMBER: 0000912057-01-508701 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROFLUIDICS INTERNATIONAL CORP CENTRAL INDEX KEY: 0000723889 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 042793022 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11625 FILM NUMBER: 1602491 BUSINESS ADDRESS: STREET 1: 30 OSSIPEE RD STREET 2: P O BOX 9101 CITY: NEWTON STATE: MA ZIP: 02164-9101 BUSINESS PHONE: 6179695452 MAIL ADDRESS: STREET 1: 30 OSSIPEE ROAD STREET 2: P O BOX 9101 CITY: NEWTON STATE: MA ZIP: 02164-9101 10-K 1 a2043743z10-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ---------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 ---------------------- Commission File Number: 0-11625 MFIC CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-2793022 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30 Ossipee Road, P.0. Box 9101 Newton, Massachusetts 02464-9101 - ------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 969-5452 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in determining such value is an affiliate), based upon the closing sale price of the Common Stock on March 16, 2001 as reported on the Over-the-Counter Bulletin Board was $2,966,905. The number of shares outstanding of the registrant's Common Stock as of March 16, 2001 was 7,366,667 shares. DOCUMENTS INCORPORATED BY REFERENCE The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2000. Portions of such proxy statement are incorporated by reference into Part III of this report. Item 1. BUSINESS: Company Overview: - ----------------- MFIC Corporation ("MFIC" or the "Company"), through its wholly-owned subsidiaries, Microfluidics Corporation ("Microfluidics") and MediControl Corporation ("MediControl"), its Microfluidics Division, as well as its other operating divisions, Epworth Mill and 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(R) high shear materials processor systems are produced at the Microfluidics Division, while dispersers, dissolvers, colloid mills, horizontal media mills, and vertical media mills are produced at the Morehouse-COWLES Division. The Epworth Mill Division sells and distributes grinding media. Microfluidizer(R) materials processing equipment, produced by the Company's Microfluidics Division, is used to formulate high shear fluid emulsions, dispersions, and liposomes, and is used in deagglomeration and 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(R) 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(R) equipment is used in biotechnology applications to harvest, through cell disruption, the cultivated product contents of plant and animal cells. -2- The Company's product lines are used to blend, emulsify, disperse, deagglomerate and grind fluid formulations. These fluid formulations may be liquid/liquid or liquid/solid formulations and are generally prepared in quantities ranging from one gallon to hundreds of gallons in an industrial environment. In connection with the processing of emulsions and dispersions, the various pieces of equipment in the product lines may be used in preparatory steps prior to introduction of the product into the Microfluidizer(R) system for further processing. The Company's product lines are diversified and certain equipment is used independent of the Microfluidizer(R) equipment in the preparation of many industrial fluid formulations where the desired product characteristics do not require high energy Microfluidizer(R) processing. While the Microfluidizer(R) 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 enables 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(R) and Zinger(R) are trademarks of the Company, which have been registered with the United States Patent and Trademark Office. Morehouse-COWLES(TM), Epworth Mill(TM) and Microfluidics(TM) 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. -3- The Technology: The Company's Microfluidizer(R) 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(R) processor technology is used in processing industries to mix materials that are normally very difficult to mix. The Microfluidizer(R) 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. Prior to October 1, 2000, the Company's Epworth Mill products consisted of ball mills and horizontal media mills. The division is 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 Epworth Mill Division's patented Zinger(R) 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(R) 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 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 March 19, 2001 the Company reached an agreement to sell the operation for $200,000 in cash and notes, which will result in a loss on the sale of the ball mill assets of approximately $13,000. -4- 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(R) equipment can be used to mix and formulate 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 processed foods, medicines, photographic films, hydraulic fluids and polymers. The Company believes that, generally, an emulsion processed with Microfluidizer(R) 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 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(R) equipment is currently used to harvest, by cell rupture, the contents of plant or animal cells. The precision with which the Microfluidizer(R) 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(R) equipment minimizes the amount and presence of cell wall debris, thus resulting in maximum yields. The Microfluidizer(R) 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(R) equipment is initially employed in a research laboratory, -5- 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 1/2 liter 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(R) 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 of a 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. This model is constructed from epoxy painted carbon steel rather than from standard stainless steel that the Company used in other models. 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 forcustomers 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 -6- 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 50 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 is designed engineered, and constructed for use in "rugged" industrial environments such as coatings, paints, and pigments research and manufacturing. The M-700 Series products are constructed from painted carbon steel instead of the stainless steel of previous models and will use components especially designed to withstand such hazards as dust, grease, and water spray. Because the equipment is not used in sanitary environments, it can be constructed using materials and methods that otherwise could not be used in pharmaceutical, biotechnology, and other "clean" application industries and 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. In fiscal 2000, the Company manufactured and shipped the first 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. -7- Zinger(R) Horizontal Media Mills: This media milling equipment is available in the following sizes that process products in volumes ranging from 1/4 liter to 60 liter batches or on a continuous basis. o The XL Series: The XL Series equipment is used in laboratory environments and has processing vessel sizes from .25 liters to .33 liters. o The SV Series: The SV Series equipment is used in pilot scale environments and has processing vessel sizes from 3.0 to 5.1 liters. o The LV Series: The LV Series equipment is used in production environments and has processing vessel sizes from 27 to 60 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. Customers in other geographical regions are assisted directly by Company sales staff. -8- 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 2000, 1999, or 1998. Competition: - ------------ The Microfluidizer(R) 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 over products of our competitors. The Company believes that the Microfluidizer(R) equipment product line offers the highest shear forces available in the process equipment market today. In many critical formulations Microfluidizer(R) 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 and industrial applications. The Company believes that the Microfluidizer(R) 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. -9- 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. Some of the organizations competing with the Company have greater capital resources, research and development staffs and facilities and marketing capabilities than the Company. 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 $835,136, $927,582, and $935,880 in 2000, 1999, and 1998 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 is in various stages of prosecution in the major industrial countries. Cooperative Research Arrangements: - ---------------------------------- The Company subsidizes research and development activities centered around Microfluidizer(R) 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(R) 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; Universite 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(R) processing technology. Additionally, on occasion research reports, technical papers, and doctoral theses may be published, which document the use of Microfluidizer(R) technology. Finally, the Company engages in many informal co-operative development efforts with its' customers, particularly in the Microfluidics Division. -10- 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(R) 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(R) 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(R) 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(R) 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(R) 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 Company 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 -11- terms and the quality of their products. The Company believes that there are adequate available alternate manufacturing sources and suppliers for the division's components and raw materials. 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(R) 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(R) equipment for the formulation or production of FDA approved parenteral (injectable) drugs or compounds. 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 -12- 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 16, 2001, and March 16, 2000 was approximately $3,281,000 and $3,371,000, 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 73 full-time employees as of March 16, 2001. 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. 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 small portion of space is sublet to another entity for a total of $6,000 per annum. The lease terms expire at various times through August 2006. The Company has the option to extend the leases for up to ten additional years. The Company believes these facilities will be adequate for operations for the next several years. Item 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 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, 2000. -13- PART II 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.
- ---------------------------------------------------------------------------------------------------------- Quarters Ended 12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31 2000 2000 2000 2000 1999 1999 1999 1999 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Low 9/16 15/16 1/2 3/8 1/4 3/8 1/4 5/8 - ---------------------------------------------------------------------------------------------------------- High 1 1/8 1 5/16 1 1/16 1 7/16 7/16 13/16 3/4 1 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
As of March 16, 2001, there were approximately 387 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. -14- 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, 2000. 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 F 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 15, 1998. Selected Statement of Operations Data
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Total revenues $15,725,695 $14,083,216 $8,869,679 $ 7,105,706 $ 6,273,768 - --------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 15,793,065 14,417,304 9,968,142 6,702,410 5,922,885 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (67,370) (334,088) (1,098,463) 403,296 350,883 - --------------------------------------------------------------------------------------------------------------------------------- Interest expense (350,486) (542,045) (149,043) - - - --------------------------------------------------------------------------------------------------------------------------------- Other (expense) income (250,000) - - 50,012 50,009 - --------------------------------------------------------------------------------------------------------------------------------- Interest income 248 9,835 119,492 159,256 100,612 - --------------------------------------------------------------------------------------------------------------------------------- Gain on sale of investments - 11,864 36,203 91,863 - - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income before taxes and extraordinary items (667,608) (854,434) (1,091,811) 704,427 501,504 - --------------------------------------------------------------------------------------------------------------------------------- Income tax (provision) benefit - - (413,630) 403,630 - - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income before (667,608) (854,434) (1,505,441) 1,108,057 501,504 extraordinary items - --------------------------------------------------------------------------------------------------------------------------------- Gain on subordinated debt restructuring 194,500 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Net(loss) income $(473,108) $(854,434) $(1,505,441) $1,108,057 $501,504 - --------------------------------------------------------------------------------------------------------------------------------- Weighted-average shares outstanding: - --------------------------------------------------------------------------------------------------------------------------------- Basic 7,086,058 5,818,588 5,296,923 4,914,722 4,941,711 - --------------------------------------------------------------------------------------------------------------------------------- Diluted 7,086,058 5,818,588 5,296,923 4,966,998 4,948,506 - --------------------------------------------------------------------------------------------------------------------------------- -15- Basic amounts per common share: - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income per share before extraordinary gain $(.09) $(.15) $(.28) $.23 $.10 - --------------------------------------------------------------------------------------------------------------------------------- Extraordinary gain per share: .03 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Basic net (loss) income per share $(.06) $(.15) $(.28) $.23 $.10 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Diluted amounts per share: - --------------------------------------------------------------------------------------------------------------------------------- Net (loss) income per share before extraordinary gain $(.09) $(.15) $(.28) $.22 $.10 - --------------------------------------------------------------------------------------------------------------------------------- Extraordinary gain per share .03 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Diluted net (loss) income per $(.06) $(.15) $(.28) $.22 $.10 share - ---------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data - --------------------------------------------------------------------------------------------------------------------------------- Working capital $1,900,740 $1,404,820 $1,575,113 $6,805,556 $6,072,621 - --------------------------------------------------------------------------------------------------------------------------------- Total assets 13,664,235 13,227,316 14,700,022 8,872,218 7,183,324 - --------------------------------------------------------------------------------------------------------------------------------- Long term debt 896,243 775,000 675,000 - - - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 7,093,781 7,161,111 8,029,786 7,538,143 6,428,523 - ---------------------------------------------------------------------------------------------------------------------------------
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(R) or Zinger(R) 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 -16- 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 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 -17- 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 G. 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 (R) 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(R) horizontal media mills that Huber had purchased from MFIC's Epworth Mill Division in 1998. The notice of revocation was accompanied by a claim for the repayment of the full purchase price of $384,948 and for incidental and consequential damages as a result of alleged breaches of express and implied warranties in the amount of $2,790,350. The Company denied any liability. At the request of Huber and as an accommodation, the Company, in both 2000 and 1999 performed certain services which, the Company believed, were accepted by Huber as a cure for problems encountered by Huber with the performance of this equipment. On October 20, 2000, the Company entered into a settlement agreement with Huber pursuant to which, the Company paid $100,000 to Huber upon execution of the agreement, and executed a promissory note for $350,000 payable two years from the execution date, with interest payable quarterly in arrears at 10% per annum. 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. -18- 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 profitabilility. Fiscal 1999 Compared to Fiscal 1998 - ----------------------------------- As discussed in Note F 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 15, 1998. Total revenues for the year ended December 31, 1999 were $14,083,216 as compared to revenues of $8,869,679 for the year ended December 31, 1998, representing an increase of $5,213,537, or 59%. This increase in revenues was the result of $4,849,708 in additional revenue generated by the Company's Epworth Mill and Morehouse-COWLES divisions, and an increase in sales by the Microfluidics Division of the Company in the amount of $363,829. For the Microfluidics Division, North American sales for the year ended December 31, 1999 increased to $4,518,962, or 5% as compared to North American sales of $4,299,285 for the year ended December 31, 1998. This increase in North American sales was principally due to an increase in the sale of spare parts. Foreign sales were $1,899,989 for the year ended December 31, 1999 compared to $1,755,836 for the year ended December 31, 1998, an increase of $144,153 or 8%. This increase in foreign sales was principally due to an increase in the sale of machines compared to 1998. Within the Microfluidics Division, sales of the M-110 Laboratory Series decreased by approximately $240,000, from $2,555,842, or 42% of sales, in 1998 to $2,315,636, in 1999, or 36% of sales, while spare part sales increased by approximately $484,000 to 37% of sales, to $2,404,936 in 1999, from $1,920,491 in 1998. Sales of a new line, the M-700 Series, accounted for approximately $572,000, or 9% of sales in 1999. Sales of the M-210 Series decreased by approximately $295,000 to 3% of division sales to $204,853 in 1999 from $499,372, or 8% of sales, in 1998. In addition, the Company's sale of M-610 large volume production units in fiscal 1999 was one unit, down from three units from fiscal 1998, representing a decrease of approximately $598,000. Total cost of goods sold for 1999 was $7,990,398 or 57% of revenue, as compared to $4,954,826 -19- or 56% of revenue for 1998. The increase in cost of goods sold in absolute dollars reflects the increase in sales generated by the Epworth Mill and Morehouse-COWLES operating divisions of the Company, offset by a decrease in cost of goods sold by the Microfluidics Division of approximately $408,000. For the Microfluidics Division of the Company, cost of goods sold was $2,403,245, or 37% of sales, compared to $2,810,954, or 46% of sales, for 1998. The decrease in cost of goods sold was due to reduced sales of large volume machines, which have a lower gross profit margin. 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 1999 were $6,426,906 or 46% of revenue, as compared to $5,013,316, or 57% of revenue, for 1998, which is an increase of $1,413,590, or 28%. Research and development expenses for 1999 were $927,582 compared to $935,880 for 1998, a decrease of $8,298, or 1%. Excluding research and development expenses attributable to the Epworth Mill and Morehouse-COWLES operating divisions of the Company of $359,463, which represented an increase of approximately $102,000, the decrease in research and development expenses of the Microfluidics Division of approximately $110,000 is primarily due to a decrease in payroll and related costs of approximately $121,000, offset by a decrease in grant reimbursement funds of approximately $27,000. Sales and Marketing expenses for 1999 increased approximately $571,000, from $2,363,844 in 1998 to $2,934,668, or 24%. Excluding selling expenses of approximately $938,000 attributable to the Epworth Mill and Morehouse-COWLES divisions of the Company, selling expenses increased by approximately $145,000, from $1,851,584 to $1,996,277 due to an increase in advertising expense of approximately $92,000, travel and entertainment expenses of approximately $40,000, and printing expenses of approximately $33,000. For the year ended December 31, 1999, general and administrative expenses increased by approximately $851,000, from $1,713,592 for the year ended December 31, 1998, to $2,564,656. Excluding expenses attributable to the Epworth Mill and Morehouse-COWLES operating divisions of the Company of approximately $877,000 in 1999 and $396,000 in 1998, general and administrative expenses increased approximately $370,000, principally due to an increase in amortization of goodwill in connection with the purchases of the assets and selected liabilities of the Epworth Mill and Morehouse-COWLES divisions of approximately $246,000, and an increase in professional fees of approximately $170,000, offset by a decrease in corporate overhead of approximately $23,000. Interest income for 1999 decreased to $9,835 from $119,492 for 1998, a decrease of $109,657 or 92%. The decrease for 1999 was due to the amount of cash available to invest. The Company realized a gain on the sale of a portion of the Company's holdings in PolyMedica Industries, Inc. in the amount of $36,203 for the year ended 1998, and a gain on the sale of -20- Cardiotech International, Inc., in the amount of $11,864 for 1999. The Company realized a gain on the sale of fixed assets in 1999 of $58,847. In the fourth quarter of 1998, the Company adjusted the valuation allowance against its deferred tax assets, resulting in a charge of $413,630, due to the uncertainty of earning sufficient taxable income to realize the benefit of the deferred tax assets. 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:
- ------------------------------------------------------------------------------------------------------------------ Fiscal 2000 Quarters - ------------------------------------------------------------------------------------------------------------------ First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------ Net sales $3,732,919 $3,951,979 $3,949,071 $4,091,726 - ------------------------------------------------------------------------------------------------------------------ Gross profit 1,751,869 1,746,354 1,872,287 1,666,720 - ------------------------------------------------------------------------------------------------------------------ Net income (loss) before extraordinary gain 51,406 28,654 (316,348) (431,320) - ------------------------------------------------------------------------------------------------------------------ Extraordinary gain 194,500 - - - - ------------------------------------------------------------------------------------------------------------------ Net income (loss) $245,906 $28,654 $(316,348) $(431,320) - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Net income (loss) per share: - ------------------------------------------------------------------------------------------------------------------ Basic income (loss) per share before extraordinary gain $.01 $.00 $(.04) $(.06) - ------------------------------------------------------------------------------------------------------------------ Extraordinary gain per share .03 - - - ------------------------------------------------------------------------------------------------------------------ Net income (loss) per share $.04 $.00 $(.04) $(.06) - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Diluted income (loss) per share before extraordinary gain $.01 $.00 $(.04) $(.06) - ------------------------------------------------------------------------------------------------------------------ Extraordinary gain per share .03 - - - - ------------------------------------------------------------------------------------------------------------------ Diluted income (loss) per share $.04 $.00 $(.04) $(.06) - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Fiscal 1999 Quarters - ------------------------------------------------------------------------------------------------------------------ First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------ Net sales $2,597,122 $3,342,517 $3,692,425 $4,451,152 - ------------------------------------------------------------------------------------------------------------------ Gross profit 931,590 1,526,182 1,692,991 1,942,055 - ------------------------------------------------------------------------------------------------------------------ -21- Net (loss) income $(629,226) $(49,864) $(78,903) $(96,441) - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Net (loss) income per share: - ------------------------------------------------------------------------------------------------------------------ Basic $(.11) $(.01) $(.01) $(.02) - ------------------------------------------------------------------------------------------------------------------ Diluted $(.11) $(.01) $(.01) $(.02) - ------------------------------------------------------------------------------------------------------------------
