UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-11201
Merrimac Industries, Inc.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-1642321
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
41 FAIRFIELD PLACE
WEST CALDWELL, NEW JERSEY 07006
(Address of Principal Executive Offices) (Zip Code)
(973) 575-1300
(Registrant's Telephone Number)
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of November 10, 2006, there were 3,146,971 shares of Common Stock, par value
$.01 per share, outstanding.
MERRIMAC INDUSTRIES, INC.
41 Fairfield Place
West Caldwell, NJ 07006
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Quarters and Nine Months Ended September 30, 2006
and October 1, 2005 (Unaudited).................................... 1
Consolidated Balance Sheets-September 30, 2006 (Unaudited) and
December 31, 2005.................................................. 2
Consolidated Statement of Stockholders' Equity as of
September 30, 2006 (Unaudited)..................................... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and October 1, 2005 (Unaudited)........... 4
Notes to Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 32
Item 4. Controls and Procedures ....................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 32
Item 1A. Risk Factors ................................................... 32
Item 6. Exhibits ....................................................... 33
Signatures............................................................... 36
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Quarters Ended Nine Months Ended
-------------------------- ----------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------- ---------- ------------- ------------
OPERATIONS
Net sales .................................... $6,747,546 $7,890,033 $21,229,135 $22,717,345
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales ............................. 4,249,070 4,639,793 12,619,121 13,164,551
Selling, general and administrative ....... 2,493,986 2,469,693 7,624,915 7,124,979
Research and development .................. 608,540 489,602 1,496,584 1,538,272
---------- ---------- ----------- -----------
7,351,596 7,599,088 21,740,620 21,827,802
---------- ---------- ----------- -----------
Operating income (loss) ...................... (604,050) 290,945 (511,485) 889,543
Interest and other expense, net .............. (7,517) (60,532) (59,198) (177,420)
Loss on disposition of capital assets ........ -- (6,961) -- (42,829)
---------- ---------- ----------- -----------
Income (loss) before income taxes ............ (611,567) 223,452 (570,683) 669,294
Provision (benefit) for income taxes ......... (13,000) (5,000) (61,000) 25,000
---------- ---------- ----------- -----------
Net income (loss) ............................ $ (598,567) $ 228,452 $ (509,683) $ 644,294
========== ========== =========== ===========
Net income (loss) per common share-basic ..... $ (.19) $ .07 $ (.16) $ .21
========== ========== =========== ===========
Net income (loss) per common share-diluted ... $ (.19) $ .07 $ (.16) $ .20
========== ========== =========== ===========
Weighted average number of shares outstanding:
Basic ..................................... 3,137,241 3,144,744 3,143,377 3,141,135
========== ========== =========== ===========
Diluted ................................... 3,137,241 3,179,140 3,143,377 3,175,005
========== ========== =========== ===========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) ............................ $ (598,567) $ 228,452 $ (509,683) $ 644,294
Comprehensive income:
Foreign currency translation adjustment ... (2,318) 345,193 316,529 233,358
---------- ---------- ----------- -----------
Comprehensive income (loss) .................. $ (600,885) $ 573,645 $ (193,154) $ 877,652
========== ========== =========== ===========
See accompanying notes.
1
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2006 2005
(UNAUDITED) (AUDITED)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 2,115,037 $ 4,081,330
Restricted cash ....................................................... 1,500,000 --
Accounts receivable, net .............................................. 6,342,234 5,309,786
Income tax refunds receivable ......................................... 316,483 418,420
Inventories, net ...................................................... 4,239,905 3,709,567
Other current assets .................................................. 785,049 692,832
Deferred tax assets ................................................... 144,000 140,000
----------- ------------
Total current assets ............................................ 15,442,708 14,351,935
----------- ------------
Property, plant and equipment ............................................ 40,032,960 38,708,486
Less accumulated depreciation and amortization ........................ 26,784,787 24,735,905
----------- ------------
Property, plant and equipment, net ....................................... 13,248,173 13,972,581
Restricted cash .......................................................... -- 1,500,000
Other assets ............................................................. 611,834 614,553
Deferred tax assets ...................................................... 498,000 482,000
Goodwill ................................................................. 3,679,755 3,501,193
----------- ------------
Total Assets .................................................... $33,480,470 $ 34,422,262
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 680,330 $ 907,895
Accounts payable ...................................................... 1,045,107 1,161,199
Accrued liabilities ................................................... 1,725,861 1,545,407
Customer deposits ..................................................... 194,430 863,582
Deferred income taxes ................................................. 20,000 20,000
----------- ------------
Total current liabilities ....................................... 3,665,728 4,498,083
Long-term debt, net of current portion ................................... 1,800,960 2,071,299
Deferred compensation .................................................... 10,513 19,692
Deferred liabilities ..................................................... 27,591 2,720
Deferred tax liabilities ................................................. 140,000 140,000
----------- ------------
Total liabilities ............................................... 5,644,792 6,731,794
----------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share:
Authorized: 1,000,000 shares, no shares issued
Common stock, par value $.01 per share:
20,000,000 shares authorized; 3,271,176 and 3,228,715 shares issued;
and 3,146,971 and 3,146,615 shares outstanding, respectively ....... 32,711 32,287
Additional paid-in capital ............................................ 19,237,452 18,823,353
Retained earnings ..................................................... 7,931,595 8,441,278
Accumulated other comprehensive income ................................ 1,683,945 1,367,416
----------- ------------
28,885,703 28,664,334
Less treasury stock, at cost - 124,205 shares at September 30, 2006 and
82,100 shares at December 31, 2005 ................................. (973,864) (573,866)
Less loan to officer-stockholder ...................................... -- (400,000)
Less unearned compensation ............................................ (76,161) --
----------- ------------
Total stockholders' equity ...................................... 27,835,678 27,690,468
----------- ------------
Total Liabilities and Stockholders' Equity ...................... $33,480,470 $ 34,422,262
=========== ============
See accompanying notes.
2
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
Accumulated
Common Stock Additional Other
------------------- Paid-in Retained Comprehensive
Shares Amount Capital(A) Earnings Income
--------- ------- ----------- ---------- -------------
Balance, December 31, 2005.... 3,228,715 $32,287 $18,823,353 $8,441,278 $1,367,416
Net income (loss)............. (509,683)
Share-based compensation...... 128,942
Stock Purchase Plan sales..... 31,161 311 183,940
Exercise of stock options..... 2,300 23 15,627
Grant of restricted stock..... 9,000 90 85,590
Foreign currency translation.. 316,529
Repayment of Loan to
Officer-Stockholder........
--------- ------- ----------- ---------- ----------
Balance, September 30, 2006... 3,271,176 $32,711 $19,237,452 $7,931,595 $1,683,945
========= ======= =========== ========== ==========
Loan to
Treasury Stock Officer- Unearned
Shares Amount Stockholder Compensation Total
-------- --------- ----------- ------------ -----------
Balance, December 31, 2005.... 82,100 $(573,866) $(400,000) $ -- $27,690,468
Net income (loss)............. (509,683)
Share-based compensation...... 9,519 138,461
Stock Purchase Plan sales..... 184,251
Exercise of stock options..... 15,650
Grant of restricted stock..... (85,680) --
Foreign currency translation.. 316,529
Repayment of Loan to
Officer-Stockholder........ 42,105 (399,998) 400,000 2
------- --------- ---------- -------- -----------
Balance, September 30, 2006... 124,205 $(973,864) $ -- $(76,161) $27,835,678
======= ========= ========== ======== ===========
(A) Tax benefits associated with the exercise of employee stock options are
recorded to additional paid-in capital when such benefits are realized.
See accompanying notes.
3
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
---------------------------
September 30, October 1,
2006 2005
------------- -----------
Cash flows from operating activities:
Net income (loss) $ (509,683) $ 644,294
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization 1,955,240 2,363,692
Amortization of deferred financing costs 37,440 37,440
Share-based compensation 138,461 --
Loss on disposition of assets -- 42,829
Deferred and other compensation 2,600 62,818
Changes in operating assets and liabilities:
Accounts receivable (969,108) 548,608
Income tax refunds receivable 120,417 96,035
Inventories (523,303) (559,762)
Other current assets (83,027) (281,145)
Deferred tax assets -- 18,000
Other assets (26,009) 94,530
Accounts payable (72,229) (210,932)
Accrued liabilities 154,969 (244,126)
Customer deposits (669,152) (49,543)
Income taxes payable -- (83,552)
Deferred compensation (11,779) (32,408)
Other liabilities 24,871 (23,440)
----------- -----------
Net cash (used in) provided by operating activities (430,292) 2,423,338
----------- -----------
Cash flows from investing activities:
Purchases of capital assets (1,247,747) (1,157,287)
Proceeds from disposition of capital assets -- 300,000
----------- -----------
Net cash used in investing activities (1,247,747) (857,287)
----------- -----------
Cash flows from financing activities:
Borrowings under revolving credit facility -- 161,017
Borrowings from revolving lease line 159,988 230,753
Repayment of borrowings (680,731) (839,178)
Proceeds from the exercise of stock options 15,650 22,050
Proceeds from Stock Purchase Plan sales 184,251 39,368
----------- -----------
Net cash used in financing activities (320,842) (385,990)
----------- -----------
Effect of exchange rate changes 32,588 38,425
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,966,293) 1,218,486
Cash and cash equivalents at beginning of year 4,081,330 2,166,481
----------- -----------
Cash and cash equivalents at end of period $ 2,115,037 $ 3,384,967
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ -- $ 210,000
=========== ===========
Interest on credit facilities $ 219,426 $ 216,269
=========== ===========
Non-cash activities:
Repurchase of common stock for treasury $ 399,998 $ 209,000
=========== ===========
Loan to officer-stockholder repaid through repurchase of
common stock for treasury $ 400,000 $ --
=========== ===========
See accompanying notes.
4
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnote disclosures otherwise required by generally
accepted accounting principles for a full fiscal year. 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 30, 2006 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-K for the year ended December 31, 2005.
2. CONTRACT REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of Staff
Accounting Bulletin No. 104. Contract revenue and related costs on fixed-price
and cost-reimbursement contracts that require customization of products to
customer specifications are recorded when title transfers to the customer, which
is generally on the date of shipment. Prior to shipment, manufacturing costs
incurred on such contracts are recorded as work-in-process inventory.
Anticipated losses on contracts are charged to operations when identified.
Revenue related to non-recurring engineering charges is generally recognized
upon shipment of the related initial units produced or based upon contractually
established stages of completion.
The cost rates utilized for cost-reimbursement contracts are subject to review
by third parties and can be revised, which can result in additions to or
reductions from revenue. Revisions which result in reductions to revenue are
recognized in the period that the rates are reviewed and finalized; additions to
revenue are recognized in the period that the rates are reviewed, finalized,
accepted by the customer, and collectability from the customer is assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is no
reasonable basis on which to estimate such adjustments given the Company's very
limited experience with these contracts. The Company recognized $482,000 and
$732,000 of revenue related to cost reimbursement contracts during the third
quarter and first nine months of 2006, respectively. No revenue was recognized
related to cost-reimbursement contracts during the third quarter and first nine
months of 2005.
3. ACCOUNTING PERIOD
The Company's fiscal year is the 52-53 week period ending on the Saturday
closest to December 31. The Company has quarterly dates that correspond with the
Saturday closest to the last day of each calendar quarter and each quarter
consists of 13 weeks in a 52-week year. Periodically, the additional week to
make a 53-week year (fiscal year 2003 was the last and fiscal year 2008 will be
the next) is added to the fourth quarter, making such quarter consist of 14
weeks.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in equity of a company
during a period from transactions and other events and circumstances from
non-owner sources. Accumulated other comprehensive income at September 30, 2006
and December 31, 2005 was attributable solely to the effects of foreign currency
translation.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, SFAS No. 151, "Inventory Costs (An amendment of ARB No. 43,
Chapter 4)," was issued. SFAS No. 151 amends Accounting Research Bulletin
("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current-period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on normal capacity
of the production facilities. The Company adopted SFAS No. 151 on January 1,
2006. The adoption of SFAS No. 151 did not have a material impact on its
financial position and results of operations.
5
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP
123R-3"), "Transition Election Related to Accounting for the Tax Effects of
Share-based Payment Awards," that provides an elective alternative transition
method of calculating the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to the adoption of SFAS 123R (the "APIC
Pool") to the method otherwise required by paragraph 81 of SFAS 123R. The
Company may take up to one year from the effective date of this FSP to evaluate
its available alternatives and make its one-time election. The Company is
currently evaluating the alternative methods; however, neither alternative would
have an impact on the Company's results of operations or financial condition for
the nine months ended September 30, 2006, due to the fact that the Company is
currently using prior period net operating losses and has not realized any tax
benefits under SFAS 123R.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109 "Accounting for Income Taxes". FIN 48 prescribes
a recognition threshold and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact that FIN 48
will have on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108")
to provide guidance on Quantifying Financial Statement Misstatements. SAB 108
addresses how the effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in current-year financial statements.
SAB 108 requires registrants to quantify misstatements using both the balance
sheet and income statement approaches and to evaluate whether either approach
results in quantifying an error that is material in light of relevant
quantitative and qualitative factors. SAB 108 does not change the SEC staff's
guidance in SAB 99 on evaluating the materiality of misstatements.
When the effect of initial adoption of SAB 108 is determined to be material, SAB
108 allows registrants to record that effect as a cumulative effect adjustment
to beginning-of-year retained earnings. SAB 108 is effective for the first
fiscal year ending after November 15, 2006. The Company is currently evaluating
the impact that SAB 108 will have on its financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements". SFAS No. 157 establishes a single
authoritative definition of fair value, sets out a framework for measuring fair
value and requires additional disclosures about fair-value measurements. SFAS
No. 157 applies only to fair-value measurements that are already required or
permitted by other accounting standards and is expected to increase the
consistency of those measurements. It will also affect current practices by
nullifying Emerging Issues Task Force guidance that prohibited recognition of
gains or losses at the inception of derivative transactions whose fair value is
estimated by applying a model and by eliminating the use of "blockage" factors
by brokers, dealers and investment companies that have been applying AICPA
Guides. SFAS No. 157 is effective for fiscal years beginning after November
15,2007. The Company is currently evaluating the impact that SFAS No. 157 will
have on its financial position and results of operations.
