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 September 29, 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
Incorporation
or Organization)
|
|
(I.R.S.
Employer
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 ¨
Accelerated
filer ¨
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 ¨
No x
As
of
November 9, 2007, there were 2,926,033 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 (Loss) for the
Quarters
and Nine Months Ended September 29, 2007 and September 30, 2006
(Unaudited)
|
1
|
|
|
Consolidated
Balance Sheets-September 29, 2007 (Unaudited) and December 30,
2006
|
2
|
|
|
Consolidated
Statement of Stockholders’ Equity for the Nine Months Ended September 29,
2007 (Unaudited)
|
3
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 29,
2007 and
September 30, 2006 (Unaudited)
|
4
|
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
|
Item
2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
|
14
|
|
|
Item
3. Quantitative and Qualitative
Disclosures about Market Risk
|
24
|
|
|
Item
4T. Controls and Procedures
|
24
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
24
|
|
|
Item
1A. Risk Factors
|
24
|
|
|
Item
5. Other
Information
|
25
|
|
|
Item
6. Exhibits
|
26
|
|
|
Signatures
|
27
|
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
29,
2007
|
|
September
30,
2006
|
|
September
29,
2007
|
|
September
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
6,612,494
|
|
$
|
5,498,645
|
|
$
|
16,495,411
|
|
$
|
17,282,913
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
3,796,384
|
|
|
3,215,008
|
|
|
9,615,265
|
|
|
9,620,739
|
|
Selling,
general and administrative
|
|
|
2,099,038
|
|
|
2,221,596
|
|
|
6,292,769
|
|
|
6,706,503
|
|
Research
and development
|
|
|
399,980
|
|
|
578,511
|
|
|
1,219,487
|
|
|
1,402,141
|
|
|
|
|
6,295,402
|
|
|
6,015,115
|
|
|
17,127,521
|
|
|
17,729,383
|
|
Operating
income (loss)
|
|
|
317,092
|
|
|
(516,470
|
)
|
|
(632,110
|
)
|
|
(446,470
|
)
|
Interest
and other (expense) income, net
|
|
|
(72,196
|
)
|
|
52,640
|
|
|
(55,795
|
)
|
|
119,692
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
244,896
|
|
|
(463,830
|
)
|
|
(687,905
|
)
|
|
(326,778
|
)
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
244,896
|
|
|
(463,830
|
)
|
|
(687,905
|
)
|
|
(326,778
|
)
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations before income taxes
|
|
|
(1,472,457
|
)
|
|
(147,737
|
)
|
|
(4,766,381
|
)
|
|
(243,905
|
)
|
Writedown
of net assets held for sale to fair value
|
|
|
(585,884
|
)
|
|
-
|
|
|
(585,884
|
)
|
|
-
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
(13,000
|
)
|
|
506,000
|
|
|
(61,000
|
)
|
Loss
from discontinued operations
|
|
|
(2,058,341
|
)
|
|
(
134,737
|
)
|
|
(5,858,265
|
)
|
|
(182,905
|
)
|
Net
loss
|
|
$
|
(1,813,445
|
)
|
$
|
(598,567
|
)
|
$
|
(6,546,170
|
)
|
$
|
(509,683
|
)
|
Income
(loss) per common share from continuing operations - basic
|
|
$
|
.08
|
|
$
|
(.15
|
)
|
$
|
(.23
|
)
|
$
|
(.10
|
)
|
Loss
per common share from discontinued operations - basic
|
|
$
|
(.70
|
)
|
$
|
(.04
|
)
|
$
|
(1.97
|
)
|
$
|
(.06
|
)
|
Net
loss per common share - basic
|
|
$
|
(.62
|
)
|
$
|
(.19
|
)
|
$
|
(2.20
|
)
|
$
|
(.16
|
)
|
Income
(loss) per common share from continuing
operations - diluted
|
|
$
|
.08
|
|
$
|
(.15
|
)
|
$
|
(.23
|
)
|
$
|
(.10
|
)
|
Loss
per common share from discontinued operations - diluted
|
|
$
|
(.69
|
)
|
$
|
(.04
|
)
|
$
|
(1.97
|
)
|
$
|
|
)
|
Net
loss per common share - diluted
|
|
$
|
(.61
|
)
|
$
|
(.19
|
)
|
$
|
(2.20
|
)
|
$
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - basic
|
|
|
2,917,245
|
|
|
3,137,241
|
|
|
2,974,757
|
|
|
3,143,377
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
2,960,187
|
|
|
3,137,241
|
|
|
2,974,757
|
|
|
3,143,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,813,445 |
) |
$
|
(598,567
|
) |
|
(6,546,170
|
)
|
$
|
(509,683
|
)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
88,179
|
|
|
(2,318
|
)
|
|
456,693
|
|
|
316,529
|
|
Comprehensive
loss
|
|
$
|
(1,725,266
|
)
|
$
|
(600,885
|
)
|
$
|
(6,089,477
|
)
|
$
|
(193,154
|
)
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
September
29,
2007
|
|
December
30,
2006
|
|
|
|
(UNAUDITED)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,148,260
|
|
$
|
5,399,333
|
|
Accounts
receivable, net
|
|
|
6,517,573
|
|
|
5,132,319
|
|
Inventories,
net
|
|
|
4,481,851
|
|
|
3,740,317
|
|
Other
current assets
|
|
|
776,482
|
|
|
833,543
|
|
Current
assets held for sale
|
|
|
1,044,334
|
|
|
1,615,814
|
|
Total
current assets
|
|
|
13,968,500
|
|
|
16,721,326
|
|
Property,
plant and equipment
|
|
|
37,580,094
|
|
|
36,626,348
|
|
Less
accumulated depreciation and amortization
|
|
|
26,490,857
|
|
|
24,850,616
|
|
Property,
plant and equipment, net
|
|
|
11,089,237
|
|
|
11,775,732
|
|
Restricted
cash
|
|
|
250,000
|
|
|
-
|
|
Other
assets
|
|
|
499,305
|
|
|
491,596
|
|
Deferred
tax assets
|
|
|
100,000
|
|
|
100,000
|
|
Long-term
assets held for sale
|
|
|
793,192
|
|
|
5,164,852
|
|
Total
Assets
|
|
$
|
26,700,234
|
|
$
|
34,253,506
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
550,000
|
|
$
|
550,000
|
|
Accounts
payable
|
|
|
682,072
|
|
|
758,344
|
|
Accrued
liabilities
|
|
|
1,246,672
|
|
|
1,077,169
|
|
Customer
deposits
|
|
|
356,044
|
|
|
203,783
|
|
Deferred
income taxes
|
|
|
100,000
|
|
|
100,000
|
|
Current
liabilities related to assets held for sale
|
|
|
1,151,180
|
|
|
677,554
|
|
Total
current liabilities
|
|
|
4,085,968
|
|
|
3,366,850
|
|
Long-term
debt, net of current portion