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 $80,718 in 2000, $970,442 in 1999, and used cash of $1,259,391 from operations in 1998, respectively. 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. In 1998, the amount of the cash decrease was principally the result of funding the net loss from operations, a decrease in inventories and accounts receivables, offset by a decrease in current liabilities. 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. As of December 31, 2000, the Company had no material commitments for capital expenditures. 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. The Company utilized $6,638,534 for investing activities in 1998. Net cash used for investing activities included the acquisition of the Epworth Mill and Morehouse-COWLES businesses, net of cash acquired, as well as the purchase of capital equipment. For financing activities, the Company generated cash of $37,138 in 2000, used cash of $1,301,128 in 1999, and generated cash of $4,365,424 in 1998, respectively. 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. In 1998, cash was generated from the proceeds of borrowings to finance the acquisition of the Epworth Mill and Morehouse-COWLES businesses. The cash and cash equivalents balance at December 31, 2000 was $286,355, an increase of $90,183 from the December 31, 1999 balance of $196,172. At December 31, 2000, 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 -22- maximum borrowing of $4,000,000. As of December 31, 2000 and March 16, 2001, the Company had borrowings of $2,724,015 and $2,617,069, respectively. Under the terms of the line of credit with National Bank of Canada, 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 less than $200,000 per year, cannot pay dividends, and must maintain certain financial covenants. In addition, the Company is required to maintain a lockbox arrangement with the National Bank of Canada and all cash receipts are included in the lockbox and are applied against the outstanding line of credit. As discussed in Note G to the consolidated financial statements, the Company was in violation of the tangible net worth, liabilities to worth ratio, and net income covenants of the credit facility as of December 31, 2000. The Company received a waiver from the National Bank of Canada, as of December 31, 2000, but is required to meet such covenants thereafter. The Company's ability to continue planned operations is dependent upon access to financing under its Credit Facility, which is potentially impacted by the Company's ability to achieve future compliance with the financial covenants. Given the terms of the financial covenants and historical results, it is at least reasonably possible that the Company will be in violation of the financial covenants in the future. As indicated in Note N, 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 National Bank of Canada. 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' Epworth Mill Division and the concentration of manufacturing operations in an effort to improve costs and marketing leverage; however, there can be no assurance that the Company will be successful in implementing these plans. Assuming that there is no significant change in the Company's business, the Company believes that cash flows from operations, together with 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. -23- NEW ACCOUNTING PRONOUNCEMENTS In June 1998, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended to be effective for fiscal years beginning after June 15, 2000 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The standard is effective for the Company on January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133". The standard clarifies certain elements of SFAS No. 133. Management has determined that the implementation of SFAS No. 133 will not have a material impact on the Company's 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 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 $3,128,000 of variable rate borrowings outstanding under its revolving credit agreement. A hypothetical 10% adverse change in interest rates for this variable rate debt would have had an approximate $35,000 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 G and Note M. -24- 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.
Page Report of Independent Auditors F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2 & F-3 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 F-6 Notes to Consolidated Financial Statements F-7
-25- REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of MFIC Corporation: We have audited the accompanying consolidated balance sheets of MFIC Corporation and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits 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 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 1999, and the results of their operations and their cash flows for each of the three 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, 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. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts March 29, 2001, except for Note N, as to which the date is April 13, 2001 F-1 MFIC CORPORATION CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- ASSETS December 31, December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Current Assets: - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $286,355 $196,172 - ------------------------------------------------------------------------------------------------------------------- Accounts receivable, less allowance of $55,570 and $65,321 in 2000 and 2,862,489 2,710,684 1999, respectively - ------------------------------------------------------------------------------------------------------------------- Other receivables 3,490 108,607 - ------------------------------------------------------------------------------------------------------------------- Accounts receivable- related party 18,525 23,252 - ------------------------------------------------------------------------------------------------------------------- Inventories 4,023,240 3,477,123 - ------------------------------------------------------------------------------------------------------------------- Prepaid expenses 223,100 180,187 - ------------------------------------------------------------------------------------------------------------------- Other current assets 137,752 - --------- --------- - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 7,554,951 6,696,025 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Property - ------------------------------------------------------------------------------------------------------------------- Furniture, fixtures and office equipment 438,507 461,852 - ------------------------------------------------------------------------------------------------------------------- Machinery and equipment 579,617 929,330 - ------------------------------------------------------------------------------------------------------------------- Leasehold improvements 211,660 310,563 ------- ------- - ------------------------------------------------------------------------------------------------------------------- 1,229,784 1,701,745 - ------------------------------------------------------------------------------------------------------------------- Less: Accumulated depreciation and amortization (654,828) (859,875) --------- --------- - ------------------------------------------------------------------------------------------------------------------- Net property 574,956 841,870 - ------------------------------------------------------------------------------------------------------------------- Assets held for sale 213,142 - - ------------------------------------------------------------------------------------------------------------------- Goodwill (net of accumulated amortization of $981,050 in 2000 and $554,329 in 1999) 5,183,409 5,610,130 - ------------------------------------------------------------------------------------------------------------------- Patents, licenses and other assets (net of accumulated amortization of $567,321 in 2000 and $464,389 in 1999) 117,777 79,291 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $13,644,235 $13,227,316 =========== =========== - -------------------------------------------------------------------------------------------------------------------
F-2 - ------------------------------------- See notes to consolidated financial statements MFIC CORPORATION CONSOLIDATED BALANCE SHEETS (Continued)
- -------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity December 31, December 31, 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Current Liabilities: - -------------------------------------------------------------------------------------------------------------------- Accounts payable $1,816,086 $1,325,567 - -------------------------------------------------------------------------------------------------------------------- Accrued expenses 105,366 154,653 - -------------------------------------------------------------------------------------------------------------------- Accrued interest- related party 70,085 77,500 - -------------------------------------------------------------------------------------------------------------------- Accrued compensation and vacation pay 157,971 119,712 - -------------------------------------------------------------------------------------------------------------------- Customer advances 623,184 537,958 - -------------------------------------------------------------------------------------------------------------------- Line of credit 2,724,015 3,075,815 - -------------------------------------------------------------------------------------------------------------------- Current portion of term note payable 95,004 - - -------------------------------------------------------------------------------------------------------------------- Current portion of long-term debt- related party 62,500 - --------- --------- - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 5,654,211 5,291,205 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - - - -------------------------------------------------------------------------------------------------------------------- Long-term debt, net of current portion- related party 237,500 775,000 - -------------------------------------------------------------------------------------------------------------------- Term note 308,743 - - -------------------------------------------------------------------------------------------------------------------- Note payable - other 350,000 - - -------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: - -------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share, 20,000,000 shares authorized; 7,588,948 and 6,061,307 shares issued at December 31, 2000 and 1999, respectively 75,889 60,613 - -------------------------------------------------------------------------------------------------------------------- Additional paid-in capital 12,891,904 12,494,839 - -------------------------------------------------------------------------------------------------------------------- Accumulated deficit (5,193,342) (4,720,234) - -------------------------------------------------------------------------------------------------------------------- Less: Treasury Stock, at cost, 250,219 and 242,719 shares at December 31, 2000 and 1999, respectively (680,670) (674,107) -------- -------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 7,093,781 7,161,111 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,644,235 $13,227,316 =========== =========== - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
F-3 - ------------------------------------- See notes to consolidated financial statements MFIC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------- Year ended Year ended Year ended Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------- Revenues $15,725,695 $14,083,216 $ 8,869,679 - ---------------------------------------------------------------------------------------------------------------------------- Cost of goods sold 8,688,465 7,990,398 4,954,826 - ---------------------------------------------------------------------------------------------------------------------------- Research and development 835,136 927,582 935,880 - ---------------------------------------------------------------------------------------------------------------------------- Selling 3,482,866 2,934,668 2,363,844 - ---------------------------------------------------------------------------------------------------------------------------- General and administrative 2,786,598 2,564,656 1,713,592 --------- --------- --------- - ---------------------------------------------------------------------------------------------------------------------------- Total cost and expenses 15,793,065 14,417,304 9,968,142 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Loss from operations (67,370) (334,088) (1,098,463) - ---------------------------------------------------------------------------------------------------------------------------- Interest expense (350,486) (542,045) (149,043) - ---------------------------------------------------------------------------------------------------------------------------- Interest income 248 9,835 119,492 - ---------------------------------------------------------------------------------------------------------------------------- Other (expense) income (250,000) - - - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Gain on sale of investments - 11,864 36,203 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Net loss before income taxes and extraordinary item (667,608) (854,434) (1,091,811) - ---------------------------------------------------------------------------------------------------------------------------- Income tax provision - - (413,630) - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Net loss before extraordinary item $(667,608) $(854,434) $(1,505,441) - ---------------------------------------------------------------------------------------------------------------------------- Gain on subordinated debt restructuring 194,500 - - --------- --------- ----------- - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Net loss $(473,108) $(854,434) $(1,505,441) - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding: - ---------------------------------------------------------------------------------------------------------------------------- Basic 7,086,058 5,818,588 5,296,923 - ---------------------------------------------------------------------------------------------------------------------------- Diluted 7,086,058 5,818,588 5,296,923 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Basic amounts per common share: - ---------------------------------------------------------------------------------------------------------------------------- Net loss per share before extraordinary gain $(.09) $(.15) $(.28) - ---------------------------------------------------------------------------------------------------------------------------- Extraordinary gain per share .03 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Basic net loss per share $(.06) $(.15) $(.28) - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Diluted amounts per common share: - ---------------------------------------------------------------------------------------------------------------------------- Net loss per share before extraordinary gain $(.09) $(.15) $(.28) - ---------------------------------------------------------------------------------------------------------------------------- Extraordinary gain per share .03 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Diluted net loss per share $(.06) $(.15) $(.28) - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Comprehensive Loss - ---------------------------------------------------------------------------------------------------------------------------- Net Loss $(473,108) $(854,434) $(1,505,441) - ---------------------------------------------------------------------------------------------------------------------------- Unrealized depreciation on marketable securities -- -- (45,558) --------- --------- ----------- - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive Loss $(473,108) $(854,434) $(1,550,999) ========= ========= =========== - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
F-4 - ------------------------------------------------ See notes to consolidated financial statements MFIC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------ Year ended Year ended Year ended Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operations: - ------------------------------------------------------------------------------------------------------------------------------ Net Loss $(473,108) $(854,434) $(1,505,441) - ------------------------------------------------------------------------------------------------------------------------------ Reconciliation of net loss to cash flows from operations: - ------------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization 804,823 692,948 321,251 - ------------------------------------------------------------------------------------------------------------------------------ Bad debt provision (recovery) (9,751) (34,679) 30,000 - ------------------------------------------------------------------------------------------------------------------------------ Non cash provision for loss on legal settlement 150,000 - - - ------------------------------------------------------------------------------------------------------------------------------ Extraordinary gain on debt restructuring (194,500) - - - ------------------------------------------------------------------------------------------------------------------------------ Gain on sale of investments - (11,864) (36,203) - ------------------------------------------------------------------------------------------------------------------------------ Gain on sale of assets (81,752) (58,847) - - ------------------------------------------------------------------------------------------------------------------------------ Deferred income tax provision - - 413,630 - ------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash due to change in: - ------------------------------------------------------------------------------------------------------------------------------ Receivables and other receivables (89,210) (413,762) 391,771 - ------------------------------------------------------------------------------------------------------------------------------ Inventories (461,121) 973,803 766,258 - ------------------------------------------------------------------------------------------------------------------------------ Prepaid expenses (42,913) (15,659) (48,615) - ------------------------------------------------------------------------------------------------------------------------------ Other current assets (68,552) - - - ------------------------------------------------------------------------------------------------------------------------------ Current liabilities 546,802 692,936 (1,592,042) ------- ------- --------- - ------------------------------------------------------------------------------------------------------------------------------ Net cash from (used by) operations 80,718 970,442 (1,259,391) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from (used by) investing activities: - ------------------------------------------------------------------------------------------------------------------------------ Proceeds from sale of investments - 11,864 36,203 - ------------------------------------------------------------------------------------------------------------------------------ Proceeds from sale of assets 152,989 169,394 - - ------------------------------------------------------------------------------------------------------------------------------ Acquisition, net of cash acquired - - (6,441,675) - ------------------------------------------------------------------------------------------------------------------------------ Purchase of property (180,662) (205,113) (233,062) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (27,673) (23,855) (6,638,534) - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from (used by) financing activities: - ------------------------------------------------------------------------------------------------------------------------------ (Payments) proceeds from Comerica Bank line of credit (3,075,815) (1,271,967) 4,347,782 - ------------------------------------------------------------------------------------------------------------------------------ Net proceeds from National Bank of Canada line of credit 2,724,015 - - - ------------------------------------------------------------------------------------------------------------------------------ Proceeds from term note 475,000 - - - ------------------------------------------------------------------------------------------------------------------------------ Payments on term note (71,253) - - - ------------------------------------------------------------------------------------------------------------------------------ Principal payments on long term debt - (25,000) - - ------------------------------------------------------------------------------------------------------------------------------ Financing costs and termination payments for debt refinancing (265,587) - - - ------------------------------------------------------------------------------------------------------------------------------ Issuance of restricted common stock 250,000 - - - ------------------------------------------------------------------------------------------------------------------------------ Issuance of common stock under employee stock purchase plan 7,341 - 7,724 - ------------------------------------------------------------------------------------------------------------------------------ Issuance of common stock under employee stock option plan - 3,459 25,061 - ------------------------------------------------------------------------------------------------------------------------------ Treasury stock purchased (6,563) (7,620) (15,143) ----- ----- ------ - ------------------------------------------------------------------------------------------------------------------------------ Net cash from (used by) financing activities 37,138 (1,301,128) 4,365,424 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 90,183 (354,541) (3,532,501) - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 196,172 550,713 4,083,214 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year 286,355 196,172 550,713 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: - ------------------------------------------------------------------------------------------------------------------------------ Assets acquired in exchange for notes or 200,000 - 2,825,000 common stock - ------------------------------------------------------------------------------------------------------------------------------ Cash paid for interest 367,111 479,560 100,861 - ------------------------------------------------------------------------------------------------------------------------------
F-5 - ------------------------------------------------ See notes to consolidated financial statements MFIC CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------- Numbers of Common Additional Accumulated Accumulated Number of Treasury Total Shares of Stock at paid-in deficit Other Shares of Stock Common par value capital Comprehensive Treasury Stock Income Stock - --------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1997 5,136,804 $51,368 $10,442,840 $(2,360,359) $55,638 220,719 $(651,344) $7,538,143 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Change in unrealized depreciation on marketable securities (45,558) (45,558) - --------------------------------------------------------------------------------------------------------------------------- Stock options exercised 16,250 163 24,898 25,061 - --------------------------------------------------------------------------------------------------------------------------- Proceeds from employee stock purchase plan 3,929 39 7,685 7,724 - --------------------------------------------------------------------------------------------------------------------------- Issuance of stock in conjunction with purchase of Epworth and Morehouse divisions 900,000 9,000 2,016,000 2,025,000 - --------------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock 14,500 (15,143) (15,143) - --------------------------------------------------------------------------------------------------------------------------- Net loss (1,505,441) (1,505,441) - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1998 6,056,983 60,570 12,491,423 (3,865,800) 10,080 235,219 (666,487) 8,029,786 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Reclassification adjustment for gain included in net income (10,080) (10,080) - --------------------------------------------------------------------------------------------------------------------------- Proceeds from employee stock purchase plan 4,324 43 3,416 3,459 - --------------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock 7,500 (7,620) (7,620) - --------------------------------------------------------------------------------------------------------------------------- Net loss (854,434) (854,434) - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1999 6,061,307 60,613 12,494,839 (4,720,234) 0 242,719 (674,107) $7,161,111 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Issuance of restricted common stock 1,500,000 15,000 390,000 405,000 - --------------------------------------------------------------------------------------------------------------------------- Issuance of common stock under employee stock purchase plan 27,641 276 7,065 7,341 - --------------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock 7,500 (6,563) (6,563) - --------------------------------------------------------------------------------------------------------------------------- Net loss (473,108) (473,108) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 7,588,948 $75,889 $12,891,904 $(5,193,342) $0 250,219 $(680,670) $7,093,781 - ---------------------------------------------------------------------------------------------------------------------------
F-6 - ------------------------------------------------ See notes to consolidated financial statements MFIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 1. Description of Business MFIC Corporation ("MFIC" or the "Company"), through its wholly-owned subsidiaries, Microfluidics Corporation ("Microfluidics") and MediControl Corporation ("MediControl"), its Microfluidics Division, as well as its operating divisions, Epworth Mill and Morehouse-COWLES specializes 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(R) 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 Epworth Mill Division sells and distributes grinding media. 2. Consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, ("MFIC") and MediControl. All significant intercompany transactions have been eliminated. 3. Cash Equivalents The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents. 4. Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. 5. Assets Held for Sale Assets held for sale consist of inventory and fixed assets to be sold in connection with the Company's decision to sell its Ball Mill Repair business. 6. Property The Company's property is recorded at cost. Depreciation is computed on the straight-line method, based upon useful lives of three to seven years. Leasehold improvements are amortized on 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 $278,201, $249,029, and $123,001 for the years ended December 31, 2000, 1999, and 1998, respectively. 7. 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 3-15 years. 8. 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, 2000, 1999 and 1998 there were no such impairments. F-7 9. Income Taxes The Company provides for income taxes based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be reversed. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or loss in the period of the change. 10. 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. F-8 11. Earnings (Loss) per Share Basic net income (loss) per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share (EPS) reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock unless the effects of such equivalent shares were antidilutive. A reconciliation of the numerators and denominators of the basic and diluted EPS computations for income (loss) per share from continuing operations is shown below. Options to purchase 1,761,575, 1,303,731,and 1,416,587 shares of common stock were outstanding for the years ended 2000, 1999 and 1998, respectively. All options outstanding during 2000, 1999 and 1998 were excluded from the computation of diluted EPS because the effect of such options would have been antidilutive.
- ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Average shares outstanding- basic 7,086,058 5,818,588 5,296,923 --------- --------- --------- - ---------------------------------------------------------------------------------------------------------- Basic loss per share before extraordinary gain $(.09) $(.15) $(.28) ----- ----- ----- - ---------------------------------------------------------------------------------------------------------- Extraordinary gain per share .03 .00 .00 --- --- --- - ---------------------------------------------------------------------------------------------------------- Basic loss per share $(.06) $(.15) $(.28) ----- ----- ----- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Effect of dilutive stock options - - - - ---------------------------------------------------------------------------------------------------------- Average shares outstanding- diluted 7,086,058 5,818,588 5,296,923 --------- --------- --------- - ---------------------------------------------------------------------------------------------------------- Diluted loss per share before extraordinary gain $(.09) $(.15) $(.28) ----- ----- ----- - ---------------------------------------------------------------------------------------------------------- Extraordinary gain per share .03 .00 .00 --- --- --- - ---------------------------------------------------------------------------------------------------------- Diluted loss per share $(.06) $(.15) $(.28) ----- ----- ----- - ----------------------------------------------------------------------------------------------------------
12. Use of Estimates The process of preparing consolidated financial statements in conformity with accounting principles generally accepted in the Untied States of America requires the use of 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 these estimates. 13. New Accounting Pronouncements In June 1998, The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended to be effective for fiscal years beginning after June 15, 2000 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The standard is effective for the Company on January 1, 2001. In June, 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133". The standard clarifies certain elements of SFAS No. 133. The implementation of SFAS No. 133 will not have a material impact on the Company's 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. 14. 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. 15. Certain fiscal 1999 and fiscal 1998 amounts have been reclassified to conform with fiscal 2000 presentations. B. INDUSTRY SEGMENT, EXPORT SALES AND MAJOR CUSTOMER: The Company has 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. Sales to Europe were approximately $997,000, $1,024,000, and $832,000, and sales to Asia were approximately $1,805,000, $1,542,000, and $924,000, in 2000, 1999, and 1998, respectively. No customer accounted for over 10% of the Company's revenues in 2000, 1999 and 1998. F-9 C. MARKETABLE SECURITIES: In 1999, the Company sold 6,720 shares of Cardiotech International, Inc. at a gain of $11,864. In 1998, the Company sold 3,940 shares of PolyMedica Industries, Inc. at a gain of $36,203. At December 31, 2000, the Company did not hold investments in marketable securities. D. INVENTORY The components of inventories are as follows at December 31:
------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------ ------------------------------------------------------------------ Raw materials $2,670,155 $2,070,913 ------------------------------------------------------------------ Work in progress 473,095 320,151 ------------------------------------------------------------------ Finished goods 879,990 1,086,059 ------- --------- ----------------------------------------------------------------- TOTAL $4,023,240 $3,477,123 ------------------------------------------------------------------
E. INTANGIBLE 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, 17 years. Patents and other intangible assets were purchased in 1991 as a result of a share exchange by MediControl stockholders. These patents and other intangible assets were amortized using the straight line method over five years. In addition, in 1995, the Company capitalized $96,680 of patent costs related to a cooperative research venture. Amortization of these assets charged to expense was $42,269 in 2000, and $43,920 in 1999 and 1998. 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. F-10 F. 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 are 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, $.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 fifteen year period, which the Company determined to be the useful life. F-11 G. INDEBTEDNESS Long-term debt as of the following dates consisted of:
- ------------------------------------------------------------------------------------------------------------ December 31, 2000 December 31, 1999 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ 10% note payable 350,000 $475,000 - ------------------------------------------------------------------------------------------------------------ 10% subordinated note payable to related party 300,000 300,000 - ------------------------------------------------------------------------------------------------------------ Term note payable 403,747 ------- - ------------------------------------------------------------------------------------------------------------ Less current portion (157,504) - -------- - ------------------------------------------------------------------------------------------------------------ TOTAL $896,243 $775,000 ======== ======== - ------------------------------------------------------------------------------------------------------------
The subordinated notes are payable to Lake Shore Industries Inc. and J.M. Huber Corporation. See Note M to the Consolidated Financial Statements for further explanation of the note to Lake Shore Industries Inc. In a letter dated June 16, 2000, J.M. Huber Corporation ("Huber") informed MFIC Corporation that it purportedly was revoking its acceptance of seven model LV-40 Zinger(R) horizontal media mills that Huber had purchased from MFIC's Epworth Mill Division in 1998. The notice of revocation was accompanied by a claim for the repayment of the full purchase price of $384,948 and for incidental and consequential damages as a result of alleged breaches of express and implied warranties in the amount of $2,790,350. The Company denied any liability. At the request of Huber and as an accommodation, the Company, in both 2000 and 1999 performed certain services which, the Company believed, were accepted by Huber as a cure for problems encountered by Huber with the performance of this equipment. On October 20, 2000, the Company entered into a settlement agreement with Huber pursuant to which, the Company paid $100,000 to Huber upon execution of the agreement, and executed a promissory note for $350,000 payable two years from the execution date, with interest payable quarterly in arrears at 10% per annum. 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. 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. The unused portion of the line of credit was $339,185 at December 31, 1999. 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 (.50%). All borrowings under the Revolving Credit Line are evidenced by a $4 million promissory note having a maturity date of February 28, 2003 (the "Revolving Note"), and (ii) a $475,000 term promissory note, amortized over a five year period but having a maturity date of February 28, 2003 and bearing interest at an interest rate equal to the Prime Rate plus three quarters of one percent (.75%). Loans under the Credit Facility are secured by a collateral pledge to the Lender of substantially all the assets of the Company and its subsidiaries. The Company's Microfluidics Corporation subsidiary has guaranteed the Company's obligations to the Lender under the Credit Facility. The Company has pledged to the Lender all shares of Microfluidics Corporation owned by the Company. From the proceeds of the initial loan, the Company repaid the outstanding balance owed to Comerica Bank of approximately $2,585,000. As 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. At December 31, 2000, the Company was in violation of the tangible net worth, liabilities to worth ratio, and net income covenants. The Company has received a waiver of these violations from the Lender as of December 31, 2000, but is required to meet such covenants thereafter. Due to the subjective acceleration clause, and the lock-box arrangement, the Revolving Credit Line is classified as a current liability in the Consolidated Balance Sheet. At December 31, 2000, the outstanding balance on the Revolving Credit Line was $2,724,015, having an interest rate of 10%. The balance outstanding on the term loan was $403,743, at an interest rate of 10.25%. 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 as of December 31, 2000. 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. Given the terms of the financial covenants and historical results, it is at least reasonably possible that the Company will be in violation of the financial covenants in the future. 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 Epworth Mill Division and the concentration of manufacturing operations in an effort to improve costs and marketing leverage; however, there can be no assurance that the Company will be successful in implementing these plans. H. EMPLOYEE BENEFITS The Company offers a 401(k) profit-sharing plan (the "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 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 made no matching contributions in 2000 or 1999 and $23,842 in 1998. Plan administration expenses of $226, $3,951, and $3,464 were incurred by the Company in 2000, 1999, and 1998, respectively. The Company instituted a cafeteria plan in 1992, giving the employees certain pre-tax advantages on specific payroll deductions. F-12 I. INCOME TAXES The provision/(benefit) for income taxes for the years ended are as follows:
Federal State Total -------------------------------------------------------------------------------------------- December 31, 2000 -------------------------------------------------------------------------------------------- Current $0 $0 $0 -------------------------------------------------------------------------------------------- Deferred 0 0 0 -------------------------------------------------------------------------------------------- TOTAL $0 $0 $0 -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- December 31, 1999 -------------------------------------------------------------------------------------------- Current $0 $0 $0 -------------------------------------------------------------------------------------------- Deferred $0 $0 $0 -- -- -- -------------------------------------------------------------------------------------------- TOTAL $0 $0 $0 == == == -------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- December 31, 1998 -------------------------------------------------------------------------------------------- Current $0 $0 $0 -------------------------------------------------------------------------------------------- Deferred 351,630 62,000 413,630 ------- ------ ------- -------------------------------------------------------------------------------------------- TOTAL $351,630 $62,000 $413,630 ======== ======= ======== --------------------------------------------------------------------------------------------
The approximate tax effect of each type of temporary difference and carryforward and the valuation allowance is as follows at December 31:
2000 1999 - ------------------------------------------------------------------------------------------- Net operating loss $1,878,000 $1,655,000 - ------------------------------------------------------------------------------------------- Research and development credit 172,000 186,000 - ------------------------------------------------------------------------------------------- Inventory capitalization 414,000 323,000 - ------------------------------------------------------------------------------------------- Accruals and Allowances 76,000 65,000 - ------------------------------------------------------------------------------------------- Depreciation and amortization (14,000) (61,000) --------- --------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Net deferred tax asset before valuation allowance 2,526,000 2,168,000 - ------------------------------------------------------------------------------------------- Valuation allowance (2,526,000) (2,168,000) --------- --------- - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Net deferred tax asset $0 $0 == == - -------------------------------------------------------------------------------------------
F-13 The Company has a federal net operating loss tax (NOL) carryforward of approximately $4,695,000 and research and development tax credit carryforwards of approximately $172,000 expiring at various dates beginning in 2001 through 2019. Ownership changes may result in future limitations on the utilization of net operating losses and research and development tax credit carryforwards. Based on the financial results known at December 31, 2000, the Company has established a valuation allowance against the deferred tax asset due to the uncertainty of earning sufficient taxable income to realize the benefit of these assets. Therefore the Company increased the valuation allowance by $358,000 and $323,000 in 2000 and 1999, respectively. The following schedule reconciles the difference between the federal income tax rate and the effective income tax rate for the years ended December 31,
- ------------------------------------------------------------------------------------------ 2000 1999 1998 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Federal income tax rate (34.0%) (34.0)% (34.0)% - ------------------------------------------------------------------------------------------ State income tax rate (6.0%) (6.0)% (6.0)% - ------------------------------------------------------------------------------------------ Permanent differences 3.4% 4.5% 0.4% - ------------------------------------------------------------------------------------------ Change in valuation allowance 36.6% 35.5% 77.5% ----- ----- ----- - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ TOTAL EFFECTIVE TAX RATE 0% 0% 37.9% ===== ===== ===== - ------------------------------------------------------------------------------------------
J. STOCKHOLDERS' EQUITY: The Company adopted the 1988 Stock Plan as the successor plan to the 1987 Stock Plan, which, as amended at the 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. Additionally, the Company has an employee stock purchase plan. Under the employee stock 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 1000 for each six month period. The number of shares issued pursuant to this plan totaled 27,641, 4,324, and 3,929 in 2000, 1999, and 1998, respectively. F-14 The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. FASB Statement No. 123 "Accounting For Stock-Based Compensation"("FAS 123") was issued in 1995 and, if fully adopted, changes the method for recognition of cost on plans similar to those of the Company. Pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 are presented below. The Company's employee stock option plan provides for the granting of nonqualified stock options that 1.) are granted at prices which equate to or are above the market value of the stock on the date of the grant; 2.) vest ratably over a three and one half to four year service vesting period and 3.) expire ten years subsequent to award. A summary of the status of the Company's stock options as of December 31, 2000, 1999, and 1998, and changes during the year ended on those dates is presented below:
-------------------------------------------------------------------------------------- 2000 1999 1998 Weighted Weighted Weighted Average Average Average -------------------------------------------------------------------------------------- Shares Exercise Shares Exercise Shares Exercise Price Price Price -------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Outstanding, at beginning 1,303,731 $1.13 1,416,587 $1.15 946,150 $2.37 of year - ----------------------------------------------------------------------------------------------------------------------- Option shares: - ----------------------------------------------------------------------------------------------------------------------- - -Granted 583,500 .41 64,044 .71 1,701,625 1.34 - ----------------------------------------------------------------------------------------------------------------------- - -Exercised 0 0 0 0 (16,250) 1.54 - ----------------------------------------------------------------------------------------------------------------------- - -Cancelled (125,656) .96 (176,900) 1.16 (1,214,938) 2.38 - ----------------------------------------------------------------------------------------------------------------------- Outstanding, at end 1,761,575 $.94 1,303,731 $1.13 1,416,587 $1.15 of year - -----------------------------------------------------------------------------------------------------------------------
In October, 1998 the Board of Directors approved a vote to reprice 1,591,225 employee stock options. The options were originally issued between January 1990 through January 1998 and had original grant prices ranging between $1.16 and $6.25. The grant price for these options was lowered to $1.13 which reflected the market value of the stock as of the reprice date. The repriced options vest over either a three or four year period, depending upon when the original grants were issued. No compensation expense was recorded for the repricing. F-15 The table below summarizes options outstanding and exercisable at December 31, 2000:
--------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Exercisable Weighted Remaining Average As of Average Range of Number of Contractual Exercise December 31, Exercise Exercise Price Options Life Price 2000 Price - -------------------------------------------------------------------------------------------------------------------------- $.31 - 2.00 1,732,275 7.5 $.92 613,201 1.20 - -------------------------------------------------------------------------------------------------------------------------- $2.01 - 5.88 29,300 .6 2.10 16,200 2.62 - -------------------------------------------------------------------------------------------------------------------------- TOTAL 1,761,575 7.5 $.94 629,401 1.24 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Options Available for Future Grant 420,475 879,294 766,438 - -------------------------------------------------------------------------------------------------------------------------- Weighted Average Fair Value of Options Granted During the Year $0.38 $0.63 $1.22 - --------------------------------------------------------------------------------------------------------------------------
