**+**

**UNITED STATES**

**SECURITIESAND 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**

 

**Forthe fiscal year ended December 31, 2001**

 

----

 

**CommissionFile Number: 0-11625**

 

**MFICCORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                                                 |   | **04-2793022**                       |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                              |   | (I.R.S. Employer Identification No.) |
|                                                                                         |   |                                 |
| **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 checkmark whether the registrant;  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes     ý  No     o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

 

 

The aggregate market value of Common Stockheld by non-affiliates of the registrant (without admitting that any personwhose shares are not included in determining such value is an affiliate), basedupon the closing sale price of the Common Stock on March 15, 2002 as reportedon the NASDAQ Over-the-Counter Bulletin Board was $1,900,381.

 

The number of shares outstanding of theregistrant’s Common Stock as of March 15, 2002 was 7,651,981 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant intends to file a definitiveproxy statement pursuant to Regulation 14A within 120 days of the end of thefiscal year ended December 31, 2001. Portions of such proxy statement areincorporated by reference into Part III of this report.

 

# **Item 1.**                                                BUSINESS:

 

CompanyOverview:

 

MFIC Corporation (MFIC or the Company), through its wholly-ownedsubsidiaries, Microfluidics Corporation (Microfluidics Division) andMediControl Corporation (MediControl), as well as its other operating division,Morehouse-COWLES, specializes in producing and marketing a broad line of fluidmaterials processing systems used for a variety of grinding, dispersing,milling, and blending applications across a variety of industries and for usein numerous applications within those industries. Microfluidizer®high shear fluid processor systems are produced at the Microfluidics Division,while high shear dispersers, dissolvers, colloid mills, horizontal media mills,vertical media mills, and grinding media are either produced or sold by theMorehouse-COWLES Division.

 

Microfluidizer® fluid processing equipment, produced by theCompany’s Microfluidics Division, is used to formulate stable emulsions,dispersions, and liposomes, and is used in general for deagglomeration and forcell disruption for the biotech industry. Emulsions are found in a broadvariety of common products, including processed foods, pharmaceuticals, andspecialty coatings such as photographic films. Dispersions are often employedin products such as pharmaceuticals, inks, pigments and coatings.  The Company believes that the processingtechnique of the Microfluidizer® equipment enhances the stabilityand consistency of emulsions and dispersions due to the equipment’s uniqueability to consistently produce uniform micron and sub micron scale particlesin many applications.  Liposomes, whichare biodegradable cell-like structures, are used to encapsulate medications ornutrients, and are typically used in cosmetic or pharmaceutical products.  In addition, Microfluidizer®equipment is used in biotechnology applications to harvest, through celldisruption, the cultivated product contents of plant and animal cells.

 

2

----

 

The Company’s product lines are used to create stable emulsions anddispersions through deagglomeration and particle size reduction. Theseformulations may be liquid/liquid or liquid/solid formulations and aregenerally prepared in quantities ranging from one gallon to several thousandgallons in an industrial environment.  Inconnection with the processing of emulsions and dispersions, the various piecesof equipment in the product lines of the Morehouse-COWLES Division may be usedin preparatory steps prior to introduction of the product into theMicrofluidizer® system for further processing.

 

The Company’s product lines are diversified and certain equipment isused independent of the Microfluidizer® equipment in the preparationof many industrial fluid formulations where the desired product characteristicsdo not require the sub-micron size of particles created by Microfluidizer®processing.

 

While the Microfluidizer® equipment is generally used in theprocessing of high value-added end-products that require extremely smallparticle sizes, the Company’s other product lines are used in broader, highvolume, lower value-added applications requiring less stringent particle sizereduction.

 

The combination of product lines result in one of the broadestofferings of fluid processing equipment in the materials processingmarket.  The Company, in late 1998 andearly 1999, integrated its then existing three divisions such that itscorporate marketing and sales group was responsible for the marketing and salesof the products for all divisions. The acquisition of the Epworth Mill andMorehouse-COWLES divisions in 1998 and the consolidation of marketing and salespersonnel into one group enabled the Company to sell stand-alone pieces ofequipment to smaller companies that require only limited processing capability,as well as integrated systems or multiple pieces of equipment from more thanone division to larger customers that have a variety of fluid processingrequirements.

 

The Company was incorporated in Delaware in 1983. The Company, formerlynamed Biotechnology Development Corporation, changed its name effectiveJune 8, 1993 to Microfluidics International Corporation, and again changedits name effective July 12, 1999 to MFIC Corporation. Its principal executiveoffices are located at 30 Ossipee Road, in Newton, Massachusetts,02464-9101 and its telephone number is (617) 969-5452.

 

Microfluidizer® and Zinger® are trademarks of theCompany, which have been registered with the United States Patent and TrademarkOffice.  Morehouse-COWLESTMand Microfluidicsäare trademarks of the Company for which registration applications have beenfiled with the United States Patent and Trademark Office.  All other trademarks or trade names referredto herein are the property of their respective owners.

 

3

----

 

The Technology:

 

The Company’s Microfluidizer® materials processor device isbased on patents and related technology that were licensed by the Company fromArthur D. Little & Co. in 1983 and subsequently purchased by theCompany in 1985. The Company holds two United States patents related to theapparatus and process used to intimately mix liquids and disperse particulatesolids in microemulsions.

 

The Company’s Microfluidizer® processor technology is usedin materials processing and product formulation to mix materials that arenormally very difficult to mix. The Microfluidizer® processortechnology allows manufacturers in the chemical, pharmaceutical, biotechnology,cosmetic, and food processing industries to produce higher quality productswith better characteristics on a more consistent basis than with otherblending, mixing, or homogenizing techniques. Additionally, the equipment isused for cell disruption to harvest the cultivated contents of animal and/orplant cells and for liposomal encapsulation of materials for the cosmeticsbiotech/ biopharma industry.

 

Prior to October 1, 2000, the Company’s Epworth Mill Division productsconsisted of ball mills and horizontal media mills. The division was alsoengaged in the sale and distribution of grinding media.  The division’s ball mills are used in coarsegrinding application of liquid slurries such as ore from mines or coarseslurries of material that will later be processed into finer slurries.  The ball mills use large media in ahorizontal rotating cylindrical vessel to crush and grind the product beingprocessed. The patented Zinger® horizontal media mill utilizes aunique design for grinding and dispersing solid materials in a liquid carryingmedium.  The design is based uponestablished rotating, horizontal shaft technology but adds the uniquecapability of enhanced mechanical activity between the grinding media and theproduct formulation.  The enhancedmechanical activity is achieved through a unique combination of speciallydesigned rotors and containment vessels. In comparison to traditional horizontal media mills, the Zinger mediamill technology has demonstrated significantly improved productivity in termsof greater volumes of product processed at acceptable quality than thecomparably sized and priced horizontal media mills. On July 24, 2000, theCompany announced that it would transfer the manufacturing and sale of itsZinger® horizontal media mills from its Michigan-based Epworth MillDivision to the Morehouse-COWLES Division plant in Fullerton, California. Thetransfer began on October 1, 2000, and was completed in the fourth quarter offiscal 2000.

 

On September 30, 2000, the Company ceased operations of the Ball Millrepair business and decided to sell its Ball Mill operation conducted at theEpworth Mill Division through a broker.  On April 13, 2001 the Company concluded the sale of the operation for$200,000 in cash and a promissory note, which resulted in a loss on the sale ofthe Ball Mill assets of approximately $53,000.

 

The Company’s Morehouse-COWLES Division manufactures grinding anddispersing equipment used mainly in the coatings and ink industries. Theproducts include high-speed 

 

4

----

 

dissolvers, dispersers,stone mills, and vertical and horizontal media mills. As one of the earlyinventors of dispersers, dissolvers, colloid mills, and media mills, the onehundred-year-old COWLES name is an industry-accepted symbol of quality,reliable products.

 

Commercial Applications:

 

The Microfluidizer® equipment can be used to mix and formulatestable emulsions, dispersions and liposomes, and for cell disruption.

 

Emulsions are homogenous mixtures of oil and water components (or othernormally immiscible components), which, if mixed properly, do not readilyseparate.  Emulsions comprise manyproducts, such as food additives, medicines (including injectable drugs),photographic films, and polymers.  TheCompany believes that, generally, an emulsion processed with Microfluidizer®equipment will exhibit improved stability and require reduced concentrations ofcostly emulsifying agents that are otherwise needed to enhance productstability.

 

Dispersions are mixtures of fine solids suspended in liquid so that thetwo do not separate readily after processing. Similar to emulsions, dispersions are used in a variety of consumer andindustrial products, including pigments for medicines (including injectabledrugs), paints and inks, iron oxide for magnetic tapes and mascara,phosphorescent coatings for TV screens and fluorescent lamps, barium titanatefor capacitors, toners and inks.

 

Liposomes are biodegradable cell-like structures, formed from materialssuch as cholesterol and lecithin, which can be used to encapsulate medicationsor nutrients.  Pharmaceutical andcosmetic manufacturers use liposomes as a delivery system to target activeingredients for specific anatomical sites and to prolong their efficacy.  To date, liposomes have been usedcommercially in two applications, of medical diagnostic agents andcosmetics.  Applications include the encapsulationof dye to be used as a marker in medical diagnostic tests and the encapsulationof ingredients for deeper skin penetration, or time release control, as well aspharmaceutical, food and specialized agricultural applications.

 

In the biotechnology industry, Microfluidizer® equipment iscurrently used to harvest, by cell rupture, the contents of plant or animalcells.  The precision with which theMicrofluidizer® equipment can be used to break up materials allowsthe encapsulating cell wall to be ruptured without damage to or contaminationof the cell contents. As a result, the Microfluidizer® equipmentminimizes the amount and presence of cell wall debris, thus resulting inmaximum yields.

 

The Microfluidizer® equipment is generally used in commercialapplications where a scientist, formulator or chemist is trying to develop orimprove a product formulation for an expensive, high value-added end product.Microfluidizer® equipment is initially employed in a researchlaboratory, with the equipment subsequently being used in scaleup to pilotscale production of new or improved products, and ultimately, for fullproduction scale volumes as the improved

 

5

----

 

product comes to market. Fromlaboratory to production, the volume of product processed range from less thanone-half liter per minute to 200 liters per minute.

 

The Company also manufactures products that are generally used forblending, mixing, deagglomeration and dispersion of paints and coatings, inks,adhesives, sealants, and pigment dispersions. These applications tend to beless technically demanding, the formulations are less expensive to produce andthe volumes of product produced are large.

 

The Products:

 

TheCompany currently manufactures and markets the following lines of equipment:

 

The HC Series:  The HC Series, also known as “Homogenizers,” is alaboratory-scale series of equipment that is intended to impart moderate levelsof energy into a customer’s product with greater flow rates than the moreenergy intensive Microfluidizer® devices. Operating pressures ofproducts in the Company’s HC Series can range from under 500 psi to ashigh as 8,000 psi, and will process as much as two liters of fluid perminute.

 

The M-110 Series:  The M-110 Series, a laboratory product line, is designedprimarily for research and development applications. Standard models canoperate at pressures as high as 25,000 psi and have a flow rate that exceedsone-half liter of product per minute. The most recent introduction in this line is the M-110EHI model designedfor “non-sanitary” industrial applications such as paint, coatings, pigmentsand other chemical/industrial applications. The M-110EHI includes an on-board hydraulic pump system for highperformance “lab scale” micro-mixing at processing pressures up to 25,000 psiand flow rates up to 450 ml/min and has numerous standard features and optionssuch as an explosive-proof model.

 

The M-140 Series:   The M-140K, introduced in June of 1994, is a laboratory-scaleunit developed for customers in the chemical, biotechnology, pharmaceutical,cosmetic and food processing industries that require elevated operatingpressures and higher shear forces to achieve better performance.  The M-140K can achieve operating pressures upto 40,000 psi. The M–140K has a built-in hydraulic system and utilizes abi-directional intensifier pump that provides a highly uniform pressureprofile. It has been designed with many accessories and options including anexplosion proof motor, control package, and solvent seal quench.

 

The M-210 Series:   The M-210 Series is a pilot unit and is primarily marketed topharmaceutical, cosmetic and food product manufacturers who have created asuccessful new or improved formulation on the M-110 Series unit and would liketo increase their productive capacity. The M-210 Series unit is typically used for testing formulations atgreater volume levels before initiating full-scale production. For somecustomers (such as pharmaceutical product manufacturers), the M-210 Series mayhave the capacity to function as a production unit.

 

6

----

 

The M-610 Series:  The M-610 Series consists of custom-builtmodels used for large-scale production. These units have flow rates of up to 19 gallons per minute and generateoperating pressures up to 40,000 psi.

 

The M-700 Series:  The M-700 Series was introduced at the endof fiscal 1998 and was originally designed, engineered, and constructed for usein “rugged” industrial environments such as coatings, paints and pigmentsresearch and manufacturing.  The M-700Series products will use components especially designed to withstand suchhazards as dust, grease, and water spray. Through use of our own proprietary designed intensifier pump and othercomponents, the system is also more cost-effective, resulting in list pricereductions of 30% and more.

 

The M-700 Series equipment is available in a variety of configurationsand 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 witha maximum operating pressure of 30,000 psi. It achieves flow rates andproductive capacity exceeding that of the M-210 series and is, therefore,considered by the Company to be a large-scale production unit.  The 700 series incorporates the same “cleanin place” design present on the 210 and 610 series systems.  Between fiscal 2000 and the end of fiscal 2001,the Company manufactured and shipped four sterile M-700 machine designed foruse in the pharmaceutical industry.

 

Stone Mills: Stone Mills are utilized for processing chemicals, food products andminerals where the user desires to reduce particles to 15-25 microns in sizeand where the capital equipment costs must be minimized.

 

Vertical MediaMills: VerticalMedia Mills are used in connection with batches or continuous milling ofproducts in a wide variety of industries including chemical, agricultural,cosmetics and food.  Batch sizestypically range from 2 to 60 gallons with throughput capacities of 2 to 900gallons per hour.

 

Single ShaftDissolvers and Dispersers: Single Shaft Dissolvers and Dispersers are available in a variety ofsizes to meet demand from laboratory to full production volume.  Generally, these dissolvers and dispersersare used in lower cost products, at viscosities up to 50,000 centipoise thatrequire blending, mixing, deagglomeration and dispersion.

 

Multi-shaftDissolvers and Dispersers: Multi-shaft Dissolvers and Dispersers are available in a variety of sizesto meet demand from laboratory to full production volume.  Generally these dissolvers and dispersersare used for high viscosity products up to 2 million centipoise.

 

Customized Units: To meet larger production volumerequirements or specialized applications, the division provides customizedsingle and multi-shaft dissolvers and dispersers on a specialized quotationbasis.

 

7

----

 

Zinger® HorizontalMedia Mills:  This media milling equipment is available inthe following sizes that process products in volumes ranging from one-quarterliter to 60 liter batches or on a continuous basis.

 

**•**                  The XL Series: The XL Series equipment is used in laboratoryenvironments and has processing vessel sizes from 0.33 liters to 1.25 liters.

 

**•**                  The SV Series: The SV Series equipment is used in pilot scaleenvironments and has processing vessel sizes from 1.35 to 5.1 liters.

 

**•**                  The LV Series: The LV Series equipment is used in productionenvironments and has processing vessel sizes from 7.3 to 38 liters.

 

Distribution of Grinding Media - The Company is one of the largestdistributors of grinding media in the United States. Sale and distribution ofgrinding media includes a wide variety of grinding media from media producersaround the world.  The media are used asconsumables in mixers produced by the Company as well as by competitors. Mediatypes include all currently used materials in the industry including glass,ferrous, stone, steel shot, and ceramic.

 

Marketing andSales:

 

The Company’smarketing and sales activities are conducted through a corporate marketing andsales group that is responsible for the worldwide marketing and sales of allproducts.

