UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended June 28, 2008
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period
from to
Commission
File No. 0-11201
Merrimac
Industries, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
DELAWARE
|
22-1642321
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
41
FAIRFIELD PLACE
WEST
CALDWELL, NEW JERSEY 07006
(Address
of Principal Executive Offices) (Zip Code)
(973)
575-1300
(Registrant’s
Telephone Number)
Former
name, former address and former fiscal year, if changed since last report:
N/A
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of "accelerated filer, large accelerated filer and a smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
As
of
August 11, 2008, there were 2,948,037 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
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss)
|
|
|
for
the Quarters and Six Months Ended June 28, 2008
|
|
|
and
June 30, 2007 (Unaudited)
|
1
|
|
|
Condensed
Consolidated Balance Sheets-June 28, 2008 (Unaudited) and
|
|
|
December
29, 2007
|
2
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity for the Six
Months
|
|
|
Ended
June 28, 2008 (Unaudited)
|
3
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months
|
|
|
Ended
June 28, 2008 and June 30, 2007 (Unaudited)
|
4
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
5
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
15
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
26
|
|
|
|
Item
4.
|
Controls
and Procedures
|
26
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
27
|
|
|
|
Item
1A.
|
Risk
Factors
|
27
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
28
|
|
|
|
Item
5.
|
Other
Information
|
28
|
|
|
|
Item
6.
|
Exhibits
|
28
|
|
|
|
Signatures
|
|
29
|
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June
28,
|
|
June
30,
|
|
June
28,
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
7,524,203
|
|
$
|
5,371,471
|
|
$
|
13,281,889
|
|
$
|
9,882,917
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
4,308,912
|
|
|
3,004,761
|
|
|
7,760,872
|
|
|
5,818,881
|
|
Selling,
general and administrative
|
|
|
2,353,395
|
|
|
1,976,729
|
|
|
4,597,965
|
|
|
4,193,731
|
|
Research
and development
|
|
|
374,581
|
|
|
335,262
|
|
|
747,399
|
|
|
819,507
|
|
|
|
|
7,036,888
|
|
|
5,316,752
|
|
|
13,106,236
|
|
|
10,832,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
487,315
|
|
|
54,719
|
|
|
175,653
|
|
|
(949,202
|
)
|
Interest
and other (expense) income, net
|
|
|
(48,607
|
)
|
|
(4,231
|
)
|
|
(109,180
|
)
|
|
16,401
|
|
Income
(loss) from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
438,708
|
|
|
50,488
|
|
|
66,473
|
|
|
(932,801
|
)
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
438,708
|
|
|
50,488
|
|
|
66,473
|
|
|
(932,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes in 2007
|
|
|
(55,036
|
)
|
|
(3,519,411
|
)
|
|
(55,036
|
)
|
|
(3,799,924
|
)
|
Net
income (loss)
|
|
$
|
383,672
|
|
$
|
(3,468,923
|
)
|
$
|
11,437
|
|
$
|
(4,732,725
|
)
|
Income
(loss) per common share from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-basic
|
|
$
|
.15
|
|
$
|
.02
|
|
$
|
.02
|
|
$
|
(.31
|
)
|
Loss
per common share from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-basic
|
|
$
|
(.02
|
)
|
$
|
(1.21
|
)
|
$
|
(.02
|
) |
$ |
(1.27
|
)
|
Net
income (loss) per common share-basic
|
|
$
|
.13
|
|
$
|
(1.19
|
)
|
$
|
-
|
|
$
|
(1.58
|
)
|
Income
(loss) per common share from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-diluted
|
|
$
|
.15
|
|
$
|
.02
|
|
$
|
.02
|
|
$
|
(.31
|
)
|
Loss
per common share from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-diluted
|
|
$
|
(.02
|
)
|
$
|
(1.20
|
)
|
$
|
(.02
|
)
|
$
|
(1.27
|
)
|
Net
income (loss) per common share-diluted
|
|
$
|
.13
|
|
$
|
(1.18
|
)
|
$
|
-
|
|
$
|
(1.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding-basic
|
|
|
2,939,788
|
|
|
2,910,711
|
|
|
2,936,155
|
|
|
3,003,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding-diluted
|
|
|
2,945,203
|
|
|
2,947,464
|
|
|
2,948,287
|
|
|
3,003,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
383,672
|
|
$
|
(3,468,923
|
)
|
$
|
11,437
|
|
$
|
(4,732,725
|
)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
307,131
|
|
|
-
|
|
|
368,514
|
|
Comprehensive
income (loss)
|
|
$
|
383,672
|
|
$
|
(3,161,792
|
)
|
$
|
11,437
|
|
$
|
(4,364,211
|
)
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 28,
2008
|
|
December 29,
2007
|
|
|
|
(UNAUDITED)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
409,374
|
|
$
|
2,004,471
|
|
Accounts
receivable, net
|
|
|
7,609,252
|
|
|
5,299,753
|
|
Inventories,
net
|
|
|
6,462,065
|
|
|
5,039,770
|
|
Other
current assets
|
|
|
542,981
|
|
|
774,007
|
|
Due
from assets sale contract
|
|
|
-
|
|
|
664,282
|
|
Total
current assets
|
|
|
15,023,672
|
|
|
13,782,283
|
|
Property,
plant and equipment
|
|
|
37,949,701
|
|
|
37,556,672
|
|
Less
accumulated depreciation and amortization
|
|
|
27,650,605
|
|
|
26,600,240
|
|
Property,
plant and equipment, net
|
|
|
10,299,096
|
|
|
10,956,432
|
|
Restricted
cash
|
|
|
-
|
|
|
250,000
|
|
Other
assets
|
|
|
470,390
|
|
|
531,633
|
|
Deferred
tax assets
|
|
|
52,000
|
|
|
52,000
|
|
Total
Assets
|
|
$
|
25,845,158
|
|
$
|
25,572,348
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
1,050,000
|
|
$
|
550,000
|
|
Accounts
payable
|
|
|
1,085,015
|
|
|
943,481
|
|
Accrued
liabilities
|
|
|
1,645,339
|
|
|
1,965,403
|
|
Customer
deposits
|
|
|
483,393
|
|
|
363,296
|
|
Deferred
income taxes
|
|
|
52,000
|
|
|
52,000
|
|
Total
current liabilities
|
|
|
4,315,747
|
|
|
3,874,180
|
|
Long-term
debt, net of current portion
|
|
|
3,237,500
|
|
|
3,762,500
|
|
Deferred
liabilities
|
|
|
62,778
|
|
|
61,300
|
|
Total
liabilities
|
|
|
7,616,025
|
|
|
7,697,980
|
|
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; 3,310,486 and 3,289,103 shares
issued; and
2,947,581 and 2,926,198 shares outstanding, respectively
|
|
|
33,105
|
|
|
32,891
|
|
Additional
paid-in capital
|
|
|
20,132,831
|
|
|
19,789,717
|
|
Retained
earnings
|
|
|
1,185,361
|
|
|
1,173,924
|
|
|
|
|
21,351,297
|
|
|
20,996,532
|
|
Less
treasury stock, at cost - 362,905 shares at June 28, 2008 and December
29, 2007
|
|
|
(3,122,164
|
)
|
|
(3,122,164
|
)
|
Total
stockholders' equity
|
|
|
18,229,133
|
|
|
17,874,368
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
25,845,158
|
|
$
|
25,572,348
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX
MONTHS ENDED JUNE 28, 2008
(UNAUDITED)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
Treasury Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balance,
December 29, 2007
|
|
|
3,289,103
|
|
$
|
32,891
|
|
$
|
19,789,717
|
|
$
|
1,173,924
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
17,874,368
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
11,437
|
|
|
|
|
|
|
|
|
11,437
|
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
257,480
|
|
|
|
|
|
|
|
|
|
|
|
257,480
|
|
Stock
Purchase Plan sales
|
|
|
9,301
|
|
|
93
|
|
|
57,344
|
|
|
|
|
|
|
|
|
|
|
|
57,437
|
|
Exercise
of stock options
|
|
|
4,082
|
|
|
41
|
|
|
28,290
|
|
|
|
|
|
|
|
|
|
|
|
28,331
|
|
Vesting
of restricted stock
|
|
|
8,000
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Balance,
June 28, 2008
|
|
|
3,310,486
|
|
$
|
33,105
|
|
$
|
20,132,831
|
|
$
|
1,185,361
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
18,229,133
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
Months Ended
|
|
|
|
June
28, 2008
|
|
June
30, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
11,437
|
|
$
|
(4,732,725
|
)
|
Less,
loss from discontinued operations
|
|
|
(55,036
|
)
|
|
(3,799,924
|
)
|
Income
(loss) from continuing operations
|
|
|
66,473
|
|
|
(932,801
|
)
|
Adjustments
to reconcile net income (loss) from continuing operations to net
cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,270,228
|
|
|
1,157,836
|
|
Amortization
of deferred financing costs
|
|
|
16,080
|
|
|
14,716
|
|
Share-based
compensation
|
|
|
257,560
|
|
|
132,496
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,309,499
|
)
|
|
644,552
|
|
Inventories
|
|
|
(1,422,295
|
)
|
|
(825,915
|
)
|
Other
current assets
|
|
|
125,749
|
|
|
187,107
|
|
Other
assets
|
|
|
125,891
|
|
|
(198,602
