UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 28, 2002 Commission file No. 0-11201
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MERRIMAC INDUSTRIES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 22-1642321
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Fairfield Place, West Caldwell, New Jersey 07006
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(Address of principal executive offices)
Registrant's telephone number (973) 575-1300
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at November 8, 2002
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Common Stock ($.01 par value) 3,129,357
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
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September 28, December 29,
2002 2001
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(Unaudited) (Audited)
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ASSETS
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Current assets:
Cash and cash equivalents ...................... $ 930,631 $ 1,844,434
Accounts receivable, net........................ 5,426,634 5,632,008
Income tax refunds receivable................... 102,611 195,323
Inventories..................................... 4,744,965 4,797,205
Other current assets ........................... 387,140 691,712
Deferred tax assets ............................ 548,000 548,000
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Total current assets ....................... 12,139,981 13,708,682
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Property, plant and equipment at cost............. 35,949,530 33,568,651
Less accumulated depreciation and amortization.. 16,415,632 14,605,751
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Property, plant and equipment, net.......... 19,533,898 18,962,900
Other assets ..................................... 836,595 676,073
Deferred tax assets, non-current.................. 1,064,000 1,194,000
Goodwill.......................................... 2,473,900 2,451,037
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Total Assets ............................... $36,048,374 $36,992,692
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LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Current portion of long-term debt .............. $ 866,556 $ 4,368,565
Accounts payable ............................... 2,002,669 3,577,922
Accrued liabilities ............................ 1,168,427 1,620,305
Income taxes payable............................ 26,750 268,274
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Total current liabilities .................. 4,064,402 9,835,066
Long-term debt, net of current portion ........... 3,658,684 3,871,635
Deferred compensation ............................ 131,112 155,768
Deferred liabilities.............................. 169,129 118,597
Deferred tax liabilities ......................... 958,000 958,000
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Total liabilities .......................... 8,981,327 14,939,066
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Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share:
Authorized: 1,000,000 shares
No shares issued
Common stock, par value $.01 per share:
Authorized: 20,000,000 shares
Issued: 3,200,214 and 2,859,249 shares ...... 32,002 28,592
Common stock warrants........................... 837,200 837,200
Additional paid-in capital ..................... 17,837,699 14,327,586
Retained earnings .............................. 9,677,137 9,531,445
Accumulated comprehensive loss.................. (291,551) (327,066)
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28,092,487 24,397,757
Less treasury stock, at cost:
61,400 and 208,904 shares..................... (457,440) (1,760,131)
Less loan to officer-stockholder ............... (568,000) (584,000)
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Total stockholders' equity ................. 27,067,047 22,053,626
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Total Liabilities and Stockholders' Equity . $36,048,374 $36,992,692
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See accompanying notes.
- 1 -
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
-------------------------------------
(Unaudited)
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Quarters Ended Nine Months Ended
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September 28, September 29, September 28, September 29,
2002 2001 2002 2001
OPERATIONS --------------------------- ----------------------------
Net sales ................................... $5,938,929 $5,812,301 $19,251,844 $18,668,833
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales ............................. 3,323,334 2,889,186 10,456,362 8,994,440
Selling, general and administrative ....... 1,820,659 2,281,120 6,451,326 7,013,810
Research and development .................. 723,337 954,076 1,910,988 2,501,924
Amortization of goodwill................... - 36,948 - 111,492
Reincorporation charge..................... - - - 330,000
Restructuring charge....................... - - 240,000 -
---------- ---------- ----------- -----------
5,867,330 6,161,330 19,058,676 18,951,666
---------- ---------- ----------- -----------
Operating income (loss)...................... 71,599 (349,029) 193,168 (282,833)
Interest and other expense (income), net .... 24,545 (19,690) 127,476 (69,249)
---------- ---------- ----------- -----------
Income (loss) before income taxes............ 47,054 (329,339) 65,692 (213,584)
Benefit for income taxes .................... (10,000) (120,000) (80,000) (110,000)
---------- ---------- ----------- -----------
Net income (loss)............................ $ 57,054 $ (209,339) $ 145,692 $ (103,584)
========== ========== =========== ===========
Net income (loss) per common share:
Basic and diluted.......................... $ .02 $(.08) $ .05 $(.04)
====== ===== ===== =====
Weighted average number of
shares outstanding:
Basic ..................................... 3,145,370 2,622,573 3,055,713 2,615,551
========= ========= ========= =========
Diluted.................................... 3,147,634 2,622,573 3,098,894 2,615,551
========= ========= ========= =========
COMPREHENSIVE INCOME (LOSS)
Net income (loss)............................ $ 57,054 $ (209,339) $ 145,692 $ (103,584)
Comprehensive income:
Foreign currency translation adjustment.... (174,775) (194,504) 35,515 (248,766)
---------- ---------- ----------- -----------
Comprehensive income (loss).................. $ (117,721) $ (403,843) $ 181,207 $ (352,350)
========== ========== =========== ===========
See accompanying notes.
-2-
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
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Nine Months Ended
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September 28, September 29,
2002 2001
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Cash flows from operating activities:
Net income (loss).................................. $ 145,692 $ (103,584)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 1,938,138 1,673,277
Amortization of goodwill ...................... - 111,492
Amortization of deferred income................ (65,466) (65,474)
Deferred and other compensation................ 62,568 63,925
Deferred income taxes.......................... - (60,000)
Changes in operating assets and liabilities:
Accounts receivable.......................... 205,374 900,323
Income tax refunds receivable................ 92,712 (95,568)
Inventories.................................. 52,239 (1,301,255)
Other current assets......................... 264,573 (262,743)
Other assets................................. (160,522) 72,311
Accounts payable............................. (1,881,560) (604,443)
Accrued liabilities.......................... (451,878) (300,869)
Income taxes payable......................... (111,524) (173,000)
Deferred compensation........................ (31,224) (40,126)
Other liabilities............................ 115,998 130,643
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Net cash provided by (used in) operating activities.. 175,120 (55,091)
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Cash flows from investing activities:
Purchase of capital assets......................... (2,193,192) (7,390,777)
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Net cash used in investing activities................ (2,193,192) (7,390,777)
---------- ----------
Cash flows from financing activities:
Borrowing under revolving credit facility.......... 500,000 4,500,000
Borrowing under lease facility..................... - 419,192
Borrowing under mortgage facility.................. 2,500,000 -
Repayment of borrowings............................ (6,721,484) (110,216)
Repurchase of common stock......................... (457,440) -
Proceeds from the issuance of common stock, net.... 5,110,347 -
Proceeds from the exercise of stock options........ 163,307 198,521
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Net cash provided by financing activities............ 1,094,730 5,007,497
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Effect of exchange rate changes...................... 9,539 (56,331)
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Net decrease in cash and cash equivalents............ (913,803) (2,494,702)
Cash and cash equivalents at beginning of year....... 1,844,434 3,425,390
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Cash and cash equivalents at end of period........... $ 930,631 $ 930,688
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes..................................... $ 24,645 $ 302,253
========== ==========
Loan interest.................................... $ 185,860 $ 126,070
========== ==========
Unpaid purchases of capital assets................. $ 306,000 $1,673,592
========== ==========
See accompanying notes.
-3-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and footnote disclosures otherwise required by
Regulation S-B. The financial statements do, however, reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial position of the Company as of September 28, 2002 and its results
of operations and cash flows for the periods presented. Results of operations of
interim periods are not necessarily indicative of results for a full year. These
financial statements should be read in conjunction with the audited consolidated
financial statements in the Company's Annual Report on Form 10-KSB for December
29, 2001. Certain prior year amounts have been reclassified to conform to
current year presentation.
B. Contract revenue recognition
Sales and related cost of sales on fixed-price contracts that require
customization of products to customer specifications are recorded as title to
these products transfers to the customer, which is generally on the date of
shipment. Prior to shipment, manufacturing costs incurred on such contracts are
recorded as work-in-process inventory. Anticipated losses on contracts are
charged to operations when identified. Revenue related to non-recurring
engineering charges is generally recognized upon shipment of the initial units
produced or based upon contractually established stages of completion.
C. Private placement of common stock
On February 28, 2002, the Company sold to DuPont Electronic Technologies
528,400 shares of Common Stock, representing approximately 16.6% of the
Company's outstanding Common Stock after giving effect to the sale, for an
aggregate purchase price of $5,284,000. The Company and DuPont Electronic
Technologies have also agreed to work together to better understand the dynamics
of the markets for high-frequency electronic components and modules. David B.
Miller, Vice President and General Manager of DuPont Electronic Technologies,
was appointed to the Company's Board of Directors. As a result of this sale,
pursuant to the anti-dilution provisions of the Warrants issued in October 2000,
the exercise price of the Warrants was reduced to $17.80 and the number of
shares subject to the Warrants was increased to 429,775.
D. New accounting standards
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting and eliminates the
pooling method of accounting. SFAS No. 141 will not have an impact on the
Company's business since the Company has accounted for all of its business
combinations using the purchase method of accounting.
