UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the fiscal year ended January 3, 1998
Commission file number 0-11201
Merrimac Industries, Inc.
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(Name of small business issuer as specified in its charter)
New Jersey 22-1642321
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
41 Fairfield Place West Caldwell, New Jersey 07006
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(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code 973-575-1300
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each Exchange on which registered
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Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.( )
State registrant's revenues for its most recent fiscal year: $18,659,106.
The aggregate market value of voting stock held by non-affiliates based
upon the average price of such stock as quoted on AMEX for March 27, 1998 was
$19,044,000. Shares of Common Stock held by each officer and director have been
excluded in that such persons may be deemed to be affiliates.
Registrant's Common Stock outstanding at March 27, 1998 was 1,577,834
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I - Certain information contained in the Annual Report to Stockholders
& for Fiscal Year Ended January 3, 1998.
Part II - Filed as Exhibit 13 herewith.
Part III - Certain information contained in the Proxy Statement for May 20,
1998 Annual Meeting of Stockholders.
Exhibit index on page 9.
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PART I
Merrimac Industries, Inc., originally known as Merrimac Research and
Development, was incorporated in 1954 under the laws of the State of New York,
to design and produce unique microwave and radio frequency components previously
unavailable to the industry. Merrimac Industries, Inc. was reincorporated in New
Jersey in 1994 and is hereinafter sometimes referred to as "Merrimac" or the
"Company".
ITEM 1. DESCRIPTION OF BUSINESS.
Cautionary Statement
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Certain statements in this Annual Report on Form 10-KSB are forward-looking
statements based on current management expectations and are subject to risks and
uncertainties. Factors that could cause future results to differ from these
expectations include general economic and industry conditions, competitive
products and pricing pressures, risks relating to governmental regulatory
actions in communications and defense programs, and inventory risks due to
technological innovation. Additional factors to which the Company's performance
is subject are described in the Company's reports filed from time to time with
the Securities and Exchange Commission.
General
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Merrimac is a leader in passive RF and microwave components for industry,
government and science. Merrimac components are today found in applications as
diverse as satellites, combat and commercial aircraft, cellular radio systems,
magnetic resonance medical diagnostic instruments, personal communications
systems (PCS) and wireless internet connectivity.
Merrimac has become a versatile technologically-oriented company
specializing in miniature radio frequency lumped-element components, integrated
networks, microstrip and stripline microwave components, subsystems 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.
The Company manufactures and sells approximately 1,500 components and
subsystems used in signal processing systems (the extraction of useable
information from radio signals) in the frequency spectrum of D.C. to 65 GHz. The
Company's products are designed to process signals having wide bandwidths and
are of relatively small size and lightweight. When integrated into subsystems,
advantages of lower cost and smaller size are realized due to the removal of
connectors, cases and headers. The Company's components range in price from $20
to $10,000 and its subsystems range from $500 to $75,000, or more.
The Company has traditionally developed and offered for sale products built
to specific customer needs and standard catalog items. Approximately 33% of 1997
revenues were derived from initial orders for products custom designed for
specific customer applications, 42% from repeat orders for such products, and
25% from catalog sales.
Prior to 1997, the Company distributed its product catalog that was updated
and re-printed approximately every two years. Now the Company maintains an
electronic catalog on its internet website. The Merrimac catalog includes
hundreds of standard components, and was compiled to provide a well-balanced,
in-depth choice of passive signal processing components. These components often
form the platform-basis for customization of designs in which the size, package,
finish, electrical parameters, environmental performance, reliability, etc., are
tailored for a specific customer application.
The Company's strategy is to be a reliable supplier of high quality,
technically innovative signal processing products. The Company coordinates its
marketing, research and development, and manufacturing operations to develop new
products and expand its markets. The Company'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 (PCS) electronics. The
Company's research and development efforts are targeted towards providing
customers with more complex, reliable, and compact products at lower costs.
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Today, the major aerospace companies purchase components and subsystems
from Merrimac including many complex I&Q networks, quadraphase modulators and
antenna beamformers. Merrimac design engineers work to develop solutions to
customer requirements that are unique or require special performance. Merrimac
is committed to continuously enhancing its leading position in high-performance
electronic signal processing components for communications, defense and
aerospace applications.
Improved production efficiencies coupled with the capacity of the newly
operational low-cost manufacturing facility in Costa Rica and more extensive use
of automated test equipment such as Hewlett Packard network analyzers (models
8510, 8720 and 8735) have resulted in a considerable reduction of the set-up
time to take measurements, calibrate test equipment and print out hard copy of
data. In addition, computerized cost controls such as closed job history and
up-to-date work in process costs are also enhancing the Company's competitive
position. Laser marking continues to be incorporated into the process of metal
packages, providing totally permanent marking, greater flexibility and lower
costs. See also discussion of CAD/CAM in "Research and Development" below.
For a discussion of financial information about the nature of business,
foreign and domestic operations and export sales, reference is made to Note 9 to
Consolidated Financial Statements in the Company's Annual Report to Stockholders
for Fiscal Year Ended January 3, 1998, which note is incorporated herein by
reference.
Products
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The Company's major product categories are: (1) power dividers/combiners
that equally divide input signals or combine coherent signals for nearly
lossless power combinations; (2) I&Q networks (a subassembly of circuits which
allows two information signals (incident and quadrature) to be carried on a
single radio signal for use in digital communication and navigational
positioning); (3) directional couplers that allow for signal sampling along
transmission lines; (4) phase shifters that accurately and repeatedly alter a
signal's phase transmission to achieve desired signal processing or
demodulation; (5) hybrid junctions that serve to split input signals into two
output signals with 0 degree phase difference or 180 degrees out of phase with
respect to each other;(6) balanced mixers that convert input frequencies to
another frequency; (7) variable attenuators that serve to control or reduce
power flow without distortion; (8) beamformers that permit an antenna to
electronically track or transmit a signal; (9) quadrature couplers that serve to
split input signals into two output signals 90 degrees out of phase with respect
to each other or combine equal amplitude quadrature signals; and (10)
solid-state switches that control signal routing. The Company's other product
categories include single side band modulators, image reject mixers, vector
modulators and a wide variety of specialized integrated assemblies. In the last
fiscal year, no one product accounted for more than ten percent of total net
sales.
About 44% of the Company's sales were derived from the sales of products
for use in high-reliability aerospace, satellite, and missile applications in
1997. These products are designed to withstand severe environments without
failure or maintenance over prolonged periods of time (from 5 to 20 years). The
Company provides facilities dedicated to the design, development, manufacture,
and testing of these products along with special program management and
documentation personnel. The Company offers products in most of its major
categories for high-reliability applications.
The Company's products are also used in a broad range of other defense and
commercial applications, including radar, navigation, missiles, satellites,
electronic warfare and counter-measures, cellular analog and digital electronics
(PCS) and communications equipment. The Company's products are also utilized in
systems to receive and distribute television signals from satellites and through
other microwave networks including cellular radio.
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Marketing
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The Company markets its products in the United States and Canada directly
to customers through a marketing staff comprised of 10 employees and through 15
independent domestic sales organizations. The Company's marketing program
focuses on identifying new programs and applications for which the Company can
develop prototypes leading to volume production orders.
The Company utilizes approximately 17 independent sales organizations to
market its products elsewhere in the world. Sales to foreign customers amounted
to: $5,731,000 (30.7% of sales) in fiscal 1997; $4,390,000 (31.0% of sales) in
fiscal 1996; and $4,229,000 (29.4% of sales) in fiscal 1995.
The Company's customers are primarily major industrial corporations that
incorporate the Company's products into a wide variety of defense and commercial
systems. The Company's customers include Raytheon, Boeing, Northrop Grumman,
Lockheed Martin, Harris Corp., Litton Industries, Hughes Aircraft, TRW,
Southwest Research and Motorola. Sales to any one foreign geographic area did
not exceed 10% of net sales for 1997, 1996 or 1995. Sales to Lockheed Martin in
1997 and 1996 amounted to 13.4% and 10.8% of net sales, respectively. No one
customer accounted for more than 10% of net sales in 1995.
The Company has a uniform resource locator ("URL") internet address
(www.merrimacind.com) and has established a commercial presence on the World
Wide Web and makes its product catalog available on the Company website.
Research and Development
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During fiscal 1997, 1996 and 1995, research and development expenditures
amounted to $556,000, $246,000 and $275,000, respectively. The Company plans to
commit development funds at the same level in 1998 as in 1997 and will focus its
efforts at specific customer applications requiring further miniaturization,
precision and volume applications.
The Company's research and development activities include development of
prototypes for new programs and applications and the implementation of new
technologies to enhance the Company's competitive position. Projects focusing on
surface mounted devices (SMD) multi-layer and micro-electronic assemblies are
directed toward development of more circuitry in smaller, lower cost, and more
reliable packaging that is easier for customers to integrate into their
products. The Company continues to expand its use of computer aided design and
manufacturing (CAD/CAM) in order to reduce design and manufacturing costs as
well as development time.
Backlog
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The Company manufactures specialized components and subsystems pursuant to
firm orders from customers and standard components for inventory. At January 3,
1998, the Company had a firm backlog of orders of approximately $9,758,000. The
Company estimates that approximately 90% of the orders in its backlog as of
January 3, 1998 will be shipped within one year. The Company does not consider
its business to be seasonal.
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Competition
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The Company encounters competition in all aspects of its business. The
Company competes both domestically and internationally in the military and
commercial markets and specifically within the aerospace and telecommunications
areas. The Company's competitors consist of entities of all sizes. Occasionally,
smaller companies offer lower prices due to lower overhead expenses, and
generally larger companies have greater financial and operating resources than
the Company. The Company competes with all on a basis of technological
performance, quality, reliability and dependability in meeting shipping
schedules as well as on the basis of price. The Company believes that the above
factors have served well in earning the respect and loyalty of many customers in
the industry. These factors have enabled the Company over the years to
successfully maintain a stable customer base and have directly contributed to
the Company's ability to attract new customers.