6. SHARE-BASED COMPENSATION
On January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(revised 2004), "Share-Based Payment" ("SFAS No. 123R") which requires that
the costs resulting from all share-based payment transactions be recognized in
the financial statements at their fair values. The Company adopted SFAS 123R
using the modified prospective application method under which the provisions of
SFAS 123R apply to new awards and to awards modified, repurchased, or cancelled
after the adoption date. Additionally, compensation cost for the portion of the
awards for which the requisite service has not been rendered that are
outstanding as of the adoption date is recognized in the Consolidated Statement
of Operations over the remaining service period after the adoption date based on
the award's original estimate of fair value. Results for prior periods have not
been restated.
6
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the adoption of SFAS No. 123R, the Company's financial results
were lower than under our previous accounting method for share-based
compensation expense by the following amounts:
Quarter Ended Nine Months Ended
September 30, September 30,
2006 2006
------------- -----------------
Operating income (loss) $50,000 $129,000
Income (loss) before income taxes $50,000 $129,000
Net income (loss) $50,000 $129,000
Basic net income (loss) per share $ .02 $ .04
Diluted net income (loss) per share $ .02 $ .04
Because of the Company's net operating loss carryforwards, no tax benefits
resulting from the exercise of stock options have been recorded, thus there was
no effect on cash flows from operating or financing activities.
For the quarter and nine months ended September 30, 2006, share-based
compensation expense related to the 2001 Employee Stock Purchase Plan and the
various stock option plans was allocated as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
2006 2006
------------- -----------------
Cost of sales $ 8,000 $ 23,000
Selling, general and administrative $42,000 $106,000
------- --------
Total share-based compensation $50,000 $129,000
======= ========
Prior to adopting SFAS No. 123R on January 1, 2006, the Company's share-based
compensation expense was accounted for under the recognition and measurement
principles of APB Opinion No. 25 "Accounting for Stock-Based Compensation" and
related interpretations. For the quarter and nine months ended October 1, 2005,
no share-based compensation expense is reflected in net income, as all options
granted under the Company's stock option plans had an exercise price equal to
the underlying common stock price on the date of the grant. The following table
illustrates the effect on net income and net income per common share for the
quarter ended October 1, 2005, as if the Company had applied the fair value
recognition provisions for share-based employee compensation of SFAS 123R:
Quarter Ended Nine Months Ended
October 1, 2005 October 1, 2005
--------------- -----------------
Net income - as reported $228,452 $ 644,294
Plus: stock-based compensation
expense included in reported net income -- --
Less: Stock-based compensation expense determined
using the fair value method (42,000) (111,000)
-------- ---------
Net income - pro forma $186,452 $ 533,294
======== =========
Basic net income per share:
As reported $ .07 $ .21
Pro forma $ .06 $ .18
Diluted net income per share:
As reported $ .07 $ .20
Pro forma $ .06 $ .17
7
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each of the options granted in 2006 and 2005 was estimated on
the date of grant using the Black-Scholes option valuation model.
The following weighted average assumptions were utilized:
2006 2005
------ ------
Expected option life (years)................................ 2.9 2.4
Expected volatility......................................... 31.00% 38.00%
Risk-free interest rate..................................... 5.15% 4.00%
Expected dividend yield..................................... 0.00% 0.00%
Fair value per share of options granted..................... $ 2.63 $ 3.20
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options and subscription rights.
New Share-Based Compensation Plans:
On June 22, 2006, the Company's stockholders approved three new share-based
compensation programs as follows: (i) 2006 Stock Option Plan; (ii) 2006 Key
Employee Incentive Plan; and (iii) 2006 Non-Employee Directors' Stock Plan.
The 2006 Stock Option Plan authorizes the grant of an aggregate of 500,000
shares of Common Stock to employees, directors and consultants of the Company.
Under the 2006 Stock Option Plan, the Company may grant to eligible individuals
incentive stock options, as defined in Section 422 of the Internal Revenue Code
of 1986 ("Code"), and/or non-qualified stock options. The purposes of the 2006
Stock Option Plan are to attract, retain and motivate employees, compensate
consultants, and to enable employees, consultants and directors, including
non-employee directors, to participate in the long-term growth of the Company by
providing for or increasing the proprietary interests of such persons in the
Company, thereby assisting the Company to achieve its long-range goals. The 2006
Stock Option Plan replaced the 2001 Stock Option Plan, and the remaining
unissued options of 19,700 under the 2001 Stock Option Plan are no longer
available for grant.
The 2006 Stock Option Plan may be terminated, amended, altered, or discontinued
at any time by the Board, but no amendment may impair the rights of a
participant without the participant's consent, subject to the terms of the 2006
Stock Option Plan. In addition, the 2006 Stock Option Plan may not be amended
without the approval of the Company's stockholders to the extent such approval
is required by law or the listing requirements of any exchange on which the
Company's equity securities are publicly traded. Options may not be granted
under the 2006 Stock Option Plan after March 28, 2016, or earlier as the
Compensation Committee may determine.
At September 30, 2006 there were 82,500 options outstanding under the 2006 Stock
Option Plan of which none were exercisable. These options were granted on June
22, 2006 at an exercise price of $9.52, the closing price of the Company's
shares on the American Stock Exchange on the date immediately prior to grant,
pursuant to the 2006 Stock Option Plan. Options available for grant under the
2006 Stock Option Plan were 417,500 at September 30, 2006.
The 2006 Key Employee Incentive Plan replaces the 2001 Key Employee Incentive
Plan, which terminated on April 20, 2006. The purpose of the 2006 Key Employee
Incentive Plan is to give the Company a competitive advantage in retaining and
motivating key officers and employees and to provide the Company and its
subsidiaries with a stock plan providing incentives linked to increases in
stockholder value.
The 2006 Key Employee Incentive Plan is substantially similar to the 2001 Key
Employee Incentive Plan. The changes primarily relate to updating for changes in
applicable tax law and to raise the target market capitalization levels to be
achieved by the Company in order for the 2006 Key Employee Incentive Plan
participants to receive the benefits of the 2006 Key Employee Incentive Plan.
The number of Restricted Shares issued under the 2006 Key Employee Incentive
Plan will depend on whether the Company achieves certain target market
capitalizations during the five-year period
8
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning on March 29, 2006 (the "Effective Date"). If the Company attains or
achieves an average market capitalization equal to or greater than $58,000,000
during any six-month period during the five-year period beginning on the
Effective Date (the "$58,000,000 Market Capitalization"), then each participant
who shall still be in the employ of the Company on the last day of such
six-month period will be issued the number of Restricted Shares determined by
multiplying (a) his or her Award Percentage, (b) 5% and (c) the average market
capitalization during such six-month period and dividing the product by the
average fair market value of the common Stock during such six-month period.
If the Company attains or achieves an average market capitalization equal to or
greater than $93,000,000 over the course of any six-month period during the
five-year period beginning on the Effective Date (the "$93,000,000 Market
Capitalization"), then each participant who shall still be in the employ of the
Company on the last day of such six-month period will be awarded the number of
Restricted Shares determined by multiplying (a) his or her Award Percentage, (b)
5% and (c) the average market capitalization during such six-month period and
dividing the product by the average fair market value of the Common Stock during
such six-month period. Such six-month periods may be, in whole or in part,
coterminous with, the six-month period in which the $58,000,000 Market
Capitalization is achieved. In no event can Restricted Shares be issued upon
attainment of either the $58,000,000 Market Capitalization or the $93,000,000
Market Capitalization more than once during the five-year term of the 2006 Key
Employee Incentive Plan.
For purposes of the 2006 Key Employee Incentive Plan, market capitalization is
defined as the number of outstanding shares of Common Stock (excluding any
shares of Common Stock issued subsequent to the Effective Date, other than
shares of Common Stock issued upon the exercise of stock options granted to
employees, directors or consultants or through the purchase of shares of Common
Stock under any stock purchase plan) on a fully diluted basis, multiplied by the
fair market value per share of the Common Stock.
In the event of a Change in Control prior to the achievement of the $58,000,000
Market Capitalization, the $58,000,000 Market Capitalization will be deemed to
be achieved if the number of outstanding shares of Common Stock (calculated on a
fully diluted basis) on the date of the Change in Control multiplied by the fair
market value determined as of the date of the Change of Control is equal to or
greater than $58,000,000, and in the event it is achieved, each participant will
be granted the number of Restricted Shares determined by multiplying (i) such
participant's Award Percentage, (ii) 5% and (iii) the Change in Control Market
Capitalization and dividing the product by the Change in Control Price.
Similarly, the $93,000,000 Market Capitalization will be deemed to be achieved
if such number of shares on the date of the Change of Control multiplied by the
fair market value as of the date of the Change of Control is equal to or greater
than $93,000,000, and in the event it is achieved, each participant will be
granted the number of Restricted Shares determined by multiplying (i) such
participant's Award Percentage, (ii) (A) if the $58,000,000 Market
Capitalization shall have previously been achieved, 5% or (B) if the $58,000,000
Market Capitalization shall not have previously been achieved, 10% and (iii) the
Change in Control Market Capitalization and dividing the product by the Change
in Control Price.
The maximum value of an award of Restricted Shares which may be issued to any
participant upon achievement (or deemed achievement) of the $58,000,000 Market
Capitalization is $1,500,000 (based on the fair market value on the date of
issuance of such shares). The maximum value of an award of Restricted Shares
which may be issued to any participant upon achievement (or deemed achievement)
of the $93,000,000 Market Capitalization is $3,500,000 (based on the fair market
value of the Common Stock on the date of issuance of the Restricted Shares). In
the event a Change in Control shall occur which results in a change of control
market capitalization equal to or greater than $93,000,000 prior to achievement
of the $58,000,000 Market Capitalization, the maximum award would be $5,000,000.
The 2006 Key Employee Incentive Plan will terminate at the end of ten years
after its Effective Date; provided that the Restricted Shares outstanding as of
such date will not be affected or impaired by the termination of the 2006 Key
Employee Incentive Plan.
The 2006 Non-Employee Directors' Stock Plan is a new plan that authorizes the
grant of an aggregate of 100,000 shares of Common Stock to the non-employee
directors of the Company. The plan authorizes each non-employee director to
receive 1,500 shares of restricted stock in 2006, and 1,500 shares or such other
amount as the Board of Directors may, from time to time, decide for each year in
the future following the Company's Annual Meeting of Stockholders.
The purpose of the 2006 Non-Employee Directors' Stock Plan is to attract, retain
and motivate the most capable non-employee directors, to align the interests of
the Company's non-employee
9
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
directors and stockholders, to compensate the non-employee directors in line
with the Company's competitors, and to generally increase the effectiveness of
the Company's non-employee director compensation structure, thereby assisting
the Company to achieve its long-range goals. The 2006 Non-Employee Directors'
Stock Plan may be terminated, amended, altered, or discontinued at any time by
the Board, but no amendment may impair the rights of a participant without the
participant's consent, subject to the terms of the 2006 Non-Employee Directors'
Stock Plan. In addition, the 2006 Non-Employee Directors' Stock Plan may not be
amended without the approval of the Company's stockholders to the extent such
approval is required by law or the listing requirements of any exchange on which
the Company's equity securities are publicly traded. Awards may not be granted
under the 2006 Non-Employee Directors' Stock Plan after December 31, 2015, or
earlier as the Board may determine.
On June 22, 2006, the Company issued its initial grant of 9,000 shares of
restricted stock to its non-employee directors. The per share price of the grant
was $9.52 (the closing price of the Company's shares on the American Stock
Exchange on the date immediately prior to the grant, pursuant to the terms of
the Plan). The shares of restricted stock vest over a three-year period.
Share-based compensation expense for the quarter and nine months ended September
30, 2006 related to the grant of restricted stock was approximately $7,000 and
$10,000, respectively, and unearned compensation of $76,000 is included in the
accompanying consolidated balance sheets as a reduction of stockholders' equity.
Existing Stock Option and Employee Stock Purchase Plans:
At September 30, 2006, the Company maintains share-based compensation
arrangements under the following plans: (i) 1993 Stock Option Plan; (ii) 1997
Long Term Incentive Plan; and (iii) 2001 Stock Option Plan. In addition,
non-qualified options for the purchase of a total of 33,000 shares exercisable
at $10.00 per share as a result of grants by the Board of Directors in 1996 to
non-employee directors at fair market value on the date of grant expired
September 1, 2006.
At September 30, 2006 there were 381,884 options outstanding under the 1993
Stock Option Plan, the 1997 Long Term Incentive Plan and the 2001 Stock Option
Plan of which all were exercisable. No options are available for future grant
under the 1993 Stock Option Plan, the 1997 Long Term Incentive Plan or the 2001
Stock Option Plan.
A summary of all stock option activity and information related to all options
outstanding follows:
Weighted
average
exercise
price Shares
-------------------
Outstanding at December 31, 2005.......................... $ 9.83 430,869
Granted ................................................ 9.52 82,500
Exercised ................................................ 6.80 (2,300)
Cancelled ................................................ 10.86 (46,685)
------------------
Outstanding at September 30, 2006 ........................ $ 9.37 464,384
------------------
Option price range at end of period ...................... $3.10-$17.00
------------------
The aggregate intrinsic value represents the total pre-tax intrinsic value (the
difference between the Company's closing stock price on the last trading day of
the third quarter and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had
all option holders exercised their options on September 30, 2006. At September
30, 2006, the aggregate intrinsic value was $592,000. This amount changes based
on the fair market value of the Company's common stock. The total intrinsic
value of options exercised for the quarter and nine months ended September 30,
2006 was $1,000 and $5,000, respectively. The total fair value of options vested
for the quarter and nine months ended September 30, 2006 was approximately
$8,000 and $27,000, respectively.
