UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September 27, 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
November 17, 2008, there were 2,951,324 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
|
|
|
for
the Quarters and Nine Months Ended September 27, 2008
|
|
|
and
September 29, 2007 (Unaudited)
|
1
|
|
|
|
Condensed
Consolidated Balance Sheets-September 27, 2008 (Unaudited)
and
|
|
|
December
29, 2007
|
2
|
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity for the Nine Months
|
|
|
Ended
September 27, 2008 (Unaudited)
|
3
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months
|
|
|
Ended
September 27, 2008 and September 29, 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
|
25
|
|
|
|
Item
4.
|
Controls
and Procedures
|
25
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
26
|
|
|
|
Item
1A.
|
Risk
Factors
|
26
|
|
|
|
Item
5.
|
Other
Information
|
27
|
|
|
|
Item
6.
|
Exhibits
|
28
|
|
|
|
Signatures
|
|
29
|
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
8,327,790
|
|
$
|
6,612,494
|
|
$
|
21,575,742
|
|
$
|
16,495,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
5,578,779
|
|
|
3,796,384
|
|
|
13,128,049
|
|
|
9,615,265
|
|
Selling,
general and administrative
|
|
|
2,423,472
|
|
|
2,099,038
|
|
|
7,021,437
|
|
|
6,292,769
|
|
Research
and development
|
|
|
105,114
|
|
|
399,980
|
|
|
852,513
|
|
|
1,219,487
|
|
|
|
|
8,107,365
|
|
|
6,295,402
|
|
|
21,001,999
|
|
|
17,127,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
220,425
|
|
|
317,092
|
|
|
573,743
|
|
|
(632,110
|
)
|
Interest
and other expense, net
|
|
|
(17,336
|
)
|
|
(72,196
|
)
|
|
(126,516
|
)
|
|
(55,795
|
)
|
Income
(loss) from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
203,089
|
|
|
244,896
|
|
|
447,227
|
|
|
(687,905
|
)
|
Provision
for income taxes
|
|
|
10,000
|
|
|
-
|
|
|
10,000
|
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
193,089
|
|
|
244,896
|
|
|
437,227
|
|
|
(687,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
(10,956
|
)
|
|
(2,058,341
|
)
|
|
(65,992
|
)
|
|
(5,858,265
|
)
|
Net
income (loss
|
|
$
|
182,133
|
|
$
|
(1,813,445
|
)
|
$
|
371,235
|
|
$
|
(6,546,170
|
)
|
Income
(loss) per common share from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-basic
|
|
$
|
.06
|
|
$
|
.08
|
|
$
|
.15
|
|
$
|
(.23
|
)
|
Loss
per common share from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-basic
|
|
$
|
-
|
|
$
|
(.70
|
)
|
$
|
(.02
|
)
|
$
|
(1.97
|
)
|
Net
income (loss) per common share-basic
|
|
$
|
.06
|
|
$
|
(.62
|
)
|
$
|
.13
|
|
$
|
(2.20
|
)
|
Income
(loss) per common share from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-diluted
|
|
$
|
.06
|
|
$
|
.08
|
|
$
|
.15
|
|
$
|
(.23
|
)
|
Loss
per common share from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations-diluted
|
|
$
|
-
|
|
$
|
(.69
|
)
|
$
|
(.02
|
)
|
$
|
(1.97
|
)
|
Net
income (loss) per common share-diluted
|
|
$
|
.06
|
|
$
|
(.61
|
)
|
$
|
.13
|
|
$
|
(2.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding-basic
|
|
|
2,948,037
|
|
|
2,917,245
|
|
|
2,940,112
|
|
|
2,974,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding-diluted
|
|
|
2,965,537
|
|
|
2,960,187
|
|
|
2,965,366
|
|
|
2,974,757
|
|
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
27,
2008
|
|
December
29,
2007
|
|
ASSETS
|
|
(UNAUDITED)
|
|
(Note
1)
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,922,987
|
|
$
|
2,004,471
|
|
Accounts
receivable, net
|
|
|
6,892,601
|
|
|
5,299,753
|
|
Inventories,
net
|
|
|
5,885,741
|
|
|
5,039,770
|
|
Other
current assets
|
|
|
620,195
|
|
|
774,007
|
|
Revenue
in excess of billing
|
|
|
1,185,909
|
|
|
-
|
|
Due
from Canadian assets sale contract
|
|
|
-
|
|
|
664,282
|
|
Total
current assets
|
|
|
16,507,433
|
|
|
13,782,283
|
|
Property,
plant and equipment
|
|
|
37,886,003
|
|
|
37,556,672
|
|
Less
accumulated depreciation and amortization
|
|
|
28,165,460
|
|
|
26,600,240
|
|
Property,
plant and equipment, net
|
|
|
9,720,543
|
|
|
10,956,432
|
|
Restricted
cash
|
|
|
-
|
|
|
250,000
|
|
Other
assets
|
|
|
509,628
|
|
|
531,633
|
|
Deferred
tax assets
|
|
|
52,000
|
|
|
52,000
|
|
Total
Assets
|
|
$
|
26,789,604
|
|
$
|
25,572,348
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
1,550,000
|
|
$
|
550,000
|
|
Accounts
payable
|
|
|
905,045
|
|
|
943,481
|
|
Accrued
liabilities
|
|
|
1,833,644
|
|
|
1,965,403
|
|
Customer
deposits
|
|
|
520,361
|
|
|
363,296
|
|
Deferred
income taxes
|
|
|
52,000
|
|
|
52,000
|
|
Income
taxes payable
|
|
|
10,000
|
|
|
|
|
Total
current liabilities
|
|
|
4,871,050
|
|
|
3,874,180
|
|
Long-term
debt, net of current portion
|
|
|
3,145,833
|
|
|
3,762,500
|
|
Deferred
liabilities
|
|
|
63,515
|
|
|
61,300
|
|
Total
liabilities
|
|
|
8,080,398
|
|
|
7,697,980
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, par value $.01 per share:
|
|
|
|
|
|
|
|
Authorized:
1,000,000 shares
|
|
|
|
|
|
|
|
No
shares issued or outstanding
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share:
|
|
|
|
|
|
|
|
20,000,000
shares authorized; 3,310,942 and 3,289,103 shares issued;
and
2,948,037 and 2,926,198 shares outstanding, respectively
|
|
|
33,110
|
|
|
32,891
|
|
Additional
paid-in capital
|
|
|
20,253,101
|
|
|
19,789,717
|
|
Retained
earnings
|
|
|
1,545,159
|
|
|
1,173,924
|
|
|
|
|
21,831,370
|
|
|
20,996,532
|
|
Less
treasury stock, at cost - 362,905 shares of common stock at September
27,
2008 and December 29, 2007
|
|
|
(3,122,164
|
)
|
|
(3,122,164
|
)
|
Total
stockholders' equity
|
|
|
18,709,206
|
|
|
17,874,368
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
26,789,604
|
|
$
|
25,572,348
|
|
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE
MONTHS ENDED SEPTEMBER 27, 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
|
|
|
|
|
|
|
|
|
|
|
|
371,235 |
|
|
|
|
|
|
|
|
371,235 |
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
375,757
|
|
|
|
|
|
|
|
|
|
|
|
375,757 |
|
Stock
Purchase Plan sales