|
)
|
Accounts
payable
|
|
|
141,534
|
|
|
170,648
|
|
Accrued
liabilities
|
|
|
(295,515
|
)
|
|
9,204
|
|
Customer
deposits
|
|
|
120,097
|
|
|
102,000
|
|
Deferred
liabilities
|
|
|
1,479
|
|
|
11,730
|
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
(1,902,218
|
)
|
|
472,971
|
|
Net
cash used in operating activities of discontinued
operations
|
|
|
(55,036
|
)
|
|
(295,948
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(1,957,254
|
)
|
|
177,023
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of capital assets
|
|
|
(612,893
|
)
|
|
(755,796
|
)
|
Cash
proceeds from sale of discontinued operations
|
|
|
664,282
|
|
|
-
|
|
Net
cash provided by (used in) investing activities of continuing
operations
|
|
|
51,389
|
|
|
(755,796
|
)
|
Net
cash used in investing activities of discontinued
operations
|
|
|
-
|
|
|
(171,265
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
51,389
|
|
|
(927,061
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repurchase
of common stock for the treasury
|
|
|
-
|
|
|
(2,148,300
|
)
|
Borrowings
under revolving credit facility
|
|
|
500,000
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(525,000
|
)
|
|
(275,000
|
)
|
Restricted
cash returned
|
|
|
250,000
|
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
28,331
|
|
|
73,800
|
|
Proceeds
from Stock Purchase Plan sales
|
|
|
57,437
|
|
|
7,495
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities of continuing
operations
|
|
|
310,768
|
|
|
(2,342,005
|
)
|
Net
cash used in financing activities of discontinued
operations
|
|
|
-
|
|
|
(68,496
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
310,768
|
|
|
(2,410,501
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
-
|
|
|
16,410
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,595,097
|
)
|
|
(3,144,129
|
)
|
Cash
and cash equivalents at beginning of period, including $0 and $562,205
reported under assets held for sale
|
|
|
2,004,471
|
|
|
5,961,537
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period including $0 and $42,905 reported
under assets held for sale
|
|
$
|
409,374
|
|
$
|
2,817,408
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for-
|
|
|
|
|
|
|
|
Interest
on credit facilities
|
|
$
|
112,717
|
|
$
|
182,544
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not
include all information and footnote disclosures otherwise required by
accounting principles generally accepted in the United States of America for
a
full fiscal year. The financial statements do, however, reflect all adjustments
of a normal recurring nature which are, in the opinion of management, necessary
for a fair presentation of the financial position of Merrimac Industries, Inc.
(“Merrimac” or the “Company”) as of June 28, 2008 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 results of operations related to Filtran Microcircuits Inc.
(“FMI”) for the quarterly and six months of 2007 prior periods have been
reported as discontinued operations.
The
condensed consolidated balance sheet at December 29, 2007 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 March 28, 2008 for the year ended December 29, 2007.
2.
DISCONTINUED OPERATIONS
Company
management determined, and on August 9, 2007 the Board of Directors approved,
that the Company should divest its FMI operations. The 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 reflected FMI as a
discontinued operation and the Company reclassified prior financial statements
to reflect the results of operations, financial position and cash flows of
FMI
as discontinued operations.
On
December 28, 2007, the Company sold substantially all of the assets of its
wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), a
manufacturer of high technology/high reliability printed circuit boards, that
has operations in Toronto, Ontario, Canada and Chatsworth, California. The
transaction was effected pursuant to an asset purchase agreement entered into
between Merrimac, FMI and FTG. The total consideration payable by FTG was
$1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities
of
approximately $368,000 (Canadian $360,000). FTG paid $818,000 (Canadian
$800,000) of the purchase price at closing and the balance was paid on February
21, 2008 following the conclusion of a transitional period.
Operating
results of FMI, which were formerly represented as Merrimac’s microwave
micro-circuitry segment, are
summarized as follows:
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
854,000
|
|
$
|
-
|
|
$
|
1,766,000
|
|
Loss
before provision for income taxes
|
|
$
|
(55,000
|
)
|
$
|
(3,013,000
|
)
|
$
|
(55,000
|
)
|
$
|
(3,294,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
506,000
|
|
|
|
|
|
506,000
|
|
Net
loss
|
|
$
|
(55,000
|
)
|
$
|
(3,519,000
|
)
|
$
|
(55,000
|
)
|
$
|
(3,800,000
|
)
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
CONTRACT REVENUE RECOGNITION
The
Company derives its revenues from sales of the following: customized products,
which include amounts billable for non-recurring engineering services and in
some instances the production and delivery of prototypes, and
the
subsequent production and delivery of units under short-term, firm-fixed price
contracts; the design, documentation, production and delivery of a series of
complex components under long-term firm-fixed price contracts; and the delivery
of off-the-shelf standard products.
The
Company accounts for all contracts, except those for the sale of off-the-shelf
standard products, in accordance with AICPA Statement of Position No. 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts” (“SOP 81-1”).
The
Company recognizes all amounts billable under short-term contracts involving
non-recurring engineering (“NRE”) services for customization of products in net
sales and all related costs in cost of sales under the completed-contract method
when the customized units are delivered. The Company periodically enters into
contracts with customers for the development and delivery of a prototype prior
to the shipment of units. Under those circumstances, the Company recognizes
all
amounts billable for NRE services in net sales and all related costs in cost
of
sales when the prototype is delivered and recognizes all of the remaining
amounts billable and the related costs when the units are delivered.
Periodically,
the Company has complex, long-term contracts for the engineering design,
development and production of space electronics products for which revenue
is
recognized under the percentage-of-completion method. Sales and related contract
costs for design and documentation services under this type of contract are
recognized based on the cost-to-cost method. Sales and related contract costs
for products delivered under these contracts are recognized on the
units-of-delivery method.
Pursuant
to SOP 81-1, anticipated losses on all contracts are charged to operations
in
the period when the losses become known.
Sales
of
off-the-shelf standard products and related costs of sales are recorded when
title transfers to the customer, which is generally on the date of shipment,
provided persuasive evidence of an arrangement exists, the sales price is fixed
or determinable and collection of the related receivable is
probable.
4.
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 2008 will be the next) is added to
the
fourth quarter, making such quarter consist of 14 weeks.
5.
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) is defined as the change in equity of a company during a period
from transactions and other events and circumstances from non-owner sources.
Accumulated other comprehensive income at June 30, 2007 was attributable solely
to the effects of foreign currency translation. Following
the sale of the Company’s discontinued operations in December 2007, there is no
foreign currency translation adjustment at June 28, 2008.
6.
RECENT
ACCOUNTING PRONOUNCEMENTS
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. The Company adopted
SFAS No. 157 on December 30, 2007. The adoption of SFAS No. 157 did not have
an
impact on its financial position and results of operations.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The
Company adopted SFAS No. 159 on December 30, 2007. The adoption of SFAS No.
