UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended June 30, 2007
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from __________ to __________
Commission
File No. 0-11201
Merrimac
Industries, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
DELAWARE
|
22-1642321
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
41
FAIRFIELD PLACE
WEST
CALDWELL, NEW JERSEY 07006
(Address
of Principal Executive Offices) (Zip Code)
(973)
575-1300
(Registrant’s
Telephone Number)
Former
name, former address and former fiscal year, if changed since last report:
N/A
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of
the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
As
of
August 10, 2007, there were 2,916,035 shares of Common Stock, par value $.01
per
share, outstanding.
MERRIMAC
INDUSTRIES, INC.
41
Fairfield Place
West
Caldwell, NJ 07006
INDEX
|
|
|
Page
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income
|
|
|
|
for
the Quarters and Six Months Ended June 30, 2007
|
|
|
|
and
July 1, 2006 (Unaudited)
|
|
1
|
|
|
|
|
|
Consolidated
Balance Sheets-June 30, 2007 (Unaudited) and
|
|
|
|
December
30, 2006
|
|
2
|
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity as of
|
|
|
|
June
30, 2007 (Unaudited)
|
|
3
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Six Months
|
|
|
|
Ended
June 30, 2007 and July 1, 2006 (Unaudited)
|
|
4
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
5
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
|
and
Results of Operations
|
|
15
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
25
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
25
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
25
|
|
|
|
|
Item 1A. |
Risk
Factors
|
|
25
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
26
|
|
|
|
|
Item
5.
|
Other
Matters
|
|
26
|
|
|
|
|
Item
6.
|
Exhibits
|
|
27
|
|
|
|
|
Signatures |
|
|
28
|
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
6,225,005
|
|
$
|
8,250,886
|
|
$
|
11,649,284
|
|
$
|
14,481,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
3,842,532
|
|
|
4,540,285
|
|
|
7,485,151
|
|
|
8,370,051
|
|
Selling,
general and administrative
|
|
|
2,284,375
|
|
|
2,645,035
|
|
|
4,775,226
|
|
|
5,130,929
|
|
Research
and development
|
|
|
360,571
|
|
|
516,096
|
|
|
871,567
|
|
|
888,044
|
|
Goodwill
impairment charge
|
|
|
2,630,000
|
|
|
-
|
|
|
2,630,000
|
|
|
-
|
|
|
|
|
9,117,478
|
|
|
7,701,416
|
|
|
15,761,944
|
|
|
14,389,024
|
|
Operating
income (loss)
|
|
|
(2,892,473
|
)
|
|
549,470
|
|
|
(4,112,660
|
)
|
|
92,565
|
|
Interest
and other expense, net
|
|
|
(70,450
|
)
|
|
(32,977
|
)
|
|
(114,065
|
)
|
|
(51,681
|
)
|
Income
(loss) before income taxes
|
|
|
(2,962,923
|
)
|
|
516,493
|
|
|
(4,226,725
|
)
|
|
40,884
|
|
Provision
(benefit) for income taxes
|
|
|
506,000
|
|
|
(13,000
|
)
|
|
506,000
|
|
|
(48,000
|
)
|
Net
income (loss)
|
|
$
|
(3,468,923
|
)
|
$
|
529,493
|
|
$
|
(4,732,725
|
)
|
$
|
88,884
|
|
Net
income (loss) per common share-basic
|
|
$
|
(1.19
|
)
|
$
|
.17
|
|
$
|
(1.58
|
)
|
$
|
.03
|
|
Net
income (loss) per common share-diluted
|
|
$
|
(1.19
|
)
|
$
|
.17
|
|
$
|
(1.58
|
)
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,910,711
|
|
|
3,143,725
|
|
|
3,003,513
|
|
|
3,146,444
|
|
Diluted
|
|
|
2,910,711
|
|
|
3,183,322
|
|
|
3,003,513
|
|
|
3,166,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,468,923
|
)
|
$
|
529,493
|
|
$
|
(4,732,725
|
)
|
$
|
88,884
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
307,131
|
|
|
327,556
|
|
|
368,514
|
|
|
318,847
|
|
Comprehensive
income (loss)
|
|
$
|
(3,161,792
|
)
|
$
|
857,049
|
|
$
|
(4,364,211
|
)
|
$
|
407,731
|
|
See
accompanying
notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
June
30, 2007
|
|
December
30, 2006
|
|
|
|
(UNAUDITED)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,817,408
|
|
$
|
5,961,537
|
|
Accounts
receivable, net
|
|
|
5,230,332
|
|
|
5,851,617
|
|
Income
tax refunds receivable
|
|
|
103,000
|
|
|
99,000
|
|
Inventories,
net
|
|
|
4,783,787
|
|
|
3,917,473
|
|
Other
current assets
|
|
|
726,555
|
|
|
881,699
|
|
Deferred
tax assets
|
|
|
-
|
|
|
10,000
|
|
Total
current assets
|
|
|
13,661,082
|
|
|
16,721,326
|
|
Property,
plant and equipment
|
|
|
41,235,675
|
|
|
40,084,105
|
|
Less
accumulated depreciation and amortization
|
|
|
28,497,706
|
|
|
27,098,740
|
|
Property,
plant and equipment, net
|
|
|
12,737,969
|
|
|
12,985,365
|
|
Other
assets
|
|
|
538,654
|
|
|
491,596
|
|
Deferred
tax assets
|
|
|
100,000
|
|
|
552,000
|
|
Goodwill
|
|
|
1,062,534
|
|
|
3,503,219
|
|
Total
Assets
|
|
$
|
28,100,239
|
|
$
|
34,253,506
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
620,655
|
|
$
|
648,524
|
|
Accounts
payable
|
|
|
1,438,141
|
|
|
994,221
|
|
Accrued
liabilities
|
|
|
1,322,755
|
|
|
1,420,322
|
|
Customer
deposits
|
|
|
305,783
|
|
|
203,783
|
|
Deferred
income taxes
|
|
|
100,000
|
|
|
100,000
|
|
Total
current liabilities
|
|
|
3,787,334
|
|
|
3,366,850
|
|
Long-term
debt, net of current portion
|
|
|
4,277,279
|
|
|
4,564,040
|
|
Deferred
liabilities
|
|
|
49,569
|
|
|
37,839
|
|
Total
liabilities
|
|
|
8,114,182
|
|
|
7,968,729
|
|
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:
|
|
|
|
|
|
|
|
20,000,000
shares authorized; 3,278,940 and 3,265,638 shares issued;
|
|
|
|
|
|
|
|
and
2,916,035 and 3,141,433 shares outstanding, respectively
|
|
|
32,789
|
|
|
32,656
|
|
Additional
paid-in capital
|
|
|
19,450,788
|
|
|
19,237,130
|
|
Retained
earnings
|
|
|
1,867,092
|
|
|
6,599,817
|
|
Accumulated
other comprehensive income
|
|
|
1,757,552
|
|
|
1,389,038
|
|
|
|
|
23,108,221
|
|
|
27,258,641
|
|
Less
treasury stock, at cost - 362,905 shares at June 30, 2007
and
|
|
|
|
|
|
|
|
124,205
shares at December 30, 2006
|
|
|
(3,122,164
|
)
|
|
(973,864
|
)
|
Total
stockholders' equity
|
|
|
19,986,057
|
|
|
26,284,777
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
28,100,239
|
|
$
|
34,253,506
|
|
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
SIX
MONTHS ENDED JUNE 30, 2007
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital(A)
|
|
Earnings
|
|
Income
|
|
Shares
|
|
Amount
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 30, 2006
|
|
|
3,265,638
|
|
$
|
32,656
|
|
$
|
19,237,130
|
|
$
|
6,599,817
|
|
$
|
1,389,038
|
|
|
124,205
|
|
$
|
(973,864
|
)
|
|
26,284,777
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(4,732,725
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,732,725
|
)
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
132,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,466
|
|
Stock
Purchase Plan sales
|
|
|
1,002
|
|
|
10
|
|
|
7,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,495
|
|
Exercise
of stock options
|
|
|
9,300
|
|
|
93
|
|
|
73,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,800
|
|
Vesting
of restricted stock.
|
|
|
3,000
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Repurchase
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,700
|
|
|
(2,148,300
|
)
|
|
(2,148,300
|
)
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,514
|
|
|
|
|
|
|
|
|
368,514
|
|
Balance,
June 30, 2007
|
|
|
3,278,940
|
|
$
|
32,789
|
|
$
|
19,450,788
|
|
$
|
1,867,092
|
|
$
|
1,757,552
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
19,986,057
|
|
(A)
Tax
benefits associated with the exercise of employee stock options are recorded
to
additional paid-in capital when such benefits are realized.
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
July
1, 2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(4,732,725
|
)
|
$
|
88,884
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,291,531
|
|
|
1,317,701
|
|
Amortization
of deferred financing costs
|
|
|
14,716
|
|
|
24,960
|
|
Impairment
of goodwill
|
|
|
2,630,000
|
|
|
-
|
|
Deferred
income taxes
|
|
|
506,000
|
|
|
-
|
|
Share-based
compensation
|
|
|
132,496
|
|
|
82,000
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
685,580
|
|
|
(174,158
|
)
|
Income
tax refunds receivable
|
|
|
-
|
|
|
(15,228
|
)
|
Inventories
|
|
|
(845,896
|
)
|
|
(286,625
|
)
|
Other
current assets
|
|
|
166,434
|
|
|
77,199
|
|
Other
assets
|
|
|
(61,774
|
)
|
|
(21,511
|
)
|
Accounts
payable
|
|
|
399,742
|
|
|
(95,417
|
)
|
Accrued
liabilities
|
|
|
(122,811
|
)
|
|
96,469
|
|
Customer
deposits
|
|
|
102,000
|
|
|
(737,176
|
)
|
Deferred
liabilities
|
|
|
11,730
|
|
|
8,490
|
|
Net
cash provided by operating activities
|
|
|
177,023
|
|
|
365,588
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of capital assets
|
|
|
(927,061
|
)
|
|
(979,366
|
)
|
Net
cash used in investing activities
|
|
|
(927,061
|
)
|
|
(979,366
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Borrowings
from revolving lease line
|
|
|
-
|
|
|
159,988
|
|
Repurchase
of common stock for the treasury
|
|
|
(2,148,300
|
)
|
|
-
|
|
Repayment
of borrowings
|
|
|
(343,496
|
)
|
|
(464,263
|
)
|
Proceeds
from the exercise of stock options
|
|
|
73,800
|
|
|
13,600
|
|
Proceeds
from Stock Purchase Plan sales
|
|
|
7,495
|
|
|
172,763
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(2,410,501
|
)
|
|
(117,912
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
16,410
|
|
|
33,122
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(3,144,129
|
)
|
|
(698,568
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
5,961,537
|
|
|
4,081,330
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,817,408
|
|
$
|
3,382,762
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
on credit facilities
|
|
$
|
205,558
|
|
$
|
144,331
|
|
Non
cash activities:
|
|
|
|
|
|
|
|
Repurchase
of common stock for treasury
|
|
$
|
-
|
|
$
|
399,998
|
|
Loan
to officer-stockholder repaid through repurchase of common stock
for
treasury
|
|
$
|
-
|
|
$
|
400,000
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with the instructions to Form 10-Q and therefore do not include
all
information and footnote disclosures otherwise required by accounting principles
generally accepted in the United States of America for a full fiscal year.
The
financial statements do, however, reflect all adjustments of a normal recurring
nature which are, in the opinion of management, necessary for a fair
presentation of the financial position of Merrimac Industries, Inc. (“Merrimac”
or the “Company”) as of June 30, 2007 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.