Manufacturing, Assembly and Source of Supply
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Manufacturing operations consist principally of design, assembly and
testing of components and subsystems built from purchased electronic materials
and components, fabricated parts, and printed circuits. Manual and
semi-automatic methods are utilized depending principally upon production
volumes. The Company has its own machine shop employing CAD/CAM techniques and
etching facilities to handle soft and hard substrate materials. In addition, the
Company maintains testing and inspection procedures intended to minimize
production errors and enhance product reliability. The Company began
manufacturing in Costa Rica in the second half of 1996. In January 1998, these
operations were moved to a larger facility.
During 1997, the Company continued to implement programs to improve the
efficiency of manufacturing operations and reduce costs. The Company continues
to establish more stringent procedures and documentation standards to provide
for the prompt transfer of the production of prototype products from engineering
to manufacturing. To enhance the structure and quality of these functions, ISO
9001 certification is being sought for the Company. The Company's manufacturing
subsidiary located in Costa Rica has recently obtained ISO 9002 certification.
Documentation improvements are being implemented which will also strengthen the
Company's position as a world class quality supplier upon completion of these
process improvements.
Generally, the Company uses manufacturing cost savings to enhance its
competitive position.
Electronic components and raw materials used in the Company's products are
generally available from a sufficient number of qualified suppliers. Some
materials are standard items. Subcontractors manufacture certain materials to
the Company's specifications. The Company is not dependent upon any single
supplier for any of its components or materials.
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Employee relations
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As of January 3, 1998 the Company employed approximately 170 persons, of
which 30 are employed at the Company's Costa Rica facility. None of the
Company's employees are represented by a labor organization. The Company has
never experienced a work stoppage or interruption due to a labor dispute.
Management believes that its relations with its employees are satisfactory.
Patents
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The Company owns 15 patents with respect to certain inventions it
developed. Although it has from time to time filed patent applications in
connection with the inventions which it believes are patentable, the Company
does not believe that patents or other similar intangible rights afford
significant protection from competitors or are material to its business.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's administrative offices, research and principal production
facilities are located in West Caldwell, New Jersey, on a five-acre parcel owned
by the Company. A 12,000 square-foot plant was built in November 1966; a 13,500
square-foot addition was completed in December 1971; and a 26,500 square-foot
addition was completed in July 1980, aggregating 52,000 square-feet presently.
The Company owns all of its land, buildings, laboratories, production and
office equipment, as well as its furniture and fixtures in West Caldwell, New
Jersey. The Company believes that its plant and facilities are well suited for
the Company's business and are properly utilized, suitably located and in good
condition.
In December 1997 the Company entered into a new five-year lease for a
17,000 square-foot manufacturing facility in Costa Rica. The previous lease was
for a 3,000 square-foot facility.
The Company does not make any investments in real estate other than in
connection with its operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to other lawsuits, both as a plaintiff and a
defendant, arising in the normal course of business. It is the opinion of
Management, that the disposition of these various lawsuits will not individually
or in the aggregate materially adversely affect the consolidated financial
position or the results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock began trading on the American Stock Exchange on
July 11, 1988 under the symbol MRM, and is still listed there.
Reference is made to the tables captioned "Quarterly Financial Information"
and "Quarterly Common Stock Data" page 24 of the Company's Annual Report to
Stockholders for fiscal year ended January 3, 1998, which is incorporated herein
in by reference for information with respect to the high and low bid prices of
the Company's Common Stock during the Company's past two fiscal years.
The Company had approximately 200 holders of record on March 30, 1998. The
Company believes there are an additional 1,300 holders of record in "street
name" through broker nominees.
Reference is made to Note 8 to the Consolidated Financial Statements in the
Company's Annual Report to Stockholders for fiscal year ended January 3, 1998,
which note is incorporated herein by reference for information with respect to
payment of cash dividends in 1997, 1996 and 1995.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Reference is made to pages 9 and 10 of the Company's Annual Report to
Stockholders for the fiscal year ended January 3, 1998, which pages are
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
Reference is made to pages 11 through 23 of the Company's Annual Report to
Stockholders for fiscal year ended January 3, 1998, which pages are incorporated
herein by reference with respect to the Company's financial position as of
January 3, 1998 and December 28, 1996 and the results of operations and cash
flows for the years ended January 3, 1998, December 28, 1996 and December 30,
1995 and the report of Arthur Andersen LLP included herein as follows and the
report of J. H. Cohn LLP dated February 18, 1997, which is incorporated herein
by reference from the Company's Annual Report to Stockholders for the fiscal
year ended December 28, 1996:
Page in
Annual Report
Form to Stockholders
10-KSB 1997
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Consolidated Balance Sheets at January 3, 1998
and December 28, 1996 ...................... 12
For the fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995:
Consolidated Statements of Income .......... 11
Consolidated Statements of Stockholders'
Equity .................................... 13
Consolidated Statements of Cash Flows ...... 14
Notes to Consolidated Financial Statements ...... 15-23
Reports of Independent Public Accountants ....... 12-13
ITEM 8. CHANGES IN AND DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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PART III
Pursuant to General Instruction E3. to Form 10-KSB, portions of information
required by items 9-12 and indicated below are hereby incorporated by reference
to the Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "Proxy Statement") which the Company will file with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this report.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following is a list of the Company's executive officers, their ages and
their positions as of January 3, 1998. Generally each executive officer is
elected for a term of one year at the organizational meeting of the Board of
Directors following the Annual Meeting of Stockholders.
Name Age Position
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Mason N. Carter 51 Chairman, President and
Chief Executive Officer
Eugene W. Niemiec 58 Vice Chairman and
Chief Technology Officer
Robert V. Condon 51 Vice President, Finance,
Treasurer, Secretary and
Chief Financial Officer
Richard E. Dec 54 Vice President, Marketing
Brian R. Dornan 49 Vice President, Research and
Development
Reynold K. Green 39 Vice President, Sales
Jacob Lin 49 Vice President, Operations
Family Relationships.
There are no family relationships among the officers listed.
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<PAGE>
Business Experience of Executive Officers During Past Five Years.
Mr. Carter was elected to the additional position of Chairman of the Board
on July 24, 1997. He has served as President and Chief Executive Officer ("CEO")
since December 16, 1996. From 1994 to 1996 he was President of the Products and
Systems Group of Datatec Industries, Inc., Fairfield, New Jersey, a leading
provider of data network implementation services. He was President and CEO of
Kentile, Inc., Chicago, Illinois, a manufacturer of resilient flooring from 1992
to 1994.
Mr. Niemiec has been Vice Chairman and Chief Technology Officer of the
Company since December 16, 1996. From September 1994 to December 1996 he held
the offices of President, Chief Executive Officer and Chief Operating Officer.
He was President and Chief Operating Officer from 1990 to 1994.
Mr. Condon has been Vice President, Finance and Chief Financial Officer
("CFO") since joining the Company in March 1996 and was appointed Secretary and
Treasurer in January 1997. Prior to joining the Company, he was with Berkeley
Educational Services as Vice President, Finance, Treasurer and CFO from 1995 to
February 1996. During 1994 Mr. Condon was involved in consulting and
entrepreneurial activities. From 1989 to 1993, he was Senior Vice President,
Finance and CFO of SCS Communications, a private holding company.
Mr. Dec has been Vice President, Marketing since joining the Company in
March 1997. Prior to joining the Company, he was with Kinley & Manbeck, Inc. a
business process re-engineering and systems implementation consulting company as
Vice President of Business Development from April 1996 to March 1997. From 1995
to March 1996, he was National Account Manager, Product and Systems Group for
Datatec Industries, Inc. From 1993 to 1994, he was Vice President of Product
Development for Kentile, Inc., a manufacturer of resilient flooring.
Mr. Dornan, effective October 1996, was appointed Group Vice President of
Technology and Engineering and was appointed Vice President, Research and
Development in February 1998. He had been Group Vice President of Manufacturing
since 1986.
Mr. Green, effective March 1997, was appointed Vice President, Sales and
from April 1996 to March 1997 he was Vice President of Manufacturing. Over the
past 5 years, Mr. Green held positions of Director of Manufacturing, National
Sales Manager and Director of Quality Control and High-Reliability Services at
Merrimac.
Mr. Lin has been Vice President, Operations since joining the Company in
March 1997. Prior to joining the Company, he was with Don Aux Associates, a
change implementation consulting organization, as Project Manager, from 1996 to
March 1997. From 1992 to 1996 he was with Gemini Consulting as a senior
consultant responsible for re-engineering.
Information relating to (a) compliance with Section 16 of the Exchange Act
(b) the directors of the Company, is incorporated herein by reference to the
Company's Proxy Statement to be distributed in connection with the 1998 Annual
Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION.
See the information under the caption "EXECUTIVE COMPENSATION" contained in
the Proxy Statement, which information is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information in the table and the notes thereto, under the caption
"SHARE OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN STOCKHOLDERS"
contained in the Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No.
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3 (a) By-Laws of the Company are hereby incorporated
by reference to Exhibit C to the Proxy Statement
of the Company dated March 18, 1994.
(b) Certificate of Incorporation of the Company is
hereby incorporated by reference to Exhibit B of
the Proxy Statement of the Company dated
March 18, 1994.