10
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth information as of September 30, 2006 regarding
weighted average exercise prices, weighted average remaining contractual lives
and remaining outstanding options under the various stock option plans sorted by
range of exercise price:
Options Outstanding Options Exercisable
- --------------------------------------------------------------- ----------------------------
Weighted Weighted Average Weighted
Options Number Average Remaining Number Average
Price Range Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- ------------- ----------- -------------- ---------------- ----------- --------------
$3.10-$7.00 90,900 $ 6.01 4.0 years 90,900 $ 6.01
$7.01-$10.00 203,694 $ 9.24 7.5 years 121,194 $ 9.04
$10.01-$13.00 91,490 $11.03 1.1 years 91,490 $11.03
$13.01-$17.00 78,300 $13.95 3.4 years 78,300 $13.95
In 2001, the Company's stockholders approved a stock purchase plan pursuant to
which 250,000 shares of the Company's common stock were initially reserved for
sale to eligible employees.
Under this plan, the Company may grant employees the right to subscribe to
purchase shares of common stock from the Company at 85% of the market value on
specified dates and pay for the shares through payroll deductions over a period
of up to 27 months.
A summary of stock purchase plan subscription activity follows:
Weighted
average
subscription
price Shares
-----------------------
Subscribed at December 31, 2005....................... $6.34 44,047
-----------------------
Subscribed ........................................... $8.10 18,771
Purchased ............................................ 5.91 (31,161)
Cancelled ............................................ 6.62 (1,682)
-----------------------
Subscribed at September 30, 2006...................... $7.87 29,975
-----------------------
Subscription price range end of period................ $7.48-$8.10
-----------------------
7. GOODWILL
The changes in the carrying amount of goodwill for the periods ended September
30, 2006 and December 31, 2005 are as follows:
2006 2005
---------- ----------
Original balance $3,179,341 $3,179,341
Accumulated amortization through 2001 (434,603) (434,603)
Accumulated foreign currency adjustment through
prior year 756,455 633,175
Foreign currency adjustment, current year 178,562 123,280
---------- ----------
Balance, end of period $3,679,755 $3,501,193
========== ==========
8. INVENTORIES
Inventories are stated at the lower of cost or market, using the average cost
method. Cost includes materials, labor, and manufacturing overhead related to
the purchase and production of inventories.
Inventories consist of the following:
September 30, December 31,
2006 2005
------------- ------------
Finished goods $ 619,823 $ 365,346
Work in process 1,739,666 1,675,747
Raw materials and purchased parts 1,880,416 1,668,474
---------- ----------
Total $4,239,905 $3,709,567
========== ==========
Total inventories are net of valuation allowances for obsolescence and cost
overruns of
11
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1,231,000 at September 30, 2006 and $1,084,000 at December 31,` 2005.
9. CURRENT AND LONG-TERM DEBT
The Company was obligated under the following debt instruments at September 30,
2006 and December 31, 2005:
September 30, December 31,
2006 2005
------------- ------------
The CIT Group/Business Credit, Inc. (A):
Revolving line of credit, interest 1/2% above prime -- --
Term loan A, due October 8, 2008, variable interest
above LIBOR or prime $ 500,000 $ 725,000
Term loan B, due October 8, 2010, variable interest
above LIBOR or prime 1,571,432 1,866,074
The Bank of Nova Scotia (B):
Capital leases, interest 7.3%, due April 2006 -- 74,025
Capital leases, interest 5.85%, due May 2006 -- 36,725
Capital leases, interest 7.9%, due June 2006 -- 67,469
Capital leases, interest 7.35%, due March 2007 31,865 --
Capital leases, interest 7.5%, due May 2007 34,103 --
Capital leases, interest 5.8%, due January 2010 190,766 209,901
Capital leases, interest 6.6%, due March 2011 153,124 --
---------- ----------
2,481,290 2,979,194
Less current portion 680,330 907,895
---------- ----------
Long-term portion $1,800,960 $2,071,299
========== ==========
The financing agreement with CIT consisted of a $5,000,000 revolving line of
credit, that was temporarily reduced by $250,000 until certain conditions are
met; a $1,500,000 machinery and equipment term loan ("Term Loan A") and a
$2,750,000 real estate term loan ("Term Loan B"). In connection with this
financing agreement, the Company was required to place, over the life of the
loan, $1,500,000 as restricted cash collateral with CIT. As further discussed
below, the financing agreement was terminated on October 18, 2006, the loans
were repaid and the restricted cash was returned by CIT to the Company. The
revolving line of credit, which expired October 18, 2006, was subject to an
availability limit under a borrowing base calculation (85% of eligible accounts
receivable as defined in the financing agreement plus 100% of the $1,500,000
restricted cash). At September 30, 2006, the Company had available borrowing
capacity under its revolving line of credit of $4,400,000. The revolving line of
credit bore interest at the prime rate plus 0.50% (currently 8.75%). The
principal amount of Term Loan A was payable in 60 equal monthly installments of
$25,000 and bore interest at the prime rate plus 1% (currently 9.25%). The
principal amount of Term Loan B was payable in 84 equal monthly installments of
$32,738 and bore interest at the prime rate plus 1% (currently 9.25%). As of
September 30, 2006, the Company, under the terms of its agreement with CIT, had
elected to convert $500,000 of Term Loan A and $1,570,000 of Term Loan B from
their prime rate base to LIBOR-based interest rate loans. The current LIBOR
interest rate options were renewed on April 13, 2006 for six months at an
interest rate of 8.4543% and expired October 13, 2006. The revolving line of
credit and the term loans were secured by substantially all of the Company's
assets located within the United States and the pledge of 65% of the stock of
the Company's subsidiaries located in Costa Rica and Canada.
On October 18, 2006, the Company entered into a new financing agreement with
North Fork Bank which consists of a two-year $5,000,000 revolving line of
credit, a five-year $2,000,000 machinery and equipment term loan due October 1,
2011 ("Term Loan") and a ten-year $3,000,000 real estate term loan due October
1, 2016 ("Mortgage Loan"). Completion of the new financing agreement resulted in
additional cash loan proceeds of approximately $2,900,000 plus the release of
previously restricted cash of $1,500,000. The revolving line of credit is
subject to an availability limit under a borrowing base calculation (85% of
eligible accounts receivable plus up to 50% of eligible raw materials inventory
plus up to 25% of eligible electronic components, with an inventory advance
sublimit not to exceed $1,500,000, as defined in the financing agreement). The
revolving line of credit expires October 18, 2008. The revolving line of credit
bears interest at the prime rate less 0.50% (currently 7.75%) or LIBOR plus 2%.
The principal amount of the Term Loan is payable in 59 equal monthly
installments of $33,333 and one final payment of the remaining principal
balance. The Term Loan bears interest at the prime rate less 0.50% (currently
7.75%) or LIBOR plus 2.25%. The principal amount of the Mortgage Loan is payable
in 119 equal monthly installments of $12,500 and one final payment of the
remaining principal balance.
12
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Mortgage Loan bears interest at the prime rate less 0.50% (currently 7.75%)
or LIBOR plus 2.25%. On October 18, 2006, the Company, under the terms of its
agreement with North Fork Bank, elected to convert $1,950,000 of the Term Loan
and $2,950,000 of the Mortgage Loan from their prime rate base to LIBOR-based
interest rate loans for one month at an interest rate of 7.57%, which expire
November 17, 2006. The revolving line of credit, the Term Loan and the Mortgage
Loan are secured by substantially all assets located within the United States
and the pledge of 65% of the stock of the Company's subsidiaries located in
Costa Rica and Canada. The provisions of the financing agreement require the
Company to maintain certain financial covenants. The Company was in compliance
with these covenants at September 30, 2006. The Company reclassified
approximately $143,000 from current portion of long-term debt to long-term debt
to reflect the terms of the North Fork Bank financing agreement at September 30,
2006. In connection with the new financing agreement with North Fork Bank, the
Company will be taking a charge of approximately $170,000 in the fourth quarter
of 2006 related to the write-off of the unamortized loan costs related to the
prior financing agreement.
FMI has a revolving credit agreement in place with The Bank of Nova Scotia for
up to $500,000 (Canadian) at the prime rate plus 0.75%. No borrowings were
outstanding under this agreement at September 30, 2006.
FMI has a $1,800,000 (Canadian) (approximately $1,600,000 US) revolving lease
line with the Bank of Nova Scotia, whereby the Company can obtain funding for
previous production equipment purchases via a sale/leaseback transaction. As of
September 30, 2006, $410,000 has been utilized under this facility. Such leases
are payable in monthly installments for up to five years and are secured by the
related production equipment. Interest rates (typically prime rate plus one
percent) are set at the closing of each respective sale/leaseback transaction.
During the first quarter of 2006, FMI obtained $160,000 in connection with the
sale/leaseback of certain production equipment. The related equipment was
originally purchased by the Company in 2005.
Assets acquired under capital leases that are included in property, plant and
equipment, net, have a depreciated cost of approximately $771,000 at of
September 30, 2006 and $678,000 at December 31, 2005.
10. WARRANTIES
The Company's products sold under contracts have warranty provisions. Estimated
warranty costs for each contract are determined based on the contract terms and
technology specific issues. The Company accrues estimated warranty costs at the
time of sale and any additional amounts are recorded when such costs are
probable and can be reasonably estimated. Warranty expense was approximately
$29,000 and $99,000 for the quarters ended September 30, 2006 and October 1,
2005, respectively, and $126,000 and $217,000 for the nine months ended
September 30, 2006 and October 1, 2005, respectively. Warranty costs were higher
in 2005 due to one product with an inordinate amount of repair costs. The
warranty reserve at September 30, 2006 and December 31, 2005 was $164,000 and
$168,000, respectively.
11. INCOME TAXES
The current tax benefit for the quarter and nine months ended September 30, 2006
represents refundable Canadian provincial tax credits for which FMI, as a
technology company, has qualified.
The Company's effective tax rate for the nine months ended October 1, 2005
reflects U.S. Federal Alternative Minimum Tax and state income taxes that are
due based on certain statutory limitations on the use of the Company's net
operating loss carryforwards.
The Company currently has significant deferred tax assets resulting from net
operating loss carryforwards, tax credit carryforwards and deductible temporary
differences, which should reduce taxable income in future periods. A valuation
allowance is required when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. The Company's 2002 and 2003 net losses
weighed heavily in the Company's overall assessment. As a result of the
assessment, the Company established a full valuation allowance for its remaining
net domestic deferred tax assets at December 28, 2002. This assessment continued
unchanged in 2003, 2004, 2005 and the first nine months of 2006. In 2005 the
Company added a valuation allowance for certain Canadian deferred tax assets of
$270,000, because it believed that the probability of realization of such assets
was uncertain. During the third quarter and first nine months of 2006 the
Company added additional valuation allowances of $63,000 and $172,000,
respectively, for certain Canadian deferred tax assets because it believed that
the probability of realization of such assets was uncertain. Management believes
that a valuation allowance is
13
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not required for the remainder of FMI's recorded deferred tax assets as they are
more likely than not to be realized.
Internal Revenue Service Code Section 382 places a limitation on the utilization
of net operating loss carryforwards when an ownership change, as defined in the
tax law, occurs. Generally, an ownership change occurs when there is a greater
than 50 percent change in ownership. If such a change should occur, the actual
utilization of net operating loss carryforwards, for tax purposes, would be
limited annually to a percentage of the fair market value of the Company at the
time of such change. The Company may become subject to these limitations in 2006
depending on change in ownership.
12. BUSINESS SEGMENT DATA
The Company's operations are conducted primarily through two business segments:
(1) electronic components and subsystems and (2) microwave micro-circuitry.
These segments, and the principal operations of each, are as follows:
Electronic components and subsystems: Design, manufacture and sale of electronic
component devices offering extremely broad frequency coverage and high
performance characteristics for communications, defense and aerospace
applications. Of the identifiable assets, 84% are located in the United States
and 16% are located in Costa Rica. Included in such segment are the Multi-Mix(R)
Microtechnology net assets.
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. All
of the identifiable assets are located in Canada.
Information about the Company's operations in different areas of its business
follows. Operating income is net sales less operating expenses. Operating
expenses exclude interest expense, other income and income taxes. Corporate
assets consist principally of cash and corporate expenses are immaterial.
Intersegment sales and the resulting intersegment assets are principally due to
intercompany sales from the microwave micro-circuitry segment to the electronic
components and subsystems segment.
Quarters Ended Nine Months Ended
-------------------------- --------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(In thousands of dollars) (In thousands of dollars)
Industry segments:
Sales to unaffiliated customers:
Electronic components and subsystems $5,499 $5,932 $17,283 $17,393
Microwave micro-circuitry 1,256 1,974 4,082 5,440
Intersegment sales (7) (16) (136) (116)
------ ------ ------- -------
Consolidated $6,748 $7,890 $21,229 $22,717
====== ====== ======= =======
Income before income taxes:
Operating income (loss):
Electronic components and subsystems $ (516) $ 160 $ (446) $ 604
Microwave micro-circuitry (88) 131 (65) 285
Interest and other expense, net (8) (61) (60) (177)
Loss on disposition of assets -- (7) -- (43)
------ ------ ------- -------
Consolidated $ (612) $ 223 $ (571) $ 669
====== ====== ======= =======
Depreciation and amortization:
Electronic components and subsystems $ 574 $ 731 $ 1,759 $ 2,163
Microwave micro-circuitry 63 68 196 201
------ ------ ------- -------
Consolidated $ 637 $ 799 $ 1,955 $ 2,364
====== ====== ======= =======
Capital expenditures:
Electronic components and subsystems $ 247 $ 546 $ 1,203 $ 1,090
Microwave micro-circuitry 22 51 45 67
------ ------ ------- -------
Consolidated $ 269 $ 597 $ 1,248 $ 1,157
====== ====== ======= =======
September 30, October 1,
2006 2005
------------- ----------
Identifiable assets:
Electronic components and subsystems $24,453 $24,609
Microwave micro-circuitry 6,922 6,817
Corporate 2,115 3,385
Intersegment (10) (69)
------- -------
Consolidated $33,480 $34,742
======= =======
14
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. The calculation of diluted net income (loss) per common share is similar
to that of basic net income (loss) per common share, except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if all potentially dilutive common shares, principally those
issuable under stock options and warrants, were issued during the reporting
period to the extent they are not anti-dilutive.