|
|
|
9,757
|
|
|
98
|
|
|
59,337
|
|
|
|
|
|
|
|
|
|
|
|
59,435 |
|
Exercise
of stock options
|
|
|
4,082
|
|
|
41
|
|
|
28,290
|
|
|
|
|
|
|
|
|
|
|
|
28,331 |
|
Vesting
of restricted stock
|
|
|
8,000
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Balance,
September 27, 2008
|
|
|
.3,310,942
|
|
$
|
33,110
|
|
$
|
20,253,101
|
|
$
|
1,545,159
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
18,709,206
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
September
29,
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
371,235
|
|
$
|
(6,546,170
|
)
|
Loss
from discontinued operations
|
|
|
(65,992
|
)
|
|
(5,858,265
|
)
|
Income
(loss) from continuing operations
|
|
|
437,227
|
|
|
(687,905
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) from continuing operations to net
cash used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,907,668
|
|
|
1,756,945
|
|
Amortization
of deferred financing costs
|
|
|
24,120
|
|
|
22,755
|
|
Share-based
compensation
|
|
|
375,837
|
|
|
223,037
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,592,848
|
)
|
|
(1,385,254
|
)
|
Inventories
|
|
|
(845,971
|
)
|
|
(741,534
|
)
|
Revenue
in excess of billing
|
|
|
(1,185,909
|
)
|
|
-
|
|
Other
current assets
|
|
|
48,944
|
|
|
57,061
|
|
Other
assets
|
|
|
69,311
|
|
|
(30,464
|
)
|
Accounts
payable
|
|
|
(38,436
|
)
|
|
(76,272
|
)
|
Accrued
liabilities
|
|
|
(98,316
|
)
|
|
169,503
|
|
Income
taxes payable
|
|
|
10,000
|
|
|
-
|
|
Customer
deposits
|
|
|
157,065
|
|
|
152,261
|
|
Deferred
liabilities
|
|
|
2,215
|
|
|
17,595
|
|
Net
cash used in operating activities of continuing operations
|
|
|
(729,093
|
)
|
|
(522,272
|
)
|
Net
cash used in operating activities of discontinued
operations
|
|
|
(65,992
|
)
|
|
(363,141
|
)
|
Net
cash used in operating activities
|
|
|
(795,085
|
)
|
|
(885,413
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of capital assets
|
|
|
(671,780
|
)
|
|
(1,070,450
|
)
|
Cash
proceeds from sale of discontinued operations
|
|
|
664,282
|
|
|
-
|
|
Net
cash used in investing activities of continuing operations
|
|
|
(7,498
|
)
|
|
(1,070,450
|
)
|
Net
cash used in investing activities of discontinued
operations
|
|
|
-
|
|
|
(180,136
|
)
|
Net
cash used in investing activities
|
|
|
(7,498
|
)
|
|
(1,250,586
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repurchase
of common stock for the treasury
|
|
|
-
|
|
|
(2,148,300
|
)
|
Borrowings
under revolving credit facility
|
|
|
1,000,000
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(616,667
|
)
|
|
(412,500
|
)
|
Restricted
cash returned (deposited)
|
|
|
250,000
|
|
|
(250,000
|
)
|
Proceeds
from the exercise of stock options
|
|
|
28,331
|
|
|
73,800
|
|
Proceeds
from Stock Purchase Plan sales
|
|
|
59,435
|
|
|
78,649
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities of continuing
operations
|
|
|
721,099
|
|
|
(2,658,351
|
)
|
Net
cash used in financing activities of discontinued
operations
|
|
|
-
|
|
|
(51,783
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
721,099
|
|
|
(2,710,134
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes
|
|
|
-
|
|
|
32,856
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(81,484
|
)
|
|
(4,813,277
|
)
|
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
|
|
$
|
1,922,987
|
|
$
|
1,148,260
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for-
|
|
|
|
|
|
|
|
Interest
on credit facilities
|
|
$
|
173,762
|
|
$
|
272,644
|
|
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 September 27, 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
(“SFAS”) 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 third quarter of 2007 and 2008, and and the
first nine months of 2007 and 2008 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. See summary
of Significant Accounting Policies in the Company’s 2007 Annual Report on Form
10-K for a discussion of the accounting policies utilized by the
Company.
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 of $664,282 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
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
1,003,000
|
|
$
|
-
|
|
$
|
2,824,000
|
|
Loss
before provision for income taxes
|
|
$
|
(11,000
|
)
|
|
(2,058,000
|
)
|
$
|
(66,000
|
)
|
|
(5,352,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
----
|
|
|
----
|
|
|
----
|
|
|
506,000
|
|
Net
loss
|
|
$
|
(11,000
|
)
|
$
|
(2,058,000
|
)
|
$
|
(66,000
|
)
|
$
|
(5,858,000
|
)
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
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.
Increasingly,
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. The Company has one contract which is primarily
related to the design and development (and to a lesser extent, the production
of
space electronics) for which revenue under the entire contract is recognized
under the percentage of completion method using the cost-to-cost method. For
such contract the Company has recognized revenues in excess of billings of
approximately $1,186,000 at September 27, 2008.
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 September 29, 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 September 27, 2008. There were no
differences between net income (loss) and comprehensive income (loss) for any
period presented except for the nine months ended September 29, 2007 summarized
as follows:
COMPREHENSIVE
LOSS
Net
loss
|
|
$
|
(6,546,170
|
)
|
Comprehensive
income:
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
456,693
|
|
Comprehensive
loss
|
|
$
|
(6,089,477
|
)
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“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 Financial Accounting Standards Board (“FASB”) issued SFAS 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 of 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 SFAS 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.
Due
to
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.