10 (a) Profit Sharing Plan of the Company is hereby
incorporated by reference to Exhibit 10(n) to
the Company's Registration Statement
(No. 2-79455). *
(b) 1993 Stock Option Plan of the Company effective
March 31, 1993 is hereby incorporated by
reference to Exhibit 4(c) to the Company's
Registration Statement on Form S-8 which was
filed with the Securities and Exchange Commission
on September 14, 1993. *
(c) 1995 Stock Purchase Plan of the Company is hereby
incorporated by reference to Exhibit A of the Proxy
Statement of the Company dated March 17, 1995. *
(d) 1996 Stock Option Plan for Non-Employee Directors of the
Company is hereby incorporated reference to Exhibit 10(d)
to the Company's Annual Report on Form 10-KSB dated March
24, 1997.*
(e) Employment Agreement between the Company and Mason N. Carter
dated as of December 19, 1996 is hereby incorporated by
reference to Exhibit 10(e) to the Company's Annual Report
on Form 10-KSB dated March 24, 1997.*
(f) Employment Agreement between the Company and Eugene W. Niemiec
dated as of December 16, 1996 is hereby incorporated by
reference to Exhibit 10(f) to the Company's Annual Report
on Form 10-KSB dated March 24, 1997.*
(g) 1983 Key Employees Stock Option Plan of the Company effective
March 21, 1983 is hereby incorporated by reference to Exhibit
10(m) to the Annual Report on Form 10-K which was filed with
the Securities and Exchange Commission on March 31, 1983.*
(h) Long Term Incentive Plan of the Company is hereby
incorporated by reference to Exhibit (a) to the Proxy
Statement of the Company dated May 12, 1997.*
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(i) Form of Severance Agreement entered into with certain officers
of the Company.*
(j) Schedule of officers with substantially identical agreements
to the form filed as Exhibit 10(i) hereto.
13 Annual Report to Stockholders for Fiscal Year
Ended January 3, 1998.
21 Subsidiaries of the Registrant.
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of J.H. Cohn LLP.
27.1 Financial Data Schedule for Fiscal Year Ended January 3, 1998.
27.2 Restated Financial Data Schedule for periods ended March 29,
1997, June 28, 1997, September 27, 1997, and fiscal year ended
December 28, 1996.
27.3 Restated Financial Data Schedule for periods ended March 30,
1996, June 29, 1996, September 28, 1996, and fiscal years
ended December 30, 1995 and December 31, 1994.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed on November 6, 1997
announcing the appointment of two new directors, Dr. Joel H. Goldberg
and Mr. Frederick J. Gumm.
A Current Report on Form 8-K was filed on February 26, 1998 reporting
the Company's results of operations for the fourth quarter and 1997
fiscal year.
* Indicates that exhibit is a management contract or compensatory
plan or arrangement.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERRIMAC INDUSTRIES, INC.
-------------------------
(Registrant)
Date: March 30, 1998 By: /s/ Mason N. Carter
---------------------------
Mason N. Carter
Chairman, President and
Chief Executive officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Date Title
------------------------- ------- --------
/s/ Mason N. Carter 3-30-98 Director
------------------------- ------- --------
(Mason N. Carter)
/s/ Albert H. Cohen 3-30-98 Director
------------------------- ------- --------
(Albert H. Cohen)
/s/ Joel H. Goldberg 3-30-98 Director
------------------------- ------- --------
(Joel H. Goldberg)
/s/ Frederick J. Gumm 3-30-98 Director
------------------------- ------- --------
(Frederick J. Gumm)
/s/ Eugene W. Niemiec 3-30-98 Director
------------------------- ------- --------
(Eugene W. Niemiec)
/s/ Arthur A Oliner 3-30-98 Director
------------------------- ------- --------
(Arthur A.Oliner)
/s/ Robert V. Condon 3-30-98 Vice President, Finance,
------------------------- ------- ------------------------
(Robert V. Condon) Treasurer, Secretary and
------------------------
Chief Financial Officer
------------------------
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Merrimac Industries, Inc.
We have audited the accompanying consolidated balance sheet of Merrimac
Industries, Inc. and Subsidiaries as of January 3, 1998 and the related
consolidated statement of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Merrimac
Industries, Inc. and Subsidiaries as of January 3, 1998 and their results of
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 13, 1998
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Merrimac Industries, Inc.
We have audited the accompanying consolidated balance sheet of Merrimac
Industries, Inc. and Subsidiaries as of December 28, 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended December 28, 1996 and December December 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Merrimac
Industries, Inc. and Subsidiaries as of December 28, 1996 and their results of
operations and cash flows for the years then ended, December 28, 1996 and
December December 30, 1995 in conformity with generally accepted accounting
principles.
J. H. COHN LLP
Roseland, New Jersey
February 18, 1997
-13-
Exhibit 10.I
THIS SEVERANCE AGREEMENT, dated as of January 5, 1998 (this "Agreement"),
is made by and between Merrimac Industries, Inc., a New Jersey corporation,
having its principal offices at 41 Fairfield Place, West Caldwell, New Jersey
(the "Company"), and _______________________, residing in the State of New
Jersey (the "Executive").
WHEREAS, the Company considers it essential to the best interests of its
shareholders to foster the continued employment of key executive management
personnel; and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes
that, as is the case with many publicly-held corporations, the possibility of a
Change in Control (as defined in Section 1.3 below) of the Company exists from
time to time and that such possibility, and the uncertainty, instability and
questions which it may raise for and among key executive management personnel,
may result in the premature departure or significant distraction of such
management personnel to the material detriment of the Company and its
shareholders; and
WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce, focus and encourage the continued attention and dedication of key
members of the executive management of the Company and its subsidiaries,
including (without limitation) the Executive, to their assigned duties without
distraction in the face of potentially disturbing or unsettling circumstances
arising from the possibility of a Change in Control of the Company; and
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Executive hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
1.1 "Annual Base Salary" shall mean the Executive's rate of regular
basic annual compensation prior to any reduction under a salary reduction
agreement pursuant to section 401(k) or section 125 of the Internal Revenue Code
of 1986, as amended from time to time (the "Code"), and shall not include
(without limitation) cost of living allowances, fees, retainers, reimbursements,
bonuses, incentive awards, prizes or similar payments.
1.2 "Cause" for termination by the Company of the Executive's
employment, after any Change in Control, shall mean (i) willful failure to
perform normal and customary duties for an extended period of time for any
reason other than death or disability; or (ii) gross negligence or willful
misconduct, including but not limited to fraud, embezzlement or intentional
misrepresentation; or (iii) commission of, or indictment or conviction for, a
felony; or (iv) misappropriation of a material opportunity of the Company; or
(v) willfully engaging in competitive activities against the Company or
purposely aiding a competitor of the Company; or (vi) violation of any material
term of the Agreement and, if the violation may be cured by the Executive, the
failure to cure the violation within ten days after receipt of written notice of
such violation.
1.3 "Change in Control" shall mean and be deemed to have occurred if:
(i) any Person (as that person is defined in Section 1.7 below), who is or
becomes the beneficial owner (as that term is used in Section 13(d) of the
Securities and Exchange Act of 1934 ("the Exchange Act")) of stock of the
Company entitled to cast more than 25% of the votes at the time entitled to be
cast generally for the election of directors; or (ii) more than 50% of the
members of the Board of Directors of the Company shall not be Continuing
Directors (which term, as used herein, means the directors of the Company (A)
who were members of the Board of Directors of the Company on December 1, 1997 or
(B) who subsequently became directors of the Company and who were elected or
designated to be candidates for election as nominees of the Board of Directors,
or whose election or nomination for election by the Company's stockholders was
otherwise approved, by a vote of a majority of the Continuing Directors then on
the Board of Directors); or (iii) the Company is merged or consolidated with, or
in any transaction or series of transactions, all or substantially all of the
business or assets of the Company shall be sold or otherwise acquired by,
another corporation or entity and, as a result thereof, the stockholders of the
Company immediately prior thereto shall not have at least 50% or more of the
combined voting power of the surviving, resulting or transferee corporation or
entity.
-1-
<PAGE>
1.4 "Company" shall mean Merrimac Industries, Inc., a New Jersey
corporation, and any successor to its business and/or assets which assumes
(either expressly, by operation of law or otherwise) and/or agrees to perform
this Agreement by operation of law or otherwise (except in determining, under
Section 1.3 hereof, whether or not any Change in Control of the Company has
occurred in connection with such succession).
1.5 "Disability" shall mean if, as result of physical or mental
illness or injury, the Executive is unable to perform the essential duties of
his position for a period of 90 days or for a period of 120 non-consecutive days
in any twelve month period, or poses a direct threat to the safety and health of
the Executive or others and there is no reasonable accommodation that can be
provided by the Company that would allow the Executive to perform the essential
functions of the Executive's position as determined by applicable law.
1.6 "Good Reason" for termination by the Executive of the Executive's
employment in connection with or as a result of any Change in Control, shall
mean the occurrence (without the Executive's prior express written consent) of
any one of the following acts, or failures to act: (i) a material diminution of
the duties and responsibilities of the Executive; or (ii) a reduction in
compensation or benefits of the Executive; or (iii) any failure by the Company
to comply with any of the provisions of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive; or (iv) any purported termination of the Executive's employment which
is not in pursuant to a Notice of Termination satisfying the requirements of
Section 3.1; or (v) the relocation of the Company's principal executive offices
where the Executive works to a location more than twenty-five (25) miles from
its location on the date of this Agreement or, the Company's requiring the
Executive to be based anywhere other than the Company's principal executive
offices. Required travel on the Company's business to an extent substantially
consistent with the Executive's business travel obligations as of the date of
this Agreement is not a relocation event under this Agreement.
1.7 "Person" shall have the meaning ascribed thereto in Section 13(d)
and 14(d) in the Exchange Act provided, however, a Person shall not include (i)
the Company or any of its subsidiaries, (ii) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any of its
subsidiaries (in its capacity as such), (iii) an underwriter temporarily holding
securities pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same character and proportions as their ownership of stock of
the Company.
2. Severance Payments.
2.1 Severance. The Company shall pay the Executive the payments
described in this Section 2.1 (the "Severance Payments") upon the termination of
the Executive's employment with the Company within one year after a Change in
Control unless such termination is (i) by the Company for Cause, or (ii) by the
Executive without Good Reason, or (iii) due to Executive's death or disability.
The Executive's right to terminate the Executive's employment for Good Reason
shall not be affected by the Executive's incapacity due to physical or mental
illness. The Executive's continued employment shall not constitute consent to,
or a waiver of rights with respect to any act or failure to act constituting
Good Reason hereunder.