The fair value of each option granted during 2000, 1999, and 1998 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (i) dividend yield of 0%; (ii) expected volatility of 146% in 2000 and 137% in 1999 and 1998; (iii) risk-free interest rate of 5.25% in 2000, 1999 and 1998; and (iv) Expected life of five years. Had compensation cost for the Company's 2000, 1999, 1998 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net loss, and basic and diluted net loss per share for 2000, 1999, 1998 would approximate the pro forma amounts below:
------------------------------------------------------------------------------------------------ As Reported Pro forma - ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Net loss $(473,108) $(854,434) $(1,505,441) $(862,383) $(1,209,813) $(1,843,511) ========== ========== ============ ========== ============ ============ - ------------------------------------------------------------------------------------------------------------------------- Net loss per share $(.06) $(.15) $(.28) $(.12) (.21) $(.35) ====== ====== ====== ====== ===== ====== - -------------------------------------------------------------------------------------------------------------------------
F-16 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 $.52 a share, having an expiration date of July 2, 2004. As of December 31, 2000, there were 100,000 warrants outstanding. At December 31, 2000, the Company has reserved 2,850,000 shares for issuance under the above mentioned stock plans and warrants. K. COMMITMENTS AND CONTINGENCIES: At December 31, 2000, the Company had operating leases for the rental of its facilities, which require the following minimum payments:
------------------------------------------- Minimum Payments ------------------------------------------- ------------------------------------------- 2001 $420,005 ------------------------------------------- 2002 286,805 ------------------------------------------- 2003 139,120 ------------------------------------------- 2004 66,000 ------------------------------------------- 2005 66,000 ------------------------------------------- -------------------------------------------
Rent expense for 2000, 1999, and 1998 was approximately $405,000, $499,000, and $282,000, respectively. The current leases are due to terminate at various times through August 2006. F-17 L. RELATED PARTY TRANSACTIONS During 2000, 1999, and 1998, 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 $75,780, $79,291, and $76,363 by G&G during 2000, 1999, and 1998, respectively. At December 31, 2000, and 1999, G&G owed the Company $18,525 and $23,252 respectively. As discussed in Notes F and G, the Company owed the former Principals of Morehouse and Epworth $300,000 and $775,000 at December 31, 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 M amounted to $88,750 and is being amortized over 5 years. Total payments in 2000 were $17,916. M. SETTLEMENT AGREEMENT, DEBT RESTRUCTURING AND REFINANCING On December 20, 1999 the Company signed an agreement in principle (the "Agreement In Principle") with J.B. Jennings and Bret A. Lewis, the former owners of the Epworth Mill and Morehouse-COWLES businesses (the "Sellers"), Lake Shore Industries, Inc., and JLJ Properties, Inc., entities owned and controlled by the Sellers. The Agreement In Principle set forth understandings among the parties concerning restructuring of the Company's subordinated debt and resolution of various disputes. On January 17, 2000 a definitive settlement agreement incorporating these subject matters was executed between the parties (the "Settlement Agreement"). 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. N. Subsequent Event 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 has been classified as a non-current liability. F-18 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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, 2000. 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, 2000. 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, 2000. 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, 2000. PART IV 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, 2000 and 1999 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Report 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 F-19 (a)(3.) List of Exhibits. Exhibit Index Exhibit Description of Exhibit Number ---------------------- - ------ 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, 1998 and incorporated herein by reference). 10.3 1989 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 refernce). 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. F-20 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 the 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 the 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 for the 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 the 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 the 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. F-21 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. 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. 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. 10.29 Security Agreement of the Company in favor of National Bank of Canada dated February 28, 2000. F-22 10.30 Trademark and Trademark Applications Security Agreement of the Company in favor of National Bank of Canada dated February 28, 2000. 10.31 Patent and Patent Applications Security Agreement of the Company in favor of National Bank of Canada dated February 28, 2000. 10.32 Unlimited Guaranty of Microfluidics Corporation in favor of National Bank of Canada Dated February 28, 2000. 10.33 Stock Pledge Agreement between the Company and National Bank of Canada dated February 28, 2000. 10.34 Subordination Agreement among the Company, Lake Shore Industries, Inc. and National Bank of Canada dated as of February 28, 2000. 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. 10.36 Forbearance Agreements with Comerica. 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). 10.38 Letter dated December 31, 1999 from MFIC Corporation to Irwin J. Gruverman and G&G Diagnostics Corp. 10.39 Letter dated December 31, 1999 from MFIC Corporation to Irwin J. Gruverman. *10.40 First Amendment to Revolving Credit and Term Loan Agreement between the Company and National Bank of Canada dated March 30, 2000. *10.41 Lease between ABB and Microfluidics dated April 14, 2000 for space at Lampertheim, Germany *10.42 Security agreement between MFIC Corporation and J.M. Huber Corporation dated October 18, 2000 *10.43 Settlement agreement between MFIC and J.M. Huber Corporation dated December 18, 2000. F-23 *10.44 Termination agreement between Michael A. Lento and MFIC Corporation dated December 14, 2000. *10.45 Letter dated December 31, 2000 from MFIC Corporation to Irwin J. Gruverman and G&G. *10.46 Letter dated December 31, 2000 from MFIC Corporation to Irwin J. Gruverman. *23(a) 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. (b) Reports on Form 8-K. None (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. F-24 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 26th day of March 2001. MFIC CORPORATION By: /s/ Irwin J. Gruverman ---------------------- Irwin J. Gruverman Chief Executive Officer F-25 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.
Signature Title Date - --------- ----- ---- /s/ Irwin J. Gruverman Chief Executive Officer March 26, 2001 - ---------------------- (Principal Executive Officer), Irwin J. Gruverman Chairman of the Board of Directors and Secretary /s/ James N. Little Director March 26, 2001 - ------------------- James N. Little /s/ Vincent Cortina Director March 26, 2001 - -------------------- Vincent Cortina /s/ Leo Pierre Roy Director March 26, 2001 - ------------------ Leo Pierre Roy /s/Edward T. Paslawski Director March 26, 2001 - ---------------------- Edward T. Paslawski
F-26 SCHEDULE II MFIC CORPORATION Valuation and Qualifying Accounts and Reserves For the years ended December 31, 2000, 1999, and 1998
- -------------------------------------------------------------------------------------------------------------------------------- Balance at Additions Charged Deductions Balance at End Beginning of to Costs and and of Period Period Expenses Adjustments - -------------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000 $65,321 $58,280 $(68,031) $55,570 - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 100,000 18,291 (52,970) 65,321 - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1998--Note 1 40,000 30,000 30,000 100,000 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- INVENTORY RESERVE - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000 157,034 59,010 (22,000) 194,044 - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 147,034 10,000 - 157,034 - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1998--Note 2 82,000 - 65,034 147,034 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED AMORTIZATION RELATED TO GOODWILL AND OTHER - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000 $1,021,718 526,653 - $1,548,371 - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 577,799 443,919 - 1,021,718 - -------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1998 379,549 198,250 - 577,799 - --------------------------------------------------------------------------------------------------------------------------------
Note 1: An amount totaling $30,000 was added to the allowance for doubtful accounts reserve as a result of the acquisition of Epworth Manufacturing and Morehouse--COWLES, Inc. on August 14, 1998. Note 2: An amount totaling $65,034 was added to the inventory reserve via the acquisition of Morehouse--COWLES, Inc. on August 14, 1998. S-1 EX-10.41 2 a2043743zex-10_41.txt EXHIBIT 10.41 Exhibit 10.41 Rental Contract between ABB, Edisonstra(beta)e 15, in 68623 Lampertheim and Microfluidics, 30 Ossipee Road, Newton, MA 02464-9101 1. Rental object 1.1 The landlord is the main renter of the factory location, Edisonstra(beta)e 15, 68623 Lampertheim. The ABB Gebaudetechnik AG (building technic AG), Gebaude Management Lampertheim (building management Lampertheim) is responsible for the administration, the management and the renting of the location in Lampertheim. 1.2 We can use the following rooms: o 2 office rooms hall 02, second floor 62 m(2) restroom, socialroom o "storage room" hall 05, cellar 70 m(2) = lab. - -------------------------------------------------------------------------------- 132 m(2) We have one parking place inside the grounds. We can make use of the employees parking places and there are of course parking places for customers. 1 2. Rental capacity, rent, infrastructure- and supplying charges The landlord rents the rooms including infrastructure, service and supplementary services 2.1 The rent exclusive heating charges/ incidental charges: o office rooms 62 m(2) 10,50 DM/m(2) 651,00 DM restroom, socialroom o "storage room" 70 m(2) 9,80 DM/m(2) 686,00 DM = lab., with com- pessed air, water, sewage and electricity o one parking place 1 piece 50,00 DM/piece 50,00 DM inside the grounds - -------------------------------------------------------------------------------- The rental price not including the heating charges/calculation/incidental charges: 1.387,00 DM 2.2. Incidental expenses 2.2.1. Infrastructure services and costs (fix incidental charges) Costs for everything inside the grounds. Ground and building services. For example: 2 o location administration/ additional expenses, o mean (basic) taxes and building insurance, o availability of the infrastructure inside the grounds, o availability of a fire detector, direkt transmission to the fire brigade o availability, maintenance and service of the fire extinguisher o electrical security check o entrance, telephone-, and reception services basic calculation: building area 132 m(2) 2,36 DM/m(2) 311,52 DM Care of the area and the grounds Cleaning of streets and gardens inside and outside the grounds including cleaning of the streets and areas in winter when there is a lot of snow. Basic calculation: building area 132 m(2) 0,16 DM/m(2) 21,12 DM - -------------------------------------------------------------------------------- Incidental expenses, (fix): 332,64 DM 2.2.2 Services+Costs (variable incidental charges) The cleaning of the offices, social and restroom is done every day after 4 o'clock pm. We have our own restroom. 3 Basic calculation: building area 132 m(2) 1,15 DM/m(2) 151,80 DM MFIC is allowed to use the cafeteria inside the grounds.ABB has a card-payment system. But there is also a basic price to pay: Basic calculation: 3 employees 17,70 DM/employee 53,10 DM - -------------------------------------------------------------------------------- Basic calculation Services: 151,80 DM 53,10 DM - -------------------------------------------------------------------------------- 204,90 DM 2.2.3 Supplementary services and costs Maintenance, operation, service and availability consisting of the supply and waste management comprising the power supply and waste line. - - Electric energy supply basic costs: basic calculation: building area 132 m(2) 0,35 DM/m(2) 46,20 DM - - Heating costs, ventilation: basic calculation: building area 132 m(2) 0,39 DM/m(2) 51,48 DM - - Water supply, sewage disposal: basic calculation: building area 132 m(2) 0,13 DM/m(2) 17,16 DM 4 - - ISDN telephone, fax and data transmission: MFIC can make use to six of ISDN-phones/fax connections basic calculation for six connections: 6 con. 35,00 DM/con. 210,00 DM The actual telephone usage will be charged seperately with the reduced telekom tariff for large companies. - - MFIC also has to pay for precipitation water discharge. basic calculation: building area 132 m(2) 0,16 DM/m(2) 21,12 DM - - Pressurized air supply basic calculation: building area 70 m(2) 0,25 DM/m(2) 17,50 DM Where applicable, actual usage will be invoiced separately and added to the basic costs. - -------------------------------------------------------------------------------- Incidental expenses Supply and waste management 363,46 DM ================================================================================ 2.3 Other services The following further services can be offered: - - Litter/waste management, exept fur special wastes like chemicals etc. Every day when the building will be cleaned and the waste will be disposed of. If necessary, further waste management services can be handled by the landlord. These will be invoiced separately. 5 - - Mail Inside and outside the grounds there are special mail services from ABB, that we can use. Internally there is a mail distribution department. Costs will be charged separately in case this is used by us. If the MFIC wishes to use this service, it will be invoiced depending on actua usage. - - Workshop services for the maintenance of the supply and waste management the landlord has special persons who are responsible for service. They have one workshop for electrical maintenance and one workshop for the mechanical costs for engeneering. MFIC can make use of this workshop. This will be charged for separately from case to case. 3. Settlement 3.1 The rent, infrastructure and costs of services as well as the basic price/fix price will be determined the end of the year, corresponding to the building area or the number of employees and will be fixed for the following year. If necessary, quarterly adjustments can be made. 3.2 The consumption / variable costs: ABB determines the preceding consumption at the end of the year and for the following year the consumption value will be fixed as partpayment/markdown. The value to the real consumption takes part at the end of a half calendar year as a repayment or a credit entry. At the beginning of this contract the part payment will be estimated and invoiced. 6 3.3 The landlord writes all costs for rent, infrastructure and incidental expenses and so on, on one invoice and it has to be paid by MFIC, monthly until the 5 th working day, to the account of the landlord. 3.4 If the monthly rental will not be paid until the 10 th working day, the landlord has the right to invoice interests of the general rate of the Dt. Bundesbank + 4 % from the first day of delay until the amount will be paid. 3.5 The settlement of the workshop services will happen with regard to an order by means of order notes (order notes for maintenance work) of material and time. Basic costs for 1998 -> one hour -> 76,00 DM 4. Renting MFIC rents the rooms together with the services. Microfluidics is aware of the area, size and condition of the rental object, as well as its machines and supply and waste management. MFIC accepts the rental object in the condition in which it is after fulfilment of the additional agreement dated the 10th of April 2000 at the beginning of this rental contract on the 1st of July 2000.It is accepted without restriction. 5. Rental time and cancellation 5.1 The rental period beginns on July 1st 2000 and is fixed for a minimum period of three years. 7 5.2 If the agreement is not terminated with a six months` notice to the end of the 3 year period, it will go on. Then the rental agreement can be terminated with a six months` notice to the end of each quarter. 6. Premature cancellation of the rental 6.1 The landlord has the right to cancel the rental contract immediately, a) if MFIC doesn't fulfils the commitments in the contract and the landlord already sent a reminder, b) if MFIC doesn`t pays the rental price and is more than three month in delay of payment. Then the landlord has to send us a payment reminder, with a deadline of 14 days, 6.2 If the rental finishes with a premature cancellation MFIC has to pay for damages done, if the landlord has to rent his office cheaper the next party. 6.3 If the rental finishes because of a premature cancellation of MFIC`s business has to be paid a down payment of 1.500,00 DM/month until the end of the fixed contracttime of 3 years. 8 7. Rental security 7.1 MFIC has to pay a bank guarantee of DM 5.000,00. A Bank guarantee for the three years of fix rental time has to be made on a Bank in Germany. 7.2 If the bank guarantee has to be used, the money has to be replenished on the bank until there are again DM 5.000,00 on the account. 7.3 At the end of the rental the landlord gives back the bank guarantee certificate, acknowledging that all commitments are fulfilled. 