-4-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" by
the Company on December 30, 2001, goodwill is no longer subject to amortization
over its estimated useful life. However, goodwill will be tested for impairment
annually under a two-step approach, or more frequently, if events or changes in
circumstances indicate that the asset might be impaired. Impairment is assessed
at the "reporting unit" level by applying a fair value-based test. A reporting
unit is defined as the same as or one level below the operating segment level as
described in SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Under the two-step approach, the carrying amount of the
reporting unit is compared with its fair value. If the carrying amount of the
reporting unit exceeds its fair value, the "implied" fair value (as defined in
SFAS No. 142) of the reporting unit's goodwill is compared with its carrying
amount to measure the amount of the impairment loss, if any. When the carrying
amount of the reporting unit's goodwill exceeds the implied fair value of the
goodwill, an impairment loss is recognized in an amount equal to the excess. In
addition, under SFAS No. 142, an acquired intangible asset should be separately
recognized if the benefit of the intangible is obtained through contractual or
other legal rights, or if the intangible asset can be sold, transferred,
licensed, rented, or exchanged. Intangible assets will be amortized over their
estimated useful lives.
On an annualized basis, the Company expects that the adoption of this
accounting standard will reduce the amortization of goodwill and intangibles by
approximately $150,000 commencing in 2002. In connection with the adoption of
SFAS No. 142, the Company has completed the first of the impairment tests of
goodwill as of December 30, 2001 required by the standard, which indicated there
was no impairment of goodwill. The Company will perform the required annual
assessment during the fourth quarter of 2002.
Goodwill:
The changes in the carrying amount of goodwill for the nine month periods
ended September 28, 2002 and September 29, 2001 are as follows:
2002 2001
---------- ----------
Balance, beginning of year $2,451,037 $2,774,248
Goodwill amortized - (111,492)
Foreign currency adjustment 22,863 (156,726)
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Balance, end of period $2,473,900 $2,506,030
========== ==========
The current impact that the adoption of SFAS No. 142 had on net income
(loss) and net income (loss) per share for the periods presented is as follows:
Quarters Ended Nine Months Ended
--------------------------- ---------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
--------------------------- ---------------------------
Reported net income (loss) for the period $57,054 $(209,339) $145,692 $(103,584)
Add back: Amortization of goodwill - 36,948 - 111,492
------- --------- ------- ---------
Adjusted net income (loss) for the period $57,054 $(172,391) $145,692 $ 7,908
======= ========= ======= =========
Basic and diluted net income (loss) per share:
Reported net income (loss) $ .02 $(.08) $ .05 $(.04)
Amortization of goodwill - .01 - .04
----- ----- ----- -----
Adjusted net income (loss) $ .02 $(.07) $ .05 $ -
===== ===== ===== =====
-5-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires that
asset retirement obligations that are identifiable upon acquisition and
construction, and during the operating life of a long-lived asset be recorded as
a liability using the present value of the estimated cash flows. A corresponding
amount would be capitalized as part of the asset's carrying amount and amortized
to expense over the asset's useful life. The Company is required to adopt the
provisions of SFAS No. 143 effective January 5, 2003. The Company is currently
evaluating the impact of adoption of this statement. The Company does not expect
that the adoption of SFAS No. 143 will have a material impact on the Company's
financial position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" is effective for fiscal periods beginning after December 15, 2001. SFAS
No. 144 establishes an accounting model for impairment or disposal of long-lived
assets to be disposed of by sale. The Company does not expect that the adoption
of SFAS No. 144 will have a material impact on the Company's financial position
or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of
FASB Statement No. 13 and Technical Corrections", will require gains and losses
on extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. Extraordinary treatment will be required for certain extinguishments as
provided in APB Opinion No. 30. The statement also amended SFAS No. 13 for
certain sale-leaseback and sublease accounting. The Company is required to adopt
the provisions of SFAS No. 145 effective January 5, 2003. The Company is
currently evaluating the impact of adoption of this statement, however, the
Company does not expect that the adoption of SFAS No. 145 will have a material
impact on the Company's financial position or results of operations.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" nullifies EITF Issue No. 94-3. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, whereas EITF No. 94-3 had recognized the
liability at the commitment date to an exit plan. The Company is required to
adopt the provisions of SFAS No. 146 effective for exit or disposal activities
initiated after January 4, 2003. The Company is currently evaluating the impact
of adoption of this statement to determine if the adoption of SFAS No. 146 will
have a material impact on the Company's financial position or results of
operations.
E. Delaware reincorporation
On February 22, 2001, the Company (previously incorporated in the State of
New Jersey) was reincorporated in the State of Delaware. In connection with the
reincorporation, each share of Common Stock, par value $.50 per share, of the
Company prior to the reincorporation was converted into one share of Common
Stock, par value $.01 per share, of the Company, as reincorporated in Delaware.
As a result of the reincorporation, the authorized capital stock of the Company
was increased to 20 million shares of common stock, par value $.01 per share
(from 5 million shares of Common Stock prior to the reincorporation), and one
million shares of preferred stock, par value $.01 per share.
The Company incurred $330,000 of costs in connection with the
reincorporation in Delaware. Such expense was reflected as a reincorporation
charge in the accompanying statement of operations in 2001. The reincorporation
charge, net of tax benefits, was $198,000 or $.08 per share in the first quarter
of 2001.
The Board of Directors has the authority to issue up to one million shares
of Preferred Stock and to fix the number of shares constituting any series and
the designation of such series, and to determine the preferences, rights and
qualifications or limitations of such series of Preferred Stock, without any
further vote or action by the Company's stockholders.
-6-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. Inventories
Inventories consist of the following:
September 28, December 29,
2002 2001
------------ -----------
Finished goods ...................... $ 418,840 $ 490,135
Work in process ..................... 2,270,573 2,057,036
Raw materials and purchased parts ... 2,055,552 2,250,034
---------- ----------
Total $4,744,965 $4,797,205
========== ==========
Total inventories are net of valuation allowances for obsolescence of
$967,000 at September 28, 2002 and $991,000 at December 29, 2001.
G. Net income (loss) per common share
SFAS No. 128, "Earnings per Share," establishes the computation and
presentation of net income per common share. Under the standard, both basic and
diluted net income per common share are presented.
Basic net income per common share is calculated by dividing net income,
less dividends on preferred stock, if any, by the weighted average common shares
outstanding during the period.
The calculation of diluted net income per common share is similar to that
of basic net income per common share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, principally those
issuable under stock options, were issued during the reporting period.
Stock options and warrants are excluded from the computation of diluted
loss per share in the periods where their effects were antidilutive.
H. Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income" defines comprehensive
income, which includes items in addition to those reported in the statement of
operations, and requires disclosures about the components of comprehensive
income. Comprehensive income includes all changes in stockholders' equity during
a period except those resulting from investments by or distributions to
stockholders. The Company has determined that the components of comprehensive
income (loss) impacting the Company consist primarily of cumulative translation
adjustments.
I. Accounting period
The Company's fiscal year is the 52-53 week period ending on the Saturday
closest to December 31. The Company has quarterly dates that correspond with the
Saturday closest to the last day of each calendar quarter and each quarter
consists of 13 weeks in a 52-week year. Every fifth year, the additional week to
make a 53-week year (fiscal year 1997 was the last and fiscal year 2002 will be
the next) is added to the fourth quarter, making such quarter consist of 14
weeks.
J. Transactions with management and loans to officer-stockholder
In May 1998, the Company sold 22,000 shares of Common Stock to Mason N.
Carter, Chairman, President and Chief Executive Officer of the Company, at a
price of $11.60 per share, which approximated the average closing price of the
Company's Common Stock during the second quarter of 1998. The Company lent Mr.
Carter $255,000 in connection with the purchase of these shares and combined
that loan with a prior loan to Mr. Carter in the amount of $105,000. The
resulting total principal amount of $360,000 was payable May 4, 2003 and bore
interest at a variable interest rate based on the prime rate of the Company's
lending bank. This loan was further amended on July 29, 2002. Accrued interest
of $40,000 was added to the principal, bringing the new principal amount of the
loan to $400,000, the due date was extended to May 4, 2006, and interest (at the
same rate as was previously applicable) is now payable monthly. Mr. Carter has
pledged 33,000 shares of Common Stock as security for this loan which is a
full-recourse loan.
On August 31, 2000, in connection with an amendment of Mr. Carter's
employment agreement, the Company loaned Mr. Carter an additional $280,000.
Interest on the loan will be calculated at a variable interest rate based on the
prime rate of the Company's lending bank, payable in accordance with Mr.
Carter's employment agreement. Each year the Company will forgive 20% of the
amount due under this loan and the accrued interest thereon. During 2002,
$56,000 of principal and $12,000 of accrued interest was forgiven. For fiscal
year 2003, the Company projects that $56,000 of principal and $8,000 of accrued
interest will be forgiven.
-7-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. Current and long-term debt
The Company was obligated under the following debt instruments at September
28, 2002 and December 29, 2001:
September 28, December 29,
2002 2001
------------- ------------
Fleet Bank (A):
Revolving credit facility, interest 1/2% below prime ........ $ 500,000 $4,000,000
Mortgage loan, callable March 2007, interest 1/2% below prime 3,412,500 3,500,000
The Bank of Nova Scotia (B):
Capital leases, interest 7.0%, due October 2002.............. 78,440 131,662
Capital leases, interest 8.7%, due May 2005.................. 213,859 248,191
Capital leases, interest 7.3%, due April 2006................ 174,705 197,033
Capital leases, interest 7.9%, due June 2006................. 145,736 163,314
---------- ----------
4,525,240 8,240,200
Less current portion......................................... 866,556 4,368,565
---------- ----------
Long-term portion............................................ $3,658,684 $3,871,635
========== ==========
(A) The Company commenced borrowing in April 2001 under its existing
revolving credit facility with Fleet Bank, at an interest rate of one-half
percent below the bank's floating prime rate, which was 7.0% at that time.