2.1.1 The Company shall pay to the Executive for a period of twelve
months, in accordance with the Company's regular salary payment procedures, an
annualized amount equal to two times the Annual Base Salary of the Executive.
2.1.2 For a twenty-four month period after the Date of Termination,
the Company shall arrange to provide the Executive with health insurance
benefits substantially similar to those which the Executive is receiving
immediately prior to any Change in Control.
2.2 Round Down. To the extent that any payments made under this
Agreement may be subject to the excise tax imposed under section 4999 of the
Code, the Company shall reduce the amount of such payments by the minimum amount
necessary to avoid being subject to such excise tax.
-2-
<PAGE>
3. Termination Procedures.
3.1 Notice of Termination. Within one year after a Change in Control
any purported termination of the Executive's employment with the Company (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 3
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon, if any, and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment with the Company under the provision so indicated. For purposes of
this Agreement, any purported termination not effected in accordance with this
Section 3.1 shall not be considered effective.
3.2 Date of Termination. "Date of Termination", with respect to any
purported termination of the Executive's employment with the Company within one
year of after a Change in Control shall mean (i) if the Executive's employment
is terminated for Disability, 10 days after Notice of Termination is given
(provided that the Executive shall not have returned to the full-time
performance of the Executive's duties during such period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination which, in the case of a termination by the Company,
shall not be less than ten business days except in the case of a termination for
Cause and, in the case of a termination by the Executive, shall not be less than
ten business days nor more than 20 business days, respectively, after the date
such Notice of Termination is given.
4. No Mitigation. The Company agrees that, if the Executive's employment is
terminated, the Executive is not required to seek other employment or attempt in
any way to reduce any amounts payable to the Executive by the Company pursuant
to Section 2. Further, the amount of any payment or benefit provided for in
Section 2 (other than pursuant to Section 2.1.2) shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, or offset against any amount claimed to be
owed by the Executive to the Company or any of its subsidiaries or otherwise.
5. Successors; Binding Agreement.
5.1 Successors. In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
5.2 Binding Agreement. This Agreement shall inure to the benefit of
and be enforceable by this Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be payable to
the Executive hereunder (other than amounts which, by their terms, terminate
upon the death of the Executive) the Executive shall be paid, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the executors, personal representatives or administrators of
the Executive's estate.
6. Notices. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below, or to such other addresses as either party
may have furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon actual receipt:
To the Company: Merrimac Industries, Inc.
41 Fairfield Place
West Caldwell, NJ 07006
Attn: Chief Executive Officer
To the Executive: -----------------------------
-----------------------------
-----------------------------
-3-
<PAGE>
7. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of New Jersey without regard to the principles of
conflict of laws thereof. All references to sections of the Exchange Act or the
Code shall be deemed also to refer to and include any successor provisions to
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed.
8. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
10. No Limitation. Nothing in this Agreement shall prevent or limit the
Executive's continuing or future participation in any plan, program, policy or
practice provided by the Company or any of its affiliated companies and for
which the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other contract or
agreement with the Company or any of its affiliated companies. Amounts which are
vested benefits or which the Executive is otherwise entitled to receive under
any plan, policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program or contract or agreement except as explicitly modified by this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first written above.
MERRIMAC INDUSTRIES, INC.
By:
--------------------
Name: Mason N. Carter
Title: Chairman and Chief Executive Officer
-4-
EXHIBIT 10 (j)
Schedule identifying substantially similar agreements, among Merrimac
Industries, Inc. ("Merrimac") and each of the following persons, to the
Agreement constituting Exhibit 10(j) to the Annual Report on Form 10-KSB of
Merrimac for the fiscal year ended January 3, 1998.
Two Year Payment
Robert V. Condon
Richard E. Dec
Brian R. Dornan
Reynold K. Green
Jacob Lin
One Year Payment
James J. Logothetis
Joseph McAndrew
Olivia McKay
Neil S. Thomas
-1-
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1997 Compared to 1996:
Results of operations reflect increases in net sales of $4,506,000 or 31.8%
and operating income (before the 1996 restructuring charge) of $1,202,000 or
151%. Net income of $1,402,000 compares to a net loss of $297,000 after the
restructuring charge reported in 1996 and diluted net income of $.87 per share
compares to diluted net loss of $.19 per share in the prior year.
Net foreign sales amounted to $5,731,000 or 30.7% of net sales, an increase
of $1,341,000 or 30.6% compared to prior year's net foreign sales of $4,390,000.
Net domestic sales amounted to $12,928,000 or 69.3% of net sales, an increase of
$3,165,000 or 32.4% compared to prior year's net domestic sales of $9,763,000.
The increases in net sales were attributable to increased shipments of orders
from a higher order backlog, process improvement initiatives, customer service
focus and reduction of total-cycle-time to market.
Orders increased $3,457,000 or 20.7% to $20,186,000 in 1997 and the backlog
of firm unfilled orders increased $1,527,000 or 18.6% to $9,758,000 at year-end.
As a result of the increases in net sales, cost of sales increased
$1,707,000 or 20.7%. Cost of sales as a percentage of net sales decreased 4.9%
to 53.3% for 1997. The decrease in cost of sales as a percentage of net sales
when compared to the prior year is the result of volume-related improved
efficiencies in the manufacturing cycle, a higher concentration of productive
labor utilized in completing customer orders and a reduction of non-productive
labor associated with training and instruction programs instituted during the
prior year.
Selling, general and administrative expenses increased $1,675,000 or 33.2%,
and as a percentage of net sales increased .4% to 36.0%. Increases in selling
costs were related to higher sales commissions due to increased sales revenues.
General and administrative expenses partially increased due to additional
compensation expenses related to the hiring of additional administrative
personnel and higher compensation expenses resulting from last year's mid-year
merit increases to certain employees. Certain transitional costs associated with
further restructuring and re-engineering also increased selling, general and
administrative expenses.
Research and development expenses for new products were $556,000 for 1997,
an increase of $309,000 or 126% from prior year. The Company settled litigation
relating to a 1992 acquisition claim and obtained a worldwide release for
current and any future claims of any nature arising from the utilization of
acquired technology. The cost of the settlement, including expenses, was
$122,000 and was charged to operations this year.
1996 Compared to 1995:
In 1996 net sales were $14,153,000 compared to $14,397,000 in 1995.
Operations generated a loss of $589,000 in 1996. After excluding the $1,382,000
restructuring charge recognized in 1996, operations generated income of $793,000
compared to operating income of $2,309,000 in 1995. A net loss of $297,000 in
1996 compares to net income of $1,652,000 in 1995. The operating loss was
primarily due to the increases in cost of sales and selling, general and
administrative expenses coupled with the restructuring charge.
-1-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net foreign sales amounted to $4,390,000 or 31.0% of net sales, an increase
of $161,000 or 3.8% compared to prior year's foreign sales of $4,229,000. Net
domestic sales amounted to $9,763,000 or 69.0% of net sales, a decrease of
$405,000 or 4.0% compared to prior year's domestic sales of $10,168,000.
Management attributed approximately $200,000 of the decrease to the continued
decline of net domestic defense activity.
Orders increased $1,776,000 or 11.9% to $16,729,000 in 1996 and the backlog
of firm unfilled orders increased $2,575,000 or 45.5% to $8,231,000 at year-end.
Cost of sales as a percentage of net sales increased 8.1% to 58.2%, which
amounted to an increase of $1,032,000. The primary reasons for the increases
were the loss of production time from Total Quality Management (TQM) and ISO
9001 quality standards program training and implementation, as well as the setup
costs for the new manufacturing facility in Costa Rica, which items in the
aggregate were $811,000. In addition, higher compensation rates due to the merit
pay increases that became effective at mid-year 1995; additional manufacturing
personnel hired to reduce the number of backlog ship days; the doubling of the
matching contribution rate by the Company to the Company's 401(k) Plan; and
fixed overhead increases not fully absorbed because the shipment shortfall
impacted cost of sales.
Selling, general and administrative expenses increased $331,000 and as a
percentage of net sales increased from 32.7% in 1995 to 35.6% in 1996. The
increases are due primarily to aggregate costs of $464,000 for TQM and ISO 9001
training, instruction and implementation costs and a comprehensive marketing
analysis utilizing an outside consulting firm, as well as higher compensation
expenses resulting from 1995 mid-year merit increases to all employees.
Liquidity and Capital Resources:
The Company's financial condition remained strong throughout 1997. The
Company had liquid resources comprised of cash and cash equivalents (including
investments in available-for-sale securities in 1996) totaling approximately
$2,400,000 for 1997 and 1996. The Company's working capital was approximately
$8,700,000 and its current ratio was 4.7 at the end of 1997 compared to
approximately $8,000,000 and 5.7, respectively, in 1996.
The Company's operating activities generated cash flows of $1,621,000 in
1997 compared to $792,000 in 1996. Primary reasons for the increase in cash
flows in 1997 were increases in net income plus depreciation and current
liabilities which partly offset increases in accounts receivable and
inventories. Investments in property, plant and equipment were $1,800,000 in
1997 compared to $1,003,000 in 1996. Proceeds from the exercise of stock options
were $593,000 for 65,400 shares of common stock in 1997 compared to $286,000 for
36,300 shares in 1996.
The Company paid cash dividends of $459,000 in 1997 compared to $617,000 in
1996 at the quarterly rate of $.10 per share. The Company issued a news release
on August 28, 1997 regarding the Board of Directors review of its strategy for
growth and relationship to its cash dividend policy. The Board of Directors
decision was to reinvest all future earnings in the Company and eliminate the
cash dividend. During 1996 the Company made open market purchases of 154,100
shares of its common stock at a cost of $1,630,000. No shares have been
repurchased in 1997.
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company recently entered into a $7,000,000 revolving credit and term
loan agreement with Summit Bank, at one-half percent below the bank's floating
prime rate. Up to $2,500,000 of borrowings may be used for capital expenditures
under the term loan. The full line is available for future borrowing needs of
the Company for working capital and general corporate purposes.