 

Marketing programsinclude advertising, direct mail, seminars, trade shows and telemarketing. Inaddition, the Company has an active program of field demonstrations, as well asdemonstrations to potential users in the Company’s applications laboratorieslocated in Newton, Massachusetts, Fullerton, California, and Lampertheim, Germany.International distributors and sales agents are supported with tradeadvertising, collateral literature and trade show materials.  The distributors also advertise directly ontheir own behalf and attend regional and international trade shows.  As an aid to the marketing and salesactivity for the equipment, the Company provides prospective customers withaccess to its testing laboratories. These laboratories provide free processingand particle size and distribution analysis of a prospective customer’s sampleformulation. Additionally, a prospective customer may pay for subsequentlaboratory time and services on a fee for services basis, which includesequipment rentals.

 

The Company sellsits divisions’ equipment in the United States through a network of independentmanufacturer’s representative firms who are managed by the Company’s regionalsales managers. In Canada, the Company has an exclusive distributor for theMicrofluidics product line. In Europe, the Company sells its equipment througha network of independent regional sales agents and distributors who are managedby the Company’s European Sales Manager. In Asia and the Pacific Rim, the Company sells through a network ofdistributors and

 

8

----

 

independentmanufacturer’s representative firms. Customers in other geographical regionsare assisted directly by Company sales staff.

 

Customers:

 

The users of theCompany’s systems are in various industries, including the chemical,pharmaceuticals, food, cosmetic and biotechnology industries.  No customer accounted for more than 10% ofthe Company’s revenues in 2001, 2000, or 1999.

 

Competition:

 

The Microfluidizer®equipment product line of high shear processors has direct competition in itsmajor markets, including pharmaceutical and coatings/chemical applications, butmanagement believes that the Company’s products have larger installed bases andcompetitive performance advantages over products of our competitors.  The Company believes that the Microfluidizer®equipment product line offers the highest shear forces available in the processequipment market today. In many critical formulations Microfluidizer®processors produces better quality products for our customers.

 

The M-700 Seriesof fluid processors, together with the M-210 and M-610 product lines, providehigh shear fluid processing capabilities for both sanitary, sterile, andindustrial applications.  The Companybelieves that the Microfluidizer® product line provides a distinctadvantage over the product lines of our competitors with respect to theprocessing of abrasive slurries or solids dispersed in liquids in large partbecause of the Company’s unique, wear-resistant, diamond interaction chamberand the special design of the intensifier pumping system.

 

Media sales are indirect competition with a large number of suppliers, including the major sourceof the Company’s media materials.

 

The product linesof the Morehouse-COWLES Division have direct competition in its major marketsegments.  The Morehouse-COWLES productline has strong brand name recognition, a large installed base and a reputationfor high quality, reliable, processing systems.  The systems of this division have a very broad market use in a widevariety of mixing, blending, grinding, and dispersing applications andtherefore have potential for high volume unit shipments.

 

The patentedZinger horizontal media mill competes against a well-established group ofcompetitive mills. The unique design of the Zinger media mill, however, resultsin an economic advantage for customers who employ the Zinger media mill becausethey are able to process larger volumes of product at lower energy cost whileattaining at least the same quality as produced by competitive mill, and can doso occupying less floor space. As customers replace older mills or expand theirfacilities, they will gain an economic advantage by lowering the processingcosts of their products by using a mill, such as the Zinger media mill, whichmore efficiently processes larger quantities of product than competitive mills.

 

9

----

 

The Company faces,and will continue to face, intense competition from other companies whomanufacture and sell fluid processing systems used in grinding, mixing, millingand dispersing applications. The Company is subject to significant competitionfrom organizations that are pursuing technologies and products that are similarto the Company’s technology and products. The Company’s future success willdepend in large part on its maintaining a competitive position in the fluidprocessing systems field.  Rapidtechnological development by the Company or others may result in products ortechnologies becoming obsolete before the Company recovers the expenses it incursin connection with their development. Products offered by the Company could be made obsolete by less expensiveor more effective technologies.  Therecan be no assurance that the Company will be able to make the enhancements toits technology necessary to compete successfully with newly emergingtechnologies.  The Company expectscompetition to intensify in the fluid processing systems field as technicaladvances are made and become more widely known.

 

Research and Development:

 

The Company’sresearch and development efforts are focused on developing new mixingtechniques for the process industries and further enhancing the functionality,reliability and performance of existing products.  Research and development costs were $857,491, $835,136, and$927,582, in 2001, 2000, and 1999 respectively. The Company continues to pursuedevelopment of the Multi-Stream Mixer Reactor (See Patents and ProprietaryRights Protection) by working with customers who assist in the development ofthe system with both application knowledge and financial support.  Patent coverage for this new product hasbeen obtained in the United States and is in various stages of prosecution inthe other major industrial countries.

 

Cooperative ResearchArrangements:

 

The Companysubsidizes research and development activities centered around Microfluidizer®processing technology at a number of research centers and universities.  The Company’s subsidy of these activitiestakes the form of substantial reduction or elimination of the customary rentalcharges for the Microfluidizer® equipment provided for use. TheCompany has, in recent years, subsidized research and development in thefollowing fields at the following universities: The University ofMassachusetts, Lowell - biotechnology; Lehigh University - polymer chemistry;Université Laval (Quebec) - food science; Worcester Polytechnic Institute (WPI)- catalytic chemistry; and Purdue University - pharmaceuticals.  In addition to their research activities,these universities provide the Company with contacts at industrial companiesthat may utilize the Microfluidizer® processing technology.  Additionally, on occasion, research reports,technical papers, and doctoral theses may be published, which document the useof Microfluidizer® technology. Finally, the Company engages in manyinformal co-operative development efforts with its’ customers, particularly inthe Microfluidics Division.

 

In addition toproviding subsidies, the Company has, in the past, entered into a researcharrangement with Worcester Polytechnic Institute (WPI).  The Company has supported research anddevelopment at WPI since 1988.  In 1992,the Company entered into a cooperative venture

 

10

----

 

with WPI to develop,patent and license for WPI, for its commercial applications, the Microfluidizer®process technology in the following fields: (i) the production ofcatalysts used in chemical and petroleum processing; (ii) the manufactureof advanced ceramic materials; and (iii) the destruction of volatileorganic compounds and other organic contaminants in process waste water. TheCompany and WPI applied for United States and foreign patents in 1992 and 1993,respectively, which cite the Microfluidizer® processing technologyas enabling the above process technologies. The two applied-for United Statespatents were both granted and issued to WPI in the United States in 1995. In1996 one applied for patent was granted to WPI in France for European entry inthe Patent Cooperation Treat (PCT) countries. Patent issuance for these processtechnologies in several other foreign jurisdictions is either pending or is inthe latter stages of prosecution. The program is inactive at this time.

 

Patents and ProprietaryRights Protection:

 

To protect itsproprietary rights, the Company relies on a combination of U.S. patent andtrademark laws, trade secrets, confidentiality agreements, contractualprovisions and technical means. In the event of patent infringement or breachof confidentiality, there can be no assurance that these measures will beadequate or that the Company will have sufficient resources to prosecute orprevail in an action against a third party. In addition, the Company has not sought patent or trademark protectionfor its Microfluidizer® equipment’s interaction chamber in anycountry other than the United States and, as such, its proprietary rights arenot subject to the protection of patent or trademark laws of foreign countrieswhere the Company’s equipment is sold. The Company’s Microfluidizer® equipment process patentexpires on March 13, 2007 and its device patent expires on August 6,2002. In 1997 the Company completed development of a novel adaptation of itsMicrofluidizer® equipment - a Multi-Stream High Pressure MixerReactor.  In August 1997, the Companyfiled a patent application for the device and its processes with the UnitedStates Patent and Trademark Office, (USPTO), and filed a Patent CooperationCountry (PCT) application on May 5, 1998. In July and November 2000, the USPTO issuedto the Company notices of allowances of utility patent claims regarding theMultiple Stream High Pressure Mixer/Reactor and the use thereof. The Company’sZinger horizontal media mill is protected by a United States patent grantedJune 5, 1997.

 

Manufacturing:

 

At present, theMicrofluidics Division subcontracts the manufacture of many of the componentsof its equipment to third parties, with the Company undertaking the remainingfabrication, assembly and performance testing. The Division has selected certain primary suppliers based upon pricingterms and the quality of their products. The Company believes that there are adequate available alternatemanufacturing sources and suppliers for their components and raw materialsrequirements.

 

The Morehouse-COWLESDivision performs a significant portion of machining and assembly operations atits respective manufacturing location. Certain specialty components of the systems

 

11

----

 

are provided by outsidecontractors. The Company believes that there are adequate available alternatecontractors to provide the division with specialty components.

 

The loss of anyprimary supplier could have a material, adverse effect on the Company’sbusiness, financial condition, or results of operations.

 

Government Regulation:

 

Certain of theCompany’s customers utilize the Company’s equipment in processes and productionthat are subject to governmental regulation. For example, the manufacturing andmarketing of pharmaceutical products requires the approval of the Food and DrugAdministration (FDA) within the United States and of comparable agencies inforeign countries.  The FDA hasestablished mandatory procedures, safety standards and protocols that apply tothe manufacture, clinical testing and marketing of new pharmaceutical productsin the United States.  The process ofseeking and obtaining FDA approval of a new product often takes a number ofyears and often involves the expenditure of substantial resources.  The FDA approval process contributes to theextremely long lead times that are attendant to manufacturing equipment ordersfor these applications.

 

Further, inaddition to product approvals, the FDA imposes requirements as to manufacturingpractices, record keeping and reporting (Good Manufacturing Practices or GMP).GMP-regulated companies are subject to inspections by the FDA (inclusive ofMicrofluidizer® equipment) and product approvals may be withdrawn ifGMP are not met.

 

At present, theCompany’s customers include companies who are making FDA approved drugs andpreparations for external use and companies who utilize Microfluidizer®equipment for the formulation or production of FDA approved parenteral(injectable) drugs or compounds.

 

For the Company’sequipment entering Europe, CE compliance (Regulatory Compliance with EuropeanSafety Standards) is required.

 

Various laws,regulations and recommendations relating to safe working conditions, laboratorypractices and the purchase, storage, movement, import and export, use anddisposal of harmful or potentially harmful substances that may be used inconnection with the Company’s research work are, or may, be applicable to itsactivities.  These laws include, amongothers, the United States Atomic Energy Act, the Clean Air Act, the Clean WaterAct, the Occupational Safety and Health Act, the National Environmental PolicyAct, the Toxic Substances Control Act, the Resource Conservation and RecoveryAct, national restrictions on technology transfer, import, export and customsregulations and other present and possible future local, state or Federalregulation.  The extent of adversegovernmental regulation which might result from future legislation oradministrative action cannot be accurately predicted.  Certain agreements that may be entered into by the Companyinvolving exclusive license rights may also be subject to national orsupranational antitrust regulatory control, the effect of which cannot bepredicted.

 

12

----

 

Backlog:

 

The Company’ssales order backlog of accepted and unfilled orders at March 15, 2002, andMarch 16, 2001 was approximately $3,337,000 and $3,281,000, respectively.Backlog as of any particular date should not be relied upon as indicative ofthe Company’s net revenues for any future period.

 

Employees:

 

The Company hasapproximately 72 full-time employees as of March 15, 2002.  None of the Company’s employees are coveredby a collective bargaining agreement, and the Company considers its relationswith its employees to be satisfactory. The Company believes that its future success will depend in large parton its ability to attract and retain highly skilled employees.

 

# **Item 2.**          PROPERTIES

 

The Company’scorporate 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 rentsapproximately 127,000 square feet of offices, production and research anddevelopment facilities at these locations for administrative, development andproduction activities. A portion of space is sublet to other non-affiliatedcompanies for a total of $84,000 per annum. The lease terms expire at varioustimes through August 2006. The Company has the option to extend the leases forup to five additional years.  TheCompany believes these facilities will be adequate for operations for the nextseveral years.

 

# **Item 3.**          LEGALPROCEEDINGS

 

The Company is nota party to any material legal proceedings.

 

# **Item 4.**          SUBMISSION OFMATTERS TO VOTE OF SECURITY HOLDERS

 

No matters weresubmitted to a vote of the Company’s security holders during the quarter endedDecember 31, 2001.

 

13

----

 

**PART II**

 

# **Item 5.**          MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The Company’sCommon Stock is traded on the Over the Counter Bulletin Board under the symbolMFIC.  The following table sets forththe range of quarterly high and low bid quotations for the last two fiscal years,as furnished by the National Association of Securities Dealers AutomatedQuotation System.  The quotationsrepresent interdealer quotations without adjustment for retail markups,markdowns, or commissions, and may not necessarily represent actual transactions.

 
| **Quarters  Ended** |   | **12/31  2001** |   | **9/30  2001** |   | **6/30  2001** |   | **3/31  2001** |   | **12/31  2000** |   | **9/30  2000** |   | **6/30  2000** |   | **3/31  2000** |   |
|---------------------|--------|-----------------|--------|----------------|--------|----------------|--------|----------------|--------|-----------------|--------|----------------|--------|----------------|--------|----------------|--------|
| **Low**             |   | 0.40            |   | 0.56           |   | 0.43           |   | 0.50           |   | 0.5625          |   | 0.9375         |   | 0.50           |   | 0.375          |   |
| **High**            |   | 0.65            |   | 1.11           |   | 1.19           |   | 0.875          |   | 1.125           |   | 1.3125         |   | 1.0625         |   | 1.4375         |   |

 

As of March 15,2002, there were approximately 380 holders of record of the Company’s CommonStock.

 

The Company hasnever paid any cash dividends on its Common Stock and presently anticipatesthat no dividends on its Common Stock will be declared in the foreseeablefuture. The Company’s current policy is to retain all of its earnings tofinance future growth. In addition, pursuant to loan covenants contained in theCompany’s loan agreement with its commercial leader, the Company may not paydividends without the commercial lender’s prior approval.

 

# **Item 6.**          SELECTED FINANCIAL DATA

 

The selectedfinancial information presented below is derived from the audited consolidatedfinancial statements of the Company for each of the five years in the periodended December 31, 2001. The information set forth below should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the Consolidated Financial Statements and relatedNotes included elsewhere in this Form 10-K.

 

14

----

 

As discussed inNote 6 to the accompanying financial statements, in August 1998, the Companyacquired the assets and assumed certain liabilities of two businesses,Morehouse-COWLES, Inc. and Epworth Manufacturing Company. These acquisitionswere accounted for as a purchase. Accordingly, in the accompanying financialstatements, the results of operations and cash flows include Morehouse-COWLESand Epworth Mill subsequent to August 14, 1998.

