UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 30, 2002 Commission file No. 0-11201
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MERRIMAC INDUSTRIES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-1642321
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Fairfield Place, West Caldwell, New Jersey 07006
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(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (973) 575-1300
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
----
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 13, 2002
----------------------------- ---------------------------
Common Stock ($.01 par value) 3,187,658
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
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March 30, December 29,
2002 2001
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(Unaudited) (Audited)
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ASSETS
------
Current assets:
Cash and cash equivalents ....................... $ 2,414,121 $ 1,844,434
Accounts receivable, net......................... 4,549,381 5,632,008
Income tax refunds receivable.................... 186,487 195,323
Inventories...................................... 4,706,112 4,797,205
Other current assets ............................ 366,297 691,712
Deferred tax assets ............................. 548,000 548,000
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Total current assets ........................ 12,770,398 13,708,682
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Property, plant and equipment at cost.............. 34,520,843 33,568,651
Less accumulated depreciation and amortization... 15,216,746 14,605,751
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Property, plant and equipment, net............. 19,304,097 18,962,900
Other assets ...................................... 716,044 676,073
Deferred tax assets, non-current................... 1,194,000 1,194,000
Goodwill........................................... 2,442,533 2,451,037
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Total Assets ................................ $36,427,072 $36,992,692
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Current portion of long-term debt ............... $ 396,172 $ 4,368,565
Accounts payable ................................ 1,948,317 3,577,922
Accrued liabilities ............................. 1,363,934 1,620,305
Income taxes payable............................. 275,920 268,274
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Total current liabilities ................... 3,984,343 9,835,066
Long-term debt, net of current portion ............ 3,798,716 3,871,635
Deferred compensation ............................. 147,643 155,768
Deferred liabilities............................... 197,331 118,597
Deferred tax liabilities .......................... 958,000 958,000
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Total liabilities ........................... 9,086,033 14,939,066
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Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share:
Authorized: 1,000,000 shares
No shares issued
Common stock, par value $.01 per share:
Authorized: 20,000,000 shares
Issued: 3,186,008 and 2,859,249 shares ....... 31,860 28,592
Common stock warrants............................ 837,200 837,200
Additional paid-in capital ...................... 17,722,370 14,327,586
Retained earnings ............................... 9,674,282 9,531,445
Accumulated comprehensive loss................... (340,673) (327,066)
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27,925,039 24,397,757
Less treasury stock, at cost:
208,904 shares at December 29, 2001............ - (1,760,131)
Less loan to officer-stockholder ................ (584,000) (584,000)
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Total stockholders' equity ................... 27,341,039 22,053,626
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Total Liabilities and Stockholders' Equity ... $36,427,072 $36,992,692
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See accompanying notes.
- 1 -
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
-------------------------------------
(Unaudited)
-----------
Quarter Ended
-----------------------
March 30, March 31,
2002 2001
OPERATIONS -----------------------
Net sales ................................... $6,850,587 $6,090,367
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Costs and expenses:
Cost of sales ............................. 3,656,307 2,944,456
Selling, general and administrative ....... 2,343,780 2,272,674
Research and development .................. 575,547 637,916
Amortization of goodwill................... - 37,392
Reincorporation charge..................... - 330,000
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6,575,634 6,222,438
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Operating income (loss)...................... 274,953 (132,071)
Interest and other expense (income), net .... 62,116 (36,375)
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Income (loss) before income taxes............ 212,837 (95,696)
Provision (benefit) for income taxes ........ 70,000 (65,000)
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Net income (loss)............................ $ 142,837 $ (30,696)
========== ==========
Net income (loss) per common share:
Basic and diluted ......................... $ .05 $(.01)
===== =====
Weighted average number of
shares outstanding:
Basic ..................................... 2,835,381 2,604,743
========= =========
Diluted.................................... 2,943,428 2,604,743
========= =========
COMPREHENSIVE INCOME (LOSS)
Net income (loss)............................ $ 142,837 $ (30,696)
Comprehensive income (loss):
Foreign currency translation adjustment.... (13,607) (205,084)
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Comprehensive income (loss).................. $ 129,230 $ (235,780)
========== ==========
See accompanying notes.
-2-
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
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Quarter Ended
-------------------------
March 30, March 31,
2002 2001
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Cash flows from operating activities:
Net income (loss).................................. $ 142,837 $ (30,696)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 613,043 532,322
Amortization of goodwill ...................... - 37,392
Amortization of deferred income................ (21,822) (21,830)
Deferred and other compensation................ 2,174 2,647
Deferred income taxes.......................... - (87,000)
Changes in operating assets and liabilities:
Accounts receivable.......................... 1,082,626 796,522
Income tax refunds receivable................ 8,836 9,700
Inventories.................................. 91,093 (241,798)
Other current assets......................... 325,415 (36,113)
Other assets................................. (39,971) 108,390
Accounts payable............................. (1,878,603) (549,341)
Accrued liabilities.......................... (256,370) (445,815)
Income taxes payable......................... 7,646 (6,577)
Deferred compensation........................ (10,299) (18,528)
Other liabilities............................ 100,556 99,160
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Net cash provided by operating activities............ 167,161 148,435
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Cash flows from investing activities:
Purchase of capital assets......................... (708,940) (1,053,480)
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Net cash used in investing activities................ (708,940) (1,053,480)
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Cash flows from financing activities:
Borrowing under mortgage facility.................. 2,500,000 -
Repayment of borrowings............................ (6,543,001) (48,007)
Proceeds from the issuance of common stock, net.... 5,084,130 -
Proceeds from the exercise of stock options........ 74,052 123,136
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Net cash provided by financing activities............ 1,115,181 75,129
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Effect of exchange rate changes...................... (3,715) (101,460)
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Net increase (decrease) in cash and cash equivalents. 569,687 (931,376)
Cash and cash equivalents at beginning of year....... 1,844,434 3,425,390
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Cash and cash equivalents at end of period........... $2,414,121 $2,494,014
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes..................................... $ 61,760 $ -
========== ==========
Loan interest.................................... $ 73,200 $ 9,878
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Unpaid purchases of capital assets................. $ 249,000 $ -
========== ==========
See accompanying notes.
-3-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and footnote disclosures otherwise required by
Regulation S-B. The financial statements do, however, reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial position of the Company as of March 30, 2002 and its results of
operations and cash flows for the periods presented. Results of operations of
interim periods are not necessarily indicative of results for a full year. These
financial statements should be read in conjunction with the audited consolidated
financial statements in the Company's Annual Report on Form 10-KSB for December
29, 2001. Certain prior year amounts have been reclassified to conform to
current year presentation.
B. Contract revenue recognition
Sales and related cost of sales on fixed-price contracts that require
customization of standard products to customer specifications are recorded as
title to these products transfers to the customer, which is generally on the
date of shipment. Prior to shipment, manufacturing costs incurred on such
contracts are recorded as work in process inventory. Anticipated losses on
contracts are charged to operations when identified. Revenue related to
non-recurring engineering charges is generally recognized upon shipment of the
initial units produced or based upon contractually established stages of
completion.
C. Private placement of common stock
On February 28, 2002, the Company entered into a stock purchase agreement
with DuPont Electronic Technologies pursuant to which the Company sold 528,400
shares of Common Stock, representing approximately 16.6% of the Company's
outstanding Common Stock after giving effect to the sale, for an aggregate
purchase price of $5,284,000. The Company and DuPont Electronic Technologies
have also agreed to work together to better understand the dynamics of the
markets for high-frequency electronic components and modules. David B. Miller,
Vice President and General Manager of DuPont Electronic Technologies, was
appointed to the Company's Board of Directors. As a result of this sale, certain
contractual anti-dilution provisions affected both the exercise price and the
number of shares subject to the Warrants issued in October 2000. The exercise
price of the Warrants was reduced to $17.80 and the number of shares subject to
the Warrants was increased to 429,775. The expiration date of the Warrants
remained unchanged.