Management believes that with the liquid resources and the unused line of
credit available, along with cash flows expected to be generated from
operations, the Company will have sufficient resources for currently
contemplated operations in 1998. Expansion of the Company's manufacturing
facility in Costa Rica, that became operational during the second half of 1996,
is currently underway with completion anticipated early in 1998. The Company's
capital expenditures for new projects and production equipment are anticipated
to exceed its depreciation and amortization expenses in 1998.
The Company recognizes the need to assure that its operations will not be
adversely impacted by Year 2000 software failures. The impact on operations has
been evaluated and plans have been formulated to ensure Year 2000 compliance
before the end of 1998. Beginning in 1998, existing mission-critical software
will be revised to process dates for 1999 and beyond without any disruption to
the business. Software revisions will be performed by Company employees and the
total estimated cost for achieving Year 2000 compliance has not been and is not
anticipated to be material to the Company's financial position or results of
operations.
The Company was authorized on November 1, 1996 to purchase up to 100,000
shares of its common stock, depending on market conditions, and has purchased
4,100 shares to date under such authorization.
Periodically, the Company explores the possibility of acquiring similar
manufacturers of electronic devices or companies in related fields, although it
currently has no definitive plans or agreements. Management believes that any
such acquisitions and business operation expansion could be financed through its
liquid and capital resources currently available as previously discussed and/or
through additional borrowing or issuance of equity or debt securities. The
additional debt from any acquisitions, if consummated, would increase the
Company's debt-to-equity ratio and such debt or equity securities might, at
least in the near term, have a dilutive effect on net income per share.
Certain statements in this annual report are forward-looking statements
based on current management expectations and are subject to risks and
uncertainties. Factors that could cause future results to differ from these
expectations include general economic and industry conditions, competitive
products and pricing pressures, risks relating to governmental regulatory
actions in communications and defense programs, and inventory risks due to
technological innovation. Additional factors to which the Company's performance
is subject are described in the Company's reports filed from time to time with
the Securities and Exchange Commission.
-3-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net sales ........................................... $18,659,106 $14,152,970 $14,396,633
----------------------------------------
Costs and expenses:
Cost of sales .................................... 9,947,774 8,240,639 7,208,152
Selling, general and administrative .............. 6,716,187 5,041,606 4,710,752
Amortization of intangible assets ................ 77,568 169,180
Restructuring charge ............................. 1,381,709
----------------------------------------
16,663,961 14,741,522 12,088,084
----------------------------------------
Operating income (loss) ............................. 1,995,145 (588,552) 2,308,549
Interest and other income, net ...................... 162,264 97,300 282,517
----------------------------------------
Income (loss) before income taxes ................... 2,157,409 (491,252) 2,591,066
Provision (credit)for income taxes .................. 755,000 (194,000) 939,000
----------------------------------------
Net income (loss) ................................... $1,402,409 $ (297,252) $ 1,652,066
========================================
Net income (loss) per common share-basic ............ $.91 $(.19) $.97
Net income (loss) per common share-diluted .......... $.87 $(.19) $.95
----------------------------------------
Weighted average number of shares outstanding-basic.. 1,539,421 1,549,218 1,700,422
Weighted average number of shares outstanding-diluted 1,618,339 1,575,515 1,730,889
----------------------------------------
</TABLE>
See accompanying notes.
-4-
<PAGE>
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and December 28, 1996
<TABLE>
<CAPTION>
1997 1996
---------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................................... $ 2,414,725 $ 1,265,581
Investments in available-for-sale securities ....................................... 1,140,832
Accounts receivable ................................................................ 3,091,287 1,850,042
Inventories ........................................................................ 4,508,569 4,165,818
Other current assets ............................................................... 173,203 271,810
Deferred tax assets ................................................................ 919,500 968,000
---------------------------
Total current assets ................................................ 11,107,284 9,662,083
---------------------------
Property, plant and equipment, at cost ................................................ 13,856,825 12,668,930
Less accumulated depreciation and amortization ..................................... 9,663,081 9,326,688
---------------------------
Net property, plant and equipment ..................................................... 4,193,744 3,342,242
Deferred tax assets ................................................................... 65,000 47,000
Other assets .......................................................................... 193,776 30,440
---------------------------
Total Assets ........................................................ $15,559,804 $13,081,765
===========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................................................... $1,141,779 $ 750,763
Accrued liabilities ................................................................ 1,193,669 952,880
Income taxes payable ............................................................... 45,825
---------------------------
Total current liabilities ........................................... 2,381,273 1,703,643
Deferred compensation ................................................................. 375,700 249,100
---------------------------
Total liabilities ................................................... 2,756,973 1,952,743
---------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.50 per share;
5,000,000 shares authorized; 2,651,131 and 2,585,749 shares issued ....... ...... 1,325,566 1,292,875
Additional paid-in capital ......................................................... 9,709,244 9,005,330
Retained earnings .................................................................. 10,995,086 10,051,720
Unrealized holding gain on available-for-sale securities, net ...................... 6,162
---------------------------
22,029,896 20,356,087
Less treasury stock, at cost - 1,074,839 .......................................... 9,227,065 9,227,065
---------------------------
Total stockholders' equity .......................................... 12,802,831 11,129,022
---------------------------
Total Liabilities and Stockholders' Equity .......................... $15,559,804 $13,081,765
===========================
</TABLE>
See accompanying notes.
-5-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Additional Unrealized
Common Stock paid-in holding Retained Treasury Stock
Shares Amount capital gain (loss) earnings Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,521,196 $1,260,598 $8,537,460 $(213,720) $9,989,697 830,735 $6,561,572
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,652,066
Exercise of options 28,256 14,128 164,364
Tax benefit - stock options* 21,300
Effect of change in fair value of
available-for-sale securities 215,620
Cash dividends (676,013)
Purchase of common stock 90,004 1,035,045
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 30, 1995 2,549,452 1,274,726 8,723,124 1,900 10,965,750 920,739 7,596,617
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss (297,252)
Exercise of options 36,297 18,149 268,206
Tax benefit - stock options* 14,000
Effect of change in fair value of
available-for-sale securities 4,262
Cash dividends (616,778)
Purchase of common stock 154,100 1,630,448
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1996 2,585,749 1,292,875 9,005,330 6,162 10,051,720 1,074,839 9,227,065
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,402,409
Issuance of stock options** 12,000
Exercise of options 65,382 32,691 559,914
Tax benefit - stock options* 132,000
Effect of change in fair value of
available-for-sale securities (6,162)
Cash dividends (459,043)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998 2,651,131 $1,325,566 $9,709,244 - $10,995,086 1,074,839 $9,227,065
===================================================================================================================================
</TABLE>
* Tax benefit resulting from exercise and disposition of stock options and
subsquent disposition of stock.
** Compensation expense, net of tax effects, from issuance of stock options at
a discount from fair market value.
See accompanying notes.
-6-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities: -------------------------------------------
<S> <C> <C> <C>
Net income (loss) ....................................... $1,402,409 $ (297,252) $1,652,066
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ....................... 953,705 890,859 850,637
Loss (gain) on available-for-sale securities ........ (65,006) 17,650
Write-off of intangible assets ...................... 244,500
Deferred compensation ............................... 238,600 279,100
Deferred income taxes ............................... 22,000 (473,000) (47,000)
Stock-based compensation expense .................... 20,700
Changes in operating assets and liabilities:
Accounts receivable ............................... (1,241,245) 523,139 (321,528)
Inventories ....................................... (342,751) (245,808) (272,180)
Other current assets .............................. 98,607 (145,595) 74,685
Deferred tax assets ............................... (8,700)
Other assets ...................................... (163,336) (2,178) 15,253
Accounts payable .................................. 391,016 364,460 68,053
Accrued liabilities ............................... 158,789 (32,397) 120,067
Income taxes payable .............................. 186,325 (331,797) 52,871
Deferred compensation ............................. (30,000)
-------------------------------------------
Net cash provided by operating activities ................... 1,621,113 791,681 2,192,924
-------------------------------------------
Cash flows from investing activities:
Purchase of capital assets .............................. (1,805,294) (1,012,259) ( 450,997)
Proceeds from sales of capital assets ................... 5,461 9,071 3,690
Proceeds from sales and maturities
of available-for-sale securities ...................... 1,340,454 2,272,070 1,292,983
Purchase of available-for-sale securities ............... (146,152) (1,129,297)
-------------------------------------------
Net cash provided by (used in) investing activities ......... (605,531) 139,585 845,676
-------------------------------------------
Cash flows from financing activities:
Repurchase of common stock .............................. (1,630,448) (1,035,045)
Proceeds from the issuance of common stock .............. 592,605 286,355 178,492
Payments of dividends ................................... (459,053) (616,778) (676,013)
-------------------------------------------
Net cash provided by (used in) financing activities ......... 133,562 (1,960,871) (1,532,566)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents ........ 1,149,144 (1,029,605) 1,506,034
Cash and cash equivalents at beginning of year .............. 1,265,581 2,295,186 789,152
-------------------------------------------
Cash and cash equivalents at end of year .................... $2,414,725 $1,265,581 $2,295,186
===========================================
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes ........................................... $ 675,000 $ 712,500 $ 833,776
===========================================
Supplemental disclosure of non-cash investing activity:
Unrealized holding gain on available-for-sale
securities, less deferred tax provision of $4,200 and
$143,000 in 1996 and 1995 ............................ - $ 4,262 $ 215,620
===========================================
</TABLE>
See accompanying notes.
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
1.Summary of significant accounting policies
Principles of consolidation: The financial statements include the accounts
of the Company, Industrias Merrimac Incorporada, S.A. a wholly-owned subsidiary
located in San Jose, Costa Rica, and Merrimac International, Inc. FSC, a
wholly-owned foreign sales corporation. All intercompany accounts have been
eliminated in consolidation.