 

**SelectedStatement of Operations Data**

 
|                                                       |   | **Year Ended  December 31,  2001** |       | **Year Ended  December 31,  2000** |   | **Year Ended  December 31,  1999** |   | **Year Ended  December 31,  1998** |       | **Year Ended  December 31,  1997** |   |
|------------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|--------|------------------------------------|--------|------------------------------------|------------|------------------------------------|--------|
| Total revenues                                             |   | $                                  | 15,511,014 |                               | $      | 15,725,695                         |   | $                                  | 14,083,216 |                               | $      | 8,869,679 |   | $ | 7,105,706 |   |
| Total costs and expenses                                   |   | 15,728,336                         |       | 15,793,065                         |   | 14,417,304                         |   | 9,968,142                          |       | 6,702,410                          |   |
| Income (loss) from operations                              |   | (217,322                           | )          | (67,370                            | )      | (334,088                           | )      | (1,098,463                         | )          | 403,296                            |   |
| Interest expense                                           |   | (261,754                           | )          | (350,486                           | )      | (542,045                           | )      | (149,043                           | )          | —                             |   |
| Other (expense) income                                     |   | (53,142                            | )          | (250,000                           | )      | —                             |   | —                             |       | 50,012                             |   |
| Interest income                                            |   | 7,032                              |       | 248                                |   | 9,835                              |   | 119,492                            |       | 159,256                            |   |
| Gain on sale of investments                                |   | —                             |       | —                             |   | 11,864                             |   | 36,203                             |       | 91,863                             |   |
| Net (loss) income before taxes and  extraordinary item     |   | (525,186                           | )          | (667,608                           | )      | (854,434                           | )      | (1,091,811                         | )          | 704,427                            |   |
| Income tax (provision) benefit                             |   | —                             |       | —                             |   | —                             |   | (413,630                           | )          | 403,630                            |   |
| Net (loss) income before extraordinary item                |   | (525,186                           | )          | (667,608                           | )      | (854,434                           | )      | (1,505,441                         | )          | 1,108,057                          |   |
| Gain on subordinated debt restructuring                    |   | —                             |       | 194,500                            |   | —                             |   | —                             |       | —                             |   |
| Net (loss) income                                          |   | $                                  | (525,186   | )                                  | $      | (473,108                           | )      | $                                  | (854,434   | )                                  | $      | (1,505,441 | ) | $ | 1,108,057 |   |
| Weighted-average shares outstanding:                       |   |                               |       |                               |   |                               |   |                               |       |                               |   |
| Basic                                                      |   | 7,375,102                          |       | 7,086,058                          |   | 5,818,588                          |   | 5,296,923                          |       | 4,914,722                          |   |
| Diluted                                                    |   | 7,375,102                          |       | 7,086,058                          |   | 5,818,588                          |   | 5,296,923                          |       | 4,966,998                          |   |
| Basic amounts per common share:                            |   |                               |       |                               |   |                               |   |                               |       |                               |   |
| Net (loss)income  per share before extraordinary gain |   | $                                  | (.07       | )                                  | $      | (.09                               | )      | $                                  | (.15       | )                                  | $      | (.28 | ) | $ | .23 |   |
| Extraordinary gain per share:                              |   | —                             |       | .03                                |   | —                             |   | —                             |       | —                             |   |
| Basic net (loss) income per share                          |   | $                                  | (.07       | )                                  | $      | (.06                               | )      | $                                  | (.15       | )                                  | $      | (.28 | ) | $ | .23 |   |
| Diluted amounts per share:                                 |   |                               |       |                               |   |                               |   |                               |       |                               |   |
| Net (loss) income per share before  extraordinary gain     |   | $                                  | (.07       | )                                  | $      | (.09                               | )      | $                                  | (.15       | )                                  | $      | (.28 | ) | $ | .22 |   |
| Extraordinary gain per share                               |   |                               |       | .03                                |   | —                             |   | —                             |       | —                             |   |
| Diluted net (loss) income per share                        |   | $                                  | (.07       | )                                  | $      | (.06                               | )      | $                                  | (.15       | )                                  | $      | (.28 | ) | $ | .22 |   |

 

**Selected Balance Sheet Data**

** **
|                      |   | **Year Ended  December 31,  2001** |   | **Year Ended  December 31,  2000** |      | **Year Ended  December 31,  1999** |   | **Year Ended  December 31,  1998** |   | **Year Ended  December 31,  1997** |      |
|---------------------------|--------|------------------------------------|--------|------------------------------------|-----------|------------------------------------|--------|------------------------------------|--------|------------------------------------|-----------|
| Working capital           |   | 1,404,675                          |   | $                                  | 1,900,740 |                               | $      | 1,404,820                          |   | $                                  | 1,575,113 |   | $ | 6,805,556 |   |
| Total assets              |   | 12,639,391                         |   | 13,644,235                         |      | 13,227,316                         |   | 14,700,022                         |   | 8,872,218                          |      |
| Long term debt            |   | 316,239                            |   | 896,243                            |      | 775,000                            |   | 675,000                            |   | —                             |      |
| Stockholders’ equity |   | 6,587,087                          |   | 7,093,781                          |      | 7,161,111                          |   | 8,029,786                          |   | 7,538,143                          |      |
|                           |        |                                    |        |                                    |           |                                    |        |                                    |        |                                    |           |  |  |  |  |

 

15

----

 

# **Item 7.**               MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**CERTAIN FACTORS AND CAUTIONARY STATEMENTREGARDING FORWARD-LOOKING STATEMENTS**

 

Management believes that this report containsforward-looking statements that are subject to certain risks and uncertaintiesincluding statements relating to the Company’s plan to achieve full sales/marketingand operational integration of its divisions, to achieve revenue growth, tomaintain and/or increase operating profitability, and to attain net incomeprofitability. Such statements are based on management’s current expectationsand are subject to a number of factors and uncertainties that could causeactual results achieved by the Company to differ materially from thosedescribed in the forward-looking statements. The Company cautions investors that there can be no assurance that theactual results or business conditions will not differ materially from thoseprojected or suggested in such forward-looking statements as a result ofvarious factors, including but not limited to, the following risks anduncertainties: (i) the ability to manage the integration of the Company’sdivisions into a cohesive operation and the attainment of successful operatingresults of such integrated operations, (ii) whether the performance advantagesof the Company’s Microfluidizer® or Zinger® materialsprocessing equipment will be realized commercially or that a commercial marketfor the equipment will continue to develop, and (iii) whether the Company willhave access to sufficient working capital through continued and improving cashflow from sales and ongoing borrowing availability, the latter being subject tothe Company’s ability to comply with the covenants and terms of the Company’sloan agreement with its senior lender.

 

**Resultsof Operations**

 

**Fiscal2001 Compared to Fiscal 2000**

 

Total revenues for the year ended December31, 2001 were $15,511,014 as compared to revenues of $15,725,695 for the yearended December 31, 2000, representing a decrease of $214,681, or 1%. Thisdecrease in revenues was the result of a decrease in sales by theMorehouse-COWLES Division of the Company of approximately $1,390,000, adecrease in sales at the Epworth Mill Division of approximately $1,442,000 (dueto a cessation of operations of the Ball Mill repair business), offset by anincrease of approximately $2,617,000 in additional revenue generated by theCompany’s Microfluidics Division.

 

North American sales for the year endedDecember 31, 2001 decreased to approximately $10,630,000, or 7%, as compared toNorth American sales of approximately $11,386,000 for the year ended December31, 2000.  This decrease in NorthAmerican sales was principally due to a decrease in the sale of machines.  Foreign sales were approximately $4,881,000for the year ended December 31, 2001 compared to $4,340,000 for the year endedDecember 31, 2000, an increase of $541,000 or 12%. This increase in foreignsales was principally due to an increase in the sale of machines.

 

16

----

 

Total cost of goods sold for2001 was $8,897,755 or 58% of revenue, as compared to $8,688,465 or 55% ofrevenue for 2000.  The increase in costof goods sold reflects primarily the increase in sales generated by theMicrofluidics operating division of the Company, offset by a decrease in costof goods sold by the Morehouse-COWLES and Epworth Mills operatingdivisions.  The Company’s major productlines have different profit margins, as well as multiple profit margins withineach product line.  In the course of theperiods compared, there may be significant changes in the cost of revenues as apercentage of revenue depending on the mix of product sold.  Also, the cost of sales as a percent ofrevenue will differ between laboratory and pilot plant units sold, due to thedifference in costs between air driven and electric-hydraulic units.

 

Total operating expenses for 2001 were$6,830,581 or 44% of revenue, as compared to $7,104,600 or 45% of revenue for2000, which is a decrease of $274,019 or 4%.

 

Research and development expenses for 2001were $857,491 compared to $835,136 for 2000, an increase of $22,355 or 3%.  The increase in research and developmentexpenses is primarily due to an increase in payroll and related costs ofapproximately $157,000, partially offset by a decrease in amortization costs ofapproximately $60,000, a decrease in outside contract services of approximately$44,000, and a reduction of expenses at the Epworth Mill Division ofapproximately $49,000, due to the transfer of the division’s operations inOctober of 2000.

 

Sales and Marketing expenses for 2001decreased approximately $433,000, from $3,482,866 in 2000 to $3,049,418 or 12%.The decrease was due principally to the reduction of selling expenses at theEpworth Mills Division of approximately $287,000, a decrease in commissionexpense of approximately $138,000, and decreases in consultant expenses ofapproximately $48,000, partially offset by increases of approximately $41,000in demonstration cost expenses.

 

General andadministrative expenses for 2001 increased by approximately $137,000, from$2,786,598 for the year ended December 31, 2000, to $2,923,672, or 5%.  The increase in general and administrativeexpenses is primarily due to an increase in payroll costs of approximately $152,000, andan increase in grinding media sales costs of approximately $169,000, partiallyoffset by a reduction of general and administrative costs of approximately$167,000 at the Epworth Mill Division, due to the sale of the business, and adecrease in professional fees of approximately $40,000.

 

Interest expense for 2001 decreased from$350,486 in 2000 to $261,754, a decrease of $88,732, or 25%.  The decrease was due primarily to areduction in the interest rate paid, partially offset by the increase in debtdue to the transaction with J.M. Huber Corporation.

 

Interest income for 2001 increased to $7,032from $248 for 2000, an increase of $6,784.  The increase is due tointerest earned on the note receivable arising from the sale of the Ball Milloperation.

 

17

----

 

**Fiscal2000 Compared to Fiscal 1999**

 

Total revenues for the year ended December31, 2000 were $15,725,695 as compared to revenues of $14,083,216 for the yearended December 31, 1999, representing an increase of $1,642,479 or 12%.

 

North Americansales for the year ended December 31, 2000 increased to approximately$11,386,000, a 12% increase as compared to North American sales ofapproximately $10,126,000 for the year ended December 31, 1999.  This increase in North American sales wasprincipally due to an increase in the sale of machines.  Foreign sales were approximately $4,340,000for the year ended December 31, 2000 compared to $3,898,000 for the year endedDecember 31, 1999, an increase of approximately $442,000 or 11%. This increasein foreign sales was principally due to an increase in the sale of machinescompared 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 for1999.  The increase in cost of goodssold in absolute dollars reflects the increase in sales principally generatedby the Microfluidics division of the Company, offset by a decrease in cost ofgoods sold by the Epworth Mill Division. The decrease in cost of goods sold wasdue to reduced sales at the Epworth Mill Division due to the Company ceasingoperations of the Ball Mill repair business on September 30, 2000. TheCompany’s three major product lines have different profit margins, as well asmultiple profit margins within each product line.  In the course of the periods compared, there may be significantchanges in the cost of revenues as a percentage of revenue depending on the mixof product sold.  Also, the cost ofsales as a percent of revenue will differ between laboratory and pilot planunits sold, due to the difference in costs between air driven andelectric-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%. Thedecrease in research and development expenses is primarily due to a decrease inpayroll costs of approximately $40,000, and a decrease in general research anddevelopment expenses of approximately $52,000.

 

Sales and marketing expenses for 2000increased approximately $548,198 or 19% from $2,934,668 to $3,482,866. Theincreases were due principally to increases in outside commissions ofapproximately $295,000, payroll and related expenses of approximately $205,000,an increase in advertisement expenses of approximately  $88,000, partially offset by a decrease inprinting costs of approximately $21,000, and other general cost reductions of$19,000.

 

For the year ended December 31, 2000, generaland administrative expenses increased by approximately $222,000, from$2,564,656 for the year ended December 31, 1999, to $2,786,598, or 9%. Theincrease in general and administrative expenses was principally due to anincrease in corporate overhead of approximately $93,000, amortization ofgoodwill costs of approximately $36,000, professional fees of approximately$34,000, and other cost increases of $59,000.

 

18

----

 

 

Interest expense for 2000 decreased to$350,486 from $542,045 for 1999, a decrease of $191,559, or 35%. The decreasewas due to a decrease in borrowings, the impact of the debt restructuring, anda decrease in the interest rates charged the Company.

 

Interest income for 2000 decreased to $248from $9,835 for 1999, a decrease of $9,587 or 97%. The decrease for 2000 was due to the amount of cashavailable to invest as a result of the line of credit lockbox arrangement withNational Bank of Canada described in note 7.

 

As a result of a debt restructuring andrefinancing, the Company recorded an extraordinary gain of approximately$195,000 in the first quarter of fiscal 2000.

 

On July 24, 2000, the Company announced thatit would transfer the sales and manufacturing of its line of Zinger ® horizontalmedia mills from its Michigan-based Epworth Mill Division to theMorehouse-COWLES plant in Fullerton, California. The transfer began on October1, 2000 and did not have a material impact on the profitability of the Company.Simultaneously, the Company ceased operations of the Ball Mill repair businessand decided to sell its Ball Mill product line.  On March 19, 2001, the Company reached an agreement to sell theBall Mill operation for $200,000 in cash and notes.  The assets held for sale are separately classified in the balancesheet at December 31, 2000.

 

In a letter dated June 16, 2000, J.M. HuberCorporation (“Huber”) informed MFIC Corporation that it purportedly wasrevoking its acceptance of seven model LV-40 Zinger® horizontal media mills thatHuber had purchased from MFIC’s Epworth Mill Division in 1998. The notice ofrevocation was accompanied by a claim for the repayment of the full purchaseprice of $384,948 and for incidental and consequential damages as a result ofalleged 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 anaccommodation, the Company, in both 2000 and 1999 performed certain serviceswhich, the Company believed, were accepted by Huber as a cure for problemsencountered by Huber with the performance of this equipment. On October 20,2000, the Company entered into a settlement agreement with Huber pursuant towhich, the Company paid $100,000 to Huber upon execution of the agreement, and executeda promissory note for $350,000 payable two years from the execution date, withinterest payable quarterly in arrears at 10% per annum. The Company may prepaythe note through April 2001, with the note being discharged for $300,000 plusaccrued and unpaid interest. Huber has transferred all interest in the sevenMedia Mills to the Company, and shipped the equipment to the Company forreconditioning and resale. The Company recorded a loss on this transaction of$250,000.  The loss is included in otherexpense in the consolidated statement of operations.

 

The Company had a sales backlog of $3,281,000and $3,371,000 at March 16, 2001 and March 16, 2000, respectively.

 

At December 31, 2000 the Company had anear-record backlog, with orders and order inquiry levels, especially forMicrofluidizer production equipment, at a very strong level. This activitycombined with ongoing business activity trends and reduced financing costs makeimprovement in operations likely for the foreseeable quarters in 2001. Managementbelieves that in 2001 the Company should experience growth in revenues,realization of improved operating performance, and attainment of netprofitability.

 

19

----

 

 

**QUARTERLYRESULTS OF OPERATIONS**

 

The following table sets forth, for theperiods presented, certain data from our consolidated statements ofoperations.  In the opinion of ourmanagement, the unaudited quarterly consolidated statement of operations datahave been prepared on substantially the same basis as our audited consolidatedfinancial statements and include all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of the financialinformation for the periods presented. This information should be read in conjunction with the consolidatedfinancial statements and related notes included elsewhere in this Annual Reporton Form 10-K.  The operating results inany quarter are not necessarily indicative of the results that may be expectedfor any future period.

 

Summarized unaudited quarterly financial dataare as follows:

 
|                                |   | **Fiscal  2001 Quarters** |      |
|-------------------------------------|--------|---------------------------|-----------|
|                                |   | **First**                 |      | **Second** |   | **Third** |   | **Fourth** |    |
| Net sales                           |   | $                         | 4,449,624 |   | $ | 3,436,749 |   | $ | 3,753,750 |   | $ | 3,870,891 |   |
| Gross profit                        |   | 2,227,086                 |      | 1,472,388 |   | 1,649,237 |   | 1,264,548 |   |
| Net income (loss)                   |   | 497,055                   |      | (285,573 | ) | (240,165 | ) | (496,503 | ) |
|                                |   |                      |      |   |   |   |   |   |   |
| Net income (loss) per share:        |   |                      |      |   |   |   |   |   |   |
| Net income (loss) per share         |   | $                         | .07       |   | $ | (.04 | ) | $ | (.03 | ) | $ | (.07 | ) |
|                                |   | —                    |      | — |   | — |   | — |   |
| Diluted net income (loss) per share |   | $                         | .07       |   | $ | (.04 | ) | $ | (.03 | ) | $ | (.07 | ) |

 

20

----

 
|                                        |   | **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:                |   |                      |      |   |   |   |   |   |   |
| Net income (loss) per share                 |   | $                         | .04       |   | $ | .00 |   | $ | (.04 | ) | $ | (.06 | ) |
|                                        |   |                      |      |   |   |   |   |   |   |
| Diluted net income (loss) per share         |   | $                         | .04       |   | $ | .00 |   | $ | (.04 | ) | $ | (.06 | ) |

 

As a result of adebt restructuring and refinancing, the Company recorded an extraordinary gainof 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 aloss of approximately $250,000.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company generated cash of $297,127 in2001, $80,718 in 2000, and $970,442 in 1999. In 2001, the Company’s principal operating cash requirements were tofund its net loss from operations, increase in other assets, and decreases incurrent liabilities, offset by a decrease in trade and other receivables,inventories, and prepaid expenses.  In2000, the Company’s principal operating cash requirements were to fund its netloss from operations, increases in inventories, trade and other receivables, andprepaid expenses, offset by a decrease in current liabilities. In 1999, theCompany’s principal operating cash requirements were to fund its net loss fromoperations, an increase in accounts receivables, offset by decreases ininventory and an increase in current liabilities.