|
|
|
3,900,000
|
|
|
4,312,500
|
|
Deferred
liabilities
|
|
|
55,434
|
|
|
37,839
|
|
Long-term
liabilities related to assets held for sale
|
|
|
236,346
|
|
|
251,540
|
|
Total
liabilities
|
|
|
8,277,748
|
|
|
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; 3,288,388 and 3,265,638 shares issued; and 2,925,483
and 3,141,433 shares outstanding, respectively
|
|
|
32,884
|
|
|
32,656
|
|
Additional
paid-in capital
|
|
|
19,612,388
|
|
|
19,237,130
|
|
Retained
earnings
|
|
|
53,647
|
|
|
6,599,817
|
|
Accumulated
other comprehensive income
|
|
|
1,845,731
|
|
|
1,389,038
|
|
|
|
|
21,544,650
|
|
|
27,258,641
|
|
Less
treasury stock, at cost - 362,905 shares at September 29, 2007
and 124,205
shares at December 30, 2006
|
|
|
(3,122,164
|
)
|
|
(973,864
|
)
|
Total
stockholders' equity
|
|
|
18,422,486
|
|
|
26,284,777
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
26,700,234
|
|
$
|
34,253,506
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
NINE
MONTHS ENDED SEPTEMBER 29, 2007
(UNAUDITED)
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Retained
|
|
Accumulated
Other Comprehensive
|
|
Treasury
Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital(A)
|
|
Earnings
|
|
Income
|
|
|
|
|
|
Total
|
|
|
|
|
3,265,638
|
|
$
|
32,656
|
|
$
|
19,237,130
|
|
$
|
6,599,817
|
|
$
|
1,389,038
|
|
|
124,205
|
|
$
|
(973,864
|
)
|
|
26,284,777
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(6,546,170
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,546,170
|
)
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
223,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,007
|
|
Stock
Purchase Plan sales
|
|
|
10,450
|
|
|
105
|
|
|
78,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456,693 |
|
|
|
|
|
|
|
|
456,693 |
|
Balance,
September 29, 2007
|
|
|
3,288,388
|
|
$
|
32,884
|
|
$
|
19,612,388
|
|
$
|
53,647
|
|
$
|
1,845,731
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
18,422,486
|
|
(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)
|
|
Nine
Months Ended
|
|
|
|
September
29,
2007
|
|
September
30,
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,546,170
|
)
|
$
|
(509,683
|
)
|
Less,
Loss from discontinued operations
|
|
|
(5,858,265
|
)
|
|
(182,905
|
)
|
Loss
from continuing operations
|
|
|
(687,905
|
)
|
|
(326,778
|
)
|
Adjustments
to reconcile net loss from continuing operations to net cash used
in
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,756,945
|
|
|
1,759,143
|
|
Amortization
of deferred financing costs
|
|
|
22,755
|
|
|
37,440
|
|
Share-based
compensation
|
|
|
223,037
|
|
|
138,461
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,385,254
|
)
|
|
(1,295,186
|
)
|
Inventories
|
|
|
(741,534
|
)
|
|
(515,381
|
)
|
Other
current assets
|
|
|
57,061
|
|
|
(31,981
|
)
|
Other
assets
|
|
|
(30,464
|
)
|
|
34,991
|
|
Accounts
payable
|
|
|
(76,272
|
)
|
|
(21,655
|
)
|
Accrued
liabilities
|
|
|
169,503
|
|
|
167,222
|
|
Customer
deposits
|
|
|
152,261
|
|
|
(669,152
|
)
|
Deferred
liabilities
|
|
|
17,595
|
|
|
15,692
|
|
Net
cash used in operating activities of continuing operations
|
|
|
(522,272
|
)
|
|
(707,184
|
)
|
Net
cash (used in) provided by operating activities of discontinued
operations
|
|
|
(363,141
|
)
|
|
276,892
|
|
Net
cash used in operating activities
|
|
|
(885,413
|
)
|
|
(430,292
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of capital assets
|
|
|
(1,070,450
|
)
|
|
(1,202,980
|
)
|
Net
cash used in investing activities of continuing operations
|
|
|
(1,070,450
|
)
|
|
(1,202,980
|
)
|
Net
cash used in investing activities of discontinued
operations
|
|
|
(
180,136
|
)
|
|
(44,767
|
)
|
Net
cash used in investing activities
|
|
|
(1,250,586
|
)
|
|
(1,247,747
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repurchase
of common stock for the treasury
|
|
|
(2,148,300
|
)
|
|
-
|
|
Repayment
of borrowings
|
|
|
(412,500
|
)
|
|
(519,641
|
)
|
Restricted
cash deposited
|
|
|
(250,000
|
)
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
73,800
|
|
|
15,650
|
|
Proceeds
from Stock Purchase Plan sales
|
|
|
78,649
|
|
|
184,251
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities of continuing operations
|
|
|
(2,658,351
|
)
|
|
(319,740
|
)
|
Net
cash used in financing activities of discontinued
operations
|
|
|
(51,783
|
)
|
|
(1,102
|
)
|
Net
cash used in financing activities
|
|
|
(2,710,134
|
)
|
|
(320,842
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
32,856
|
|
|
32,588
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(4,813,277
|
)
|
|
(1,966,293
|
)
|
Cash
and cash equivalents at beginning of period, including $562,205
and
$422,960 reported under assets held for sale
|
|
|
5,961,537
|
|
|
4,081,330
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period including $0 and $686,571
reported
under assets held for sale
|
|
$
|
1,148,260
|
|
$
|
2,115,037
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
on credit facilities
|
|
$
|
272,644
|
|
$
|
179,702
|
|
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 September 29, 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.
In
accordance with the provisions of Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS
No. 144), the assets and liabilities relating to Filtran Microcircuits Inc.
(“FMI”) currently being held for sale have been reclassified as held for sale in
the consolidated balance sheets for all periods presented and the results
of
operations of FMI for the current and prior periods have been reported as
discontinued operations.
