<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000 Commission file No. 0-11201
------------------ -----------
MERRIMAC INDUSTRIES, INC.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New Jersey 22-1642321
------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 Fairfield Place, West Caldwell, New Jersey 07006
--------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip code)
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
---------------------------- -------------------------------------------
Common Stock American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
----
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at November 8, 2000
----------------------------- ---------------------------------
Common Stock ($.50 par value) 2,563,001
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, January 1,
2000 2000
------------- -----------
(Unaudited) (Audited)
------------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents ....................... $ 1,342,564 $ 1,108,141
Accounts receivable, net......................... 4,484,213 3,774,796
Inventories ..................................... 3,799,142 2,913,423
Income tax refund receivable..................... 299,425 427,330
Other current assets ............................ 425,023 386,507
Deferred tax assets ............................. 744,000 744,000
----------- -----------
Total current assets ........................ 11,094,367 9,354,197
----------- -----------
Property, plant and equipment ..................... 21,282,771 19,213,264
Less accumulated depreciation ................... 12,468,806 11,337,477
----------- -----------
Property, plant and equipment, net............. 8,813,965 7,875,787
Other assets ...................................... 556,829 563,507
Goodwill, net...................................... 2,800,766 3,047,623
----------- -----------
Total Assets ................................ $23,265,927 $20,841,114
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Current portion of long-term debt ............... $ 624,529 $ 2,627,267
Accounts payable ................................ 2,159,587 1,164,584
Accrued liabilities ............................. 1,273,323 1,311,791
Income taxes payable............................. 263,073 -
----------- -----------
Total current liabilities ................... 4,320,512 5,103,642
Long-term debt, net of current portion ............ 1,598,912 1,769,447
Deferred compensation ............................. 196,366 234,734
Deferred tax liabilities .......................... 232,000 232,000
----------- -----------
Total liabilities ........................... 6,347,790 7,339,823
----------- -----------
Shareholders' equity:
Common stock, par value $.50 per share:
Authorized: 5,000,000 shares
Issued: 2,760,122 and 2,698,309 shares ....... 1,380,061 1,349,154
Additional paid-in capital ...................... 11,745,465 11,256,532
Retained earnings ............................... 9,286,772 9,192,310
Accumulated comprehensive income (loss).......... (60,850) 142,589
----------- -----------
22,351,448 21,940,585
Less treasury stock, at cost:
568,904 and 958,904 shares .................... (4,793,311) (8,079,294)
Less loan to officer-shareholder ................ (640,000) (360,000)
----------- -----------
Total shareholders' equity ................... 16,918,137 13,501,291
----------- -----------
Total Liabilities and Shareholders' Equity ... $23,265,927 $20,841,114
=========== ===========
See accompanying notes.
- 1 -
<PAGE>
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE INCOME
-------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------- -----------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
OPERATIONS ----------------------- ------------------------
<S> <C> <C> <C> <C>
Net sales ................................... $6,437,186 $5,328,250 $16,297,983 $15,192,026
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales ............................. 3,302,496 2,694,482 8,343,319 7,847,373
Selling, general and administrative ....... 2,230,958 1,781,770 5,948,119 4,962,339
Research and development .................. 483,877 577,410 1,332,658 1,523,728
Amortization of goodwill................... 41,563 39,340 119,557 90,914
Restructuring charge....................... - - 315,000 -
--------- ---------- ----------- -----------
6,058,894 5,093,002 16,058,653 14,424,354
---------- ---------- ----------- -----------
Operating income............................. 378,292 235,248 239,330 767,672
Interest and other expense, net ............. 9,148 65,540 114,868 145,079
---------- ---------- ----------- -----------
Income before income taxes .................. 369,144 169,708 124,462 622,593
Provision for income taxes .................. 150,000 60,000 30,000 218,000
---------- ---------- ----------- -----------
Net income................................... $ 219,144 $ 109,708 $ 94,462 $ 404,593
========== ========== =========== ===========
Net income per common share:
Basic...................................... $ .10 $.06 $ .05 $ .23
===== ==== ===== =====
Diluted.................................... $ .09 $.06 $ .04 $ .23
===== ==== ===== =====
Weighted average number of
shares outstanding:
Basic...................................... 2,186,015 1,741,327 2,021,057 1,749,739
========== ========== ========= =========
Diluted.................................... 2,379,028 1,771,825 2,171,314 1,776,321
========== ========== ========= =========
COMPREHENSIVE INCOME
Net income................................... $ 219,144 $ 109,708 $ 94,462 $ 404,593
Other comprehensive income, net of tax:
Foreign currency translation adjustments... (87,694) (37,464) (203,439) (31,733)
---------- ---------- --------- ---------
Comprehensive income (loss).................. $ 131,450 $ 72,244 $(108,977) $372,860