 

Net cash used by investing activities for2001 resulted from the sale of assets from the Ball Mill operation offset bythe issuance of a note receivable in connection with the sale of the Ball Milloperation, and the purchase of fixed assets, partially offset by the sale offixed assets.  As of December 31, 2001,the Company had no material commitments for capital expenditures.  Net cash used by investing activities of$27,673 in 2000 consisted of the proceeds from the sale of assets of $152,989,offset by the purchase of capital equipment of $180,662.  The Company’s 

 

21

----

 

sale of assets principally related to usedequipment. The Company used cash of $23,855 for investing activities in 1999.Net cash used in investing activities included the proceeds from the sale ofassets, net of the purchase of capital equipment.

 

For financing activities, the Company usedcash of $387,235 in 2001, generated cash of $37,138 in 2000, and used cash of$1,301,128 in 1999. Cash used in 2001 reflected the payments on the line ofcredit, line of credit term note, and subordinated debt, partially offset bythe proceeds from the issuance of common stock.  In 2000, cash was generated from the proceeds of stock issued,from the proceeds of both a line of credit and a term note from a refinancing,and was used to pay down a previous line of credit, and pay fees in connectionwith obtaining the line of credit. In 1999 cash was used to pay down the lineof credit, and purchase treasury stock, and was offset in part by the issuanceof stock under the employee stock option plan.

 

The cash and cash equivalents balance atDecember 31, 2001 was $87,386, a decrease of $198,969 from theDecember 31, 2000 balance of $286,355. At December 31, 2001, the Companymaintained a line of credit and a term loan (collectively the Credit Facility)with National Bank of Canada (the Lender). The line of credit facility provides for a maximum borrowing of$4,000,000. As of December 31, 2001 and March 15, 2002, the Company hadborrowings of $2,535,792 and $2,269,345, respectively.  On January 16, 2002, the United Statesportion of the Lender’s loan portfolio was sold to PNC Bank (The Successor Lender.)  The Company’s loans, terms, and conditionsare the same with the Successor Lender, as they were with the Lender.

 

Under the terms of the line of credit withthe Successor Lender, the Company is subject to a number of restrictions thatimpact the Company’s use of funds.  TheCompany is limited to acquisition of property of $200,000 per year or less,cannot pay dividends, and must maintain certain financial covenants asdefined.  In addition, the Company isrequired to maintain a lockbox arrangement with the Successor Lender, and allcash receipts are included in the lockbox and are applied against theoutstanding line of credit.  Asdiscussed in Note 7 to the consolidated financial statements, the Company wasin violation of all covenants of the Credit Facility as of December 31,2001.  At December 31, 2000, except forthe debt service and maximum capital expenditures covenants, the Company was inviolation of the same covenants.  TheCompany received a waiver from the Successor Lender and the Lender as of bothDecember 31 2001, and December 31, 2000, respectively, but is required to meetsuch covenants thereafter. As indicated in Note 7, the Company determined thatviolations of the tangible net worth and liabilities to worth ratio covenantoccurred for the quarter ended March 31, 2001. The Company obtained a waiver for these violations from the Lender.  The Company’s ability to continue plannedoperations is dependent upon access to financing under its Credit Facility,which is potentially impacted by the Company’s ability to achieve future compliancewith the financial covenants. On March 29, 2002, the Company and the SuccessorLender set new covenants for fiscal 2002. Borrowings outstanding under theCredit Facility are secured by a collateral pledge to the lender ofsubstantially all of the assets of the Company.  Management of the Company is executing plans for a return toprofitability, including the recent reorganization of its Morehouse-COWLESDivision and the concentration of manufacturing operations in an effort toimprove costs and marketing leverage; however, there can be no assurance thatthe Company will be successful in implementing these plans.

 

22

----

 

Assuming that there is no significant changein the Company’s business, the Company believes that cash flows fromoperations, together with existing cash balances, will be sufficient to meetits working capital and debt service requirements for at least the next twelvemonths.

 

**NASDAQ DELISTING**

 

The Company’s Common Stock was listed on theNASDAQ National Market (the National Market) under the symbol MFIC.  The Company was notified by the NationalMarket that, as of October 9, 1998, the Company was not in compliance with theNational Market requirements for the continued listing of its Common Stockbecause the public float of the Common Stock was less than $5,000,000 for morethan thirty consecutive days.  NASDAQcalculates the market value of a Company’s common stock by multiplying theclosing bid price of the stock by the number of shares held bynon-affiliates.  The Company estimatedthat 4,494,502 shares were currently held by non-affiliates. The notice fromthe National Market further stated that the Company’s Common Stock would bedelisted as of January 18, 1999 if the public float was not $5,000,000 or morefor a period of ten consecutive trading days during the ninety-day period fromOctober 19, 1998 to January 17, 1999. Further, as of September 30, 1998, theCompany 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 onMarch 11, 1999, the National Market notified the Company that the Company wasnot in compliance with the minimum bid price requirement.  As of March 24, 1999, the Company had stillnot satisfied any one of the three foregoing requirements.  The Company requested a hearing before theNational 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 stockwas delisted from the National Market. The Company is currently listed on theOver the Counter Bulletin Board. The liquidity of such securities may beimpaired not only in the number of shares that could be bought and sold, butalso through delays in the timing of transactions, reductions in securitiesanalysts’ and media coverage of the Company, and lower prices than mightotherwise be attained.

 

**NEWACCOUNTING PRONOUNCEMENTS**

 

In July 2001, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 141, *Business Combinations*.SFAS No. 141 requires the purchase method of accounting for businesscombinations initiated after June 30, 2001 and eliminates thepooling-of-interests method.  TheCompany does not believe that the adoption of SFAS No. 141 will have asignificant impact on its financial statements.

 

In June 1998, the Financial AccountingStandard's Board (FASB) issued SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities.* As amended in June 1999, the statement iseffective for all fiscal quarters of all fiscal years beginning after June 15,2000.  In June 2000, the FASB issuedSFAS No. 138, which is a significant amendment to SFAS No. 133.  SFAS No.133 and its amendments establishaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectively, thederivatives) and for hedging activities. The EITF has also issued a number of derivative-related tentative andfinal consensuses.  These statements donot have an impact on its consolidated position or results of operations.

 

In July 2001, the FASB issued Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets*, which is effective January 1, 2002.SFAS No. 142 requires, among other things, the discontinuance of goodwillamortization.  In addition, the standardincludes provisions for the reclassification of certain existing recognizedintangibles as goodwill, reassessment of the useful lives of existingrecognized intangibles, reclassification of certain intangibles out ofpreviously reported goodwill, and the identification of reporting units forpurposes of assessing potential future impairment of goodwill.  SFAS No. 142 also requires the Company tocomplete a transitional goodwill impairment test six months from the date ofadoption. The Company has made an assessment of the goodwill valuation, andbased on this assessment will take a charge of approximately $2,700,000 in thefirst quarter ended March 31, 2002 for the impairment.

 

23

----

 

In October 2001, the FASB issued SFAS No.144, *Accounting for the Impairment orDisposal of Long-lived Assets,* which is effective for fiscal yearsbeginning after December 15, 2001 and interim periods within those fiscalyears.  This SFAS develops oneaccounting model for long-lived assets that are to be disposed of by sale aswell as addressing the principal implementation issue.  The Company does not expect the adoption ofthis statement to have a material impact on its financial statements.

 

In December 1999 the Securities and ExchangeCommission (SEC) released Staff Accounting Bulletin (SAB) No. 101, “RevenueRecognition in Financial Statements.” This SAB clarifies certain elements ofrevenue recognition. Since December, the SEC has issued several amendments thatpostponed the implementation date until the fourth quarter of fiscal 2000. Theimplementation of the SAB did not have a material impact on the Company’sFinancial Statements.

 

# **ITEM 7A**                     QUANTITATIVEAND QUALITIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s financial instruments aregenerally not subjected to changes in market value as a result of changes ininterest rates due to the short maturities of the instruments.  The Company’s fixed rate debt is not exposedto cash flow or interest rate changes but is exposed to fair market valuechanges in the event of refinancing this fixed rate debt.  The Company does not have significantexposure to fluctuations in foreign exchange rates.

 

The Company had approximately $2,785,000 ofvariable rate borrowings outstanding under its revolving credit agreement atDecember 31, 2001.  A hypothetical 10%adverse change in interest rates for this variable rate debt would have had anapproximate $15,000 negative effect on the Company’s earnings and cash flows onan annual basis.

 

For additional information about the Company’sfinancial instruments, see Note 7 and Note 13.

 

24

----

 

# **Item 8.**             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

The following Consolidated FinancialStatements of the Company and its Subsidiaries appear on the following pages ofthis Form 10-K.

 
|                                                                                                                        |
|-----------------------------------------------------------------------------------------------------------------------------|
| Report of Independent Auditors                                                                                              |
|                                                                                                                        |
| Report of Independent Auditors                                                                                              |
|                                                                                                                        |
| Consolidated Balance Sheets as of December 31, 2001 and 2000                                                           |
|                                                                                                                        |
| Consolidated Statements of Operations for  the years ended December 31, 2001, 2000 and 1999.                           |
|                                                                                                                        |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2001, 2000 and 1999                            |
|                                                                                                                        |
| Consolidated Statements of Changes in  Stockholders’ Equity for the years ended December 31, 2001, 2000 and  1999 |
|                                                                                                                        |
| Notes to Consolidated Financial Statements                                                                                  |

 
|   | **(b)** | **Reports on Form 8-K.**                                                                                                |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------|
|   |    | The Company  filed a current report on Form 8-K regarding changes in its certifying  accountant dated October 29, 2001. |
|   |    |                                                                                                                    |
|   | **(c)** | **Exhibits.**                                                                                                           |
|   |    | The Company  hereby files as part of this Form 10-K the Exhibits listed in  Item 14(a)(3) as set forth above.      |
|   |    |                                                                                                                    |
|   | **(d)** | **Financial Statement Schedules.**                                                                                      |
|   |    | See (a)(2)  above.                                                                                                      |

 

25

----

 

**REPORT****OFINDEPENDENT AUDITORS**

 

To the Board of Directors and

Stockholders of MFIC Corporation:

 

We have audited the accompanying consolidatedbalance sheet of MFIC Corporation and Subsidiaries as of December 31, 2001, andthe related consolidated statement of operations, changes in stockholders’equity, and cash flows for the year then ended.  Our audit also included the financial statement schedule listedin the index at Item 14 (a)(2).  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audit.  The financial statements ofMFIC Corporation and Subsidiaries as of December 31, 2000, were audited byother auditors whose report dated March 29, 2001 expressed an unqualified opinionon those statements.

 

We conducted our audit in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of MFIC Corporation and Subsidiaries as of December 31,2001, and the results of their operations and their cash flows for the yearended December 31, 2001 in conformity with accounting principles generallyaccepted in the United States of America.  Also, in our opinion, such financial statement schedule referredto above, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects the informationset forth therein.

 

BROWN & BROWN LLP

Boston, Massachusetts

Feburary 27, 2002, except for Note 7, as towhich the date is March 29, 2002

 

F-1

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

To the Board of Directors and

Stockholders of MFIC Corporation:

 

We have auditedthe accompanying consolidated balance sheet of MFIC Corporation andSubsidiaries as of December 31, 2000, and the related consolidated statementsof operations, changes in stockholders’ equity, and cash flows for each of thetwo years in the period ended December 31, 2000. Our audit also included thefinancial statement schedule listed in the index at Item 14 (a)(2) for each ofthe two years in the period ended December 31, 2000.  These consolidated financial statements and financial statementschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and financial statement schedule based on ouraudits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of MFIC Corporation and Subsidiariesas of December 31, 2000, and the results of their operations and their cashflows for each of the two years in the period ended December 31, 2000 inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, suchfinancial statement schedule referred to above for each of the two years in theperiod ended December 31, 2000, when considered in relation to the basic 2000and 1999 consolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

 

DELOITTE & TOUCHE LLP

Boston, Massachusetts

March 29, 2001, except for Note 7, as towhich the date is April 13, 2001

 

F-2

----

 

**MFICCORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| **ASSETS**                                                                                                     |   | **December 31,** |           |
|----------------------------------------------------------------------------------------------------------------|--------|------------------|----------------|
|                                                                                                           |   | **2001**         |           | **2000** |   |
| *Current Assets:*                                                                                              |   |             |           |   |   |
| Cash and cash equivalents                                                                                      |   | $                | 87,386         |   | $ | 286,355 |   |
| Accounts receivable, less allowance of  $38,248 and $55,570 in 2001 and 2000, respectively.                    |   | 2,707,136        |           | 2,862,489 |   |
| Other receivables                                                                                              |   | 50,798           |           | 3,490 |   |
| Accounts receivable— related party                                                                        |   | —           |           | 18,525 |   |
| Note receivable — current                                                                                 |   | 17,798           |           | — |   |
| Inventories                                                                                                    |   | 3,962,745        |           | 4,023,240 |   |
| Prepaid expenses                                                                                               |   | 180,687          |           | 223,100 |   |
| Other current assets                                                                                           |   | 134,190          |           | 137,752 |   |
| **TOTAL CURRENT ASSETS**                                                                                       |   | **7,140,740**    | ** **     | **7,554,951** | ** ** |
|                                                                                                           |   |             |           |   |   |
| *Property and Equipment, at cost:*                                                                             |   |             |           |   |   |
| Furniture, fixtures and office equipment                                                                       |   | 194,365          |           | 438,507 |   |
| Machinery and equipment                                                                                        |   | 459,880          |           | 579,617 |   |
| Leasehold improvements                                                                                         |   | 126,849          |           | 211,660 |   |
|                                                                                                           |   | **781,094**      | ** **     | **1,229,784** | ** ** |
| Less: Accumulated depreciation and  amortization                                                               |   | (221,331         | )              | (654,828 | ) |
| **Net property and equipment**                                                                                 |   | **559,763**      | ** **     | **574,956** | ** ** |
|                                                                                                           |   |             |           |   |   |
| Note receivable — long-term                                                                               |   | 88,988           |           | — |   |
| Assets held for sale                                                                                           |   | —           |           | 213,142 |   |
| Goodwill (net of accumulated amortization of  $1,403,050 in 2001 and $981,050 in 2000)                         |   | 4,761,409        |           | 5,183,409 |   |
| Patents, licenses and other assets (net of  accumulated amortization of $662,085 in 2001 and $567,321 in 2000) |   | 88,491           |           | 117,777 |   |
|                                                                                                           |   |             | ** **     |   | ** ** |
| **TOTAL ASSETS**                                                                                               |   | **$**            | **12,639,391** | ** ** | **$** | **13,644,235** | ** ** |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

 