In connection with DuPont's purchase of the Company's Common Stock, the
Company and DuPont also entered into a registration rights agreement which
provides DuPont with two demand registrations at any time following February 28,
2004.
D. Adoption of Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which established new accounting and reporting
standards and requires that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded as assets or
liabilities in the balance sheet measured at fair value. SFAS No. 133 requires
that changes in the fair value of derivatives be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company has
adopted the provisions of the Statement in 2001. The Company does not currently
hold derivative instruments or engage in hedging activities and therefore the
adoption of SFAS No. 133 has not had any impact on the Company's financial
position, results of operations or cash flows.
On June 30, 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting and
eliminates the pooling method of accounting. SFAS No. 141 will not have an
impact on the Company's business since the Company has accounted for all of its
business combinations using the purchase method of accounting.
-4-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With the adoption of SFAS No. 142 by the Company on December 30, 2001,
goodwill will no longer be subject to amortization over its estimated useful
life. However, goodwill will be subject to at least an annual assessment for
impairment and more frequently if circumstances indicate a possible impairment.
The Company is required to perform a fair value-based goodwill impairment test.
In addition, under SFAS No. 142, an acquired intangible asset should be
separately recognized if the benefit of the intangible is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged. Intangible assets will be amortized
over their estimated useful lives. Any write-down of goodwill would be charged
to results of operations in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. On an annualized basis, the
Company expects that the adoption of this accounting standard will reduce the
amortization of goodwill and intangibles by approximately $150,000 commencing in
2002, unless future impairment reviews result in periodic write-downs of
goodwill.
The following information provides the required disclosures and describes
the impact the adoption of SFAS No. 142 had on the Company during the periods
reported:
Goodwill:
The changes in the carrying amount of goodwill for the three month periods
ended March 30, 2002 and March 31, 2001 are as follows:
2002 2001
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Balance, beginning of year $2,451,037 $2,774,248
Goodwill amortized - (37,392)
Foreign currency adjustment (8,504) (119,421)
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Balance, end of period $2,442,533 $2,617,435
========== ==========
In connection with the adoption of SFAS No. 142, the Company is in process
of completing its transitional impairment assessment which will be done within
six months from the date of adoption as required by the standard. The Company
has not determined the impact the adoption of this pronouncement will have on
the Company and its results of operations.
The current impact that the adoption of SFAS No. 142 had on net income
(loss) and net income (loss) per share for the periods presented is as follows:
Quarter Ended
--------------------
March 30, March 31,
2002 2001
--------------------
Reported net income (loss) for the period $142,837 $ (30,696)
Add back: Amortization of goodwill - 37,392
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Adjusted net income (loss) for the periods $142,837 $ 6,696
======== =========
Basic and diluted net income (loss) per share:
Reported net income (loss) $.05 $(.01)
Amortization of goodwill - .01
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Adjusted net income (loss) $.05 $ .00
==== =====
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", which requires the fair value for
an asset retirement obligation to be recorded in the period in which it is
incurred. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002, with earlier adoption encouraged. The Company does not expect that the
adoption of SFAS No. 143 will have a material impact on the Company's financial
position or its results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is
effective for fiscal periods beginning after December 15, 2001. SFAS No. 144
establishes an accounting model for impairment or disposal of long-lived assets
to be disposed of by sale. The Company does not expect that the adoption of SFAS
No. 144 will have a material impact on the Company's financial position or
its results of operations.
-5-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. Delaware reincorporation
On February 22, 2001, the Company (previously incorporated in the State of
New Jersey) was reincorporated in the State of Delaware. In connection with the
reincorporation, each share of Common Stock, par value $.50 per share, of the
Company prior to the reincorporation was converted into one share of Common
Stock, par value $.01 per share, of the Company, as reincorporated in Delaware.
As a result of the reincorporation, the authorized capital stock of the Company
was increased to 20 million shares of common stock, par value $.01 per share
(from 5 million shares of Common Stock prior to the reincorporation), and one
million shares of preferred stock, par value $.01 per share.
The Company incurred $330,000 of costs in connection with the
reincorporation in Delaware. Such expense was reflected as a reincorporation
charge in the accompanying statement of operations in 2001. The reincorporation
charge, net of tax benefits, was $198,000 or $.08 per share in the first quarter
of 2001.
The Board of Directors has the authority to issue up to one million shares
of Preferred Stock and to fix the number of shares constituting any series and
the designation of such series, and to determine the preferences, rights and
qualifications or limitations of such series of Preferred Stock, without any
further vote or action by the Company's stockholders.
F. Inventories
Inventories consist of the following:
March 30, December 29,
2002 2001
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Finished goods ...................... $ 448,475 $ 490,135
Work in process ..................... 2,172,097 2,057,036
Raw materials and purchased parts ... 2,085,540 2,250,034
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Total $4,706,112 $4,797,205
========== ==========
Total inventories are net of valuation allowances for obsolescence of
$983,000 at March 30, 2002 and $991,000 at December 29, 2001.
-6-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. Net income (loss) per common share
SFAS No. 128, "Earnings per Share," establishes the computation and
presentation of net income per common share. Under the standard, both basic and
diluted net income per common share are presented.
Basic net income per common share is calculated by dividing net income,
less dividends on preferred stock, if any, by the weighted average common shares
outstanding during the period.
The calculation of diluted net income per common share is similar to that
of basic net income per common share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, principally those
issuable under stock options, were issued during the reporting period.
Stock options and warrants did not have an effect on the computation of
diluted loss per share in the first quarter 2001 since they were antidilutive.
H. Comprehensive income (loss)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income. SFAS No. 130 defines comprehensive income,
which includes items in addition to those reported in the statement of
operations, and requires disclosures about the components of comprehensive
income. Comprehensive income includes all changes in stockholders' equity during
a period except those resulting from investments by or distributions to
stockholders. The Company has determined the components of comprehensive income
(loss) impacting the Company consists primarily of cumulative translation
adjustments.
I. Accounting period
The Company's fiscal year is the 52-53 week period ending on the Saturday
closest to December 31. The Company has quarterly dates that correspond with the
Saturday closest to the last day of each calendar quarter and each quarter
consists of 13 weeks in a 52-week year. Every fifth year, the additional week to
make a 53-week year (fiscal year 1997 was the last and fiscal year 2002 will be
the next) is added to the fourth quarter, making such quarter consist of 14
weeks.
J. Transactions with management and loan to officer-stockholder
In May 1998, the Company sold 22,000 shares of Common Stock to Mason N.
Carter, Chairman, President and Chief Executive Officer of the Company, at a
price of $11.60 per share, which approximated the average closing price of the
Company's Common Stock during the first quarter of 1998. The Company extended to
Mr. Carter a loan of $255,000 in connection with the purchase of these shares.
In addition, the Company amended a prior loan to Mr. Carter of $105,000. The
total of $360,000 is due May 4, 2003 and interest payments (except as described
below) are due quarterly, calculated at a variable interest rate based on the
prime rate of the Company's lending bank. However, payment of interest that
accrued from November 1998 until November 1999 was deferred and payment of
interest that will accrue from November 2001 until November 2002 will be
deferred until May 4, 2003. Payment of the loan is secured by the pledge of
33,000 shares of Common Stock purchased by Mr. Carter with the proceeds of the
loans and Mr. Carter has agreed to restrictions on the resale of these shares of
Common Stock. The sale of these shares of Common Stock was exempt from
registration under the Securities Act of 1933, as amended ("the Act"), as a
transaction not involving a public offering under Section 4(2) of the Act.