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.
DISCONTINUED OPERATIONS
Company
management determined, and the Board of Directors approved on August 9, 2007,
that the Company should divest its FMI operations and is in the process of
seeking interested parties to purchase FMI. The potential divestiture should
enable Merrimac 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 reflects FMI as a
discontinued operation and the Company reclassified prior financial statements
to reflect the results of operations, cash flows and financial position of
FMI
as discontinued operations.
Operating
results of FMI, which were formerly represented as Merrimac’s microwave
micro-circuitry segment are
summarized as follows:
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
29,
2007
|
|
September
30,
2006
|
|
September
29,
2007
|
|
September
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,003,317
|
|
$
|
1,256,286
|
|
$
|
2,824,301
|
|
$
|
4,082,344
|
|
Loss
before provision (benefit) for income taxes
|
|
|
(1,472,457
|
)
|
|
(147,737
|
)
|
|
(4,766,381
|
)
|
|
(243,905
|
)
|
Writedown
of net assets held for sale to fair value
|
|
|
(585,884
|
)
|
|
-
|
|
|
(585,884
|
)
|
|
-
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
(13,000
|
)
|
|
506,000
|
|
|
(61,000
|
)
|
Net
loss
|
|
$
|
(2,058,341
|
)
|
$
|
(134,737
|
)
|
$
|
(5,858,265
|
)
|
$
|
(182,905
|
)
|
3. ASSETS
HELD FOR SALE
The
assets and liabilities relating to FMI have been reclassified as held for
sale
in the accompanying consolidated balance sheets. Merrimac has estimated the
fair
value of the net assets of FMI to be sold to be $450,000 based upon preliminary
sales negotiations. Loss from discontinued operations includes goodwill
impairment charges of $3,756,000 and a charge of $506,000 to provide a full
valuation allowance for a Canadian net deferred tax asset.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
the
event a sales agreement cannot be concluded, FMI will be in violation of
its
credit facility covenants and its line of credit will be terminated. If the
line
of credit is terminated, FMI likely will be forced to file for bankruptcy
protection and begin liquidation proceedings.
The
assets and liabilities relating to Filtran are summarized as
follows:
|
|
September
29,
2007
|
|
December
30,
2006
|
|
Cash
|
|
$
|
-
|
|
$
|
562,204
|
|
Accounts
receivable
|
|
|
639,954
|
|
|
719,298
|
|
Inventories
|
|
|
251,789
|
|
|
177,156
|
|
Other
current assets
|
|
|
152,591
|
|
|
157,156
|
|
Current
assets held for sale
|
|
|
1,044,334
|
|
|
1,615,814
|
|
Property,
plant and equipment, net
|
|
|
793,192
|
|
|
1,209,633
|
|
Goodwill
|
|
|
-
|
|
|
3,503,219
|
|
Deferred
income taxes
|
|
|
-
|
|
|
452,000
|
|
Long-term
assets held for sale
|
|
|
793,192
|
|
|
5,164,852
|
|
Assets
held for sale
|
|
$
|
1,837,526
|
|
$
|
6,780,666
|
|
Current
liabilities
|
|
$
|
1,151,180
|
|
$
|
677,554
|
|
Long-term
debt
|
|
|
236,346
|
|
|
251,540
|
|
Liabilities
related to assets held for sale
|
|
$
|
1,387,526
|
|
$
|
929,094
|
|
4.
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. No revenue was recognized related
to
cost-reimbursement contracts during the third quarter and first nine months
of
2007. The Company recognized $482,000 and $732,000 of revenue related to
cost
reimbursement contracts during the third quarter and first nine months of
2006,
respectively.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
5.
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.
6.
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 September 29, 2007 and December
30,
2006 was attributable solely to the effects of foreign currency
translation.
7.
RECENT
ACCOUNTING PRONOUNCEMENTS
On
November 10, 2005, the Financial Accounting Standards Board (“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
nine
months ended September 29, 2007, due to the fact that the Company currently
has
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.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 “Fair Value Measurements”. SFAS No. 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value and
requires additional disclosures about fair-value measurements. SFAS No. 157
applies only to fair-value measurements that are already required or permitted
by other accounting standards and is expected to increase the consistency
of
those measurements. It will also affect current practices by nullifying Emerging
Issues Task Force guidance that prohibited recognition of gains or losses
at the
inception of derivative transactions whose fair value is estimated by applying
a
model and by eliminating the use of “blockage” factors by brokers, dealers and
investment companies that have been
applying
AICPA Guides. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact that SFAS
No.
157 will have on its financial position and results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
No. 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items
for
which the fair value option has been elected are reported in net income.
SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The Company is currently evaluating
the impact that SFAS No. 159 will have on its financial position and results
of
operations.
8.
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.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September 29, 2007 and September 30, 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
|
|
Nine
Months Ended
|
|
|
|
September
29, 2007
|
|
September
30, 2006
|
|
September
29, 2007
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
25,000
|
|
$
|
8,000
|
|
$
|
54,000
|
|
$
|
23,000
|
|
Selling,
general and administrative
|
|
|
66,000
|
|
|
49,000
|
|
|
169,000
|
|
|
115,000
|
|
Total
share-based compensation
|
|
$
|
91,000
|
|
$
|
57,000
|
|
$
|
223,000
|
|
$
|
138,000
|
|
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 nine months ended
September 29, 2007 and September 30, 2006 were utilized:
|
|
2007
|
|
2006
|
|
Expected
option life (years)
|
|
|
3.0
|
|
|
2.9
|
|
Expected
volatility
|
|
|
22.00
|
%
|
|
31.00
|
%
|
Risk-free
interest rate
|
|
|
4.93
|
%
|
|
5.15
|
%
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Fair
value per share of options granted
|
|
$
|
2.02
|
|
$
|
2.63
|
|
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.
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
September 29, 2007, there were 341,000 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 159,000 at September
29, 2007.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
At
September 29, 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
September 29, 2007, there were 265,242 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
|
|
|
9.36
|
|
|
255,500
|
|
|
|
|
|
|
|
Exercised
|
|
|
7.94
|
|
|
(9,300
|
)
|
|
|
|
|
|
|
Cancelled
|
|
|
12.55
|
|
|
(47,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 29, 2007.
|
|
$
|
9.31
|
|
|
606,242
|
|
|
7.0
|
|
$
|
597,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 29, 2007.
|
|
$
|
9.22
|
|
|
292,742
|
|
|
4.4
|
|
$
|
436,000
|
|
No
options were exercised during the quarter ended September 29, 2007. The total
intrinsic value of options exercised for the quarter ended September 30, 2006
was $1,000. The total intrinsic value of options exercised for the nine-month
periods ended September 29, 2007 and September 30, 2006 was $16,000 and $5,000,
respectively.