8. Value security 8.1 Rent not including heating charges/incidental charges During the three fixed years the rental price won't be increased. If the costs of living increase or decrease after the three years of constant renting time, tenter or the landlord can require to make a new measuring rod for the new determination of the rental price. It belongs to the economical relations and the relations on the market in the region, for comparable offices which are for rent. 8.2. Incidental costs The costs of infrastructure and service will be adapted every year to the development of the statistical Bundesamt (national bureau) for the costs of living. The starting point is the cost of living index from 1999. 9 If costs like property rates, insurance and waste line charges change neither MFIC nor ABB can influence each party is allowed to adapt to the new prices. The costs of consumption belong to the contracts and bills of the supplying companies which are transmitted from ABB to MFIC without additional charges. 9. Incidental costs, taxes and insurance 9.1 The renter has to take every incidental costs that have to be paid for the maintenance of the office, unless already stated in ,,2". 9.2 MFIC isn`t liable for delivery of natural gas, heating oil, current, water and so on. If there will be a breakdown of these delivery services, the rent has to be reduced. 9.3 All incidental charges are taken into account as in point 2.2.1. 9.4 MFIC has to take over all taxes and private charges and duties for our company. 9.5 MFIC has to pay all incidental costs, taxes and insurances directly to the demanding companies. 10 10. Harzardous waste guarantee Environmental authorities have proofed the object to be free of soil contamination in 1991. 11. Liability 11.1 For the liability of the landlord the legal regulation will be effective. 11.2 MFIC has to conclude a third party insurance for the liability in view of the rental rooms. 11.3 If something wrong will happen to the rental rooms, the landlord is not forced to pay compensation, only if it's his fault. If it's his fault and he has to build the rooms new the contract goes on. But, the renter isn't able to use the rooms or if the rooms can only be used partly because of higher violence, the landlord has to reduce the rental price. 12. Using of the rental rooms, subletting 12.1 MFIC make use to the rooms as agreed in this contract and has to treat the furnishing well. 11 12.2 Subletting is only allowed if the landlord gives his written consent. Consent can only be denied for important reasons. A change of owner of a company or the change of the business form will be treated as a 13. Architectural changes 13.1 MFIC can do architectural changes only with the agreement of the landlord. He only doesn't has to agree if there are important reasons why. All architectural changes have to be paid for by MFIC and all risks and dangers are to be accepted by MFIC. 13.2 All changes have to be documented. 13.3 After ending of the contract MFIC has to reestablish all architectural changes and so on. Unless the landlord has approved the architectural changes and these changes don't impair the using of the object. If the landlord leaves the changes, MFIC doesn't has any claim for repayment. 13.4 If MFIC does any architectural or other changes in the time of stay there and the value of the office increases, the landlord has the right to take over this changes after termination of the contract over. But he has to pay for the changes minus a suitable depreciation for the wear. 12 14. Maintenance 14.1 We have to keep the rooms clean and take care. 14.2 All damages have to be paid for by renting party. 14.3 The landlord has to look for the buildings and maintenance of the grounds and so on. He has to change and to pay for example for damaged bulbs. MFIC is responsible for regular redecoration in the rooms, like wallpaper, painting of the doors or replacement of floorings. These repairs have to be done by experts with the agreement of the landlord. 14.4 MFIC has to tell, if something gets damaged. If the MFIC doesn`t tell this the landlord and the damage will become bigger, it will have to be paid for by MFIC. 14.5 After termination, MFIC agrees to leave the rooms in a good condition over (redecorated see 14.3). 15. Promotion / advertising 15.1 MFIC can do promotion for the company outside and inside the building, but MFIC has to get permission from the landlord. 13 15.2 Renter has to apply for official approval for advertising. After termination of rental agreement the advertisment has to removed. 15.3 This service mentioned in 15.1 and 15.2 can be made by the landlord and renter has to pay for that 16. Entering the rooms by the landlord 16.1 The landlord or persons representing the landlord are allowed to enter the office during the business hours. They have to inform renting party and to arrange an appointment. 16.2 The landlord has the right to enter the office rooms without an appointment for security or other serious reasons. 17. Termination of the rental time MFIC has to clean the rooms and have to hand them over in good condition. 18. Others For the assignment of the rights and the duties from this contract MFIC needs the agreement of the landlord. An agreement only can be refused by an important reason. 14 18.1 If duties from this contract don't go over to the respective legal successor by law each party of the contract, agrees to leave the commitments to its potential legal successor. 19. Ending 19.1 This contract can only be changed or expanded in writing. If something is missing or any party wants to expand the contract we have to talk to our landlord. We only can change or expand the contract, if the landlord agrees with us. 19.2 If one point of the contract becomes invalid this has no effect on the rest of the contract. Additional agreements are added; e. g. determination of places for air, water, electricity supply, etc. Nina Behrens, Weinheim, den 14. April 2000 15 EX-10.42 3 a2043743zex-10_42.txt EXHIBIT 10.42 Exhibit 10.42 EXHIBIT B LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made the _____ day of October, 2000, by and between MFIC CORPORATION, a Delaware corporation (the "Borrower"), and J.M. HUBER CORPORATION, a New Jersey corporation (the "Secured Party"). ARTICLE 1 GRANT OF A SECURITY INTEREST Section 1.01 To the extent permitted by law, Borrower hereby grants to the Secured Party for its benefit a first lien security interest in all of Borrower's right, title and interest in the following equipment, together with any and all substitutions therefor and replacements thereof, any and all additions and accessions thereto, and all proceeds thereof, (such collateral is collectively referred to herein as the "Collateral"): Model LV40SST Zinger(R)horizontal media mill Serial No. L2206 ------------------------------------------------------------- Model LV40SST Zinger(R)horizontal media mill Serial No. L2206200 ---------------------------------------------------------------- Model LV40SST Zinger(R)horizontal media mill Serial No. L2206300 ---------------------------------------------------------------- Model LV40SST Zinger(R)horizontal media mill Serial No. L2206400 ---------------------------------------------------------------- Model LV40SST Zinger(R)horizontal media mill Serial No. L2206500 ---------------------------------------------------------------- Model LV40SST Zinger(R)horizontal media mill Serial No. L2206600 ---------------------------------------------------------------- Model LV40SST Zinger(R)horizontal media mill Serial No. L2206700 ---------------------------------------------------------------- ARTICLE 2 OBLIGATIONS SECURED Section 2.01 The security interests hereby granted by Borrower are to secure payment to the Secured Party of the indebtedness of Borrower, incurred by Borrower in connection with Borrower's purchase of the Collateral from Secured Party on or about the date hereof, in the principal sum of Three Hundred Fifty Thousand Dollars ($350,000), with interest thereon evidenced by a secured purchase money promissory note of even date herewith, made by the Borrower payable to the Secured Party (the "Note"); and to secure payment to the Secured Party of all costs, expenses and reasonable attorney's fees incurred by the Secured Party in the collection or enforcement of any indebtedness or liability of Borrower secured hereby. Each of the foregoing being hereinafter sometimes collectively referred to as "Obligations" of the Borrower. ARTICLE 3 REPRESENTATIONS Section 3.01 The Borrower represents and warrants to the Secured Party that: (a) No Other Encumbrances. Except for the security interests granted by this Agreement and subordinate security interests granted as part of Borrower's present lending arrangements on the assets of Borrower, Borrower is the sole owner of the Collateral free and clear of all liens, claims and encumbrances. (b) Location of Collateral. The Collateral shall be located at the Borrower's Morehouse-COWLES Division's place of business in Fullerton, California. Borrower will not change the location of the Collateral or cause such Collateral to be moved, maintained or stored in any other location without notifying the Secured Party. In no event without the prior written consent of the Secured Party shall the collateral be shipped to a location outside the United States unless such shipment is part of the sale of the Collateral. ARTICLE 4 COVENANTS Section 4.01 The Borrower covenants and agrees with the Secured Party that: (a) Inspection of Collateral. The Secured Party or its agents may at any time and from time to time inspect the Collateral and the books and records of the Borrower pertaining thereto upon reasonable notice to Borrower and during regular business hours. (b) Expenses. Borrower shall be liable for and agree to pay the Secured Party any and all expenses incurred or paid by the Secured Party in protecting or enforcing its rights under this Agreement including reasonable attorneys' fees and legal expenses. (c) Application of Net Proceeds. Upon an Event of Default, the Secured Party shall have the right to apply the net proceeds of the sale or other disposition of the Collateral, first, to the principal indebtedness due under the Note and then to any other indebtedness of the Borrower owed to the Secured Party. (d) Maintenance of Collateral. Borrower will keep all Collateral in good condition and repair at Borrower's own expense. Any loss or destruction of the Equipment shall be at Borrower's risk and shall not release Borrower from any Obligation set forth herein. Section 4.02 Insurance. Borrower agrees at its expense to insure its respective Collateral against such risks and hazards. Borrower will use reasonable efforts to have its policy of insurance contain a clause that in the event of loss, payments shall be made to the Secured Party as its interest may appear; that Borrower hereby grants the Secured Party a security interest in the proceeds of any insurance, whether paid by reason of loss, injury, return premium or otherwise, and such proceeds may be applied toward the repair or replacement of the Collateral or payment of the Obligations secured hereby at Borrower's option. Section 4.03 Proceeds from Resale of Collateral. Borrower agrees that all Net Proceeds (as hereinafter defined) from the sale of the Collateral, or any part of it, shall be paid as herein provided to the Secured Party as provided in Section 4.04, it being expressly understood and agreed by the parties that, in the event a case under the United States Bankruptcy Code is commenced by or against Borrower, the Net Proceeds (meaning the proceeds from the sale of any of the collateral, less reasonable transportation costs, storage and reconditioning costs, and costs of sale including but not limited to commissions and taxes attributable to the sale of such 2 collateral) shall not constitute property of Borrower's bankruptcy estate, but shall belong to Secured Party. Section 4.04 Sale and Sale Notice of Collateral. In the event Borrower sells the Collateral, or any part of it, prior to the satisfaction of the Note, Borrower shall promptly give notice of the sale to the Secured Party three (3) business days before Borrower is required to ship the collateral to any buyer. Prior to the scheduled date for shipping, the Secured Party shall release its security interest in the portion of the Collateral sold by Borrower. For purposes of releasing its security therein upon a sale of the Collateral, the Secured Party hereby appoints the Borrower through any officer designated by the Borrower, as attorney-in-fact for the Secured Party, with power to act in Secured Party's name with respect to the release of the Secured Party's security interest. Within ten (10) business days following such sale(s), the Borrower shall provide notice ("Sale Notice") of the Net Proceeds to be received from such sale(s) to Secured Party. Such Sale Notice(s) shall contain: (a) a detailed description of the sales terms, including, without limitation, a description of the Collateral being sold, the price received, and a statement setting forth what portion, if any, of the Collateral remains unsold; (b) a detailed statement of the following costs actually incurred by Borrower in connection with such sale(s) (the "Sales Costs"): (i) all transportation costs incurred by Borrower to ship the Collateral sold from Secured Party's location to Borrower's Morehouse-COWLES Division in Fullerton, California; (ii) reasonable storage and reconditioning costs incurred by Borrower as to the Collateral sold; and (iii) costs related to the sale of the Collateral sold, including but not limited to commissions and taxes actually incurred and paid by Borrower; and (c) a statement of the Net Proceeds, calculated by subtracting the Sales Costs from the price received in the sale. Borrower shall direct the purchaser(s) of the Collateral, or any part of it, to pay an amount equal to the Net Proceeds from each sale of Collateral directly to the Secured Party. ARTICLE 5 EVENTS OF DEFAULT Section 5.01 Borrower shall be in default under this Agreement upon the happening of any of the following events (each is an "Event of Default"): (a) Occurrence of any Event of Default under the Note or under the terms of any Obligation secured hereunder. (b) Default by Borrower in payment or performance of any payment obligation or other covenant contained or referred to herein or any Obligation secured hereby or thereby. (c) Breach by Borrower of any representation or warranty contained herein or in any other security agreement between the parties or in any Obligation secured hereby or thereby. (d) Irreparable loss, theft or destruction of any of the Collateral, unless Secured Party receives the proceeds from insurance against such event. (e) Borrower becomes insolvent; or is unable to pay its debts as they mature, or discontinues business operations; or commits an act of bankruptcy or makes an assignment for creditors; or files a petition under the federal Bankruptcy Code or any other federal or state 3 bankruptcy, insolvency or other similar law or regulation; or becomes adjudicated bankrupt or petitions or applies to any tribunal for any receiver or trustee for Borrower, or any substantial part of Borrower's assets; or commences any insolvency or other proceedings for the relief of the Borrower, either under any law now or hereafter in force or otherwise, and whether by arrangement, reorganization, compromise, extension, or otherwise, or for dissolution or liquidation; or a proceeding or case is commenced against Borrower under the federal Bankruptcy Code or any other federal or state bankruptcy, insolvency or other similar law or regulation, and such proceeding or case is not dismissed or stayed within 60 days of filing. ARTICLE 6 REMEDIES Section 6.01 If the Borrower fails to make a payment on the Note when due or if any of the Events of Default specified herein shall occur, and Borrower fails to cure the Event of Default within thirty (30) days from the date of written notice from the Secured Party in the event of a non-payment Event of Default, or three (3) business days in the event of a payment Event of Default, then in such event and at any time thereafter the Secured Party may declare all Obligations secured hereby to be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived. The Secured Party in addition to such other rights and remedies as are or may be set forth in this Agreement and in any other agreement between the parties or any Obligation secured hereby or thereby may exercise and shall have the rights and remedies of a Secured Party under the Uniform Commercial Code in effect in the State of Georgia at the date of this Agreement. The Secured Party may require and Borrower agrees upon demand to assemble the Collateral and make it available at a place to be designated by the Secured Party which is reasonably convenient to the parties or the Secured Party may enter any premises and take possession of the Collateral or any part thereof. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Secured Party will give Borrower reasonable notice of time and place of any public sale thereof or the time after which any private sale or any other intended disposition thereof is to be made. The requirement of reasonable notice shall be met if notice is mailed, postage prepaid to Borrower at its above mentioned address, at least ten (10) days before the time of sale or disposition of the Collateral. Borrower shall pay to Secured Party, on demand, any and all expenses, incurred or paid by the Secured Party in protecting or enforcing its rights, powers and remedies hereunder or under any other agreement between the parties or any Obligation secured hereby or thereby or in any way connected with any proceeding or action by whatsoever initiated concerning the protection or enforcement thereof. Section 6.02 No delay in taking any action with respect to any Event of Default shall affect the rights of the Secured Party later to take such action with respect thereto and no waiver by the Secured Party of any default shall operate as a waiver of any other default, or the same default on a future occasion. ARTICLE 7 MISCELLANEOUS PROVISIONS Section 7.01 The provisions of this Agreement may be amended, or compliance with this Agreement waived at any time only by the written agreement of the Secured Party and the Borrower. 