On August 31, 2000, in connection with an amendment of Mr. Carter's
employment agreement, the Company loaned Mr. Carter an additional $280,000.
Interest on the loan will be calculated at a variable interest rate based on the
prime rate of the Company's lending bank, payable in accordance with Mr.
Carter's employment agreement. Each year the Company will forgive 20% of the
amount due under this loan and the accrued interest thereon. During 2001, the
amount of $56,000 principal and $23,000 of accrued interest was forgiven. For
fiscal year 2002, the Company projects that $56,000 of principal and $18,000 of
accrued interest will be forgiven.
-7-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. Current and long-term debt
The Company was obligated under the following debt instruments at March 30,
2002 and December 29, 2001:
March 30, December 29,
2002 2001
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Fleet Bank (A):
Revolving credit facility, interest 1/2% below prime ........ $ - $4,000,000
Mortgage loan, callable March 2007, interest 1/2% below prime 3,500,000 3,500,000
The Bank of Nova Scotia (B):
Capital leases, interest 7.0%, due October 2002.............. 113,690 131,662
Capital leases, interest 8.7%, due May 2005.................. 235,749 248,191
Capital leases, interest 7.3%, due April 2006................ 188,718 197,033
Capital leases, interest 7.9%, due June 2006................. 156,731 163,314
---------- ----------
4,194,888 8,240,200
Less current portion......................................... 396,172 4,368,565
---------- ----------
Long-term portion............................................ $3,798,716 $3,871,635
========== ==========
(A) The Company commenced borrowing in April 2001 under its existing
revolving credit facility with Fleet Bank (formerly Summit Bank), at an interest
rate of one-half percent below the bank's floating prime rate, which was 7.0% at
that time. During 2001, the Company borrowed an aggregate amount of $7,500,000
under this facility. The weighted average interest rate on the borrowings under
this facility during 2002 was 4.25% and the current interest rate is 4.25%.
During the first quarter of 2002, the Company obtained an additional
increase of $2,500,000 in the Company's lines of credit with Fleet Bank which
were increased to a total of $10,000,000, $3,500,000 of which consists of a
first mortgage callable in March 2007 on the Company's West Caldwell, New Jersey
manufacturing facility. The revolving line of credit of $6,500,000 expires June
30, 2002 and Fleet Bank has advised the Company that it will extend the
revolving credit facility for one year.
The Company successfully completed a private placement of 528,400 shares of
Company Common Stock on February 28, 2002 that raised $5,284,000 before offering
expenses. The Company repaid the Fleet Bank revolving credit facility from the
proceeds of that offering. The Company currently has $6,500,000 available under
its existing revolving credit facility.
As a result of the closing of mortgage financing with Fleet Bank in March
2002, the Company classified $3,500,000 as long-term debt in the December 29,
2001 balance sheet.
The revolving credit facility and mortgage loan are secured by
substantially all assets located within the United States.
(B) Capital leases included in property, plant and equipment, net, have a
depreciated cost of approximately $604,000 at March 30, 2002 and $632,000 at
December 29, 2001.
-8-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. Private placements of Common Stock and Warrants to purchase Common Stock
On April 7, 2000, the Company entered into a stock purchase and exclusivity
agreement with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson Holding
International, B.V. ("EHI") pursuant to which the Company sold to EHI 375,000
shares of Common Stock, representing approximately 17.5% of the Company's
outstanding Common Stock after giving effect to the sale, for an aggregate
purchase price of $3,375,000. The stock purchase and exclusivity agreement also
provides that the Company will design, develop and produce exclusively for
Ericsson Multi-Mix(R) products that incorporate active RF power transistors for
use in wireless base station applications, television transmitters and certain
other applications that are intended for Bluetooth transceivers. The Company
also agreed that it will generally be the priority supplier for such products.
In connection with EHI's purchase of the Company's Common Stock, the
Company and EHI also entered into a registration rights agreement which provides
EHI with two demand registrations at any time following April 7, 2002.
On October 26, 2000, the Company entered into subscription agreements for
common stock and three-year warrants to purchase shares of Common Stock
("Warrants") with a group of investors led by Adam Smith Investment Partners,
L.P. and certain of its affiliates (the "Adam Smith Investors"), EHI, and three
members of the board of directors of the Company (the "Director Investors"). The
Company sold to the investors units at a price of $12.80 per unit, each unit
consisting of one share of Common Stock and one Warrant with an exercise price
of $21.25, which expire on October 26, 2003 ("Units"). The Adam Smith Investors
purchased 240,000 Units, EHI purchased 100,000 Units and the Director Investors
purchased 20,000 Units for an aggregate purchase price of $4,608,000. The Common
Stock portion of the Units represented an aggregate of approximately 14% of the
outstanding Common Stock of the Company after giving effect to the sales. The
Warrants contain certain anti-dilution provisions.
The Warrants were valued using the Black-Scholes option valuation model
with a resulting allocation of the aggregate proceeds from the Units
attributable to the Warrants of $837,200, net of issue costs. The following
assumptions were utilized to value the Warrants: price per share of common stock
of $15.25; expected life of three years; expected volatility of 40%; a risk free
interest rate of 6%; an expected yield of 0.0%; and a liquidity discount of 33%.
In connection with the purchase by EHI and the Adam Smith Investors of
Merrimac Common Stock and Warrants, the Company, EHI and the Adam Smith
Investors also entered into registration rights agreements which provide EHI and
the Adam Smith Investors each with two demand registrations at any time
following October 26, 2002.
As a result of the sale of 528,400 shares of common stock at $10.00 per
share on February 28, 2002 (See Note C Private placement of common stock),
certain contractual anti-dilution provisions affected both the exercise price
and the number of shares subject to the Warrants issued in October 2000. The
exercise price of the Warrants was reduced to $17.80 and the number of shares
subject to the Warrants was increased to 429,775. The expiration date remained
unchanged.
-9-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. Lease modification and facility sharing agreement
The Company entered into an agreement effective January 2001, with a
customer to relinquish to this customer approximately half of the Company's
17,000 square-foot leased manufacturing facility in Costa Rica. Associated with
the transaction, the Company entered into a new four-year lease agreement with a
five-year renewal option with its Costa Rica landlord for the reduced space. In
addition, the Company transferred certain employees to its customer, agreed to
share certain personnel resources and common costs, and committed to provide
certain management, administrative and other services to its customer.
In connection with the transaction, the Company received $200,000 from its
customer and will receive further payments of $250,000 over a two-year period.
The Company will reduce its facility occupancy expenses by approximately $87,000
during each of the next four years that commenced January 2000 to an aggregate
amount of approximately $348,000.
The Company deferred approximately $102,000 of costs at December 30, 2000
incurred in connection with entering into this agreement and other incremental
costs, for the purpose of providing this customer with trained personnel and
certain other services required for their dedicated manufacturing capability.
Such costs classified in the balance sheet as other assets at December 30, 2000
were recovered through the $200,000 payment received in January 2001 as
described above. In January 2002, the Company received the second payment of
$150,000 and the final payment of $100,000 is due January 2003. At March 30,
2002, the unamortized amount of $140,000 in payments received is included in
deferred liabilities.