The following table summarizes the calculation of basic and diluted net income
per share:
Quarters Ended Nine Months Ended
-------------------------- --------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
Net income (loss) available to common stockholders ... $ (598,567) $ 228,452 $ (509,683) $ 644,294
========== ========== ========== ==========
Basic net income (loss) per share
- ---------------------------------
Weighted average number of shares outstanding for
basic net income per share - Common stock ......... 3,137,241 3,144,744 3,143,377 3,141,135
========== ========== ========== ==========
Net income (loss) per common share - basic ........... $ (.19) $ .07 $ (.16) $ .21
========== ========== ========== ==========
Diluted net income (loss) per share
- -----------------------------------
Weighted average number of shares outstanding for
diluted net income (loss) per share:
Common stock ......................................... 3,137,241 3,144,744 3,143,377 3,141,135
Effect of dilutive securities:
Stock options (1) .................................... -- 34,396 -- 33,870
---------- ---------- ---------- ----------
Weighted average number of shares outstanding for
diluted net income (loss) per share ............... 3,137,241 3,179,140 3,143,377 3,175,005
========== ========== ========== ==========
Net income (loss) per common share - diluted ......... $ (.19) $ .07 $ (.16) $ .20
========== ========== ========== ==========
(1) Represents additional shares resulting from assumed conversion of stock
options less shares purchased with the proceeds therefrom.
Because of the net loss for the quarter and nine months ended September 30,
2006 approximately 464,000 shares underlying stock options were excluded
from the calculation of diluted net income (loss) per share as the effect
would be anti-dilutive. Diluted net income per share excludes 261,000 and
286,000 shares underlying stock options for the quarter and nine months
ended October 1, 2005, respectively, as the exercise price of these options
was greater than the average market value of the common shares, resulting
in an anti-dilutive effect on net income per share.
14. RELATED PARTY TRANSACTIONS
In May 1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter,
Chairman, President and Chief Executive Officer of the Company, at a price of
$11.60 per share, which approximated the average closing price of the Company's
Common Stock during the first quarter of 1998. The Company 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. This loan was further amended on
July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing
the new principal amount of the loan to $400,000, the due date was extended to
May 4, 2006, and interest (at the same rate as was previously applicable) was
payable monthly. Mr. Carter pledged 33,000 shares of Common Stock as security
for this loan, which was 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, payable in accordance with Mr.
Carter's employment agreement. Each year the Company is required to forgive 20%
of the amount due under this loan and the accrued interest thereon. During 2005,
the Company forgave $56,000 of principal and $3,000 of accrued interest and paid
a tax gross-up benefit of $4,300. This loan was fully satisfied in 2005.
On March 29, 2006, the Company entered into an agreement with Mr. Carter to
purchase 42,105 shares of the Company's common stock owned by Mr. Carter at a
purchase price of $9.50 per share (the closing price of the common stock on
March 29, 2006) resulting in a total purchase price for the shares of $399,998.
As a condition to the Company's obligation to purchase the shares,
15
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
concurrent with the Company's payment of the purchase price Mr. Carter paid to
the Company $400,000 (plus any accrued and unpaid interest) in full satisfaction
of Mr. Carter's promissory note in favor of the Company dated July 29, 2002.
This transaction was closed on April 24, 2006.
During the third quarter and first nine months of 2006, the Company's outside
general counsel Katten Muchin Rosenman LLP was paid $130,000 and $317,000,
respectively, for providing legal services to the Company. During the third
quarter and first nine months of 2005, Katten Muchin Rosenman LLP was paid
$37,000 and $212,000, respectively. A director of the Company is counsel to
Katten Muchin Rosenman LLP but does not share in the fees that the Company pays
to such law firm and his compensation is not based on such fees.
During 2006 and 2005 the Company retained Career Consultants, Inc. and SK
Associates to perform executive searches and to provide other services to the
Company. The Company paid an aggregate of $4,000 and $10,000 to these companies
during the third quarter and first nine months of 2006, respectively. The
Company paid an aggregate of $2,000 and $5,000 to these companies during the
third quarter and first nine months of 2005, respectively. A director of the
Company is the chairman and chief executive officer of these companies.
During the third quarter and first nine months of 2006, a director of the
Company was paid $9,000 and $27,000, respectively, for providing
technology-related consulting services to the Company. For the third quarter and
first nine months of 2005, such director was paid $9,000 and $27,000,
respectively.
During the third quarter and first nine months of 2006, DuPont Electronic
Technologies ("DuPont"), a stockholder and the employer of a director, was paid
$4,000 and $31,000, respectively, for providing technological and
marketing-related personnel and services on a cost-sharing basis to the Company
under the Technology Agreement dated February 28, 2002. During the third quarter
and first nine months of 2005, DuPont was paid $17,000 and $42,000,
respectively. A director of the Company is an officer of DuPont, but does not
share in any of these payments.
Each director who is not an employee of the Company receives a monthly
director's fee of $1,500, plus an additional $500 for each meeting of the Board
and of any Committees of the Board attended. In addition, the Chair of the Audit
Committee receives an annual fee of $2,500 for his services in such capacity.
The directors are also reimbursed for reasonable travel expenses incurred in
attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
Option Plan, each non-employee director is granted an option to purchase 2,500
shares of the Common Stock of the Company on the date of each Annual Meeting of
Stockholders. Such options have a three-year vesting period. Each such grant has
an exercise price equal to the fair market value on the date of such grant and
will expire on the tenth anniversary of the date of the grant. On June 22, 2006,
non-qualified stock options to purchase an aggregate of 17,500 shares were
issued to seven directors at an exercise price of $9.52 per share. Also on June
22, 2006, pursuant to the 2006 Non-Employee Directors' Stock Plan, 9,000 shares
of restricted stock were granted to six directors at a fair market value of
$9.52 per share. Such restricted stock vests annually over a three-year period.
On December 13, 2004 Infineon Technologies AG ("Infineon"), at such time the
beneficial owner of approximately 15% of the Company's common stock, sold
475,000 shares of the Company's common stock to four purchasers in a
privately-negotiated transaction. Two purchasers in such transaction, K
Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
with Ludwig G. Kuttner, who was President and Chief Executive Officer of
Hampshire Group, Limited ("Hampshire"), purchased 300,000 shares representing an
aggregate of approximately 9.6% of the Company's common stock. Mr. Kuttner was
elected to the Company's Board of Directors at its 2006 Annual Meeting of
Stockholders. As a result of an ongoing investigation by Hampshire's audit
committee of allegations of certain improprieties and possibly unlawful conduct
involving Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment
with Hampshire has been terminated. Mr. Kuttner has been on a leave of absence
from his position as a director of Merrimac since the date of his election until
the resolution of the investigation. During his leave of absence, Mr. Kuttner is
not entitled to any compensation from the Company. Infineon also assigned to
each purchaser certain registration rights to such shares under the existing
registration rights agreements Infineon had with the Company. In connection with
the transaction, the Company and Infineon terminated the Stock Purchase and
Exclusivity Letter Agreement dated April 7, 2000, as amended, which provided
that the Company would design, develop and produce exclusively for Infineon
certain Multi-Mix(R) products that incorporate active RF power transistors for
use in certain wireless base station applications, television transmitters and
certain other applications that are intended for Bluetooth transceivers.
16
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DuPont and the four purchasers above hold registration rights which currently
give them the right to register an aggregate of 1,003,413 shares of Common Stock
of the Company.
15. SUBSEQUENT EVENT: RESTRUCTURING AND RELATED CHARGES
As a result of a decline in orders received from its customers during the first
nine months of 2006, the Company reduced headcount by 13 persons in mid-November
2006, beyond the termination of 5 personnel during the third quarter of 2006,
principally involved in production and administration. The Company will record a
personnel restructuring charge of approximately $200,000, consisting of
severance and certain other personnel costs, during the fourth quarter of 2006.
Substantially all of the restructuring charge will be paid during the fourth
quarter of 2006 and the first quarter of 2007.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements relating to future
results of 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: risks associated with demand for and market
acceptance of existing and newly developed products as to which the Company has
made significant investments, particularly its Multi-Mix(R) products; the
possibilities of impairment charges to the carrying value of our Multi-Mix(R)
assets, thereby resulting in charges to our earnings; risks associated with
adequate capacity to obtain raw materials and reduced control over delivery
schedules and costs due to reliance on sole source or limited suppliers; slower
than anticipated penetration into the satellite communications, defense and
wireless markets; failure of our Original Equipment Manufacturer, or OEM,
customers to successfully incorporate our products into their systems; changes
in product mix resulting in unexpected engineering and research and development
costs; delays and increased costs in product development, engineering and
production; reliance on a small number of significant customers; the emergence
of new or stronger competitors as a result of consolidation movements in the
market; the timing and market acceptance of our or our OEM customers' new or
enhanced products; general economic and industry conditions; the risk that the
benefits expected from the Company's acquisition of Filtran Microcircuits Inc.
are not realized; the ability to protect proprietary information and technology;
competitive products and pricing pressures; our ability and the ability of our
OEM customers to keep pace with the rapid technological changes and short
product life cycles in our industry and gain market acceptance for new products
and technologies; foreign currency fluctuations between the U.S. and Canadian
dollars; risks relating to governmental regulatory actions in communications and
defense programs; and inventory risks due to technological innovation and
product obsolescence, as well as other risks and uncertainties as are detailed
from time to time in the Company's Securities and Exchange Commission filings.
These forward-looking statements are made only as of the date of the filing of
this Form 10-Q, and the Company undertakes no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
Merrimac Industries, Inc. ("Merrimac" or the "Company") is involved in the
design, manufacture and sale of electronic component devices offering extremely
broad frequency coverage and high performance characteristics, and microstrip,
bonded stripline and thick metal-backed Teflon(R) (PTFE) and mixed dielectric
multilayer circuits for communications, defense and aerospace applications. The
Company's operations are conducted primarily through two business segments: (1)
electronic components and subsystems and (2) microwave micro-circuitry (through
its subsidiary, Filtran Microcircuits Inc.).
The following table provides a breakdown of our sales between these segments for
the quarters and nine months ended September 30, 2006 and October 1, 2005:
Quarters Ended
-------------------------------------------------
September 30, 2006 October 1, 2005
----------------------- -----------------------
$ % of sales $ % of sales
---------- ---------- ---------- ----------
Electronic components
and subsystems $5,499,000 81.5 % $5,932,000 75.2 %
Microwave micro-circuitry(1) $1,256,000 18.6 % $1,974,000 25.0 %
Intersegment sales $ (7,000) (0.1)% $ (16,000) (0.2)%
---------- ----- ---------- -----
Consolidated $6,748,000 100.0 % $7,890,000 100.0 %
========== ===== ========== =====
Nine Months Ended
---------------------------------------------------
September 30, 2006 October 1, 2005
------------------------ ------------------------
$ % of sales $ % of sales
----------- ---------- ----------- ----------
Electronic components
and subsystems $17,283,000 81.4 % $17,393,000 76.6 %
Microwave micro-circuitry(1) $ 4,082,000 19.2 % $ 5,440,000 23.9 %
Intersegment sales $ (136,000) (0.6)% $ (116,000) (0.5)%
----------- ----- ----------- -----
Consolidated $21,229,000 100.0 % $22,717,000 100.0 %
=========== ===== =========== =====
(1) Substantially all conducted by our Canadian subsidiary, Filtran
Microcircuits Inc.
18
Merrimac is a versatile technologically oriented company specializing in
miniature radio frequency lumped-element components, integrated beamformer
networks, microstrip and stripline microwave components, subsystem assemblies
and ferrite attenuators. Of special significance has been the combination of two
or more of these technologies into single components to achieve superior
performance and reliability while minimizing package size and weight. Merrimac
components are today found in applications as diverse as satellites, military
and commercial aircraft, radar, cellular wireless and WiMAX infrastructure base
stations, medical and dental diagnostic instruments and wireless Internet
connectivity. Merrimac's components range in price from $0.50 to more than
$10,000 and its subsystem assemblies range from $500 to more than $1,000,000.
Multi-Mix(R)
In 1998, Merrimac introduced Multi-Mix(R) Microtechnology capabilities, an
innovative process for microwave, multilayer integrated circuits and
micro-multifunction module (MMFM)(R) technology and subsystems. This process is
based on fluoropolymer composite substrates, which are bonded together into a
multilayer structure using a fusion bonding process. The fusion process provides
a homogeneous dielectric medium for superior electrical performance at microwave
frequencies. This 3-dimensional Multi-Mix(R) design consisting of stacked
circuit layers permits the manufacture of components and subsystems that are a
fraction of the size and weight of conventional microstrip and stripline
products.
Beginning in 2005 and continuing into 2006, Merrimac focused its design and
manufacturing efforts on Multi-Mix(R) multilayer subsystem products for sale to
several satcom and military customers during 2005 and 2006.
In addition, in 2005 Merrimac started the design of a high power amplifier for
use in base station infrastructure, military and satcom applications. An
important part of base station infrastructure equipment is the high power
transmit amplifier, which must provide extremely linear performance in order to
boost signals carrying voice, data and video services without distortion.