The
consolidated balance sheet at December 30, 2006 has been derived from the
audited financial statements at that date but does not include all the
information required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto included
in
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 16, 2007 for the year ended December 30, 2006.
2.
CONTRACT REVENUE RECOGNITION
The
Company recognizes revenue in accordance with the provisions of Staff Accounting
Bulletin No. 104. Contract revenue and related costs on fixed-price and
cost-reimbursement contracts that require customization of products to customer
specifications are recorded when title 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 related initial units produced or based upon contractually
established stages of completion.
The
cost
rates utilized for cost-reimbursement contracts are subject to review by third
parties and can be revised, which can result in additions to or reductions
from
revenue. Revisions which result in reductions to revenue are recognized in
the
period that the rates are reviewed and finalized; additions to revenue are
recognized in the period that the rates are reviewed, finalized, accepted by
the
customer, and collectability from the customer is reasonably assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is
no
reasonable basis on which to estimate such adjustments given the Company’s very
limited experience with these contracts. $250,000 of revenue was recognized
related to cost reimbursement contracts during the second quarter and first
six
months of 2006. No revenue was recognized related to cost-reimbursement
contracts during the second quarter and first six months of 2007.
3.
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. Periodically, the additional week to make a 53-week
year (fiscal year 2003 was the last and fiscal year 2008 will be the next)
is
added to the fourth quarter, making such quarter consist of 14
weeks.
4.
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) is defined as the change in equity of a company during a period
from transactions and other events and circumstances from non-owner sources.
Accumulated other comprehensive income at June 30, 2007 and December 30, 2006
was attributable solely to the effects of foreign currency
translation.
5.
RECENT
ACCOUNTING PRONOUNCEMENTS
On
November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"),
"Transition Election Related to Accounting for the Tax Effects of Share-based
Payment Awards," that provides an elective alternative transition method of
calculating the pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R (the "APIC Pool") to the
method otherwise required by paragraph 81 of SFAS 123R. The Company elected
to
use
the regular method to calculate the APIC Pool. The regular method will not
have
an impact on the Company's results of operations or financial condition for
the
quarter and six months ended
June 30, 2007, due to the fact that the Company is currently using prior period
net operating losses and has not realized any tax benefits under SFAS 123R.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
threshold and measurement of a tax position taken or expected to be taken in
a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted FIN 48 on December 31, 2006. The adoption of
FIN
48 did not have an impact on the opening retained earnings of the Company.
6.
SHARE-BASED COMPENSATION
On
January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R") which requires that the
costs resulting from all share-based payment transactions be recognized in
the
financial statements at their fair values. The Company adopted SFAS 123R using
the modified prospective application method under which the provisions of SFAS
123R
apply to new awards and to awards modified, repurchased, or cancelled after
the
adoption date. Additionally, compensation cost for the portion of the awards
for
which the requisite service has not been rendered that are outstanding as of
the
adoption date is recognized in the consolidated statement of operations over
the
remaining service period after the adoption date based on the award's original
estimate of fair value.
Because
of the Company’s net operating loss carryforwards, no tax benefits resulting
from the exercise of stock options have been recorded, thus there was no effect
on cash flows from operating or financing activities.
For
the
quarters and six months ended June 30, 2007 and July 1, 2006, share-based
compensation expense related to the 2001 Employee Stock Purchase Plan and the
various stock option plans was allocated as follows:
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
July
1, 2006
|
|
June
30, 2007
|
|
July
1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
21,000
|
|
$
|
4,000
|
|
$
|
29,000
|
|
$
|
15,000
|
|
Selling,
general and administrative
|
|
|
60,000
|
|
|
34,000
|
|
|
103,000
|
|
|
67,000
|
|
Total
share-based compensation
|
|
$
|
81,000
|
|
$
|
38,000
|
|
$
|
132,000
|
|
$
|
82,000
|
|
The
fair
value of the options granted was estimated on the date of grant using the
Black-Scholes option valuation model.
The
following weighted average assumptions for the quarters and six months ended
June 30, 2007 and July 1, 2006 were utilized:
|
|
2007
|
|
2006
|
|
Expected
option life (years)
|
|
|
3.0
|
|
|
3.0
|
|
Expected
volatility
|
|
|
22.00
|
%
|
|
30.00
|
%
|
Risk-free
interest rate
|
|
|
4.93
|
%
|
|
5.15
|
%
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Fair
value per share of options granted
|
|
$
|
2.03
|
|
$
|
2.57
|
|
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and subscription rights have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and subscription rights.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Share-Based
Compensation Plans:
On
June
22, 2006, the Company’s stockholders approved three new share-based compensation
programs as follows: (i) 2006 Stock Option Plan; (ii) 2006 Key Employee
Incentive Plan; and (iii) 2006 Non-Employee Directors’ Stock Plan.
The
2006
Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
Common Stock to employees, directors and consultants of the Company. Under
the
2006 Stock Option Plan, the
Company may grant to eligible individuals incentive stock options, as defined
in
Section 422 of the Internal Revenue Code of 1986 (the “Code”), and/or
non-qualified stock options. The purposes of the 2006 Stock Option Plan are
to
attract, retain and motivate employees, compensate consultants, and to enable
employees, consultants and directors, including non-employee directors,
to participate in the long-term growth of the Company by providing for or
increasing the proprietary interests of such persons in the Company, thereby
assisting the Company to achieve its long-range goals. The 2006 Stock Option
Plan replaced the 2001 Stock Option Plan, and the remaining 19,700 unissued
options under the 2001 Stock Option Plan are no longer available for
grant.
At
June
30, 2007, there were 332,700 options outstanding under the 2006 Stock Option
Plan of which 27,500 were exercisable. Options are granted at the closing price
of the Company’s shares on the American Stock Exchange on the date immediately
prior to grant, pursuant to the 2006 Stock Option Plan. Options available for
grant under the 2006 Stock Option Plan were 167,300 at June 30,
2007.
At
June
30, 2007, the Company also maintains share-based compensation arrangements
under
the following plans: (i) 1993 Stock Option Plan; (ii) 1997 Long-Term Incentive
Plan; and (iii) 2001 Stock Option Plan.
At
June
30, 2007, there were 292,742 options outstanding under the 1993 Stock Option
Plan, the 1997 Long Term Incentive Plan and the 2001 Stock Option Plan, of
which
all were exercisable. No options are available for future grant under the 1993
Stock Option Plan, the 1997 Long Term Incentive Plan or the 2001 Stock Option
Plan.
A
summary
of all stock option activity and information related to all options outstanding
follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Price
|
|
Shares
|
|
Term
|
|
Value
|
|
Outstanding
at December 30, 2006
|
|
$
|
9.55
|
|
|
407,092
|
|
|
|
|
|
|
|
Granted
|
|
|
9.34
|
|
|
247,200
|
|
|
|
|
|
|
|
Exercised
|
|
|
7.94
|
|
|
(9,300
|
)
|
|
|
|
|
|
|
Cancelled
|
|
|
11.02
|
|
|
(19,550
|
)
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
$
|
9.48
|
|
|
625,442
|
|
|
6.9
|
|
$
|
576,000
|
|
Exercisable
at June 30, 2007
|
|
$
|
9.09
|
|
|
320,242
|
|
|
4.3
|
|
$
|
429,000
|
|
The
total
intrinsic value of options exercised for the quarters ended June 30, 2007 and
July 1, 2006 was $11,000 and $1,000, respectively. The total intrinsic value
of
options exercised for the six-month periods ended June 30, 2007 and July 1,
2006
was $16,000 and $4,000, respectively.
The
total
fair value of options granted for the quarter and six months ended June 30,
2007
was approximately $501,000. The total fair value of options granted for the
quarter and six months July 1, 2006 was approximately $212,000.
As
of
June 30, 2007, the total future compensation cost related to nonvested stock
options and the employee stock purchase plan not yet recognized in the statement
of operations was $718,000. Of that total, $186,000, $269,000, $198,000 and
$65,000 are expected to be recognized in 2007, 2008, 2009 and 2010,
respectively.
The
2006
Non-Employee Directors’ Stock Plan is a plan that authorizes the grant of an
aggregate of 100,000 shares of Common Stock to the non-employee directors of
the
Company. The plan authorizes each non-employee director to receive 1,500 shares
of restricted stock beginning in 2006, and 1,500 shares or such other amount
as
the Board of Directors may, from time to time, decide for each year in the
future following the Company’s Annual Meeting of Stockholders.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
June
20, 2007, the Company issued a grant of 10,500 shares of restricted stock to
its
non-employee directors. The per share price of the grant was $9.78 (the closing
price of the Company’s shares on the American Stock Exchange on the date
immediately prior to the grant, pursuant to the terms of the plan). One third
of
such restricted stock vests on the anniversary of the grant date over a
three-year period. Share-based compensation expense for the quarter and six
months ended June 30, 2007 related to the grant of restricted stock was
approximately $7,000 and $14,000, which was based on a straight-line
amortization. Restricted shares of common stock
available for grant under the 2006 Non-Employee Directors’ Stock Plan were
80,500 at June 30, 2007.
A
summary
of unvested restricted stock activity and information related to all restricted
stock outstanding follows:
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Day
|
|
|
|
|
|
Fair
Value
|
|
Shares
|
|
|
|
|
|
|
|
Outstanding
at December 30, 2006
|
|
$
|
9.52
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9.78
|
|
|
10,500
|
|
Vested
|
|
|
9.52
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
$
|
9.69
|
|
|
16,500
|
|
7.
GOODWILL
Goodwill
primarily includes the excess purchase price paid over the fair value of net
assets acquired in the Company’s 1999 acquisition of Filtran Microcircuits Inc.
(“FMI”). When the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets"("SFAS 142"), the net carrying
value of the FMI goodwill was $2,745,000, which was reduced by $435,000 of
accumulated amortization. Under SFAS 142, the Company ceased amortization of
goodwill and tests its goodwill on an annual basis, or whenever events or
circumstances indicate that impairment may have occurred. Under SFAS 142
goodwill impairment is determined using a two-step process. The first step
of
the goodwill impairment test is to identify a potential impairment by comparing
the fair value of a reporting unit with its carrying amount, including goodwill.
If the estimated fair value of the reporting unit exceeds its carrying amount,
the reporting unit’s goodwill is not considered to be impaired and the second
step of the impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit’s goodwill, determined in the same manner as the amount of
goodwill recognized in a business combination, with the carrying amount of
such
goodwill. If the carrying amount
of
the reporting unit’s goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to that excess.
During
the quarter ended June 30, 2007, the Company initiated an interim goodwill
impairment test of its FMI reporting unit. This occurred as a result of FMI’s
failure to meet 2007 bookings and sales targets, which resulted in continuing
operating losses and a reduction of its bank borrowing availability. The
estimates of fair value of the reporting unit are determined using a discounted
cash flow analysis. A discounted cash flow analysis requires the Company to
make
various judgmental assumptions and estimates, including assumptions about future
cash flows, growth rates and discount rates. The assumptions and estimates
about
the future cash flows and growth rates are based on the reporting unit’s budgets
and business plans. Discount rate assumptions are based on an assessment of
the
risk inherent in the future cash flows of the reporting unit. As a result of
the
impairment test, the Company recorded a non-cash goodwill impairment charge
of
$2,630,000 related to the Company’s FMI reporting unit for the quarter ended
June 30, 2007. The impairment charges did not affect the Company’s liquidity or
result in non-compliance with any financial debt covenants.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
changes in the carrying amount of goodwill for the six months ended June 30,
2007 and the fiscal year ended December 30, 2006 are as follows:
|
|
2007
|
|
2006
|
|
Original
balance
|
|
$
|
3,179,341
|
|
$
|
3,179,341
|
|
Accumulated
amortization through 2001
|
|
|
(434,603
|
)
|
|
(434,603
|
)
|
Impairment
charge, current year
|
|
|
(2,630,000
|
)
|
|
-
|
|
Accumulated
foreign currency adjustment through
|
|
|
|
|
|
|
|
prior
year
|
|
|
758,481
|
|
|
756,455
|
|
Foreign
currency adjustment, current year
|
|
|
189,315
|
|
|
2,026
|
|
Balance,
end of period
|
|
$
|
1,062,534
|
|
$
|
3,503,219
|
|
8.