N. Pro forma weighted average number of common shares outstanding
Had the sale of 528,400 shares of common stock on February 28, 2002
referred to in Note C, Private placement of common stock, occurred at the
beginning of the year, the pro forma basic and diluted weighted average number
of common shares outstanding would have been:
Quarter Ended
---------------
March 30, 2002
---------------
Basic:
Actual 2,835,381
Adjustments for sale of
Common Stock on February 28, 2002 348,404
---------
Basic - pro forma 3,183,785
Effect of dilutive securities-
Stock options 108,047
---------
Diluted - pro forma 3,291,832
=========
-10-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. Business segment data
The Company's operations are conducted primarily through two business
segments: (1) electronic components and (2) microwave micro-circuitry. These
segments, and the principal operations of each, are as follows:
Electronic components: Design, manufacture and sale of electronic component
devices offering extremely broad frequency coverage and high performance
characteristics for communications, defense and aerospace applications. Of the
identifiable assets, 85% are located in the United States and 15% are located in
Costa Rica.
Microwave micro-circuitry: Design, manufacture and sale of microstrip,
bonded stripline and thick metal-backed Teflon(R) (PTFE) and mixed dielectric
multilayer circuits for communications, defense and aerospace applications. Of
the identifiable assets all are located in Canada.
Information about the Company's operations in different industries follows.
Operating income is net sales less operating expenses. Operating expenses
exclude interest expense, other income and income taxes. Assets are identified
with the appropriate operating segment and are substantially all located in the
North America geographic area. Corporate assets consist principally of cash.
Corporate expenses and inter-segment sales are immaterial.
Quarter Ended
-------------------------
March 30, March 31,
2002 2001
-------------------------
(In thousands of dollars)
Industry segments:
Sales to unaffiliated customers:
Electronic components $ 6,036 $ 4,618
Microwave micro-circuitry 815 1,472
------- -------
Consolidated $ 6,851 $ 6,090
======= =======
Income before provision for income taxes:
Operating income (loss):
Electronic components $ 289 $ (301)
Microwave micro-circuitry (14) 169
Interest and other (expense)
income, net (62) 36
-------- ------
Consolidated $ 213 $ (96)
======= =======
Identifiable assets:
Electronic components $28,950 $18,885
Microwave micro-circuitry 5,063 5,034
Corporate 2,414 2,494
------- -------
Consolidated $36,427 $26,413
======= =======
Depreciation and amortization:
Electronic components $ 544 $ 450
Microwave micro-circuitry 69 120
------- -------
Consolidated $ 613 $ 570
======= =======
Capital expenditures, net:
Electronic components $ 672 $ 908
Microwave micro-circuitry 37 145
------- -------
Consolidated $ 709 $ 1,053
======= =======
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY
---------------------------------------------
(Unaudited)
-----------
The following table displays line items in the Consolidated Statements of
Operations as a percentage of net sales.
Percentage of Net Sales
-----------------------
Quarter Ended
-----------------------
March 30, March 31,
2002 2001
---------- ---------
Net sales.................................... 100.0% 100.0%
------ ------
Costs and expenses:
Cost of sales.............................. 53.4 48.3
Selling, general and administrative........ 34.2 37.4
Research and development................... 8.4 10.5
Amortization of goodwill................... - .6
Reincorporation charge..................... - 5.4
------ ------
96.0 102.2
------ ------
Operating income (loss)...................... 4.0 (2.2)
Interest and other expense (income), net..... .9 (.6)
------ ------
Income (loss) before income taxes.......... 3.1 (1.6)
Provision (benefit) for income taxes....... 1.0 (1.1)
------ ------
Net income (loss).......................... 2.1% (0.5%)
====== ======
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Estimates and Policies
The Company's management makes certain assumptions and estimates that
impact the reported amounts of assets, liabilities and stockholders' equity, and
revenues and expenses. The management judgments that are currently the most
critical are related to the accounting for the Company's investments in
Multi-Mix(R) Microtechnology, contract revenue recognition and inventory
valuation.
Following is a summary of the carrying amounts of the Multi-Mix(R)
Microtechnology net assets included in the Company's consolidated financial
statements at March 30, 2002 and the related future planned purchases and lease
obligation commitments through January 2006.
Net assets:
Property, plant and equipment, at cost $13,189,000
Less accumulated depreciation and amortization 1,332,000
-----------
Property, plant and equipment, net 11,857,000
Inventories 961,000
Other assets, net 528,000
-----------
Total net assets at March 30, 2002 $13,346,000
-----------
Commitments:
Planned equipment purchases for 2002 $ 1,200,000
Lease obligations through January 2006 1,108,000
-----------
Total commitments $ 2,308,000
-----------
Total net assets and commitments $15,654,000
===========
The Company anticipates receiving increasing levels of orders during 2002
for its Multi-Mix(R) Microtechnology products, for which substantial research
and development costs have also been incurred. Due to economic and market
conditions in the wireless industry, the telecommunications system service
providers have curtailed their capital equipment purchases from our customers.
These circumstances have caused the Company's customers to delay Multi-Mix(R)
Microtechnology product purchases that had been anticipated for fiscal year
2001. A continued extended delay or reduction from planned levels in new orders
expected from customers for these products could require the Company to pursue
alternatives related to the utilization or realization of these assets and
commitments, the net result of which could be materially adverse to the
financial results and position of the Company. The Company has made no such
determination at this time.
The Company's planned equipment purchases and other commitments are
expected to be funded through a revolving credit facility of $6,500,000, which
becomes due June 30, 2002, supplemented by liquid cash resources and cash flows
that are expected to be provided by operations. The Company's bank has advised
the Company that it will extend the revolving credit facility for one year.
Contract revenue recognition and related costs on fixed-price contacts that
require customization of standard products to customer specifications are
recorded as title to these products transfers to the customer, which is
generally on the date of shipment. Prior to shipment, manufacturing costs
incurred on such contracts are recorded as work in process inventory.
Anticipated losses on contracts are charged to operations when identified.
Revenue related to non-recurring engineering charges is generally recognized
upon shipment of the initial units produced or based upon contractually
established stages of completion.
Inventories are valued at the lower of average cost or market. Inventories
are periodically reviewed for their projected manufacturing usage utilization
and, when slow-moving or obsolete inventories are identified, a provision for a
potential loss is made and charged to operations. At March 30, 2002, total
inventories of $4,706,000 are net of a $983,000 valuation allowance for
obsolescence.
First quarter 2002 compared to first quarter 2001
Consolidated results of operations for the first quarter of 2002 reflect an
increase in net sales from the first quarter of the prior year of $761,000 or
12.5% to $6,851,000. This increase was primarily attributable to a $1,418,000
increase in net sales of electronic components, which was partially offset by a
$657,000 decrease in sales of microwave micro-circuitry products of from the
Company's wholly-owned subsidiary Filtran Microcircuits Inc. ("FMI").
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Orders of $5,825,000 were received during the first quarter of 2002, a
decrease of $1,724,000 or 22.8% compared to $7,549,000 in orders received during
the first quarter of 2001. The first quarter of 2002 sales level exceeded orders
received during the first quarter of 2002 by approximately 15.0%. As a result,
backlog decreased by $1,026,000 or 8.7% to $10,831,000 at the end of first
quarter 2002 compared to $11,857,000 at year-end 2001.