Recently, Merrimac was granted a United States Patent for its Multi-Mix(R)
Resource Module ("Resource Module") along with another Patent for its
Multi-Mix(R) Microtechnology from the State Intellectual Property Office of the
People's Republic of China entitled "Method of Making Microwave Multifunction
Modules Using Fluoropolymer Composite Substrates".
The Company is currently developing and designing prototypes for new high-power
subassembly solutions for wireless infrastructure OEMs for size, weight, and
cost reduction of base station power amplifiers. The Company believes the
Resource Module will be the foundation or building block for providing Total
Integrated Platform Solutions by attaching and embedding high-power
semiconductor transistor die (such as LDMOS, SiC, GaN, SiGe, GaAs FET/MESFET and
PHEMT) into 3D highly integrated multilayer modules for use in wireless
infrastructure high-power amplifiers, tower top amplifiers, WiMAX base stations,
radio transceivers and phased-array radar transmitter elements. The Company
believes the Resource Module offers a very attractive value proposition that
provides enabling solutions to a variety of different commercial and military
market applications.
Merrimac has delivered custom designed and high power Multi-Mix(R) components
for a Homeland Security and Public Safety integrated communications system to
assist in future civil and governmental inter-departmental communications. In
addition, Multi-Mix PICO(R) orders for WiMAX customer premise equipment continue
to be received in 2006. WiMAX is another growth area for Multi-Mix(R). WiMAX
provides wireless access technology for "last mile" broadband services for the
home, such as high-speed Internet and video on demand, offering size and cost
advantages.
Merrimac continues to make upgrades to existing military systems that require
more functionality and advanced capabilities in smaller and lightweight
products. Multi-Mix(R) Microtechnology has the ability to provide leverage to a
host of military systems where size, weight and performance requirements are
mission-critical. We are engaged in ongoing collaborative design efforts with
our key account customers to develop prototypes for potential applications.
Possible applications include shipboard radar, military space applications,
joint tactical radio systems, classified airborne integrated filter assemblies,
instantaneous frequency measuring receivers for airborne applications, and
wireless and WiMAX infrastructure basestations. These efforts focus on achieving
the best tradeoffs in size, cost, performance and power for their systems, while
utilizing advanced integration capabilities of Multi-Mix(R) Microtechnology.
While there can be no assurance any of these collaborative efforts will result
in the Company receiving production orders for its products following
development of a successful prototype, the Company believes such projects could
result in significant future revenues.
Merrimac's strategy is to be a reliable supplier of high quality, technically
innovative signal processing products. Merrimac coordinates its marketing,
research and development, and
19
manufacturing operations to develop new products and expand its markets.
Merrimac's marketing and development activities focus on identifying and
producing prototypes for new military and commercial programs and applications
in aerospace, navigational systems, telecommunications and cellular analog and
digital wireless telecommunications electronics. Merrimac's research and
development efforts are targeted towards providing customers with more complex,
reliable, and compact products at lower costs.
Multi-Mix PICO(R)
In July 2001, Merrimac introduced its Multi-Mix PICO(R) Microtechnology. Through
Multi-Mix PICO(R) technology, Merrimac offers a group of products at a greatly
reduced size, weight and cost that includes hybrid junctions, directional
couplers, quadrature hybrids, power dividers and inline couplers, filters and
vector modulators along with 802.11a, 802.11b, and 802.11g Wireless LAN (Local
Area Network) modules. When compared to conventional multilayer quadrature
hybrids and directional coupler products, Multi-Mix PICO(R) is more than 84%
smaller in size, without experiencing loss of power or performance. Merrimac has
completed the development of a broad line of Multi-Mix(R) components for use in
wireless infrastructure base station applications.
Any future demand for Multi-Mix(R) for the wireless market is dependent on
various third-party programs and is directly related to the timing of our
customers' and potential customers' phase-out of existing programs and their
migration, which is not assured and has not yet commenced commercially, toward
new programs to meet their customers' new requirements. The Company also
anticipates decreased levels of orders for the remainder of fiscal year 2006 due
to defense program delays, but anticipates increased levels of orders for 2007
for its Multi-Mix(R) Microtechnology products based on inquiries from existing
customers, requests to quote from prospective and existing customers and market
research. Nevertheless, in times of armed conflict or war, military spending is
concentrated on armaments build up, maintenance and troop support, and not on
the research and development and specialty applications that are the Company's
core strengths and revenue generators. Accordingly, defense and military product
revenues may decrease and should not be expected to increase, at times of armed
conflicts or war.
Filtran Microcircuits Inc.
Acquired by Merrimac in February 1999, Filtran Microcircuits Inc. ("FMI") is a
leading manufacturer of microwave micro-circuitry for the high frequency
communications industry. FMI produces microstrip, bonded stripline, and thick
metal-backed Teflon(R) (PTFE) microcircuits for RF applications including
satellite, aerospace, personal communications systems, fiber optic
telecommunications, automotive, navigational and defense applications worldwide.
FMI participates in the market for millimeter-wave applications. FMI also
supplies mixed dielectric multilayer and high speed interconnect circuitry to
meet customer demand for high performance and cost-effective packaging.
Certain defense and automotive orders from existing customers expected for FMI
have been delayed. FMI anticipates a portion of this new order volume to renew
later in the fourth quarter of 2006 or early 2007 based on inquiries, requests
to quote and prototype requests from existing customers.
For more information regarding the electronics components and subsystems
business and the microwave micro-circuitry business done by FMI, please see Note
12 of the Notes to Consolidated Financial Statements.
Additional Information
The Company markets and sells its products domestically and internationally
through a direct sales force and manufacturers' representatives. Merrimac has
traditionally developed and offered for sale products built to specific customer
needs, as well as standard catalog items.
Cost of sales for the Company consists of materials, salaries and related
expenses, and outside services for manufacturing and certain engineering
personnel and manufacturing overhead. Our products are designed and manufactured
in the Company's facilities. The Company's manufacturing and production
facilities infrastructure overhead are relatively fixed and are based on its
expectations of future net revenues. Should the Company experience a reduction
in net revenues in a quarter, as discussed below, it could have difficulty
adjusting short-term expenditures and absorbing any excess capacity expenses. If
this were to occur, the Company's operating results for that quarter would be
negatively impacted. In order to remain competitive, the Company must
continually reduce its manufacturing costs through design and engineering
innovations and increases in manufacturing efficiencies. There can be no
assurance that the Company will be able to reduce its manufacturing costs.
20
The Company anticipates that depreciation and amortization expenses will exceed
capital expenditures in fiscal year 2006 by approximately $500,000. The Company
intends to issue commitments to purchase $800,000 of capital equipment from
various vendors for the remainder of 2006. The Company anticipates that such
equipment will be purchased and become operational during the remainder of 2006
and early 2007. The Company's planned equipment purchases and other commitments
are expected to be funded through cash resources and cash flows expected to be
generated from operations, and supplemented by the Company's new $5,000,000
revolving credit facility, which expires October 18, 2008.
Selling, general and administrative expenses consist of personnel costs for
administrative, selling and marketing groups, sales commissions to employees and
manufacturing representatives, travel, product marketing and promotion costs, as
well as legal, accounting, information technology and other administrative
costs. As discussed below, the Company expects to continue to make significant
and increasing expenditures for selling, general and administrative expenses,
especially in connection with implementation of its strategic plan for
generating and expanding sales of Multi-Mix(R) products.
Research and development expenses consist of materials, salaries and related
expenses of certain engineering personnel, and outside services related to
product development projects. The Company charges all research and development
expenses to operations as incurred. The Company believes that continued
investment in research and development is critical to the Company's long-term
business success. The Company intends to continue to invest in research and
development programs in future periods, and expects that these costs will
increase over time, in order to develop new products, enhance performance of
existing products and reduce the cost of current or new products.
The Company has experienced a declining level of sales and operating income for
2006 and anticipates this trend to continue in the fourth quarter, primarily
resulting from materially decreased bookings in the first nine months of 2006
and resulting lower backlog of the Company's traditional products, particularly
products sold by its Filtran subsidiary. The Company has also experienced the
loss of certain anticipated orders as well as delays in space and defense
program orders, including Multi-Mix(R) products. The Company will continue to
focus its Multi-Mix(R) Microtechnology business strategy on development,
manufacturing and marketing of the high power amplifier Multi-Mix(R) Resource
Module and ancillary products. Accordingly, to support the Multi-Mix(R)
initiative, the Company expects to make significant investments in additional
technical designing and engineering personnel resources, resulting in increased
annual compensation costs of up to approximately $700,000, and additional assets
and equipment of approximately $400,000.
The adoption by the Company of SFAS No. 123R accounting, effective January 1,
2006, will add additional non-cash compensation expense from previously and
currently issued stock options and Stock Purchase Plan offerings to the
Company's future reported results of operations. Such expenses have not been
recorded in this manner prior to 2006, in accordance with prior accounting
requirements, and, therefore, future results are not directly comparable to all
pre-2006 accounting periods. Further, additional non-cash share-based
compensation charges to operating income will result from future stock option
grants, Stock Purchase Plan offerings and restricted stock awards to co-workers
and non-officer Directors under the Company's various compensation plans. See
Note 6 of Notes to Consolidated Financial Statements.
As a result of the lower level of certain traditional sales currently being
experienced and anticipated, losses of certain anticipated orders and delays of
orders from satellite and defense customers, including Multi-Mix(R) products,
the increased investment in our Multi-Mix(R) technology initiative, the
restructuring charge and the write-off of the loan costs described the analysis
of the third quarter and nine-month results, adoption of the SFAS No. 123R
accounting standard and other future events described herein, the Company
anticipates that operating income, net income and net income per share will be
adversely affected during the remainder of 2006 (resulting in an expected loss
for the fourth quarter and fiscal year 2006) and until our Multi-Mix(R) product
line sales increase as anticipated in 2007.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The Company's management makes certain assumptions and estimates that impact the
reported amounts of assets, liabilities and stockholders' equity, and revenues
and expenses. The management judgments that are currently the most critical are
related to the accounting for the Company's investments in Multi-Mix(R)
Microtechnology, contract revenue recognition, inventory valuation, valuation of
goodwill and valuation of deferred tax assets.
21
Impairment of Long-Lived Assets
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 30, 2006 and the related future planned purchases and
lease obligation commitments through January 2011.
Net assets:
Property, plant and equipment, at cost $14,787,000
Less accumulated depreciation and amortization 7,827,000
-----------
Property, plant and equipment, net 6,960,000
Inventories 422,000
Other assets, net 150,000
-----------
Total net assets at September 30, 2006 $ 7,532,000
-----------
Commitments:
Planned equipment purchases for the remainder of 2006 $ 300,000
Lease obligations through January 2011 800,000
-----------
Total commitments $ 1,100,000
-----------
Total net assets and commitments $ 8,632,000
===========
Approximately 35% of the property, plant and equipment may be utilized in other
areas of our electronic components and subsystems operations.
Any future demand for Multi-Mix(R) for the wireless market is dependent on
various third-party programs and is directly related to the timing of our
customers' and potential customers' phase-out of existing programs and their
migration, which is not assured and has not yet commenced commercially, toward
new programs to meet their customers' new requirements. While these
circumstances have resulted in the delay or cancellation of Multi-Mix(R)
Microtechnology product purchases that had been anticipated from certain
specific customers or programs, the Company has implemented a strategic plan
utilizing product knowledge and customer focus to expand specific sales
opportunities. However, continued extended delay or reduction from planned
levels in new orders expected from customers for these products could require
the Company to pursue alternatives related to the utilization or realization of
these assets and commitments, the net result of which could be materially
adverse to the financial results and position of the Company. In accordance with
the Company's evaluation of Multi-Mix(R) under SFAS No. 144, the Company has
determined no provision for impairment is required at this time. Management will
continue to monitor the recoverability of the Multi-Mix(R) assets.
Contract Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Staff
Accounting Bulletin No. 104. Contract revenue and related costs on fixed-price
and cost-reimbursement contracts that require customization of products to
customer specifications are recorded when title transfers to the customer, which
is generally on the date of shipment. Prior to shipment, manufacturing costs
incurred on such contracts are recorded as work-in-process inventory.
Anticipated losses on contracts are charged to operations when identified.
Revenue related to non-recurring engineering charges is generally recognized
upon shipment of the related initial units produced or based upon contractually
established stages of completion.
The cost rates utilized for cost-reimbursement contracts are subject to review
by third parties and can be revised, which can result in additions to or
reductions from revenue. Revisions which result in reductions to revenue are
recognized in the period that the rates are reviewed and finalized; additions to
revenue are recognized in the period that the rates are reviewed, finalized,
accepted by the customer, and collectability from the customer is assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is no
reasonable basis on which to estimate such adjustments given the Company's very
limited experience with these contracts. The Company recognized $482,000 and
$732,000 of revenue related to cost reimbursement contracts during the third
quarter and first nine months of 2006, respectively. No revenue was recognized
related to cost-reimbursement contracts during the third quarter and first nine
months of 2005.
Inventory Valuation
Inventories are valued at the lower of average cost or market. Inventories are
periodically reviewed for their projected manufacturing usage utilization and,
when slow-moving or obsolete inventories are identified, a provision for a
potential loss is made and charged to operations.
22
Total inventories are net of valuation allowances for obsolescence and cost
overruns of $1,231,000 at September 30, 2006 and $1,084,000 at December 31,
2005. Procurement of inventory is based on specific customer orders and
forecasts. Customers have certain rights of modification with respect to these
orders and forecasts. As a result, customer modifications to orders and
forecasts affecting inventory previously procured by us and our purchases of
inventory beyond customer needs may result in excess and obsolete inventory for
the related customers. Although the Company may be able to use some of these
excess components and raw materials in other products it manufactures, a portion
of the cost of this excess inventory may not be recoverable from customers, nor
may any excess quantities be returned to the vendors. The Company also may not
be able to recover the cost of obsolete inventory from vendors or customers.