159
did not have an impact on its financial position and results of operations,
since the Company did not elect the fair value option for any assets or
liabilities.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
principles and requirements for how an acquiring company recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest if the acquired company and the goodwill
acquired. SFAS 141R also established disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS
141R is effective for fiscal periods beginning after December 15, 2008. The
Company is currently evaluating the impact that SFAS 141R will have on its
financial position and results of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards of ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
160
is effective for fiscal periods beginning after December 15, 2008. The Company
is currently evaluating the impact that SFAS 160 will have on its financial
position and results of operations.
7.
SHARE-BASED COMPENSATION
On
January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R") which requires that the
costs resulting from all share-based payment transactions be recognized in
the
financial statements at their fair values. The Company adopted SFAS 123R using
the modified prospective application method under which the provisions of SFAS
123R
apply to new awards and to awards modified, repurchased, or cancelled after
the
adoption date. Additionally, compensation cost for the portion of the awards
for
which the requisite service has not been rendered that are outstanding as of
the
adoption date is recognized in the consolidated
statement of operations over the remaining service period after the adoption
date based on the award's original estimate of fair value.
Because
of the Company’s net operating loss carryforwards, no tax benefits resulting
from the exercise of stock options have been recorded, thus there was no effect
on cash flows from operating or financing activities.
For
the
quarters and six months ended June 28, 2008 and June 30, 2007, share-based
compensation expense related to the 2001 Employee Stock Purchase Plan and the
various stock option plans was allocated as follows:
|
|
Quarters Ended
|
|
Six Months Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
45,000
|
|
$
|
21,000
|
|
$
|
90,000
|
|
$
|
29,000
|
|
Selling,
general and administrative
|
|
|
93,000
|
|
|
60,000
|
|
|
168,000
|
|
|
103,000
|
|
Total
share-based compensation
|
|
$
|
138,000
|
|
$
|
81,000
|
|
$
|
258,000
|
|
$
|
132,000
|
|
The
fair
value of the options granted was estimated on the date of grant using the
Black-Scholes option valuation model.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following weighted average assumptions for options granted in the quarters
and
six months ended June 28, 2008 and June 30, 2007 were utilized:
|
|
2008
|
|
2007
|
|
Expected
option life (years)
|
|
|
6.0
|
|
|
5.7
|
|
Expected
volatility
|
|
|
37.56
|
%
|
|
32.89
|
%
|
Risk-free
interest rate
|
|
|
3.14
|
%
|
|
4.53
|
%
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
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.
Share-Based
Compensation Plans:
On
June
22, 2006, the Company’s stockholders approved three share-based compensation
programs as follows: (i) 2006 Stock Option Plan; (ii) 2006 Key Employee
Incentive Plan; and (iii) 2006 Non-Employee Directors’ Stock Plan.
The
2006
Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
Common Stock to employees, directors and consultants of the Company. Under
the
2006 Stock Option Plan, the
Company may grant to eligible individuals incentive stock options, as defined
in
Section 422 of the Internal Revenue Code of 1986 (the “Code”), and/or
non-qualified stock options. The purposes of the 2006 Stock Option Plan are
to
attract, retain and motivate employees, compensate consultants, and to enable
employees, consultants and directors, including non-employee directors,
to participate in the long-term growth of the Company by providing for or
increasing the proprietary interests of such persons in the Company, thereby
assisting the Company to achieve its long-range goals. The 2006 Stock Option
Plan replaced the 2001 Stock Option Plan, and the remaining 19,700 unissued
options under the 2001 Stock Option Plan are no longer available for
grant.
At
June
28, 2008, there were 328,100 options outstanding under the 2006 Stock Option
Plan of which 124,365 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 171,900 at June 28,
2008.
At
June
28, 2008, the Company also maintains share-based compensation arrangements
under
the following plans: (i) 1997 Long-Term Incentive Plan; and (ii) 2001 Stock
Option Plan.
At
June
28, 2008, there were 143,300 options outstanding under 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 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:
|
|
2008
|
|
|
|
Weighted
|
|
|
|
|
|
average
|
|
Shares
|
|
|
|
exercise
|
|
or price
|
|
|
|
price
|
|
per share
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
$
|
9.30
|
|
|
594,747
|
|
Granted
|
|
|
5.15
|
|
|
17,500
|
|
Exercised
|
|
|
6.94
|
|
|
(4,082
|
)
|
Expired
|
|
|
10.12
|
|
|
(72,965
|
)
|
Forfeited
|
|
|
8.53
|
|
|
(63,800
|
)
|
Outstanding
at end of period
|
|
$
|
9.14
|
|
|
471,400
|
|
Exercisable
at end of period
|
|
$
|
9.22
|
|
|
267,665
|
|
Option
price range at end of period
|
|
$5.15
- $17.00
|
|
Weighted
average estimated fair value of options granted during the
year
|
|
|
|
|
$
|
2.14
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of intrinsic and fair value stock option information follows:
Aggregate
intrinsic value of outstanding options at June 28, 2008
|
|
$
|
0
|
|
Aggregate
intrinsic value of exercisable options at June 28, 2008
|
|
$
|
0
|
|
Intrinsic
value of options exercised during 2008
|
|
$
|
9,000
|
|
Fair
value of options vested during 2008
|
|
$
|
343,000
|
|
As
of
June 28, 2008, 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 $674,000. Of that total, $197,000, $344,000, $128,000 and
$5,000 are expected to be recognized in 2008, 2009, 2010 and 2011,
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
26, 2008, the Company issued a grant of 9,000 shares of restricted stock to
six
of its non-employee directors. The per share price of the grant was $5.15 (the
closing price of the Company’s shares on The American Stock Exchange on the date
immediately prior to the grant, pursuant to the terms of the plan). One third
of
such restricted stock vests on the anniversary of the grant date over a
three-year period. Share-based compensation expense for the quarter and six
months ended June 28, 2008 related to the grants of restricted stock was
approximately $32,000 and $47,000, respectively, which was based on a
straight-line amortization. Share-based compensation expense for the quarter
and
six months ended June 30, 2007 related to the grants of restricted
stock was approximately $7,000 and $14,000, respectively. Restricted shares
of
common stock available for grant under the 2006 Non-Employee Directors’ Stock
Plan were 71,500 at June 28, 2008.
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 29, 2007.
|
|
$
|
9.69
|
|
|
16,500
|
|
Granted
|
|
|
5.15
|
|
|
9,000
|
|
Vested
|
|
|
9.67
|
|
|
(8,000
|
)
|
Outstanding
at June 28, 2008
|
|
$
|
7.36
|
|
|
17,500
|
|
8.
INVENTORIES
Inventories
are stated at the lower of cost or market, using the average cost method. Cost
includes materials, labor and manufacturing overhead related to the purchase
and
production of inventories.
Inventories
consist of the following:
|
|
June 28,
2008
|
|
December 29,
2007
|
|
Finished
goods
|
|
$
|
538,857
|
|
$
|
239,503
|
|
Work
in process
|
|
|
3,297,259
|
|
|
2,979,632
|
|
Raw
materials and purchased parts
|
|
|
2,625,949
|
|
|
1,820,635
|
|
Total
|
|
$
|
6,462,065
|
|
$
|
5,039,770
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.
LONG-LIVED ASSETS
The
Company accounts for long-lived assets under SFAS 144, “Accounting for the
impairment or disposal of long-lived assets” (“SFAS NO. 144”). Management
assesses the recoverability of its long-lived assets, which consist primarily
of
fixed assets and intangible assets with finite useful lives, whenever events
or
changes in circumstances as described in SFAS No. 144 indicate that the carrying
value may not be recoverable. Impairment charges would be included with costs
and expenses in the Company's consolidated statements of operations, and would
result in reduced carrying amounts of the related assets on the Company's
consolidated balance sheets.
Fixed
assets and intangible assets related to the Multi-Mix® product line have been
tested for recoverability at least annually since 2002 following the guidance
of
SFAS No. 144. Based on the results of this testing, we have concluded that
the
undiscounted cash flows expected to result from the use of these assets exceeds
its carrying amount and, therefore, there is no impairment loss.
10.