INVENTORIES
Inventories
are stated at the lower of cost or market, using the average cost method. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories.
Inventories
consist of the following:
|
|
June
30, 2007
|
|
December
30, 2006
|
|
Finished
goods
|
|
$
|
225,028
|
|
$
|
345,519
|
|
Work
in process
|
|
|
2,406,415
|
|
|
1,634,475
|
|
Raw
materials and purchased parts
|
|
|
2,152,344
|
|
|
1,937,479
|
|
Total
|
|
$
|
4,783,787
|
|
$
|
3,917,473
|
|
The
Company recorded provisions for obsolescence and cost overruns of $154,000
and
$80,000 for the quarters ended June 30, 2007 and July 1, 2006, respectively,
and
$178,000 and $100,000 for the six months ended June 30, 2007 and July 1, 2006,
respectively.
9.
CURRENT AND LONG-TERM DEBT
The
Company was obligated under the following debt instruments at June 30, 2007
and
December 30, 2006:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
North
Fork Bank (A):
|
|
|
|
|
|
Revolving
line of credit, 2.00% above LIBOR or 0.50% below prime
|
|
$
|
-
|
|
$
|
-
|
|
Term
loan, due October 1, 2011, 2.25% above LIBOR or 0.50%
|
|
|
|
|
|
|
|
below
prime
|
|
|
1,700,000
|
|
|
1,900,000
|
|
Mortgage
loan, due October 1, 2016, 2.25% above LIBOR or 0.50%
|
|
|
|
|
|
|
|
below
prime
|
|
|
2,887,500
|
|
|
2,962,500
|
|
The
Bank
of Nova Scotia (B):
Capital
leases, interest 7.35%, due March 2007
|
|
|
-
|
|
|
15,389
|
|
Capital
leases, interest 7.50%, due May 2007
|
|
|
-
|
|
|
20,590
|
|
Capital
leases, interest 5.80%, due January 2010
|
|
|
168,686
|
|
|
173,170
|
|
Capital
leases, interest 6.60%, due March 2011
|
|
|
141,748
|
|
|
140,915
|
|
|
|
|
4,897,934
|
|
|
5,212,564
|
|
Less
current portion
|
|
|
620,655
|
|
|
648,524
|
|
Long-term
portion
|
|
$
|
4,277,279
|
|
$
|
4,564,040
|
|
(A)
|
On
October 18, 2006, the Company entered into a financing agreement
with
North Fork Bank which consists of a two-year $5,000,000 revolving
line of
credit, a five-year $2,000,000 machinery and equipment term loan
due
October 1, 2011 (“Term Loan”) and a ten-year $3,000,000 real estate term
loan due October 1, 2016 (“Mortgage Loan”). This financing agreement
replaced the prior financing agreement with CIT. Completion of the
financing agreement resulted in additional cash loan proceeds of
approximately $2,900,000 plus the release of previously restricted
cash of
$1,500,000. The revolving line of credit is subject to an availability
limit under a borrowing base calculation (85% of eligible accounts
receivable plus up to 50% of eligible raw materials inventory plus
up to
25% of eligible electronic components, with an inventory advance
sublimit
not to exceed $1,500,000, as defined in the financing agreement).
The
revolving line of credit expires October 18, 2008. At June 30, 2007,
the
Company had available borrowing capacity under its revolving line
of
credit of $3,100,000. The revolving line of credit bears interest
at the
prime rate less 0.50% (currently 7.75%) or LIBOR plus 2.00%. The
principal
amount of the Term Loan is payable in 59 equal monthly installments
of
$33,333 and one final payment of the remaining principal balance
of
$33,333. The Term Loan bears interest at the prime rate less 0.50%
(currently 7.75%) or LIBOR plus 2.25%. The principal amount of the
Mortgage Loan is payable in 119 equal monthly installments of $12,500
and
one final payment of the remaining principal balance of $1,512,500.
The
Mortgage Loan bears interest at the prime rate less 0.50% (currently
7.75%) or LIBOR plus 2.25%. At June 30, 2007, the Company, under
the terms
of its agreement with North Fork Bank, elected to convert $1,700,000
of
the Term Loan and $2,875,000 of the Mortgage Loan from their prime
rate
base to LIBOR-based interest rate loans for one month at an interest
rate
of 7.57%, which expired July 18, 2007. The revolving line of credit,
the
Term Loan and the Mortgage Loan are secured by substantially all
assets
located within the United States and the pledge of 65% of the stock
of the
Company's subsidiaries located in Costa Rica and Canada. The provisions
of
the financing agreement require the Company to maintain certain financial
covenants.
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
North
Fork Bank and the Company amended the financing agreement, as of May 15, 2007,
which (i) eliminates the fixed charge coverage ratio covenant for the quarter
ending June 30, 2007, (ii) adds a covenant related to earnings before interest,
taxes, depreciation and amortization (“EBITDA”) for the four quarters ending
June 30, 2007 to require the Company to achieve a minimum level of EBITDA,
and
(iii) modifies the fixed charge coverage ratio covenant for periods after the
quarter ending June 30, 2007. The Company was in compliance with these amended
covenants at June 30, 2007.
On
August
9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
Agreement, under which North Fork Bank consented to the guaranty by Merrimac
of
FMI's borrowings under the revolving credit agreement with The Bank of Nova
Scotia in the amount of up to $250,000 (Canadian). In consideration for North
Fork Bank providing such consent, Merrimac agreed to deposit $250,000 into
a
controlled collateral account with North Fork Bank and also agreed to prepay
the
mortgage loan portion of the credit facility with North Fork Bank with fifty
percent of the proceeds from a sale of FMI up to a maximum amount of $500,000
(see Note 16).
(B)
|
FMI
has an amended formula-based secured revolving credit agreement in
place
with The Bank of
Nova Scotia to borrow up to $250,000 (Canadian) (approximately $235,000
US) at the prime rate
plus 2 percent. Such agreement is guaranteed by Merrimac. No borrowings
were outstanding
under this agreement at June 30,
2007.
|
FMI
has a
$336,000 (Canadian) (approximately $310,000 US) revolving lease line with the
Bank of
Nova
Scotia, whereby the Company can obtain funding for previous production equipment
purchases
via a sale/leaseback transaction. As of June 30, 2007, $310,000 had been
utilized under this facility. The Bank of Nova Scotia will not allow any new
borrowings on this revolving lease line. Such leases are payable in monthly
installments for up to five years and are secured by the related production
equipment. Interest rates (typically prime rate plus 2.25 percent) are set
at
the closing of each respective sale/leaseback transaction. During the first
quarter of 2006, FMI obtained $160,000 (US) in connection with the
sale/leaseback of certain production equipment. The related equipment was
originally purchased by the Company in 2005.
Assets
securing capital leases included in property, plant and equipment, net, have
a
depreciated cost of approximately $694,000 (US) at June 30, 2007 and $703,000
(US) at December 30, 2006.
10.
WARRANTIES
The
Company's products sold under contracts have warranty obligations. Estimated
warranty costs for each contract are determined based on the contract terms
and
technology specific issues. The Company accrues estimated warranty costs at
the
time of sale and any additional amounts are recorded when such costs are
probable and can be reasonably estimated. Warranty expense was approximately
$4,000 and $62,000 for the quarters ended June 30, 2007 and July 1, 2006,
respectively, and $52,000 and $97,000 for the six months ended June 30, 2007
and
July 1, 2006, respectively. The warranty reserve at June 30, 2007 and December
30, 2006 was $228,000 and $256,000, respectively.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
11.
INCOME TAXES
The
current tax benefit for the quarter and six months ended July 1, 2006 represents
refundable Canadian provincial tax credits for which FMI, as a technology
company, has qualified.
As
of
June 30, 2007, the Company has significant deferred tax assets resulting from
net operating loss carryforwards, tax credit carryforwards and deductible
temporary differences, which
should reduce taxable income in future periods. A valuation allowance is
required when management assesses that it is more likely than not that all
or a
portion of a deferred tax asset will not be realized. The Company's 2002, 2003
and 2006 net losses have weighed heavily in the Company's overall assessments.
The Company established a full valuation allowance for its remaining U.S. net
deferred tax assets as a result of its assessment at December 28, 2002. This
assessment continued unchanged from 2003 through the first six months of 2007.
In 2006 the Company recorded additional valuation allowances for certain
Canadian deferred tax assets of $427,000 because it believed that it was more
likely than not that the deferred tax assets would not be realized. In
conjunction with the determination that goodwill was impaired, as described
in
Note 7, and the continuing losses at FMI, the Company established a full
valuation allowance of $506,000 during the second quarter of 2007 for its
remaining Canadian net deferred tax asset.
The
Code
Section 382 places a limitation on the utilization of net operating loss
carryforwards when an ownership change, as defined in the tax law, occurs.
Generally, an ownership change occurs when there is a greater than 50 percent
change in ownership. If such a change should occur, the actual utilization
of
net operating loss carryforwards, for tax purposes, would be limited annually
to
a percentage of the fair market value of the Company at the time of such change.
The Company may become subject to these limitations in 2007 depending on the
extent of the changes in its ownership.
12.
BUSINESS SEGMENT DATA
The
Company's operations are conducted primarily through two business segments:
(1)
electronic components and subsystems and (2) microwave micro-circuitry. These
segments, and the principal operations of each, are as follows:
Electronic
components and subsystems: 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, 84% are located in the United States and 16% are located
in
Costa Rica. Included in such segment are the Multi-Mix® Microtechnology net
assets.
Microwave
micro-circuitry: Design, manufacture and sale of microstrip, bonded stripline
and thick metal-backed Teflon® (PTFE) and mixed dielectric multilayer circuits
for communications, defense
and aerospace applications. All of the identifiable assets are located in
Canada.
Information
about the Company's operations in different areas of its business follows.