4 Section 7.02 The Borrower shall do, make, execute and deliver all such additional and further acts, things, deeds, assurances and instruments as the Secured Party may reasonably require for the purpose of more completely vesting in and assuring to the Secured Party its rights hereunder in or to the Collateral. Without limiting the foregoing, at its expense, the Borrower shall defend the title to the Collateral (or any part thereof), and promptly upon request by Secured Party execute, acknowledge and deliver any financing statement, continuation statement, security agreement, or other document Secured Party may require in order to perfect, preserve, maintain, continue, protect and/or extend the lien or security interest granted to Secured Lender under this Agreement and its priority. Section 7.03 Any notice or demand which by any provision of this Agreement is required or provided to be given shall be deemed to have been sufficiently given or served for all purposes by being sent by certified mail, return receipt requested, postage prepaid, and addressed as follows (or such other address as either party may designate by written notice to the other party): If to Borrower: MFIC Corporation 30 Ossipee Road Newton, Massachusetts 02464 Attn: Jack Swig, Esq. If to Secured Party: J. M. Huber Corporation Engineered Materials Division 4401 Northside Parkway Suite 600 Atlanta, Georgia 30327 Attn: Edward Castorina, Esq. with a copy to: Jones, Day, Reavis & Pogue 3500 SunTrust Plaza 303 Peachtree Street, N.E. Atlanta, Georgia 30308-3242 Attn: William B. B. Smith, Esq. Section 7.04 All rights of the Secured Party hereunder shall inure to the benefit of its successors and assigns and all obligations of the Borrower hereunder shall bind Borrower's successors and assigns. Section 7.05 TIME IS OF THE ESSENCE HEREOF. 5 Section 7.06 This Agreement may be executed in a number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall comprise but a single instrument. Section 7.07 This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and, other than as contained in the Note or that certain Settlement Agreement by and between Borrower and the Secured Party as of the date hereof, there are no understandings or agreements or representations relative to this Agreement which are not fully expressed in this Agreement. Section 7.08 THE BORROWER (A) AND THE SECURED PARTY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF THIS AGREEMENT, (B) SUBMITS TO THE NONEXCLUSIVE PERSONAL JURISDICTION IN FULTON COUNTY, GEORGIA, OF THE COURTS THEREOF AND THE UNITED STATES DISTRICT COURTS FOR THE NORTHERN DISTRICT OF GEORGIA, FOR THE ENFORCEMENT OF THIS AGREEMENT, AND (C) WAIVES ANY AND ALL PERSONAL RIGHTS UNDER THE LAW OF ANY JURISDICTION TO OBJECT ON ANY BASIS (INCLUDING, WITHOUT LIMITATION, INCONVENIENCE OF FORUM) TO JURISDICTION OR VENUE WITHIN THE STATE OF GEORGIA FOR THE PURPOSE OF LITIGATION TO ENFORCE THIS AGREEMENT. NOTHING HEREIN CONTAINED, HOWEVER, SHALL PREVENT THE SECURED PARTY FROM BRINGING ANY ACTION OR EXERCISING ANY RIGHTS AGAINST ANY COLLATERAL AND AGAINST THE BORROWER PERSONALLY, AND AGAINST ANY ASSETS OF THE BORROWER, WITHIN ANY OTHER STATE OR JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW. Section 7.09 In case one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any laws, the validity, legality and enforceability of the remaining provisions contained herein shall remain effective and binding on the parties thereto and shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement under seal by their duly authorized representatives, as of the date and year first written above. MFIC CORPORATION By:__________________________________________________ Attest:_____________________________________ Name:________________________________________________ Name:_______________________________________ Title:_______________________________________________ Title:______________________________________ [Corporate Seal]
6 J.M. HUBER CORPORATION By:__________________________________________________ Attest:_____________________________________ Name:________________________________________________ Name:_______________________________________ Title:_______________________________________________ Title:______________________________________ [Corporate Seal]
7 EX-10.43 4 a2043743zex-10_43.txt EXHIBIT 10.43 Exhibit 10.43 SETTLEMENT AGREEMENT This Settlement Agreement (the "Agreement") is entered into this day of October, 2000, between MFIC Corporation, a Delaware corporation having its principal offices at 30 Ossipee Road, Newton, Massachusetts 02464 ("MFIC"), and J.M. Huber Corporation, a New Jersey corporation having its principal offices at 333 Thornall Street, Edison, New Jersey 08837, together with its Engineered Materials Division having its principal offices at 4401 Northside Parkway, Suite 600, Atlanta, Georgia 30327 ("HUBER"). WHEREAS, MFIC commenced an action against HUBER in the United States District Court for the District of Massachusetts, Civil Action No. 00-CV-11437-EFH, (the "MFIC Case"); and WHEREAS, HUBER commenced an action against MFIC and Epworth Manufacturing Company ("Epworth") in the Superior Court of Gordon County, Georgia, Civil Action No. 2000-CV-37580, which MFIC removed to the United States District Court for the Northern District of Georgia, Rome Division, Civil Action No. 4:00-CV-279-HLM (the "HUBER Case"); and WHEREAS, both the MFIC Case and the HUBER Case relate to the sale of seven (7) Zinger(R) horizontal media mills purchased by HUBER from Epworth, now the Epworth Mill Division of MFIC Corporation, together with all spare parts, equipment, accessories, gauges, and accessions (collectively referred to hereinafter as the "Equipment"); and WHEREAS, MFIC and HUBER wish to fully and finally settle and terminate all suits, causes of action, cases and controversy concerning the sale of the Equipment to HUBER. NOW THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which both parties mutually acknowledge, MFIC and HUBER agree as follows: 1. MFIC shall pay the sum of one hundred thousand dollars ($100,000) to HUBER upon execution of this Agreement. 2. Upon execution of this Agreement, MFIC shall execute a term purchase money promissory note in the form annexed hereto as Exhibit A (the "Note") and loan and security agreement in the form annexed hereto as Exhibit B (the "Security Agreement"). The Note is in the face amount of $350,000 payable to the order of HUBER and bears interest at a rate of ten percent (10%) per annum, payable quarterly in arrears. The Note has a principal maturity date two (2) years from the execution of this Agreement. Up to and including February 28, 2001 (the "Prepayment Date"), MFIC may prepay the Note and discharge all obligations thereunder by tendering the sum of three hundred thousand dollars ($300,000) plus accrued and unpaid interest outstanding under the Note. The Security Agreement is a purchase money security agreement on the Equipment, which MFIC will repurchase from HUBER pursuant to this Agreement. 3. Simultaneously with the execution of this Agreement, HUBER shall: A. Execute the Mutual Cross Releases in the form as attached hereto as EXHIBIT C, releasing to the fullest extent permitted by law, but subject to the express obligations of this Agreement and Exhibits A through C hereof, any and all claims, and/or causes of action against MFIC and Epworth arising out of or relating to the purchase and use of the Equipment by HUBER; and B. Execute the Stipulation of Dismissal in the form annexed hereto as Exhibit D or in such other form as may be required by the Court in order to terminate, with prejudice, the HUBER Case; and C. Execute a bill of sale for the Equipment to transfer all of its right, title and interest free and clear of any liens, claims, charges or other encumbrances and ship to MFIC (at MFIC's direction and expense) the Equipment for reconditioning and resale by MFIC. HUBER shall retain a purchase money security interest in the Equipment or any portion thereof until resale of such Equipment, or any portion thereof, by MFIC. 4. Simultaneously with the execution of this Agreement, MFIC shall: A. Execute the Mutual Cross Releases in the form as attached hereto as EXHIBIT C, releasing to the fullest extent permitted by law, but subject to the express obligations of this Agreement and Exhibits A through C hereof, any and all claims, and/or causes of action against HUBER arising out of or relating to the purchase and use of the Equipment by HUBER; and B. Execute the Stipulation of Dismissal in the form annexed hereto as Exhibit E or in such other form as may be required by the Court in order to terminate, with prejudice, the MFIC Case. 5. The parties further covenant and agree as follows: A. Upon receipt of the Equipment pursuant to paragraph 3(C) hereof, MFIC shall recondition the Equipment in a manner reasonably necessary to prepare the Equipment for sale to a third party. B. MFIC hereby covenants and agrees to make reasonable efforts to sell the Equipment to a third party in an arms-length transaction, upon commercially reasonable terms and conditions. C. HUBER warrants and represents to MFIC that HUBER has good and marketable title to the Equipment free and clear of any liens, claims, charges or other encumbrances. 6. This Settlement Agreement shall be binding upon the parties and their respective successors or assigns. 7. The terms and provisions of this Agreement are contractual and not merely a recital. This Agreement is voluntarily entered into and is not based, in whole or in part, upon any 2 representation or statement of any kind not contained herein by any party hereto or such party's respective attorneys or representatives, oral or otherwise, as to the merit, legal validity, or value of any claim, demand, right, entitlement, action or cause of action of any of the parties hereto or as to any other matter whatsoever. Each party agrees with or warrants to the other: (a) that the covenants, agreements and/or payments provided for herein, constitute good and sufficient consideration for the covenants, agreements and/or payments made or received by it; (b) that is it duly authorized to execute this Agreement; (c) that is has not heretofore assigned to any other individual or entity of any kind all or any portion of any claims released by it hereunder; and (d) that this Agreement is a full, fair, arms-length, final and complete accord, satisfaction and settlement of all matters contained herein, including all claims that were asserted or could have been asserted in the MFIC Case or the HUBER Case. The parties further acknowledge and agree that the wording in this Agreement is the product of joint cooperation, collaboration, and negotiation between the parties and their respective legal counsel. 8. This Agreement constitutes the entire agreement between the parties with respect to the subject matter of the Agreement and there are no understandings or agreements or representations relative to the Agreement which are not fully expressed in the Agreement. 9. This Agreement may be executed in a number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall comprise but a single instrument. 10. Should any provision of this Agreement be invalid or unenforceable for any reason, the remaining provisions hereof shall remain of full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement under seal by their duly authorized representative, as of the date and year first written above. MFIC CORPORATION By:__________________________________________________ Attest:_____________________________________ Name:________________________________________________ Name:_______________________________________ Title:_______________________________________________ Title:______________________________________ [Corporate Seal]
3 J.M. HUBER CORPORATION By:__________________________________________________ Attest:_____________________________________ Name:________________________________________________ Name:_______________________________________ Title:_______________________________________________ Title:______________________________________ [Corporate Seal]
4 EXHIBIT A PURCHASE MONEY PROMISSORY NOTE $350,000 October ____, 2000 Boston, Massachusetts FOR VALUE RECEIVED, the undersigned promises to pay to the order of J.M. HUBER CORPORATION ("CREDITOR"), a New Jersey Corporation with its principal place of business in Edison, New Jersey, the principal sum of THREE HUNDRED AND FIFTY THOUSAND DOLLARS ($350,000), with interest thereon, or on such part thereof as shall from time to time remain unpaid, from the date of this promissory note (the "Note") until paid, at the rate set forth below, payable as follows: Interest shall be payable on the unpaid principal balance hereunder at a rate of ten percent (10%) per annum. Interest shall be compounded annually, and shall be calculated based on a 360-day year of twelve 30-day months. Payments of accrued interest shall be paid quarterly in arrears, commencing on December 31, 2000 or, if such date falls on a non-business day, on the next business day thereafter. Up to and including February 28, 2001 (the "Prepayment Date"), MFIC may prepay this Note and discharge all obligations hereunder including all principal and interest whether accrued or unpaid or not, by tendering the sum of three hundred thousand dollars ($300,000), whether paid in one or more installments, plus accrued and unpaid interest outstanding on this Note (in the aggregate the "Prepayment Amount"). Upon receipt by CREDITOR of the full Prepayment Amount on or before the Prepayment Date, CREDITOR shall mark the Note paid in full and return it to MFIC. All outstanding principal and interest shall be due and payable on the two year anniversary of this Note. Payments shall be made to CREDITOR at its principal place of business and shall be deemed made by placing such payment in any form of traceable overnight delivery or by wire transfer. This Note is subject to and secured by the terms of that certain Loan and Security Agreement dated as of even date herewith between the undersigned and the CREDITOR (hereinafter, as it may be amended or supplemented from time to time, called the "Security Agreement"). The undersigned agrees to pay all costs and expenses, including all attorneys' fees in connection with the collection of this Note upon default. The undersigned shall pay to CREDITOR a late charge of five (5%) percent of any payment of interest not paid to CREDITOR within three (3) business days after receipt by the undersigned of written notice sent by CREDITOR to the undersigned, by any form of traceable delivery whether by United States mail or any private delivery service, to the effect that said payment was not received by CREDITOR when due. At the option of CREDITOR, the Note shall become immediately due and payable in full without notice or demand upon the occurrence at any time of an "Event of Default" under the Security Agreement or any of the following events: (1) default in any payment of interest due hereunder, and the continuation of such default for three (3) business days after receipt by the undersigned of written notice of such default sent by CREDITOR to the undersigned by any form of traceable delivery, whether by United States mail or any private delivery service; (2) the liquidation, termination or dissolution of the undersigned; (3) any levy, seizure or attachment of any of the undersigned's property; or (4) if the undersigned, shall: (i) cease generally to pay its obligations as they become due, or be unable, or admit in writing its inability to pay its debts as they mature, or make a general assignment for the benefit of, or enter into any composition, trust mortgage or other arrangement with creditors; (ii) apply for, or consent (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee or liquidator of the undersigned, or of a substantial part of its assets, or authorize such application or consent, or proceedings seeking such appointment shall be commenced against the undersigned, and continue undismissed for sixty (60) days; or (iii) apply for, or consent (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, readjustment of debt, insolvency, dissolution, liquidation or other similar law of insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorize such application or consent, or proceedings to such and shall be instituted against the undersigned, and remain unstayed or undismissed for sixty (60) days, be approved as properly instituted or result in adjudication of bankruptcy or insolvency. The undersigned hereby: (1) waives presentment, demand, protest and notices of every kind and description (other than any notice of default in payment as herein provided); (2) waives any defenses based upon, and specifically assents to, any and all extensions and postponements of the time of payment and all other indulgences and forbearances which may be granted by the holder to the undersigned; and (3) agrees to be bound by all other terms contained in this Note. No delay or omission on the part of CREDITOR in exercising any right hereunder shall operate as a waiver of such right or of any other right of CREDITOR, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. No single or partial exercise of any power hereunder shall preclude other or future exercise thereof or the exercise of any other power. Signed in the presence of: MFIC CORPORATION ____________________________________________ By:______________________________ Name:____________________________ Title:___________________________