F-3

----

 
|                                                                                                                                                      |   |          | **December  31,** |          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-------------------|---------------|
|                                                                                                                                                      |   |          | **2001**          |          |   | **2000** |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                             |   |          |              |          | ** ** |
| *Current Liabilities:*                                                                                                                                    |   |          | * *          |          | * * |
| Line of credit                                                                                                                                            |   | $             | 2,535,792         |          | $ | 2,724,015 |   |
| Accounts payable and accrued expenses                                                                                                                     |   |          | 1,989,148         |          |   | 1,921,452 |   |
| Accrued interest — related party                                                                                                                     |   | 44,635        |              | 70,085        |   |
| Accrued compensation and vacation pay                                                                                                                     |   | 109,619       |              | 157,971       |   |
| Customer advances                                                                                                                                         |   | 536,867       |              | 623,184       |   |
| Current portion of term note payable                                                                                                                      |   | 95,004        |              | 95,004        |   |
| Current portion of long-term debt-related  party                                                                                                          |   | 75,000        |              | 62,500        |   |
| Note payable — other                                                                                                                                 |   | 350,000       |              | —        |   |
| **TOTAL CURRENT LIABILITIES**                                                                                                                             |   | **5,736,065** | ** **        | **5,654,211** | ** ** |
|                                                                                                                                                      |   |          |              |          |   |
| Commitments (Note 11)                                                                                                                                     |   |          |              |          |   |
| Long-term debt, net of current  portion-related party                                                                                                     |   | 162,500       |              | 237,500       |   |
| Term note                                                                                                                                                 |   | 153,739       |              | 308,743       |   |
| Note payable — other                                                                                                                                 |   | —        |              | 350,000       |   |
| *Stockholders’ Equity:*                                                                                                                              |   |          |              |          |   |
| Common Stock, par value $.01 per share,  20,000,000 shares authorized; 7,643,981 and 7,588,948 shares issued at  December 31, 2001 and 2000, respectively |   | 76,440        |              | 75,889        |   |
| Additional paid-in capital                                                                                                                                |   | 12,916,876    |              | 12,891,904    |   |
| Accumulated deficit                                                                                                                                       |   | (5,718,528    | )                 | (5,193,342    | ) |
| Less: Treasury Stock, at cost, 260,446 and  250,219 shares at December 31, 2001 and 2000, respectively                                                    |   | (687,701      | )                 | (680,670      | ) |
|                                                                                                                                                      |   |          |              |          |   |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                                                       |   | **6,587,087** | ** **        | **7,093,781** | ** ** |
|                                                                                                                                                      |   |          |              |          |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                       |   | **$**         | **12,639,391**    | ** **    | **$** | **13,644,235** | ** ** |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-4

----

 

**MFICCORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
|                                                                                           |   | **Years Ended December 31,** |       |
|------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                           |   | **2001**                     |       | **2000** |   | **1999** | ** ** |
| Revenues                                                                                       |   | $                            | 15,511,014 |   | $ | 15,725,695 |   | $ | 14,083,216 |   |
| Cost of goods sold                                                                             |   | 8,897,755                    |       | 8,688,465 |   | 7,990,398 |   |
| Gross income                                                                                   |   | 6,613,259                    |       | 7,037,230 |   | 6,092,818 |   |
| Operating expenses                                                                             |   |                         |       |   |   |   |   |
| Research and development                                                                       |   | 857,491                      |       | 835,136 |   | 927,582 |   |
| Selling                                                                                        |   | 3,049,418                    |       | 3,482,866 |   | 2,934,668 |   |
| General and administrative                                                                     |   | 2,923,672                    |       | 2,786,598 |   | 2,564,656 |   |
| Total operating expenses                                                                       |   | 6,830,581                    |       | 7,104,600 |   | 6,426,906 |   |
|                                                                                           |   |                         |       |   |   |   |   |
| Loss from operations                                                                           |   | (217,322                     | )          | (67,370 | ) | (334,088 | ) |
|                                                                                           |   |                         |       |   |   |   |   |
| Interest expense                                                                               |   | (261,754                     | )          | (350,486 | ) | (542,045 | ) |
| Interest income                                                                                |   | 7,032                        |       | 248 |   | 9,835 |   |
| Other (expense) income                                                                         |   | (53,142                      | )          | (250,000 | ) | — |   |
| Gain on sale of investments                                                                    |   | —                       |       | — |   | 11,864 |   |
|                                                                                           |   |                         |       |   |   |   |   |
| Net loss before income taxes and  extraordinary item                                           |   | (525,186                     | )          | (667,608 | ) | (854,434 | ) |
| Income tax provision                                                                           |   | —                       |       | — |   | — |   |
|                                                                                           |   |                         |       |   |   |   |   |
| Net loss before extraordinary item                                                             |   | (525,186                     | )          | (667,608 | ) | (854,434 | ) |
| Gain on subordinated debt restructuring                                                        |   | —                       |       | 194,500 |   | — |   |
|                                                                                           |   |                         | ** ** |   | ** ** |   | ** ** |
| Net loss                                                                                       |   | $                            | (525,186   | ) | $ | (473,108 | ) | $ | (854,434 | ) |
|                                                                                           |   |                         | ** ** |   | ** ** |   | ** ** |
| Weighted average number of common and common  equivalent shares outstanding: Basic and Diluted |   | 7,375,102                    |       | 7,086,058 |   | 5,818,588 |   |
|                                                                                           |   |                         |       |   |   |   |   |
| Basic and diluted amounts per common share:                                                    |   |                         |       |   |   |   |   |
| Net loss per share before extraordinary  gain                                                  |   | $                            | (.07       | ) | $ | (.09 | ) | $ | (.15 | ) |
| Extraordinary gain per share                                                                   |   | —                       |       | .03 |   | — |   |
| Basic and diluted net loss per share                                                           |   | $                            | (.07       | ) | $ | (.06 | ) | $ | (.15 | ) |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-5

----

 

**MFIC CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                         |   | **Years  Ended December 31,** |     |
|----------------------------------------------------------------------------------------------|--------|-------------------------------|----------|
|                                                                                         |   | **2001**                      |     | **2000** |   | **1999** | ** ** |
| *Cash flows from operating activities:*                                                      |   |                          | * * |   | * * |   | * * |
| Net Loss                                                                                     |   | $                             | (525,186 | ) | $ | (473,108 | ) | $ | (854,434 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                 |   |                          |     |   |   |   |   |
| Depreciation and amortization                                                                |   | 726,252                       |     | 804,823 |   | 692,948 |   |
| Bad debt recovery                                                                            |   | (17,322                       | )        | (9,751 | ) | (34,679 | ) |
| Non cash provision for loss on legal  settlement                                             |   | —                        |     | 150,000 |   | — |   |
| Extraordinary gain on debt restructuring                                                     |   | —                        |     | (194,500 | ) | — |   |
| Gain on sale of investments                                                                  |   | —                        |     | — |   | (11,864 | ) |
| Gain on sale of assets                                                                       |   | (32,254                       | )        | (81,752 | ) | (58,847 | ) |
| *Changes in assets and liabilities:*                                                         |   |                          |     |   |   |   |   |
| Receivables and other receivables                                                            |   | 143,892                       |     | (89,210 | ) | (413,762 | ) |
| Inventories                                                                                  |   | 60,495                        |     | (461,121 | ) | 973,803 |   |
| Prepaid expenses                                                                             |   | 42,413                        |     | (42,913 | ) | (15,659 | ) |
| Other current assets                                                                         |   | (61,882                       | )        | (68,552 | ) | — |   |
| Current liabilities                                                                          |   | (92,423                       | )        | 546,802 |   | 692,936 |   |
| Loss on sale of Ball Mill repair business  assets                                            |   | 53,142                        |     | — |   | — |   |
| Net cash provided by operating activities                                                    |   | 297,127                       |     | 80,718 |   | 970,442 |   |
|                                                                                         |   |                          |     |   |   |   |   |
| *Cash flows from investing activities:*                                                      |   |                          |     |   |   |   |   |
| Proceeds from sale of investments                                                            |   | —                        |     | — |   | 11,864 |   |
| Proceeds from sale of fixed assets                                                           |   | 37,925                        |     | 152,989 |   | 169,394 |   |
| Purchase of fixed assets                                                                     |   | (200,000                      | )        | (180,662 | ) | (205,113 | ) |
| Issuance of note receivable in connection  with sale of Ball Mill operation                  |   | (115,000                      | )        | — |   | — |   |
| Proceeds from note receivable                                                                |   | 8,214                         |     | — |   | — |   |
| Proceeds from sale of Ball Mill repair  business assets (net of selling expenses of $40,000) |   | 160,000                       |     | — |   | — |   |
| Net cash used in investing activities                                                        |   | (108,861                      | )        | (27,673 | ) | (23,855 | ) |
|                                                                                         |   |                          |     |   |   |   |   |
| *Cash flows from financing activities:*                                                      |   |                          | * * |   | * * |   | * * |
| Payments on Comerica Bank line of credit                                                     |   | —                        |     | (3,075,815 | ) | (1,271,967 | ) |
| Net proceeds from National Bank of Canada line of credit                                     |   | —                        |     | 2,724,015 |   | — |   |
| Proceeds from term note                                                                      |   | —                        |     | 475,000 |   | — |   |
| Payments on term note                                                                        |   | (155,004                      | )        | (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                                 |   | 17,909                        |     | 7,341 |   | — |   |
| Issuance of common stock under employee  stock option plan                                   |   | 7,614                         |     | — |   | 3,459 |   |
| Treasury stock purchased                                                                     |   | (7,031                        | )        | (6,563 | ) | (7,620 | ) |
| Payments on line of credit                                                                   |   | (188,223                      | )        | — |   | — |   |
| Payments on subordinated debt-related party                                                  |   | (62,500                       | )        | — |   | — |   |
| Net cash provided by (used in) financing  activities                                         |   | (387,235                      | )        | 37,138 |   | (1,301,128 | ) |
|                                                                                         |   |                          |     |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                        |   | (198,969                      | )        | 90,183 |   | (354,541 | ) |
| Cash and cash equivalents, beginning of  year                                                |   | 286,355                       |     | 196,172 |   | 550,713 |   |
| Cash and cash equivalents, end of year                                                       |   | $                             | 87,386   |   | $ | 286,355 |   | $ | 196,172 |   |
|                                                                                         |   |                          |     |   |   |   |   |
| Supplemental disclosure of cash flow  information:                                           |   |                          |     |   |   |   |   |
| Assets acquired in exchange for notes or  common stock                                       |   | —                        |     | 200,000 |   | — |   |
| Cash paid for interest                                                                       |   | $                             | 269,421  |   | $ | 367,111 |   | $ | 479,560 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-6

----

 

**MFIC****CORPORATION**

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

 
|                                                         |   | **Numbers of  Shares of  Common  Stock** |       | **Common  Stock at  Par Value** |       | **Additional  Paid-in  Capital** |       | **Accumulated  Deficit** |       | **Accumulated  Other  Comprehensive  Income** |       | **Number of  Shares of  Treasury  Stock** |       | **Treasury  Stock** |       | **Total  Stockholders’  Equity** |       |
|--------------------------------------------------------------|--------|------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| Balance, 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, Dec. 31, 1999                                       |   | 6,061,307                                |       | 60,613                          |       | 12,494,839                       |       | (4,720,234               | )          | —                                        |       | 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, Dec. 31, 2000                                       |   | 7,588,948                                |       | 75,889                          |       | 12,891,904                       |       | (5,193,342               | )          | —                                        |       | 250,219                                   |       | (680,670            | )          | 7,093,781                             |       |
| Stock options exercised                                      |   | 24,375                                   |       | 245                             |       | 7,369                            |       | —                   |       | —                                        |       | —                                    |       | —              |       | 7,614                                 |       |
| Issuance of common stock under employee  stock purchase plan |   | 30,658                                   |       | 306                             |       | 17,603                           |       | —                   |       | —                                        |       | —                                    |       | —              |       | 17,909                                |       |
| Purchase of treasury stock                                   |   | —                                   |       | —                          |       | —                           |       | —                   |       | —                                        |       | 10,227                                    |       | (7,031              | )          | (7,031                                | )          |
| Net loss                                                     |   | —                                   |       | —                          |       | —                           |       | (525,186                 | )          | —                                        |       | —                                    |       | —              |       | (525,186                              | )          |
| Balance, Dec. 31, 2001                                       |   | 7,643,981                                |       | $                               | 76,440     |                             | $          | 12,916,876               |       | $                                             | (5,718,528 | )                                         | $          | —              |       | 260,446                               |       | $ | (687,701 | ) | $ | 6,587,087 |   |
|                                                              |        |                                          |            |                                 |            |                                  |            |                          |            |                                               |            |                                           |            |                     |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-7

----

 

**MFIC CORPORATION**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

# **Note 1**                                                  ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

**Organization**

 

MFIC Corporation (MFIC or the Company),through its wholly-owned subsidiaries, Microfluidics Corporation(Microfluidics) and MediControl Corporation (MediControl), as well as itsoperating divisions, Morehouse-COWLES and Microfluidics, specialize inproducing and marketing a broad line of proprietary fluid materials processingsystems used for a variety of grinding, mixing, milling, and blendingapplications across a variety of industries and for use in numerousapplications within those industries. Microfluidizer® materialsprocessor systems are produced at the Microfluidics Division, while dispersers,dissolvers, colloid mills, horizontal media and vertical media mills areproduced at the Morehouse-COWLES Division. The Morehouse-COWLES Division also sells and distributes grinding media.

 

**Principlesof Consolidation**

 

The consolidated financial statements of theCompany include the accounts of the Company and its wholly owned subsidiaries,(Microfluidics) and MediControl.

 

All significant intercompany transactions andbalances have been eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUntied States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

**RevenueRecognition**

 

Revenue from the sale of machines and spareparts is generally recognized upon shipment of the product or when the earningsprocess is complete.  Rental income forthe lease of equipment is recognized on a straight-line basis over the term ofthe lease agreement.  Rental income andequipment sales are classified in revenues in the consolidated statement ofoperations.

 

F-8

----

 

**Cashand Cash Equivalents**

 

The Company considers all highly liquidsecurities with maturities of 90 days or less, at the time of acquisition, tobe cash equivalents.

 

**Inventories**

 

Inventories consist of material, labor andmanufacturing overhead and are stated at the lower of cost or market. Cost isdetermined on a first-in, first-out basis.

 

The Company periodically reviews quantitiesof inventory on hand and compares these amounts to expected usage of eachparticular product line.  The Companyrecords a charge to cost of goods sold, by any amounts required to reduce thecarrying value to net realizable value.

 

**AssetsHeld for Sale**

 

Assets held for sale consist of inventory andfixed assets which were sold in connection with the Company’s sale of its BallMill repair business during 2001.

 

**Propertyand Equipment**

 

The Company’s property and equipment isrecorded at cost. Depreciation is computed using the straight-line method,based upon useful lives of 3 to7 years.  Leasehold improvements areamortized using the straight-line method based upon the shorter of theestimated useful lives or remaining life of the lease. Expenditures formaintenance and repairs are expensed as incurred.  Upon retirement or sale of property and equipment, the cost ofthe disposed asset and the related accumulated depreciation are removed fromthe accounts and any resulting gain, or loss is credited or charged tooperations.

 

Depreciationexpense totaled $209,523, $278,201, and $249,029 for the years ended December31, 2001, 2000, and 1999, respectively.

 

**Patents,Licenses, Other Intangible Assets and Goodwill**

 

Patents, patent applications, rights, andgoodwill are stated at acquisition cost. Amortization is recorded using thestraight-line method over the shorter of the legal lives or useful life of thepatents.  Goodwill is being amortizedover 15 years.  Patents, licenses andother intangible assets are being amortized over a period of 3 to 17 years.

 

F-9

----

 

**Impairmentof Long-Lived Assets**

 

At each balance sheet date, the Companyassesses whether there has been an impairment in the value of long-lived assetsby determining whether projected undiscounted cash flows generated by theapplicable 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 adiscount rate reflecting the Company’s average cost of funds. As of December31, 2001, 2000 and 1999 there were no such impairments.