Cash and cash equivalents: The Company considers all highly liquid
securities with an original maturity of less than three months to be cash
equivalents. The Company maintains cash deposits with banks that at times exceed
applicable insurance limits. The Company reduces its exposure to credit risk by
maintaining such deposits with high quality financial institutions. Because of
their liquidity and short-term maturities, the carrying value of these financial
instruments approximates their fair value.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Contract revenues: Sales and related cost of sales under fixed-price
contracts are recorded as deliveries are made. Prior to shipment, manufacturing
costs incurred on such contracts are recorded as work in process inventory.
Anticipated future losses on contracts are charged to income when identified.
Investments: The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and classified its portfolio of investment
securities, as available-for-sale securities. Available-for-sale securities are
carried at quoted market values. Unrealized gains and losses are included as a
separate component of stockholders' equity. Realized gains and losses,
determined using the specific identification method, are included in income in
the period incurred.
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Inventories: Inventories are valued at the lower of average cost or market
and consist of the following:
1997 1996
-------------------------------
Finished goods ....................... $ 778,675 $ 885,863
Work in process ...................... 2,571,426 2,134,013
Raw materials and
purchased parts ...................... 1,158,468 1,145,942
-------------------------------
$4,508,569 $4,165,818
===============================
Total inventories are net of valuation allowances for obsolescence of $1,533,000
in 1997 and $1,761,000 in 1996.
Depreciation: Depreciation is computed for financial purposes on the
straight-line method, while accelerated methods are used, where applicable, for
tax purposes. The following estimated useful lives are used for financial
statement purposes:
Land improvements ..................................... 10 years
Building .............................................. 25 years
Machinery and equipment ............................... 3 - 10 years
Office equipment, furniture and fixtures............... 5 - 10 years
Assets under construction are not depreciated until the assets are placed
into service. Fully depreciated assets included in property, plant and equipment
at January 3, 1998 and December 28, 1996 amounted to $6,818,000 and $6,040,000,
respectively.
Long-lived assets: Effective December 31, 1995, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Under Statement No. 121, impairment losses on long-lived assets are recognized
when events or changes in circumstances indicate that the undiscounted cash
flows estimated to be generated by such assets are less than their carrying
value. Impairment losses are then measured by comparing the fair value of assets
to their carrying amounts.
During 1996, the Company determined that its intangible assets, comprised
primarily of the excess of cost over the fair value of net assets of acquired
businesses, had become impaired and estimated that they would not generate any
significant cash flows in future periods. Accordingly, the carrying value of the
impaired assets of $244,500 was written off in conjunction with certain other
restructuring charges (see Note 12). Prior to such determination, the intangible
assets were being amortized on a straight-line basis over a period of five
years. The implementation of Statement No. 121 did not have any effect on the
determination of the amount written off.
Advertising: The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were $139,000 in 1997,
$150,000 in 1996 and $140,000 in 1995.
Income taxes: The Company uses the asset and liability method to account
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on temporary differences between financial reporting and tax
bases of assets and liabilities, and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Savings and Investment Plan: The Company's Savings and Investment Plan is a
401(k) plan (the "Plan") that provides eligible employees with the option to
defer and invest up to 16% of their compensation, with 50% of the first 6% of
such savings matched by the Company. The Company's contributions to the Plan
were $147,000 in 1997, $142,000 in 1996 and $105,000 in 1995. The Board of
Directors may also authorize a discretionary amount to be contributed to the
Plan and allocated to eligible employees annually. Amounts contributed to the
Plan were $200,000 in 1997, $145,000 in 1996 and $288,000 in 1995.
Stock-based compensation: Effective December 31, 1995, the Financial
Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation," which permitted the Company to elect to account for stock-based
compensation arising under its stock option and stock subscription plans by
using a fair value based method or continuing to measure compensation expense
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue using the intrinsic value method and make the pro forma
disclosures required by Statement No. 123 of net income and net income per share
as if the fair value based method of accounting had been applied (see Note 6).
Since the Company generally grants options and rights to subscribe to purchase
shares at or near the market price of the underlying share on the date of grant,
it will not be required to recognize compensation expense as a result of such
grants.
Research and development: Research and development expenditures of $556,000
in 1997, $246,000 in 1996 and $275,000 in 1995 were expensed as incurred.
Interest expense: Interest expense was not material in 1997, 1996 and 1995.
Net income (loss) per share: Effective January 3, 1998, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 128, "Earnings
per Share," which establishes the new standard for computation and presentation
of net income (loss) per common share. Under the new requirements both basic and
diluted net income (loss) per common share are presented. All prior period net
income (loss) per common share information have been restated.
Basic net income (loss) per common share is calculated by dividing net
income (loss), less dividends on preferred stock, if any, by the weighted
average common shares outstanding during the period.
The calculation of diluted net income (loss) per common share is similar to
that of basic net income (loss) per common share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, principally those
issuable under stock options, were issued during the reporting period
(see Note 6).
Accounting period: The Company's fiscal year is the 52 - 53 week period
ending on the Saturday closest to December 31. There were 53 weeks in fiscal
year 1997 and 52 weeks in fiscal 1996 and 1995.
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
2. Investments in available-for-sale securities
The amortized cost of the Company's portfolio of available-for-sale
investments in marketable equity securities at December 28, 1996 was reconciled
to the fair market value, which was also the carrying value, of the portfolio at
December 28, 1996 as follows:
1996
-----------
Amortized cost ............................... $1,130,470
Gross unrealized gains....................... 10,876
Gross unrealized losses ...................... (514)
-----------
Fair market value ............................ $1,140,832
===========
The net unrealized gains of $10,362 in 1996 were included as a separate
component of stockholders' equity, net of deferred tax effects. Sales of
securities totaled $1,275,000 in 1997 and $2,275,000 in 1996 and $993,000 in
1995. Realized gains in 1997 were $65,000 and realized gains and losses in 1996
and 1995 were not material.
3. Property plant and equipment
Property plant and equipment consists of the following:
1997 1996
------------------------------
Land and land improvements ............... $ 547,446 $ 547,446
Building ................................. 2,375,680 2,238,868
Machinery and equipment .................. 6,169,081 5,850,630
Office equipment,
furniture and fixtures ................ 4,764,618 4,031,986
------------------------------
$13,856,825 $12,668,930
==============================
4.Accrued liabilities
Accrued liabilities consist of the following:
1997 1996
------------------------------
Commissions .......................... $ 152,871 $ 140,656
Vacation ............................. 82,969 185,853
Savings Plan contribution ............ 162,204 144,525
Employee compensation ................ 278,382 164,820
Warranty reserve ..................... 150,000 150,000
Deferred compensation ................ 112,000 30,000
Other ............................... 255,243 137,026
------------------------------
$ 1,193,669 $ 952,880
==============================
5.Line of credit
The Company has a $7,000,000 unsecured bank line of credit agreement with
interest payable at one-half percent below the lending bank's the prime rate.
There were no borrowings outstanding under this line of credit agreement or any
previous line of credit agreements as of the end or during any of the last three
fiscal years.
-11-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998 December 28, 1996 and December 30, 1995
6.Stock option and stock purchase plans
Under the Company's 1993 Stock Option Plan, 300,000 shares of common stock
were initially reserved for issuance. The 1993 Option Plan provides for issuance
of qualified and non-qualified options. The qualified options may not be issued
at less than 100% of the fair market value of the shares on the date of grant
and they may be exercised at any time between one and ten years from the date of
grant. The non-qualified options may be granted to employees at an exercise
price determined by the Stock Option Committee of the Board of Directors which
may not be less than par value. Such options may become exercisable immediately
after the grant and/or at any time before the tenth anniversary of the grant.
The non-qualified options may also be granted to non-employee directors,
provided the option price is at least equal to the closing price on the date the
option is granted. Such options are exercisable after the grant or at any time
before the fifth anniversary of the grant.
As of January 3, 1998, options for the purchase of a total of 227,350
shares remained outstanding and exercisable under the 1993 Option Plan, and
options for 16,550 shares were available for future grant. In addition, (i)
qualified options for the purchase of a total of 4,962 shares remained
outstanding and exercisable under the Company's 1983 Key Employee Stock Option
Plan (however, options can no longer be granted under this plan); and (ii)
non-qualified options for the purchase of a total of 50,000 shares remained
outstanding and exercisable 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.
A summary of all stock option activity and information related to all
options outstanding follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average Shares average Shares average Shares
exercise or price exercise or price exercise or price
price per share price per share price per share
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year ............... $ 9.76 181,612 $8.90 140,684 $8.59 54,527
Granted ....................... 12.32 156,400 10.97 64,500 9.00 97,000
Exercised ....................... 9.17 (47,400) 7.82 (20,572) 5.50 (3,493)
Cancelled ....................... 8.67 (1,400) 9.10 (3,000) 7.51 (7,350)
- ------------------------------------------------------------------------------------------------------------------
Outstanding at end of year....... 11.24 289,212 9.76 181,612 8.90 140,684
- ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year....... $11.24 282,312 $9.76 181,612 $8.72 49,684
- ------------------------------------------------------------------------------------------------------------------
Option price range at end of year $5.50-$15.00 $5.50-$11.00 $5.50-$10.88
- ------------------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted during
the year........................ $4.71 $1.98 $2.88
- ------------------------------------------------------------------------------------------------------------------
The approximate weighted average of the remaining contractual life of the
outstanding options at January 3, 1998 was 8.8 years.
</TABLE>
-12-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
6.Stock Option and Stock Purchase Plans (continued)
In 1995, the Company's stockholders approved a stock purchase plan pursuant
to which 200,000 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.
In 1997, the Company's stockholders approved a long-term incentive plan
("LTIP") pursuant to which 250,000 shares of the Company's common stock were
initially reserved for grant to eligible employees. The LTIP provides for
issuance of Incentive Stock Options, Non-qualified Stock Options, Bonus Stock
and Discounted Stock Options. Under this plan, the Company may grant to
employees who hold positions no more senior than mid-level management,
discounted stock options for up to 100,000 shares of common stock, with the
option price per share of common stock to be at least greater than or equal to
50% of the fair market value of the common stock on the date of grant. During
1997 discounted stock options for the purchase of 6,900 shares were granted at
$14.00, a discount of $3.00 below the fair market value at the date of grant.