Operating income is net sales less operating expenses. Operating expenses
exclude interest expense, other income and income taxes. Corporate assets
consist principally of cash and corporate expenses
are immaterial. Intersegment sales and the resulting intersegment assets are
principally due to intercompany sales from the microwave micro-circuitry segment
to the electronic components and subsystems segment.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In
thousands of dollars)
|
|
(In
thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Industry
segments:
|
|
|
|
|
|
|
|
|
|
Sales
to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
Electronic
components and subsystems
|
|
$
|
5,371
|
|
$
|
7,102
|
|
$
|
9,883
|
|
$
|
11,784
|
|
Microwave
micro-circuitry
|
|
|
895
|
|
|
1,180
|
|
|
1,821
|
|
|
2,826
|
|
Intersegment
sales
|
|
|
(41
|
)
|
|
(31
|
)
|
|
(55
|
)
|
|
(128
|
)
|
Consolidated
|
|
$
|
6,225
|
|
$
|
8,251
|
|
$
|
11,649
|
|
$
|
14,482
|
|
Income
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
components and subsystems
|
|
$
|
55
|
|
$
|
697
|
|
$
|
(949
|
)
|
$
|
70
|
|
Microwave
micro-circuitry
|
|
|
(2,947
|
)
|
|
(148
|
)
|
|
(3,164
|
)
|
|
23
|
|
Interest
and other expense, net
|
|
|
(71
|
)
|
|
(33
|
)
|
|
(114
|
)
|
|
(52
|
)
|
Consolidated
|
|
$
|
(2,963
|
)
|
$
|
516
|
|
$
|
(4,227
|
)
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
components and subsystems
|
|
$
|
587
|
|
$
|
591
|
|
$
|
1,158
|
|
$
|
1,185
|
|
Microwave
micro-circuitry
|
|
|
70
|
|
|
64
|
|
|
134
|
|
|
133
|
|
Consolidated
|
|
$
|
657
|
|
$
|
655
|
|
$
|
1,292
|
|
$
|
1,318
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
components and subsystems
|
|
$
|
355
|
|
$
|
418
|
|
$
|
756
|
|
$
|
956
|
|
Microwave
micro-circuitry
|
|
|
73
|
|
|
9
|
|
|
171
|
|
|
23
|
|
Consolidated
|
|
$
|
428
|
|
$
|
427
|
|
$
|
927
|
|
$
|
979
|
|
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
Electronic
components and subsystems
|
|
$
|
21,881
|
|
$
|
23,740
|
|
Microwave
micro-circuitry
|
|
|
3,570
|
|
|
7,007
|
|
Corporate
|
|
|
2,817
|
|
|
3,383
|
|
Intersegment
|
|
|
(168
|
)
|
|
(60
|
)
|
Consolidated
|
|
$
|
28,100
|
|
$
|
34,070
|
|
13.
NET
INCOME (LOSS) PER COMMON SHARE
Basic
net
income (loss) per common share is calculated by dividing net income (loss)
by
the weighted average number of common shares outstanding during the
period.
The
calculation of diluted net income (loss) per common share is similar to that
of
basic net income (loss) 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 to the
extent they are not anti-dilutive, using the treasury stock method.
The
following table summarizes the calculation of basic and diluted net income
per
share:
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
$
|
(3,468,923
|
)
|
$
|
529,493
|
|
$
|
(4,732,725
|
)
|
$
|
88,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
net income per share-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,910,711
|
|
|
3,143,725
|
|
|
3,003,513
|
|
|
3,146,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - basic
|
|
$
|
(1.19
|
)
|
$
|
.17
|
|
$
|
(1.58
|
)
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,910,711
|
|
|
3,143,725
|
|
|
3,003,513
|
|
|
3,146,444
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options (1)
|
|
|
-
|
|
|
38,559
|
|
|
-
|
|
|
19,279
|
|
Restricted
stock
|
|
|
-
|
|
|
1,038
|
|
|
-
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
net income (loss) per share
|
|
|
2,910,711
|
|
|
3,183,322
|
|
|
3,003,513
|
|
|
3,166,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - diluted
|
|
$
|
(1.19
|
)
|
$
|
.17
|
|
$
|
(1.58
|
)
|
$
|
.03
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Represents
additional shares resulting from assumed conversion of stock options
less
shares purchased with the proceeds
therefrom.
|
Diluted
net income per share excludes 625,000 and 348,000 shares underlying stock
options for
the
quarters ended June 30, 2007 and July 1, 2006, respectively, and 625,000 and
348,000 shares
underlying stock options for the six months ended June 30, 2007 and July 1,
2006, respectively,
as the exercise price of these options was greater than the average market
value
of
the common shares, resulting in an anti-dilutive effect on net income
per
share.
14.
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 loaned Mr. Carter
$255,000 in connection with the purchase of these shares and combined that
loan
with a prior loan to Mr. Carter in the amount of $105,000. The resulting total
principal amount of $360,000 was payable May 4, 2003 and bore interest at a
variable interest rate based on the prime rate. This loan was further amended
on
July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing
the new principal amount of the loan to $400,000, the due date was extended
to
May 4, 2006, and interest (at the same rate as was previously applicable) was
now payable monthly. Mr. Carter pledged 33,000 shares of Common Stock as
security for this loan, which was a full-recourse loan.
On
March
29, 2006, the Company entered into an agreement with Mr. Carter to purchase
42,105 shares of the Company's common stock owned by Mr. Carter at a purchase
price of $9.50 per share (the closing price of the common stock on March 29,
2006) resulting in a total purchase price for the shares of $399,998. As a
condition to the Company’s obligation to purchase the shares, concurrent with
the Company’s payment of the purchase price Mr. Carter will pay to the Company
$400,000 (plus any accrued and unpaid interest) in full satisfaction of Mr.
Carter’s promissory note in favor of the Company dated July 29, 2002. This
transaction was closed on April 24, 2006.
During
the second quarter and first six months of 2007, the Company's outside general
counsel Katten Muchin Rosenman LLP was paid $108,000 and $196,000, respectively,
for providing legal services to the Company. During the second quarter and
first
six months of 2006, Katten Muchin Rosenman LLP was paid $94,000 and $187,000,
respectively. A director of the Company is counsel to Katten Muchin Rosenman
LLP
but does not share in the fees that the Company pays to such law firm and his
compensation is not based on such fees.
During
2007 and 2006 the Company retained Career Consultants, Inc. and SK Associates
to
perform executive searches and to provide other services to the Company. The
Company paid an aggregate of $5,000 and $21,000 to these companies during the
second quarter and first six months of 2007, respectively. The Company paid
an
aggregate of $4,000 and $6,000 to these companies during the second quarter
and
first six months of 2006, respectively. A director of the Company is the
chairman and chief executive officer of these companies.
During
the second quarter and first six months of 2007, a director of the Company
was
paid $9,000 and $18,000, respectively, for providing technology-related
consulting services to the Company. For the second quarter and first six months
of 2006, such director was paid $9,000 and $18,000, respectively.
During
the second quarter and first six months of 2006, DuPont Electronic Technologies
(“DuPont”), a stockholder and the employer of a director, was paid $12,000 and
$27,000, respectively, for providing technological and marketing-related
personnel and services on a cost-sharing basis to the Company under the
Technology Agreement dated February 28, 2002. No payments were made to DuPont
during the second quarter and first six months of 2007. A director of the
Company is an officer of DuPont, but does not share in any of these
payments.
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. In addition, the Chair of the Audit Committee
receives an annual fee of $2,500 for his services in such capacity. The
directors are also reimbursed for reasonable travel expenses incurred in
attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
Option Plan, each non-employee director is granted an option to purchase 2,500
shares of the Common Stock of the Company on the date of each Annual Meeting
of
Stockholders. Such options have a three-year vesting period. Each such grant
has
an exercise price equal to the fair market value on the date of such grant
and
will expire on the tenth anniversary of the date of the grant. On June 20,
2007,
non-qualified stock options to purchase an aggregate of 20,000 shares were
issued to eight directors at an exercise price of $9.78 per share.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Also
on
June 20, 2007, pursuant to the 2006 Non-Employee Directors’ Stock Plan, 10,500
shares of restricted stock were granted to seven directors at a fair market
value of $9.78 per share. Such restricted stock vests ratably over a three-year
period.
On
December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
beneficial owner of approximately 15% of the Company’s common stock, sold
475,000 shares of the Company’s common stock to four purchasers in a
privately-negotiated transaction. Two purchasers in such transaction, K
Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
with Ludwig G. Kuttner, who was President and Chief Executive Officer of
Hampshire Group, Limited (“Hampshire”), purchased 300,000 shares representing an
aggregate of approximately 9.6% of the Company’s common stock. Mr. Kuttner was
elected to the Company’s Board of Directors at its 2006 Annual Meeting of
Stockholders. As a result of an ongoing investigation by Hampshire's audit
committee, the Securities and Exchange Commission, and the Department of Justice
of allegations of certain improprieties and possibly unlawful conduct involving
Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment with
Hampshire has been terminated and he remains as a director. Mr. Kuttner took
a
leave of absence from his position as a director of Merrimac. During his leave
of absence, Mr. Kuttner was not entitled to any compensation from the Company.
Mr. Kuttner rescinded his leave of absence from his position as a director
of
Merrimac as of June 20, 2007. Infineon also assigned to each purchaser certain
registration rights to such shares under the existing registration rights
agreements Infineon had with the Company. In connection with the transaction,
the Company and Infineon terminated the Stock Purchase and Exclusivity Letter
Agreement dated April 7, 2000, as amended, which provided that the Company
would
design, develop and produce exclusively for Infineon certain Multi-Mix® products
that incorporate active RF power transistors for use in certain wireless base
station applications, television transmitters and certain other applications
that are intended for Bluetooth transceivers.
DuPont
and the four purchasers above hold registration rights which currently give
them
the right to register an aggregate of 1,003,413 shares of Common Stock of the
Company.
15.
REPURCHASE OF COMMON STOCK
On
March
13, 2007, the Company repurchased in a private transaction 238,700 shares of
its
Common Stock for the treasury at $9.00 per share for an aggregate total of
$2,148,300 from a group of investors. The Company also announced that it amended
its 1999 Stockholder Rights Plan by increasing the defined “Acquiring Person”
threshold to 12.5 percent from 10 percent.
16.
SUBSEQUENT EVENT
Company
management has determined, and the Board of Directors has approved on August
9,
2007, that the Company should divest its FMI operations and is in the process
of
seeking interested parties. The potential divestiture should enable Merrimac
Industries, Inc. to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
Beginning with the third quarter of 2007, the Company will reflect FMI as a
discontinued operation and the Company intends to restate prior financial
statements to reflect the results of operations, cash flows and financial
position of FMI as discontinued operations. At
June
30, 2007 the major classes of assets and liabilities for FMI were as
follows:
Current
assets
|
|
$
|
1,187,000
|
|
Property,
plant and equipment, net
|
|
$
|
1,364,000
|
|
Goodwill
|
|
$
|
1,163,000
|
|
Current
liabilities
|
|
$
|
954,000
|
|
Long-term
debt
|
|
$
|
240,000
|
|
ITEM
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains statements relating to future results
of
Merrimac ) (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. In this report, the words “we”, “us” and “our” refer to
Merrimac and its subsidiaries. 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: risks associated with demand
for
and market acceptance of existing and newly developed products as to which
the
Company has made significant investments, particularly its Multi-Mix® products;
the possibilities of impairment charges to the carrying value of our Multi-Mix®
assets, thereby resulting in charges to our earnings; risks associated with
adequate capacity to obtain raw materials and reduced control over delivery
schedules and costs due to reliance on sole source or limited suppliers; slower
than anticipated penetration into the satellite communications, defense and
wireless markets; failure of our Original Equipment Manufacturer, or OEM,
customers to successfully incorporate our products into their systems; changes
in product mix resulting in unexpected engineering and research and development
costs; delays and increased costs in product development, engineering and
production; reliance on a small number of significant customers; the emergence
of new or stronger competitors as a result of consolidation movements in the
market; the timing and market acceptance of our or our OEM customers’ new or
enhanced products; general economic and industry conditions; the risk that
the
benefits expected from the Company’s acquisition of Filtran Microcircuits Inc.
are not realized; the ability to protect proprietary information and technology;
competitive products and pricing pressures; our ability and the ability of
our
OEM customers to keep pace with the rapid technological changes and short
product life cycles in our industry and gain market acceptance for new products
and technologies; foreign currency fluctuations between the U.S. and Canadian
dollars; risks relating to governmental regulatory actions in communications
and
defense programs; and inventory risks due to technological innovation and
product obsolescence, as well as other risks and uncertainties as are 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 of the filing
of
this Form 10-Q, 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.