 

**ComprehensiveIncome (Loss)**

 

Statement of Accounting Financial Standards(SFAS) No. 130, *Reporting Comprehensive Income*, requires disclosure of allcomponents of comprehensive income (loss) on an annual and interim basis.Comprehensive income (loss) is defined as the change in equity of a businessenterprise during a period from transactions and other events and circumstancesfrom non-owner sources. Comprehensive income (loss) is the same as the reportednet loss for all periods presented.

 

**Research and Development Expenses**

 

The Company charges research and developmentexpenses to operations as incurred.

 

**Earnings(Loss) per Share**

 

Basic and diluted net loss pershare is presented in conformity with SFAS No. 128, *Earnings per Share,* for allperiods presented.  In accordance withSFAS No. 128, basic and diluted net loss per common share was determined bydividing net loss applicable to common stockholders by the weighted averagenumber of common shares outstanding during the period.  Options to purchase 1,612,980, 1,761,575 and1,303,731 shares of common stock were outstanding for the years ended 2001,2000 and 1999, respectively. Basic and diluted net loss per share are the samefor all periods presented because all outstanding common stock equivalents havebeen excluded as they are antidilutive.

 

**FairValue of Financial Instruments**

 

The carrying amount of cash and cashequivalents, accounts receivable, accounts payable and accrued liabilitiesapproximates fair value due to the short term nature of these accounts. TheCompany’s bank debt, because it carries a variable interest rate, is stated atits approximate fair market value. The Company’s subordinated debt bearsinterest at 10%, which approximates fair market value.

 

F-10

----

 

**NewAccounting Pronouncements**

 

In June 1998, the Financial AccountingStandard's Board (FASB) issued SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities.* As amended in June 1999, the statement iseffective for all fiscal quarters of all fiscal years beginning after June 15,2000.  In June 2000, the FASB issuedSFAS No. 138, which is a significant amendment to SFAS No. 133.  SFAS No.133 and its amendments establishaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectively, thederivatives) and for hedging activities. The EITF has also issued a number of derivative-related tentative andfinal consensuses.  These statements donot have an impact on its consolidated position or results of operations.

 

In July 2001, the FASB issued SFAS No. 141, *Business Combinations*.  SFAS No. 141 requires the purchase method ofaccounting for business combinations initiated after June 30, 2001 andeliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS No. 141 will havea significant impact on its financial statements.

 

In July 2001, the FASB issued SFAS No. 142, *Goodwill and Other Intangible Assets*,which is effective January 1, 2002. SFAS No. 142 requires, among other things,the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassificationof certain existing recognized intangibles as goodwill, reassessment of theuseful lives of existing recognized intangibles, reclassification of certainintangibles out of previously reported goodwill, and the identification ofreporting units for purposes of assessing potential future impairment ofgoodwill.  SFAS No. 142 also requiresthe Company to complete a transitional goodwill impairment test six months fromthe date of adoption. The Company has made an assessment of the goodwill valuation,and has determined that the Company will take a charge of approximately$2,700,000 in the first quarter ended March 31, 2002.

 

In October 2001, the FASB issued SFAS No.144, *Accounting for the Impairment orDisposal of Long-lived Assets,* which is effective for fiscal yearsbeginning after December 15, 2001 and interim periods within those fiscalyears.  This SFAS develops oneaccounting model for long-lived assets that are to be disposed of by sale aswell as addressing the principal implementation issue.  The Company does not expect the adoption ofthis statement to have a material impact on its financial statements.

 

In December 1999 the Securities and ExchangeCommission (SEC) released Staff Accounting Bulletin (SAB) No. 101, *Revenue Recognition in Financial Statements*.This SAB clarifies certain elements of revenue recognition. Since December, theSEC has issued several amendments that postponed the implementation date untilthe fourth quarter of fiscal 2000. The implementation of SAB No. 101 did nothave a material impact on the Company’s Financial Statements.

 

**Reclassifications**

 

Certain fiscal 1999 and 2000 amounts havebeen reclassified to conform with fiscal 2000 and 2001 presentations.

 

# **Note 2**                                                  SEGMENT,GEOGRAPHIC AND ENTERPRISE-WIDE REPORTING

 

SFAS No. 131, *Disclosures about Segments of anEnterprise and Related Information,* requires companies to report selectedinformation about operating segments, as well as enterprise-wide disclosuresabout products, services, geographic areas and major customers.  Operating segments are determined based onthe way management organizes its business for making operating decisions andassessing performance.  The Company’schief decision-maker, as defined under SFAS No. 131, is the chairman and chiefexecutive officer. The Company has determined that it conducts its operationsin one business segment: the development, manufacture, marketing and sale ofprocess and formulation equipment.  TheCompany’s sales are primarily to companies with processing needs in the chemical,pharmaceutical, food, cosmetic, and biotechnology industries.  The Company conducts its business primarilyin the United States of America.  TheCompany has less than 1% of total assets overseas.  As a result, the financial

 

F-11

----

 

information disclosed hereinrepresents all of the material financial information related to the Company’sprincipal operating segment.

 

Approximate sales to customers outside NorthAmerica are broken out, by major foreign markets, as follows:

 
|   |   | **2001**  |          | **2000**   |   | **1999**      |       |
|--------|--------|-----------|---------------|------------|--------|---------------|------------|
| Asia   |   | $         | 2,674,000     |       | $      | 1,805,000     |       | $ | 1,542,000 |   |
| Europe |   | 1,401,000 |          | 997,000    |   | 1,024,000     |       |
| Other  |   | 806,000   |          | 1,538,000  |   | 1,391,000     |       |
|   |   | **$**     | **4,881,000** | ** ** | **$**  | **4,340,000** | ** ** | **$** | **3,957,000** | ** ** |

 

No customeraccounted for over 10% of the Company’s revenues in 2001, 2000 and 1999.

 

# **Note 3**                                                  MARKETABLESECURITIES

 

At December 31, 2001 and 2000, the Companydid not hold investments in marketable securities. In 1999, the Company sold 6,720 shares of CardiotechInternational, Inc. at a gain of $11,864.

 

# **Note 4**                                                  INVENTORY

 

The components of inventories are as followsat December 31:

 
|             |   | **2001** |          | **2000**   |   |
|------------------|--------|----------|---------------|------------|--------|
| Raw materials    |   | $        | 2,841,475     |       | $      | 2,670,155 |   |
| Work in progress |   | 195,644  |          | 473,095    |   |
| Finished goods   |   | 925,626  |          | 879,990    |   |
| **TOTAL**        |   | **$**    | **3,962,745** | ** ** | **$**  | **4,023,240** | ** ** |

 

F-12

----

 

# **Note 5**                                                  INTANGIBLES AND OTHER ASSETS

 

The Company purchased the rights and title ofcertain liposome and microemulsion technology devices from Arthur D. Little in1985.  The unamortized license fee and patent are included in intangibleassets and are being amortized using the straight line method over the usefullife of the patent, which is 17 years. In 1995, the Company capitalized $96,680 of patent costs related to acooperative research venture. Amortization of these assets charged to expense was $24,576 in 2001,$42,269 in 2000, and $43,920 in 1999.  In 2001, the Company capitalized $64,528 of costs related to theMulti-Stream Mixer Reactor patent, which is being amortized over a 17-yearperiod, beginning in the last quarter of 2001. Amortization of these costs in 2001 amounted to $950.

 

Costs incurred in connection with the debtrefinancing that occurred on February 28, 2000 are being amortized over threeyears, the initial term of the line of credit. The total of such costs was approximately $207,000.  Amortization of these costs amounted to $69,204 in 2001 and $57,663 in 2000,respectively.

 

# **Note 6**                                                  ACQUISITIONS

 

On August 14, 1998 (the Closing Date) MFICpurchased substantially all of the assets (the Transferred assets) and assumedcertain liabilities of Epworth Manufacturing Company of South Haven, Michigan(Epworth) and Morehouse-COWLES, Inc. of Fullerton, California (Morehouse andtogether with Epworth, the Sellers) pursuant to an Asset Purchase Agreement****(theAgreement) dated as of June 19, 1998 by and among MFIC, Epworth andMorehouse.  Messrs. J.B. Jennings andBret A. Lewis were the sole stockholders of both Epworth and Morehouse (thePrincipals).  Epworth and Morehouse eachmanufactures and distributes a product line of crushing/grinding, mixing,dissolving and dispersion systems for solid or solids materials processing thatwere marketed together under the EMCO U.S.A. trade name.

 

In accordance with the Agreement, MFIC paidor delivered to the Sellers the following as consideration for the purchaseprice: (i) $5,508,480 in cash, (ii) two subordinated promissory notes in theaggregate principal amount of $800,000 (the Promissory Notes) and (iii) 900,000shares of MFIC’s restricted common stock, $0.01 par value per share, subject tothe restrictions set forth in a Stockholders Agreement among MFIC and thePrincipals dated August 14, 1998 (the “Stockholders Agreement”).  MFIC also incurred approximately $500,000 inexpenses.  In addition, MFIC assumedapproximately $1,930,000 in accounts payable and accrued liabilities. Theacquisition has been accounted for under the purchase method of accounting.

 

The amount paid in excess of the identifiedfair market value of the assets purchased less liabilities assumed has beenallocated to goodwill.  This amount isbeing amortized over a 15-year period, which the Company determined to be theuseful life.

 

F-13

----

 

# **Note 7**                                                  DEBT

 

Long-term debt as of the following datesconsisted of:

 
|                                            |   | **December  31,** |        |
|-------------------------------------------------|--------|-------------------|-------------|
|                                            |   | **2001**          |        | **2000** | ** ** |
| 10% note payable                                |   | $                 | 350,000     |   | $ | 350,000 |   |
| 10% subordinated note payable to related  party |   | 237,500           |        | 300,000 |   |
| Term note payable                               |   | 248,743           |        | 403,747 |   |
| Less current portion                            |   | (520,004          | )           | (157,504 | ) |
| **TOTAL**                                       |   | **$**             | **316,239** | ** ** | **$** | **896,243** | ** ** |

 

**Subordinate Notes Payable**

 

The subordinated note is payable to LakeShore Industries Inc. See Note 13 for further explanation of the note to LakeShore Industries Inc.

 

**Notes Payable**

 

In a letter dated June 16, 2000, J.M. HuberCorporation (Huber) informed MFIC Corporation that it purportedly was revokingits acceptance of seven model LV-40 Zinger® horizontal media mills that Huberhad purchased from MFIC’s Epworth Mill Division in 1998. The notice ofrevocation was accompanied by a claim for the repayment of the full purchaseprice of $384,948 and for incidental and consequential damages as a result ofalleged 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, theCompany believed, were accepted by Huber as a cure for problems encountered byHuber with the performance of this equipment. On October 20, 2000, the Companyentered into a settlement agreement with Huber pursuant to which, the Companypaid $100,000 to Huber upon execution of the agreement, and executed apromissory note for $350,000 payable two years from the execution date, withinterest payable quarterly in arrears at 10% per annum.  Huber transferred all interest in the sevenMedia Mills to the Company, and shipped the equipment to the Company forreconditioning and resale. The Company recorded a loss on this transaction of$250,000 in 2000.  At December 31, 2001,the Company reviewed the carrying value of this equipment and as a result,determined that the value was approximately $80,000, resulting in a furthercharge of $120,000 to operations.

 

F-14

----

 

**Line of Credit**

 

From August 1998 to February 28, 2000, theCompany operated under a revolving loan and security agreement with ComericaBank. The outstanding balance was $3,075,815 at December 31, 1999, bearinginterest at 12.25%.  Since May 5, 1999,the Company had operated under a forbearance agreement to the Comerica Bankloan agreement, which restricted the level of borrowings, and prohibited theCompany from paying dividends.

 

On February 28, 2000 (the Closing Date) theCompany entered into a revolving credit and term loan agreement with NationalBank of Canada (the Lender) providing the Company with a $4,475,000 three-yearrevolving credit and term loan facility (together the Credit Facility).  The Credit Facility is comprised of: (i) a $4million three year revolving line of credit (Revolving Credit Line) withadvances thereunder bearing interest at an interest rate equal to the primerate (the Prime Rate for United States borrowings from the National Bank ofCanada as publicly announced from time to time) plus one-half percent(0.50%).  All borrowings under theRevolving Credit Line are evidenced by a $4 million promissory note having amaturity date of February 28, 2003 (the Revolving Note), and (ii) a $475,000term promissory note, amortized over a five year period but having a maturitydate of February 28, 2003 and bearing interest at an interest rate equal to thePrime Rate (4.75% at December 31, 2001) plus three quarters of one percent(0.75%).  Loans under the CreditFacility are secured by a collateral pledge to the Lender of substantially allthe assets of the Company and its subsidiaries. The Company’s MicrofluidicsCorporation subsidiary has guaranteed the Company’s obligations to the Lenderunder the Credit Facility. The Company has also pledged to the Lender all sharesof Microfluidics Corporation owned by the Company.  From the proceeds of the initial loan, the Company repaid theoutstanding balance owed to Comerica Bank of approximately $2,585,000.   On January 16, 2002, the United Statesportion of National Bank of Canada’s operations and its loan portfolio was soldto PNC Bank, the Successor Lender.

 

As one of the Lender’s conditions precedentto the closing of the Finance Facility, the Company’s Chairman, IrwinGruverman, at the closing of the Credit Facility purchased, for  $250,000, 1,000,000 shares of restrictedCommon Stock of the Company. This purchase was approved by the Company’s Boardof Directors on December 30, 1999.

 

The Credit Facility includes restrictivefinancial and non-financial covenants. The covenants include prohibition from paying dividends and limitscapital expenditures to $200,000 per year. In addition, the financial covenants include quarterly calculations oftangible net worth, liabilities to worth ratio, net income, and debt servicecoverage.  The Credit Facility alsocontains a subjective acceleration clause and a lock-box arrangement, wherebyremittances from the Company’s customers reduce the outstanding amount of theRevolving Credit Line.

 

After review of the results as of and for thequarter ended March 31, 2001, the Company notified the National Bank of Canadathat it was in violation of the tangible net worth and liabilities to worthratio covenants contained in the Credit Facility for the quarter ended March31, 2001.  On April 13, 2001, theCompany 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’sexpectations of future compliance, the non-current portion of the termPromissory Note was classified as a non-current liability, as of December 31,2000.

 

At both December 31, 2001 and December 31,2000, the Company was not in compliance with the tangible net worth,liabilities to worth ratio, and net income covenants.  The Company was also in violation of the debt service covenant atDecember 31, 2001. The Company has received a waiver of these violations fromthe Lender for the December 31, 2000 non-compliance, and a waiver from theSuccessor Lender for the

 

F-15

----

 

year ended December 31, 2001, but is requiredto meet all covenant requirements thereafter. On March 29, 2002, The Company and the Successor Lender agreed on arevised set of covenants for fiscal 2002.

 

Due to the subjective acceleration clause,and the lock-box arrangement, the revolving credit line is classified as acurrent liability in the consolidated balance sheet. At December 31, 2001, theoutstanding balance on the Revolving Credit Line was $2,535,792, having aninterest rate of 5.5%. The balance outstanding on the term loan was $248,743,at an interest rate of 5.75%.

 

**Management’sPlans**

 

As discussed above, the Company violated thetangible net worth, liabilities to worth ratio and net income covenants of theCredit Facility at both December 31, 2001 and December 31, 2000, and the debtservices covenant at December 31, 2001. The Company’s ability to continue planned operations is dependent uponaccess to financing under the Credit Facility, which is potentially impacted bythe Company’s ability to achieve future compliance with the financialcovenants.  On March 29, 2002, theCompany and the Successor Lender agreed on a new set of covenants for fiscalyear 2002.  It is expected by managementthat the Company will be in compliance with the revised covenants.   Borrowings outstanding under the CreditFacility are secured by a collateral pledge to the Lender of substantially allof the assets of the Company.

 

Management of the Company is executing plansfor a return to profitability; however, there can be no assurance that theCompany will be successful in implementing these plans.