Write offs or write downs of inventory generally arise from:
o declines in the market value of inventory;
o changes in customer demand for inventory, such as cancellation of
orders; and
o our purchases of inventory beyond customer needs that result in excess
quantities on hand that we are not able to return to the vendor or
charge back to the customer.
Valuation of Goodwill
With the adoption of SFAS No. 142 by the Company on December 30, 2001, goodwill
is no longer subject to amortization over its estimated useful life. However,
goodwill is subject to at least an annual assessment for impairment and more
frequently if circumstances indicate a possible impairment. The Company
performed the annual assessment during the fourth quarter of 2005 and determined
there was no impairment. The Company will perform its annual assessment for 2006
during the fourth quarter of 2006.
Valuation of Deferred Tax Assets
The Company currently has significant deferred tax assets resulting from net
operating loss carryforwards, tax credit carryforwards and deductible temporary
differences, which should reduce taxable income in future periods. A valuation
allowance is required when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. The Company's 2002 and 2003 net losses
weighed heavily in the Company's overall assessment. As a result of the
assessment, the Company established a full valuation allowance for its remaining
net domestic deferred tax assets at December 28, 2002. This assessment continued
unchanged in 2003, 2004, 2005 and the first nine months of 2006. In 2005 the
Company added a valuation allowance for certain Canadian deferred tax assets of
$270,000, because it believed that the probability of realization of such assets
was uncertain. During the third quarter and first nine months of 2006 the
Company added additional valuation allowances of $63,000 and $172,000,
respectively, for certain Canadian deferred tax assets because it believed that
the probability of realization of such assets was uncertain. Management believes
that a valuation allowance is not required for the remainder of FMI's recorded
deferred tax assets as they are more likely than not to be realized.
CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY
(UNAUDITED)
The following table reflects the percentage relationships of items from the
Consolidated Statements of Operations as a percentage of net sales.
Percentage of Net Sales Percentage of Net Sales
-------------------------- --------------------------
Quarters Ended Nine Months Ended
-------------------------- --------------------------
September 30, October 1, September 30, October 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
Net sales............................... 100.0% 100.0% 100.0% 100.0%
----- ---- ----- ----
Costs and expenses:
Cost of sales........................ 63.0 58.8 59.4 57.9
Selling, general and administrative.. 37.0 31.3 35.9 31.4
Research and development............. 9.0 6.2 7.1 6.8
----- ---- ----- ----
109.0 96.3 102.4 96.1
----- ---- ----- ----
Operating income (loss)................. (9.0) 3.7 (2.4) 3.9
Interest and other expense, net......... (.1) (.8) (.3) (.8)
Loss on disposition of assets........... -- (.1) -- (.2)
----- ---- ----- ----
Income (loss) before income taxes....... (9.1) 2.8 (2.7) 2.9
Provision (benefit) for income taxes.... (.2) (.1) (.3) .1
----- ---- ----- ----
Net income (loss)....................... (8.9)% 2.9% (2.4)% 2.8%
===== ==== ===== ====
23
THIRD QUARTER AND FIRST NINE MONTHS OF 2006 COMPARED TO THE THIRD QUARTER AND
FIRST NINE MONTHS OF 2005
Net sales.
Consolidated results of operations for the third quarter of 2006 reflect a
decrease in net sales from the third quarter of 2005 of $1,142,000 or 14.5% to
$6,747,000. The decrease was attributable to a $433,000 decrease in net sales of
electronic components and subsystems and a $718,000 decrease in sales of
microwave micro-circuitry products from FMI and a $9,000 decrease in
intersegment sales. Sales decreased due to the loss of certain anticipated
orders as well as from delays in space and defense program orders for both of
the Company's operating segments. Consolidated results of operations for the
first nine months of 2006 reflect a decrease in net sales from the first nine
months of 2005 of $1,488,000 or 6.6% to $21,229,000. The decrease was
attributable to a $110,000 decrease in net sales of electronic components and
subsystems and a $1,358,000 decrease in sales of microwave micro-circuitry
products from FMI and a $20,000 decrease in intersegment sales. Sales for the
first nine months of 2006 were lower than the first nine months of 2005
primarily due to the lower bookings levels received during the second half of
2005 and the first quarter of 2006 as compared to comparable prior periods was
due to the loss of certain anticipated orders as well as from delays in space
and defense programs. Sales for the first nine months of 2006 for the electronic
components and subsystems segment included $1,200,000 of revenue recognized in
connection with the early close out of a fixed price customer contract during
the second quarter.
In times of armed conflict or war, military spending is concentrated on
armaments build up, maintenance and troop support, and not on the research and
development and specialty applications that are the Company's core strengths and
revenue generators. The Company also anticipates decreased levels of orders for
the remainder of fiscal year 2006 due to defense program delays, although the
Company anticipates increased levels of orders for 2007 for its Multi-Mix(R)
Microtechnology products based on inquiries from existing customers, requests to
quote from prospective and existing customers and market research.
The decrease in sales of the microwave micro-circuitry segment for the third
quarter and first nine months of 2006 was due to delays and cancellations in new
orders from existing customers from the automotive and defense markets in the
first half of 2006. FMI anticipates a portion of this new order volume to renew
later in the fourth quarter of 2006 or early 2007 based on inquiries, requests
to quote and prototype requests from existing customers.
Backlog represents the amount of orders the Company has received that have not
been shipped as of the end of a particular fiscal period. The orders in backlog
are a measure of future sales and determine the Company's upcoming material,
labor and service requirements. The book-to-bill ratio for a particular period
represents orders received for that period divided by net sales for the same
period. The Company looks for this ratio to exceed 1.0 to 1, indicating the
backlog is being replenished by new orders at a higher rate than the sales being
removed from the backlog.
The following table presents key performance measures that we use to monitor our
operating results for the nine months ended September 30, 2006 and October 1,
2005:
2006 2005
----------- -----------
Beginning backlog $13,139,000 $12,945,000
Plus bookings $19,080,000 $21,511,000
Less net sales $21,229,000 $22,717,000
Ending backlog $10,990,000 $11,739,000
Book-to-bill ratio 0.90 0.95
Orders of $6,216,000 were received during the third quarter of 2006, an increase
of $1,040,000 or 20.1% compared to $5,176,000 in orders received during the
third quarter of 2005. Orders of $19,080,000 were received during the first nine
months of 2006 a decrease of $2,431,000 or 11.3% compared to $21,511,000 in
orders received during the first nine months of 2005. The decrease in orders for
the first nine months of 2006 as compared to the first nine months of 2005 was
due to delays in expected satellite and defense programs for all product lines,
including our Multi-Mix(R) products. Backlog decreased by $2,149,000 to
$10,990,000 at the end of third quarter of 2006 compared to $13,139,000 at
year-end 2005. The Company believes its book-to-bill ratio for fiscal 2006 could
be slightly less than the desired ratio of 1.0 to 1.
24
Cost of sales and Gross profit.
The following table provides comparative gross profit information, by product
segment, between the quarters and nine months ended September 30, 2006 and
October 1, 2005.
Quarter ended September 30, 2006 Quarter ended October 1, 2005
----------------------------------- -----------------------------------
Increase/ Increase/
(Decrease) % of (Decrease) % of
from prior Segment from prior Segment
$ period Net Sales $ period Net Sales
---------- ---------- --------- ---------- ---------- ---------
Electronic Components and
Subsystems gross
profit $2,284,000 $(424,000) 41.5% $2,708,000 $(41,000) 45.6%
Microwave Micro-Circuitry
gross profit $ 215,000 $(327,000) 17.1% $ 542,000 $129,000 27.5%
Consolidated gross profit $2,499,000 $(751,000) 37.0% $3,250,000 $ 88,000 41.2%
Nine Months ended September 30, 2006 Nine Months ended October 1, 2005
------------------------------------ -----------------------------------
Increase/ Increase/
(Decrease) % of (Decrease) % of
from prior Segment from prior Segment
$ period Net Sales $ period Net Sales
---------- ---------- --------- ---------- ---------- ---------
Electronic Components and
Subsystems gross
profit $7,662,000 $(490,000) 44.3% $8,152,000 $(350,000) 46.9%
Microwave Micro-Circuitry
gross profit $ 948,000 $(453,000) 23.2% $1,401,000 $ 84,000 25.8%
Consolidated gross profit $8,610,000 $(943,000) 40.6% $9,553,000 $(266,000) 42.1%
The decrease in gross profit dollars for the third quarter of 2006 for the
electronic components and subsystems segment was due to the overall decrease in
segment sales. The decrease in gross margin percent to 41.5% in the third
quarter of 2006 from 45.6% in the third quarter of 2005 for the electronic
components and subsystems segment was due to the decrease in sales and the
further impact of the lower level of sales having to absorb fixed manufacturing
costs. The decrease in gross profit for the first nine months of 2006 for the
electronic components and subsystems segment was due to the overall decrease in
segment sales partially offset by the second quarter revenue and related
expenses recognized as a result of the early contract closeout previously
mentioned. The decrease in gross profit percent to 44.3% in the first nine
months of 2006 from 46.9% in the first nine months of 2005 for the electronic
components and subsystems segment was due to the decrease in sales and the
further impact of the lower level of sales having to absorb fixed manufacturing
costs.
Depreciation expense included in consolidated cost of sales for the third
quarter of 2006 was $598,000, a decrease of $131,000 compared to the third
quarter of 2005. Depreciation expense included in consolidated cost of sales for
the first nine months of 2006 was $1,786,000, a decrease of $359,000 compared to
the first nine months of 2005. For the third quarter and first nine months of
2006, approximately $373,000 and $1,118,000, respectively, of depreciation
expense was associated with Multi-Mix(R) Microtechnology capital assets. For the
third quarter and first nine months of 2005, approximately $418,000 and
$1,214,000, respectively of depreciation expense was associated with
Multi-Mix(R) Microtechnology capital assets.
FMI sales include intersegment sales of $7,000 and $16,000 in the third quarter
of 2006 and 2005, respectively. The decrease in gross profit and gross profit
percent for the third quarter and first nine months of 2006 is due to higher
material, direct labor and manufacturing costs,
25
attributable to the strengthening of the Canadian dollar. FMI sales include
intersegment sales of $136,000 and $116,000 in the first nine months of 2006 and
2005, respectively.
Selling, general and administrative expenses.
Selling, general and administrative expenses of $2,494,000 for the third quarter
of 2006 increased by $24,000 or 1.0%, and when expressed as a percentage of net
sales, increased by 5.7 percentage points to 37.0% compared to the third quarter
of 2005. The increase in such expenses for the third quarter of 2006 was due to
higher selling and administrative costs related to higher compensation,
partially offset by lower commissions on the lower sales level. Selling, general
and administrative expenses of $7,625,000 for the first nine months of 2006
increased by $500,000 or 7.0%, and when expressed as a percentage of net sales,
increased by 4.5 percentage points to 35.9% compared to the first nine months of
2005. The increase in such expenses for the first nine months of 2006 was due to
higher selling, marketing and administrative expenses related to higher
compensation partially offset by lower commissions on the lower sales level. In
connection with the new financing agreement with North Fork Bank, the Company
will be taking a charge of approximately $170,000 in the fourth quarter related
to the write-off of the unamortized loan costs related to the prior financing
agreement.
Research and development expenses.
Research and development expenses for new products were $608,000 for the third
quarter of 2006, an increase of $119,000 or 24.3%, and when expressed as a
percentage of net sales, an increase of 2.8 percentage points to 9.0% compared
to the third quarter of 2005. Except for $30,000 of expenses at FMI (a decrease
of $10,000 from such FMI expenses in the third quarter of 2005) substantially
all of the research and development expenses were related to Multi-Mix(R)
Microtechnology products. Research and development expenses for new products
were $1,497,000 for the first nine months of 2006, a decrease of $41,000 or
2.7%, and when expressed as a percentage of net sales, an increase of 0.3
percentage points to 7.1% compared to the first nine months of 2005. Except for
$94,000 of expenses at FMI (a decrease of $26,000 from such FMI expenses in the
first nine months of 2005) substantially all of the research and development
expenses were related to Multi-Mix(R) Microtechnology products. The Company
anticipates that these expenses will increase in future periods in connection
with implementation of our strategic plan for Multi-Mix(R).
Operating income (loss).
Consolidated operating loss for the third quarter of 2006 was $604,000 compared
to consolidated operating income of $291,000 for the third quarter of 2005. The
decrease in consolidated operating income for the third quarter of 2006 was due
to lower gross profit from the decrease in sales and higher research and
development costs related to the Company's Multi-Mix(R) products. Consolidated
operating income for the third quarter of 2006 included a non-cash charge of
$50,000 for share-based compensation resulting from the adoption of SFAS No.
123R.
Consolidated operating loss for the first nine months of 2006 was $511,000
compared to consolidated operating income of $889,000 for the first nine months
of 2005. The decrease in consolidated operating income for the first nine months
of 2006 was due the lower gross profit from the decrease in sales and due to
higher selling, general and administrative expenses compared to the first nine
months of 2005. Consolidated operating loss for the first nine months of 2006
included a non-cash charge of $129,000 for share-based compensation resulting
from the adoption of SFAS No. 123R.
Because of the declining level of orders and sales, the Company reduced its
headcount and will record a restructuring charge in the fourth quarter of 2006
of approximately $200,000. The restructuring charge, the write-off of the loan
costs described above, the adoption of the SFAS No. 123R accounting standard and
the increased investment in our Multi-Mix(R) technology initiative, combined
with the lower order and sales levels will result in an operating loss for the
fourth quarter and for fiscal year 2006. The Company anticipates annual savings
of $1,500,000 to begin in the first quarter of 2007 from the restructuring and
other cost reduction and containment measures to be implemented.