OVERVIEW
Merrimac
is involved in the design, manufacture and sale of electronic component devices
offering extremely broad frequency coverage and high performance
characteristics, and microstrip, bonded stripline and thick metal-backed Teflon®
(PTFE) and mixed dielectric multilayer circuits for communications, defense
and
aerospace applications. The Company's operations are conducted primarily through
two business segments: (1) electronic components and subsystems and (2)
microwave micro-circuitry (through its subsidiary, FMI).
The
following table provides a breakdown of our sales between these segments for
the
quarters and six months ended June 30, 2007 and July 1, 2006:
|
|
Quarters
Ended
|
|
|
|
June
30, 2007
|
|
July
1, 2006
|
|
|
|
|
|
|
|
%
of sales
|
|
|
|
|
|
%
of sales
|
|
Electronic
components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
subsystems
|
|
$
|
5,371,000
|
|
|
86.3
|
%
|
$
|
7,102,000
|
|
|
86.1
|
%
|
Microwave
micro-circuitry(1)
|
|
|
895,000
|
|
|
14.4
|
%
|
|
1,180,000
|
|
|
14.3
|
%
|
Intersegment
sales
|
|
|
(41,000
|
)
|
|
(0.7
|
)%
|
|
(31,000
|
)
|
|
(0.4
|
)%
|
Consolidated
|
|
$
|
6,225,000
|
|
|
100.0
|
%
|
$
|
8,251,000
|
|
|
100.0
|
%
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
July
1, 2006
|
|
|
|
$
|
|
%
of sales
|
|
$
|
|
%
of sales
|
|
Electronic
components
|
|
|
|
|
|
|
|
|
|
and
subsystems
|
|
$
|
9,883,000
|
|
|
84.8
|
%
|
$
|
11,784,000
|
|
|
81.4
|
%
|
Microwave
micro-circuitry(1)
|
|
|
1,821,000
|
|
|
15.6
|
%
|
|
2,826,000
|
|
|
19.5
|
%
|
Intersegment
sales
|
|
|
(55,000
|
)
|
|
(0.4
|
)%
|
|
(128,000
|
)
|
|
(0.9
|
)%
|
Consolidated
|
|
$
|
11,649,000
|
|
|
100.0
|
%
|
$
|
14,482,000
|
|
|
100.0
|
%
|
(1)
Substantially all conducted by our Canadian subsidiary,
FMI.
Merrimac
is a versatile technologically-oriented company specializing in miniature radio
frequency lumped-element components, integrated networks, microstrip and
stripline microwave components, subsystem assemblies and ferrite attenuators.
Of
special significance has been the combination of two or more of these
technologies into single components to achieve superior performance and
reliability while minimizing package size and weight. Merrimac components are
today found in applications as diverse as satellites, military and commercial
aircraft, radar, cellular radio systems, medical and dental diagnostic
instruments and wireless Internet connectivity. Merrimac's components range
in
price from $0.50 to more than $10,000 and its subsystem assemblies range from
$500 to more than $1,500,000.
The
Company’s operations for the second quarter of 2007 were negatively impacted by
a non-cash goodwill impairment charge of $2,630,000 to the FMI reporting unit.
During the quarter ended June 30, 2007, the Company conducted an interim
goodwill impairment test of its FMI reporting unit. This occurred as a result
of
FMI’s failure to meet 2007 bookings and sales targets, which resulted in
continuing operating losses and a reduction of its bank borrowing availability.
During the first six months of 2007, such goodwill amount increased $189,000
to
$3,693,000 resulting from the Canadian dollar increase from $0.86 at December
30, 2006 to $0.94 at the end of June. The stronger Canadian dollar has an
unfavorable impact on FMI’s cost structure and upon its U.S. dollar denominated
export sales, which were approximately 75% of FMI’s sales during the first six
months of 2007.
In
conjunction with the determination that goodwill was impaired and the continuing
losses at FMI, the Company established a full valuation allowance of $506,000
during the second quarter of 2007 for its Canadian net deferred tax asset as
management believed that it is more likely than not that its deferred tax asset
will not be realized.
Sales
for
the electronic components and subsystems segment for the second quarter of
2007
were lower than the second quarter of 2006 due to both the shipment of a
$750,000 order to a significant military customer and $1,200,000 of revenue
recognized in connection with the early close out of a fixed price customer
contract which took place in 2006 and did not recur in the second quarter of
2007. Orders of $9,974,000 received during the second quarter of 2007 and
$16,459,000 received during the first six months of 2007 were both Company
records. Backlog increased by $4,810,000 or 38.8% to $17,195,000 at the end
of
the second quarter of 2007. The June 30, 2007 backlog is a record for the
highest quarter-end backlog the Company has achieved.
The
Company markets and sells its products domestically and internationally through
a direct sales force and manufacturers’ representatives. Merrimac has
traditionally developed and offered for sale products built to specific customer
needs, as well as standard catalog items.
Cost
of
sales for the Company consists of materials, salaries and related expenses,
and
outside services for manufacturing and certain engineering personnel and
manufacturing overhead. Our products are designed and manufactured in the
Company’s facilities. The Company’s manufacturing and production facilities
infrastructure overhead are relatively fixed and are based on its expectations
of future net revenues. Should the Company experience a reduction in net
revenues in a quarter, it could have difficulty adjusting short-term
expenditures and absorbing any excess capacity expenses. If this were to occur,
the Company’s operating results for that quarter would be negatively impacted.
In order to remain competitive, the Company must continually reduce its
manufacturing costs through design and engineering innovations and increases
in
manufacturing efficiencies. There can be no assurance that the Company will
be
able to reduce its manufacturing costs.
The
Company anticipates that depreciation and amortization expenses will exceed
capital expenditures in fiscal year 2007 by approximately $300,000. The Company
intends to issue commitments to purchase $1,500,000 of capital equipment from
various vendors for the remainder of 2007. The Company anticipates that such
equipment will be purchased and become operational during the remainder of
2007.
The Company’s planned equipment purchases and other commitments are expected to
be funded through cash resources and cash flows expected to be generated from
operations, and supplemented by the Company’s $5,000,000 revolving credit
facility, which expires October 18, 2008.
Selling,
general and administrative expenses consist of personnel costs for
administrative, selling and marketing groups, sales commissions to employees
and
manufacturing representatives, travel, product marketing and promotion costs,
as
well as legal, accounting, information technology and other administrative
costs. As discussed below, the Company expects to continue to make significant
and increasing expenditures for selling, general and administrative expenses,
especially in connection with implementation of its strategic plan for
generating and expanding sales of Multi-Mix® products.
Research
and development expenses consist of materials, salaries and related expenses
of
certain engineering personnel, and outside services related to product
development projects. The Company charges all research and development expenses
to operations as incurred. The Company believes that continued investment in
research and development is critical to the Company’s long-term business
success. The Company intends to continue to invest in research and development
programs in future periods, and expects that these costs will increase over
time, in order to develop new products, enhance performance of existing products
and reduce the cost of current or new products.
The
Company expects that its defense and satellite customers should continue to
maintain their approximate current levels of orders during fiscal year 2007,
though there are no assurances they will do so. Nevertheless, in times of armed
conflict or war, military spending is concentrated on armaments build up,
maintenance and troop support, and not on the research and development and
specialty applications that are the Company’s core strengths and revenue
generators. The Company also anticipates increased levels of orders during
fiscal year 2007 for its Multi-Mix® Microtechnology products, based on inquiries
from existing customers, requests to quote from prospective and existing
customers and market research.
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®
Microtechnology, contract revenue recognition, inventory valuation, valuation
of
goodwill and valuation of deferred tax assets.
Impairment
of long-lived assets
Following
is a summary of the carrying amounts of the Multi-Mix® Microtechnology net
assets included in the Company's consolidated financial statements at June
30,
2007 and the related future planned purchases and lease obligation commitments
through January 2011.
Net
assets:
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
14,904,000
|
|
Less
accumulated depreciation and amortization
|
|
|
8,700,000
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,204,000
|
|
Inventories
|
|
|
509,000
|
|
Other
assets, net
|
|
|
164,000
|
|
|
|
|
|
|
Total
net assets at June 30, 2007
|
|
|
6,877,000
|
|
|
|
|
|
|
Commitments:
|
|
|
|
|
Planned
equipment purchases for the remainder of 2007
|
|
|
550,000
|
|
Lease
obligations through January 2011
|
|
|
675,000
|
|
|
|
|
|
|
Total
commitments
|
|
|
1,225,000
|
|
|
|
|
|
|
Total
net assets and commitments
|
|
$
|
8,102,000
|
|
Approximately
35% of the property, plant and equipment may be utilized in other areas of
our
electronic components and subsystems operations.
Any
future demand for Multi-Mix® for the wireless market is dependent on various
third-party programs and is directly related to the timing of our customers’ and
potential customers’ phase-out of existing programs and their migration, which
is not assured and has not yet commenced commercially, toward new programs
to
meet their customers’ new requirements. While these circumstances have resulted
in the delay or cancellation of Multi-Mix® Microtechnology product purchases
that had been anticipated from certain specific customers or programs, the
Company has implemented a strategic plan utilizing product knowledge and
customer focus to expand specific sales opportunities. However, 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. In accordance with the Company’s evaluation of
Multi-Mix® under SFAS No. 144, the Company has determined no provision for
impairment is required at this time. Management will continue to monitor the
recoverability of the Multi-Mix® assets.
Contract
Revenue Recognition
The
Company recognizes revenue in accordance with the provisions of Staff Accounting
Bulletin No. 104. Contract revenue and related costs on fixed-price and
cost-reimbursement contracts that require customization of products to customer
specifications are recorded when title 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 related initial units produced or based upon contractually
established stages of completion.
The
cost
rates utilized for cost-reimbursement contracts are subject to review by third
parties and can be revised, which can result in additions to or reductions
from
revenue. Revisions which result in reductions to revenue are recognized in
the
period that the rates are reviewed and finalized; additions to revenue are
recognized in the period that the rates are reviewed, finalized, accepted by
the
customer, and collectability from the customer is assured. The Company submits
financial information regarding the cost rates on cost-reimbursement contracts
for each fiscal year in which the Company performed work on cost-reimbursement
contracts. The Company does not record any estimates on a regular basis for
potential revenue adjustments, as there currently is no reasonable basis on
which to estimate such adjustments given the Company’s very limited experience
with these contracts. $250,000 of revenue was recognized related to cost
reimbursement contracts during the second quarter and first six months of 2006.
No revenue was recognized related to cost-reimbursement contracts during the
second quarter and first six months of 2007.
Inventory
Valuation
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. Total inventories are net of valuation
allowances for obsolescence and cost overruns of $1,432,000 at June 30, 2007
and
$1,174,000 at December 30, 2006. The Company recorded provisions for
obsolescence and cost overruns of $154,000 and $80,000 for the quarters ended
June 30, 2007 and July 1, 2006, respectively, and $178,000 and $100,000 for
the
six months ended June 30, 2007 and July 1, 2006, respectively.
Procurement
of inventory is based on specific customer orders and forecasts. Customers
have
certain rights of modification with respect to these orders and forecasts.
As a
result, customer modifications to orders and forecasts affecting inventory
previously procured by us and our purchases of inventory beyond customer needs
may result in excess and obsolete inventory for the related customers. Although
the Company may be able to use some of these excess components and raw materials
in other products it manufactures, a portion of the cost of this excess
inventory may not be recoverable from customers, nor may any excess quantities
be returned to the vendors. The Company also may not be able to recover the
cost
of obsolete inventory from vendors or customers.