During 2001, the Company borrowed an aggregate amount of $7,500,000 under this
facility. The weighted average interest rate on the borrowings under this
facility during 2002 was 4.25% and the current interest rate is 3.75%.
During the first quarter of 2002, the Company obtained an additional
increase of $2,500,000 in the Company's lines of credit with Fleet Bank which
were increased to a total of $10,000,000, $3,500,000 of which consists of a
first mortgage callable in March 2007 on the Company's West Caldwell, New Jersey
manufacturing facility. The $6,500,000 revolving line of credit has been
extended for one year to June 30, 2003.
The Company successfully completed a private placement of 528,400 shares of
Company Common Stock on February 28, 2002 that raised $5,284,000 before offering
expenses. The Company repaid the Fleet Bank revolving credit facility from the
proceeds of that offering. The Company borrowed $500,000 on July 29, 2002 from
its line of credit with Fleet Bank and currently has $6,000,000 available under
its existing revolving credit facility.
The revolving credit facility and mortgage loan are secured by
substantially all Company assets located within the United States.
(B) Capital leases included in property, plant and equipment, net, have a
depreciated cost of approximately $574,000 at September 28, 2002 and $632,000 at
December 29, 2001.
-8-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. Private placements of Common Stock and Warrants to purchase Common Stock
On April 7, 2000, the Company entered into a stock purchase and exclusivity
agreement with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson Holding
International, B.V. ("EHI") pursuant to which the Company sold to EHI 375,000
shares of Common Stock, representing approximately 17.5% of the Company's
outstanding Common Stock after giving effect to the sale, for an aggregate
purchase price of $3,375,000. The stock purchase and exclusivity agreement also
provides that the Company will design, develop and produce exclusively for
Ericsson Multi-Mix(R) products that incorporate active RF power transistors for
use in wireless base station applications, television transmitters and certain
other applications that are intended for Bluetooth transceivers. The Company
also agreed that it will generally be the priority supplier for such products.
On October 26, 2000, the Company entered into subscription agreements for
common stock and three-year warrants to purchase shares of Common Stock
("Warrants") with a group of investors led by Adam Smith Investment Partners,
L.P. and certain of its affiliates (the "Adam Smith Investors"), EHI, and three
members of the board of directors of the Company (the "Director Investors"). The
Company sold to the investors units at a price of $12.80 per unit, each unit
consisting of one share of Common Stock and one Warrant with an exercise price
of $21.25, which expire on October 26, 2003 ("Units"). The Adam Smith Investors
purchased 240,000 Units, EHI purchased 100,000 Units and the Director Investors
purchased 20,000 Units for an aggregate purchase price of $4,608,000. The Common
Stock portion of the Units represented an aggregate of approximately 14% of the
outstanding Common Stock of the Company after giving effect to the sales. The
Warrants contain certain anti-dilution provisions.
On October 1, 2002, EHI completed the sale of its microelectronics business
(excluding optosemiconductors and power modules, but including the RF power
business) to Infineon Technologies AG ("Infineon"). As part of this transaction,
EHI transferred to Infineon 475,000 shares of the Company and the right to
acquire 119,381 shares of the Company's common stock pursuant to the Warrants,
and EHI assigned to Infineon its rights in the following agreements between EHI
and the Company: (i) the Stock Purchase and Exclusivity Letter Agreement, dated
April 7, 2000, as amended by the letter agreement dated February 1, 2002; (ii)
the Registration Rights Agreement, dated April 7, 2000; (iii) the Subscription
Agreement, dated as of October 26, 2000; and (iv) the Registration Rights
Agreement, dated October 26, 2000 (collectively, the "Agreements"). The Company
also agreed to make certain modifications to the Agreements and the Warrants.
These changes are reflected in the Modification Agreement, dated as of September
27, 2002, between the Company and Infineon.
The Warrants were valued using the Black-Scholes option valuation model
with a resulting allocation of the aggregate proceeds from the Units
attributable to the Warrants of $837,200, net of issue costs. The following
assumptions were utilized to value the Warrants: price per share of common stock
of $15.25; expected life of three years; expected volatility of 40%; a risk free
interest rate of 6%; an expected yield of 0.0%; and a liquidity discount of 33%.
As a result of the sale of 528,400 shares of common stock at $10.00 per
share on February 28, 2002 (See Note C Private placement of common stock),
certain contractual anti-dilution provisions affected both the exercise price
and the number of shares subject to the Warrants issued in October 2000. The
exercise price of the Warrants was reduced to $17.80 and the number of shares
subject to the Warrants was increased to 429,775.
-9-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. Lease modification and facility sharing agreement
The Company entered into an agreement effective January 2001, with a
customer to relinquish to this customer approximately half of the Company's
17,000 square-foot leased manufacturing facility in Costa Rica. Associated with
the transaction, the Company entered into a new four-year lease agreement with a
five-year renewal option with its Costa Rica landlord for the reduced space. In
addition, the Company transferred certain employees to its customer, agreed to
share certain personnel resources and common costs, and committed to provide
certain management, administrative and other services to its customer.
In connection with the transaction, the Company received $200,000 from its
customer and will receive further payments of $250,000 over a two-year period.
The Company will reduce its facility occupancy expenses by approximately $87,000
during each of the next four years that commenced January 2000 to an aggregate
amount of approximately $348,000.
The Company deferred approximately $102,000 of costs at December 30, 2000
incurred in connection with entering into this agreement and other incremental
costs, for the purpose of providing this customer with trained personnel and
certain other services required for their dedicated manufacturing capability.
Such costs classified in the balance sheet as other assets at December 30, 2000
were recovered through the $200,000 payment received in January 2001 as
described above. In January 2002, the Company received the second payment of
$150,000 and the final payment of $100,000 is due January 2003. At September 28,
2002, the unamortized amount of $96,000 in payments received is included in
deferred liabilities.
N. Pro forma weighted average number of common shares outstanding
Had the sale of 528,400 shares of common stock on February 28, 2002
referred to in Note C, Private placement of common stock, occurred at the
beginning of the year, the pro forma basic and diluted weighted average number
of common shares outstanding would have been:
Nine Months Ended
------------------
September 28, 2002
------------------
Basic and diluted:
Actual 3,055,713
Adjustment for sale of
Common Stock on February 28, 2002 119,134
---------
Basic - pro forma 3,174,847
Effect of dilutive securities-
Stock options 43,181
---------
Diluted - pro forma 3,218,028
=========
-10-
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. Business segment data
The Company's operations are conducted primarily through two business
segments: (1) electronic components and (2) microwave micro-circuitry. These
segments, and the principal operations of each, are as follows:
Electronic components: Design, manufacture and sale of electronic component
devices offering extremely broad frequency coverage and high performance
characteristics for communications, defense and aerospace applications. Of the
identifiable assets, 80% are located in the United States and 20% are located in
Costa Rica.
Microwave micro-circuitry: Design, manufacture and sale of microstrip,
bonded stripline and thick metal-backed Teflon(R) (PTFE) and mixed dielectric
multilayer circuits for communications, defense and aerospace applications. Of
the identifiable assets all are located in Canada.
Information about the Company's operations in different industries follows.
Operating income is net sales less operating expenses. Operating expenses
exclude interest expense, other income and income taxes. Assets are identified
with the appropriate operating segment and are substantially all located in the
North America geographic area. Corporate assets consist principally of cash.
Corporate expenses and inter-segment sales are immaterial.
Quarters Ended Nine Months Ended
---------------------------- ----------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
---------------------------- ----------------------------
(In thousands of dollars) (In thousands of dollars)
Industry segments:
Sales to unaffiliated customers:
Electronic components $ 5,065 $ 4,973 $16,825 $15,291
Microwave micro-circuitry 874 839 2,427 3,378
------- ------- ------- -------
Consolidated $ 5,939 $ 5,812 $19,252 $18,669
======= ======= ======= =======
Income (loss) before provision
for income taxes:
Operating income (loss):
Electronic components $ (100) $ (264) $ 98 $ (360)
Microwave micro-circuitry 172 (85) 95 77
Interest and other (expense)
income, net (25) 20 (127) 69
------- ------- ------- -------
Consolidated $ 47 $ (329) $ 66 $ (214)
======= ======= ======= =======
Identifiable assets:
Electronic components $30,270 $27,185
Microwave micro-circuitry 4,847 4,694
Corporate 931 931
------- -------
Consolidated $36,048 $32,810
======= =======
Depreciation and amortization:
Electronic components $ 654 $ 509 $ 1,764 $ 1,432
Microwave micro-circuitry 53 102 174 353
------- ------- ------- -------
Consolidated $ 707 $ 611 $ 1,938 $ 1,785
======= ======= ======= =======
Capital expenditures, net:
Electronic components $ 535 $ 2,473 $ 2,076 $ 6,989
Microwave micro-circuitry 24 - 117 402
------- ------- ------- -------
Consolidated $ 559 $ 2,473 $ 2,193 $ 7,391
======= ======= ======= =======
-11-
P. Restructuring and related charges
As a result of a decline in orders received from its customers during the
first six months of 2002, the Company reduced head count by 23 persons,
principally involved in production, manufacturing support and sales. We recorded
a personnel restructuring charge of $240,000 consisting of severance and certain
other personnel costs, during the second quarter of 2002. The company paid
substantially all of the accrued restructuring charge of $240,000 during the
third quarter of 2002.