The
total
fair value of options granted for the quarter ended September 29, 2007 was
approximately $20,000. The total fair value of options granted for the nine
months ended September 29, 2007 was approximately $517,000. No options were
granted for the quarter ended September 30, 2006. The total fair value of
options granted for the nine months ended September 30, 2006 was approximately
$212,000.
As
of
September 29, 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 $620,000. Of that total, $72,000, $275,000, $204,000
and $69,000 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.
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 nine
months ended September 29, 2007 related to the grant of restricted stock was
approximately $16,000 and $33,000, which was based on a straight-line
amortization. Share-based compensation expense for the quarter and nine months
ended September 30, 2006 related to the grant of restricted stock was
approximately $7,000 and $10,000, respectively. Restricted shares of common
stock available for grant under the 2006 Non-Employee Directors’ Stock Plan were
80,500 at September 29, 2007.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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 September 29, 2007
|
|
$
|
9.69
|
|
|
16,500
|
|
9.
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:
|
|
September
29,
2007
|
|
December
30,
2006
|
|
Finished
goods
|
|
$
|
40,619
|
|
$
|
345,519
|
|
Work
in process
|
|
|
2,241,368
|
|
|
1,539,645
|
|
Raw
materials and purchased parts
|
|
|
2,199,864
|
|
|
1,855,153
|
|
Total
|
|
$
|
4,481,851
|
|
$
|
3,740,317
|
|
Total
inventories are net of valuation allowances for obsolescence and cost overruns
of $1,553,000 at September 29, 2007 and $1,172,000 at December 30, 2006. The
Company recorded provisions for obsolescence and cost overruns of $47,000 and
$30,000 for the quarters ended September 29, 2007 and September 30, 2006,
respectively, and $223,000 and $131,000 for the nine months ended September
29,
2007 and September 30, 2006, respectively.
10.
CURRENT AND LONG-TERM DEBT
The
Company was obligated under the following debt instruments at September 29,
2007
and December 30, 2006:
|
|
2007
|
|
2006
|
|
North
Fork Bank:
|
|
|
|
|
|
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
|
|
|
1,600,000
|
|
|
1,900,000
|
|
Mortgage
loan, due October 1, 2016, 2.25% above LIBOR or 0.50% below
prime
|
|
|
2,850,000
|
|
|
2,962,500
|
|
|
|
|
4,450,000
|
|
|
4,862,500
|
|
Less
current portion
|
|
|
550,000
|
|
|
550,000
|
|
Long-term
portion
|
|
$
|
3,900,000
|
|
$
|
4,312,500
|
|
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 September 29, 2007, the Company had available
borrowing capacity under its revolving line of credit of $4,600,000. The
revolving line of credit bears interest at the prime rate less 0.50% (currently
7.00%) 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 7.00%) 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 7.00%) or LIBOR
plus
2.25%. At September 29, 2007, the Company, under the terms of its agreement
with
North Fork Bank, elected to convert $1,500,000 of the Term Loan and $2,800,000
of the Mortgage Loan from their prime rate base to LIBOR-based interest rate
loans for six months at an interest rate of 7.6325%, which expires January
18,
2008 and $100,000 of the term loan for three months at an interest rate of
7.61%, which expired October 18, 2007. Interest expense on the above borrowings
were $98,000 and $73,000 for the quarters ended September 29, 2007 and September
30, 2006, respectively. Interest expense on the above borrowings were $295,000
and $217,000 for the nine-month periods ended September 29, 2007 and September
30, 2006, respectively. 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) eliminated the fixed charge coverage ratio covenant for the quarter
ended June 30, 2007, (ii) added a covenant related to earnings before interest,
taxes, depreciation and amortization (“EBITDA”) for the four quarters ended June
30, 2007 to require the Company to achieve a minimum level of EBITDA, and (iii)
modified the fixed charge coverage ratio covenant for periods after the quarter
ending September 29, 2007. The Company was in compliance with these amended
covenants at September 29, 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 deposited $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
3).
11.
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
$57,000 and $30,000 for the quarters ended September 29, 2007 and September
30,
2006, respectively, and $136,000 and $131,000 for the nine months ended
September 29, 2007 and September 30, 2006, respectively. The warranty reserve
at
September 29, 2007 and December 30, 2006 was $200,000.
12.
INCOME TAXES
As
of
September 29, 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,
2006 and 2007 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 nine
months of 2007.
Internal
Revenue Service 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.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
13.
BUSINESS SEGMENT DATA
The
Company's continuing operations are conducted primarily through one business
segment, electronic components and subsystems. This segment involves the design,
manufacture and sale of electronic component devices offering extremely broad
frequency coverage and high performance characteristics for communications,
defense and aerospace applications. Of the identifiable assets, 85% are located
in the United States and 15% are located in Costa Rica.
14.
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
(loss) per share:
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
29,
|
|
September
30,
|
|
September
29,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income (loss) available to common stockholders
|
|
$
|
(1,813,445
|
)
|
$
|
(598,567
|
)
|
$
|
(6,546,170
|
)
|
$
|
(509,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for basic net income (loss)
per
share-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,917,245
|
|
|
3,137,241
|
|
|
2,974,757
|
|
|
3,143,377
|
|
Net
income (loss) per common share - basic
|
|
$
|
(.62
|
)
|
$
|
(.19
|
)
|
$
|
(2.20
|
)
|
$
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for diluted net income (loss)
per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,917,245
|
|
|
3,137,241
|
|
|
2,974,757
|
|
|
3,143,377
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options (1)
|
|
|
42,942
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for diluted net income (loss)
per
share
|
|
|
2,960,187
|
|
|
3,137,241
|
|
|
2,974,757
|
|
|
3,143,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - diluted
|
|
$
|
(.61
|
)
|
$
|
(.19
|
)
|
$
|
(2.20
|
)
|
$
|
(.16
|
)
|
(1)
|
Represents
additional shares resulting from assumed conversion of stock options
less
shares purchased with the proceeds
therefrom.
|
|
Because
of the loss from continuing operations for the nine months ended September
29, 2007 and for the quarter and nine months ended September 30, 2006,
approximately 606,000, 464,000 and 464,000 shares underlying stock
options, respectively, were excluded from the calculation of diluted
net income (loss) per share as the effect would be
anti-dilutive. |
15.