Write
offs or write downs of inventory generally arise from:
|
·
|
declines
in the market value of inventory;
|
|
·
|
changes
in customer demand for inventory, such as cancellation of orders;
and
|
|
·
|
our
purchases of inventory beyond customer needs that result in excess
quantities on hand that we are not able to return to the vendor or
charge
back to the customer.
|
Valuation
of Goodwill
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
is subject to at least an annual assessment for impairment and more frequently
if circumstances indicate a possible impairment. The Company performed an
interim goodwill impairment test during the second quarter of 2007 and compared
the fair value of FMI’s assets, including goodwill, to its carrying value and
determined the carrying value of FMI exceeded its fair value. The Company has
recorded a non-cash impairment charge of approximately $2,630,000 to operations
for the quarter ended June 30, 2007. The impairment charge does not affect
the
Company’s liquidity and has not resulted in non-compliance with any debt
covenants. If actual market conditions differ or forecasts change at the time
of
the annual assessment in the fourth quarter of 2007, the Company may be required
to record an additional goodwill impairment charge.
Valuation
of Deferred Tax Assets
As
of
June 30, 2007, the Company has significant deferred tax assets resulting from
net operating loss carryforwards, tax credit carryforwards and deductible
temporary differences, which should reduce taxable income in future periods.
A
valuation allowance is required when management assesses that it is more likely
than not that all or a portion of a deferred tax asset will not be realized.
The
Company's 2002, 2003 and 2006 net losses have weighed heavily in the Company's
overall assessments. The Company established a full valuation allowance for
its
remaining U.S. net deferred tax assets as a result of its assessment at December
28, 2002. This assessment continued unchanged from 2003 through the first six
months of 2007. In 2006 the Company recorded additional valuation allowances
for
certain Canadian deferred tax assets of $427,000 because it believed that it
was
more likely than not that the deferred tax assets would not be realized. In
conjunction with the determination that goodwill was impaired, as described
in
Note 7, and the continuing losses at FMI, the Company established a full
valuation allowance of $506,000 during the second quarter of 2007 for its
remaining Canadian net deferred tax asset.
CONSOLIDATED
STATEMENTS OF OPERATIONS SUMMARY
(UNAUDITED)
The
following table reflects the percentage relationships of items from the
Consolidated Statements of Operations as a percentage of net sales.
|
|
Percentage
of Net Sales
|
|
Percentage
of Net Sales
|
|
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
61.7
|
|
|
55.0
|
|
|
64.3
|
|
|
57.8
|
|
Selling,
general and administrative
|
|
|
36.7
|
|
|
32.0
|
|
|
41.0
|
|
|
35.5
|
|
Research
and development
|
|
|
5.8
|
|
|
6.3
|
|
|
7.5
|
|
|
6.1
|
|
Goodwill
impairment charge
|
|
|
42.2
|
|
|
-
|
|
|
22.6
|
|
|
-
|
|
|
|
|
146.4
|
|
|
93.3
|
|
|
135.4
|
|
|
99.4
|
|
Operating
income
|
|
|
(46.4
|
)
|
|
6.7
|
|
|
(35.4
|
)
|
|
.6
|
|
Interest
and other expense, net
|
|
|
(1.1
|
)
|
|
(.4
|
)
|
|
(1.0
|
)
|
|
(.3
|
)
|
Income
before income taxes
|
|
|
(47.5
|
)
|
|
6.3
|
|
|
(36.4
|
)
|
|
.3
|
|
Provision
(benefit) for income taxes
|
|
|
8.1
|
|
|
(.1
|
)
|
|
4.3
|
|
|
(.3
|
)
|
Net
income
|
|
|
(55.6
|
)%
|
|
6.4
|
%
|
|
(40.7
|
)%
|
|
.6
|
%
|
SECOND
QUARTER AND FIRST SIX MONTHS OF 2007 COMPARED TO THE SECOND QUARTER AND FIRST
SIX MONTHS OF 2006
Net
sales.
Consolidated
results of operations for the second quarter of 2007 reflect a decrease in
net
sales from the second quarter of 2006 of $2,026,000 or 24.6% to $6,225,000.
The
decrease was attributable to a $1,731,000 decrease in net sales of electronic
components and subsystems and a $285,000 decrease in sales of microwave
micro-circuitry products from FMI and a $10,000 increase of intersegment sales.
Sales for the electronic components and subsystems segment for the second
quarter of 2006 included both the shipment of a $750,000 order to a significant
military customer and $1,200,000 of revenue recognized in connection with the
early close out of a fixed price customer contract which did not recur in the
second quarter of 2007. Consolidated results of operations for the first six
months of 2007 reflect a decrease in net sales from the first six months of
2006
of $2,832,000 or 19.6% to $11,649,000. The decrease was attributable to a
$1,901,000 decrease in net sales of electronic components and subsystems and
a
$1,005,000 decrease in sales of microwave micro-circuitry products from FMI
and
a $73,000 decrease of intersegment sales. Sales for the electronic components
and subsystems segment for the first six months of 2006 included both the
shipment of a $750,000 order to a significant military customer and $1,200,000
of revenue recognized in connection with the early close out of a fixed price
customer contract mentioned above which did not recur in the first six months
of
2007.
The
decrease in sales of the microwave micro-circuitry segment for the second
quarter and first six months of 2007 was due to a reduced beginning of the
year
backlog and weakness in first quarter 2007 orders.
Backlog
represents the amount of orders the Company has received that have not been
shipped as of the end of a particular fiscal period. The orders in backlog
are a
measure of future sales and determine the Company’s upcoming material, labor and
service requirements. The book-to-bill ratio for a particular period represents
orders received for that period divided by net sales for the same period. The
Company looks for this ratio to exceed 1.0, indicating the backlog is being
replenished by new orders at a higher rate than the sales being removed from
the
backlog.
The
following table presents key performance measures that we use to monitor our
operating results for the six months ended June 30, 2007 and July 1,
2006:
|
|
2007
|
|
2006
|
|
Beginning
backlog
|
|
$
|
12,385,000
|
|
$
|
13,139,000
|
|
Plus
bookings
|
|
|
16,459,000
|
|
|
12,864,000
|
|
Less
net sales
|
|
|
11,649,000
|
|
|
14,482,000
|
|
Ending
backlog
|
|
$
|
17,195,000
|
|
$
|
11,521,000
|
|
Book-to-bill
ratio
|
|
|
1.41
|
|
|
0.89
|
|
Orders
of
$9,974,000 were received during the second quarter of 2007, an increase of
$1,055,000 or 11.8% compared to $8,919,000 in orders received during the second
quarter of 2006. Orders of $16,459,000 were received during the first six months
of 2007, an increase of $3,595,000 or 27.9% compared to $12,864,000 in orders
received during the first six months of 2006. Backlog increased by $4,810,000
or
38.8% to $17,195,000 at the end of the second quarter of 2007 compared to
$12,385,000 at year-end 2006, due to the increased orders received during the
second quarter. The book-to-bill ratio for the second quarter of 2007 was 1.60
to 1 and for the second quarter of 2006 was 1.08 to 1. The book-to-bill ratio
for the first six months of 2007 was 1.41 to 1 and for the first six months
of
2006 was 0.89 to 1.
Cost
of sales and Gross profit.
The
following table provides comparative gross profit information, by product
segment, between the quarters and six months ended June 30, 2007 and July 1,
2006.
|
|
Quarter
ended June 30, 2007
|
|
Quarter
ended July 1, 2006
|
|
|
|
$
|
|
Increase/
(Decrease)
from prior period
|
|
%
of
Segment
Net
Sales
|
|
$
|
|
Increase/
(Decrease)
from prior period
|
|
%
of
Segment
Net
Sales
|
|
Electronic
Components and Subsystems
gross profit
|
|
$
|
2,367,000
|
|
$
|
(1,143,000
|
)
|
|
44.1%
|
|
$
|
3,510,000
|
|
$
|
738,000
|
|
|
49.4
|
%
|
Microwave
Micro-Circuitry
gross profit
|
|
$
|
16,000
|
|
$
|
(184,000
|
)
|
|
1.8%
|
|
$
|
200,000
|
|
$
|
(296,000
|
)
|
|
16.9
|
%
|
Consolidated
gross
profit
|
|
$
|
2,383,000
|
|
$
|
(1,327,000
|
)
|
|
38.3%
|
|
$
|
3,710,000
|
|
$
|
442,000
|
|
|
45.0
|
%
|
|
|
Six
Months ended June 30, 2007
|
|
Six
Months ended July 1, 2006
|
|
|
|
$
|
|
Increase/
(Decrease)
from prior period
|
|
%
of
Segment
Net
Sales
|
|
$
|
|
Increase/
(Decrease)
from prior period
|
|
%
of
Segment
Net
Sales
|
|
Electronic
Components and Sub-assemblies
gross profit
|
|
$
|
4,064,000
|
|
$
|
(1,315,000
|
)
|
|
41.1%
|
|
$
|
5,379,000
|
|
$
|
(65,000
|
)
|
|
45.6
|
%
|
Microwave
Micro-Circuitry
gross
profit
|
|
$
|
100,000
|
|
$
|
(633,000
|
)
|
|
5.5%
|
|
$
|
733,000
|
|
$
|
(126,000
|
)
|
|
25.9
|
%
|
Consolidated
gross
profit
|
|
$
|
4,164,000
|
|
$
|
(1,948,000
|
)
|
|
35.7%
|
|
$
|
6,112,000
|
|
$
|
(191,000
|
)
|
|
42.2
|
%
|
The
decrease in gross profit and gross profit percentage for the second quarter
and
first six months of 2007 for both segments of the Company was due to the impact
of the lower level of sales having to absorb fixed manufacturing costs. Gross
profit for the second quarter of 2006 for the electronic components and
subsystems segment included $1,060,000 from the early close out of a fixed
price
customer contract.
Depreciation
expense included in consolidated cost of sales for the second quarter of 2007
was $599,000, an increase of $17,000 compared to the second quarter of 2006.
Depreciation expense included in consolidated cost of sales for the first six
months of 2007 was $1,179,000, a decrease of $10,000 compared to the first
six
months of 2006. For the second quarter and first six months of 2007,
approximately $383,000 and $758,000, respectively, of depreciation expense
was
associated with Multi-Mix® Microtechnology capital assets. For the second
quarter and first six months of 2006, approximately $373,000 and $740,000,
respectively of depreciation expense was associated with Multi-Mix®
Microtechnology capital assets.
FMI
sales
include intersegment sales of $41,000 and $31,000 in the second quarter of
2007
and 2006, respectively, and include intersegment sales of $55,000 and $128,000
in the first six months of 2007 and 2006, respectively.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses of $2,284,000 for the second quarter of
2007
decreased by $361,000 or 13.6%, and when expressed as a percentage of net sales,
increased by 4.7 percentage points to 36.7% compared to the second quarter
of
2006. The decrease in such expenses for the second quarter of 2007 was due
to
lower commissions on the reduced sales level and lower marketing and
administrative costs. Selling, general and administrative expenses of $4,775,000
for the first six months of 2007 decreased by $356,000 or 6.9%, and when
expressed as a percentage of net sales, increased 5.5 percentage points to
41.0%
compared to the first six months of 2006. The decrease in such expenses for
the
first six months of 2007 was due to lower commissions on the reduced sales
level
and lower marketing and administrative costs.
Research
and development expenses.