Q. Subsequent event: reorganization and restructuring
The Company reorganized its operations, effective November 1, 2002, to
reflect a more market-driven focus and to better support its customer base. The
Company believes this will be accomplished by combining all of its technologies
into a single cohesive unit. This reorganization allows the Company to increase
its breadth of product offerings and offer more integrated solutions.
Concurrent with the reorganization, the Company reduced its personnel
complement by approximately 5%. The Company will make provisions for
restructuring and potentially other charges, which amount is presently
undetermined, in the fourth quarter of 2002 for the costs associated with the
reorganization and restructuring.
-12-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY
---------------------------------------------
(Unaudited)
-----------
The following table displays line items in the Consolidated Statements of
Operations as a percentage of net sales.
Percentage of Net Sales Percentage of Net Sales
---------------------------- ----------------------------
Quarters Ended Nine Months Ended
---------------------------- ----------------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales.................................... 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses:
Cost of sales.............................. 56.0 49.7 54.3 48.2
Selling, general and administrative........ 30.6 39.2 33.5 37.5
Research and development................... 12.2 16.4 9.9 13.4
Amortization of goodwill................... - .7 - .6
Reincorporation charge..................... - - - 1.8
Restructuring charge....................... - - 1.3 -
------ ------ ------ ------
98.8 106.0 99.0 101.5
------ ------ ------ ------
Operating income (loss)...................... 1.2 (6.0) 1.0 (1.5)
Interest and other expense (income), net..... .4 (.3) .6 (.4)
------ ------ ------ ------
Income (loss) before income taxes............ .8 (5.7) .4 (1.1)
Benefit for income taxes..................... (.2) (2.1) (.4) (.6)
------ ------ ------ ------
Net income (loss)............................ 1.0% (3.6)% .8% (.5)%
====== ====== ====== ======
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Estimates and Policies
The Company's management makes certain assumptions and estimates that
impact the reported amounts of assets, liabilities and stockholders' equity, and
revenues and expenses. These assumptions and estimates are inherently uncertain.
The management judgments that are currently the most critical are related to the
accounting for the Company's investments in Multi-Mix(R) Microtechnology,
contract revenue recognition, inventory valuation and valuation of goodwill.
Below we describe these policies further as well as the estimates and policies
involved.
The following is a summary of the carrying amounts of the Multi-Mix(R)
Microtechnology net assets included in the Company's consolidated financial
statements at September 28, 2002 and the related future planned purchases and
lease obligation commitments through January 2006.
Net assets:
Property, plant and equipment, at cost $14,318,000
Less accumulated depreciation and amortization 1,949,000
-----------
Property, plant and equipment, net 12,369,000
Inventories 1,184,000
Other assets, net 812,000
-----------
Total net assets at September 28, 2002 $14,365,000
===========
Commitments:
Planned equipment purchases for 2002 $800,000
Lease obligations through January 2006 963,000
-----------
Total commitments $ 1,763,000
-----------
Total net assets and commitments $16,128,000
===========
Due to economic and market conditions in the wireless telecommunications
industry, the system service providers have significantly reduced their capital
equipment purchases from our customers. These circumstances have caused the
Company's customers to delay or cancel Multi-Mix(R) Microtechnology product
purchases that had been anticipated for 2002. While the Company continues to
pursue new business opportunities, a continued delay or reduction from
anticipated levels in new orders for these products would require the Company to
reassess the carrying value of such assets or pursue alternatives (including a
potential write-off) related to the utilization or realization of these assets
and commitments, the result of which could be materially adverse to the
financial results and position of the Company. The Company has made no such
determination at this time.
The Company's planned equipment purchases and other commitments are
expected to be funded through a $6,500,000 revolving credit facility, which has
been extended to June 30, 2003, and supplemented by cash resources and cash
flows that are expected to be provided by operations.
Contract revenue recognition and related costs on fixed-price contracts
that require customization of products to customer specifications are recorded
when title transfers to the customer, which is generally on the date of
shipment. Prior to shipment, manufacturing costs incurred on such contracts are
recorded as work-in-process inventory. Anticipated losses on contracts are
charged to operations when identified. Revenue related to non-recurring
engineering charges is generally recognized upon shipment of the initial units
produced or based upon contractually established stages of completion.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. As of September 28, 2002, the
Company held inventories valued at $4,745,000 which is net of a $967,000
valuation allowance for obsolescence, which is based upon an established
inventory turnover model.
With the adoption of SFAS No. 142 by the Company on December 30, 2001,
goodwill is no longer subject to amortization over its estimated useful life.
However, goodwill will be subject to at least an annual assessment for
impairment and more frequently if circumstances indicate a possible impairment.
Based on an appraisal conducted by an independent appraisal firm, we believe the
estimated fair value of the Company's wholly-owned subsidiary Filtran
Microcircuits Inc. ("FMI") at December 30, 2001 exceeds the carrying value of
the net assets of the microwave micro-circuitry reporting segment and,
therefore, there was no impairment of goodwill. The Company will perform the
required annual assessment during the fourth quarter of 2002.
Third quarter and the first nine months of 2002 compared to the third
quarter and the first nine months of 2001
Consolidated results of operations for the third quarter of 2002 reflect an
increase in net sales from the third quarter of 2001 of $127,000 or 2.2% to
$5,939,000. This increase was attributable to increases in net sales of
electronic components of $92,000 and microwave micro-circuitry products of
$35,000 from FMI. Consolidated results of operations for the first nine months
of 2002 reflect an increase in net sales compared to the first nine months of
the prior year of $583,000 or 3.1% to $19,252,000. This increase was primarily
attributable to a $1,535,000 increase in the net sales of electronic components,
which was partially offset by a $952,000 decrease in sales of microwave
micro-circuitry products from FMI. The decrease during the first nine months of
2002 in FMI sales was due to softness in the telecommunications sector that FMI
serves, principally millimeter wave applications for wireless broadband
solutions.
Orders of $5,773,000 were received during the third quarter of 2002, a
decrease of $522,000 or 8.3%, compared to $6,295,000 in orders received during
the third quarter of 2001. Orders received during the third quarter of 2002 were
approximately 2.8% below third quarter 2002 net sales. Orders of $18,309,000
were received for the first nine months of 2002, a decrease of $2,455,000 or
11.8%, compared to $20,764,000 in orders received for the first nine months of
2001. Orders received for the first nine months of 2002 were approximately 4.9%
below net sales recorded in the first nine months of 2002. As a result, backlog
decreased by $943,000 or 8.0% to $10,913,000 at the end of the third quarter of
2002, compared to $11,856,000 at year-end 2001. The reductions in orders and
backlog reflected significant weakness in certain communications markets that
are served by the Company.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company believes that the current economic downturn, resulting in
reduced spending by wireless service providers, has caused many wireless
companies to delay or forego purchases of the Company's products. This is
reflected in the decrease in the Company's backlog. However, the Company expects
that its satellite and defense customers should continue to maintain their
approximate current levels of orders during the remainder of fiscal year 2002,
although there are no assurances they will do so. The Company also anticipates
increasing levels of orders during the remainder of fiscal year 2002 and for
fiscal year 2003 for its new Multi-Mix(R) Microtechnology products, for which
the Company has made a significant capital investment and incurred substantial
research and development costs. The Company expects that weakness in the
telecommunications sector that FMI serves will continue into the fourth quarter
of fiscal year 2002.
Consolidated cost of sales increased $434,000 or 15.0%, and as a percentage
of net sales increased 6.3 percentage points to 56.0%, for the third quarter of
2002 compared to the third quarter of 2001. Consolidated cost of sales increased
$1,462,000 or 16.3%, and as a percentage of net sales increased 6.1 percentage
points to 54.3%, for the first nine months of 2002. Cost of sales increased
$590,000 and $2,274,000 for the third quarter and the first nine months of 2002,
respectively, in the electronic components segment, resulting from higher sales
levels and manufacturing cost increases that were attributable to increases in
insurance expense, depreciation, rent and other occupancy expenses and
underabsorbed manufacturing overhead expenses related to the expansions of the
Company's West Caldwell, New Jersey and Costa Rica manufacturing production
facilities. Cost of sales declined $156,000 and $812,000 for the third quarter
and the first nine months of 2002, respectively, in the microwave
micro-circuitry segment, resulting from the decline in segment sales in the
third quarter and the first nine months of 2002 of approximately 4.1% and 28.2%,
respectively, compared to the third quarter and the first nine months of 2001.
Depreciation expense included in cost of sales for the third quarter of
2002 was $529,000, an increase of $66,000 compared to the third quarter of 2001.
For the third quarter of 2002, approximately $263,000 of depreciation expense
was associated with Multi-Mix(R) Microtechnology capital assets. Depreciation
expense included in the cost of sales for the first nine months of 2002 was
$1,561,000, an increase of $209,000 compared to the first nine months of 2001.