CURRENT AND LONG-TERM DEBT
The
Company was obligated under the following debt instruments at June 28, 2008
and
December 29, 2007:
|
|
2008
|
|
2007
|
|
Capital
One, N.A. (formerly North Fork Bank):
|
|
|
|
|
|
|
|
Revolving
line of credit, 2.00% above LIBOR or 0.50% below prime
|
|
$
|
500,000
|
|
$
|
-
|
|
Term
loan, due October 1, 2011, 2.25% above LIBOR or 0.50% below
prime
|
|
|
1,300,000
|
|
|
1,500,000
|
|
Mortgage
loan, due October 1, 2016, 2.25% above LIBOR or 0.50% below
prime
|
|
|
2,487,500
|
|
|
2,812,500
|
|
|
|
|
4,287,500
|
|
|
4,312,500
|
|
Less
current portion
|
|
|
1,050,000
|
|
|
550,000
|
|
Long-term
portion
|
|
$
|
3,237,500
|
|
$
|
3,762,500
|
|
On
October 18, 2006, the Company entered into a financing agreement with Capital
One, N.A. (formerly 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).
Our
revolving line of credit with Capital One, N.A. expires in October 2008. Capital
One, N.A. has indicated to us that it does not intend to renew the line of
credit. We believe that we will be able to refinance the line of credit with
another financial institution, but such refinancing likely will be on less
favorable terms to us. The Company borrowed $500,000 under its revolving line
of
credit on May 1, 2008. At June 28, 2008, the Company had available borrowing
capacity under its revolving line of credit of $4,500,000. Subsequent to the
end
of the second quarter of 2008, the Company borrowed an additional $500,000
under
its revolving line of credit on July 1, 2008. The revolving line of credit
bears
interest at the prime rate less 0.50% (4.50% at June 28, 2008 and currently
4.50%) 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. The Term Loan bears interest at the prime rate less 0.50%
(4.50% at June 28, 2008 and currently 4.50%) 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. The Mortgage
Loan bears interest at the prime rate less 0.50% (4.50% at June 28, 2008 and
currently 4.50%) or LIBOR plus 2.25%. At June 28, 2008, the Company had no
portion of its borrowings under LIBOR-based interest rates. 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.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Capital
One, N.A. 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 June 28, 2008.
On
August
9, 2007, Capital One, N.A. and Merrimac entered into a Pledge and Security
Agreement, under which Capital One, N.A. 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 Capital
One, N.A. providing such consent, Merrimac deposited $250,000 into a controlled
collateral account with Capital One, N.A. and also agreed to prepay the mortgage
loan portion of the credit facility with Capital One, N.A. with fifty percent
of
the net proceeds from a sale of FMI, up to a maximum amount of $500,000. This
agreement terminated in November 2007 when The Bank of Nova Scotia terminated
FMI’s revolving credit agreement. Upon the termination of such agreement, the
Company agreed to repay a portion of its Mortgage Loan with the funds in the
controlled collateral account upon the expiration of the LIBOR contracts in
January 2008. On January 18, 2008, Merrimac repaid $250,000 of the Mortgage
Loan
using the funds previously deposited into the controlled collateral
account.
At
June
28, 2008 and December 29, 2007, the fair value of the Company's debt
approximates carrying value. The fair value of the Company's long-term debt
is
estimated based on current interest rates.
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
$15,000 and $28,000 for the quarters ended June 28, 2008 and June 30, 2007,
respectively, and $65,000 and $79,000 for the six months ended June 28, 2008
and
June 30, 2007, respectively. The warranty reserve at June 28, 2008 and December
29, 2007 was $200,000.
12.
INCOME TAXES
The
Company’s effective tax rate for the quarter and six months ended June 28, 2008,
(which effective tax rate was zero percent), reflects U.S. Federal Alternative
Minimum Tax and State income taxes that are due based on certain statutory
limitations on the use of the Company’s net operating loss carryforwards. No
provision or benefit for income taxes was recorded based on management’s
estimate of the minimal projected taxable income and the availability of net
operating loss carryforwards that can be utilized.
As
of
June 28, 2008, 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 second
quarter of 2008.
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 2008 depending on the extent of the
changes in its ownership.
13.
BUSINESS SEGMENT DATA
The
Company's continuing operations are conducted 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.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
|
|
Six Months Ended
|
|
|
|
June 28,
2008
|
|
June 30,
2007
|
|
June 28,
2008
|
|
June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
383,672
|
|
$
|
(3,468,923
|
)
|
$
|
11,437
|
|
$
|
(4,732,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for basic net income (loss)
per
share- Common stock
|
|
|
2,939,788
|
|
|
2,910,711
|
|
|
2,936,155
|
|
|
3,003,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - basic
|
|
$
|
.13
|
|
$
|
(1.19
|
)
|
$
|
-
|
|
$
|
(1.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for diluted net income (loss)
per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,939,788
|
|
|
2,910,711
|
|
|
2,936,155
|
|
|
3,003,513
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options (1)
|
|
|
5,415
|
|
|
36,753
|
|
|
12,132
|
|
|
-
|
|
Weighted
average number of shares outstanding for diluted net income (loss)
per
share
|
|
|
2,945,203
|
|
|
2,947,464
|
|
|
2,948,287
|
|
|
3,003,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - diluted
|
|
$
|
.13
|
|
$
|
(1.18
|
)
|
$
|
-
|
|
$
|
(1.58
|
)
|
(1)
|
Represents
additional shares resulting from assumed conversion of stock options
less
shares purchased with the proceeds
therefrom.
|
Diluted
net income (loss) per share excludes 456,000 and 228,000 shares underlying
stock
options for
the
quarters ended June 28, 2008 and June 30, 2007, respectively, as the exercise
price of these options
was greater than the average market value of the common shares, resulting in
an
anti-dilutive effect on net income (loss) per share. Diluted net income (loss)
per share excludes 425,000 shares underlying stock options for the six-month
period ended June 28, 2008, as the exercise price of these options was greater
than the average market value of the common shares, resulting in an
anti-dilutive effect on net income (loss) per share. Due to the net loss for
the
six months ended June 30, 2007, approximately 625,000 shares underlying stock
options 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 second quarter and first six months of 2008, the Company's outside general
counsel Katten Muchin Rosenman LLP was paid $96,000 and $169,000, respectively,
for providing legal services to the Company. During the second quarter and
first
six months of 2007, Katten Muchin Rosenman LLP was paid $108,000 and $196,000,
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
2008 and 2007 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 $2,000 and $3,000 to these companies during the
second quarter and first six months of 2008, respectively. The Company paid
an
aggregate of $5,000 and $21,000 to these companies during the second quarter
and
first six months of 2007, respectively. A director of the Company is the
chairman and chief executive officer of these companies.
During
the second quarter and first six months of 2008 and 2007, a director of the
Company was paid $9,000 and $18,000, respectively, for providing
technology-related consulting services to the Company.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 second quarter and first six months of 2008 or 2007. A
director of the Company is an officer of DuPont, but would not share in these
payments, if any.
Compensation
of Directors: 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 26, 2008, non-qualified stock options to purchase an aggregate of 17,500
shares were issued to seven directors at an exercise price of $5.15 per share.
Also on June 26, 2008, pursuant to the 2006 Non-Employee Directors’ Stock Plan,
six directors each received a grant of 1,500 shares of restricted stock at
a
fair market value of $5.15 per share. One-third of such restricted stock vests
on the anniversary of the grant date 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 at that time. 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 two of the purchasers above hold registration rights, which currently give
them the right in perpetuity to register an aggregate of 828,413 shares of
Common Stock of the Company. There are no settlement alternatives and the
registration of the shares of Common Stock would be on a “best efforts” basis.
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.
17.
LEGAL
PROCEEDINGS
Merrimac
is a party to lawsuits, arising in the normal course of business. It is the
opinion of management of Merrimac 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 the
Company.
On
February 22, 2008, a statement of claim in Ontario Superior Court of Justice
was
filed by a former FMI employee against FMI seeking damages for approximately
$77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
assets to FTG. The Company settled this claim in May 2008 for a minimal
amount.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
March
10, 2008, a statement of claim in Ontario Superior Court of Justice was filed
by
nineteen (19) former FMI employees against Merrimac, FMI and FTG seeking
damages
for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
following the sale of FMI’s assets to FTG. The former FMI employees are alleging
that an employment contract existed between FMI and the plaintiffs and are
seeking additional damages for termination of the alleged contract. Merrimac
believes it has been improperly named in this claim and is petitioning the
Court
to be removed as a defendant.