The Company believes that the current economic downturn, resulting in
reduced spending by wireless service providers, has caused many wireless
companies to delay or forego purchases of the Company's products. This is
reflected in the decrease in the Company's backlog. However, the Company expects
that its satellite and defense customers should continue to maintain their
approximate current levels of orders during fiscal year 2002, although there are
no assurances they will do so. The Company also anticipates increased levels of
orders during the second-half of fiscal year 2002 for its new Multi-Mix(R)
Microtechnology products, for which the Company has made a significant capital
investment and incurred substantial research and development costs. The Company
expects that softness in the telecommunications sector that FMI serves,
principally millimeter wave applications for wireless broadband solutions, which
caused a substantial reduction in the microwave micro-circuitry segment sales
and profitability for the first quarter of 2002 compared to prior-year results,
will continue during fiscal year 2002.
Cost of sales increased $712,000 or 24.2%, and as a percentage of net sales
increased 5.1 percentage points to 53.4% for the first quarter of 2002. Cost of
sales increased $1,063,000 for the electronic components segment, resulting from
higher sales levels and manufacturing cost increases that were attributable to
increases in depreciation and other occupancy expenses related to the expansion
of the Company's West Caldwell, New Jersey and Costa Rica manufacturing
production facilities. Cost of sales declined $351,000 in the microwave
micro-circuitry segment, resulting from the decline in first quarter 2002
segment sales of approximately 44.7% compared to the first quarter of the prior
year.
Depreciation expense included in cost of sales was $541,000, an increase of
$107,000. For the first quarter of 2002, approximately $275,000 of depreciation
expense was associated with Multi-Mix(R) Microtechnology capital assets. The
balance of the increase in depreciation expense was a result of higher capital
equipment purchases in the current and prior years.
Gross profit for the first quarter of 2002 for the electronic components
segment increased by $355,000 to $2,806,000 or 46.5% of segment net sales of
$6,036,000 compared to gross profit of $2,451,000 or 53.1% of segment net sales
of $4,618,000 in the first quarter of 2001. Gross profit for the first quarter
of 2002 for the microwave micro-circuitry segment decreased by $307,000 to
$388,000 or 47.6% of segment net sales of $815,000, compared to $695,000 or
47.2% of segment net sales of $1,472,000 in the first quarter of 2001.
Selling, general and administrative expenses of $2,344,000 for the first
quarter of 2002 increased by $71,000 or 3.1%, and when expressed as a percentage
of net sales, decreased by 3.1% to 34.2%. The dollar increases resulted from
higher sales commission expenses, partially offset by decreases in personnel
recruitment costs and professional fees.
As a result of the adoption of a new accounting standard, the amortization
of goodwill ceased for the first quarter of 2002. Amortization of goodwill of
$37,000 was recorded for the first quarter of 2001. Goodwill of approximately
$3,100,000, which arose from the acquisition of FMI, was being amortized on a
straight-line basis over a life of twenty years. The Company is in the process
of completing a review for impairment under SFAS No. 142 related to this
goodwill.
Research and development expenses for new products were $575,000 for the
first quarter of 2002, a decrease of $63,000 or 9.9% compared to the first
quarter of 2001. Except for $148,000 of expenses at FMI, an increase of $69,000
over the first quarter of the prior year, substantially all of the research and
development expenses were related to Multi-Mix(R) Microtechnology and Multi-Mix
PICO(TM) products.
Consolidated operating income for the first quarter of 2002 was $275,000
compared to consolidated operating income of $198,000, before the effect of
charges associated with the reincorporation in Delaware of $330,000, in the
first quarter of 2001, and compared to a consolidated operating loss of
$132,000, after the inclusion of the reincorporation charge of $330,000, for the
first quarter of 2001.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating income for the electronic components segment was $289,000 for the
first quarter of 2002 compared to a $301,000 operating loss after the $330,000
reincorporation charge in the first quarter of 2001. Operating loss for the
microwave micro-circuitry segment was $14,000 for the first quarter of 2002
compared to operating income of $169,000 for the first quarter of 2001.
Interest expense, net was $62,000 for the first quarter of 2002 compared to
net interest income of $36,000 for the first quarter of 2001. Interest expense
for the first quarter of 2002 was principally incurred on borrowings under a
revolving credit facility and mortgage loan in connection with capital equipment
purchases and the building expansion constructed during fiscal year 2001.
Interest income for the first quarter of 2001 was primarily due to the proceeds
received from the issuance of common stock in private placements in fiscal year
2000 that offset interest expense.
A provision for income taxes of $70,000 was recorded for the first quarter
of 2002 with an effective tax rate of 33% compared to a tax benefit of $65,000
for the first quarter of 2001 with an effective tax benefit rate of 68%. The
principal adjustments to the statutory Federal income tax rate of 34% for the
first quarter of 2002 relates to $32,000 in tax credits associated with research
and development expenditures and foreign sales corporation tax benefits of
$13,000.
Net income for the first quarter of 2002 was $143,000 compared to a net
loss of $31,000, after the after-tax effects of the first quarter 2001
reincorporation charge of $198,000. Net income per basic and diluted share for
the first quarter of 2002 was $.05 compared to a net loss of $.01 per share,
after the after-tax effects of the $.08 per share reincorporation charge that
was reported in the first quarter of 2001.
The weighted average number of diluted shares outstanding increased by
approximately 338,000 shares or 13.0% for the first quarter of 2002 compared to
the first quarter of 2001, resulting from the issuance of 528,000 new shares to
DuPont Electronic Technologies during the first quarter of 2002.
Liquidity and Capital Resources
The Company had liquid resources comprised of cash and cash equivalents
totaling approximately $2,400,000 at the end of the first quarter of 2002
compared to approximately $1,800,000 at the end of 2001. The Company's working
capital was approximately $8,800,000 and its current ratio was 3.2 at the end of
the first quarter of 2002 compared to $4,000,000 and 1.4, respectively, at the
end of 2001.
The Company's operating activities provided net positive cash flows of
$167,000 during the first quarter of 2002 compared to $148,000 of net positive
cash flows during the first quarter of 2001. The primary positive operating cash
flows resulted from net income of $143,000, depreciation and amortization
charges of $613,000 and decreases in accounts receivable, inventories and other
current assets. These positive cash flows were offset primarily by payments made
during the first quarter of 2002 that reduced the year-end 2001 amounts of
accounts payable and accrued liabilities.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company made net cash investments in property, plant and equipment of
$709,000 during the first quarter of 2002, (and had unpaid invoices for such
investments of $249,000 at March 30, 2002), compared to net cash investments
made in property, plant and equipment of $1,053,000 during the first quarter of
2001. These capital expenditures are related to new production and test
equipment capabilities in connection with the introduction of new products and
enhancements to existing products. The depreciated cost of capital equipment
associated with Multi-Mix(R) Microtechnology was $11,857,000 at the end of the
first quarter 2002, an increase of $505,000 compared to $11,352,000 at the end
of fiscal year 2001.
In April 2001, the Company commenced borrowing under its $7,500,000
revolving credit facility with Fleet Bank (formerly Summit Bank), at an interest
rate of one-half percent below the bank's floating prime rate, which was 7.0% at
that time. During fiscal year 2001, the Company borrowed an aggregate amount of
$7,500,000 under this facility, which was also the amount owed at year-end 2001.
The weighted average interest rate on the borrowings under this facility during
the first quarter of 2002 was 4.25% and is the same interest rate currently.
During the first quarter of 2002, the Company obtained an increase of
$2,500,000 in the Company's lines of credit with Fleet Bank to a total of
$10,000,000, $3,500,000 of which consists of a first mortgage callable in March
2007 on the Company's West Caldwell, New Jersey manufacturing facility. The
$6,500,000 revolving line of credit expires June 30, 2002 and Fleet Bank has
advised the Company that it will extend the revolving credit facility for one
year. The Company successfully completed a private placement of 528,400 shares
of common stock on February 28, 2002 that raised $5,284,000 before offering
expenses. The Company repaid $5,000,000, all of its then revolving borrowings,
to Fleet Bank from the proceeds of that offering. The Company currently has
$6,500,000 available under its revolving line of credit.