For the first nine months of 2002, approximately $814,000 of depreciation
expense was associated with Multi-Mix(R) Microtechnology capital assets. Other
increases in depreciation expense were a result of higher capital equipment
purchases in the current and prior years and the commencement of depreciation
expense associated with the West Caldwell, New Jersey 19,200 square-foot
building expansion, which was placed into service during the first quarter of
2002. During the third quarter of 2002, depreciation and amortization expense
commenced on the recently completed 36,200 square-foot Multi-Mix(R)
manufacturing facility in San Jose, Costa Rica.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated gross profit for the third quarter and the first nine months
of 2002 were impacted by the items referred to in the above discussion of
consolidated cost of sales. Consolidated gross profit for the third quarter of
2002 was $2,616,000 or 44.0% of net sales compared to consolidated gross profit
of $2,923,000 or 50.3% of net sales for the third quarter of 2001. Gross profit
for the third quarter of 2002 for the electronic components segment decreased by
$498,000 or 19.2% to $2,090,000 which represented 41.3% of segment net sales of
$5,065,000, compared to a gross profit of $2,588,000 or 52.0% of segment net
sales of $4,973,000 in the third quarter of 2001. Gross profit for the third
quarter of 2002 for the microwave micro-circuitry segment increased by $190,000
to $526,000 which represented 60.2% of segment net sales of $874,000, compared
to $336,000 or 40.0% of segment net sales of $840,000 in the third quarter of
2001. Consolidated gross profit for the first nine months of 2002 was $8,795,000
or 45.7% of net sales compared to consolidated gross profit of $9,674,000 or
51.8% of net sales for the first nine months of 2001. Gross profit for the first
nine months of 2002 for the electronic components segment decreased by $740,000
or 8.9% to $7,531,000 which represented 44.8% of segment net sales of
$16,825,000 compared to gross profit of $8,271,000 or 54.1% of segment net sales
of $15,291,000 for the first nine months of 2001. Gross profit for the first
nine months of 2002 for the microwave micro-circuitry segment decreased by
$139,000 or 9.9% to $1,264,000 which represented 52.1% of segment net sales of
$2,427,000, compared to $1,404,000 or 41.5% of segment net sales of $3,378,000
for the first nine months of 2001.
Consolidated selling, general and administrative expenses of $1,821,000 for
the third quarter of 2002 decreased by $460,000 or 20.2%, and when expressed as
a percentage of net sales, decreased by 8.6 percentage points to 30.7% compared
to the third quarter of 2001. The dollar decreases resulted from lower sales
commission expenses due to a reduction in commissionable sales for the third
quarter of 2002 and lower personnel recruitment costs and professional fees.
Selling, general and administrative expenses of $6,451,000 for the first nine
months of 2002 decreased by $563,000 or 8.0%, and when expressed as a percentage
of net sales, decreased by 4.0 percentage points to 33.5% compared to the first
nine months of 2001. The dollar decreases resulted from decreases in sales
commission expenses, personnel recruitment costs, marketing expenses and other
administrative expenses for the first nine months of 2002.
Research and development expenses for new products were $723,000 for the
third quarter of 2002, a planned decrease of $231,000 or 24.2% compared to the
third quarter of 2001. Except for $126,000 of research and development expenses
at FMI, an increase of $51,000 over the third quarter of 2001, substantially all
of the research and development expenses were related to Multi-Mix(R)
Microtechnology and Multi-Mix PICO(TM) products. Research and development
expenses for new products were $1,911,000 for the first nine months of 2002, a
planned decrease of $591,000 or 23.6% compared to the first nine months of 2001.
Except for $380,000 of research and development expenses at FMI, an increase of
$155,000 over the first nine months of 2001, substantially all of the research
and development expenses were related to Multi-Mix(R) Microtechnology and
Multi-Mix PICO(TM) products. We anticipate maintaining current levels of
research and development expenses for the remainder of the year.
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Consolidated operating income for the third quarter of 2002 was $72,000. We
reported a consolidated operating loss of $349,000 for the third quarter of
2001. As a result of a decline in orders received from its customers during the
first six months of 2002, the Company reduced head count by 23 persons,
principally involved in production, manufacturing support and sales. We recorded
a personnel restructuring charge of $240,000, consisting of severance and
certain other personnel costs, during the second quarter of 2002. The Company
paid substantially all of the accrued restructuring charge of $240,000 during
the third quarter of 2002. For the first nine months of 2002, consolidated
operating income was $433,000, before giving effect to the $240,000 second
quarter of 2002 personnel restructuring charge and, after including the
personnel restructuring charge, was $193,000. Consolidated operating income for
the first nine months of 2001 was $47,000 before the effect of charges
associated with the reincorporation in Delaware of $330,000 recorded in the
first quarter of 2001 and, after including the reincorporation charge, was a
consolidated operating loss of $283,000.
Operating loss for the electronic components segment for the third quarter
of 2002 was $100,000 compared to an operating loss of $264,000 in the third
quarter of 2001. Operating income for the microwave micro-circuitry segment was
$172,000 for the third quarter of 2002 compared to an operating loss of $85,000
for the third quarter of 2001. For the first nine months of 2002, the Company's
operating income for its electronic components segment was $296,000 before the
effect of charges associated with the personnel restructuring charge and, after
inclusion of the $198,000 second quarter personnel restructuring charge, was
$98,000. Before the effect of charges associated with the reincorporation in
Delaware of $330,000 recorded in the first quarter of 2001, operating loss for
the electronic components segment for the first nine months of 2001 was $30,000
and, after the inclusion of the reincorporation charge, the operating loss was
$360,000. For the first nine months of 2002, the Company's operating income for
its microwave micro-circuitry segment was $137,000 before the effect of charges
associated with the personnel restructuring charge and, after inclusion of the
$42,000 second quarter personnel restructuring charge, was $95,000.
Net interest expense was $25,000 for the third quarter of 2002, which
compares to net interest income of $20,000 for the third quarter of 2001. Net
interest expense was $127,000 for the first nine months of 2002 compared to net
interest income of $69,000 for the first nine months of 2001. Interest expense
of $58,000 was capitalized to property, plant and equipment in the third quarter
of 2001 and $81,000 for the first nine months of 2001. Interest expense for the
third quarter of 2002 was principally incurred on borrowings under our revolving
credit facility and a mortgage loan in connection with capital equipment
purchases and the building expansion constructed during fiscal year 2001.
Interest income for the third quarter of 2001 was primarily due to interest
earned on the proceeds received from the issuance of common stock in private
placements in fiscal year 2000 and interest capitalized to certain long-term
construction fixed asset projects that offset interest expense.
An income tax benefit of $10,000 was recorded for the third quarter of 2002
compared to an income tax benefit of $120,000 for the third quarter of 2001 with
an effective tax rate of 36.5%. The principal adjustments to the statutory
Federal income tax rate of 34% for the third quarter of 2002 relates to $12,000
in tax credits associated with research and development expenditures. An income
tax benefit of $80,000 was recorded for the first nine months of 2002 compared
to an income tax benefit of $110,000 for the first nine months of 2001. The
principal adjustments to the statutory Federal income tax rate of 34% for the
first nine months of 2002 relates to $75,000 in tax credits associated with
research and development expenditures.
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
During the period ended June 29, 2002, the Company completed the first of
the required impairment tests required under SFAS No. 142, which was adopted
effective December 30, 2001, related to goodwill. Under the new rules, goodwill
is no longer subject to amortization but it is reviewed for potential impairment
upon adoption and thereafter annually or upon the occurrence of an impairment
indicator. The annual amortization of goodwill, which would have approximated
$150,000, is no longer required. Goodwill of approximately $3,100,000, which
arose from the acquisition of FMI in 1999, was being amortized on a
straight-line basis over twenty years. Amortization of goodwill of $37,000 and
$111,000 were recorded for the third quarter and the first nine months of 2001,
respectively.
The Company recorded net income for the third quarter of 2002 of $57,000
compared to a net loss of $209,000 for the third quarter of 2001. On a per share
basis, we recorded net income of $.02 per share for the third quarter of 2002
compared to a net loss of $.08 per share reported for the third quarter of 2001.
Net income for the first nine months of 2002 was $146,000 after giving
effect to the personnel restructuring charge of $150,000. For the first nine
months of 2001, we reported a net loss of $104,000, after the after-tax effects
of the first quarter 2001 reincorporation charge of $198,000. Net income was
$.05 per share for the first nine months of 2002 after deducting the $.05 per
share personnel restructuring charge. For the first nine months of 2001, net
loss per share of $.04 per share was reported, after the after-tax effects of a
$.08 per share reincorporation charge reported in the first quarter of 2001.
The weighted average number of basic shares outstanding increased by
approximately 522,000 shares or 19.9% for the third quarter of 2002 compared to
the third quarter of 2001, and increased by 440,000 shares or 16.8% for the
first nine months of 2002 compared to the first nine months of 2001. The
increase in shares outstanding was primarily due to the issuance of 528,000
shares to DuPont Electronic Technologies during the first quarter of 2002.
Liquidity and Capital Resources
The Company had liquid resources comprised of cash and cash equivalents
totaling approximately $900,000 at the end of the third quarter of 2002 compared
to approximately $1,800,000 at the end of 2001. The Company's working capital
was approximately $8,100,000 and its current ratio was 3.0 to 1 at the end of
the third quarter of 2002 compared to $4,000,000 and 1.4 to 1, respectively, at
the end of 2001.