The
components of share-based compensation expense in the statements ofoperations
are as follows:
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$
|
95,000
|
|
$
|
61,000
|
|
$
|
293,000
|
|
$
|
147,000
|
|
Restricted
stock
|
|
|
17,000
|
|
|
16,000
|
|
|
64,000
|
|
|
33,000
|
|
Employee
stock purchase plan
|
|
|
6,000
|
|
|
14,000
|
|
|
19,000
|
|
|
43,000
|
|
Total
share-based compensation
|
|
$
|
118,000
|
|
$
|
91,000
|
|
$
|
376,000
|
|
$
|
223,000
|
|
For
the
quarters and nine months ended September 27, 2008 and September 29, 2007,
share-based compensation expense was allocated as follows:
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
45,000
|
|
$
|
25,000
|
|
$
|
135,000
|
|
$
|
54,000
|
|
Selling,
general and administrative
|
|
|
73,000
|
|
|
66,000
|
|
|
241,000
|
|
|
169,000
|
|
Total
share-based compensation
|
|
$
|
118,000
|
|
$
|
91,000
|
|
$
|
376,000
|
|
$
|
223,000
|
|
The
fair
value of the options granted was estimated on the date of grant using the
Black-Scholes option valuation model.
The
following weighted average assumptions for options granted in the quarter and
nine months ended September 27, 2008 and September 29, 2007 were
utilized:
|
|
2008
|
|
2007
|
|
Expected
option life (years)
|
|
|
6.0
|
|
|
5.8
|
|
Expected
volatility
|
|
|
37.56
|
%
|
|
33.51
|
%
|
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. 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. At September 27, 2008,
there were 318,800 options outstanding under the 2006 Stock Option Plan of
which
124,600 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 181,200 at September 27, 2008.
At
September 27, 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.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At
September 27, 2008, there were 141,600 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:
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
Number
of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Term
(Years)
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at
|
|
|
|
|
|
|
|
|
|
December
29, 2007
|
|
|
594,747
|
|
$
|
9.30
|
|
|
|
|
|
|
|
Granted
|
|
|
17,500
|
|
|
5.15
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,082
|
)
|
|
6.94
|
|
|
|
|
|
|
|
Expired
|
|
|
(74,665
|
)
|
|
10.13
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(73,100
|
)
|
|
8.62
|
|
|
|
|
|
|
|
Outstanding
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
27, 2008
|
|
|
460,400
|
|
$
|
9.13
|
|
|
6.9
|
|
|
2,000
|
|
Exercisable
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
27, 2008
|
|
|
266,200
|
|
$
|
9.22
|
|
|
5.6
|
|
|
-
|
|
The
weighted-average grant-date fair value of options granted during the nine months
ended September 27, 2008 and September 29, 2007 was $2.14 and $3.77,
respectively. The total intrinsic value of options exercised during the nine
months ended September 27, 2008 was approximately $9,000. No options were
exercised during the quarters ended September 27, 2008 and September 29, 2007.
The total intrinsic value of options exercised for the nine months ended
September 29, 2007 was approximately $1,000 and $16,000, respectively.
As
As of
September 27, 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 $577,000. Of that total, $100,000, $344,000,
$128,000 and $5,000 are expected to be recognized in 2008, 2009, 2010 and 2011,
respectively. The fair value of options vested during the quarter and nine
months ended September 27, 2008 was $14,000 and $357,000, respectively. The
fair
value of options vested during the nine months ended September 29, 2007 was
$71,000. There were no options vested during the quarter ended September 27,
2007.
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 each anniversary of the grant date over a
three-year period. Share-based compensation expense for the quarter and nine
months ended September 27, 2008 related to the grants of restricted stock was
approximately $17,000 and $64,000, respectively, which was based on a
straight-line amortization of the fair value of the awards over the expected
service period of three years. Share-based compensation expense for the quarter
and nine months ended September 29, 2007 related to the grants of restricted
stock was approximately $16,000 and $33,000, respectively. Restricted shares
of
common stock available for grant under the 2006 Non-Employee Directors’ Stock
Plan were 71,500 at September 27, 2008.
A
summary
of unvested restricted stock activity and information related to all restricted
stock outstanding follows:
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Day
|
|
|
|
|
|
Fair
Value
|
|
Shares
|
|
|
|
|
|
|
|
Unvested
at December 29, 2007
|
|
$
|
9.69
|
|
|
16,500
|
|
Granted
|
|
|
5.15
|
|
|
9,000
|
|
Vested
|
|
|
9.67
|
|
|
(8,000
|
)
|
Unvested
at September 27, 2008
|
|
$
|
7.36
|
|
|
17,500
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of
September 27, 2008, the total future compensation cost related to the 2006
Non-Employee Directors’ Stock Plan not yet recognized in the statement of
operations was $108,000. Of that total, $19,000, $55,000, $28,000 and $6,000
are
expected to be recognized in 2008, 2009, 2010 and 2011, respectively.
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:
|
|
September
27,
2008
|
|
December
29,
2007
|
|
Finished
goods
|
|
$
|
442,822
|
|
$
|
239,503
|
|
Work
in process
|
|
|
2,919,172
|
|
|
2,979,632
|
|
Raw
materials and purchased parts
|
|
|
2,523,747
|
|
|
1,820,635
|
|
Total
|
|
$
|
5,885,741
|
|
$
|
5,039,770
|
|
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 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 September 27,
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
|
|
$
|
1,000,000
|
|
$
|
-
|
|
Term
loan, due October 1, 2011, 2.25% above LIBOR or 0.50%
|
|
|
|
|
|
|
|
below
prime
|
|
|
1,233,333
|
|
|
1,500,000
|
|
Mortgage
loan, due October 1, 2016, 2.25% above LIBOR or 0.50%
|
|
|
|
|
|
|
|
below
prime
|
|
|
2,462,500
|
|
|
2,812,500
|
|
|
|
|
4,695,833
|
|
|
4,312,500
|
|
Less
current portion
|
|
|
1,550,000
|
|
|
550,000
|
|
Long-term
portion
|
|
$
|
3,145,833
|
|
$
|
3,762,500
|
|
Facility
in effect at September 27, 2008 - repaid September 30, 2008
On
October 18, 2006, the Company entered into a financing agreement with Capital
One, N.A. (formerly North Fork Bank) consisting 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”). 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).
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company borrowed $500,000 under the revolving line of credit on May 1, 2008.
On
July 1, 2008, the Company borrowed an additional $500,000 under the revolving
line of credit. The revolving line of credit bears interest at the prime rate
less 0.50% (4.50% at September 27, 2008) 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 September 27, 2008) 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
September 27, 2008 and currently 4.50%) or LIBOR plus 2.25%. At September 27,
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
collateralized 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 September 29, 2007, (ii) added a covenant related to earnings before
interest, taxes, depreciation and amortization (“EBITDA”) for the four quarters
ended September 29, 2007 to require the Company to achieve a minimum level
of
EBITDA, and (iii) modified the fixed charge coverage ratio covenant for periods
after the quarter ending September 29, 2007. The Company was in compliance
with
these amended covenants at September 27, 2008.