A summary of stock purchase plan subscription activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average Shares average Shares average Shares
exercise or price exercise or price exercise or price
price per share price per shares price per share
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subscribed,
beginning of year ........ $8.66 18,274 $7.30 16,932 $7.01 43,442
Subscribed ................ 10.09 17,923 9.46 18,649
Purchased ................. 8.82 (17,982) 7.98 (15,725) 6.43 (24,763)
Cancelled ................. 9.70 (2,159) 8.70 (1,582) 9.24 (1,747)
- ----------------------------------------------------------------------------------------------------------------
Subscribed at end of year.. $9.93 16,056 $8.66 18,274 $7.30 16,932
- ----------------------------------------------------------------------------------------------------------------
Subscription price
range, end of year $9.46-$10.09 $6.69-$9.46 $6.69-$9.24
- ----------------------------------------------------------------------------------------------------------------
Weighted average fair
value of rights granted
during the year ........ $3.75 $3.10
- ----------------------------------------------------------------------------------------------------------------
-13-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
6.Stock Option and Stock Purchase Plans (continued)
</TABLE>
The weighted average remaining contractual life of an outstanding stock
subscription at January 3, 1998 was approximately one year.
As explained in Note 1, the Company has adopted the disclosure-only
provisions of Statement No. 123. Accordingly, no earned or unearned compensation
cost was recognized in the accompanying consolidated financial statements for
stock options and stock purchase plan subscription rights granted in 1997 and
1996, except for the discounted stock options granted in 1997.
The table below sets forth the pro forma net income (loss) and the pro
forma diluted net income (loss) per share information as calculated in
accordance with Statement No. 123.
<TABLE>
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as reported .............. $1,402,409 $(297,252) $1,652,066
Net income (loss) - pro forma ................. 1,212,409 (495,252) 1,395,066
- -------------------------------------------------------------------------------------------
Net income (loss) per share-as reported ....... $.87 $(.19) $.95
Net income (loss) per share-pro forma .......... $.75 $(.31) $.80
- -------------------------------------------------------------------------------------------
The Statement No. 123 method of accounting has not been applied to options
granted in periods prior to January 1, 1995 and the resulting pro forma
compensation expense may not be indicative of pro forma expense in future years.
</TABLE>
The fair value of each of the options and purchase plan subscription rights
granted in 1997, 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option valuation model. For 1997, the following weighted average
assumptions were utilized: no dividend yield; expected volatility of 30%; a risk
free interest rate of 6%; and expected lives of five years. For 1996 and 1995,
the following weighted average assumptions were utilized: dividend yield of
3.4%; expected volatility of 25%; a risk free interest rate of 6%; and expected
lives of two years. However, the Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options and
subscription rights have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options and subscription rights.
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
7.Income taxes
The provision (credit) for income taxes consists of the following
components:
1997 1996 1995
Current tax provision: ---------------------------------------
Federal ......................... $ 569,000 $ 214,000 $ 767,000
State ........................... 164,000 65,000 219,000
---------------------------------------
733,000 279,000 986,000
---------------------------------------
Deferred tax provision (credit):
Federal ......................... 17,000 (369,000) (46,000)
State ........................... 5,000 (104,000) (1,000)
---------------------------------------
22,000 (473,000) (47,000)
---------------------------------------
Provision (credit) for income taxes. $ 755,000 $(194,000) $ 939,000
=======================================
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities at January 3, 1998 and December 28, 1996 are as
follows:
1997 1996
---------------------
Current deferred tax assets:
Inventory valuation allowance ................... $685,000 $ 755,000
Depreciation and amortization ................... 17,800
Capitalized inventory costs ..................... 87,100 69,600
Warranty cost ................................... 64,500 64,500
Deferred compensation ........................... 12,900 131,300
Other ........................................... 70,000 66,000
---------------------
919,500 1,104,200
---------------------
Non-current deferred tax assets:
Deferred compensation ........................... 196,800
Non-current deferred tax liabilities:
Depreciation and amortization ................... (45,000)
State income taxes .............................. (86,800) (89,100)
---------------------
65,000 (89,100)
---------------------
Net deferred tax assets .................... $984,500 $1,015,100
=====================
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
7.Income taxes (continued)
The statutory federal income tax rate is reconciled to the effective tax
rate computed by dividing the provision (credit) for income taxes by income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Statutory rate ....................................... 34.0% (34.0)% 34.0%
Effect of:
State income tax, net of federal income tax effects 5.2 (5.2) 5.5
Tax exempt dividends and interest ................. (.5) (6.2) (2.2)
Foreign Sales Corporation income .................. (2.7) (3.3) (1.6)
Foreign subsidiary loses .......................... 7.6
Research and Development credits .................. (.8)
Other ............................................. (.2) 1.5 .5
-------------------------------
Effective tax rate ................................... 35.0% (39.6%) 36.2%
</TABLE>
8.Cash dividends
During 1997, the Company has paid a $.10 per share dividend in each of the
first three quarters. The dividend was eliminated by a decision of the Board of
Directors on August 28, 1997. The Company had previously paid dividends of $.10
per share in each of the four quarters of fiscal 1996 and 1995.
9.Nature of business
Management considers the Company to be in one business segment: the design,
manufacture and sale of electronic devices offering extremely broad frequency
coverage and high performance characteristics. The Company primarily sells to
customers in the communications, defense and aerospace industries.
Foreign sales amounted to approximately $5,731,000 in 1997, $4,390,000 in
1996 and $4,229,000 in 1995. Sales to any one foreign geographic area did not
exceed 10% of net sales for 1997, 1996 or 1995. Sales to Lockheed Martin in 1997
and 1996 amounted to 13.4% and 10.8% of net sales, respectively. No one customer
accounted for more than 10% of net sales in 1995.
-16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Accounts receivable are financial instruments that expose the Company to a
concentration of credit risk. A substantial portion of the Company's accounts
receivable are from customers in the defense industry, and 30% of its
receivables at January 3, 1998 were from five customers. Exposure to credit risk
is limited by the large number of customers comprising the remainder of the
Company's customer base, their geographical dispersion and by ongoing customer
credit evaluations performed by the Company.
<TABLE>
10. Net income (loss) per common share.
The following table summarizes the calculation of basic and diluted net
income (loss) per common share for 1997, 1996 and 1995:
<S>
1997 1996 1995
----------------------------------------
Numerator: <C> <C> <C>
Net income (loss) available to common stockholders ......................... $1,402,409 $(297,252) $1,652,066
- ------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding for basic net income (loss) per share .. 1,539,421 1,549,218 1,700,422
Effect of dilutive securities - stock options 78,918 26,297 30,467
- ------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding for diluted net income (loss) per share. 1,618,339 1,575,515 1,730,889
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic ........................................ $.91 $(.19) $.97
Net income (loss) per share - diluted ...................................... $.87 $(.19) $.95
- ------------------------------------------------------------------------------------------------------------------------
At December 30, 1995, there were 21,150 stock options outstanding excluded
from the calculation of dilutive securities because the exercise prices of the
options were greater than the average market value of the common shares.
</TABLE>
11. Commitments and contingencies
Lease commitments:
The Company leases real estate and equipment under operating leases
expiring at various dates through December 2002. The leases include provisions
for rent escalation, renewals and purchase options, and the Company is generally
responsible for taxes, insurance, maintenance and repairs. Aggregate rental
expense charged to operations amounted to $54,000 in 1997. Rental expense in
1996 and 1995 was not material. Future minimum lease payments under
noncancellable operating leases with an initial term exceeding one year are as
follows:
1998 $95,000
1999 122,000
2000 100,000
2001 106,000
2002 113,000
Purchase obligations:
The Company has issued purchase order commitments to processing equipment
manufacturing vendors for approximately $900,000 of capital equipment and
building improvements. The Company anticipates the equipment will be purchased
and become operational during the second half of 1998.
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Consulting and employment agreements; deferred compensation:
The Company is party to an employment agreement with its Chairman,
President and Chief Executive Officer. The agreement provides for a minimum
annual salary of $200,000 and the initial term ends on December 31, 1999 and
automatically renews for successive twelve month periods thereafter unless
terminated pursuant to the terms of the agreement.
The Company is party to an employment agreement with its Vice Chairman and
Chief Technology Officer, which initial term ends on December 31, 1999 and
renews from year-to-year thereafter unless otherwise terminated pursuant to the
terms of the agreement. The agreement provides for a minimum annual salary of
$180,000 and continuation of salary and health benefits for eighteen months upon
termination of the agreement. In addition, upon termination of the agreement,
the agreement provides for the commencement of a ten-year consulting agreement
for payments of $90,000 per year including health, disability and death
benefits. The Company maintains a key-man life insurance policy on the executive
pursuant to the terms of the agreement.
The Company is party to a consulting agreement with a former Vice
President, which initial term ends February 2001 and automatically renews for
successive twelve month periods thereafter unless otherwise terminated pursuant
to the terms of the agreement. The agreement provides for an initial
distribution valued at approximately $44,000 and minimum payments of $24,000 per
year thereafter and includes health and other certain benefits.
The Company is party to a retirement agreement that became effective
January 1997 with its former Vice President, Secretary and Controller, which
provides for annual payments of $30,000 for ten years.
In connection with the consulting and retirement agreements described
above, the Company recognized expense of approximately $239,000 in 1997 and
$279,000 in 1996. The Company accrues the present value of the estimated future
payments over the periods of the projected term of each of the respective
agreements. The minimum benefits payable in 1998 are estimated to be $112,000
and the present value of the estimated future consulting and retirement benefits
payable beyond 1998 and accrued as of January 3, 1998 is approximately $376,000.