Management believes that its current revolving credit facility, together
with its present liquid resources and cash flows that are expected to be
provided by operations, should provide sufficient resources for currently
contemplated operations during fiscal year 2002.
Capital expenditures for new projects and production equipment have
exceeded depreciation and amortization expenses during the first quarter of 2002
by approximately $345,000, and the Company anticipates that capital expenditures
will exceed depreciation and amortization expenses in fiscal year 2002. The
Company intends to issue commitments to purchase $1,200,000 of capital equipment
from various vendors. The Company anticipates that such equipment will be
purchased and become operational and the building expansion will be completed
during the second quarter of 2002.
Effective January 2001, the Company modified its existing lease for its
Costa Rica manufacturing facility, and entered into a facility sharing
arrangement with a previous customer, reducing the size of its facility to
approximately 8,200 square feet and extended the lease to December 2004. The
Company received an initial payment of $200,000 in January 2001 under the
facility sharing agreement and recovered approximately $102,000 of costs that
were deferred at December 30, 2000 in connection with such agreement. In January
2002, the Company received the second payment of $150,000 and the final payment
of $100,000 is due January 2003.
In February 2001, the Company entered into a new five-year lease in Costa
Rica for an approximately 36,200 square-foot facility for manufacturing new
Multi-Mix(R) Microtechnology products. It is anticipated that the leasehold
improvements and capital equipment for this manufacturing facility, which is
expected to cost approximately $4,500,000, should become operational during July
2002.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Related Party Transactions
In May 1998, the Company sold 22,000 shares of Common Stock to Mason N.
Carter, Chairman, President and Chief Executive Officer of the Company, at a
price of $11.60 per share, which approximated the average closing price of the
Company's Common Stock during the first quarter of 1998. The Company extended to
Mr. Carter a loan of $255,000 in connection with the purchase of these shares.
In addition, the Company amended a prior loan to Mr. Carter of $105,000. The
total of $360,000 is due May 4, 2003 and interest payments (except as described
below) are due quarterly, calculated at a variable interest rate based on the
prime rate of the Company's lending bank. However, payment of interest that
accrued from November 1998 until November 1999 was deferred and payment of
interest that will accrue from November 2001 until November 2002 will be
deferred until May 4, 2003. Payment of the loan is secured by the pledge of
33,000 shares of Common Stock purchased by Mr. Carter with the proceeds of the
loans and Mr. Carter has agreed to restrictions on the resale of these shares of
Common Stock.
On August 31, 2000, in connection with an amendment of Mr. Carter's
employment agreement, the Company loaned Mr. Carter an additional $280,000.
Interest on the loan will be calculated at a variable interest rate based on the
prime rate of the Company's lending bank, payable in accordance with Mr.
Carter's employment agreement. Each year the Company will forgive 20% of the
amount due under this loan and the accrued interest thereon. For fiscal year
2002, the Company projects that $56,000 of principal and $18,000 of accrued
interest will be forgiven.
The Company is a party to a stockholder's agreement, dated as of October
30, 1998, with a former director and Chairman of the Company. Pursuant to the
stockholder's agreement, this former director is required to vote his shares of
Common Stock as directed by the Board of Directors or the Chief Executive
Officer of the Company. There are no other obligations of the Company pursuant
to such agreement.
During the first quarter of 2002, the Company's General Counsel KMZ
Rosenman was paid $102,000 for providing legal services to the Company. A
director of the Company is Counsel to the Firm of KMZ Rosenman.
During 2002, the Company retained Career Consultants, Inc. and SK
Associates to perform executive searches and to provide outplacement services to
the Company. The Company paid an aggregate of $9,000 to these companies during
the first quarter of 2002. A director of the Company is the Chairman and Chief
Executive Officer of these companies.
During the first quarter of 2002, a director of the Company was paid $9,000
for providing financial-related consulting services to the Company.
During the first quarter of 2002, a director of the Company was paid $9,000
for providing technology-related consulting services to the Company.
Each director who is not an employee of the Company receives a monthly
director's fee of $1,500, plus an additional $500 for each meeting of the Board
and of any Committees of the Board attended. The directors are also reimbursed
reasonable travel expenses incurred in attending Board and Committee meetings.
In addition, pursuant to the 2001 Stock Option Plan, each non-employee director
is granted an immediately exercisable option to purchase 2,500 shares of the
Common Stock of the Company on the date of each Annual Meeting of Stockholders.
Each such grant is priced at the fair market value of the Common Stock on the
date of such grant.
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On April 7, 2000, the Company entered into a stock purchase and exclusivity
agreement with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson Holding
International, B.V. ("EHI") pursuant to which the Company sold to EHI 375,000
shares of Common Stock, representing approximately 17.5% of the Company's
outstanding Common Stock after giving effect to the sale, for an aggregate
purchase price of $3,375,000. The stock purchase and exclusivity agreement also
provides that the Company will design, develop and produce exclusively for
Ericsson Multi-Mix(R) products that incorporate active RF power transistors for
use in wireless basestation applications, television transmitters and certain
other applications that are intended for Bluetooth transceivers. The Company
also agreed that it will generally be Ericsson's priority supplier for such
products.
On October 26, 2000, the Company entered into subscription agreements for
Common Stock and three-year warrants to purchase shares of Common Stock
("Warrants") with a group of investors led by Adam Smith Investment Partners,
L.P. and certain of its affiliates (the "Adam Smith Investors"), EHI and Messrs.
E. Cohen, Goldberg and Fuller, members of the Board (the "Director Investors").
The Company sold to the investors units at a price of $12.80 per unit, each unit
consisting of one share of Common Stock and one Warrant with an exercise price
of $21.25 which expire on October 26, 2003 ("Units"). The Adam Smith Investors
purchased 240,000 Units, EHI purchased 100,000 Units and Messrs. E. Cohen,
Goldberg and Fuller purchased 5,000, 11,000 and 4,000 Units, respectively, for
an aggregate purchase price of $4,608,000. The Common Stock portion of the Units
represented an aggregate of approximately 14% of the outstanding Common Stock of
the Company after giving effect to the sales. The Warrants contain certain
anti-dilution provisions.
On February 28, 2002, the Company entered into a stock purchase agreement
with DuPont Electronic Technologies pursuant to which the Company sold 528,400
shares of Common Stock, representing approximately 16.6% of the Company's
outstanding Common Stock after giving effect to the sale, for an aggregate
purchase price of $5,284,000. The Company and DuPont Electronic Technologies
have also agreed to work together to better understand the dynamics of the
markets for high-frequency electronic components and modules. David B. Miller,
Vice President and General Manager of DuPont Electronic Technologies, was
appointed to the Company's Board of Directors. As a result of this sale, certain
contractual anti-dilution provisions affected both the exercise price and the
number of shares subject to the Warrants issued in October 2000. The exercise
price of the Warrants was reduced to $17.80 and the number of shares subject to
the Warrants was increased to 429,775. The expiration date of the Warrants
remained unchanged.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which established new accounting and reporting
standards and requires that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded as assets or
liabilities in the balance sheet measured at fair value. SFAS No. 133 requires
that changes in the fair value of derivatives be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company adopted
the provisions of the Statement in 2001. The Company does not currently hold
derivative instruments or engage in hedging activities and therefore the
adoption of SFAS No. 133 has not had any impact on the Company's financial
position, results of operations or cash flows.