For the third quarter of 2006, the Company's operating loss for its electronic
components and subsystems segment was $516,000 compared to operating income of
$160,000 for the third quarter of 2005. The decreased operating profitability
for the electronic components and subsystems segment was due to the lower gross
profit from the decrease in sales and higher research and development costs
related to the Company's Multi-Mix(R) products. For the third quarter of 2006,
operating loss for the microwave micro-circuitry segment was $88,000 compared to
operating income of $131,000 for the third quarter of 2005. The decreased
operating profitability for the microwave micro-circuitry segment was due the
lower gross margin from the reduced sales level and the strengthening of the
Canadian dollar.
26
For the first nine months of 2006 the Company's operating loss for its
electronic components and subsystems segment was $446,000 compared to operating
income of $604,000 for the first nine months of 2005. The decreased operating
profitability for the electronic components and subsystems segment was due to
the lower gross profit from the decrease in sales and due to higher selling,
general and administrative expenses compared to the first nine months of 2005.
For the first nine months of 2006, operating loss for the microwave
micro-circuitry segment was $65,000 compared to operating income of $285,000 for
the first nine months of 2005. The decreased operating profitability for the
microwave micro-circuitry segment was due to the segment's lower gross profit
from the lower sales level when compared to the first nine months of 2005.
Interest and other expense, net.
Interest and other expense, net was $8,000 for the third quarter of 2006
compared to interest and other expense, net of $61,000 for the third quarter of
2005. Interest and other expense, net was $59,000 for the first nine months of
2006 compared to interest and other expense, net of $177,000 for the first
months of 2005. Despite the general rise in interest rates from 2005 to 2006,
the reduction of interest and other expense for the third quarter and first nine
months of 2006 was due to lower outstanding debt balances during the first nine
months of 2006 and the institution of a cash management program in the fourth
quarter of 2005 that generated interest income on the Company's free cash
balances during 2006.
Income taxes.
The current tax benefits for the quarter and nine months ended September 30,
2006 represent refundable Canadian tax credits for which FMI, as a technology
company, has qualified.
The Company's effective tax rate for the nine months ended October 1, 2005
reflects U.S. Federal Alternative Minimum Tax and State income taxes that are
due based on certain statutory limitations on the use of the Company's net
operating loss carryforwards.
Internal Revenue Service Code Section 382 places a limitation on the utilization
of net operating loss carryforwards when an ownership change, as defined in the
tax law, occurs. Generally, an ownership change occurs when there is a greater
than 50 percent change in ownership. If such a change should occur, the actual
utilization of net operating loss carryforwards, for tax purposes, would be
limited annually to a percentage of the fair market value of the Company at the
time of such change. The Company may become subject to these limitations in 2006
depending on change in control.
Net income (loss).
Net loss for the third quarter of 2006 was $599,000 compared to net income of
$228,000 for the third quarter of 2005. Net loss per share for the third quarter
of 2006 was $.19 compared to net income of $.07 per share for the third quarter
of 2005. Net loss for the third quarter of 2006 included a non-cash charge of
$50,000 or $.02 per share for share-based compensation resulting from the
adoption of SFAS No. 123R. Net loss for the third quarter of 2006 also included
a tax benefit of $13,000 representing refundable Canadian provincial technology
tax credits for which the Company has qualified and lower net interest expense.
Net loss for the first nine months of 2006 was $510,000 compared to net income
of $644,000 for the first nine months of 2005. Net loss per share for the first
nine months of 2006 was $.16 compared to net income of $.20 per diluted share
for the nine months of 2005. Net loss for the first nine months of 2006 included
a non-cash charge of $129,000 or $.04 per share for share-based compensation
resulting from the adoption of SFAS No. 123R. Net loss for the third quarter of
2006 also included a tax benefit of $61,000 or $.02 per share representing
refundable Canadian provincial technology tax credits for which the Company has
qualified and lower net interest expense. Net income for the first nine months
of 2005 included a loss on the disposition of capital assets of $43,000 or $.01
per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company had liquid resources comprised of cash and cash equivalents totaling
approximately $2,100,000 at the end of the third quarter of 2006 compared to
approximately $4,100,000 at the end of 2005. The Company's working capital was
approximately $11,800,000 and its current ratio was 4.2 to 1 at the end of the
third quarter of 2006 compared to $9,800,000 and 3.2 to 1, respectively, at the
end of 2005. At September 30, 2006, the Company had available borrowing capacity
under its revolving line of credit of $4,400,000.
The Company's operating activities used operating cash flows of $430,000 during
the first nine months of 2006 compared to generating $2,423,000 of operating
cash flows during the first nine months of 2005. The primary uses of operating
cash flows for the first nine months of 2006 were
27
the year-to-date net loss of $510,000 which was reduced by depreciation and
amortization of $1,955,000 and share-based compensation of $138,000, increases
in accounts receivable of $969,000, inventory of $523,000 and an aggregate
decrease in accounts payable, customer deposits and accrued liabilities of
$586,000. The primary sources of operating cash flows for the first nine months
of 2005 were the year-to-date net income of $644,000 which was reduced by
depreciation and amortization of $2,364,000; a decrease in accounts receivable
of $549,000, offset by an increase in inventories of $560,000, an aggregate
decrease in accounts payable, customer deposits and accrued liabilities of
$505,000 and the reduction of income taxes payable of $84,000.
The Company made net cash investments in property, plant and equipment of
$1,247,000 during the first nine months of 2006 compared to net cash investments
made in property, plant and equipment of $857,000 during the first nine months
of 2005. These capital expenditures are related to new production and test
equipment capabilities in connection with the introduction of new products and
enhancements to existing products. The depreciated cost of capital equipment
associated with Multi-Mix(R) Microtechnology was $6,960,000 at the end of the
third quarter of 2006, a decrease of $486,000 compared to $7,446,000 at the end
of fiscal year 2005.
The Company's planned equipment purchases and other commitments are expected to
be funded through cash resources and cash flows expected to be generated from
operations, and supplemented by the Company's new $5,000,000 revolving credit
facility, which expires October 18, 2008.
The financing agreement with CIT consisted of a $5,000,000 revolving line of
credit, that was temporarily reduced by $250,000 until certain conditions are
met; a $1,500,000 machinery and equipment term loan ("Term Loan A") and a
$2,750,000 real estate term loan ("Term Loan B"). In connection with this
financing agreement, the Company was required to place, over the life of the
loan, $1,500,000 as restricted cash collateral with CIT. As further discussed
below, the financing agreement was terminated on October 18, 2006, the loans
were repaid and the restricted cash was returned by CIT to the Company. The
revolving line of credit, which expired October 18, 2006, was subject to an
availability limit under a borrowing base calculation (85% of eligible accounts
receivable as defined in the financing agreement plus 100% of the $1,500,000
restricted cash). At September 30, 2006, the Company had available borrowing
capacity under its revolving line of credit of $4,400,000. The revolving line of
credit bore interest at the prime rate plus 0.50% (currently 8.75%). The
principal amount of Term Loan A was payable in 60 equal monthly installments of
$25,000 and bore interest at the prime rate plus 1% (currently 9.25%). The
principal amount of Term Loan B was payable in 84 equal monthly installments of
$32,738 and bore interest at the prime rate plus 1% (currently 9.25%). As of
September 30, 2006, the Company, under the terms of its agreement with CIT, had
elected to convert $500,000 of Term Loan A and $1,570,000 of Term Loan B from
their prime rate base to LIBOR-based interest rate loans. The current LIBOR
interest rate options were renewed on April 13, 2006 for six months at an
interest rate of 8.4543% and expired October 13, 2006. The revolving line of
credit and the term loans were secured by substantially all of the Company's
assets located within the United States and the pledge of 65% of the stock of
the Company's subsidiaries located in Costa Rica and Canada.
On October 18, 2006, the Company entered into a new financing agreement with
North Fork Bank which consists of a two-year $5,000,000 revolving line of
credit, a five-year $2,000,000 machinery and equipment term loan due October 1,
2011 ("Term Loan") and a ten-year $3,000,000 real estate term loan due October
1, 2016 ("Mortgage Loan"). Completion of the new financing agreement resulted in
additional cash loan proceeds of approximately $2,900,000 plus the release of
previously restricted cash of $1,500,000. The revolving line of credit is
subject to an availability limit under a borrowing base calculation (85% of
eligible accounts receivable plus up to 50% of eligible raw materials inventory
plus up to 25% of eligible electronic components, with an inventory advance
sublimit not to exceed $1,500,000, as defined in the financing agreement). The
revolving line of credit expires October 18, 2008. The revolving line of credit
bears interest at the prime rate less 0.50% (currently 7.75%) or LIBOR plus 2%.
The principal amount of the Term Loan is payable in 59 equal monthly
installments of $33,333 and one final payment of the remaining principal
balance. The Term Loan bears interest at the prime rate less 0.50% (currently
7.75%) or LIBOR plus 2.25%. The principal amount of the Mortgage Loan is payable
in 119 equal monthly installments of $12,500 and one final payment of the
remaining principal balance. The Mortgage Loan bears interest at the prime rate
less 0.50% (currently 7.75%) or LIBOR plus 2.25%. On October 18, 2006, the
Company, under the terms of its agreement with North Fork Bank, elected to
convert $1,950,000 of the Term Loan and $2,950,000 of the Mortgage Loan from
their prime rate base to LIBOR-based interest rate loans for one month at an
interest rate of 7.57%, which expire November 17, 2006. The revolving line of
credit, the Term Loan and the Mortgage Loan are secured by substantially all
assets located within the United States and the pledge of 65% of the stock of
the Company's subsidiaries located in Costa Rica and Canada. The provisions of
the financing agreement require the Company to maintain certain financial
covenants. The Company was in compliance with these covenants at September 30,
2006. The Company reclassified approximately $143,000 from current portion of
long-term debt to long-term debt to reflect the terms of the North Fork Bank
financing agreement at September 30, 2006.
28
In connection with the new financing agreement with North Fork Bank, the Company
will be taking a charge of approximately $170,000 in the fourth quarter of 2006
related to the write-off of the unamortized loan costs related to the prior
financing agreement.
FMI has a revolving credit agreement in place with The Bank of Nova Scotia for
up to $500,000 (Canadian) at the prime rate plus 0.75%. No borrowings were
outstanding under this agreement at September 30, 2006.
FMI has a $1,800,000 (Canadian) (approximately $1,600,000 US) revolving lease
line with the Bank of Nova Scotia, whereby the Company can obtain funding for
previous production equipment purchases via a sale/leaseback transaction. As of
September 30, 2006, $410,000 has been utilized under this facility. Such leases
are payable in monthly installments for up to five years and are secured by the
related production equipment. Interest rates (typically prime rate plus one
percent) are set at the closing of each respective sale/leaseback transaction.
During the first quarter of 2006, FMI obtained $160,000 in connection with the
sale/leaseback of certain production equipment. The related equipment was
originally purchased by the Company in 2005.
Assets acquired under capital leases that are included in property, plant and
equipment, net, have a depreciated cost of approximately $771,000 at of
September 30, 2006 and $678,000 at December 31, 2005.
Depreciation and amortization expenses exceeded capital expenditures for
production equipment during the first nine months of 2006 by approximately
$707,000, and the Company anticipates that depreciation and amortization
expenses will exceed capital expenditures in fiscal year 2006 by approximately
$500,000. The Company intends to issue commitments to purchase $800,000 of
capital equipment from various vendors for the remainder of 2006. The Company
anticipates that such equipment will be purchased and become operational during
the remainder of 2006 and early 2007.
The functional currency for the Company's wholly-owned subsidiary FMI is the
Canadian dollar. The changes in accumulated other comprehensive income for the
nine months of 2006 and 2005 reflect the changes in the exchange rates between
the Canadian dollar and the United States dollar for those respective periods.
The functional currency for the Company's Costa Rica operations is the United
States dollar.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, SFAS No. 151, "Inventory Costs (An amendment of ARB No. 43,
Chapter 4)", was issued. SFAS No. 151 amends Accounting Research Bulletin
("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current-period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to inventory be based on normal capacity
of the production facilities. The Company adopted SFAS No. 151 on January 1,
2006. The adoption of SFAS No. 151 did not have a material impact on its
financial position and results of operations.
On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP
123R-3"), "Transition Election Related to Accounting for the Tax Effects of
Share-based Payment Awards", that provides an elective alternative transition
method of calculating the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to the adoption of SFAS 123R (the "APIC
Pool") to the method otherwise required by paragraph 81 of SFAS 123R. The
Company may take up to one year from the effective date of this FSP to evaluate
its available alternatives and make its one-time election. The Company is
currently evaluating the alternative methods, however, neither alternative would
have an impact on the Company's results of operations or financial condition for
the quarter ended September 30, 2006, due to the fact that the Company is
currently using prior period net operating losses and has not realized any tax
benefits under SFAS 123R.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109 "Accounting for Income Taxes". FIN 48 prescribes
a recognition threshold and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact that FIN 48
will have on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108")
to provide guidance on Quantifying Financial Statement Misstatements. SAB 108
addresses how the effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in current-year financial statements.
SAB 108 requires registrants to quantify misstatements using both the balance
sheet and income statement approaches and to evaluate whether either approach
results in quantifying an error that is material in light of relevant
quantitative and
29
qualitative factors. SAB 108 does not change the SEC staff's guidance in SAB 99
on evaluating the materiality of misstatements.
When the effect of initial adoption of SAB 108 is determined to be material, SAB
108 allows registrants to record that effect as a cumulative effect adjustment
to beginning-of-year retained earnings. SAB 108 is effective for the first
fiscal year ending after November 15, 2006. The Company is currently evaluating
the impact that SAB 108 will have on its financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements". SFAS No. 157 establishes a single
authoritative definition of fair value, sets out a framework for measuring fair
value and requires additional disclosures about fair-value measurements. SFAS
No. 157 applies only to fair-value measurements that are already required or
permitted by other accounting standards and is expected to increase the
consistency of those measurements. It will also affect current practices by
nullifying Emerging Issues Task Force guidance that prohibited recognition of
gains or losses at the inception of derivative transactions whose fair value is
estimated by applying a model and by eliminating the use of "blockage" factors
by brokers, dealers and investment companies that have been applying AICPA
Guides. SFAS No. 157 is effective for fiscal years beginning after November
15,2007. The Company is currently evaluating the impact that SFAS No. 157 will
have on its financial position and results of operations.