RELATED PARTY TRANSACTIONS
During
the third quarter and first nine months of 2007, the Company's outside general
counsel Katten Muchin Rosenman LLP was paid $78,000 and $274,000, respectively,
for providing legal services to the Company. During the third quarter and first
nine months of 2006, Katten Muchin Rosenman LLP was paid $130,000 and $317,000,
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 $11,000 and $32,000 to these companies during
the
third quarter and first nine months of 2007, respectively. The Company paid
an
aggregate of $4,000 and $10,000 to these companies during the third quarter
and
first nine months of 2006, respectively. A director of the Company is the
chairman and chief executive officer of these companies.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
During
the third quarter and first nine months of 2007, a director of the Company
was
paid $9,000 and $27,000, respectively, for providing technology-related
consulting services to the Company. For the third quarter and first nine months
of 2006, such director was paid $9,000 and $27,000, respectively.
The
Company has an agreement with DuPont Electronic Technologies (“DuPont”), a
stockholder and the employer of a director, 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 third quarter and first nine months of 2007. During the third
quarter and first nine months of 2006, DuPont was paid $4,000 and $31,000,
respectively. 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.
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.
16.
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.
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 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; 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
Continuing
operations.
Merrimac
is a leader in the design and manufacture of active and passive RF (Radio
Frequency) and microwave components and integrated multifunction assemblies
for
industry, government, and science. Merrimac components and integrated assemblies
are found in applications as diverse as satellites, military and commercial
aircraft, radar, cellular radio systems, medical and dental diagnostic
instruments, personal communications systems ("PCS") and wireless internet
connectivity. The Company's operations are conducted primarily through a single
business segment, electronic components and subsystems.
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'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.
Improved
orders from earlier in 2007 provided the increase in sales during the third
quarter of 2007 compared to the third quarter of 2006, particularly sales of
Multi-Mix® products to the defense industry. The increased gross profit from the
higher sales level, along with lower operating and research and development
expenses resulted in operating income for the third quarter of 2007. Orders
of
$21,768,000 received during the first nine months of 2007 were a Company record.
Backlog increased by $5,272,000 or 45.9% to $16,762,000 at the end of the third
quarter of 2007 from the end of 2006. The September 29, 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 $600,000. The Company
intends to issue commitments to purchase $700,000 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 fourth quarter
of
2007 and early 2008. 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 orders from its defense and satellite customers will be higher during
fiscal year 2007 as compared to fiscal year 2006. 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’s orders during fiscal year 2007 for its Multi-Mix®
Microtechnology products have exceeded 2006 levels. The Company anticipates
orders for all its product lines to increase in the first quarter of 2008 as
compared to the first quarter of 2007, based on inquiries from existing
customers, requests to quote from prospective and existing customers and market
research.
Discontinued
operations.
Established
in 1983, and acquired by Merrimac in February 1999, Filtran Microcircuits Inc.
(“FMI”) is a manufacturer of microwave micro-circuitry for the high frequency
communications industry. FMI produces microstrip, bonded stripline, and thick
metal-backed Teflon® (PTFE) microcircuits for RF applications including
satellite, aerospace, PCS, fiber optic telecommunications, automotive,
navigational and defense applications worldwide. FMI participates in the market
for millimeter-wave applications. FMI also supplies mixed dielectric multilayer
and high speed interconnect circuitry to meet customer demand for high
performance and cost-effective packaging.
Company
management determined, and the Board of Directors approved on August 9, 2007,
that the Company should divest its FMI operations and is in the process of
seeking interested parties to purchase FMI. The potential divestiture should
enable Merrimac 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 reflects FMI as a
discontinued operation and the Company reclassified prior financial statements
to reflect the results of operations, cash flows and financial position of
FMI
as discontinued operations.
Operating
results of FMI, which were formerly represented as Merrimac’s microwave
micro-circuitry segment are
summarized as follows:
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September 29, 2007
|
|
September
30, 2006
|
|
September
29, 2007
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,003,000
|
|
$
|
1,256,000
|
|
$
|
2,824,000
|
|
$
|
4,082,000
|
|
Loss
before provision (benefit) for income taxes
|
|
|
(1,472,000
|
)
|
|
(148,000
|
)
|
|
(4,766,000
|
)
|
|
(244,000
|
)
|
Writedown
of net assets held for sale to fair value
|
|
|
(586,000
|
)
|
|
-
|
|
|
(586,000
|
)
|
|
-
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
(13,000
|
)
|
|
506,000
|
|
|
(61,000
|
)
|
Net
loss
|
|
$
|
(2,058,000
|
)
|
$
|
(135,000
|
)
|
$
|
(5,858,000
|
)
|
$
|
(183,000
|
)
|
The
assets and liabilities relating to FMI to be sold have been reclassified as
held
for sale in the accompanying consolidated balance sheets. Merrimac has estimated
the fair value of the net assets of FMI to be sold to be $450,000 based upon
preliminary sales negotiations. Loss from discontinued operations includes
goodwill impairment charges of $3,756,000 and a charge of $506,000 to provide
a
full valuation allowance for a Canadian net deferred tax asset.
In
the
event a sales agreement cannot be concluded, FMI will be in violation of its
credit facility covenants and its line of credit will be terminated. If the
line
of credit is terminated, FMI likely will be forced to file for bankruptcy
protection and begin liquidation proceedings.
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 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 September
29, 2007 and the related future planned purchases and lease obligation
commitments through January 2011.
Net
assets:
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
14,928,000
|
|
Less
accumulated depreciation and amortization
|
|
|
9,098,000
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
5,830,000
|
|
Inventories
|
|
|
563,000
|
|
Other
assets, net
|
|
|
146,000
|
|
|
|
|
|
|
Total
net assets at September 29, 2007
|
|
|
6,539,000
|
|
|
|
|
|
|
Commitments:
|
|
|
|
|
Planned
equipment purchases for the remainder of 2007
|
|
|
525,000
|
|
Lease
obligations through January 2011
|
|
|
640,000
|
|
|
|
|
|
|
Total
commitments
|
|
|
1,165,000
|
|
|
|
|
|
|
Total
net assets and commitments
|
|
$
|
7,704,000
|
|
Approximately
36% 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 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. No revenue was recognized related
to
cost-reimbursement contracts during the third quarter and first nine months
of
2007. The Company recognized $482,000 and $732,000 of revenue related to cost
reimbursement contracts during the third quarter and first nine months of 2006,
respectively.