Merrimac
has an Employment Practices Liability insurance policy that extends coverage
to
its subsidiaries. The insurance carrier agreed to provide a defense in this
matter on April 24, 2008 and they retained Canadian counsel to defend this
claim. Merrimac made provision for the deductible amount of the insurance
policy
which is $25,000. In accordance with the requirements of SFAS No. 5, after
discussions with counsel, Merrimac cannot presently determine if the likelihood
of an unfavorable outcome is probable, reasonably possible or remote. In
addition, Merrimac cannot reasonably estimate the amount of a probable loss,
other than the minimal deductible amount under the insurance policy. Merrimac
and its insurance carrier intend to defend this claim
vigorously.
18.
SUBSEQUENT EVENT
On
July
23, 2008, a Statement of Claim was filed in Ontario Superior Court of Justice
by
the lessor of the premises formerly occupied by FMI in Ontario, Canada, against
FMI, Merrimac, and FTG. The Statement of Claim seeks damages of $150,612 in
respect of the period from and after which FTG, which purchased the assets
of
FMI, removed operations from the premises through the term of the lease. In
addition, the Statement of Claim seeks damages for $110,319 for repairs to
the
premises, and seeks to set aside the transfer of assets from FMI to FTG for
the
failure to comply with the Bulk Sales Act Ontario.
In
accordance with the requirements of SFAS No. 5, after discussions with counsel,
Merrimac cannot presently determine if the likelihood of an unfavorable outcome
is probable, reasonably possible or remote. In addition, Merrimac cannot
reasonably estimate the amount of a probable loss. The Company intends to defend
this claim vigorously.
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
Industries, Inc. is involved in the design, manufacture and sale of electronic
component devices offering extremely broad frequency coverage and high
performance characteristics, and microstrip, bonded stripline and thick
metal-backed Teflon® (PTFE) and mixed dielectric multilayer circuits for
communications, defense and aerospace applications. The Company's operations
are
conducted primarily through one business segment, electronic components and
subsystems.
Merrimac
is a versatile technologically oriented company specializing in radio frequency
Multi-Mix®, stripline, microstrip and discreet element technologies. Of special
significance has been the combination of two or more of these technologies
into
single components and integrated multifunction subassemblies to achieve superior
performance and reliability while minimizing package size and weight. 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
and
wireless connectivity. Merrimac maintains ISO 9001:2000 and AS 9100 registered
quality assurance programs. Merrimac's components range in price from $0.50
to
more than $10,000 and its subsystems range from $500 to more than
$1,500,000.
For
the
second quarter and first six months of 2008, the Company returned to profitable
results from continuing operations. Previously, the Company had experienced
losses from continuing operations in the first quarter of 2008 and prior
quarters. Improved orders and the increased opening backlog from 2007 provided
the catalyst to increase sales for the second quarter of 2008 by $2,153,000
or
40.1% and $3,399,000 or 34.4% for the first six months of 2008 compared to
2007,
particularly sales of Core and Multi-Mix® products to defense industry-related
customers. The increased gross profit from the higher sales level coupled with
most expenses, as a percentage of net sales, being lower than previous periods,
resulted in income from continuing operations for the second quarter of 2008
as
compared to losses in recent prior quarters. Backlog increased by $2,397,000
or
13.3% to $20,388,000 at the end of the first quarter of 2008 from the end of
2007. The June 28, 2008 backlog of $20,102,000, an increase of $2,111,000 or
11.7% compared to year-end 2007 backlog of $17,991,000, is slightly below the
highest quarter-end backlog of $20,388,000 that the Company achieved in March
2008, because of the higher level of second quarter 2008 sales.
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 its
revised capital expenditures for fiscal year 2008 by approximately $1,600,000.
The Company intends to reduce its commitments to purchase capital equipment
from
various vendors to an amount of approximately $400,000 for the remainder of
2008. The Company anticipates that such equipment will be purchased and become
operational during the remainder of 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.
Capital One, N.A. has indicated to us that it does not intend to renew the
line
of credit. We believe that we will be able to refinance the line of credit
with
another financial institution, but such refinancing likely will be on less
favorable terms to us.
Selling,
general and administrative expenses consist of personnel costs for
administrative, selling and marketing groups, sales commissions to employees
and
manufacturers 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 anticipates 2008 orders from its defense and satellite customers will
be
comparable to fiscal year 2007 levels. 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.
Discontinued
operations.
Filtran
Microcircuits Inc. (“FMI”) was established in 1983, and was acquired by Merrimac
in February 1999. FMI is a manufacturer of microwave micro-circuitry for the
high frequency communications industry. FMI has been engaged in the production
of 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 has supplied mixed dielectric multilayer and high speed
interconnect circuitry to meet customer demand for high performance and
cost-effective packaging.
Merrimac
management determined, and on August 9, 2007 the Board of Directors approved,
that Merrimac should divest its FMI operations. The 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 reflected FMI as a
discontinued operation and the Company reclassified prior financial statements
to reflect the results of operations, financial position and cash flows of
FMI
as discontinued operations.
On
December 28, 2007, the Company sold substantially all of the assets of its
wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), a
manufacturer of high technology/high reliability printed circuit boards, that
has operations in Toronto, Ontario, Canada and Chatsworth, California. The
transaction was effected pursuant to an asset purchase agreement entered into
between Merrimac, FMI and FTG. The total consideration payable by FTG was
$1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities
of
approximately $368,000 (Canadian $360,000). FTG paid $818,000 (Canadian
$800,000) of the purchase price at closing and the balance was paid on February
21, 2008 following the conclusion of a transitional period.
Operating
results of FMI, which were formerly represented as Merrimac’s microwave
micro-circuitry segment,
are summarized as follows:
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
|
June 28, 2008
|
|
June 30, 2007
|
|
June 28, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
854,000
|
|
$
|
-
|
|
$
|
1,766,000
|
|
Loss
before provision for income taxes
|
|
$
|
(55,000
|
)
|
$
|
(3,013,000
|
)
|
$
|
(55,000
|
)
|
$
|
(3,294,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
506,000
|
|
|
—
|
|
|
506,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(55,000
|
)
|
$
|
(3,519,000
|
)
|
$
|
(55,000
|
)
|
$
|
(3,800,000
|
)
|
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 June
28,
2008 and the related future planned purchases and lease obligation commitments
through January 2011.
Net
assets:
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
14,859,000
|
|
Less,
accumulated depreciation and amortization
|
|
|
10,117,000
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
4,742,000
|
|
Inventories
|
|
|
740,000
|
|
Other
assets, net
|
|
|
128,000
|
|
|
|
|
|
|
Total
net assets at June 28, 2008
|
|
|
5,610,000
|
|
|
|
|
|
|
Commitments:
|
|
|
|
|
Planned
equipment purchases for the remainder of 2008
|
|
|
200,000
|
|
Lease
obligations through January 2011
|
|
|
500,000
|
|
|
|
|
|
|
Total
commitments
|
|
|
700,000
|
|
|
|
|
|
|
Total
net assets and commitments
|
|
$
|
6,310,000
|
|
Approximately
34% 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 at December 29, 2007, the Company has determined
no provision for impairment is required at this time. Management of the Company
will continue to monitor the recoverability of the Multi-Mix®
assets.
Contract
Revenue Recognition
The
Company derives its revenues from sales of the following: customized products,
which include amounts billable for non-recurring engineering (“NRE”) services
and in some instances the production and delivery of prototypes, and
the
subsequent production and delivery of units under short-term, firm-fixed price
contracts; the design, documentation, production and delivery of a series of
complex components under long-term firm-fixed price contracts; and the delivery
of off-the-shelf standard products.
The
Company accounts for all contracts, except those for the sale of off-the-shelf
standard products, in accordance with AICPA Statement of Position No. 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts” (“SOP 81-1”).
The
Company recognizes all amounts billable under short-term contracts involving
non-recurring engineering services for customization of products in net sales
and all related costs in cost of sales under the completed-contract method
when
the customized units are delivered. The Company periodically enters into
contracts with customers for the development and delivery of a prototype prior
to the shipment of units. Under those circumstances, the Company recognizes
all
amounts billable for NRE services in net sales and all related costs in cost
of
sales when the prototype is delivered and recognizes all of the remaining
amounts billable and the related costs when the units are delivered.