========== ========== ========= =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
MERRIMAC INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
Nine Months Ended
--------------------------
September 30, October 2,
2000 1999
------------ ----------
Cash flows from operating activities:
Net income......................................... $ 94,462 $ 404,593
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 1,365,693 1,164,823
Amortization of goodwill ...................... 119,557 90,914
Deferred compensation ......................... 9,904 12,261
Changes in operating assets and liabilities
net of acquisition in 1999:
Accounts and income taxes receivable......... (580,528) 631,964
Inventories.................................. (885,720) (306,973)
Other current assets......................... (38,506) (247,757)
Deferred tax assets.......................... - (1,000)
Other assets................................. 5,694 (23,594)
Accounts payable............................. 994,993 57,421
Accrued liabilities.......................... 147,032 (334,758)
Income taxes payable......................... 263,074 234,546
Deferred compensation........................ (233,772) (238,468)
Loan to officer-shareholder.................. (280,000) -
---------- ----------
Net cash provided by operating activities............ 981,883 1,443,972
---------- ----------
Cash flows from investing activities:
Purchase of capital assets......................... (2,321,781) (1,716,694)
Proceeds from sales of capital assets.............. 17,909 -
Acquisition of business............................ - (4,673,794)
Cash acquired with acquisition..................... - 203,323
---------- ----------
Net cash used in investing activities................ (2,303,872) (6,187,165)
---------- ----------
Cash flows from financing activities:
Borrowing under term loan.......................... - 2,500,000
Borrowing under revolving credit facility.......... - 2,500,000
Borrowing under lease facility..................... 343,500 -
Debt assumed with acquisition...................... - 451,126
Repayment of borrowings............................ (2,516,772) (1,466,290)
Proceeds from the issuance of common stock, net.... 3,277,548 -
Proceeds from the exercise of stock options........ 528,275 35,397
Repurchase of common stock for the treasury ....... - (345,423)
---------- ----------
Net cash provided by financing activities............ 1,632,551 3,674,810
---------- ----------
Effect of exchange rate changes...................... (76,139) (13,009)
---------- ----------
Net increase (decrease) in cash and cash equivalents. 234,423 (1,081,392)
Cash and cash equivalents at beginning of year....... 1,108,141 1,852,666
---------- ----------
Cash and cash equivalents at end of period........... $1,342,564 $ 771,274
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes..................................... $ 41,000 $ 139,000
========== ==========
Loan interest.................................... $ 209,441 $ 220,224
========== ==========
See accompanying notes.
-3-
<PAGE>
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and footnote disclosures otherwise required by
Regulation S-B. The financial statements do, however, reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the financial position of the Company as of September 30, 2000 and its results
of operations and cash flows for the periods presented. Results of operations of
interim periods are not necessarily indicative of results for a full year. These
financial statements should be read in conjunction with the audited consolidated
financial statements in the Company's Annual Report on Form 10-KSB for January
1, 2000. Certain prior year amounts have been reclassified in order to conform
to current-year presentation.
B. Acquisition of Filtran Microcircuits Inc.
In February 1999, the Company completed the acquisition of all of the
outstanding stock of privately held Filtran Microcircuits Inc. ("FMI") of
Ottawa, Ontario, Canada. FMI, which had 1998 sales of approximately $3.2
million, is a manufacturer of microwave micro-circuitry. The purchase price of
approximately $4,700,000, which included $203,000 cash acquired and included the
assumption of $451,000 existing indebtedness, was financed by utilizing an
existing unused credit facility. The acquisition has been accounted for as a
purchase, and, accordingly, the purchase price has been allocated to the
underlying assets and liabilities based on their estimated fair values at the
date of the acquisition, with the excess cost of $3,179,000 recorded as goodwill
which is being amortized over 20 years.
The unaudited pro forma combined results for the comparative period
presented for 1999, as if FMI had been acquired at the beginning of
1999, are estimated to be as follows:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
October 2,
1999
-----------------
<S> <C>
Net sales........................ $15,822,000
Net income....................... 364,000
Diluted net income per share..... $.20
</TABLE>
The pro forma results are based on various assumptions and are not
necessarily indicative of what would have actually occurred had the acquisition
and related financing transactions been completed at the beginning of last year,
nor are they necessarily indicative of future consolidated results.
C. Inventories
Inventories consist of the following:
September 30, January 1,
2000 2000
------------ -----------
Finished goods ...................... $ 393,899 $ 666,186
Work in process ..................... 1,798,737 1,004,037
Raw materials and purchased parts ... 1,606,506 1,243,200
---------- ----------
Total $3,799,142 $2,913,423
========== ==========
Total inventories are net of valuation allowances for obsolescence of
$1,307,000 at September 30, and $1,166,000 at January 1, 2000.