New
Credit facility - effective September 29, 2008
On
September 29, 2008, the company entered into a credit facility with Wells Fargo
Bank, N.A. (WFB)(the “Wells Fargo Credit Facility”) which replaced the Company’s
credit facility with Capital One, N.A. On September 30, 2008, the Company repaid
all outstanding amounts under the credit facility with Capital One, N.A. with
the proceeds of the Wells Fargo Credit Facility. The Wells Fargo Credit Facility
consists of a three-year $5,000,000 collateralized revolving credit facility,
a
three-year $500,000 equipment term loan and a three-year $2,500,000 real estate
term loan. The revolving line of credit is subject to an availability limit
under a borrowing base calculation of 85% of eligible domestic accounts
receivable, 75% of eligible foreign accounts receivable, and 30% of eligible
inventory with an inventory sublimit of $400,000. The revolving line of credit
expires September 29, 2011. The revolving line of credit bears interest at
the
prime rate plus one percent, with the prime rate having a floor limit of 5%
for
loan purposes. The Company may request a LIBOR quote for an initial minimum
of
$1,000,000 with subsequent requests at a minimum of $500,000. No more than
three
such requests may be active at any point in time. LIBOR advances bear interest
at the LIBOR rate plus 3.25% for a credit advance, or 3.50% for a term loan.
The
equipment loan is required to be repaid in equal monthly installments of $13,900
based on a four year amortization. The real estate loan is required to be paid
in equal monthly installments amortized over a 180 month time period, with
any
unpaid principal and interest due and payable on the termination date of
September 29, 2011. The two term loans require mandatory prepayment under
certain circumstances subject to a prepayment fee of 1%-2% of the outstanding
balance.
The
equipment term loan bears interest at the prime (with a floor of 5%) rate plus
1%. The real estate term loan bears interest at the prime rate (with a floor
of
5%) plus 1.50% or LIBOR plus 3.50%.
The
Wells
Fargo Credit Facility contains several financial and non-financial covenants
and
is collateralized by substantially all assets of the Company.
On
September 29, 2008, under the Wells Fargo Credit Facility, the Company borrowed
approximately $1.7 million under the revolving credit facility, $500,000 under
the equipment term loan and $2.5 million under the real estate term
loan.
At
September 27, 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
$12,000 and $57,000 for the quarters ended September 27, 2008 and September
29,
2007, respectively, and $77,000 and $136,000 for the nine months ended September
27, 2008 and September 29, 2007, respectively. The warranty reserve at September
27, 2008 and December 29, 2007 was approximately $200,000.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12.
INCOME TAXES
As
of
September 27, 2008, the Company has significant deferred tax assets resulting
from net operating loss carryforwards, tax credit carryforwards, and deductible
temporary differences, which
may
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 third quarter of 2008.
For
the period ended September 27, 2008, the Company provided for Alternative
Minimum Tax and certain state taxes, based upon the estimated annualized tax
provision.
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.
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
September 27, 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.
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.
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 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.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes the calculation of basic and diluted net income
(loss) per share:
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
182,133
|
|
$
|
(1,813,445
|
)
|
$
|
371,235
|
|
$
|
(6,546,170
|
)
|
Basic
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
net income (loss) per share-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,948,037
|
|
|
2,917,245
|
|
|
2,940,112
|
|
|
2,974,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share - basic
|
|
|
$
.06
|
|
$
|
(.62
|
)
|
$
|
.13
|
|
$
|
(2.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,948,037
|
|
|
2,917,245
|
|
|
2,940,112
|
|
|
2,974,757
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options (1)
|
|
|
17,500
|
|
|
42,942
|
|
|
25,254
|
|
|
-
|
|
Weighted
average number of shares outstanding for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
net income (loss) per share
|
|
|
2,965,537
|
|
|
2,960,187
|
|
|
2,965,366
|
|
|
2,974,757
|
|
Net
income (loss) per common share - diluted
|
|
$
|
.06
|
|
$
|
(.61
|
)
|
$
|
.13
|
|
$
|
(2.20
|
)
|
(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 460,000 and 84,000 shares underlying stock
options for
the
quarters ended September 27, 2008 and September 29, 2007, respectively, as
the
exercise price of these options was greater than the average market value of
the
common shares. Diluted net income per share excludes 430,000 shares underlying
stock options for the nine-month period ended September 27, 2008, as the
exercise price of these options was greater than the average market value of
the
common shares. Due to the net loss for nine months ended September 29, 2007,
approximately 606,000 shares underlying stock options were excluded from the
calculation of diluted net loss per share as the effect would be
anti-dilutive.
15.
RELATED PARTY TRANSACTIONS
During
the third quarter and first nine months of 2008, the Company's outside general
counsel Katten Muchin Rosenman LLP was paid $73,000 and $242,000, respectively,
for providing legal services to the Company. During the third quarter and first
nine months of 2007, Katten Muchin Rosenman LLP was paid $78,000 and $274,000,
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 $1,000 and $4,000 to these companies during the
second quarter and first nine months of 2008, respectively. The Company paid
an
aggregate of $11,000 and $32,000 to these companies during the second quarter
and first nine months of 2007, respectively. A director of the Company is the
chairman and chief executive officer of these companies.
During
the third quarter and first nine months of 2008 and 2007, a director of the
Company was paid $9,000 and $27,000, respectively, for providing
technology-related consulting services to the Company.
The
Company has an agreement with DuPont Electronic Technologies (“DuPont”), a
stockholder and the employer of a director, for providing technological and
marketing-related personnel and services on a cost-sharing basis to the Company
under the Technology Agreement dated February 28, 2002. No payments were made
to
DuPont during the third quarter and first nine months of 2008 or 2007. A
director of the Company is an officer of DuPont, but would not share in these
payments, if any.
On
December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
beneficial owner of a portion 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
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 of the Company’s Common Stock.
Mr. Kuttner was elected to the Company’s Board of Directorsat 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
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. Merrimac and its insurance carrier intend to
defend these claims 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. The Company intends to defend this claim
vigorously.
After
discussions with counsel, Merrimac believes any loss under such matters will
not
have a material effect on its financial condition.
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
third quarter and first nine months of 2008, the Company realized 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 enabled
the Company to increase sales for the third quarter of 2008 by $1,716,000 or
26.0% and $5,081,000 or 30.8% for the first nine months of 2008 compared to
2007. Gross profit as a percentage of sales dropped from 42.6% in the third
quarter of 2007 to 33.0% for the third quarter of 2008. Year to date gross
profit for the first nine months of 2007 was 41.7% and year to date for the
first nine months of 2008 was 39.2%. The Company pursued a strategy of
aggressively seeking revenue opportunities throughout 2007 and early 2008.