Our operating activities provided net positive cash flows of $175,000
during the first nine months of 2002 compared to negative cash flows of $55,000
during the first nine months of 2001. The primary reason for the positive
operating cash flows resulted from depreciation and amortization charges of
$1,938,000 and decreases in accounts receivable, inventories and other current
assets. These positive cash flows were offset primarily by payments made during
the first nine months of 2002 that reduced year-end 2001 accounts payable and
accrued liabilities.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company made net capital investments in property, plant and equipment
of $2,193,000 during the first nine months of 2002 (which excludes unpaid
invoices for additional capital investments of $306,000 at September 28, 2002),
compared to net capital investments made in property, plant and equipment of
$7,391,000 during the first nine months of 2001. These capital expenditures are
related to new production facilities and processing equipment capabilities in
connection with the manufacturing of new products and enhancements to existing
products. The depreciated cost of capital equipment associated with Multi-Mix(R)
Microtechnology was $12,369,000 at the end of the third quarter of 2002, an
increase of $1,017,000 compared to $11,352,000 at the end of fiscal year 2001.
In April 2001, the Company commenced borrowing under its $7,500,000
revolving credit facility with Fleet Bank, at an interest rate of one-half
percent below the bank's floating prime rate. During fiscal year 2001, the
Company borrowed an aggregate amount of $7,500,000 under this facility. The
weighted average interest rate on the borrowings under this facility during the
third quarter and the first nine months of 2002 was 4.25%, and the current
interest rate is 3.75%.
During the first quarter of 2002, the Company obtained an increase of
$2,500,000 in the Company's lines of credit with Fleet Bank to a total of
$10,000,000, $3,500,000 of which consists of a first mortgage callable in March
2007 on the Company's West Caldwell, New Jersey manufacturing facility. The
$6,500,000 revolving line of credit has been extended for one year to June 30,
2003. The Company successfully completed a private placement of 528,400 shares
of common stock on February 28, 2002 that raised $5,284,000 before offering
expenses. The Company repaid $5,000,000, all of its then revolving borrowings,
to Fleet Bank from the proceeds of that offering. The Company borrowed $500,000
during the third quarter of 2002 from its line of credit with Fleet Bank and
currently has $6,000,000 available under this line of credit.
Management believes that its current revolving credit facility
availability, together with its present liquid resources and cash flows that are
expected to be provided by operations, should provide sufficient resources for
currently contemplated operations during the next twelve months.
Capital expenditures for new projects and production equipment exceeded
depreciation and amortization expenses during the first nine months of 2002 by
approximately $561,000, and we anticipate that capital expenditures will exceed
depreciation and amortization expenses in fiscal year 2002. The Company intends
to issue up to $800,000 of purchase order commitments for building modifications
and for capital equipment from various vendors. The Company anticipates that
such equipment will be purchased and become operational and building
modifications will be completed during the remainder of 2002 and through fiscal
year 2003.
In February 2001, the Company entered into a new five-year lease in Costa
Rica for a 36,200 square-foot facility for manufacturing new Multi-Mix(R)
Microtechnology products. The leasehold improvements and capital equipment for
this manufacturing facility were recently completed at a cost of approximately
$4,800,000 and this facility was opened for production in August 2002. The
Company also leases an 8,200 square-foot facility in Costa Rica and the lease
ends December 2004. The Company has recently initiated discussions with its
co-tenant to relinquish the 8,200 square feet of space it presently occupies and
to move its currently conducted operations into the larger facility.
The Company has been authorized by its Board of Directors to repurchase
shares of its Common Stock, from time to time, depending on market conditions
and availability of resources. During the first nine months of 2002, the Company
repurchased 61,400 shares of Common Stock at a cost of approximately $457,000.
Subsequent to the end of the third quarter of 2002, the Company repurchased
10,000 additional shares at a cost of approximately $61,000. No shares were
repurchased during fiscal 2001 or fiscal 2000.
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Related Party Transactions
In May 1998, the Company sold 22,000 shares of Common Stock to Mason N.
Carter, Chairman, President and Chief Executive Officer of the Company, at a
price of $11.60 per share, which approximated the average closing price of the
Company's Common Stock during the second quarter of 1998. The Company lent Mr.
Carter $255,000 in connection with the purchase of these shares and combined
that loan with a prior loan to Mr. Carter in the amount of $105,000. The
resulting total principal amount of $360,000 was payable May 4, 2003 and bore
interest at a variable interest rate based on the prime rate of the Company's
lending bank. This loan was further amended on July 29, 2002. Accrued interest
of $40,000 was added to the principal, bringing the new principal amount of the
loan to $400,000, the due date was extended to May 4, 2006, and interest (at the
same rate as was previously applicable) is now payable monthly. Mr. Carter has
pledged 33,000 shares of Common Stock as security for this loan which is a
full-recourse loan.
On August 31, 2000, in connection with an amendment of Mr. Carter's
employment agreement, the Company loaned Mr. Carter an additional $280,000.
Interest on the loan varies and is based on the prime rate of the Company's
lending bank, payable in accordance with Mr. Carter's employment agreement. Each
year the Company will forgive 20% of the amount due under this loan and the
accrued interest thereon. During 2002, the Company forgave $56,000 of principal
and $12,000 of accrued interest and projects that $56,000 of principal and
$8,000 of accrued interest will be forgiven in fiscal year 2003.
The Company is a party to a stockholder's agreement, dated as of October
30, 1998, with a former director and Chairman of the Company. Pursuant to the
stockholder's agreement, this former director is required to vote his shares of
Common Stock as directed by the Board of Directors or the Chief Executive
Officer of the Company. There are no other obligations of the Company pursuant
to this agreement.
During the third quarter and the first nine months of 2002, the Company's
General Counsel, KMZ Rosenman, was paid $98,000 and $324,000, respectively, for
providing legal services to the Company. A director of the Company is Counsel to
the firm of KMZ Rosenman.
During 2002, the Company retained Career Consultants, Inc. and SK
Associates to perform executive searches and to provide outplacement services to
the Company. The Company paid an aggregate of $3,000 and $20,500, respectively,
to these companies during the third quarter and the first nine months of 2002. A
director of the Company is the Chairman and Chief Executive Officer of each of
these companies.
During the third quarter and the first nine months of 2002, a director of
the Company was paid $9,000 and $27,000, respectively, for providing
financial-related consulting services to the Company.
During the third quarter and the first nine months of 2002, a director of
the Company was paid $9,000 and $27,000, respectively, for providing
technology-related consulting services to the Company.
During the third quarter of 2002, DuPont Electronic Technologies was paid
$11,000 for providing technological and marketing related services on a
cost-sharing basis to the Company. The Company expects to be charged $25,000
during the remainder of fiscal year 2002 for similar services under this
cost-sharing agreement.
Each director who is not an employee of the Company receives a monthly
director's fee of $1,500, plus an additional $500 for each meeting of the Board
and of any Committees of the Board attended. The directors are also reimbursed
for reasonable travel expenses incurred in attending Board and Committee
meetings. In addition, pursuant to the 2001 Stock Option Plan, each non-employee
director is granted an immediately exercisable option to purchase 2,500 shares
of the Common Stock of the Company on the date of each Annual Meeting of
Stockholders. Each such grant is priced at the fair market value of the Common
Stock on the date of such grant. On June 12, 2002, non-qualified stock options
to purchase an aggregate of 17,500 shares were issued to seven directors at an
exercise price of $9.90 per share.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On April 7, 2000, the Company entered into a stock purchase and exclusivity
agreement with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson Holding
International, B.V. ("EHI") pursuant to which the Company sold to EHI 375,000
shares of Common Stock, representing approximately 17.5% of the Company's
outstanding Common Stock after giving effect to the sale, for an aggregate
purchase price of $3,375,000. The stock purchase and exclusivity agreement also
provides that the Company will design, develop and produce exclusively for
Ericsson Multi-Mix(R) products that incorporate active RF power transistors for
use in wireless basestation applications, television transmitters and certain
other applications that are intended for Bluetooth transceivers. The Company
also agreed that it will generally be Ericsson's priority supplier for such
products.
On October 26, 2000, the Company entered into subscription agreements for
Common Stock and three-year warrants to purchase shares of Common Stock
("Warrants") with a group of investors led by Adam Smith Investment Partners,
L.P. and certain of its affiliates (the "Adam Smith Investors"), EHI and Messrs.
E. Cohen, Goldberg and Fuller, members of the Board (the "Director Investors").
The Company sold to the investors units at a price of $12.80 per unit, each unit
consisting of one share of Common Stock and one Warrant with an exercise price
of $21.25 which expire on October 26, 2003 ("Units"). The Adam Smith Investors
purchased 240,000 Units, EHI purchased 100,000 Units and Messrs. E. Cohen,
Goldberg and Fuller purchased 5,000, 11,000 and 4,000 Units, respectively, for
an aggregate purchase price of $4,608,000. The Common Stock portion of the Units
represented an aggregate of approximately 14% of the outstanding Common Stock of
the Company after giving effect to the sales. The Warrants contain certain
anti-dilution provisions.
On February 28, 2002, the Company sold to DuPont Electronic Technologies
pursuant to which the Company sold 528,400 shares of Common Stock, representing
approximately 16.6% of the Company's outstanding Common Stock after giving
effect to the sale, for an aggregate purchase price of $5,284,000. The Company
and DuPont Electronic Technologies have also agreed to work together to better
understand the dynamics of the markets for high-frequency electronic components
and modules. David B. Miller, Vice President and General Manager of DuPont
Electronic Technologies, was appointed to the Company's Board of Directors. As a
result of this sale, pursuant to the anti-dilution provisions of the Warrants
issued in October 2000, the exercise price of the Warrants was reduced to $17.80
and the number of shares subject to the Warrants was increased to 429,775.