-4-
<PAGE>
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. Net income (loss) per common 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 per
common share. Under the standard, both basic and diluted net income per common
share are presented.
Basic net income per common share is calculated by dividing net income,
less dividends on preferred stock, if any, by the weighted average common shares
outstanding during the period.
The calculation of diluted net income per common share is similar to that
of basic net income per common share, except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, principally those
issuable under stock options, were issued during the reporting period.
E. Comprehensive income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 defines comprehensive income, which includes items in addition
to those reported in the statement of operations, and requires disclosures about
the components of comprehensive income. Comprehensive income includes all
changes in shareholders' equity during a period except those resulting from
investments by or distributions to shareholders. The Company has determined that
the components of other comprehensive income impacting the Company consists
primarily of foreign currency translation adjustments.
F. Accounting period
The Company's fiscal year is the 52-53 week period ending on the Saturday
closest to December 31. The Company has quarterly dates that correspond with the
Saturday closest to the last day of each calendar quarter and each quarter
consists of 13 weeks in a 52-week year. Every fifth year, the additional week to
make a 53-week year (fiscal year 1997 was the last and fiscal year 2002 will be
the next) is added to the fourth quarter, making such quarter consist of 14
weeks.
G. Transactions with management and loan to officer-shareholder
On May 4, 1998, the Company sold 20,000 (22,000 after giving effect to the
Company's 10% stock dividend on June 5, 1998) shares of Common Stock from its
treasury to Mason N. Carter, Chairman, President and Chief Executive Officer of
the Company, at a price of $12.75 per share (the approximate average closing
price of the Company's Common Stock during the first quarter of 1998). The
Company extended Mr. Carter a loan of $255,000 in connection with the purchase
of these shares and amended a prior loan to Mr. Carter of $105,000. A new
promissory note for a total of $360,000, due May 4, 2003, with interest payments
due quarterly (except as provided below), calculated at a variable interest rate
based on the prime rate of the Company's lending bank, was executed by Mr.
Carter in favor of the Company. Payment of interest accrued from November 1998
until November 1999, however, will be deferred until the end of the term of the
new promissory note. Payment of the loan is secured by the pledge of the 33,000
shares of Common Stock that were purchased by Mr. Carter with the proceeds of
the loans. The sale of these shares of Common Stock was exempt from registration
under the Securities Act of 1933, as amended ("the Act"), as a transaction not
involving a public offering under Section 4 (2) of the Act.
-5-
<PAGE>
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is party to an employment agreement with its Chairman,
President and Chief Executive Officer ("executive") that provides him a minimum
annual salary of $240,000. The initial term of the agreement ends on December
31, 2002 and automatically renews for successive twelve-month periods thereafter
unless terminated pursuant to the terms of the agreement.
The Company's Board of Directors and the executive agreed to amend the
employment agreement effective August 31, 2000, by extending the initial term of
the agreement by five years to December 31, 2007, with automatic twelve-month
periods thereafter. In connection with the agreement amendment, the Company
loaned the executive $280,000 with interest calculated at a variable interest
rate based on the prime rate of the Company's lending bank, payable annually. In
addition, the executive will receive an annual special bonus on the next five
anniversaries of the agreement amendment's effective date, in the form of
forgiveness of a portion of the principal of and the interest on the loan. Each
special bonus shall be in the sum of (i) $56,000 and (ii) an amount equal to the
accrued interest on the loan, which should aggregate approximately $82,000 in
the next fiscal year.
H. Current and Long-term debt
The Company was obligated under the following debt instruments at September
30 and January 1, 2000:
<TABLE>
<CAPTION>
September 30, January 1,
2000 2000
---------- ----------
<S> <C> <C>
Summit Bank:
Revolving credit facility, interest 1/2% below prime,
due September 2000..................................... $ - $2,000,000
Term loan, interest 1/2% below prime, due December 2003..... 1,666,667 2,041,667
The Bank of Nova Scotia:
Equipment loans, interest prime plus 1%, due November 2000.. 6,700 56,042
Capital leases, interest 7.0%, due October 2003............. 227,824 299,005
Capital leases, interest 8.7%, due May 2005................. 322,250 -
---------- ----------
2,223,441 4,396,714
Less current portion........................................ 624,529 2,627,267
---------- ----------
Long-term portion........................................... $1,598,912 $1,769,447
========== ==========
</TABLE>
The Company has entered into a $7,000,000 revolving credit and term loan
agreement with Summit Bank. Up to $4,500,000 was available as of September 30,
2000 for future borrowing needs of the Company.