This
strategy has resulted in an increase in revenues with the expected decline
in
gross profit percentage, but an increase in gross profit dollars. Backlog
increased by $3,112,000 or 17.3% to $21,103,000 at the end of the third quarter
of 2008 from the end of 2007. The Company markets and sells its products
domestically and internationally through a direct sales force and manufacturers’
representatives. Merrimac has traditionally developed andoffered for sale
products built to specific customer needs, as well as standard catalog items.
Strategically,
our Multi-Mix® product development is focused on the military and space market
segments which is resulting in orders. While we will opportunistically monitor
and be alert to commercial opportunities for Multi-Mix®, where the customer is
willing to compensate us for our design work, we will not continue to
speculatively fund this commercial segment. The self-funded investment that
we
have previously made has created a library of pre-engineered designs, especially
in RF Module Amplifiers, which provide platform families for both commercial
and
military final customization.
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 $300,000 for the fourth quarter
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.
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. The Company will focus its research and development
efforts on military and space applications and reduce investment in select
commercial opportunities. Military and space applications are areas in which
the
Company has a significant core competency that the Company believes will result
in a greater return on a reduced level of development spending.
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
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
1,003,000
|
|
$
|
-
|
|
$
|
2,824,000
|
|
Loss
before provision for income taxes
|
|
$
|
(11,000
|
)
|
|
(2,058,000
|
)
|
$
|
(66,000
|
)
|
|
(5,352,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-----
|
|
|
-----
|
|
|
-----
|
|
|
506,000
|
|
Net
loss
|
|
$
|
(11,000
|
)
|
$
|
(2,058,000
|
)
|
$
|
(66,000
|
)
|
$
|
(5,858,000
|
)
|
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.
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.
Increasingly,
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. The Company has one contract which is primarily
related to design and development for which revenue under the entire contract
is
recognized under the percentage of completion method using the cost-to-cost
method. For such contract the Company has recognized revenues in excess of
billings of approximately $1,186,000 at September 27, 2008.
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
|
|
·
|
purchases
of inventory beyond customer needs that result in excess quantities
on
hand that may not be returned to the vendor or charged back to
the
customer.
|
Valuation
of Deferred Tax Assets
As
of
September 27, 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 nine
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
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
CONTINUING
OPERATIONS
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
67.0
|
|
|
57.4
|
|
|
60.8
|
|
|
58.3
|
|
Selling,
general and administrative
|
|
|
29.1
|
|
|
31.7
|
|
|
32.5
|
|
|
38.1
|
|
Research
and development
|
|
|
1.3
|
|
|
6.1
|
|
|
4.0
|
|
|
7.4
|
|
|
|
|
97.4
|
|
|
95.2
|
|
|
97.3
|
|
|
103.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss
|
|
|
2.6
|
|
|
4.8
|
|
|
2.7
|
|
|
(3.8
|
)
|
Interest
and other expense, net
|
|
|
(0.2
|
)
|
|
(1.1
|
)
|
|
(0.6
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
2.4
|
|
|
3.7
|
|
|
2.1
|
|
|
(4.2
|
)
|
Provision
for income taxes
|
|
|
(0.1
|
)
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
Income
(loss) from continuing operations
|
|
|
2.3
|
|
|
3.7
|
|
|
2.0
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
(0.1
|
)
|
|
(31.1
|
)
|
|
(0.3
|
)
|
|
(35.5
|
)
|
Net
income (loss)
|
|
|
2.2
|
%
|
|
(27.4
|
)%
|
|
1.7
|
%
|
|
(39.7
|
)%
|
THIRD
QUARTER AND FIRST NINE MONTHS OF 2008 COMPARED TO THE THIRD QUARTER AND FIRST
NINE MONTHS OF 2007-CONTINUING OPERATIONS
Net
sales.
Net
sales
from continuing operations for the third quarter of 2008 were $8,328,000, an
increase of $1,716,000 or 26.0 percent compared to the third quarter of 2007
net
sales of $6,612,000. 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 nine months of 2008 were $21,576,000,
an increase of $5,081,000 or 30.8 percent compared to net sales of $16,495,000
for the first nine months of 2007. The increase in net sales for the first
nine
months of 2008 is primarily due to the same reasons that benefited the third
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 nine months ended September 27, 2008 and September
29,
2007:
|
|
2008
|
|
2007
|
|
Beginning
backlog
|
|
$
|
17,991,000
|
|
$
|
11,490,000
|
|
Plus
bookings
|
|
|
24,688,000
|
|
|
21,767,000
|
|
Less
net sales
|
|
|
21,576,000
|
|
|
16,495,000
|
|
Ending
backlog
|
|
$
|
21,103,000
|
|
$
|
16,762,000
|
|
Book-to-bill
ratio
|
|
|
1.14
|
|
|
1.32
|
|
Orders
of
$9,295,000 were received during the third quarter of 2008, an increase of
$2,266,000 or 32.2 percent compared to $7,029,000 in orders received during
the
third quarter of 2007. Orders of $24,688,000 were received during the first
nine
months of 2008, an increase of $2,921,000 or 13.4 percent compared to
$21,767,000 in orders received during the first nine months
of
2007. Backlog increased by $3,112,000 or 17.3 percent to $21,103,000 at the
end
of the third quarter of 2008 compared to $17,991,000 at year-end 2007, due
to
the increased orders received during the first nine 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 third quarter of 2008
was
1.12 to 1 and for the third quarter of 2007 was 1.06 to 1. The book-to-bill
ratio for the first nine months of 2008 was 1.14 to 1 and for the first nine
months of 2007 was 1.32 to 1. The orders, backlog and book-to-bill data exclude
FMI information for 2007.
The
backlog of unfilled orders includes amounts based on signed contracts as well
as
agreed letters of intent, which we have determined are legally binding and
likely to proceed. Although backlog represents only business that is considered
likely to be performed, cancellations or scope adjustments may and do occur.
The
elapsed time from the award of a contract to completion of performance may
be up
to approximately four years. The dollar amount of backlog is not necessarily
indicative of our future earnings related to the performance of such work due
to
factors outside our control, such as changes in project schedules, scope
adjustments or project cancellations. We cannot predict with certainty the
portion of backlog to be performed in a given year. Backlog is adjusted
quarterly to reflect project cancellations, deferrals, revised project scope
and
cost, and sales of subsidiaries, if any.
Cost
of sales and gross profit.