Periodically,
the Company has complex, long-term contracts for the engineering design,
development and production of space electronics products for which revenue
is
recognized under the percentage-of-completion method. Sales and related contract
costs for design and documentation services under this type of contract are
recognized based on the cost-to-cost method. Sales and related contract costs
for products delivered under these contracts are recognized on the
units-of-delivery method.
Pursuant
to SOP 81-1, anticipated losses on all contracts are charged to operations
in
the period when the losses become known.
Sales
of
off-the-shelf standard products and related costs of sales are recorded when
title transfers to the customer, which is generally on the date of shipment,
provided persuasive evidence of an arrangement exists, the sales price is fixed
or determinable and collection of the related receivable is
probable.
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.
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
June 28, 2008, 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 six
months of 2008.
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY
(UNAUDITED)
The
following table reflects the percentage relationships of items from the
Condensed Consolidated Statements of Operations as a percentage of net
sales.
|
|
Percentage
of Net Sales
|
|
Percentage
of Net Sales
|
|
|
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
|
June 28,
|
|
June 30,
|
|
June 28,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
57.3
|
|
|
55.9
|
|
|
58.4
|
|
|
58.9
|
|
Selling,
general and administrative
|
|
|
31.3
|
|
|
36.8
|
|
|
34.7
|
|
|
42.4
|
|
Research
and development
|
|
|
5.0
|
|
|
6.3
|
|
|
5.6
|
|
|
8.3
|
|
|
|
|
93.6
|
|
|
99.0
|
|
|
98.7
|
|
|
109.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
6.4
|
|
|
1.0
|
|
|
1.3
|
|
|
(9.6
|
)
|
Interest
and other (expense) income, net
|
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(0.8
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
5.8
|
|
|
0.9
|
|
|
0.5
|
|
|
(9.4
|
)
|
Provision
(benefit) for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
5.8
|
|
|
0.9
|
|
|
0.5
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, after income taxes in
2007
|
|
|
(0.7
|
)
|
|
(65.5
|
)
|
|
(0.4
|
)
|
|
(38.5
|
)
|
Net
income (loss)
|
|
|
5.1
|
%
|
|
(64.6
|
)%
|
|
0.1
|
%
|
|
(47.9
|
)%
|
SECOND
QUARTER AND FIRST SIX MONTHS OF 2008 COMPARED TO THE SECOND QUARTER AND FIRST
SIX MONTHS OF 2007-CONTINUING OPERATIONS
Net
sales.
Net
sales
from continuing operations for the second quarter of 2008 were $7,524,000,
an
increase of $2,153,000 or 40.1 percent compared to the second quarter of 2007
net sales of $5,371,000. Net sales from continuing operations increased due
to a
higher level of orders received throughout fiscal year 2007, which resulted
in a
higher opening backlog at the beginning of the 2008 fiscal year, including
higher sales of Multi-Mix® products to defense industry-related customers, as
well as a continuation of the favorable trend in orders received during the
current year that have positively impacted backlog during 2008.
Net
sales
from continuing operations for the first six months of 2008 were $13,282,000,
an
increase of $3,399,000 or 34.4 percent compared to net sales of $9,883,000
for
the first six months of 2007. The increase in net sales for the first six months
of 2008 is primarily due to the same reasons that benefited the second quarter
of 2008 increase in net sales.
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 to 1, indicating the backlog is
being
replenished by new orders at a higher rate than the sales being removed from
the
backlog.
The
following table presents key performance measures that we use to monitor our
operating results for the six months ended June 28, 2008 and June 30,
2007:
|
|
2008
|
|
2007
|
|
Beginning
backlog
|
|
$
|
17,991,000
|
|
$
|
11,490,000
|
|
Plus
bookings
|
|
|
15,393,000
|
|
|
14,738,000
|
|
Less
net sales
|
|
|
13,282,000
|
|
|
9,883,000
|
|
Ending
backlog
|
|
$
|
20,102,000
|
|
$
|
16,345,000
|
|
Book-to-bill
ratio
|
|
|
1.16
|
|
|
1.49
|
|
Orders
of
$7,238,000 were received during the second quarter of 2008, a decrease of
$1,531,000 or 17.5 percent compared to $8,769,000 in orders received during
the
second quarter of 2007. Orders of $15,393,000 were received during the first
six
months of 2008, an increase of $655,000 or 4.4 percent compared to $14,738,000
in orders received during the first six months of 2007. Backlog increased by
$2,111,000 or 11.7 percent to $20,102,000 at the end of the second quarter
of
2008 compared to $17,991,000 at year-end 2007, due to the increased orders
received during the first six months of 2008, including orders from defense
industry-related customers that are scheduled for shipment later in 2008 and
2009. The book-to-bill ratio for the second quarter of 2008 was 0.96 to 1 and
for the second quarter of 2007 was 1.63 to 1. The book-to-bill ratio for the
first six months of 2008 was 1.16 to 1 and for the first six months of 2007
was
1.49 to 1. The orders, backlog and book-to-bill data exclude FMI information
for
2007.
Cost
of sales and gross profit.
The
following table provides comparative gross profit information for the quarters
and six months ended June 28, 2008 and June 30, 2007.
|
|
Quarter ended June 28, 2008
|
|
Quarter ended June 30, 2007
|
|
|
|
$
|
|
Increase/
(Decrease)
from prior
period
|
|
% of
Net Sales
|
|
$
|
|
Increase/
(Decrease)
from prior
period
|
|
% of
Net Sales
|
|
Consolidated
gross profit
|
|
$
|
3,215,000
|
|
$
|
848,000
|
|
|
42.7
|
%
|
$
|
2,367,000
|
|
$
|
(1,143,000
|
)
|
|
44.1
|
%
|
|
|
Six Months ended June 28, 2008
|
|
Six Months ended June 30, 2007
|
|
|
|
$
|
|
Increase/
(Decrease)
from prior
period
|
|
% of
Net Sales
|
|
$
|
|
Increase/
(Decrease)
from
prior
period
|
|
% of
Net Sales
|
|
Consolidated
gross
profit
|
|
$
|
5,521,000
|
|
$
|
1,457,000
|
|
|
41.6
|
%
|
$
|
4,064,000
|
|
$
|
(1,315,000
|
)
|
|
41.1
|
%
|
The
increase in consolidated gross profit for the second quarter of 2008 was due
to
the impact of the higher level of sales, which improved the absorption of fixed
manufacturing costs.
The
increase in consolidated gross profit and consolidated gross profit percentage
for the six months of 2008 was due to the impact of the higher level of sales
allowing for a better absorption of fixed manufacturing costs.
Depreciation
expense included in consolidated cost of sales for the second quarter of 2008
was $611,000, an increase of $60,000 compared to the second quarter of 2007.
Depreciation expense included in consolidated cost of sales for the first six
months of 2008 was $1,193,000, an increase of $125,000 compared to the first
six
months of 2007. For the second quarter and first six months of 2008,
approximately $414,000 and $812,000, respectively, of depreciation expense
was
associated with Multi-Mix® Microtechnology capital assets. For the second
quarter and first six months of 2007, approximately $383,000 and $758,000,
respectively, of depreciation expense was associated with Multi-Mix®
Microtechnology capital assets.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses of $2,353,000 for the second quarter of
2008
increased by $377,000 or 19.1%, and when expressed as a percentage of net sales,
decreased by 5.5 percentage points to 31.3% compared to the second quarter
of
2007. The increase in such expenses for the second quarter of 2008 was due
to
higher sales commissions, increased selling costs from recent sales personnel
hired to meet the demand of increased sales, higher professional fee costs,
and
higher share-based compensation from the grant of stock options in April 2007.
Selling, general and administrative expenses of $4,598,000 for the first six
months of 2008 increased by $404,000 or 9.6%, and when expressed as a percentage
of net sales, decreased by 7.8 percentage points to 34.6% compared to the first
six months of 2007. The increase in such expenses for the first six months
of
2008 was due to higher commissions on the increased sales level, higher selling
and administrative costs, and higher share-based compensation from the grant
of
stock options in April 2007.
Research
and development expenses.