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On June 30, 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting and
eliminates the pooling method of accounting. SFAS No. 141 will not have an
impact on the Company's business since the Company has accounted for all of its
business combinations using the purchase method of accounting.
With the adoption of SFAS No. 142 by the Company on December 30, 2001,
goodwill is no longer subject to amortization over its estimated useful life.
However, goodwill will be subject to at least an annual assessment for
impairment and more frequently if circumstances indicate a possible impairment.
The Company is required to perform a fair value-based goodwill impairment test.
In addition, under SFAS No. 142, an acquired intangible asset should be
separately recognized if the benefit of the intangible is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged. Intangible assets will be amortized
over their estimated useful lives. Any write-down of goodwill would be charged
to results of operations in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. On an annualized basis, the
Company expects that the adoption of this accounting standard will reduce the
amortization of goodwill and intangibles by approximately $150,000 commencing in
2002, unless future impairment reviews result in periodic write-downs of
goodwill. In connection with the adoption of SFAS No. 142, the Company is in
process of completing its traditional impairment assessment which will be done
within six months from the date of adoption as required by the standard. The
Company has not determined the impact the adoption of this pronouncement will
have on the Company and its results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", which requires the fair value for
an asset retirement obligation to be recorded in the period in which it is
incurred. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002, with earlier adoption encouraged. The Company does not expect that the
adoption of SFAS No. 143 will have a material impact on the Company's financial
position or results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is
effective for fiscal periods beginning after December 15, 2001. SFAS No. 144
establishes an accounting model for impairment or disposal of long-lived assets
to be disposed of by sale. The Company does not expect that the adoption of SFAS
No. 144 will have a material impact on the Company's financial position or
results of operations.
Forward-Looking Statements
This quarterly report on Form 10-QSB contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to: general economic and industry conditions;
slower than anticipated penetration into the satellite communications, defense
and wireless markets; the risk that the benefits expected from the acquisition
of Filtran Microcircuits Inc. are not realized; the ability to protect
proprietary information and technology; competitive products and pricing
pressures; the risk that the Company will not be able to continue to raise
sufficient capital to expand its operations as currently contemplated by its
business strategy; risks relating to governmental regulatory actions in
communications and defense programs; risks associated with demand for and market
acceptance of existing and newly developed products; and inventory risks due to
technological innovation and product obsolescence, as well as other risks and
uncertainties, including but not limited to those detailed from time to time in
the Company's Securities and Exchange Commission filings. These forward-looking
statements are made only as of the date hereof, and the Company undertakes no
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
-19-
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
----------- -----------
3(a) By-laws of Merrimac are hereby incorporated by reference
to Exhibit 3(ii)(b) to Post-Effective Amendment No. 2 to
the Registration Statement on Form S-8 (No. 33-68862) of
Merrimac dated February 23, 2001.
3(b) Certificate of Incorporation of Merrimac is hereby
incorporated by reference to Exhibit 3(i)(b) to
Post-Effective Amendment No. 2 to the Registration
Statement on Form S-8 (No. 33-68862) of Merrimac dated
February 23, 2001.
4(a) Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 1 to Merrimac's Current Report on
Form 8-K for the period ending March 9, 1999.
4(b) Amendment No. 1 dated as of June 9, 1999, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 1 to Merrimac's Current Report on
Form 8-K for the period ending June 9, 1999.
4(c) Amendment No. 2 dated as of April 7, 2000, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 2 to Merrimac's Current Report on
Form 8-K for the period ending April 10, 2000.
4(d) Amendment No. 3 dated as of October 26, 2000, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 2 to Merrimac's Current Report on
Form 8-K for the period ending October 27, 2000.
4(e) Amendment No. 4 dated as of February 21, 2001, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and Mellon Investor Services, L.L.C.
(formerly known as ChaseMellon Stockholder Services,
L.L.C.), as Rights Agent, is hereby incorporated by
reference to Exhibit 1(d) to Merrimac's Current Report on
Form 8-K for the period ending February 21, 2001.
4(f) Amendment No. 5, dated February 28, 2002, to the Rights
Agreement, between Merrimac and Mellon Investor Services
LLC (f.k.a. ChaseMellon Shareholder Services, L.L.C.), as
Rights Agent is hereby incorporated by reference to
Exhibit 99.4 to Merrimac's Form 8-K for the period ending
March 6, 2002.
-20-
EXHIBIT NO. DESCRIPTION
----------- -----------
10(a) Stock Purchase and Exclusivity Letter Agreement dated
April 7, 2000, among Ericsson Microelectronics, A.B.,
Ericsson Holdings International, B.V. and Merrimac is
hereby incorporated by reference to Exhibit 10(a) to
Merrimac's Quarterly Report on Form 10-QSB for the period
ending August 15, 2000.
10(b) Registration Rights Agreement dated as of April 7, 2000,
between Merrimac and Ericsson Holding International, B.V.
is hereby incorporated by reference to Exhibit 10(b) to
Merrimac's Quarterly Report on Form 10-QSB for the period
ending August 15, 2000.
10(c) Profit Sharing Plan of Merrimac is hereby incorporated by
reference to Exhibit 10(n) to Merrimac's Registration
Statement on Form S-1 (No. 2-79455).*
10(d) 1983 Key Employees Stock Option Plan of Merrimac effective
March 21, 1983, is hereby incorporated by reference to
Exhibit 10(m) to Merrimac's Annual Report on Form 10-KSB
for the year ending March 31, 1983.*
10(e) 1993 Stock Option Plan of Merrimac effective March 31,
1993, is hereby incorporated by reference to Exhibit 4(c)
to Merrimac's Registration Statement on Form S-8 (No.