Research
and development expenses for new products were $361,000 for the second quarter
of 2007, a decrease of $155,000 or 30.1%, and when expressed as a percentage
of
net sales, decreased by 0.5 percentage points to 5.8% compared to the second
quarter of 2006. Except for $25,000 of expenses at FMI (a decrease of $7,000
from such FMI expenses in the second quarter of 2006) substantially all of
the
research and development expenses were related to Multi-Mix® Microtechnology
products. Research and development expenses for new products were $872,000
for
the first six months of 2007, a decrease of $16,000 or 1.9%, and when expressed
as a percentage of net sales, increased by 1.4 percentage points to 7.5%
compared to the first six months of 2006. Except for $52,000 of expenses at
FMI
(a decrease of $12,000 from such FMI expenses in the first six months of 2006)
substantially all of the research and development expenses were related to
Multi-Mix® Microtechnology products. The Company anticipates that these expenses
will increase in future periods in connection with implementation of our
strategic plan for Multi-Mix®.
Goodwill
impairment charge.
During
the quarter ended June 30, 2007, the Company conducted an interim goodwill
impairment test of its FMI reporting unit. This occurred as a result of FMI’s
failure to meet 2007 bookings and sales targets, which resulted in continuing
operating losses and a reduction of its bank borrowing availability. FMI’s
goodwill balance has increased since its acquisition in 1999 from the continued
strengthening of the Canadian dollar versus the U.S. dollar. During the first
six months of 2007, such goodwill amount increased $189,000 to $3,693,000
resulting from the Canadian dollar increase from $0.86 at December 30, 2006
to
$0.94 at the end of June. The stronger Canadian dollar has an unfavorable impact
on FMI’s cost structure and upon its U.S. dollar denominated export sales, which
were approximately 75% of FMI’s sales during the first six months of 2007. As a
result of the impairment test, the Company recorded a non-cash goodwill
impairment charge of $2,630,000 to the FMI reporting unit during
the quarter ended June 30, 2007. After
the
impairment charge, the remaining FMI goodwill balance is approximately
$1,063,000.
Operating
income (loss).
Consolidated
operating loss for the second quarter of 2007 was $2,892,000 compared to
consolidated operating income of $549,000 for the second quarter of 2006.
Consolidated operating loss for the second quarter of 2007 included
a
$2,630,000 non-cash charge related to a partial impairment of goodwill recorded
in connection with the Company’s 1999 acquisition of FMI. Excluding the
$2,630,000 goodwill impairment charge, the remaining operating
loss for the second quarter of 2007 was due to the lower gross profit caused
by
the decrease in sales, partially offset by decreased research and development
costs and administrative costs. The
higher consolidated operating income for the second quarter of 2006 was due
to
revenue recognized as a result of the early contract close out previously
mentioned.
Consolidated
operating loss for the first six months of 2007 was $4,113,000 compared to
consolidated operating income of $93,000 for the first six months of 2006.
Consolidated operating loss for the first six months of 2007 included
a
$2,630,000 non-cash charge related to a partial impairment of goodwill.
Excluding
the $2,630,000 impairment charge, the reduction in the remaining operating
income for the first six months of 2007 as compared to the first six months
of
2006 was due to the lower gross profit caused by the decrease in sales,
partially offset by decreased selling, general and administrative expenses
compared to the first six months of 2006.
For
the
second quarter of 2007, the Company's operating income for its electronic
components and subsystems segment was $55,000 compared to operating income
of
$697,000 for the second quarter of 2006. The operating income for the second
quarter of 2006 for the electronic components and subsystems segment was higher
due to
the
increase
in gross profit resulting from revenue recognized as a result of the early
contract close out mentioned above which did not recur in 2007. For the second
quarter of 2007, operating loss for the microwave micro-circuitry segment was
$2,947,000 compared to operating loss of $148,000 for the second quarter of
2005. The increased operating loss for the microwave micro-circuitry segment
was
due to
a
$2,630,000 non-cash charge related to a partial impairment of
goodwill.
For
the
first six months of 2007 the Company's operating loss for its electronic
components and subsystems segment was $949,000 compared to operating income
of
$70,000 for the first six months of 2006. The increased operating loss for
the
electronic components and subsystems segment was due to the segment’s lower
gross profit from lower sales, partially offset by decreased selling, general
and administrative as compared to the first six months of 2006. For the first
six months of 2007, operating loss for the microwave micro-circuitry segment
was
$3,164,000 compared to operating income of $23,000 for the first six months
of
2006. The increased operating loss for the microwave micro-circuitry segment
was
due to
a
$2,630,000 non-cash charge related to a partial impairment of goodwill and
from
the
segment’s lower gross profit from the lower sales level when compared to the
first six months of 2006.
Interest
and other expense, net.
Interest
and other expense, net was $71,000 for the second quarter of 2007 compared
to
interest and other expense, net of $33,000 for the first quarter of 2006.
Interest and other expense, net was $114,000 for the first six months of 2007
compared to interest and other expense, net of $52,000 for the first months
of
2006. Interest expense for the second quarter and first six months of 2007
and
2006 was principally incurred on borrowings under the term loans which the
Company consummated during the fourth quarter of 2003 and refinanced in October
2006. Interest expense for the second quarter and first six months of 2007
was
higher than the second quarter and first six months of 2006 due to the higher
debt levels following the refinancing of the term loans in October 2006.
Income
taxes.
The
current tax benefits for the quarter and six months ended July 1, 2006 represent
refundable Canadian tax credits for which FMI, as a technology company, has
qualified.
As
of
June 30, 2007, the Company has significant deferred tax assets resulting from
net operating loss carryforwards, tax credit carryforwards and deductible
temporary differences, which should reduce taxable income in future periods.
A
valuation allowance is required when management assesses that it is more likely
than not that all or a portion of a deferred tax asset will not be realized.
The
Company's 2002, 2003 and 2006 net losses have weighed heavily in the Company's
overall assessments. The Company established a full valuation allowance for
its
remaining U.S. net deferred tax assets as a result of its assessment at December
28, 2002. This assessment continued unchanged from 2003 through the first six
months of 2007. In 2006 the Company recorded additional valuation allowances
for
certain Canadian deferred tax assets of $427,000 because it believed that it
was
more likely than not that the deferred tax assets would not be realized. In
conjunction with the determination that goodwill was impaired, as described
in
Note 7, and the continuing losses at FMI, the Company established a full
valuation allowance of $506,000 during the second quarter of 2007 for its
remaining Canadian net deferred tax asset.
The
Code
Section 382 places a limitation on the utilization of net operating loss
carryforwards when an ownership change, as defined in the tax law, occurs.
Generally, an ownership change occurs when there is a greater than 50 percent
change in ownership. If such a change should occur, the actual utilization
of
net operating loss carryforwards, for tax purposes, would be limited annually
to
a percentage of the fair market value of the Company at the time of such change.
The Company may become subject to these limitations in 2007 depending on the
extent of the changes in its ownership.
Net
income (loss).
For
the
reasons set forth above, net loss for the second quarter of 2007 was $3,469,000
compared to net income of $529,000 for the second quarter of 2006. Net loss
per
share for the second quarter of 2007 was $1.19 compared to net income of $.17
per share for the second quarter of 2006. Net
loss
for the second quarter of 2007 includes a
non-cash income tax charge of $506,000 or $.17 per share to fully provide for
a
full valuation allowance against FMI’s deferred tax asset.
For
the
reasons set forth above, net loss for the first six months of 2007 was
$4,733,000 compared to net income of $89,000 for the first six months of 2006.
Net loss per share for the first six months of 2007 was $1.58 compared to net
income of $.03 per share for the six months of 2006. Net loss for the first
six
months of 2007 includes a
non-cash income tax charge of $506,000 or $.17 per share to fully provide for
a
full valuation allowance against FMI’s deferred tax asset.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had liquid resources comprised of cash and cash equivalents totaling
approximately $2,800,000 at the end of the second quarter of 2007 compared
to
approximately $6,000,000 at the end of 2006. The principal reasons for the
reduction in cash at June 30, 2007 was the repurchase, in a private transaction,
of 238,700 shares of its Common Stock for the treasury at $9.00 per share for
an
aggregate total of $2,148,300 from a group of investors on March 13, 2007,
capital expenditures of $927,000 which exceeded operating cash provided of
$177,000 and repayments of borrowings of $343,000. The Company's working capital
was approximately $9,900,000 and its current ratio was 3.6 to 1 at the end
of
the second quarter of 2007 compared to $13,300,000 and 4.9 to 1, respectively,
at the end of 2006. At June 30, 2007, the Company had available borrowing
capacity under its revolving line of credit of $3,100,000.
The
Company's operating activities provided operating cash flows of $177,000 during
the first six months of 2007 compared to generating $366,000 of operating cash
flows during the first six months of 2006. The primary sources of operating
cash
flows for the first six months of 2007 were the reduction of accounts receivable
of $685,000, a reduction of other current assets of $166,000, and an aggregate
increase in accounts payable, customer deposits and accrued liabilities of
$379,000 offset by the six-month net loss of $4,733,000 which was reduced by
depreciation and amortization of $1,292,000, the goodwill impairment charge
of
$2,630,000, the deferred tax charge of $506,000 and share-based compensation
of
$132,000, and an increase in inventories of $846,000. The primary sources of
operating cash flows for the first six months of 2006 were the net income of
$89,000 which was reduced by depreciation and amortization of $1,318,000 and
share-based compensation of $82,000 offset by increases in accounts receivable
of $174,000, inventory of $287,000 and an aggregate decrease in accounts
payable, customer deposits and accrued liabilities of $734,000.
The
Company made net cash investments in property, plant and equipment of $927,000
during the first six months of 2007 compared to net cash investments made in
property, plant and equipment of $979,000 during the first six months of 2006.
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® Microtechnology was $6,204,000 at the end of the
second quarter of 2007, a decrease of $543,000 compared to $6,747,000 at the
end
of fiscal year 2006.
The
Company’s planned equipment purchases and other commitments are expected to be
funded through cash resources and cash flows expected to be generated from
operations, and supplemented by the Company’s $5,000,000 revolving credit
facility, which expires October 18, 2008.
On
October 18, 2006, the Company entered into a financing agreement with North
Fork
Bank which consists of a two-year $5,000,000 revolving line of credit, a
five-year $2,000,000 machinery and equipment term loan due October 1, 2011
(“Term Loan”) and a ten-year $3,000,000 real estate term loan due October 1,
2016 (“Mortgage Loan”). This financing agreement replaced the prior financing
agreement with CIT. Completion of the financing agreement resulted in additional
cash loan proceeds of approximately $2,900,000 plus the release of previously
restricted cash of $1,500,000. The revolving line of credit is subject to an
availability limit under a borrowing base calculation (85% of eligible accounts
receivable plus up to 50% of eligible raw materials inventory plus up to 25%
of
eligible electronic components, with an inventory advance sublimit not to exceed
$1,500,000, as defined in the financing agreement). The revolving line of credit
expires October 18, 2008. At June 30, 2007, the Company had available borrowing
capacity under its revolving line of credit of $3,100,000. The revolving line
of
credit bears interest at the prime rate less 0.50% (currently 7.75%) or LIBOR
plus 2.00%. The principal amount of the Term Loan is payable in 59 equal monthly
installments of $33,333 and one final payment of the remaining principal balance
of $33,333. The Term Loan bears interest at the prime rate less 0.50% (currently
7.75%) or LIBOR plus 2.25%. The principal amount of the Mortgage Loan is payable
in 119 equal monthly installments of $12,500 and one final payment of the
remaining principal balance of $1,512,500. The Mortgage Loan bears interest
at
the prime rate less 0.50% (currently 7.75%) or LIBOR plus 2.25%. At June 30,
2007, the Company, under the terms of its agreement with North Fork Bank,
elected to convert $1,700,000 of the Term Loan and $2,875,000 of the Mortgage
Loan from their prime rate base to LIBOR-based interest rate loans for one
month
at an interest rate of 7.57%, which expired July 18, 2007. The revolving line
of
credit, the Term Loan and the Mortgage Loan are secured by substantially all
assets located within the United States and the pledge of 65% of the stock
of
the Company's subsidiaries located in Costa Rica and Canada. The provisions
of
the financing agreement require the Company to maintain certain financial
covenants.