The
following table provides comparative gross profit information for the quarters
and nine months ended September 27, 2008 and September 29, 2007.
|
|
Quarter
ended September 27, 2008
|
|
|
Quarter
ended September 29, 2007
|
|
|
|
|
|
$Increase/
(Decrease) from
prior
period
|
|
%
of
Net
Sales
|
|
|
|
|
$Increase/
(Decrease)
from prior
period
|
|
%
of
Net
Sales
|
|
Consolidated
gross
profit
|
|
$
|
2,749,000
|
|
$
|
(67,000
|
)
|
|
33.0
|
%
|
|
$
|
2,816,000
|
|
$
|
532,000
|
|
|
42.6
|
%
|
|
|
Nine
Months ended September 27, 2008
|
|
|
Nine
Months ended September 29, 2007
|
|
|
|
|
|
$Increase/
(Decrease) from
prior
period
|
|
%
of
Net
Sales
|
|
|
|
|
$Increase/
(Decrease)
from prior
period
|
|
%
of
Net
Sales
|
|
Consolidated
gross
profit
|
|
$
|
8,448,000
|
|
$
|
1,568,000
|
|
|
39.2
|
%
|
|
$
|
6,880,000
|
|
$
|
(782,000
|
)
|
|
41.7
|
%
|
The
decrease in consolidated gross profit for the third quarter of 2008 was due
to
the impact of an aggressive pricing strategy in prior quarters when the
Company’s backlog was not as high as the most recent quarters.
The
increase in consolidated gross profit and consolidated gross profit percentage
for the nine 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 third quarter of 2008
was
$637,000, an increase of $83,000 compared to the third quarter of 2007.
Depreciation expense included in consolidated cost of sales for the first nine
months of 2008 was $1,908,000, an increase of $285,000 compared to the first
nine months of 2007. For the third quarter and first nine months of 2008,
approximately $391,000 and $1,203,000, respectively, of depreciation expense
was
associated with Multi-Mix® Microtechnology capital assets. For the third quarter
and first nine months of 2007, approximately $393,000 and $1,150,000,
respectively, of depreciation expense was associated with Multi-Mix®
Microtechnology capital assets.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses of $2,424,000 for the third quarter of
2008
increased by $325,000 or 15.4%, and when expressed as a percentage of net sales,
decreased by 2.5 percentage points to 29.2% compared to the third quarter of
2007. The increase in such expenses for the third quarter of 2008 was due to
higher sales commissions, increased selling costs from recent sales personnel
hired to meet the demand of increased sales and higher professional fee costs.
Selling, general and administrative expenses of $7,022,000 for the first nine
months of 2008 increased by $729,000 or 11.6%, and when expressed as a
percentage of net sales, decreased by 5.6 percentage points to 32.5% compared
to
the first nine months of 2007. The increase in such expenses for the first
nine
months of 2008 was due to higher commissions
on the increased sales level and higher selling and administrative
costs.
Research
and development expenses.
Research
and development expenses for new products were $105,000 for the third quarter
of
2008, a decrease of $295,000 or 73.7%, and when expressed as a percentage of
net
sales, decreased by 4.8 percentage points to 1.3% compared to the third 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 $853,000 for the first nine months of 2008, a decrease of
$367,000 or 30.1%, and when expressed as a percentage of net sales, decreased
by
3.4 percentage points to 4.0% compared to the first nine months of 2007.
Substantially all of the research and development expenses were related to
Multi-Mix® Microtechnology products. The Company will focus its research and
development efforts on military and space applications and reduce investment
in
select commercial opportunities. Military and space applications are areas
in
which the Company has a significant core competency that the Company believes
will result in a greater return on a reduced level of development
spending.
Operating
income (loss) from continuing operations.
Operating
income from continuing operations for the third quarter of 2008 was $220,000,
compared to operating income from continuing operations of $317,000 for the
third quarter of 2007. The
decrease in operating income from continuing operations for the third quarter
of
2008 as compared to the third quarter of 2007 was due to the lower gross profit
margins and increased selling, general and administrative expenses.
Operating
income from continuing operations for the first nine months of 2008 was $573,000
compared to an operating loss from continuing operations for the first nine
months of 2007 of $(632,000). The
increase in operating income from continuing operations for the first nine
months of 2008 as compared to the first nine months of 2007 was due to the
increase in sales, and the decrease in research and development spending,
partially offset by higher sales commissions and increased selling, general
and
administrative expenses.
Interest
and other expense, net.
Interest
and other expense, net was $(17,000) for the third quarter of 2008 compared
to
interest and other expense income, net of $(72,000) for the third quarter of
2007. Interest and other expense, net was $(127,000) for the first nine months
of 2008 compared to interest and other expense, net of $(56,000) for the first
nine months of 2007. Interest expense for the third quarter and first nine
months of 2008 and 2007 was principally incurred on borrowings under the
Company’s Credit Facility with Capital One, N.A., which was replaced by a credit
facility with Wells Fargo Bank, N.A. (the “Wells Fargo Credit Facility”)
subsequent to the end of the third quarter (see “Liquidity and Capital
Resources” below).
Income
(loss) from continuing operations.
For
the
reasons set forth above, income from continuing operations for the third quarter
of 2008 was $193,000 compared to income from continuing operations of $245,000
for the third quarter of 2007. Income per diluted share from continuing
operations for the third quarter of 2008 was $.06 compared to income from
continuing operations of $.08 per diluted share for the second quarter of
2007.
For
the
reasons set forth above, income from continuing operations for the first nine
months of 2008 was $437,000 compared to a loss from continuing operations of
$(688,000) for the first nine months of 2007. Income from continuing operations
per diluted share for the first nine months of 2008 was $.15 compared to a
loss
from continuing operations of $(.23) per share for the first nine months of
2007.
Income
taxes.
As
of
September 27, 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 nine
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
September 27, 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. Should such a change 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. For the period ended September 27, 2008, the Company
provided for Alternative Minimum Tax and certain state taxes, based upon the
estimated annualized tax provision.
Discontinued
operations.
Loss
from
discontinued operations for the third quarter was $11,000 and the first nine
months of 2008 was $66,000 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 third quarter of 2007 was $2,058,000 and for
the
first nine months of 2007 was $5,858,000. Loss from discontinued operations
in
2007 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.
Net
income (loss).
For
the
reasons set forth above, net income for the third quarter of 2008 was $182,000
compared to a net loss of $(1,813,000) for the third quarter of 2007. Net income
per diluted share for the third quarter of 2008 was $.06 compared to a net
loss
of $(.61) per diluted share for the third quarter of 2007.