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 $1,553,000 at September 29,
2007 and $1,172,000 at December 30, 2006. The Company recorded provisions for
obsolescence and cost overruns of $47,000 and $30,000 for the quarters ended
September 29, 2007 and September 30, 2006, respectively, and $223,000 and
$131,000 for the nine months ended September 29, 2007 and September 30, 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 may not be returned to the vendor or charged
back
to the customer.
|
Valuation
of Deferred Tax Assets
As
of
September 29, 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,
2006 and 2007 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 nine
months of 2007.
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
|
|
Nine
Months Ended
|
|
|
|
September
29,
|
|
September
30,
|
|
September
29,
|
|
September
30,
|
|
Continuing
operations
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
57.4
|
|
|
58.5
|
|
|
58.3
|
|
|
55.7
|
|
Selling,
general and administrative
|
|
|
31.7
|
|
|
40.4
|
|
|
38.1
|
|
|
38.8
|
|
Research
and development
|
|
|
6.1
|
|
|
10.5
|
|
|
7.4
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95.2
|
|
|
109.4
|
|
|
103.8
|
|
|
102.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
4.8
|
|
|
(9.4
|
)
|
|
(3.8
|
)
|
|
(2.6
|
)
|
Interest
and other (expense) income, net
|
|
|
(1.1
|
)
|
|
1.0
|
|
|
(0.4
|
)
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
3.7
|
|
|
(8.4
|
)
|
|
(4.2
|
)
|
|
(1.9
|
)
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
3.7
|
|
|
(8.4
|
)
|
|
(4.2
|
)
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations before income taxes
|
|
|
(22.3
|
)
|
|
(2.7
|
)
|
|
(28.9
|
)
|
|
(1.4
|
)
|
Writedown
of net assets held for sale to fair value
|
|
|
(8.8
|
)
|
|
-
|
|
|
(3.6
|
)
|
|
-
|
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
(0.2
|
)
|
|
3.0
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(31.1
|
)
|
|
(2.5
|
)
|
|
(35.5
|
)
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(27.4
|
)%
|
|
(10.9
|
)%
|
|
(39.7
|
)%
|
|
(2.9
|
)%
|
THIRD
QUARTER AND FIRST NINE MONTHS OF 2007 COMPARED TO THE THIRD QUARTER AND FIRST
NINE MONTHS OF 2006-CONTINUING OPERATIONS
Net
sales.
Net
sales
from continuing operations for the third quarter of 2007 were $6,612,000, an
increase of $1,113,000 or 20.2 percent compared to the third quarter of 2006
net
sales of $5,499,000. Net sales from continuing operations increased due to
the
higher level of orders received earlier in 2007 including higher sales of
Multi-Mix® products to the defense industry.
Net
sales
from continuing operations for the first nine months of 2007 were $16,495,000,
a
decrease of $788,000 or 4.6 percent compared to net sales of $17,283,000 for
the
first nine months of 2006. Net sales from continuing operations for the first
nine 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 which did not recur
in the first nine months of 2007.
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 nine months ended September 29, 2007 and September
30,
2006:
|
|
2007
|
|
2006
|
|
Beginning
backlog
|
|
$
|
11,490,000
|
|
$
|
12,049,000
|
|
Plus
orders
|
|
|
21,767,000
|
|
|
15,307,000
|
|
Less
net sales
|
|
|
16,495,000
|
|
|
17,283,000
|
|
Ending
backlog
|
|
$
|
16,762,000
|
|
$
|
10,073,000
|
|
Book-to-bill
ratio
|
|
|
1.32
|
|
|
0.89
|
|
Orders
of
$7,028,000 were received during the third quarter of 2007, an increase of
$1,985,000 or 39.4% compared to $5,043,000 in orders received during the third
quarter of 2006. Orders of $21,767,000 were received during the first nine
months of 2007, an increase of $6,460,000 or 42.2% compared to $15,307,000
in
orders received during the first nine months of 2006. Backlog increased by
$5,272,000 or 45.9% to $16,762,000 at the end of the third quarter of 2007
compared to $11,490,000 at year-end 2006, due to the increased orders received
during the first nine months. The book-to-bill ratio for the third quarter
of
2007 was 1.06 to 1 and for the third quarter of 2006 was 0.92 to 1. The
book-to-bill ratio for the first nine months of 2007 was 1.32 to 1 and for
the
first nine months of 2006 was 0.89 to 1. The orders, backlog and book-to-bill
information for the current and prior periods exclude FMI
information.
Cost
of sales and Gross profit.
The
following table provides comparative gross profit information between the
quarters and nine months ended September 29, 2007 and September 30,
2006.
|
|
Quarter
ended September 29, 2007
|
|
|
Quarter
ended September 30, 2006
|
|
|
|
$
|
|
Increase/ (Decrease) from
prior period
|
|
%
of Net
Sales
|
|
|
$
|
|
Increase/ (Decrease) from
prior period
|
|
%
of Net
Sales
|
|
Consolidated
gross
profit
|
|
$
|
2,816,000
|
|
$
|
532,000
|
|
|
42.6
|
%
|
|
$
|
2,284,000
|
|
$
|
(424,000
|
)
|
|
41.5
|
%
|
|
|
Nine
Months ended September 29, 2007
|
|
|
Nine
Months ended September 30, 2006
|
|
|
|
$
|
|
Increase/ (Decrease) from
prior period
|
|
%
of Net
Sales
|
|
|
$
|
|
Increase/ (Decrease) from
prior period
|
|
%
of
Net
Sales
|
|
Consolidated
gross
profit
|
|
$
|
6,880,000
|
|
$
|
(782,000
|
)
|
|
41.7
|
%
|
|
$
|
7,662,000
|
|
$
|
(490,000
|
)
|
|
44.3
|
%
|
The
increase in consolidated gross profit and consolidated gross profit percentage
for the third quarter of 2007 was due to the impact of the higher level of
sales
allowing the Company to absorb fixed manufacturing costs.