On October 1, 2002, EHI completed the sale of its microelectronics business
(excluding optosemiconductors and power modules, but including the RF power
business) to Infineon Technologies AG ("Infineon"). As part of this transaction,
EHI transferred to Infineon 475,000 shares of the Company and the right to
acquire 119,381 shares of the Company's common stock pursuant to the Warrants,
and EHI assigned to Infineon its rights in the following agreements between EHI
and the Company: (i) the Stock Purchase and Exclusivity Letter Agreement, dated
April 7, 2000, as amended by the letter agreement dated February 1, 2002; (ii)
the Registration Rights Agreement, dated April 7, 2000; (iii) the Subscription
Agreement, dated as of October 26, 2000; and (iv) the Registration Rights
Agreement, dated October 26, 2000 (collectively, the "Agreements"). The Company
also agreed to make certain modifications to the Agreements and the Warrants.
These changes are reflected in the Modification Agreement, dated as of September
27, 2002, between the Company and Infineon.
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method of accounting and eliminates the
pooling method of accounting. SFAS No. 141 will not have an impact on the
Company's business since the Company has accounted for all of its business
combinations using the purchase method of accounting.
With the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" by
the Company on December 30, 2001, goodwill is no longer subject to amortization
over its estimated useful life. However, goodwill will be tested for impairment
annually under a two-step approach, or more frequently, if events or changes in
circumstances indicate that the asset might be impaired. Impairment is assessed
at the "reporting unit" level by applying a fair value-based test. A reporting
unit is defined as the same as or one level below the operating segment level as
described in SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Under the two-step approach, the carrying amount of the
reporting unit is compared with its fair value. If the carrying amount of the
reporting unit exceeds its fair value, the "implied" fair value (as defined in
SFAS No. 142) of the reporting unit's goodwill is compared with its carrying
amount to measure the amount of the impairment loss, if any. When the carrying
amount of the reporting unit's goodwill exceeds the implied fair value of the
goodwill, an impairment loss is recognized in an amount equal to the excess. In
addition, under SFAS No. 142, an acquired intangible asset should be separately
recognized if the benefit of the intangible is obtained through contractual or
other legal rights, or if the intangible asset can be sold, transferred,
licensed, rented, or exchanged. Intangible assets will be amortized over their
estimated useful lives.
On an annualized basis, the Company expects that the adoption of this
accounting standard will reduce the amortization of goodwill and intangibles by
approximately $150,000 commencing in 2002. In connection with the adoption of
SFAS No. 142, the Company has completed the first of the impairment tests of
goodwill as of December 30, 2001 required by the standard, which indicated there
was no impairment of goodwill. The Company will perform the required annual
assessment during the fourth quarter of 2002.
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires that
asset retirement obligations that are identifiable upon acquisition and
construction, and during the operating life of a long-lived asset be recorded as
a liability using the present value of the estimated cash flows. A corresponding
amount would be capitalized as part of the asset's carrying amount and amortized
to expense over the asset's useful life. The Company is required to adopt the
provisions of SFAS No. 143 effective January 5, 2003. The Company is currently
evaluating the impact of adoption of this statement. The Company does not expect
that the adoption of SFAS No. 143 will have a material impact on the Company's
financial position or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" is effective for fiscal periods beginning after December 15, 2001. SFAS
No. 144 establishes an accounting model for impairment or disposal of long-lived
assets to be disposed of by sale. The Company does not expect that the adoption
of SFAS No. 144 will have a material impact on the Company's financial position
or results of operations.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of
FASB Statement No. 13 and Technical Corrections", will require gains and losses
on extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. Extraordinary treatment will be required for certain extinguishments as
provided in APB Opinion No. 30. The statement also amended SFAS No. 13 for
certain sale-leaseback and sublease accounting. The Company is required to adopt
the provisions of SFAS No. 145 effective January 5, 2003. The Company is
currently evaluating the impact of adoption of this statement, however, the
Company does not expect that the adoption of SFAS No. 145 will have a material
impact on the Company's financial position or results of operations.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" nullifies EITF Issue No. 94-3. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, whereas EITF No. 94-3 had recognized the
liability at the commitment date to an exit plan. The Company is required to
adopt the provisions of SFAS No. 146 effective for exit or disposal activities
initiated after January 4, 2003. The Company is currently evaluating the impact
of adoption of this statement to determine if the adoption of SFAS No. 146 will
have a material impact on the Company's financial position or results of
operations.
Forward-Looking Statements
This quarterly report on Form 10-QSB contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to: general economic and industry conditions;
slower than anticipated penetration into the satellite communications, defense
and wireless markets; the risk that the benefits expected from the acquisition
of Filtran Microcircuits Inc. are not realized; the ability to protect
proprietary information and technology; competitive products and pricing
pressures; the risk that the Company will not be able to continue to raise
sufficient capital to expand its operations as currently contemplated by its
business strategy; risks relating to governmental regulatory actions in
communications and defense programs; risks associated with demand for and market
acceptance of existing and newly developed products; and inventory risks due to
technological innovation and product obsolescence, as well as other risks and
uncertainties, including but not limited to those detailed from time to time in
the Company's Securities and Exchange Commission filings. These forward-looking
statements are made only as of the date hereof, and the Company undertakes no
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
Item 3. Controls and Procedures
Mason N. Carter, the Company's Chief Executive Officer, and Robert V.
Condon, the Company's Chief Financial Officer, have evaluated the effectiveness
of the Company's disclosure controls and procedures as of a date within 90 days
of the filing of this report. Based on such evaluation, each of Mason Carter and
Robert Condon concluded that the Company's disclosure controls and procedures
were effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC. No significant changes were
made in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation by
Mr. Carter and Mr. Condon.
-24-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
----------- -----------
3(a) By-laws of Merrimac are hereby incorporated by reference
to Exhibit 3(ii)(b) to Post-Effective Amendment No. 2 to
the Registration Statement on Form S-8 (No. 33-68862) of
Merrimac dated February 23, 2001.
3(b) Certificate of Incorporation of Merrimac is hereby
incorporated by reference to Exhibit 3(i)(b) to
Post-Effective Amendment No. 2 to the Registration
Statement on Form S-8 (No. 33-68862) of Merrimac dated
February 23, 2001.
4(a) Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 1 to Merrimac's Current Report on
Form 8-K for the period ending March 9, 1999.
4(b) Amendment No. 1 dated as of June 9, 1999, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 1 to Merrimac's Current Report on
Form 8-K for the period ending June 9, 1999.
4(c) Amendment No. 2 dated as of April 7, 2000, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 2 to Merrimac's Current Report on
Form 8-K for the period ending April 10, 2000.
4(d) Amendment No. 3 dated as of October 26, 2000, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and ChaseMellon Stockholder Services,
L.L.C., as Rights Agent, is hereby incorporated by
reference to Exhibit 2 to Merrimac's Current Report on
Form 8-K for the period ending October 27, 2000.
4(e) Amendment No. 4 dated as of February 21, 2001, to the
Stockholder Rights Agreement dated as of March 9, 1999,
between Merrimac and Mellon Investor Services, L.L.C.
(formerly known as ChaseMellon Stockholder Services,
L.L.C.), as Rights Agent, is hereby incorporated by
reference to Exhibit 1(d) to Merrimac's Current Report on
Form 8-K for the period ending February 21, 2001.
4(f) Amendment No. 5, dated February 28, 2002, to the Rights
Agreement, between Merrimac and Mellon Investor Services
LLC (f.k.a. ChaseMellon Shareholder Services, L.L.C.), as
Rights Agent is hereby incorporated by reference to
Exhibit 99.4 to Merrimac's Form 8-K for the period ending
March 6, 2002.
4(g) Amendment No. 6, dated September 18, 2002, to the Rights
Agreement, between Merrimac and Mellon Investor
Services LLC, as Rights Agent is hereby incorporated
by reference to Exhibit 99.3 to Merrimac's Form 8-K for
the period ending September 18, 2002.
-25-
EXHIBIT NO. DESCRIPTION
----------- -----------
10(a) Stock Purchase and Exclusivity Letter Agreement dated
April 7, 2000, among Ericsson Microelectronics, A.B.,
Ericsson Holdings International, B.V. and Merrimac is
hereby incorporated by reference to Exhibit 10(a) to
Merrimac's Quarterly Report on Form 10-QSB for the period
ending August 15, 2000.
10(b) Registration Rights Agreement dated as of April 7, 2000,
between Merrimac and Ericsson Holding International, B.V.
is hereby incorporated by reference to Exhibit 10(b) to
Merrimac's Quarterly Report on Form 10-QSB for the period
ending August 15, 2000.
10(c) Profit Sharing Plan of Merrimac is hereby incorporated by
reference to Exhibit 10(n) to Merrimac's Registration
Statement on Form S-1 (No. 2-79455).*
10(d) 1983 Key Employees Stock Option Plan of Merrimac effective
March 21, 1983, is hereby incorporated by reference to
Exhibit 10(m) to Merrimac's Annual Report on Form 10-KSB
for the year ending March 31, 1983.*
10(e) 1993 Stock Option Plan of Merrimac effective March 31,
1993, is hereby incorporated by reference to Exhibit 4(c)
to Merrimac's Registration Statement on Form S-8 (No.