For
the
reasons set forth above, net income for the first nine months of 2008 was
$371,000 compared to a net loss of $(6,546,000) for the first nine months of
2007. Net income per diluted share for the first nine months of 2008 was $.13
compared to a net loss of $(2.20) per share for the first nine months of
2007.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had liquid resources comprised of cash and cash equivalents totaling
approximately $1,923,000 at September 27, 2008 compared to approximately
$2,000,000 at the end of 2007. The main reason for the use of cash at September
27, 2008 were capital expenditures of $672,000. The Company's working capital
was approximately $11,600,000 and its current ratio was 3.4 to 1 at September
27, 2008 compared to $9,900,000 and 3.5 to 1, respectively, at the end of 2007.
At September 27, 2008, the Company had available borrowing capacity under its
revolving line of credit of $4,000,000, net of the $1,000,000 outstanding
revolving credit borrowings. This facility was paid off on September 30, 2008
with the proceeds of the Wells Fargo Credit Facility (see below).
The
Company's activities from continuing operations used operating cash flows of
$795,000 during the first nine months of 2008 compared to using $523,000 of
operating cash flows during the first nine months of 2007. The primary uses
of
operating cash flows from continuing operations for the first nine months of
2008 were an increase in accounts receivable of $1,593,000 from the higher
first
nine months sales level, an increase in inventories of $846,000 to meet the
production needs of the increased backlog, and an aggregate increase in revenues
in excess of billings of $1,186,000. These uses of operating cash flows were
partly offset by income from continuing operations for the first nine months
of
2008 of $437,000 plus depreciation and amortization of $1,908,000 incurred
in
the first nine months of 2008 and share-based compensation of $375,000, coupled
with an aggregate reduction in other current assets and other assets of
$152,000.
The
Company made net cash investments in property, plant and equipment of $672,000
during the first nine months of 2008 compared to net cash investments made
in
property, plant and equipment of $1,070,000 during the first nine months of
2007. The depreciated cost of capital equipment associated with Multi-Mix®
Microtechnology was $4,445,000 at the end of the first nine months of 2008,
a
decrease of $1,036,000 compared to $5,481,000 at the end of fiscal year 2007.
The
primary uses of cash flows from financing activities during the first nine
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 last quarter of 2008
have been reduced to approximately $300,000. 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.
On
October 18, 2006, the Company entered into a financing agreement with Capital
One, N.A. (formerly North Fork Bank) consisting 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”). 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
Company borrowed $500,000 under the revolving line of credit on May 1, 2008.
On
July 1, 2008, the Company borrowed an additional $500,000 under the revolving
line of credit. The revolving line of credit bears interest at the prime rate
less 0.50% (4.50% at September 27, 2008) 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 September 27, 2008) 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
September 27, 2008 and currently 4.50%) or LIBOR plus 2.25%. At September 27,
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
collateralized 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 September 29, 2007, (ii) added a covenant related to earnings before
interest, taxes, depreciation and amortization (“EBITDA”) for the four quarters
ended September 29, 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 ended September 29, 2007. The Company was in compliance with
these amended covenants at September 27, 2008.
New
Credit facility - effective September 29, 2008
On
September 29, 2008, the Company entered into the Wells Fargo Credit Facility
which replaced the Company’s credit facility with Capital One, N.A. On September
30, 2008, the Company repaid all outstanding amounts under the credit facility
with Capital One, N.A. with the proceeds of the Wells Fargo Credit Facility.
The
Wells Fargo Credit Facility consists of a three-year $5,000,000 collateralized
revolving credit facility, a three-year $500,000 equipment term loan and a
three-year $2,500,000 real estate term loan. The revolving line of credit is
subject to an availability limit under a borrowing base calculation of 85%
of
eligible domestic accounts receivable, 75% of eligible foreign accounts
receivable, and 30% of eligible inventory with an inventory sublimit of
$400,000. The revolving line of credit expires September 29, 2011. The revolving
line of credit bears interest at the prime rate plus one percent, with the
prime
rate having a floor limit of 5% for loan purposes. The Company may request
a
LIBOR quote for an initial minimum of $1,000,000 with subsequent requests at
a
minimum of $500,000. No more than three such requests may be active at any
point
in time. LIBOR advances bear interest at the LIBOR rate plus 3.25% for a credit
advance, or 3.50% for a term loan. The equipment loan is required to be repaid
in equal monthly installments of $13,900 based on a four year amortization.
The
real estate loan is required to be paid in equal monthly installments amortized
over a 180 month time period, with any unpaid principal and interest due and
payable on the termination date of September 29, 2011. The two term loans
require mandatory prepayment under certain circumstances subject to a prepayment
fee of 1%-2% of the outstanding balance.
The
equipment term loan bears interest at the prime (with a floor of 5%) rate plus
1%. The real estate term loan bears interest at the prime rate (with a floor
of
5%) plus 1.50% or LIBOR plus 3.50%.
The
Wells
Fargo Credit Facility contains several financial and non-financial covenants
and
is collateralized by substantially all assets of the Company.
On
September 30, 2008, under the Wells Fargo Credit Facility, the Company borrowed
approximately $1.7 million under the revolving credit facility, $500,000 under
the equipment term loan and $2.5 million under the real estate term
loan.
At
September 27, 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.
Depreciation
and amortization expenses exceeded capital expenditures for production equipment
during the first nine months of 2008 by approximately $1,236,000, 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 $300,000 of capital
equipment from various vendors during the last quarter 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 which has been accrued as of
September 27, 2008, 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 was 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 September 27, 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.
In
February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and its Related
Interpretive Accounting Pronouncements that Address Leasing Transactions”, which
became effective for the Company on December 30, 2007. This FSP excludes FASB
Statement No. 13, “Accounting for Leases”, and its related interpretive
accounting pronouncements from the provisions of SFAS No. 157. Implementation
of
this standard did not have a material effect on the Company's financial
statements.
In
February 2008, the FASB issued FSP No. 157-2, “Effective Date of FASB Statement
No. 157”, which delays the Company's January 1, 2008 effective date of SFAS No.
157 for all nonfinancial assets and nonfinancial liabilities, except those
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until January 1, 2009. Implementation of this
standard is not expected to have a material effect on the Company's financial
statements.
In
March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of FASB Statement No. 133" ("SFAS No.
161"), which amends and expands
the disclosure requirements of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to require qualitative disclosure about
objectives and strategies in using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and
disclosures about the underlying credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is intended to improve financial reporting
by requiring transparency about the location and amounts of derivative
instruments in an entity's financial statements; how derivative instruments
and
related hedged items are accounted for under SFAS No. 133; and how derivative
instruments and related hedged items affect its financial position, financial
performance and cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years beginning after November 15, 2008. Implementation of
this standard is not expected to have a material effect on the Company's
financial statements.