Litigation:
The Company is a party to lawsuits, both as a plaintiff and a defendant,
arising from the normal course of business. It is the opinion of management,
that the disposition of these various lawsuits will not materially affect the
consolidated financial position or results of operations of the Company.
12. Restructuring and related charge
The restructuring of engineering responsibilities and its attendant refocus
of product lines during 1996 impacted the valuation of inventories. An
additional review by management of inventories, certain intangibles arising from
acquired product designs, a non-compete agreement and deferred compensation for
a retiring senior officer resulted in aggregate charges of $1,382,000, and
charges, net of tax benefits, of $829,000 or $ .52 per share to operations in
1996.
The Company initially recognized aggregate restructuring charges of
$1,822,000 in the third quarter of 1996 and charges, net of tax benefits, of
$1,093,000. The Company reduced its estimate of the total charges by $145,000
and reclassified charges of $295,000 to cost of sales and selling, general and
administrative expenses in the fourth quarter of 1996.
END OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-18-
<PAGE>
Summarized quarterly financial data reported for 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 March 29 June 28 September 27 January 3
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ............................. $4,275,155 $4,986,288 $4,983,793 $4,413,870
Gross profit .......................... 1,900,048 2,385,205 2,249,174 2,176,905
Net income ............................ 277,746 378,100 350,015 396,548
- -------------------------------------------------------------------------------------------------------
Net income per share - basic .......... $.18 $.25 $.23 $.25
Net income per share - diluted ........ $.18 $.24 $.21 $.24
- -------------------------------------------------------------------------------------------------------
1996 March 30 June 29 September 28 December 28
- -------------------------------------------------------------------------------------------------------
Net sales ............................. $3,187,345 $3,925,528 $2,997,905 $4,042,192
Gross profit .......................... 1,548,312 1,767,288 1,068,489 1,528,242
Net income (loss)...................... 252,303 312,949 (1,139,257)(A) 276,753(B)
- -------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic.... $.16 $.20 $(.74)(A) $.18(B)
Net income (loss) per share - diluted.. $.15 $.20 $(.73)(A) $.18(B)
- -------------------------------------------------------------------------------------------------------
(A) Reflects the effects of restructuring charges (see Note 12) which, as
adjusted in the fourth quarter from those amounts originally reported in the
third quarter, reduced net income for the quarter by $916,000 or $.57 per share.
(B) Reflects the effects of adjustments to restructuring charges (see Note 12)
which increased net income for the fourth quarter by $87,000 or $.05 per
share.
</TABLE>
QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------
Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Market price per share: -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High ....... $12 13 1/16 19 3/4 19 7/8 11 3/8 11 3/8 11 3/8 12 3/8
Low ........ 10 3/4 10 1/4 12 1/8 11 10 1/8 9 3/4 9 5/8 9 3/4
-----------------------------------------------------------------
</TABLE>
The common stock of the Company is listed on the American Stock Exchange
and trades under the symbol MRM.
The market price per share information is provided with regard to the high
and low bid prices of the common stock of the Company during the periods
indicated.
-19-
SUBSIDIARIES OF MERRIMAC INDUSTRIES, INC. (the "Company")
Percentage owned
NAME Jurisdiction of Organization by the Company
---- ---------------------------- ----------------
1. Merrimac International, Virgin Islands,
Inc., FSC U.S.A. 100%
2. Merrimac Industries Province of
(Ontario) Ltd. Ontario, Canada 100%
3. Industrias Merrimac
Incorporada, S.A. Costa Rica 100%
4. Merrimac Europe Limited United Kingdom 100%
-1-
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report to the Board of Directors and stockholders of Merrimac Industries,
Inc. included in this Form 10-KSB, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 333-36795, 333-36199, 33-68862,
333-09633 and 2-86405.)
/s/ ARTHUR ANDERSEN LLP
------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 30, 1998
-1-
Exhibit 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in (i) the Registration
Statement on Form S-8 (No. 33-68862) pertaining to the 1993 Stock Option Plan,
(ii) the Registration Statement on Form S-8 (No. 333-09633) pertaining to the
1995 Stock Purchase Plan, (iii) the Registration Statement on Form S-8 (No.
2-86405) pertaining to the 1983 Key Employees' Stock Option Plan, (iv) the
Registration Statement on Form S-8 (No. 333-36795) pertaining to the Long-Term
Incentive Plan and (v) the Registration Statement on Form S-8 (No. 333-36199)
pertaining to the Stock Option Plan for Non-Employee Directors, which were
previously filed by Merrimac Industries, Inc. (the "Company"), of our report on
the consolidated financial statements of the Company and its subsidiaries, dated
February 18, 1997, which report appears elsewhere in this Annual Report on Form
10-KSB for the fiscal year ended January 3, 1998.
/s/ J.H. Cohn LLP
-----------------
J.H. Cohn LLP
Roseland, New Jersey
March 30, 1998
-1-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-3-1998
<PERIOD-END> JAN-3-1998
<CASH> 2,414,725
<SECURITIES> 0
<RECEIVABLES> 3,091,287
<ALLOWANCES> 0
<INVENTORY> 4,508,569
<CURRENT-ASSETS> 11,107,284
<PP&E> 13,856,825
<DEPRECIATION> 9,663,081
<TOTAL-ASSETS> 15,559,804
<CURRENT-LIABILITIES> 2,381,273
<BONDS> 0
0
0
<COMMON> 1,325,566
<OTHER-SE> 11,477,265
<TOTAL-LIABILITY-AND-EQUITY> 15,559,804
<SALES> 18,659,106
<TOTAL-REVENUES> 18,659,106
<CGS> 6,716,187
<TOTAL-COSTS> 6,716,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,157,409
<INCOME-TAX> 755,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,402,409
<EPS-PRIMARY> .91
<EPS-DILUTED> .87
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR YEAR
<FISCAL-YEAR-END> JAN-3-1998 JAN-3-1998 JAN-3-1998 DEC-28-1996
<PERIOD-END> MAR-29-1997 JUN-28-1997 SEP-27-1997 DEC-28-1996
<CASH> 805,583 1,078,166 974,390 1,265,581
<SECURITIES> 1,164,222 1,302,635 1,336,014 1,140,832
<RECEIVABLES> 2,513,098 2,644,391 3,426,988 1,850,042
<ALLOWANCES> 0 0 0 0
<INVENTORY> 4,477,440 4,475,188 4,290,007 4,165,818
<CURRENT-ASSETS> 10,116,658 10,713,187 11,203,522 9,662,083
<PP&E> 12,991,485 13,462,774 13,643,943 12,668,930
<DEPRECIATION> 9,474,989 9,643,221 9,865,592 9,326,688
<TOTAL-ASSETS> 13,706,403 14,707,025 15,151,968 13,081,765
<CURRENT-LIABILITIES> 2,122,349 2,691,939 2,618,979 1,703,643
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 1,294,952 1,304,780 1,319,249 1,292,875
<OTHER-SE> 10,004,572 10,397,915 10,858,111 9,836,147
<TOTAL-LIABILITY-AND-EQUITY> 13,706,403 14,707,025 15,151,968 13,081,765
<SALES> 4,275,155 9,261,443 14,245,236 14,152,970
<TOTAL-REVENUES> 4,275,155 9,261,443 14,245,236 14,152,970
<CGS> 2,375,107 4,976,190 7,710,809 8,240,639
<TOTAL-COSTS> 2,375,107 4,976,190 7,710,809 8,240,639
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 437,746 1,046,846 1,610,861 (491,252)
<INCOME-TAX> 160,000 391,000 605,000 (194,000)
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 277,746 655,846 1,005,861 (297,252)
<EPS-PRIMARY> .18 .43 .66 (.19)
<EPS-DILUTED> .18 .42 .63 (.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-28-1996 DEC-28-1996 DEC-28-1996 DEC-30-1995 DEC-31-1994
<PERIOD-END> MAR-30-1996 JUN-29-1996 SEP-28-1996 DEC-30-1995 DEC-31-1994
<CASH> 2,841,401 1,971,374 2,403,369 2,295,186 789,152
<SECURITIES> 1,272,690 1,259,384 0 2,297,705 3,232,272
<RECEIVABLES> 2,143,630 2,290,997 1,764,444 2,373,181 2,051,653
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 4,397,332 4,657,947 3,895,181 3,920,010 3,647,830
<CURRENT-ASSETS> 11,541,222 11,149,545 9,447,904 11,689,497 10,682,683
<PP&E> 12,045,517 12,235,451 12,679,319 12,085,514 11,911,822
<DEPRECIATION> 9,052,411 9,211,120 9,396,516 8,957,870 8,477,332
<TOTAL-ASSETS> 14,878,297 14,484,876 12,822,558 15,188,512 14,705,444
<CURRENT-LIABILITIES> 1,789,685 1,646,731 1,492,306 1,665,129 1,551,481
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
<COMMON> 1,280,340 1,281,920 1,284,878 1,274,726 1,260,598
<OTHER-SE> 11,653,772 11,401,725 9,667,874 12,094,157 11,751,865
<TOTAL-LIABILITY-AND-EQUITY> 14,878,297 14,484,876 12,822,558 15,188,512 14,705,444
<SALES> 3,187,345 7,112,873 10,110,778 14,396,633 13,592,787
<TOTAL-REVENUES> 3,187,345 7,112,873 10,110,778 14,396,633 13,592,787
<CGS> 1,677,817 3,874,841 5,804,257 7,208,152 6,493,598
<TOTAL-COSTS> 1,677,817 3,874,841 5,804,257 7,208,152 6,493,598
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 381,303 859,252 (984,005) 2,591,066 2,268,196
<INCOME-TAX> 129,000 294,000 (410,000) 939,000 837,000
<INCOME-CONTINUING> 0 0 0 0 0
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 252,303 565,252 (574,005) 1,652,066 1,431,196
<EPS-PRIMARY> .16 .36 (.38) .97 .82
<EPS-DILUTED> .15 .35 (.38) .95 .81
</TABLE>