2 EXHIBIT C MUTUAL CROSS RELEASES This MUTUAL CROSS RELEASE AGREEMENT (the "Release") is made as of October ____, 2000, by and between MFIC Corporation ("MFIC"), a Delaware corporation, and J.M. HUBER Corporation ("HUBER"), a New Jersey corporation. WHEREAS, except for the obligations contained in a Settlement Agreement of even date herewith, HUBER and MFIC wish to settle all claims between HUBER and MFIC arising out of or relating to the purchase and use of the Equipment (as "Equipment" is defined in the Settlement Agreement of even date herewith; hereinafter the "Equipment") including all pending litigation. NOW THEREFORE, for good and valuable consideration and the mutual payment of one dollar, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Release of HUBER. MFIC, together with any of its subsidiaries or divisions, hereby jointly and severally remise, release and forever discharge HUBER and its representatives, successors, assigns, and all persons acting through, by or in concert with it from any and all debts, demands, actions, torts, breaches, causes of action, suits, accounts, covenants, agreements, contingencies, promises, understandings, damages, expenses, compensation, claims or liabilities that any of the releasors now has, may have or ever had, whether in law or in equity, or whether known or unknown, from the beginning of the world to the date hereof arising out of or relating to the purchase and use of the Equipment by HUBER, including but not limited to, any claim relating to, arising out of or that could have been made in either J.M. Huber Corporation v. MFIC Corporation and Epworth Manufacturing Company, a/k/a Epworth Morehouse-COWLES, a/k/a Lake Shore Industries, Inc., Civil Action No. 4:00-CV-279-HLM, pending in the United States District Court for the Northern District of Georgia, Rome Division, or MFIC Corporation v. J. M. Huber Corporation , Civil Action No. 00-CV-11437-EFH, pending in the United States District Court for the District of Massachusetts. MFIC acknowledges that subsequent to the date of this Release, it may determine that it has incurred or suffered loss, damage, or injuries related to the releases herein given, but which were unknown or unanticipated at the time this Release was executed. MFIC assumes the risk that the releases contained herein shall apply to all unknown and unanticipated results arising from or related to the releases herein given, as well as to results known and anticipated, and has so acted upon the advice of legal counsel. Notwithstanding anything in this Release to the contrary, there shall be no release of the covenants terms and conditions of the Settlement Agreement of even date herewith, including without limitation Exhibits A through C thereof. 2. Release of MFIC, Epworth and Lakeshore. HUBER, together with any of its subsidiaries or divisions, hereby jointly and severally remise, release and forever discharge MFIC, Epworth Manufacturing Company, Epworth Morehouse-COWLES, and Lake Shore Industries, Inc. and their representatives, successors, assigns, and all persons acting through, by or in concert with them from any and all debts, demands, actions, torts, breaches, causes of action, suits, accounts, covenants, agreements, contingencies, promises, understandings, damages, expenses, compensation, claims or liabilities that any of the releasors now has, may have or ever had, whether in law or in equity, or whether known or unknown, from the beginning of the world to the date hereof arising out of or relating to the purchase and use of the Equipment by HUBER, including but not limited to, any claim relating to, arising out of or that could have been made in either J.M. Huber Corporation v. MFIC Corporation and Epworth Manufacturing Company, a/k/a Epworth Morehouse-COWLES, a/k/a Lake Shore Industries, Inc., Civil Action No. 4:00-CV-279-HLM, pending in the United States District Court for the Northern District of Georgia, Rome Division, or MFIC Corporation v. J.M. Huber Corporation , Civil Action No. 00-CV-11437-EFH, pending in the United States District Court for the District of Massachusetts. HUBER acknowledges that subsequent to the date of this Release, it may determine that it has incurred or suffered loss, damage, or injuries related to the releases herein given, but which were unknown or unanticipated at the time this Release was executed. HUBER assumes the risk that the releases contained herein shall apply to all unknown and unanticipated results arising from or related to the releases herein given, as well as to results known and anticipated, and has so acted upon the advice of legal counsel. Notwithstanding anything in this Release to the contrary, there shall be no release of: (i) the covenants, terms and conditions of the Settlement Agreement of even date herewith, including without limitation Exhibits A through C thereof; or (ii) any claim over by Huber against MFIC for any debts, demands, actions, torts, breaches, causes of action, suits, accounts, covenants, agreements, contingencies, promises, understandings, damages, expenses, compensation, claims or liabilities asserted by a third party against Huber arising out of or relating to the resale of the Equipment by MFIC. 3. Valid Consideration. The parties hereto warrant, represent and acknowledge that this Release is executed and delivered by the parties hereto for adequate consideration and value and is valid, binding and enforceable in accordance with its terms. 4. No Duress. The parties hereto warrant, represent and acknowledge that they have executed and delivered this Release without any duress or wrongful pressure whatsoever imposed by any party hereto or by any other person or entity acting on behalf of or in concert with any party hereto or by any independent third party, and that this Release has been executed as the free act and deed of the parties hereto. 5. No Alienation of Claims. The parties hereto warrant and represent to one another that they have not granted or purported to grant to any other person or entity any interest whatsoever in any claim, action or cause of action released herein, as security or otherwise, and that their execution hereof does not require the consent of or notice to any third party in order to be fully effective as to any claim, action or cause of action that may have existed in favor of them at any time. 6. Effective Date. The effective date (the "Effective Date") shall be the date as of which all parties hereto have executed and delivered this Release. This Release shall not be enforceable against any party prior to the Effective Date. 7. Entire Agreement. The parties hereto acknowledge, warrant and represent that the effect of this Release is not subject to any condition that has not been satisfied fully and completely as of its Effective Date and that there are no other agreements between the parties 2 hereto, either oral or in writing, that impair the scope of this Release or its validity, binding effect or enforceability in any respect whatsoever, other than the Settlement Agreement between the parties dated as of the date hereof. This release is intended to be broadly construed to effect the purposes and intent of the parties hereto. 8. Amendment and Waiver. No provisions hereof may be amended or waived other than by written document executed and delivered by the parties hereto. 9. No Admission. It is expressly understood and agreed by all parties hereto that this Release is entered into for the purpose of avoiding litigation, and the request of the parties hereto that one another execute this Release does not constitute an admission by the parties hereto of the existence of any claim, action, cause of action or defense on behalf of the parties hereto or any other person or entity. 10. Admissibility of Release. This Release may be pleaded in any action or other proceeding which may be brought, instituted or taken in connection with the matters addressed herein, by one party hereto against the other person or entity. 11. Assignment. This Release shall be binding upon the heirs, successors and assigns of the parties hereto and shall inure to the benefit of the heirs, successors and assigns of the parties hereto. 12. Severability. Should any provision of this Release be invalid or unenforceable for any reason, the remaining provisions hereof shall remain of full force and effect. 13. Counterparts. This Release may be executed in one or more counterparts and each such counterpart shall constitute an original. IN WITNESS WHEREOF, the parties have executed this Agreement under seal by their duly authorized representative, as of the date and year first written above. MFIC CORPORATION By:__________________________________________________ Attest:_____________________________________ Name:________________________________________________ Name:_______________________________________ Title:_______________________________________________ Title:______________________________________ [Corporate Seal]
3 J.M. HUBER CORPORATION By:__________________________________________________ Attest:_____________________________________ Name:________________________________________________ Name:_______________________________________ Title:_______________________________________________ Title:______________________________________ [Corporate Seal]
4 EXHIBIT D UNITED STATES DISTRICT COURT for the NORTHERN DISTRICT OF GEORGIA ROME DIVISION - ------------------------------------ J.M. HUBER CORPORATION, ) ) Plaintiff, ) ) Civil Action No. 4:00-CV-279-HLM v. ) ) MFIC CORPORATION, et al. ) ) Defendants. ) - ------------------------------------) VOLUNTARY STIPULATION OF DISMISSAL Pursuant to Fed. R. Civ. P. Rule 41(a)(1), the parties in the above-captioned action hereby stipulate to the voluntary dismissal of all claims and counterclaims with prejudice and without costs to any party. MFIC Corporation J. M. Huber Corporation By its attorneys, By its attorneys, _________________________________________ __________________________________________ Leslie A. Allen, Georgia Bar No. 011150 William B. B. Smith Georgia Bar No. 664637 Joseph R. Manning, Georgia Bar No. 469600 Mark R. Bridwell Georgia Bar No. 081601 Morris, Manning & Martin, LLP Jones, Day, Reavis & Pogue 1600 Atlanta Financial Center 3500 SunTrust Plaza 3343 Peachtree Road, N.E. 303 Peachtree Street Atlanta, GA 30326 Atlanta, GA 30308-3242 (404) 233-7000 (404) 521-3939
Dated: October , 2000 Exhibit E UNITED STATES DISTRICT COURT for the DISTRICT OF MASSACHUSETTS - ------------------------------------ ) MFIC CORPORATION, ) ) Plaintiff, ) ) Civil Action No. 00-CV-11437-EFH v. ) ) J.M. HUBER CORPORATION, ) ) Defendant. ) - ------------------------------------) VOLUNTARY STIPULATION OF DISMISSAL Pursuant to Fed. R. Civ. P. Rule 41(a)(1), the parties in the above-captioned action hereby stipulate to the voluntary dismissal of all claims and counterclaims with prejudice and without costs to any party. J. M. Huber Corporation MFIC Corporation By its attorneys, By its attorneys, ________________________________ ____________________________________ William B. B. Smith William A. Zucker, Esq., BBO #541240 Georgia Bar No. 664637 Gadsby Hannah LLP Mark R. Bridwell 225 Franklin Street Georgia Bar No. 081601 Boston, MA 02110 Jones, Day, Reavis & Pogue (617) 345-7000 3500 SunTrust Plaza 303 Peachtree Street Atlanta, GA 30308-3242 (404) 521-3939
Dated: October , 2000 EX-10.44 5 a2043743zex-10_44.txt EXHIBIT 10.44 Exhibit 10.44 SEPARATION AGREEMENT AND RELEASE It is hereby agreed by and between Michael A. Lento of 12 Sherman Road, Melrose, MA 02176, ("Mr. Lento") and MFIC Corporation, a Delaware corporation, together with its Microfluidics Corporation subsidiary, Epworth Mill and Morehouse-COWLES operating divisions, (collectively the "Company"), for good and sufficient consideration more fully described below, that: 1. Employment Status. Effective as of November 30, 2000 (the "Termination Date"), Mr. Lento was terminated from employment with the Company and has resigned any officer position(s) he holds or has held with the Company, as evidenced by his execution of the resignation(s) attached as Exh. 1. As of such Termination Date, Mr. Lento's salary ceased and any entitlement he has or might have under any Company provided benefit program terminated except as required by federal or state law or as otherwise described below. 2. Consideration. (A) Post-Termination Separation Compensation. (i) For a period commencing as of November 30, 2000 and continuing through February 28, 2001 (the "Severance Period"), the Company shall pay to Mr. Lento a bi-weekly gross amount of Five Thousand One Hundred Fifty Three Dollars and Eighty Five Cents ($5,153.85) ("Bi-Weekly Severance Payment") for a total of Thirty Two Thousand Nine Hundred Eighty Four Dollars and Sixty Four Cents $32,984.64 (collectively, the "Severance Payment"). The first such Bi-Weekly Severance Payment is to be made on the first regularly scheduled payday immediately after the expiration of the Revocation Period in para. 20. (ii) In addition, Mr. Lento shall be paid Five Thousand ($5,000) Dollars immediately after the expiration of the Revocation Period in para. 20. (iii) All payments set forth in this clause (A) of Section 2 shall be made in accordance with the Company's normal payroll practices and are subject to all applicable (if any) federal, state, and/or local withholding, payroll and other taxes. (B) Bonus Compensation. Mr. Lento shall be entitled to receive 100% of any bonus compensation due him pursuant to the Bonus Compensation Plan between the Company and Mr. Lento dated February 2, 2000 (the "Bonus Comp Plan"), attached hereto as Exh. 2. As provided in the Bonus Comp Plan, such bonus, if any, shall be calculated and payable only after the earlier to occur of: (i) the availability of the calendar year 2000 audited financial statements of MFIC Corporation, or (ii) ninety (90) days after the end of the Company's fiscal year, ended December 31, 2000. (C) Stock Options. Mr. Lento holds certain "Qualified Stock Options" to purchase the Company's Common Stock issued pursuant to the Company's 1988 Stock Option Plan (the "Qualified Option Plan"), as identified in Exh. 3. The Company, its Board of Directors, and the Administrator under the Qualified Option Plan agree or shall agree that Mr. Lento's termination date solely for purposes of vesting of stock options will be extend to January 3, 2001. To accomplish this, Mr. Lento's acknowledges and agrees that the Administrator of the Company's Qualified Option Plan may, pursuant to Section 13 thereof, reclassify such options from "qualified" under the Qualified Option Plan to "non-qualified" options if acceleration of vesting or continuation of vesting after the Termination Date would or may adversely impact or endanger the tax "qualified" status of the Company's Qualified Option Plan. Mr. Lento may execute any such vested options on a "net" basis, i.e. in a cashless exercise. 3. Insurance and Other Benefits. (A) Group Health and Dental Coverage. Mr. Lento shall be continued on the Company group health insurance plan at the same contribution rate until the end of the Severance Period. Thereafter, Mr. Lento may continue receiving group medical coverage at his own expense as provided by federal COBRA law, provided that Mr. Lento elects, within the established COBRA guidelines, COBRA continuation. Eligibility to continue this insurance under COBRA ceases upon the termination of any period allowed by law. (B) Life Insurance Coverage. The Company shall continue to provide Mr. Lento with the existing group life insurance at the same contribution rate until the Termination Date. After that date, Mr. Lento may apply to convert the existing group life insurance to an individual policy at his own expense. (C) Disability Insurance. Disability insurance will cease as of the Termination Date, and there is no right of individual conversion. (D) Retirement Plans. Mr. Lento shall be entitled to his vested benefit in the Company's 401(k) plan as determined by the plan provisions. Service credit will cease as of the Termination Date, and he may not make further contributions or salary reduce after the Termination Date. (E) Vacation Pay. Mr. Lento has received full payment for all accrued unused vacation as of the Termination Date. (F) Cessation of Benefits. Unless otherwise provided for expressly in this Agreement, all other benefits have ceased as of the Termination Date, including without limitation, the accrual of vacation time. 4. Return of Property. Mr. Lento has returned or shall return all papers, files, documents, computers, reference guides, equipment, keys, identification, credit cards, software, computer access codes, disks and institutional manuals, or other property belonging to the Company on or before the Termination Date. Mr. Lento shall not retain any copies, duplicates, reproductions or excerpts thereof. 5. Nondisclosure of Confidential Information. Mr. Lento agrees not to use to his own advantage or to disclose to any person or entity any confidential information of the Company or of any past or present customer of the Company, vendor, subcontractor or supplier of the Company, including but not limited to financial data or projections, customer lists, projects, economic information, pricing, systems, plans, methods, procedures, operations, techniques, know-how, trade secrets or merchandising or marketing strategies. Mr. Lento reaffirms and shall adhere to his obligations, in their entirety, to protect and to refrain from disclosing the Company's confidential information, trade secrets, and customer relationships as 2 such obligations and restrictions are set forth in the Invention, Assignment and Proprietary Information Agreement between Mr. Lento and the Company dated June 26, 1997 (the "Invention Agreement"), which agreement is hereby incorporated by reference, made a part hereof, and is attached hereto as Exh. 4. 6. Cooperation in Execution of Documents, Patent Related Applications, Assignment Elections, and other Instruments. (i) With regard to the Company's applied-for patents relating to its Multiple Stream Mixer Reactor device, processes and products produced thereby, of which invention Mr. Lento is listed as a co-inventor (the "Invention"), Mr. Lento agrees to, without the payment of additional compensation or consideration, execute any assignments, transfers, elections, extensions, amendments, country entry applications or other reasonably necessary documents relating to patent application of the Invention and prosecution thereof at the direction of the Company, in order to more completely vest control and ownership of the Invention in the Company. (ii) Mr. Lento agrees to execute any and all other necessary and proper documents relating to his resignation as an officer of the Company, signatory to Company bank accounts, Trustee of the Company's Retirement Program ("401(k) Program") and to sign such other documents as are required for an effective and orderly termination and transition of his authority and responsibilities. Mr. Lento shall execute a 401(k) Trustee Resignation in the form of Exh. 5. 7. Settlement of Amounts Due Mr. Lento. The amounts set forth above in Section 2 together with any amounts including earned but unused vacation pay, the consideration set forth in Section 3 shall constitute the complete and unconditional payment, settlement, satisfaction and accord with respect to all obligations and liabilities of the Company (including its successors and assigns, its officers and directors, shareholders, employees and/or agents) to Mr. Lento, and any claims, causes of action and damages by Mr. Lento against the Company and/or any such other party regarding Mr. Lento's employment with the Company, including without limitation, all claims for back wages, salary, draws, commissions, bonuses, vacation pay, expenses, compensation, severance pay, attorney's fees, compensatory damages, exemplary damages, or other costs of any kind or nature whatsoever. 