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
(a)
Evaluation
of Disclosure Controls and Procedures.
Based
on the material weaknesses in internal control identified below, as of September
27, 2008 (the end of the period covered by this report), the Company's
management evaluated, with the participation of the Company's Chief Executive
Officer and Principal Financial Officer, the effectiveness of 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). Based upon that evaluation, the Chief
Executive Officer and Principal Financial Officer concluded that, as of
September 27, 2008, the Company's disclosure controls and procedures were not
effective.
(b)
Material
Weakness in Internal Control Over Financial Reporting.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in a reasonably possible likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management identified the following material weaknesses in its
internal control over financial reporting as of September 27, 2008:
Personnel
Management
identified changes in financial personnel that led to a lack of sufficient
financial reporting experience to prepare accurate financial statements in
a
timely manner.
New
Financial Reporting System
Management
identified the failure to accurately implement the Company’s new financial
accounting system which has led to errors in preliminary financial reports
requiring additional resources and time to correct.
Potential
Problem Areas
Management
was unable to identify potential problem areas in financial reporting that
required immediate attention by operational and financial personnel that were
not identified on a timely basis.
Remediation
(a)
The
Company is currently seeking to hire an experienced chief financial officer
and
an experienced cost accountant. Until such personnel can be hired, the Company
will be utilizing an accounting consulting firm to oversee, test and support
procedures and processes for financial reporting for the fourth quarter of
2008
and for year end 2008.
(b)
Management has identified procedures to enable the Company to better close
work
orders in the new financial reporting system, including the deployment of
additional personnel to ensure that work orders are properly closed out.
(c)
Personnel will be trained as to the importance of timely and accurate reporting
to the labor system. Exception reports will be generated that provide operations
and finance information regarding any discrepancies to the procedures on a
daily
basis.
Apart
from the implementation of a new financial accounting system and changes in
financial personel, there were no changes that occurred during the quarter
ended
June 28, 2008 that materially affected, or are 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 these claims 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, as modified by our Form 10-Q for the quarter
ended June 28, 2008, 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” has been deleted and the following risk factor has
been added:
Management
identified material weaknesses in our internal control over financial reporting
in the quarters ending June 28, 2008 and September 27, 2008. Failure
to maintain effective internal control over financial reporting could result
in
our failure to accurately report our financial results.
In
the
quarters ending June 28, 2008 and September 27, 2008, management
identified several significant deficiencies in our internal control over
financial reporting that collectively constitute material weaknesses in internal
control over financial reporting. Management plans to implement new controls
and
procedures designed to remediate these significant deficiencies. If we are
unable to remediate these significant deficiencies or if we experience
additional significant deficiencies or material weaknesses in the future, we
may
be required to record material audit adjustments. As a result, investors may
lose confidence in our ability to operate our business, any of which could
materially affect our stock price.
ITEM
5.
OTHER INFORMATION.
On
November 17, 2008, the Audit Committee of Merrimac Industries, Inc. determined
that reissuing the previously filed financial statements for the Company’s
fiscal 2008 second quarter was appropriate to correct certain accounting errors.
These errors arose from control deficiencies created by changes of accounting
personnel and failure to properly implement a new financial accounting system.
The second quarter errors include a $33,937 overstatement of net sales and
corresponding $33,937 understatement of customer deposits; a $211,603
understatement of inventory and corresponding $211,603 overstatement of cost
of
sales; and a $177,666 understatement of net income.
The
Audit
Committee concluded that the aggregate impact of these errors is material to
the
fiscal 2008 second quarter financial statements. Therefore, the Company is
restating the previously filed financial statements and the Company’s financial
statements for its fiscal 2008 second quarter included in its Form 10-Q filed
on
August 18, 2008 should no longer be relied upon.
The
Company with its Audit Committee has discussed the matter described above with
J.H. Cohn LLP, its independent registered public accounting firm.
As
a
result of the adjustments, the fiscal 2008 second quarter is restated as
follows:
Consolidated
Statement of Operations
|
|
Three
Months Ended
June
28, 2008 ($)
|
|
Six
Months Ended
June
28, 2008 ($)
|
|
and
Comprehensive
Income
|
|
Previously
Reported
|
|
Restated
|
|
Previously
Reported
|
|
Restated
|
|
Net
Sales
|
|
|
7,524,203
|
|
|
7,490,266
|
|
|
13,281,889
|
|
|
13,247,952
|
|
Cost
of Sales
|
|
|
4,308,912
|
|
|
4,097,309
|
|
|
7,760,872
|
|
|
7,549,269
|
|
Net
Income
|
|
|
383,672
|
|
|
561,338
|
|
|
11,437
|
|
|
189,103
|
|
Net
Income per Common Share - Basic
|
|
|
.13
|
|
|
.19
|
|
|
0
|
|
|
.06
|
|
Net
Income per Common Share - Diluted
|
|
|
.13
|
|
|
.19
|
|
|
0
|
|
|
.06
|
|
|
|
As
Of
June
28, 2008 ($)
|
|
Consolidated
Balance Sheet
|
|
Previously
Reported
|
|
Restated
|
|
Inventories,
Net
|
|
|
6,462,065
|
|
|
6,673,668
|
|
Total
Current Assets
|
|
|
15,023,672
|
|
|
15,235,275
|
|
Total
Assets
|
|
|
25,845,158
|
|
|
26,056,761
|
|
Customer
Deposits
|
|
|
483,393
|
|
|
517,330
|
|
Total
Current Liabilities
|
|
|
4,315,747
|
|
|
4,349,684
|
|
Total
Liabilities
|
|
|
7,616,025
|
|
|
7,649,962
|
|
Retained
Earnings
|
|
|
1,185,361
|
|
|
1,363,027
|
|
Total
Stockholders’ Equity
|
|
|
18,229,133
|
|
|
18,406,799
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
25,845,158
|
|
|
26,056,761
|
|
ITEM
6.
EXHIBITS
Exhibits:
EXHIBIT
NUMBER
|
DESCRIPTION
OF EXHIBIT
|
31.1+
|
Certificate
of Chief Executive Officer and Principal Financial Officer, pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1+
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Certificate
of Chief Executive Officer and Principal Financial Officer, pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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+
Indicates that exhibit is filed as an exhibit hereto.
SIGNATURES
In
accordance with the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERRIMAC
INDUSTRIES, INC.
Date:
November 17, 2008
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By:
/s/ Mason N. Carter
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Mason
N. Carter
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Chairman,
President and
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Chief
Executive Officer and Principal Financial Officer
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