Research
and development expenses for new products were $375,000 for the second quarter
of 2008, an increase of $39,000 or 11.7%, and when expressed as a percentage
of
net sales, decreased by 1.2 percentage points to 5.0% compared to the second
quarter of 2007. Substantially all of the research and development expenses
were
related to Multi-Mix® Microtechnology products. Research and development
expenses for new products were $747,000 for the first six months of 2008, a
decrease of $72,000 or 8.8%, and when expressed as a percentage of net sales,
decreased by 2.7 percentage points to 5.6% compared to the first six months
of
2007. 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 second quarter of 2008 was $487,000,
compared to operating income from continuing operations of $55,000 for the
second quarter of 2007. The
increase in operating income from continuing operations for the second quarter
of 2008 as compared to the second quarter of 2007 was due to the improved gross
profit from the increase in sales, partially offset by higher sales commissions
and increased selling, general and administrative expenses, and higher research
and development costs.
Operating
income from continuing operations for the first six months of 2008 was $176,000
compared to an operating loss from continuing operations for the first six
months of 2007 of $(949,000). The
increase in operating income from continuing operations for the first six months
of 2008 as compared to the first six months of 2007 was due to higher gross
profit from the increase in sales, partially offset by higher sales commissions
and increased selling, general and administrative expenses.
Interest
and other (expense) income, net.
Interest
and other (expense) income, net was $(49,000) for the second quarter of 2008
compared to interest and other (expense) income, net of $(4,000) for the second
quarter of 2007. Interest and other (expense) income, net was $(109,000) for
the
first six months of 2008 compared to interest and other (expense) income, net
of
$16,000 for the first six months of 2007. Interest expense for the second
quarter and first six months of 2008 and 2007 was principally incurred on
borrowings under the term loans, which the Company refinanced in October 2006.
Interest expense, net for the second quarter and first six months of 2008 was
higher than the second quarter and first six months of 2007, due to the lower
levels of investable cash that generated less interest income to be received
during 2008 when compared to 2007.
Income
(loss) from continuing operations.
For
the
reasons set forth above, income from continuing operations for the second
quarter of 2008 was $439,000 compared to income from continuing operations
of
$50,000 for the second quarter of 2007. Income per diluted share from continuing
operations for the second quarter of 2008 was $.15 compared to income from
continuing operations of $.02 per diluted share for the second quarter of
2007.
For
the
reasons set forth above, income from continuing operations for the first six
months of 2008 was $66,000 compared to a loss from continuing operations of
$(933,000) for the first six months of 2007. Income from continuing operations
per diluted share for the first six months of 2008 was $.02 compared to a loss
from continuing operations of $(.31) per share for the first six months of
2007.
Income
taxes.
The
Company’s effective tax rate for the quarter and six months ended June 28, 2008,
(which effective tax rate was zero percent), reflects U.S. Federal Alternative
Minimum Tax and State income taxes that are due based on certain statutory
limitations on the use of the Company’s net operating loss carryforwards. No
provision or benefit for income taxes was recorded based on management’s
estimate of the minimal projected taxable income and the availability of net
operating loss carryforwards that can be utilized.
As
of
June 28, 2008, 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 six
months of 2008.
On
December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
for uncertainty in tax positions. As of that date, the Company had no uncertain
tax positions and did not record any additional benefits or liabilities. At
June
28, 2008 and December 29, 2007, the Company had no uncertain tax positions
and
did not record any additional benefits or liabilities. The Company will
recognize any accrued interest or penalties related to unrecognized tax benefits
or liabilities within the provision for income taxes.
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.
Discontinued
operations.
Loss
from
discontinued operations for the second quarter and first six months of 2008
was
$55,000 or $.02 per share, which consisted of certain ongoing professional
fees,
claim defense deductibles and certain other expenses. There was no loss from
discontinued operations in the first quarter of 2008. Loss from discontinued
operations for the second quarter of 2007 was $3,519,000 and for the first
six
months of 2007 was $3,800,000. Loss from discontinued operations includes a
partial goodwill impairment charge of $2,630,000 and a charge of $506,000 to
provide a full valuation allowance for a Canadian net deferred tax asset, for
a
total of $3,136,000 of non-cash charges. Loss from discontinued operations
for
the second quarter of 2007 was $1.21 per basic share and $1.20 per diluted
share, and for the first six months of 2007 was $1.27 per basic
share.
Net
income (loss).
For
the
reasons set forth above, net income for the second quarter of 2008 was $384,000
compared to a net loss of $(3,469,000) for the second quarter of 2007. Net
income per diluted share for the second quarter of 2008 was $.13 compared to
a
net loss of $(1.18) per diluted share for the second quarter of
2007.
For
the
reasons set forth above, net income for the first six months of 2008 was $11,000
compared to a net loss of $(4,733,000) for the first six months of 2007. Net
income per diluted share for the first six months of 2008 was nil compared
to a
net loss of $(1.58) per share for the first six months of 2007.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had liquid resources comprised of cash and cash equivalents totaling
approximately $410,000 at the end of the first six months of 2008 compared
to
approximately $2,000,000 at the end of 2007. The principal reasons for the
reduction in cash at June 28, 2008 from December 29, 2007 were capital
expenditures of $613,000, cash used in operating activities of continuing
operations of $1,902,000 as described below, and repayments of borrowings of
$525,000 offset, in part, by the return of restricted cash to repay term debt
of
$250,000, the receipt of the remaining proceeds from the sale of FMI’s assets of
$664,000, proceeds from sales of stock to employees of $86,000, and revolving
credit borrowings of $500,000 drawn down in the second quarter of 2008. The
Company's working capital was approximately $10,700,000 and its current ratio
was 3.5 to 1 at the end of the first six months of 2008 compared to $9,900,000
and 3.5 to 1, respectively, at the end of 2007. At June 28, 2008, the Company
had available borrowing capacity under its revolving line of credit of
$4,500,000, net of the $500,000 outstanding revolving credit
borrowings.
The
Company's activities from continuing operations used operating cash flows of
$1,902,000 during the first six months of 2008 compared to generating $473,000
of operating cash flows during the first six months of 2007. The primary uses
of
operating cash flows from continuing operations for the first six months of
2008
were an increase in accounts receivable of $2,309,000 from the higher first
six
months sales level, an increase in inventories of $1,422,000 to meet the
production needs of the increased backlog, and an aggregate decrease in accounts
payable, customer deposits and accrued liabilities of $34,000. These uses of
operating cash flows were partly offset by income from continuing operations
for
the first six months of 2008 of $66,000 plus depreciation and amortization
of
$1,270,000 and share-based compensation of $258,000, coupled with an aggregate
reduction in current assets and other assets of $252,000.
The
primary sources of operating cash flows from continuing operations for the
first
six months of 2007 were a decrease in accounts receivable of $645,000, a
decrease in other current assets of $187,000, and an aggregate increase in
accounts payable, customer deposits and accrued liabilities of $282,000, partly
offset by the loss from continuing operations of $933,000 and an increase in
inventory of $826,000, which was reduced by depreciation and amortization of
$1,158,000 and share-based compensation of $132,000.
The
Company made net cash investments in property, plant and equipment of $613,000
during the first six months of 2008 compared to net cash investments made in
property, plant and equipment of $756,000 during the first six months of 2007.
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 $4,742,000 at the end of the
first six months of 2008, a decrease of $739,000 compared to $5,481,000 at
the
end of fiscal year 2007.
The
primary uses of cash flows from financing activities during the first six months
of 2007 were the repurchase, in a private transaction on March 14, 2007, of
238,700 shares of common stock for the treasury at $9.00 per share for an
aggregate total of $2,148,000 and the repayments of $275,000 of term loan
borrowings.
The
Company’s remaining planned equipment purchases for the second-half of 2008 have
been reduced to approximately $400,000. The reduced capital expenditures 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.
Capital One, N.A. has indicated to us that it does not intend to renew the
line
of credit. We believe that we will be able to refinance the line of credit
with
another financial institution, but such refinancing likely will be on less
favorable terms to us.