The
decrease in consolidated gross profit and consolidated gross profit percentage
for the first nine months of 2007 was due to the impact of the lower level
of
sales having to absorb fixed manufacturing costs. Consolidated gross profit
for
the first nine months of 2006 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 third quarter of 2007
was
$554,000, an increase of $24,000 compared to the third quarter of 2006.
Depreciation expense included in consolidated cost of sales for the first nine
months of 2007 was $1,623,000, the same as the first nine months of 2006. For
the third quarter and first nine months of 2007, approximately $393,000 and
$1,150,000, respectively, of depreciation expense was associated with Multi-Mix®
Microtechnology capital assets. For the third quarter and first nine months
of
2006, approximately $373,000 and $1,118,000, respectively of depreciation
expense was associated with Multi-Mix® Microtechnology capital
assets.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses of $2,099,000 for the third quarter of
2007
decreased by $123,000 or 5.5%, and when expressed as a percentage of net sales,
decreased by 8.7 percentage points to 31.7% compared to the third quarter of
2006. The decrease in such expenses for the third quarter of 2007 was due to
lower commissions and lower marketing and administrative costs. Selling, general
and administrative expenses of $6,293,000 for the first nine months of 2007
decreased by $414,000 or 6.2%, and when expressed as a percentage of net sales,
decreased 0.7 percentage points to 38.1% compared to the first nine months
of
2006. The decrease in such expenses for the first nine 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 $400,000 for the third quarter
of
2007, a decrease of $178,000 or 30.9%, and when expressed as a percentage of
net
sales, decreased by 4.4 percentage points to 6.1% compared to the third 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 $1,219,000 for the first nine months of 2007, a decrease
of
$183,000 or 13.1%, and when expressed as a percentage of net sales, decreased
by
0.7 percentage points to 7.4% compared to the first nine 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®.
Operating
income (loss) from continuing operations.
Operating
income from continuing operations for the third quarter of 2007 was $317,000,
compared to an operating loss from continuing operations of $516,000 for the
third quarter of 2006. The
increase in operating income from continuing operations for the third quarter
of
2007 as compared to the third quarter of 2006 was due to the improved gross
profit caused by the increase in sales, in addition to lower commissions,
administrative expenses and research and development costs as compared to the
third quarter of 2006.
Operating
loss from continuing operations for the first nine months of 2007 was $632,000
compared to an operating loss from continuing operations for the first nine
months of 2006 of $446,000. The
increase in the operating loss from continuing operations for the first nine
months of 2007 as compared to the first nine months of 2006 was due to the
lower
gross profit caused by the decrease in sales, partially offset by decreased
commissions, administrative expenses and research and development costs compared
to the first nine months of 2006.
Interest
and other (expense) income, net.
Interest
and other (expense) income, net was $(72,000) for the third quarter of 2007
compared to interest and other (expense) income, net of $53,000 for the third
quarter of 2006. Interest and other (expense) income, net was $(56,000) for
the
first nine months of 2007 compared to interest and other (expense) income,
net
of $119,000 for the first nine months of 2006. Interest expense for the third
quarter and first nine months of 2007 and 2006 was principally incurred on
borrowings under the term loans which the Company entered into during the fourth
quarter of 2003 and refinanced in October 2006. Interest expense for the third
quarter and first nine months of 2007 was higher than the third quarter and
first nine months of 2006 due to the higher debt levels following the
refinancing of the term loans in October 2006.
Income
taxes.
As
of
September 29, 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,
2006 and 2007 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 nine
months of 2007.
Internal
Revenue Service 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.
Income
(loss) from continuing operations.
For
the
reasons set forth above, income from continuing operations for the third quarter
of 2007 was $245,000 compared to a loss from continuing operations of $464,000
for the third quarter of 2006. Income per diluted share from continuing
operations for the third quarter of 2007 was $.08 compared to a loss from
continuing operations of $.15 per share for the third quarter of
2006.
For
the
reasons set forth above, loss from continuing operations for the first nine
months of 2007 was $688,000 compared to a loss from continuing operations of
$327,000 for the first nine months of 2006. Loss from continuing operations
per
share for the first nine months of 2007 was $.23 compared to a loss from
continuing operations of $.10 per share for the first nine months of 2006.
Discontinued
operations.
In
the
third quarter of 2007, the Company recorded an impairment charge for the
remaining FMI goodwill balance of $1,126,000, and wrote down the remaining
net
assets of FMI by $586,000 to a fair value of $450,000. Loss from discontinued
operations for the third quarter of 2007 and 2006 includes depreciation expense
of $73,000 and $63,000, respectively.
Loss
from
discontinued operations for the third quarter of 2007 was $2,058,000 compared
to
a loss from discontinued operations of $135,000 for the third quarter of 2006.
Loss per basic share from discontinued operations for the third quarter of
2007
was $.70 and $.69 per diluted share compared to a loss from discontinued
operations of $.04 per share for the third quarter of 2006.
Loss
from
discontinued operations for the first nine months of 2007 includes goodwill
impairment charges of $3,756,000 and a charge of $506,000 to provide a full
valuation allowance for a Canadian net deferred tax asset. Also included in
the
loss from discontinued operations for the first nine months of 2007 was a
$586,000 charge for the write down of the remaining FMI net assets to an
estimated net realizable value of $450,000. Loss from discontinued operations
for the first nine months of 2007 and 2006 includes depreciation expense of
$207,000 and $196,000, respectively.
Loss
from
discontinued operations for the first nine months of 2007 was $5,858,000
compared to a loss from discontinued operations of $183,000 for the first nine
months of 2006. Loss from discontinued operations per share for the first nine
months of 2007 was $1.97 compared to a loss from discontinued operations of
$.06 per share for the first nine months of 2006.
Net
income (loss).
For
the
reasons set forth above, net loss for the third quarter of 2007 was $1,813,000
compared to a net loss of $599,000 for the third quarter of 2006. Net loss
per
basic share for the third quarter of 2007 was $.62 and $.61 per diluted share
compared to a net loss of $.19 per share for the third quarter of
2006.
For
the
reasons set forth above, net loss for the first nine months of 2007 was
$6,546,000 compared to a net loss of $510,000 for the first nine months of
2006.