33-68862) dated September 14, 1993.*
10(f) 1997 Long-Term Incentive Plan of Merrimac is hereby
incorporated by reference to Exhibit A to Merrimac's Proxy
Statement for the period ending April 11, 1997.*
10(g) Resolutions of the Stock Option Committee of the Board of
Directors of Merrimac adopted June 3, 1998, amending the
1983 Key Employees Stock Option Plan of Merrimac, the 1993
Stock Option Plan of Merrimac and the 1997 Long-Term
Incentive Plan of Merrimac and adjusting outstanding
awards thereunder to give effect to Merrimac's 10% stock
dividend paid June 5, 1998, are hereby incorporated by
reference to Exhibit 10(f) to Merrimac's Annual Report on
Form 10-KSB for the year ending March 30, 1999.*
10(h)(1) 1995 Stock Purchase Plan of Merrimac is hereby
incorporated by reference to Exhibit A to the Proxy
Statement of Merrimac for the period ending December 31,
1994.*
10(h)(2) Resolutions of the Stock Purchase Plan Committee of the
Board of Directors of Merrimac adopted June 3, 1998,
amending the 1995 Stock Purchase Plan of Merrimac and
adjusting outstanding awards thereunder to give effect to
Merrimac's 10% stock dividend paid June 5, 1998, are
hereby incorporated by reference to Exhibit 10(g)(2) to
Merrimac's Annual Report on Form 10-KSB for the year
ending January 2, 1999.*
10(i)(1) 1996 Stock Option Plan for Non-Employee Directors of
Merrimac is hereby incorporated by reference to Exhibit
10(d) to Merrimac's Annual Report on Form 10-KSB for the
year ending December 28, 1996.*
-21-
EXHIBIT NO. DESCRIPTION
----------- -----------
10(i)(2) Resolutions of the Board of Directors of Merrimac, adopted
June 3, 1998, amending the 1996 Stock Option Plan for
Non-Employee Directors of Merrimac and adjusting
outstanding awards thereunder to give effect to Merrimac's
10% stock dividend paid June 5, 1998, are hereby
incorporated by reference to Exhibit 10(h)(2) to
Merrimac's Annual Report on Form 10-KSB for the year
ending January 2, 1999.*
10(j) Amended and Restated Employment Agreement dated as of
January 1, 1998, between Merrimac and Mason N. Carter is
hereby incorporated by reference to Exhibit 10(a) to
Merrimac's Quarterly Report on Form 10-QSB for the year
ending July 4, 1998.*
10(k) Amendment dated August 31, 2000 to the Amended and
Restated Employment Agreement dated January 1, 1998,
between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(a) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
September 30, 2000.*
10(l) Amended and Restated Pledge Agreement dated as of May 4,
1998, between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(c) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
July 4, 1998.*
10(m) Amended Promissory Note dated as of May 4, 1998, executed
by Mason N. Carter in favor of Merrimac is hereby
incorporated by reference to Exhibit 10(l) to Merrimac's
Annual Report on Form 10-KSB for the year ending January
2, 1999.*
10(n) Registration Rights Agreement dated as of May 4, 1998,
between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(e) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
July 4, 1998.*
10(o)(1) Form of Severance Agreement entered into with certain
officers of Merrimac is hereby incorporated by reference
to Exhibit 10(i) to Merrimac's Annual Report on Form
10-KSB for the year ending January 3, 1998.*
10(o)(2) Schedule of officers with substantially identical
agreements to the form filed as Exhibit 10(o)(1) hereto is
hereby incorporated by reference to Exhibit 10(j) to
Merrimac's Annual Report on Form 10-KSB for the year
ending January 3, 1998.*
10(p) Consulting Agreement dated as of January 1, 1998, between
Merrimac and Arthur A. Oliner is hereby incorporated by
reference to Exhibit 10 to Merrimac's Quarterly Report on
Form 10-QSB for the period ending April 4, 1998.*
10(q) Separation Agreement dated as of December 31, 1998,
between Merrimac and Eugene W. Niemiec is hereby
incorporated by reference to
-22-
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 10(p) to Merrimac's Annual Report on Form 10-KSB
for the year ending January 2, 1999.*
10(r) Stockholder's Agreement dated as of October 30, 1998,
between Merrimac and Charles F. Huber II is hereby
incorporated by reference to Exhibit 10 to Merrimac's
Quarterly Report on Form 10-QSB for the year ending
October 3, 1998.
10(s) Stockholder's Agreement dated as of June 3, 1999, among
Merrimac, William D. Witter, Inc. and William D. Witter is
hereby incorporated by reference to Exhibit 10 to
Merrimac's Quarterly Report on Form 10-QSB for the period
ending July 3, 1999.
10(t) Subscription Agreement for Common Stock and Warrants dated
October 26, 2000, between Merrimac and Ericsson Holding
International, B.V. (with a form of Warrant attached) is
hereby incorporated by reference to Exhibit 10(t) to
Merrimac's Annual Report on Form 10-KSB for the year
ending December 30, 2000.
10(u) Registration Rights Agreement dated October 26, 2000,
between Merrimac and Ericsson Holding International, B.V.
is hereby incorporated by reference to Exhibit 10(u) to
Merrimac's Annual Report on Form 10-KSB for the year
ending December 30, 2000.
10(v) Subscription Agreement for Common Stock and Warrants
dated October 26, 2000, between Merrimac and certain
entities and individuals related to Adam Smith Investment
Partners, L.P. (with a form of Warrant attached) is
hereby incorporated by reference to Exhibit 10(v) to
Merrimac's Annual Report on Form 10-KSB for the year
ending December 30, 2000.
10(w) Registration Rights Agreement dated October 26, 2000,
between
-23-
EXHIBIT NO. DESCRIPTION
----------- -----------
Merrimac and certain entities and individuals related to
Adam Smith Investment Partners, L.P. is hereby
incorporated by reference to Exhibit 10(w) to Merrimac's
Annual Report on Form 10-KSB for the year ending December
30, 2000.
10(x) Subscription Agreement for Common Stock and Warrants dated
October 26, 2000, among Merrimac, Edward H. Cohen, Joseph
B. Fuller and Joel H. Goldberg (with a form of Warrant
attached) is hereby incorporated by reference to Exhibit
10(x) to Merrimac's Annual Report on Form 10-KSB for the
year ending December 30, 2000.
10(y) 2001 Key Employee Incentive Plan is hereby incorporated by
reference to Exhibit 4.01 to Merrimac's Form S-8
(No. 333-63434) dated June 30, 2001.
10(z) 2001 Stock Option Plan is hereby incorporated by reference
to Exhibit 4.01 to Merrimac's Form S-8 (No. 333-63436)
dated June 20, 2001.
10(aa) 2001 Stock Purchase Plan is hereby incorporated by
reference to Exhibit 4.01 to Merrimac's Form S-8
(No. 333-63438) dated June 20, 2001.
10(bb) 2001 Amended and Restated Stock Option Plan is hereby
incorporated by reference to Exhibit 4(i) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
June 30, 2001.
10(cc) Subscription Agreement, dated February 28, 2002 between
Merrimac and DuPont Chemical and Energy Operations, Inc.,
a subsidiary of E.I. DuPont de Nemours and Company is
hereby incorporated by reference to Exhibit 99.2 to
Merrimac's Form 8-K for the period ending February 28,
2002.
10(dd) Registration Rights Agreement, dated February 28, 2002
between Merrimac and DuPont Chemical and Energy
Operations, Inc., a subsidiary of E.I. DuPont de Nemours
and Company is hereby incorporated by reference to Exhibit
99.3 to Merrimac's Form 8-K for the period ending
February 28, 2002.
11 Statement re: Computation of earnings per share.
-----------------------
-24-
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on March 6, 2002, reporting the
purchase, by Dupont Electronic Technologies, of 16.6% of Merrimac's
equity interest for a purchase price of approximately $5.3 million.
-25-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MERRIMAC INDUSTRIES, INC.
-------------------------
(Registrant)
Date: May 13, 2002 By: /s/ Mason N. Carter
-------------------------------------
Mason N. Carter
Chairman, President and
Chief Executive Officer
Date: May 13, 2002 By: /s/ Robert V. Condon
-------------------------------------
Robert V. Condon
Vice President, Finance, Treasurer,
Secretary and Chief Financial Officer
-26-
Exhibit 11
MERRIMAC INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
(Unaudited)
-----------
Quarter Ended
----------------------
March 30, March 31,
2002 2001
----------------------
Numerator:
Net income (loss) available to common stockholders.... $ 142,837 $ (30,696)
========= ==========
Basic earnings (loss) per share
-------------------------------
Weighted average number of shares outstanding for
basic net income (loss) per share
Common stock.......................................... 2,835,381 2,604,743
========= ==========
Net income (loss) per common share - basic............ $ .05 $(.01)
===== =====
Diluted earnings (loss) per share
---------------------------------
Weighted average number of shares outstanding for
diluted net income (loss) per share
Common stock ......................................... 2,835,381 2,604,743
Effect of dilutive securities - stock options (1) .... 108,047 -
--------- ----------
Weighted average number of shares outstanding for
diluted net income (loss) per share................... 2,943,428 2,604,743
========= ==========
Net income (loss) per common share - diluted.......... $ .05 $(.01)
===== =====
(1) Represents additional shares resulting from assumed conversion of
stock options less shares purchased with the proceeds therefrom.
Stock options and warrants did not have an effect on the computation of the
diluted loss per share in the first quarter of 2001 since they
were antidilutive.