RELATED PARTY TRANSACTIONS
In May 1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter,
Chairman, President and Chief Executive Officer of the Company, at a price of
$11.60 per share, which approximated the average closing price of the Company's
Common Stock during the first quarter of 1998. The Company 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. This loan was further amended on
October 19, 2002. Accrued interest of $40,000 was added to the principal,
bringing the new principal amount of the loan to $400,000, the due date was
extended to May 4, 2006, and interest (at the same rate as was previously
applicable) was payable monthly. Mr. Carter has pledged 33,000 shares of Common
Stock as security for this loan, which was 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, payable in accordance with Mr.
Carter's employment agreement. Each year the Company is required to forgive 20%
of the amount due under this loan and the accrued interest thereon. During 2005,
the Company forgave $56,000 of principal and $3,000 of accrued interest and paid
a tax gross-up benefit of $4,300. This loan was fully satisfied in 2005.
On March 29, 2006, the Company entered into an agreement with Mr. Carter to
purchase 42,105 shares of the Company's common stock owned by Mr. Carter at a
purchase price of $9.50 per share (the closing price of the common stock on
March 29, 2006) resulting in a total purchase price for the shares of $399,998.
As a condition to the Company's obligation to purchase the shares, concurrent
with the Company's payment of the purchase price Mr. Carter paid to the Company
$400,000 (plus any accrued and unpaid interest) in full satisfaction of Mr.
Carter's promissory note in favor of the Company dated July 29, 2002. This
transaction was closed on April 24, 2006.
During the third quarter and first nine months of 2006, the Company's outside
general counsel Katten Muchin Rosenman LLP was paid $130,000 and $317,000,
respectively, for providing legal services to the Company. During the third
quarter and first nine months of 2005, Katten Muchin Rosenman LLP was paid
$37,000 and $212,000, respectively. A director of the Company is counsel to
Katten Muchin Rosenman LLP but does not share in the fees that the Company pays
to such law firm and his compensation is not based on such fees.
During 2006 and 2005 the Company retained Career Consultants, Inc. and SK
Associates to perform executive searches and to provide other services to the
Company. The Company paid an aggregate of $4,000 and $10,000 to these companies
during the third quarter and first nine months of 2006, respectively. The
Company paid an aggregate of $2,000 and $5,000 to these companies during the
third quarter and first nine months of 2005, respectively. A director of the
Company is the chairman and chief executive officer of these companies.
During the third quarter and first nine months of 2006, a director of the
Company was paid $9,000 and $27,000, respectively, for providing
technology-related consulting services to the Company. For the third quarter and
first nine months of 2005, such director was paid $9,000 and $27,000,
respectively.
During the third quarter and first nine months of 2006, DuPont Electronic
Technologies ("DuPont"), a stockholder and the employer of a director, was paid
$4,000 and $31,000,
30
respectively, for providing technological and marketing-related personnel and
services on a cost-sharing basis to the Company under the Technology Agreement
dated February 28, 2002. During the third quarter and first nine months of 2005,
DuPont was paid $17,000 and $42,000, respectively. A director of the Company is
an officer of DuPont, but does not share in any of these payments.
Each director who is not an employee of the Company receives a monthly
director's fee of $1,500, plus an additional $500 for each meeting of the Board
and of any Committees of the Board attended. In addition, the Chair of the Audit
Committee receives an annual fee of $2,500 for his services in such capacity.
The directors are also reimbursed for reasonable travel expenses incurred in
attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
Option Plan, each non-employee director is granted an option to purchase 2,500
shares of the Common Stock of the Company on the date of each Annual Meeting of
Stockholders. Such options have a three-year vesting period. Each such grant has
an exercise price equal to the fair market value on the date of such grant and
will expire on the tenth anniversary of the date of the grant. On June 22, 2006,
non-qualified stock options to purchase an aggregate of 17,500 shares were
issued to seven directors at an exercise price of $9.52 per share. Also on June
22, 2006, pursuant to the 2006 Non-Employee Directors' Stock Plan, 9,000 shares
of restricted stock were granted to six directors at a fair market value of
$9.52 per share. Such restricted stock vests annually over a three-year period.
On December 13, 2004 Infineon Technologies AG ("Infineon"), at such time the
beneficial owner of approximately 15% of the Company's common stock, sold
475,000 shares of the Company's common stock to four purchasers in a
privately-negotiated transaction. Two purchasers in such transaction, K
Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
with Ludwig G. Kuttner, who was President and Chief Executive Officer of
Hampshire Group, Limited ("Hampshire"), purchased 300,000 shares representing an
aggregate of approximately 9.6% of the Company's common stock. Mr. Kuttner was
elected to the Company's Board of Directors at its 2006 Annual Meeting of
Stockholders. As a result of an ongoing investigation by Hampshire's audit
committee of allegations of certain improprieties and possibly unlawful conduct
involving Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment
with Hampshire has been terminated. Mr. Kuttner has been on a leave of absence
from his position as a director of Merrimac since the date of his election until
the resolution of the investigation. During his leave of absence, Mr. Kuttner is
not entitled to any compensation from the Company. Infineon also assigned to
each purchaser certain registration rights to such shares under the existing
registration rights agreements Infineon had with the Company. In connection with
the transaction, the Company and Infineon terminated the Stock Purchase and
Exclusivity Letter Agreement dated April 7, 2000, as amended, which provided
that the Company would design, develop and produce exclusively for Infineon
certain Multi-Mix(R) products that incorporate active RF power transistors for
use in certain wireless base station applications, television transmitters and
certain other applications that are intended for Bluetooth transceivers.
DuPont and the four purchasers above hold registration rights which currently
give them the right to register an aggregate of 1,003,413 shares of Common Stock
of the Company.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about the market risks affecting
Merrimac, see "Quantitative and Qualitative Disclosures about Market Risk" in
Item 7A of Part II of the Company's annual Report on Form 10-K for the fiscal
year ending December 31, 2005, which is incorporated herein by reference. Our
exposure to market risk has not changed materially since December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2006 (the end of the period covered by this report), the
Company's management carried out an evaluation, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of September 30, 2006, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed in
the Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the true frames specified in the
Securities and Exchange Commission's rules and forms.
In designing and evaluating the Company's disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We believe that our disclosure
controls and procedures provide such reasonable assurance.
No change occurred in the Company's internal controls concerning financial
reporting during the Company's third quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Merrimac is a party to lawsuits, arising in the normal course of business. It is
the opinion of Merrimac's management that the disposition of these various
lawsuits will not individually or in the aggregate have a material adverse
effect on the consolidated financial position or the results of operations of
Merrimac.
ITEM 1A. RISK FACTORS.
There have been no material changes to our Risk Factors from those presented in
our Form 10-K for fiscal year 2005, except for certain updating changes to the
Risk Factors "Dependence on Limited Number of Suppliers," as presented below.
You should carefully consider the matters, as revised, described below and in
our Form 10-K for 2005 before making an investment decision. The risks and
uncertainties described below are not the only ones facing our Company. Our
business operations may be impaired by additional risks and uncertainties of
which we are unaware or that we currently consider immaterial.
Our business, and the subsequent results of operations or cash flows may be
adversely affected if any of such risks actually occur. In such case, the
trading price of our common stock could decline, and you may lose part or all of
your investment.
Dependence on Limited Number of Suppliers
Electronic devices, components and made-to-order assemblies used in the
Company's traditional (i.e., non-Multi-Mix) products are generally obtained from
a number of suppliers, although certain components are obtained from a limited
number of suppliers. Some devices or components are standard items while others
are manufactured to the Company's specifications by its suppliers.
Except as described below, the Company believes that most raw materials
used in manufacturing its products are available from alternative suppliers. We
do not have binding agreements or commitments with our suppliers for the
quantity and prices of our raw materials. Our reliance on suppliers, especially
sole source or limited suppliers, involves the risks of adequate capacity and
reduced control over delivery schedules and costs. While there may be
alternative qualified suppliers for some of these components, substitutes for
certain materials
32
are not readily available. Any significant interruption in delivery of such
items could have an adverse effect on the Company's operations.
Manufacturing of our Multi-Mix products requires certain components and raw
materials that currently are only available from a sole supplier or limited
number of suppliers, particularly for products intended for specific
applications. The Company's Multi-Mix products utilize certain substrate
materials in the fusion bonding process, currently obtained from a single
vendor. Although there may be alternative types of substrates that are under
evaluation, the Company has designed its current Multi-Mix products utilizing
the current source of supply, and use of alternative substrates could result in
design, engineering, manufacturing, performance and cost challenges and delays.
In addition, certain Multi-Mix products utilizing high power RF circuitry
designed for telecommunications/wireless base station infrastructure
applications require the use of LDMOS transistors which are not currently
generally commercially available in the configurations required by the Company.
The Company's Multi-Mix Resource Module would require such commercially
unavailable components when used for commercial high power amplifier base
station infrastructure applications but does not depend on these components for
military and other commercial applications for which a variety of components are
available in the proper configuration from a number of alternative sources. In
order to commercialize this high power base station LDMOS application of the
Multi-Mix Resource Module, the Company would need to establish a supply
relationship with a vendor willing to provide commercial quantities of the
needed components in a configuration that would maximize the value of the
patented Multi-Mix Resource Module for this market. The Company continues to
seek to establish a supply relationship with an LDMOS transistor provider able
to provide such components, and is also considering alternative configurations
and components. There is no assurance we will be able to establish such a vendor
relationship or alternatives, in which case we would be unable to manufacture
commercial quantities of Multi-Mix products for high power base station
infrastructure applications, which would have a material adverse effect on our
value proposition, results of operations and profitability.
Any difficulty in obtaining sufficient quantities of such raw materials on
a timely basis, and at economic prices, could result in design and engineering
changes and expenses, shipment delays and/or an inability to manufacture certain
Multi-Mix products. Significant increases in the costs of such materials could
also have a material adverse effect on our value proposition and marketing
efforts with potential customers and our results of operations and
profitability.
ITEM 6. EXHIBITS
Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3(a) 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.
3(b) 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.
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 filed with the Securities
and Exchange Commission on 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 filed with the Securities and Exchange
Commission on 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 1(b) to Merrimac's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on 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 filed with the Securities and Exchange
Commission on October 27, 2000.
33
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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 filed with the Securities and Exchange
Commission on 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 filed with the Securities and Exchange
Commission on 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 filed with the Securities and Exchange
Commission on October 10, 2002.
4(h) Amendment No. 7, dated December 13, 2004, to the Rights
Agreement, between Merrimac and Wachovia Bank, National
Association, as successor Rights Agent, is hereby incorporated by
reference to Exhibit 4.1 to Merrimac's Form 8-K filed with the
Securities and Exchange Commission on December 13, 2004.
10(a) 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 July 1,
2000.
10(b) 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 dated for the year ending December 30,
2000.
10(c) 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
filed with the Securities and Exchange Commission on March 6,
2002.
10(d) 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(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 filed
with the Securities and Exchange Commission on 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) 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) 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) Employment Agreement dated as of April 11, 2006, between Merrimac
and Mason N. Carter is hereby incorporated by reference to
Exhibit 10.1 to Merrimac's Current Report on Form 8-K, filed with
the Securities and Exchange Commission on April 13, 2006.*
10(k) 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.*
34
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10(l) 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(m) Separation Agreement dated as of December 31, 1998, between
Merrimac and Eugene W. Niemiec is hereby incorporated by
reference to Exhibit 10(p) to Merrimac's Annual Report on Form
10-KSB for the year ending January 2, 1999.*
10(n) 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 period ending October 3, 1998.
10(o) Shareholder'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(p) 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(q) 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(r) 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(s) Merrimac Severance Plan, as adopted March 29, 2006 is hereby
incorporated by reference to Exhibit 10(z) to Merrimac's Form
10-K for the period ending December 31, 2005.*
10(t) Stock Purchase Agreement, dated March 29, 2006, between Merrimac
and Mason N. Carter is hereby incorporated by reference to
Exhibit 10(aa) to Merrimac's Form 10-K for the period ending
December 31, 2005.
10(u) 2006 Stock Option Plan is hereby incorporated by reference to
Exhibit A of Merrimac's Definitive Proxy Statement filed with the
Securities and Exchange Commission on May 1, 2006.
10(v) 2006 Key Employee Incentive Plan is hereby incorporated by
reference to Exhibit B of Merrimac's Definitive Proxy Statement
filed with the Securities and Exchange Commission on May 1, 2006.
10(w) 2006 Non-Employee Directors' Stock Plan is hereby incorporated by
reference to Exhibit C of Merrimac's Definitive Proxy Statement
filed with the Securities and Exchange Commission on May 1, 2006.
10(x) Revolving Credit, Term Loan and Security Agreement, dated October
18, 2006, by and between Merrimac and North Fork Bank is hereby
incorporated by reference to Exhibit 10.1 to Merrimac's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 20, 2006.
31.1+ Chief Executive Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2+ Chief Financial Officer's Certificate, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1+ Chief Executive Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2+ Chief Financial Officer's Certificate, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
+ Indicates that exhibit is filed as an exhibit hereto.
35
SIGNATURES
In accordance with the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERRIMAC INDUSTRIES, INC.
Date: November 14, 2006 By: /s/ Mason N. Carter
-----------------------------------
Mason N. Carter
Chairman, President and
Chief Executive Officer
Date: November 14, 2006 By: /s/ Robert V. Condon
-----------------------------------
Robert V. Condon
Vice President, Finance and
Chief Financial Officer
36