 

# **Note 8**                                                  EMPLOYEEBENEFIT PLANS

 

The Company offers a 401(k) profit-sharingplan (the 401K Plan), to its employees. All Company and related entity employees who are eighteen years of ageand have completed one hour of service are eligible to participate in the 401KPlan.  Employees may contribute from 1%to 20% of their compensation.  TheCompany’s contribution is discretionary, with contributions made from time totime as management deems advisable. The Company has made no matchingcontributions during 2001, 2000, and 1999. The Company also instituted a cafeteria plan in 1992, giving theemployees certain pre-tax advantages on specific payroll deductions.

 

F-16

----

 

# **Note 9**                                                  INCOME TAXES

 

The Company accounts for incometaxes under SFAS No. 109, Accounting for Income Taxes.  Under SFAS No. 109, deferred tax assets orliabilities are computed based on the differences between the financialstatement and income tax bases of assets and liabilities using the enacted taxrates.  Deferred income tax expense orcredits are based on changes in the asset or liability from period toperiod.  At December 31, 2001, theCompany had net operating loss and research tax credit carryforwards ofapproximately $5,174,000 and $172,000, respectively, for financial reportingpurposes, which may be used to offset future taxable income.

 

The components of the netdeferred tax asset with the approximate income tax effect of each type ofcarryforward, credit and temporary difference are as follows:

 
|                          |   | **December  31,** |      |
|-------------------------------|--------|-------------------|-----------|
|                          |   | **2001**          |      | **2000** | ** ** |
| Operating loss carryforwards  |   | $                 | 2,193,000 |   | $ | 1,878,000 |   |
| Tax credit carryforwards      |   | 172,000           |      | 172,000 |   |
| Temporary differences         |   | (38,000           | )    | 476,000 |   |
|                          |   | 2,327,000         |      | 2,526,000 |   |
| Less—Valuation allowance |   | (2,327,000        | )    | (2,526,000 | )  |
|                          |   |              |      |   |   |
| Net deferred tax asset        |   | $                 | —    |   | $ | — |   |
|                               |        |                   |           |  |  |  |  |  |  |

 

The Company has recorded a fullvaluation allowance against its deferred tax assets because, based on theweight of available evidence, the Company believes it is more likely than notthat the deferred tax assets will not be realized in the near future.  The carryforwards expire from 2002 through2021 and are subject to review and possible adjustment by the Internal RevenueService.  The Internal Revenue Codecontains provisions that may limit the net operating loss and research taxcredit carryforwards in the event of certain changes in the ownership interestsof significant stockholders.

 

 

 

F-17

----

 

**Note 10                  STOCKHOLDERS’EQUITY**

**The Companyadopted the 1988 Stock Plan (The Plan) as the successor plan to the 1987 StockPlan, which, as amended at th 1997 stockholders’ meeting, authorizes the grantof Stock Rights for up to 2,350,000 shares of common stock and the 1989Non-Employee Director Stock Option Plan which, as amended at the 1996stockholders’ meeting, authorizes the grant of nonqualified stock options forup to 500,000 shares of common stock.**

**Stock Option Plan**

Options granted under the Plan vest over athree-to-five-year period and expire 10 years from the grant date.  At December 31, 2001, 583,082 shares wereavailable for future grant under the Plan.

Information with respect to activity under the Plan isas follows:
|                            |   | **Number of Shares** |   | **Weighted Average Exercise Price** |   |
|---------------------------------|--------|----------------------|--------|-------------------------------------|--------|
| Outstanding,  December 31, 1998 |   | 1,416,587            |   | $                                   | 1.15   |   |
| Granted                         |   | 64,044               |   | 0.71                                |   |
| Exercised                       |   | —               |   | —                              |   |
| Canceled                        |   | (176,900             | )      | 1.16                                |   |
|                            |   |                 |   |                                |   |
| Outstanding,  December 31, 1999 |   | 1,303,731            |   | 1.13                                |   |
| Granted                         |   | 583,500              |   | 0.41                                |   |
| Exercised                       |   | —               |   | —                              |   |
| Canceled                        |   | (125,656             | )      | 0.96                                |   |
|                            |   |                 |   |                                |   |
| Outstanding,  December 31, 2000 |   | 1,761,575            |   | 0.94                                |   |
| Granted                         |   | 328,500              |   | 0.81                                |   |
| Exercised                       |   | (24,375              | )      | 0.31                                |   |
| Canceled                        |   | (452,720             | )      | 0.98                                |   |
|                            |   |                 |   |                                |   |
| Outstanding,  December 31, 2001 |   | 1,612,980            |   | $                                   | 0.88   |   |
|                            |   |                 |   |                                |   |
| Exercisable,  December 31, 1999 |   | 354,910              |   | $                                   | 1.19   |   |
|                            |   |                 |   |                                |   |
| Exercisable,  December 31, 2000 |   | 629,401              |   | $                                   | 1.24   |   |
|                            |   |                 |   |                                |   |
| Exercisable,  December 31, 2001 |   | 878,803              |   | $                                   | 1.06   |   |

 

 

F-18

----

 

The following table summarizes information relating tocurrently outstanding and exercisable stock options as of December 31, 2001:
| **Outstanding**     |         | **Exercisable**      |      |
|---------------------|--------------|----------------------|-----------|
| **Exercise  Price** |         | **Number of Shares** |      | **Weighted Average Remaining  Contractual Life (Years)** |   | **Weighted Average Exercise Price** |   | **Number of Shares** |   | **Weighted Average Exercise Price** |   |
| $                   | 0.31 to 1.31 |                 | 1,600,180 |   | 6.5 |   | $ | 0.87 |   | 866,003 |   | $ | 1.04 |   |
| $                   | 1.69 to 5.88 |                 | 12,800    |   | 4.0 |   | 2.30 |   | 12,800 |   | 2.30 |   |
|                |         |                 |      |   |   |   |   |   |   |   |   |
|                |         | 1,612,980            |      | 6.52 |   | $ | 0.88 |   | 878,803 |   | $ | 1.06 |   |

 

 

**Accounting for Stock-Based Compensation**

The Company accounts for its stock-based compensationplan under APB Opinion No. 25.  SFAS No.123,*Accounting for Stock-Based Compensation,* establishes thefair-value-based method of accounting for stock-based compensation plans.  The Company has adopted the disclosure-onlyalternative for options granted to employees and Directors under SFAS No. 123,which requires disclosure of the pro forma effects on earnings as if SFAS No.123 had been adopted, as well as certain other information.

The Company has computed the pro forma disclosuresrequired under SFAS No. 123 for all stock options granted to employees andDirectors of the Company as of December 31, 2001, 2000 and 1999 using theBlack-Scholes option pricing model prescribed by SFAS No. 123.

The assumptions used for the years ended December 31,2001, 2000 and 1999 are as follows:
|                      |   | **December  31,** |   |
|---------------------------|--------|-------------------|--------|
|                      |   | **2001**          |   | **2000** |   | **1999** |   |
| Risk-free  interest rates |   | 5.25              | %      | 5.25 | % | 5.25 | % |
| Expected  lives           |   | 5 years           |   | 5 years |   | 5 years |   |
| Expected  volatility      |   | 197               | %      | 146 | % | 137 | % |
| Dividend  yield           |   | 0                 | %      | 0 | % | 0 | % |

 

The effect of applying SFAS No. 123 would be as follows:
|                                        |   | **Years  Ended December 31,** |     |
|---------------------------------------------|--------|-------------------------------|----------|
|                                        |   | **2001**                      |     | **2000** |   | **1999** |   |
| Net  loss as reported                       |   | $                             | (525,186 | ) | $ | (473,108 | ) | $ | (854,434 | ) |
| Pro  forma                                  |   | (843,264                      | )        | (862,383 | ) | (1,209,813 | ) |
|                                        |   |                          |     |   |   |   |   |
| Basic  and Diluted Net Loss Per Share— |   |                          |     |   |   |   |   |
| As  reported                                |   | $                             | (0.07    | ) | $ | (0.06 | ) | $ | (0.15 | ) |
| Pro  forma                                  |   | $                             | (0.11    | ) | $ | (0.12 | ) | $ | (0.21 | ) |

 

**Warrants**

** **

On September 23, 1999, the Chief Executive officer of the Company,Irwin J. Gruverman, was granted warrants to purchase up to 100,000 shares ofthe Company's common stock at a per share price of $0.52 a share, having anexpiration date of July 2, 2004. As of December 31, 2001, there were 100,000warrants outstanding.

 

**Employee Stock Purchase Plan**

TheCompany has an employee stock purchase plan (the Purchase Plan).  Under the Purchase Plan, participants aregranted options to purchase the Company’s common stock twice a year at thelower of 85% of market value at the beginning or end of each period.Calculation of the number of options granted, and subsequent purchase of theseshares, is based upon voluntary payroll deductions during each six monthperiod. The number of options granted to each employee under this plan islimited to a maximum amount of 1,000 shares for each six-month period. Thenumber of shares issued pursuant to this plan totaled 30,658, 27,641 and 4,324in 2001, 2000 and 1999, respectively.

 

 

 

 

F-19

----

 

**Note 11               COMMITMENTS**

 

The Company leases its facilities under non-cancelable operatingleases expiring through August 2006. Future minimum rental payments under the operating leases at December31, 2001 are approximately as follows:

 
| 2002                     |   |   | $             | 425,000    |   |
|--------------------------|--------|--------|---------------|------------|--------|
| 2003                     |   |   | 413,000       |       |
| 2004                     |   |   | 358,000       |       |
| 2005                     |   |   | 373,000       |       |
| 2006                     |   |   | 170,000       |       |
| **TOTAL LEASE PAYMENTS** |   | **$**  | **1,739,000** | ** ** |

 

Rent expense for 2001,2000, and 1999 was approximately $415,000, $405,000, and $499,000, respectively.

 

**Note 12               RELATED PARTY TRANSACTIONS**

 

During 2001, 2000, and1999, the Company and G&G Corporation (G&G), an entity controlled byMr. Gruverman, the Company’s Chairman, entered into an arrangement wherebyG&G reimbursed the Company for certain administrative expenses incurred forservices performed by the Company.  TheCompany was reimbursed approximately $30,407, $75,780, and $79,291 by G&G during 2001, 2000, and 1999,respectively. At December 31, 2001, 2000, and 1999, G&G owed the Company$0, 18,525 and $23,252 respectively.

 

As discussed in Notes 6and 7, the Company owed the former Principals of Morehouse and Epworth$237,500, $300,000 and $775,000 at December 31, 2001, 2000, and 1999,respectively. Interest expense on the subordinated debt for 1999 was$77,500.   Interest capitalized on the$300,000 note in connection with the Settlement Agreement discussed in Note 13amounted to $88,750 and is being amortized over 5 years.  Total payments in 2001 and 2000 were $25,449and $17,916, respectively.

 

**Note 13               SETTLEMENT AGREEMENT, DEBTRESTRUCTURING AND REFINANCING**

# ** **

On December 20, 1999 theCompany signed an agreement in principle (the Agreement In Principle) with J.B.Jennings and Bret A. Lewis, the former owners of the Epworth Mill andMorehouse-COWLES businesses (the Sellers), Lake Shore Industries, Inc., and JLJProperties, Inc., entities owned and controlled by the Sellers.  The Agreement In Principle sets forthunderstandings among the parties concerning restructuring of the Company’ssubordinated debt and resolution of various disputes.  On January 17, 2000 a definitive settlement agreementincorporating these subject matters was executed between the parties

 

F-20

----

 

(the SettlementAgreement).  In connection with theclosing of the Credit Facility, and pursuant to a Settlement Agreement datedJanuary 17, 2000 with the Company’s subordinated debt holders, the subordinateddebt of the Company was restructured in the following manner. The outstandingAugust 14, 1998 $500,000 subordinated promissory note, having a remaining$475,000 principal balance together with accrued interest at the Closing Datein 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 MFICrestricted common stock (the Conversion Shares). The fair market value of theCompany’s Common Stock on the date of the Agreement In Principle was $0.31 pershare.  MFIC was granted the right for athree-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 subordinatedpromissory note dated February 28, 2000 (the 2000 Subordinated Note).  The 2000 Subordinated Note has a maturitydate of February 28, 2005 and bears interest at a rate of ten percent (10%) perannum. The note is payable interest only in its first year and then is payablein equal quarterly installments of principal together with outstanding interestthereon until maturity.

# ** **

A disputed lease betweenthe Company and one of the Seller’s entities for property located in SouthHaven, Michigan, which was the subject of a suit to terminate filed by theCompany, was voluntarily dismissed in return for the payment by the Company ofa total of $58,000. The initial payment in the amount of $30,000 was paid onJanuary 19, 2000 upon execution of the Settlement Agreement and the balance onFebruary 28, 2000.  The Companydismissed with prejudice by joint stipulation its lawsuit to terminate thelease.  The Company and the Sellersexecuted a mutual release of liability related to the August 14, 1998 AssetPurchase Agreement.

 

As a result of the debtrestructuring and refinancing, the Company recorded an extraordinary gain ofapproximately $195,000 in the first quarter of 2000.

 

 

 

F-21

----

 

# **Item 9.**                                                  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE

 

**None.**

##### ** **

##### **PART III**

 

# **Item 10.**                                           DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

 

The information concerning directors and executive officers of theCompany required under this item is incorporated herein by reference to theCompany’s definitive proxy statement pursuant to Regulation 14A, to befiled with the Commission not later than 120 days after the close of theCompany’s fiscal year ended December 31, 2001.

 

# **Item 11.**                                           EXECUTIVECOMPENSATION

 

The information required under this item is incorporated herein byreference to the Company’s definitive proxy statement pursuant toRegulation 14A, to be filed with the Commission not later than120 days after the close of the Company’s fiscal year endedDecember 31, 2001.

 

# **Item 12.**                                           SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The information required under this item is incorporated herein byreference to the Company’s definitive proxy statement pursuant toRegulation 14A, to be filed with the Commission not later than120 days after the close of the Company’s fiscal year ended December 31,2001.

 

# **Item 13.**                                           CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

The information required under this item is incorporated herein byreference to the Company’s definitive proxy statement pursuant toRegulation 14A, to be filed with the Commission not later than120 days after the close of the Company’s fiscal year endedDecember 31, 2001.