On
October 18, 2006, the Company entered into a financing agreement with Capital
One, N.A. 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 new 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. The Company anticipates
the
revolving credit facility will be refinanced, under terms less favorable than
its existing credit facilities. At June 28, 2008, the Company had available
borrowing capacity under its revolving line of credit of $4,500,000. The
revolving line of credit bears interest at the prime rate less 0.50% (4.50%
at
June 28, 2008 and currently 4.50%) 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. The Term Loan bears interest
at the prime rate less 0.50% (4.50% at June 28, 2008 and currently 4.50%) 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. The Mortgage Loan bears interest at the prime rate less
0.50%
(4.50% at June 28, 2008 and currently 4.50%) or LIBOR plus 2.25%. At June 28,
2008, the Company had no portion of its borrowings under LIBOR-based interest
rates. 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.
Capital
One, N.A. 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 June 28, 2008.
On
August
9, 2007, Capital One, N.A. 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 Capital
One, N.A. providing such consent, Merrimac deposited $250,000 into a controlled
collateral account with Capital One, N.A. and also agreed to prepay the mortgage
loan portion of the credit facility with Capital One, N.A. with fifty percent
of
the net proceeds from a sale of FMI, up to a maximum amount of $500,000. This
agreement terminated in November 2007 when The Bank of Nova Scotia terminated
FMI’s revolving credit agreement. Upon the termination of such agreement, the
Company agreed to repay a portion of its Mortgage Loan with the funds in the
controlled collateral account upon the expiration of the LIBOR contracts in
January 2008. On January 18, 2008, Merrimac paid $250,000 of the Mortgage Loan
using the funds previously deposited into the controlled collateral
account.
Depreciation
and amortization expenses exceeded capital expenditures for production equipment
during the first six months of 2008 by approximately $660,000, and the Company
anticipates that depreciation and amortization expenses will exceed capital
expenditures in fiscal year 2008 by approximately $1,600,000. The Company
intends to issue commitments to purchase up to $400,000 of capital equipment
from various vendors for the remainder of 2008. The Company anticipates that
such equipment will be purchased and become operational during 2008.
Related
to the discontinued operations of FMI, there is a remaining lease commitment
on
its leased facility of approximately $160,000, however, the Company anticipates
settling the remaining lease commitment for a reduced amount.
The
functional currency for the Company’s Costa Rica operations is the United States
dollar. The functional currency for the Company’s previously wholly-owned
subsidiary FMI is the Canadian dollar. The change in accumulated other
comprehensive income for 2007 reflects the changes in the exchange rates between
the Canadian dollar and the United States dollar for those respective periods.
Following the sale of the Company’s discontinued operations in December 2007,
there is no foreign currency translation adjustment at June 28, 2008.
RECENT
ACCOUNTING PRONOUNCEMENTS
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. The Company adopted SFAS No. 157 On December 30, 2007. The
adoption of SFAS No. 157 did not have an impact 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. The
Company adopted SFAS No. 159 on December 30, 2007. The adoption of SFAS No.
159
did not have an impact on its financial position and results of operations,
since the Company did not elect the fair value option for any assets or
liabilities.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
principles and requirements for how an acquiring company recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest if the acquired company and the goodwill
acquired. SFAS 141R also established disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS
141R is effective for fiscal periods beginning after December 15, 2008. The
Company is currently evaluating the impact that SFAS 141R will have on its
financial position and results of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards of ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
160
is effective for fiscal periods beginning after December 15, 2008. The Company
is currently evaluating the impact that SFAS 160 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 29, 2007, which is incorporated herein by reference. Our
exposure to market risk has not changed materially since December 29, 2007.
ITEM
4.
CONTROLS AND PROCEDURES
As
of
June 28, 2008 (the end of the period covered by this report), the Company's
management carried out an evaluation, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of June
28, 2008, 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 most recent fiscal 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 management of Merrimac 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 the
Company.
On
February 22, 2008, a statement of claim in Ontario Superior Court of Justice
was
filed by a former FMI employee against FMI seeking damages for approximately
$77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
assets to FTG. The Company settled this claim in May 2008 for a minimal
amount.
On
March
10, 2008, a statement of claim in Ontario Superior Court of Justice was filed
by
nineteen (19) former FMI employees against Merrimac, FMI and FTG seeking damages
for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
following the sale of FMI’s assets to FTG. The former FMI employees are alleging
that an employment contract existed between FMI and the plaintiffs and are
seeking additional damages for termination of the alleged contract. Merrimac
believes it has been improperly named in this claim and is petitioning the
Court
to be removed as a defendant.
Merrimac
has an Employment Practices Liability insurance policy that extends coverage
to
its subsidiaries. The insurance carrier agreed to provide a defense in this
matter on April 24, 2008 and they retained Canadian counsel to defend this
claim. Merrimac made provision for the deductible amount of the insurance policy
which is $25,000. In accordance with the requirements of SFAS No. 5, after
discussions with counsel, Merrimac cannot presently determine if the likelihood
of an unfavorable outcome is probable, reasonably possible or remote. In
addition, Merrimac cannot reasonably estimate the amount of a probable loss,
other than the minimal deductible amount under the insurance policy. Merrimac
and its insurance carrier intend to defend this claim vigorously.
On
July
23, 2008, a Statement of Claim was filed in Ontario Superior Court of Justice
by
the lessor of the premises formerly occupied by FMI in Ontario, Canada, against
FMI, Merrimac, and FTG. The Statement of Claim seeks damages of $150,612 in
respect of the period from and after which FTG, which purchased the assets
of
FMI, removed operations from the premises through the term of the lease. In
addition, the Statement of Claim seeks damages for $110,319 for repairs to
the
premises, and seeks to set aside the transfer of assets from FMI to FTG for
the
failure to comply with the Bulk Sales Act Ontario.
In
accordance with the requirements of SFAS No. 5, after discussions with counsel,
Merrimac cannot presently determine if the likelihood of an unfavorable outcome
is probable, reasonably possible or remote. In addition, Merrimac cannot
reasonably estimate the amount of a probable loss. The Company intends to defend
this claim vigorously.
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 2007, except that the Risk Factor captioned “Our
revolving line of credit expires in October 2008 and the failure to renew the
revolving line of credit or a renewal on less favorable terms could have a
material adverse effect on our business operations” is revised to read as
follows:
Our
revolving line of credit expires in October 2008 and the failure to refinance
the revolving line of credit or a refinancing on less favorable terms could
have
a material adverse effect on our business operations.
Our
revolving line of credit with Capital One, N.A. expires in October 2008. Capital
One, N.A. has indicated to us that it does not intend to renew the line of
credit. We believe that we will be able to refinance the line of credit with
another financial institution, but such refinancing likely will be on less
favorable terms to us. In the event that we are unable to refinance the
revolving line of credit with another financial institution or if we are
required to refinance our line of credit on less favorable terms, our business
operations could suffer a material adverse effect.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
June
26, 2008, the Company held its Annual Stockholders Meeting at which the
stockholders elected two members to the Company's Board of Directors. The
stockholders of the Company elected Mason N. Carter and Timothy P. McCann as
Class III Directors whose terms expire at the 2011 Annual Meeting.
The
following sets forth the number of votes cast for, against or withheld, as
well
as the number of abstentions and broker non-votes, voted upon at the Company's
June 26, 2008 Annual Stockholders Meeting:
Election
of Directors.
|
|
For
|
|
Withheld
|
|
Abstain
|
|
Broker Non-Votes
|
|
Mason
N. Carter
|
|
|
2,302,252
|
|
|
216,104
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
P. McCann
|
|
|
2,484,169
|
|
|
34,187
|
|
|
-0-
|
|
|
-0-
|
|
Ratification of J.H. Cohn LLP as the Company's independent
registered public accounting firm.
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
|
|
|
|
|
2,513,691
|
|
|
3,572
|
|
|
1,093
|
|
|
|
|
The
Company’s three Class I directors, Fernando L. Fernandez, Joel H. Goldberg and
Ludwig G. Kuttner and three Class II directors, Edward H. Cohen, Arthur A.
Oliner and Harold J. Raveché, continued as directors after the Annual
Stockholders Meeting and are serving terms expiring at the time of the Company's
annual meetings in 2009 and 2010, respectively, and until their respective
successors have been duly elected and qualified.
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:
August 18, 2008
|
By:
|
/s/
Mason N. Carter
|
|
Mason
N. Carter
|
|
Chairman,
President and
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
Date:
August 18, 2008
|
By: |
/s/
Robert V. Condon
|
|
Robert
V. Condon
|
|
Vice
President, Finance and
|
|
Chief
Financial Officer
|