8. Release. (A) Release from Mr. Lento to Company. In exchange for the amount and actions described in Section 2 and other good and valuable consideration, receipt of which is hereby acknowledged, Mr. Lento and his representatives, agents, estate, successors and assigns, absolutely and unconditionally hereby release and forever discharge the Company, and its successors, assigns, shareholders, officers, directors, employees, including but not limited to Irwin Gruverman, Jack Swig and Jody Buck and/or agents, both individually and in their official capacities, for and on account of any and all liabilities, agreements, promises, debts and damages, whether existing or contingent, known or unknown, which arise out of Mr. Lento's employment with, separation from, or termination from the Company, and with respect to, any and all debts, demands, actions, causes of action, suits, covenants, contracts, wages, bonuses, damages and any and all claims, demands, liabilities, and expenses (including attorneys' fees and 3 costs) whatsoever of any name or nature both in law and in equity ("Claim") which Mr. Lento now has, ever had or may in the future have against the Company by reason of any matter, cause or thing which has happened, developed or occurred before the signing of this Agreement, including, but not limited to, any and all suits in tort or contract, and any Claims or suits relating to salary, wages, raises, bonuses and commissions, stock or stock options, the breach of an oral or written contract, misrepresentation, defamation, and interference with prospective economic advantage, interference with contract, intentional, or negligent infliction of emotional distress, negligence, breach of the covenant of good faith and fair dealing, and Claims arising out of, based on, or connected with his employment by the Company and the termination of that employment as set forth in this Agreement, including any causes of action or Claims for unlawful employment discrimination of any kind, including discrimination due to age, sex, disability, race, national origin, or harassment arising under or based on Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967 ("ADEA"), as amended; the Equal Pay Act of 1963; the Massachusetts Fair Employment Practices Act; the Massachusetts Civil Rights Act; the Massachusetts Equal Rights Law and any other state or federal equal employment opportunity or anti-discrimination law, policy, order or regulation affecting or relating to Claims or rights of employees, which Mr. Lento ever had, now has, or claims to have against the Company. Mr. Lento further agrees not to institute any charge, complaint, or lawsuit to challenge the validity of this Agreement or the circumstances surrounding its execution, subject to the provisions of Section 14. This is a General Release, including a waiver for any claims of age discrimination under federal and state statutes, such as the ADEA. (B) Release from Company to Mr. Lento. In exchange for good and valuable consideration, receipt of which is hereby acknowledged, the Company absolutely and unconditionally hereby releases and forever discharges Mr. Lento for and on account of any and all liabilities, agreements, promises, debts and damages, whether existing or contingent, known or unknown, which arise out of Mr. Lento's employment with, separation from, or termination from the Company, and with respect to, any and all debts, demands, actions, causes of action, suits, covenants, contracts, damages and any and all claims, demands, liabilities, and expenses (including attorneys' fees and costs) whatsoever of any name or nature both in law and in equity ("Claim") which the Company has by reason of any matter, cause or thing which has happened, developed or occurred before the signing of this Agreement, excluding enforcement of the terms of this Agreement and any past violations(s) of the Invention Agreement. 9. Covenant Not to Sue. Mr. Lento agrees not only to release and discharge the Company and/or its successors, assigns, shareholders, officers, directors, employees and/or agents from any and all claims as stated above that Mr. Lento could make on his own behalf or on the behalf of others, but also those claims which might be made by any other person or organization on behalf of Mr. Lento, and Mr. Lento specifically waives any right to become a member of any class, participate in or induce or encourage participation in any case, proceeding or undertaking in which a claim or claims against the Company and/or its successors, assigns, shareholders, officers, directors, employees and/or agents are made involving any matters which arise out of Mr. Lento's employment with or termination from employment with the Company, or any shareholder or shareholder derivative action. Mr. Lento represents and warrants that he has not filed any complaints, charges, or claims for relief against the Company with any local, state or federal court or administrative agency. 4 Mr. Lento agrees and covenants not to sue or bring any claims or charges against the Company with respect to any matters arising out of or relating to his employment with or separation from the Company, other than enforcement of the terms of this Agreement, or any claims that as a matter of law cannot be released, such as under the Massachusetts workers compensation system, for unemployment benefits or any claims related to the Company's future involvement with, if any, Mr. Lento's 401(k) retirement plan with the Company or except as set forth in Section 14. In the event that Mr. Lento on his own behalf institutes any such action, that claim shall be dismissed upon presentation of this Agreement and he shall reimburse the Company for all legal fees and expenses incurred in defending such claim and obtaining its dismissal. 10. Non-Interference/Non-Solicitation. Mr. Lento agrees that during the term of this Agreement and for a period of eighteen (18) months following the expiration or termination of this Agreement, he will not, without the prior written agreement of the Company: (i) solicit, or solicit for hire or cause any other person or entity to solicit, or solicit for hire any individual who is or has been employed by the Company or any of its affiliates, or any customer, vendor, subcontractor or technical consultant of the Company with whom Mr. Lento had contact at any time during the period Mr. Lento was President of the Company; or (ii) solicit, participate in, or ally himself with any person or entity to engage in or be engaged in any tender offer or so-called "hostile take-over" of or concerning the Company or its securities. Notwithstanding the provisions of para.10, subsection (i) neither Mr. Lento nor any entity with which he enters into employment or becomes otherwise affiliated with shall be prohibited from the solicitation of any customer, vendor, subcontractor or technical consultant of the Company so long as such solicitation (i) does not result in any direct competition with the Company or its products, and (ii) the result of such solicitation does not utilize proprietary manufacturing or technical information of the Company and its products. Mr. Lento will inform prospective employers and any entity with which he becomes affiliated, including but not limited to one for which he performs services as an independent contractor, of the obligations of Mr. Lento under this Agreement while such obligations continue in effect. 11. Pejorative Statements/DET Claim. The Company hereby represents, warrants and covenants that it shall avoid making pejorative statements about Mr. Lento and the terms of the his separation from employment with the Company, to the fullest extent possible, except as required by legal process, law or regulation. Company will not hereafter oppose an application for unemployment benefits to the DET by Mr. Lento, and will respond appropriately thereto. Mr. Lento understands that the DET, not the Company, makes the determination as to such benefits, and that the Company cannot assure that Mr. Lento will receive such benefits or the amount of such benefits. In response to an employment reference request, the Company will respond only with his dates of employment and positions held. Mr. Lento hereby represents, warrants and covenants that he will not make pejorative statements about the Company and/or its officers, directors, employees, or agents except as required by legal process, law or regulation. Mr. Lento further represents, warrants and covenants that he shall not make any detrimental or disparaging remarks about the products, equipment, machinery or systems, manufactured, distributed or sold by the Company. 12. Nonadmissions Clause. It is understood and agreed that this Agreement does not constitute any admission by the Company that any action taken with respect to Mr. Lento was unlawful or wrongful, or that such action constituted a breach of contract or violated any federal or state law, policy, rule or regulation. 5 13. Nondisclosure of this Agreement. Mr. Lento expressly agrees, and hereby instructs his attorney and immediate family, if any, that the nature and terms of this Agreement are confidential, and expressly agrees not to discuss or disclose them, or the facts and contentions contained therein, without the prior written consent of the Company, with or to any person, except to the Internal Revenue Service, state tax authorities, his accountant or tax advisor, his attorneys, his immediate family, his therapist or healthcare provider, or as required by law. 14. Exclusion. Nothing in this Agreement shall preclude Mr. Lento from filing a charge or complaint, including a challenge to the validity of this Agreement, with the Equal Employment Opportunity Commission or the Massachusetts Commission Against Discrimination or from participating or cooperating in any investigation or proceeding conducted by either of those agencies. In the event that a charge or complaint is filed with any administrative agency or in the event of an authorized investigation, charge or lawsuit filed by any administrative agency, Mr. Lento expressly waives and shall not accept any award or damages therefrom. 15. Breach. Mr. Lento agrees that the compensation and benefits contained in this Agreement and which flow to him from the Company are subject to termination, reduction or cancellation in the event that he takes any action or engages in any conduct deemed by the Company to be in violation of this Agreement. In the event that Mr. Lento institutes legal proceedings to enforce this Agreement, he agrees that the sole remedy available to him shall be enforcement of the terms of this Agreement and/or a claim for damages resulting from the breach of this Agreement, but that under no circumstances shall he be entitled to receive or collect any damages for claims that he has released under this Agreement in accordance with the General Release contained in Section 8 of this Agreement. 16. Injunctive Relief. The parties hereto acknowledge that any breach, by either party, of the representations, warranties and covenants contained in this Agreement (particularly in Sections 5, 9, 10 and 11 hereof) would cause irreparable harm not adequately compensable by money damages. Consequently, the parties hereby stipulate that the non-breaching party may seek injunctive relief to prevent an actual or threatened violation of this Agreement. The parties consent to jurisdiction and venue of any state or federal court for the purposes of any suit for equitable relief hereunder, and to service of process by certified or registered mail, return receipt requested. All equitable rights, remedies and damages available to the parties shall be considered cumulative and use of a particular right, remedy, damage or relief shall not preclude the non-breaching party's further exercise of other rights, remedies and damages. 17. Arbitration. With the exception in Section 16 seeking injunctive relief sought by the Company, or as otherwise provided in this Agreement, any controversy or claim regarding this Agreement, its enforcement or interpretation, shall be settled by final and binding arbitration administered by the American Arbitration Association sitting in Boston, under its Employment Dispute Resolution Rules (one arbitrator) and the award rendered by the Arbitrator shall be enforceable in any court of competent jurisdiction. 18. Representations. Mr. Lento acknowledges that in exchange for entering into this Agreement he has received good and valuable consideration in excess of that to which he would otherwise have been entitled in the absence of this Agreement. This consideration includes, but 6 is not limited to, the Company's Severance Payment to Mr. Lento as described in Section 2. Mr. Lento further acknowledges the sufficiency of that consideration. 19. Time To Consider Agreement. Mr. Lento acknowledges that he has been advised in writing to consult with an attorney and has had ample opportunity to consult with and review this Agreement with an attorney of his choice, and has been given a period of at least twenty-one (21) days within which to consider whether to sign this Agreement. Mr. Lento may sign this Agreement prior to the end of this twenty-one (21) day period, provided Mr. Lento does this knowingly and voluntarily. 20. Revocation. It is agreed and understood that for a period of seven (7) days following the execution of this Agreement, which period shall end at 5:00 p.m. on the seventh day following the date of execution, Mr. Lento may revoke this Agreement. This Agreement will not become effective until this revocation period has expired. This seven (7) day revocation period cannot be shortened by agreement of the parties or by any other means. 21. Severability. If any of the terms of this Agreement shall be held to be invalid and unenforceable, the remaining terms of this Agreement are severable and shall not be affected thereby. The invalidity or unenforceability of any provision of this Agreement shall be revised, construed and reformed, to the fullest extent possible to effectuate the purpose and intent of this Agreement. This Agreement shall be binding upon and inure to the benefit of the Company and Mr. Lento and their respective heirs, successors and assigns. 22. Entire Agreement. This Agreement and its Exhibits constitutes the entire agreement between the parties about or relating to Mr. Lento's separation from employment with the Company, or the Company's obligations to him with respect his termination and fully supersedes any and all prior agreements or understanding between the parties. The terms of this Agreement are contractual in nature and not a mere recital, and they shall take effect as a sealed document. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts, and may not be changed orally, but only by agreement in writing signed by both parties. The parties attest that no other representations were made regarding this Agreement other than those contained herein. IN WITNESS WHEREOF, the parties have signed this agreement as an instrument under seal as of the date set forth below. _______________________________________________ December ___, 2000 Michael A. Lento MFIC Corporation By:____________________________________________ December ___, 2000 Irwin Gruverman, President, CEO and Chairman M.A.L. TERMINATION AGREEMENT Exhibit 1. Resignation from MFIC Officer Positions (attached) Exhibit 2. Bonus Compensation Plan Exhibit 3. Summary of "Qualified Stock Options" Exhibit 4. Invention Assignment & Proprietary Information Agmt. - 6/26/97 Exhibit 5. Resignation as Trustee from 401(k) Plan (attached) Exhibit 1. Michael A. Lento 12 Sherman Road Melrose, MA 02176 December 14, 2000 MFIC Corporation 30 Ossipee Road Newton, MA 02464-9101 Gentlemen, This letter will confirm my resignation from the positions of President and Treasurer of MFIC Corporation, a Delaware corporation, effective as of November 20, 2000. Yours truly, Exhibit 5. Michael A. Lento 12 Sherman Road Melrose, MA 02176 December 14, 2000 MFIC Corporation 30 Ossipee Road Newton, MA 02464-9101 Gentlemen, This letter will confirm my resignation, effective November 20, 2000, from the position of Trustee of MFIC Corporation's 401(k) Plan. Yours truly, EX-10.45 6 a2043743zex-10_45.txt EXHIBIT 10.45 EXHIBIT 10.45 Irwin J. Gruverman December 31, 2000 16 Tanglewood Road Needham, MA 02494 Dear Mr. Gruverman: This will confirm our Agreement concerning charges you will incur in connection with your activities for G&G Diagnostics Corporation, and other arrangements. You may maintain an office in our premises at 30 Ossipee Road and will pay MFIC $900.00 per month for space, incidental administrative support, minor supplies usage, and limited use of the telephone and copying resources. You will reimburse MFIC for express charges, accounting help and materials and services purchased through our system. This arrangement will end when G&G Fund ceases its activities, projected as July, 2001. Jack Swig will be an employee of MFIC. He will be available to G&G on a limited consulting basis. G&G will reimburse MFIC at a rate of $1500.00 per month for such services, for so long as G&G carries on its activities, projected to end by July, 2001. MFIC CORP. /s/ Robert Bruno /s/ Irwin Gruverman - --------------------------- ---------------------------- Robert Bruno, COO Irwin Gruverman for myself and as /s/ Irwin Gruverman President, G&G - --------------------------- Diagnostics Corp. Irwin Gruverman, CEO, Chairman EX-10.46 7 a2043743zex-10_46.txt EXHIBIT 10.46 Exhibit 10.46 Irwin J. Gruverman December 31, 2000 16 Tanglewood Road Needham, MA 02194 Dear Mr. Gruverman: This will confirm our Agreement concerning your compensation as Chairman, President and CEO of MFIC. Subject to approval by the Board, we will pay you at a base rate of $95,000 per year, beginning January 1, 2001. You will participate in a bonus pool, if any, for management employees. You agree that MFIC will withhold money from your compensation to pay appropriate taxes. You will be included in MFIC's insurance and medical programs as in past years, at no cost to you, as part of your compensation. MFIC CORPORATION - ------------------------------ --------------------------- Irwin Gruverman, CEO, Chairman Irwin Gruverman, for myself EX-23.(A) 8 a2043743zex-23_a.txt EXHIBIT 23(A) Exhibit 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-6300, 33-19372, 33-38928, 33-38925, 33-86726, 333-14607, and 333-29949 of MFIC Corporation (the "Company") on Form S-8 of our report dated March 29, 2001, except for Note N, as to which the date is April 13, 2001 appearing in this Annual Report on Form 10-K of MFIC Corporation for the year ended December 31, 2000. /s/ DELOITTE AND TOUCH LLP Boston, Massachusetts April 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----