 

 

----

 

**PARTIV**

 

# **Item14.              EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

**(a)(1.)  Consolidated Financial Statements.**

 

The following Consolidated Financial Statements are included inItem 8:

 

ConsolidatedBalance Sheets as of December 31, 2001 and 2000

 

ConsolidatedStatements of Operations for the years ended December 31, 2001, 2000, and1999

 

ConsolidatedStatements of Cash Flows for the years ended December 31, 2001, 2000, and1999

 

ConsolidatedStatements of Changes in Stockholders’ Equity for the years endedDecember 31, 2001, 2000, and 1999

 

Notes to Consolidated Financial Statements

 

Reports of Independent Auditors

 

**(a)(2.)  Financial Statement Schedules.**

 

The following Consolidated FinancialStatement Schedule of the Registrant is filed as part of this report:

 

Schedule II — Valuation and QualifyingAccounts and Reserves

 

**(a)(3.)  List of Exhibits.**

 

 

----

 

**ExhibitIndex**

 
| **Exhibit  Number** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(a)                |   | Certificate of  Incorporation for the Company, as amended (filed as Exhibit 2A to  Registration Statement No. 0-11625 on Form 8-A and as Exhibit 3.1(a) to the  Company’s Report on Form 10-Q for the quarterly period ended September 30,  1999 and incorporated herein by reference).                                                                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3(b)                |   | Amended and Restated By-Laws for the Company (filed  as Exhibit 3.3(b) to the Company’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1996 and incorporated herein by reference).                                                                                                                                                                                                                                                |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                |   | 1987 Stock Plan (filed  as Exhibit 10(g) to the Company’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1987 and incorporated herein by reference).                                                                                                                                                                                                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                |   | 1988 Stock  Plan (filed as Exhibit 10(g) to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1988 and incorporated herein by  reference).                                                                                                                                                                                                                                                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                |   | 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 reference).                                                                                                                                                                                                                                                        |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                |   | Lease for 30  Ossipee Road, Newton, Massachusetts dated May 23, 1997 between Microfluidics  International Corporation and J. Frank Gerrity, Trustee of 1238 Chestnut  Street Trust under Declaration of Trust dated May 23, 1969, recorded with  Middlesex South Registry of Deeds in Book 11682, Page 384 (filed as Exhibit  3.10(a) to the Company’s form 10-Q for the quarterly period ended June 30,  1997 and incorporated herein by reference). |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5                |   | Letter of  Understanding between Microfluidics International Corporation and Worcester  Polytechnic Institute dated as of April 3, 1992 (filed as  Exhibit 3.10(f) to the Company’s Form 10-K for the fiscal year  ended December 31, 1993 and incorporated herein by reference).                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                |   | Agreement  between Microfluidics International Corporation and Catalytica, Inc. dated as  of October 18, 1993 (filed as Exhibit 3.10(g) to the Company’s  Form 10-K for the fiscal year ended December 31, 1993 and  incorporated herein by reference) with amendments dated September 1, 1994 and  March 31, 1995.                                                                                                               |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7                |   | Amendment to  agreement dated September 1, 1994 between Microfluidics International  Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as  Exhibit 3.10(g) to the Company’s Form 10-K for the fiscal year ended December  31, 1993, and incorporated herein by reference).                                                                                                                                                         |

 

 

----

 
| 10.8   |   | Amendment to  agreement dated March 31, 1995 between Microfluidics International  Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as  Exhibit 3.10(g) to the Company’s Form 10-K for the fiscal year ended December  31, 1993, and incorporated herein by reference)                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.9   |   | License  Agreement among Microfluidics International Corporation, Worcester  Polytechnic Institute and Catalytica, Inc. dated as of October 18, 1993  (filed as Exhibit 3.10(h) to the Company’s Form 10-K for the fiscal  year ended  December 31, 1993 and  incorporated herein by reference).              |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.10  |   | Amendment to  agreement dated September 1, 1994 between Microfluidics International  Corporation and Catalytica, Inc. dated as of October 18, 1993 (filed as  Exhibit 3.10(g) to the Company’s Form 10-K for the fiscal year ended December  31, 1993, and incorporated herein by reference).                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.11  |   | Letter,  dated August 15, 1995, from Microfluidics International Corporation to  Michael T. Rumley. (filed as Exhibit 3.10(j) to the Company’s Form 10-K  for fiscal year ended December 31, 1995 and incorporated herein by  reference).                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.12  |   | Letter,  dated December 31, 1995 from Microfluidics International Corporation to Irwin  J. Gruverman. (filed as Exhibit 3.10(k) to the Company’s Form 10-K for fiscal  year ended December 31, 1996 and incorporated herein by reference).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.13  |   | Warrant for  the Purchase of Shares of Common Stock, dated July 14, 1993, in favor of  Ladenburg, Thalmann & Co. Inc. (filed as Exhibit 3.10(l) to the Company’s  Form  10-K or fiscal year ended  December 31, 1996 and incorporated herein by reference).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.14  |   | Letter,  dated December 31, 1996, from Microfluidics International Corporation to  Irwin J. Gruverman. (filed as Exhibit 3.10(o) to the Company’s Form 10-K  for fiscal year ended December 31, 1996 and incorporated herein by  reference).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.15  |   | Agreement  between Microfluidics International Corporation and Catalytica, Inc. dated January  1, 1995 regarding participation in and management of the Advanced  Technology Program (ATP). (filed as  Exhibit 3.10(p) to the Company’s Form 10-K for fiscal year ended December 31,  1996 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.16  |   | Consulting Agreement  with James Little. (filed as Exhibit 3.10(q) to the Company’s Form 10-K for  fiscal year ended December 31, 1996 and incorporated herein by reference).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.17  |   | Supplemental  Agreement between Catalytica Advanced Technologies, Inc. and Microfluidics  International Corporation dated December 31, 1997.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.18  |   | Letter dated  December 31, 1997, from Microfluidics International Corporation to Irwin J.  Gruverman and G & G Diagnostics Corp.                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| 10.19  |   | 1988 Stock  Plan as amended (filed as Exhibit 10(a) to the Company’s Form 10-Q for the  quarterly period ended March 31, 1997 and incorporated herein by reference.                                                                                                                                                                    |

 

 

----

 
| 10.20  |   | Asset  Purchase Agreement, dated as of June 19, 1998, by and among the Company,  Epworth Manufacturing Company and Morehouse-COWLES, Inc.(filed as Exhibit 2.1  to Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated herein  by Reference).                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.21  |   | Stockholders  Agreement, dated August 14, 1998, by and among the Company and J.B. Jennings  and Bret A. Lewis (filed as exhibit 2.2 to Schedule 13D of Bret A. Lewis,  File No. 005-35850, and incorporated herein by reference.                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.22  |   | $500,000  Subordinated Promissory Note issued by the Company to Epworth Manufacturing  Company (filed as exhibit 99.2 to the Company’s Form 8-K on August 27, 1998,  File No. 000-11625, and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.23  |   | $300,000  Subordinated Promissory Note issued by the Company to Epworth Manufacturing  Company (filed as exhibit 99.2 to the Company’s Form 8-K on August 27, 1998,  File No. 000-11625, and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.24  |   | Revolving  credit loan between Comerica Bank and the Company dated August 12, 1998  (filed as Exhibit 10.1 to the Company’s form 10-Q for the quarterly period  ended September 30, 1998 and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.25  |   | Letter dated  December 31, 1998 from Microfluidics International Corporation To Irwin J.  Gruverman.  (Filed as exhibit 3.10(2)  to the Company’s Annual Report on Form 10-K for fiscal year ended December  31, 1998 and incorporated herein by reference.)                                  |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.26  |   | Revolving  Credit and Term Loan Agreement among MFIC Corporation and National Bank of  Canada dated February 28, 2000. (Filed as exhibit 10.26 to the Company’s  Annual Report on Form 10-K for fiscal year ended December 31, 2000, and  incorporated herein by reference.)                       |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.27  |   | Revolving  Credit Note of the Company in favor of National Bank of Canada in the amount  of $4,000,000.00 dated February 28, 2000.   (Filed as exhibit 10.27 to the Company’s Annual Report on Form 10-K  for fiscal year ended December 31, 2000, and incorporated herein by  reference.)    |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.28  |   | Term Note of  the Company in favor of National Bank of Canada in the amount of $475,000.00  dated February 28, 2000.  (Filed as  exhibit 10.28 to the Company’s Annual Report on Form 10-K for fiscal year  ended December 31, 2000, and incorporated herein by reference.)                   |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.29  |   | Security  Agreement of the Company in favor of National Bank of Canada dated February  28, 2000. (Filed as exhibit 10.29 to the Company’s Annual Report on Form 10-K  for fiscal year ended December 31, 2000, and incorporated herein by  reference.)                                             |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.30  |   | Trademark  and Trademark Applications Security Agreement of the Company in favor of  National Bank of Canada, dated February 28, 2000.  (Filed as exhibit 10.30 to the Company’s Annual Report on Form  10-K for fiscal year ended December 31, 2000, and incorporated herein by  reference.) |

 

 

----

 
| 10.31  |   | Patent and  Patent Applications Security Agreement of the Company in favor of National  Bank of Canada, dated February 28, 2000. (Filed as exhibit 10.31 to the  Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,  and incorporated herein by reference.)                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.32  |   | Unlimited  Guaranty of Microfluidics Corporation in favor of National Bank of Canada  Dated February 28, 2000.  (Filed as  exhibit 10.32 to the Company’s Annual Report on Form 10-K for fiscal year  ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33  |   | Stock Pledge  Agreement between the Company and National Bank of Canada dated February 28,  2000.  (Filed as exhibit 10.33 to the  Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,  and incorporated herein by reference.)                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.34  |   | Subordination  Agreement among the Company, Lake Shore Industries, Inc. and National Bank of  Canada dated as of February 28, 2000.   (Filed as exhibit 10.34 to the Company’s Annual Report on Form 10-K  for fiscal year ended December 31, 2000, and incorporated herein by  reference.)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.35  |   | Subordinated  Promissory Note on the Company in favor of Lake Shore Industries, Inc. in the  amount of $300,000.00 dated February 28, 2000.  (Filed as exhibit 10.35 to the Company’s Annual Report on Form  10-K for fiscal year ended December 31, 2000, and incorporated herein by  reference.)                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.36  |   | Forbearance  Agreements with Comerica. (Filed as exhibit 10.36 to the Company’s Annual  Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated  herein by reference.)                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | Settlement  Agreement, dated January 17, 2000 by and among the Company, Bret A. Lewis, J.  B. Jennings, Lake Shore Industries, Inc., and JLJ Properties, Inc., with  $300,000 Subordinated Promissory Note dated February 28, 2000, issued by the  Company to Lake Shore Industries, Inc. (FKA Epworth Manufacturing Company,  Inc).  (Filed as exhibit 10.37 to the  Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,  and incorporated herein by reference.) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | Letter,  dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman and  G&G Diagnostics Corp. (Filed as exhibit 10.38 to the Company’s Annual  Report on Form 10-K for fiscal year ended December 31, 2000, and incorporated  herein by reference.)                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.39  |   | Letter,  dated December 31, 1999, from MFIC Corporation to Irwin J. Gruverman. (Filed  as exhibit 10.39 to the Company’s Annual Report on Form 10-K for fiscal year  ended December 31, 2000, and incorporated herein by reference.)                                                                                                                                                                                                                                                             |

 

 

----

 
| 10.40        |   | First  Amendment to Revolving Credit and Term Loan Agreement between the Company and  National Bank of Canada dated March 30, 2000. (Filed as exhibit 10.40 to the  Company’s Annual Report on Form 10-K for fiscal year ended December 31, 2000,  and incorporated herein by reference.)                         |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                   |
| 10.41        |   | Lease  between ABB and Microfluidics dated April 14, 2000 for space at Lampertheim,  Germany. (Filed as exhibit 10.41 to the Company’s Annual Report on Form 10-K  for fiscal year ended December 31, 2000, and incorporated herein by  reference.)                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| 10.42        |   | Security  Agreement between MFIC Corporation and J.M. Huber Corporation dated October  18, 2000. (Filed as exhibit 10.42 to the Company’s Annual Report on Form 10-K  for fiscal year ended December 31, 2000, and incorporated herein by  reference.)                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| 10.43        |   | Settlement  agreement between MFIC Corporation and J.M. Huber Corporation dated December  18, 2000. (Filed as exhibit 10.43 to the Company’s Annual Report on Form 10-K  for fiscal year ended December 31, 2000, and incorporated herein by  reference.)                                                         |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| 10.44        |   | Termination  agreement between Michael A. Lento and MFIC Corporation dated December 14,  2000. (Filed as exhibit 10.44 to the Company’s Annual Report on Form 10-K for  fiscal year ended December 31, 2000, and incorporated herein by reference.)                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| 10.45        |   | Letter,  dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman and  G&G Diagnostics Corporation. (Filed as exhibit 10.45 to the Company’s  Annual Report on Form 10-K for fiscal year ended December 31, 2000, and  incorporated herein by reference.)                                    |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| 10.46        |   | Letter,  dated December 31, 2000, from MFIC Corporation to Irwin J. Gruverman. (Filed  as exhibit 10.46 to the Company’s Annual Report on Form 10-K for fiscal year  ended December 31, 2000, and incorporated herein by reference.)                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| *10.47  |   | Lease for 30  Ossipee Road, Newton, Massachusetts dated October 19, 2001, between  Microfluidics International Corporation and King Real Estate Corp., Trustee  of 1238 Chestnut Street Trust under Declaration of Trust dated May 23, 1969,  recorded with Middlesex South Registry of Deeds in Book 11682, Page 384. |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| *10.48  |   | Consulting  agreement with Vincent Cortina dated January 2, 2002.                                                                                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| *10.49       |   | Letter dated  December 31, 2001 from MFIC to Irwin J. Gruverman.                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| *10.50       |   | Second  Amendment to Revolving Credit and Term Loan Agreement between the Company and  PNC Bank, N.A. dated March 29, 2002.                                                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                   |
| *23(a)       |   | Consent of  Brown & Brown LLP                                                                                                                                                                                                                                                                                      |
| *23(b)       |   | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                                                                                                  |

 

----

*  Filed herewith

** Management contracts or compensatory plan or arrangement required tobe filed as an exhibit to this Form 10-K pursuant to of this report.

 

 

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto duly authorized,in the city of Newton, Commonwealth of Massachusetts, on the 29thday of March 2002.

 
|   | **MFIC CORPORATION**     |
|--------|--------------------------|
|   |                     |   |
|   | By:                      | /s/ Irwin J.  Gruverman |   |
|   | Irwin J.  Gruverman      |
|   | Chief  Executive Officer |

 

 

----

 

Pursuant to the requirements of theSecurities and Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Signature**             |   | **Title**                                                                        |                     | **Date** |
|---------------------------|--------|----------------------------------------------------------------------------------|--------------------------|----------|
|                      |   |                                                                             |                     |     |
| /s/ Irwin J.  Gruverman   |   |                                                                             | Chief  Executive Officer |     | March 29,  2002 |
| Irwin J.  Gruverman       |   | (Principal  Executive Officer), Chairman of the Board of Directors and Secretary |                     |     |
|                      |   |                                                                             |                     |     |
| /s/ James N.  Little      |   |                                                                             | Director                 |     | March 29,  2002 |
| James N.  Little          |   |                                                                             |                     |     |
|                      |   |                                                                             |                     |     |
| /s/  Vincent Cortina |   |                                                                             | Director                 |     | March 29,  2002 |
| Vincent  Cortina          |   |                                                                             |                     |     |
|                      |   |                                                                             |                     |     |
| /s/ Leo  Pierre Roy       |   |                                                                             | Director                 |     | March  29,2002 |
| Leo Pierre  Roy           |   |                                                                             |                     |     |
|                      |   |                                                                             |                     |     |
| /s/ Edward  T. Paslawski  |   |                                                                             | Director                 |     | March 29,  2002 |
| Edward T.  Paslawski      |   |                                                                             |                     |     |

 

 

----

 

**SCHEDULEII**

 

**MFIC CORPORATION**

 

Valuation and Qualifying Accounts and Reserves

For the years ended December 31, 2001, 2000, and 1999

 
|                                                                |   | **Balance at  Beginning of  Period** |      | **Additions  Charged to Costs  and Expenses** |   | **Deductions  and  Adjustments** |   | **Balance at  End  of Period** |     |
|---------------------------------------------------------------------|--------|--------------------------------------|-----------|-----------------------------------------------|--------|----------------------------------|--------|--------------------------------|----------|
| ALLOWANCE FOR DOUBTFUL ACCOUNTS                                     |   |                                 |      |                                          |   |                             |   |                           |     |
| For the year ended December 31, 2001                                |   | $                                    | 55,570    |                                          | $      |                             |   | $                              | (17,322  | )  | $ | 38,248 |   |
| 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                         |     |
|                                                                |   |                                 |      |                                          |   |                             |   |                           |     |
| INVENTORY RESERVE                                                   |   |                                 |      |                                          |   |                             |   |                           |     |
| For the year ended December 31, 2001                                |   | $                                    | 194,044   |                                          | $      | 34,727                           |   | $                              | (131,934 | ) | $ | 96,837 |   |
| 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                        |     |
|                                                                |   |                                 |      |                                          |   |                             |   |                           |     |
| ACCUMULATED AMORTIZATION RELATED TO  GOODWILL AND OTHER INTANGIBLES |   |                                 |      |                                          |   |                             |   |                           |     |
| For the year ended December 31, 2001                                |   | $                                    | 1,548,371 |                                          | $      | 516,764                          |   |                           |     | $ | 2,065,135 |   |
| 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                      |     |

 

 

----