Net loss per share for the first nine months of 2007 was $2.20 compared to
a net
loss of $.16 per share for the first nine months of 2006.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had liquid resources comprised of cash and cash equivalents totaling
approximately $1,150,000 at the end of the third quarter of 2007 compared to
approximately $5,400,000 at the end of 2006. The principal reasons for the
reduction in cash at September 29, 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 $1,070,000, operating cash used of $523,000
as
described below, restricted cash deposited of $250,000 and repayments of
borrowings of $413,000. The Company's working capital was approximately
$9,900,000 and its current ratio was 3.4 to 1 at the end of the third quarter
of
2007 compared to $13,300,000 and 4.9 to 1, respectively, at the end of 2006.
At
September 29, 2007, the Company had available borrowing capacity under its
revolving line of credit of $4,600,000.
The
Company's activities from continuing operations used operating cash flows of
$522,000 during the first nine months of 2007 compared to using $707,000 of
operating cash flows during the first nine months of 2006. The primary uses
of
operating cash flows from continuing operations for the first nine months of
2007 were the nine-month loss from continuing operations of $688,000 which
was
reduced by depreciation and amortization of $1,757,000 and share-based
compensation of $223,000, an increase in accounts receivable of $1,385,000
and
an increase in inventories of $742,000 offset by an aggregate increase in
accounts payable, customer deposits and accrued liabilities of $245,000 and
a
reduction of other current assets of $57,000. The primary uses of operating
cash
flows from continuing operations for the first nine months of 2006 were the
loss
from continuing operations of $327,000 which was reduced by depreciation and
amortization of $1,759,000 and share-based compensation of $138,000, increases
in accounts receivable of $1,295,000, inventory of $515,000 and an aggregate
decrease in accounts payable, customer deposits and accrued liabilities of
$524,000.
The
Company made net cash investments in property, plant and equipment of $1,070,000
during the first nine months of 2007 compared to net cash investments made
in
property, plant and equipment of $1,203,000 during the first nine 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 $5,830,000 at the end of the
third quarter of 2007, a decrease of $917,000 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 September 29, 2007, the Company had available
borrowing capacity under its revolving line of credit of $4,600,000. The
revolving line of credit bears interest at the prime rate less 0.50% (currently
7.00%) 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 7.00%) 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 7.00%) or LIBOR
plus
2.25%. At September 29, 2007, the Company, under the terms of its agreement
with
North Fork Bank, elected to convert $1,500,000 of the Term Loan and $2,800,000
of the Mortgage Loan from their prime rate base to LIBOR-based interest rate
loans for six months at an interest rate of 7.6325%, which expires January
18,
2008 and $100,000 of the term loan for three months at an interest rate of
7.61%, which expired October 18, 2007. Interest expense on the above borrowings
were $98,000 and $73,000 for the quarters ended September 29, 2007 and September
30, 2006, respectively. Interest expense on the above borrowings were $295,000
and $217,000 for the nine-month periods ended September 29, 2007 and September
30, 2006, respectively. 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) eliminated the fixed charge coverage ratio covenant for the quarter
ended June 30, 2007, (ii) added a covenant related to earnings before interest,
taxes, depreciation and amortization (“EBITDA”) for the four quarters ended June
30, 2007 to require the Company to achieve a minimum level of EBITDA, and (iii)
modified the fixed charge coverage ratio covenant for periods after the quarter
ending September 29, 2007. The Company was in compliance with these amended
covenants at September 29, 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 deposited $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.
Depreciation
and amortization expenses exceeded capital expenditures for production equipment
during the first nine months of 2007 by approximately $687,000, and the Company
anticipates that depreciation and amortization expenses will exceed capital
expenditures in fiscal year 2007 by approximately $600,000. The Company intends
to issue commitments to purchase $700,000 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 fourth quarter of 2007
and
early 2008.
The
functional currency for the Company’s wholly-owned subsidiary FMI is the
Canadian dollar. The changes in accumulated other comprehensive income for
the
third quarter and first nine 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 Financial Accounting Standards Board (“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
nine
months ended September 29, 2007, due to the fact that the Company currently
has
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.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 “Fair Value Measurements”. SFAS No. 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value and
requires additional disclosures about fair-value measurements. SFAS No. 157
applies only to fair-value measurements that are already required or permitted
by other accounting standards and is expected to increase the consistency of
those measurements. It will also affect current practices by nullifying Emerging
Issues Task Force guidance that prohibited recognition of gains or losses at
the
inception of derivative transactions whose fair value is estimated by applying
a
model and by eliminating the use of “blockage” factors by brokers, dealers and
investment companies that have been
applying
AICPA Guides. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact that SFAS
No.
157 will have on its financial position and results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS
No. 159 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in net income. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The Company is currently evaluating
the impact that SFAS No. 159 will have on its financial position and results
of
operations.
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
4T.
CONTROLS AND PROCEDURES
As
of
September 29, 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
September 29, 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 third 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 the additional risk factor set forth
below:
Our
inability to conclude an agreement to sell FMI could have a material adverse
effect on our results of operations.
Company
management determined, and the Board of Directors approved on August 9, 2007,
that the Company should divest its FMI operations and is in the process of
seeking interested parties to purchase FMI. The potential divestiture should
enable Merrimac 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 reflects FMI as a
discontinued operation and the Company restated prior financial statements
to
reflect the results of operations, cash flows and financial position of FMI
as
discontinued operations.
The
assets and liabilities relating to FMI to be sold have been reclassified as
held
for sale in the accompanying consolidated balance sheets. Merrimac has estimated
the fair value of the net assets of FMI to be sold to be $450,000 based upon
preliminary sales negotiations. Loss from discontinued operations for the nine
months ended September 29, 2007 includes goodwill impairment charges of
$3,756,000, reducing the goodwill balance to zero and a charge of $506,000
to
provide a full valuation allowance for a Canadian net deferred tax asset. Also
included in the loss from discontinued operations for the first nine months
of
2007 was a $586,000 charge for the write down of the remaining FMI net assets
to
an estimated net realizable value of $450,000.
In
the
event a sales agreement cannot be concluded, FMI will be in violation of its
credit facility covenants and its line of credit will be terminated. If the
line
of credit is terminated, FMI likely will be forced to file for bankruptcy
protection and begin liquidation proceedings, which would have a material
adverse effect on our results of operations.
ITEM
5.
OTHER INFORMATION.
None.
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:
November 13, 2007
|
By:
|
/s/
Mason N. Carter
|
|
Mason
N. Carter
|
|
Chairman,
President and
|
|
Chief
Executive Officer
|
|
By:
|
/s/
Robert V. Condon
|
|
Robert
V. Condon
|
|
Vice
President, Finance and
|
|
Chief
Financial Officer
|