33-68862) dated September 14, 1993.*
10(f) 1997 Long-Term Incentive Plan of Merrimac is hereby
incorporated by reference to Exhibit A to Merrimac's Proxy
Statement for the period ending April 11, 1997.*
10(g) Resolutions of the Stock Option Committee of the Board of
Directors of Merrimac adopted June 3, 1998, amending the
1983 Key Employees Stock Option Plan of Merrimac, the 1993
Stock Option Plan of Merrimac and the 1997 Long-Term
Incentive Plan of Merrimac and adjusting outstanding
awards thereunder to give effect to Merrimac's 10% stock
dividend paid June 5, 1998, are hereby incorporated by
reference to Exhibit 10(f) to Merrimac's Annual Report on
Form 10-KSB for the year ending March 30, 1999.*
10(h)(1) 1995 Stock Purchase Plan of Merrimac is hereby
incorporated by reference to Exhibit A to the Proxy
Statement of Merrimac for the period ending December 31,
1994.*
10(h)(2) Resolutions of the Stock Purchase Plan Committee of the
Board of Directors of Merrimac adopted June 3, 1998,
amending the 1995 Stock Purchase Plan of Merrimac and
adjusting outstanding awards thereunder to give effect to
Merrimac's 10% stock dividend paid June 5, 1998, are
hereby incorporated by reference to Exhibit 10(g)(2) to
Merrimac's Annual Report on Form 10-KSB for the year
ending January 2, 1999.*
10(i)(1) 1996 Stock Option Plan for Non-Employee Directors of
Merrimac is hereby incorporated by reference to Exhibit
10(d) to Merrimac's Annual Report on Form 10-KSB for the
year ending December 28, 1996.*
-26-
EXHIBIT NO. DESCRIPTION
----------- -----------
10(i)(2) Resolutions of the Board of Directors of Merrimac, adopted
June 3, 1998, amending the 1996 Stock Option Plan for
Non-Employee Directors of Merrimac and adjusting
outstanding awards thereunder to give effect to Merrimac's
10% stock dividend paid June 5, 1998, are hereby
incorporated by reference to Exhibit 10(h)(2) to
Merrimac's Annual Report on Form 10-KSB for the year
ending January 2, 1999.*
10(j) Amended and Restated Employment Agreement dated as of
January 1, 1998, between Merrimac and Mason N. Carter is
hereby incorporated by reference to Exhibit 10(a) to
Merrimac's Quarterly Report on Form 10-QSB for the year
ending July 4, 1998.*
10(k) Amendment dated August 31, 2000 to the Amended and
Restated Employment Agreement dated January 1, 1998,
between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(a) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
September 30, 2000.*
10(l) Amended and Restated Pledge Agreement dated as of July 29,
2002, between Merrimac and Mason N. Carter.*
10(m) Amended and Restated Promissory Note dated as of July 29,
2002, executed by Mason N. Carter in favor of Merrimac.*
10(n) Registration Rights Agreement dated as of May 4, 1998,
between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(e) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
July 4, 1998.*
10(o)(1) Form of Severance Agreement entered into with certain
officers of Merrimac is hereby incorporated by reference
to Exhibit 10(i) to Merrimac's Annual Report on Form
10-KSB for the year ending January 3, 1998.*
10(o)(2) Schedule of officers with substantially identical
agreements to the form filed as Exhibit 10(o)(1) hereto is
hereby incorporated by reference to Exhibit 10(j) to
Merrimac's Annual Report on Form 10-KSB for the year
ending January 3, 1998.*
10(p) Consulting Agreement dated as of January 1, 1998, between
Merrimac and Arthur A. Oliner is hereby incorporated by
reference to Exhibit 10 to Merrimac's Quarterly Report on
Form 10-QSB for the period ending April 4, 1998.*
10(q) Separation Agreement dated as of December 31, 1998,
between Merrimac and Eugene W. Niemiec is hereby
incorporated by reference to
-27-
EXHIBIT NO. DESCRIPTION
----------- -----------
Exhibit 10(p) to Merrimac's Annual Report on Form 10-KSB
for the year ending January 2, 1999.*
10(r) Stockholder's Agreement dated as of October 30, 1998,
between Merrimac and Charles F. Huber II is hereby
incorporated by reference to Exhibit 10 to Merrimac's
Quarterly Report on Form 10-QSB for the year ending
October 3, 1998.
10(s) Stockholder's Agreement dated as of June 3, 1999, among
Merrimac, William D. Witter, Inc. and William D. Witter is
hereby incorporated by reference to Exhibit 10 to
Merrimac's Quarterly Report on Form 10-QSB for the period
ending July 3, 1999.
10(t) Subscription Agreement for Common Stock and Warrants dated
October 26, 2000, between Merrimac and Ericsson Holding
International, B.V. (with a form of Warrant attached) is
hereby incorporated by reference to Exhibit 10(t) to
Merrimac's Annual Report on Form 10-KSB for the year
ending December 30, 2000.
10(u) Registration Rights Agreement dated October 26, 2000,
between Merrimac and Ericsson Holding International, B.V.
is hereby incorporated by reference to Exhibit 10(u) to
Merrimac's Annual Report on Form 10-KSB for the year
ending December 30, 2000.
10(v) Subscription Agreement for Common Stock and Warrants
dated October 26, 2000, between Merrimac and certain
entities and individuals related to Adam Smith Investment
Partners, L.P. (with a form of Warrant attached) is
hereby incorporated by reference to Exhibit 10(v) to
Merrimac's Annual Report on Form 10-KSB for the year
ending December 30, 2000.
10(w) Registration Rights Agreement dated October 26, 2000,
between
-28-
EXHIBIT NO. DESCRIPTION
----------- -----------
Merrimac and certain entities and individuals related to
Adam Smith Investment Partners, L.P. is hereby
incorporated by reference to Exhibit 10(w) to Merrimac's
Annual Report on Form 10-KSB for the year ending December
30, 2000.
10(x) Subscription Agreement for Common Stock and Warrants dated
October 26, 2000, among Merrimac, Edward H. Cohen, Joseph
B. Fuller and Joel H. Goldberg (with a form of Warrant
attached) is hereby incorporated by reference to Exhibit
10(x) to Merrimac's Annual Report on Form 10-KSB for the
year ending December 30, 2000.
10(y) 2001 Key Employee Incentive Plan is hereby incorporated by
reference to Exhibit 4.01 to Merrimac's Form S-8
(No. 333-63434) dated June 30, 2001.
10(z) 2001 Stock Option Plan is hereby incorporated by reference
to Exhibit 4.01 to Merrimac's Form S-8 (No. 333-63436)
dated June 20, 2001.
10(aa) 2001 Stock Purchase Plan is hereby incorporated by
reference to Exhibit 4.01 to Merrimac's Form S-8
(No. 333-63438) dated June 20, 2001.
10(bb) 2001 Amended and Restated Stock Option Plan is hereby
incorporated by reference to Exhibit 4(i) to Merrimac's
Quarterly Report on Form 10-QSB for the period ending
June 30, 2001.
10(cc) Subscription Agreement, dated February 28, 2002 between
Merrimac and DuPont Chemical and Energy Operations, Inc.,
a subsidiary of E.I. DuPont de Nemours and Company is
hereby incorporated by reference to Exhibit 99.2 to
Merrimac's Form 8-K for the period ending February 28,
2002.
10(dd) Registration Rights Agreement, dated February 28, 2002
between Merrimac and DuPont Chemical and Energy
Operations, Inc., a subsidiary of E.I. DuPont de Nemours
and Company is hereby incorporated by reference to Exhibit
99.3 to Merrimac's Form 8-K for the period ending
February 28, 2002.
10(ee) Consent and Waiver, dated as of September 18, 2002, among
Merrimac, Ericsson Holding International B.V. and
Infineon Technologies AG is hereby incorporated by
reference to Exhibit 99.1 to Merrimac's Form 8-K for the
period ending September 18, 2002.
10(ff) Modification Agreement, dated as of September 27, 2002,
between Merrimac and Infineon Technologies AG is hereby
incorporated by reference to Exhibit 99.2 to Merrimac's
Form 8-K for the period ending September 18, 2002.
10(gg) Letter Agreement, dated February 1, 2002, among Merrimac,
Ericsson Holding International B.V. and Ericsson
Microelectronics, A.B., which amends the Stock Purchase
and Exclusivity Letter, dated April 7, 2000 is hereby
incorporated by reference to Exhibit 99.4 to Merrimac's
Form 8-K for the period ending September 18, 2002.
11 Statement re: Computation of earnings per share.
99.1 Certification Pursuant to Section 1350 to Chapter 63 of
Title 18 of the United States Code as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on September 18, 2002 reporting
the transfer of Shares and warrants previously owned by Ericsson
Holding International, B.V. to Infineon Technologies AG.
-29-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MERRIMAC INDUSTRIES, INC.
-------------------------
(Registrant)
Date: November 8, 2002 By: /s/ Mason N. Carter
-------------------------------------
Mason N. Carter
Chairman, President and
Chief Executive Officer
Date: November 8, 2002 By: /s/ Robert V. Condon
-------------------------------------
Robert V. Condon
Vice President, Finance, Treasurer,
Secretary and Chief Financial Officer
-30-
CERTIFICATIONS
I, Mason N. Carter, certify that:
1. I have reviewed this quarterly report on Form 10QSB of Merrimac
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 /s/ Mason N. Carter
Chairman, President
and Chief Executive Officer
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CERTIFICATIONS
I, Robert V. Condon, certify that:
1. I have reviewed this quarterly report on Form 10QSB of Merrimac
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 8, 2002 /s/ Robert V. Condon
Vice President, Finance
and Chief Financial Officer
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