North
Fork Bank and the Company amended the financing agreement, as of May 15, 2007,
which (i) eliminates the fixed charge coverage ratio covenant for the quarter
ending June 30, 2007, (ii) adds a covenant related to earnings before interest,
taxes, depreciation and amortization (“EBITDA”) for the four quarters ending
June 30, 2007 to require the Company to achieve a minimum level of EBITDA,
and
(iii) modifies the fixed charge coverage ratio covenant for periods after the
quarter ending June 30, 2007. The Company was in compliance with these amended
covenants at June 30, 2007.
On
August
9, 2007, North Fork Bank and Merrimac entered into a Pledge and Security
Agreement, under which North Fork Bank consented to the guaranty by Merrimac
of
FMI's borrowings under the revolving credit agreement with The Bank of Nova
Scotia in the amount of up to $250,000 (Canadian). In consideration for North
Fork Bank providing such consent, Merrimac agreed to deposit $250,000 into
a
controlled collateral account with North Fork Bank and also agreed to prepay
the
mortgage loan portion of the credit facility with North Fork Bank with fifty
percent of the proceeds from a sale of FMI up to a maximum amount of
$500,000.
FMI
has
an amended formula-based secured revolving credit agreement in place with The
Bank of Nova Scotia to borrow up to $250,000 (Canadian) (approximately $235,000
US) at the prime rate plus 2 percent. Such agreement is guaranteed by Merrimac.
No borrowings were outstanding under this agreement at June 30,
2007.
FMI
has a
$336,000 (Canadian) (approximately $310,000 US) revolving lease line with the
Bank of Nova Scotia, whereby the Company can obtain funding for previous
production equipment purchases via a sale/leaseback transaction. As of June
30,
2007, $310,000 had been utilized under this facility. The Bank of Nova Scotia
will not allow any new borrowings on this revolving lease line. Such leases
are
payable in monthly installments for up to five years and are secured by the
related production equipment. Interest rates (typically prime rate plus 2.25
percent) are set at the closing of each respective sale/leaseback transaction.
During the first quarter of 2006, FMI obtained $160,000 (US) in connection
with
the sale/leaseback of certain production equipment. The related equipment was
originally purchased by the Company in 2005.
Assets
securing capital leases included in property, plant and equipment, net, have
a
depreciated cost of approximately $694,000 (US) at June 30, 2007 and $703,000
(US) at December 30, 2006.
Depreciation
and amortization expenses exceeded capital expenditures for production equipment
during the first six months of 2007 by approximately $356,000, and the Company
anticipates that depreciation and amortization expenses will exceed capital
expenditures in fiscal year 2007 by approximately $300,000. The Company intends
to issue commitments to purchase $1,500,000 of capital equipment from various
vendors for the remainder of 2007. The Company anticipates that such equipment
will be purchased and become operational during the second half of 2007.
The
functional currency for the Company’s wholly-owned subsidiary FMI is the
Canadian dollar. The changes in accumulated other comprehensive income for
the
second quarter and first six months of 2007 and 2006 reflect the changes in
the
exchange rates between the Canadian dollar and the United States dollar for
those respective periods. The functional currency for the Company’s Costa Rica
operations is the United States dollar.
RECENT
ACCOUNTING PRONOUNCEMENTS
On
November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"),
"Transition Election Related to Accounting for the Tax Effects of Share-based
Payment Awards", that provides an elective alternative transition method of
calculating the pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R (the "APIC Pool") to the
method otherwise required by paragraph 81 of SFAS 123R. The Company elected
to
use the regular method to calculate the APIC pool. The regular method will
not have an impact on the Company's results of operations or financial
condition for the quarter and six months ended June 30, 2007, due to the fact
that the Company is currently using prior period net operating losses and has
not realized any tax benefits under SFAS 123R.
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109 “Accounting for Income Taxes”. FIN 48 prescribes a recognition
threshold and measurement of a tax position taken or expected to be taken in
a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted FIN 48 on December 31, 2006. The adoption
of FIN 48 did not have an impact on the opening retained earnings of the
Company.
ITEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For
quantitative and qualitative disclosures about the market risks affecting
Merrimac, see “Quantitative and Qualitative Disclosures about Market Risk” in
Item 7A of Part II of the Company’s Annual Report on Form 10-K for the fiscal
year ended December 30, 2006, which is incorporated herein by reference. Our
exposure to market risk has not changed materially since December 30, 2006.
ITEM
4.
CONTROLS AND PROCEDURES
As
of
June 30, 2007 (the end of the period covered by this report), the Company's
management carried out an evaluation, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of June
30, 2007, the Company's disclosure controls and procedures were effective.
In
designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934),
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving
the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We believe that our disclosure
controls and procedures provide such reasonable assurance.
No
change
occurred in the Company's internal controls concerning financial reporting
during the Company's second quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART
II
OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS.
Merrimac
is a party to lawsuits, arising in the normal course of business. It is the
opinion of Merrimac's management that the disposition of these various lawsuits
will not individually or in the aggregate have a material adverse effect on
the
consolidated financial position or the results of operations of
Merrimac.
ITEM
1A.
RISK FACTORS.
There
have been no material changes to our Risk Factors from those presented in our
Form 10-K for fiscal year 2006, except for certain updating changes to the
Risk
Factors “In future periods, we may be required to record an impairment charge
against goodwill under which would have a material adverse effect on our results
of operations”, section as presented below.
You
should carefully consider the matters, as revised, described below and in our
Form 10-K for 2006 before making an investment decision. The risks and
uncertainties described below are not the only ones facing our company. Our
business operations may be impaired by additional risks and uncertainties of
which we are unaware or that we currently consider immaterial.
Our
business, and the subsequent results of operations or cash flows may be
adversely affected if any of such risks actually occur. In such case, the
trading price of our common stock could decline, and you may lose part or all
of
your investment.
In
future periods, we may be required to record an impairment charge against
goodwill, which would have a material adverse effect on our results of
operations.
As
of
June 30, 2007, the Company had approximately $1,063,000 of goodwill on its
balance sheet. This amount represents the remaining excess of the total purchase
price of our acquisition of FMI over the fair value of net assets acquired.
During the second quarter of 2007 the Company incurred a goodwill impairment
charge of $2,630,000. If the Company is required to record additional impairment
charges related to goodwill, such charges would have the effect of decreasing
the Company’s earnings or increasing losses in such period. If Merrimac is
required to record an additional substantial goodwill impairment charge, net
income per share or net loss per share could be materially adversely affected
in
such period.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
June
20, 2007, the Company held its Annual Stockholders Meeting at which the
stockholders elected three members to the Company's Board of Directors. The
stockholders of the Company elected Edward H. Cohen, Arthur A. Oliner and Harold
J. Raveché as Class II Directors whose terms expire at the 2010 Annual
Meeting.
The
following sets forth the number of votes cast for, against or withheld, as
well
as the number of abstentions and broker non-votes, voted upon at the Company's
June 20, 2007 Annual Stockholders Meeting:
|
|
For
|
|
Withheld
|
|
Edward
H. Cohen
|
|
|
2,086,750
|
|
|
743,511
|
|
Arthur
A. Oliner
|
|
|
1,996,276
|
|
|
833,985
|
|
Harold
J. Raveché
|
|
|
2,096,102
|
|
|
734,159
|
|
Ratification
of J.H. Cohn LLP as the Company's independent registered public accounting
firm.
For
|
|
Against
|
|
Abstain
|
|
2,697,459
|
|
|
5,297
|
|
|
127,505
|
|
The
Company’s three Class III directors, Mason N. Carter, Albert H. Cohen and David
B. Miller and three Class I directors, Fernando L. Fernandez, Joel H. Goldberg
and Ludwig G. Kuttner, continued as directors after the Annual Stockholders
Meeting and are serving terms expiring at the time of the Company's annual
meetings in 2008 and 2009, respectively, and until their respective successors
have been duly elected and qualified.
ITEM
5.
OTHER MATTERS.
During
the quarter ended June 30, 2007, the Company initiated an interim goodwill
impairment test of its FMI reporting unit. This occurred as a result of FMI’s
failure to meet 2007 bookings and sales targets, which resulted in continuing
operating losses and a reduction of its bank borrowing availability. As a result
of the impairment test, the Company recorded a non-cash goodwill impairment
charge of $2,630,000 related to the Company’s FMI reporting unit for the quarter
ended June 30, 2007. This charge was approved by the Audit Committee of the
Company on August 9, 2007.
In
conjunction with the determination that goodwill was impaired and the continuing
losses at FMI, the Company established a full valuation allowance of $506,000
during the second quarter of 2007 for its Canadian net deferred tax asset as
management believed that it is more likely than not that its deferred tax asset
will not be realized.
Company
management has determined, and the Board of Directors has approved on August
9,
2007, that the Company should divest its FMI operations and is in the process
of
seeking interested parties. The
potential divestiture should enable Merrimac Industries, Inc. to concentrate
its
resources on RF Microwave and Multi-Mix® Microtechnology product lines to
generate sustainable, profitable growth. Beginning with the third quarter of
2007, the Company will reflect FMI as a discontinued operation and the Company
intends to restate prior financial statements to reflect the results of
operations, cash flows and financial position of FMI as discontinued operations.
As
described elsewhere in this Form 10-Q, on October 18, 2006, the Company entered
into a credit facility with North Fork Bank which consists of a two-year
$5,000,000 revolving line of credit, a five-year $2,000,000 machinery and
equipment term loan due October 1, 2011 and a ten-year
$3,000,000 real estate term loan due October 1, 2016. On August 9, 2007, North
Fork Bank and Merrimac entered into a Pledge and Security Agreement, under
which
North Fork Bank consented to the guaranty by Merrimac of FMI's borrowings under
the revolving credit agreement
with The Bank of Nova Scotia in the amount of up to $250,000 (Canadian). In
consideration for North Fork Bank providing such consent, Merrimac agreed to
deposit $250,000 into a controlled collateral account with North Fork Bank
and
also agreed to prepay the mortgage
loan portion of the credit facility with North Fork Bank with fifty percent
of
the proceeds from a sale of FMI up to a maximum amount of $500,000.
ITEM
6.
EXHIBITS
Exhibits:
EXHIBIT
NUMBER
|
|
DESCRIPTION
OF EXHIBIT
|
31.1+
|
|
Chief
Executive Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2+
|
|
Chief
Financial Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1+
|
|
Chief
Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2+
|
|
Chief
Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
+
Indicates that exhibit is filed as an exhibit hereto.
SIGNATURES
In
accordance with the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
|
|
MERRIMAC
INDUSTRIES, INC.
|
|
|
|
Date:
August 14, 2007 |
By: |
/s/
Mason N. Carter |
|
Mason
N. Carter
Chairman,
President and
Chief
Executive Officer
|
|
|
|
Date:
August 14, 2007 |
By: |
/s/
Robert V. Condon |
|
Robert
V. Condon
Vice
President, Finance and
Chief
Financial Officer
|