The Company has extended its revolving credit facility due date to June
2001. The full amount outstanding of the revolving credit facility was repaid
April 7, 2000.
The term loan is secured by $2,500,000 of tangible personal property and
the equipment loans are covered by a general security agreement. The revolving
credit facility is unsecured.
At September 30 and January 1, 2000, the fair value of the Company's debt
approximates carrying value. The fair value of the Company's long-term debt is
estimated based on current interest rates.
Capital leases included in property, plant and equipment have a depreciated
cost of approximately $426,000 at September 30 and $138,000 at January 1, 2000.
-6-
<PAGE>
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. Restructuring and related charges
As a result of accelerating the transfer of increased levels and complexity
of production to the Company's Costa Rica manufacturing facility, the Company
implemented a reduction of its workforce and provided severance benefits to
certain employees during the first quarter of 2000. The restructuring charge for
the first quarter of 2000 was $315,000, and charges net of tax benefits of
$189,000 or $.10 per diluted share. The reduction in workforce affected fifteen
persons, primarily electronic components manufacturing labor, and the full
amount of the restructuring charge has been paid.
J. Stock Purchase and Exclusivity Agreement
The Company entered into a stock purchase and exclusivity agreement on
April 7, 2000 with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson
Holding International, B.V. ("EHI") pursuant to which the Company sold to EHI
375,000 shares of Company Common Stock from its treasury, representing
approximately 17.5% of the Company's outstanding common stock after giving
effect to the sale, for an aggregate cash purchase price of $3,375,000. The
stock purchase and exclusivity agreement also provides that the Company will
design, develop and produce exclusively for Ericsson Multi-Mix(TM) products that
incorporate active RF power transistors for use in wireless base station
applications, television transmitters and certain other applications that are
intended for Bluetooth transceivers and that the Company will generally be the
priority supplier for such products. Accordingly, Ericsson will receive first
priority on all Multi-Mix(TM) resources of the Company and will have priority
access to FMI's proprietary technology and manufacturing capabilities.
In connection with EHI's purchase of Company Common Stock, the Company and
EHI also entered into a registration rights agreement which provides EHI with
two demand registrations at any time following April 7, 2002.
K. Subsequent event
On October 26, 2000, the Company entered into subscription agreements for
common stock and warrants with each of three groups of investors including (i)
investors led by Adam Smith Investment Partners, L.P. and certain of its
affiliates (the "Adam Smith Investors"), (ii) Ericsson Holding International,
B.V. ("EHI") and (iii) three members of the board of directors of the Company
(the "Director Investors"). Pursuant to the subscription agreements, The Company
sold to the investors units at a price of $12.80 per unit, each unit consisting
of one share of common stock of the Company and one three-year warrant to
purchase one additional share of common stock of the Company with an exercise
price of $21.25 ("Units"). Pursuant to the subscription agreements, the Adam
Smith Investors purchased 240,000 Units, EHI purchased 100,000 Units and the
Director Investors purchased 20,000 Units, the common stock portion of which
representing approximately 14% of the outstanding stock of the Company after
giving effect to the sales, for an aggregate cash price of $4,608,000.
In connection with the purchase by the Adam Smith Investors and EHI of
Merrimac common stock and warrants, the Company, the Adam Smith Investors and
EHI also entered into registration rights agreements which provide the Adam
Smith Investors and EHI each with two demand registrations at any time following
October 26, 20
-7-
<PAGE>
MERRIMAC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. Pro forma weighted average number of common shares outstanding
Had the sales of 375,000 shares of Company Common Stock on April 7 and
360,000 Units on October 26, 2000 referred to in Notes J. and K. occurred at the
beginning of the year, the pro forma basic and diluted weighted average number
of common shares outstanding would have been:
Quarter Nine Months
---------------------------
Ended September 30, 2000
---------------------------
Basic:
Actual 2,186,015 2,021,057
Sales of:
Common stock, April 7, 2000 - 131,868
Units, October 26, 2000 (a) 360,000 360,000
--------- ---------
Basic - pro forma 2,546,015 2,512,925
Effect of dilutive securities-
Stock options 193,013 150,257
--------- ---------
Diluted - pro forma 2,739,028 2,663,182
========= =========
(a) There is no pro forma dilutive impact from the common stock warrants
included in the Units, as the warrant exercise price of $21.25 exceeds the per
share market value of the Company's common stock.
M. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards
requiring that all derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as an
asset or liability and measured at its fair value. In June 1999, the Financial
Accounting Standards Board issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133 an amendment of FASB Statement No.
133," which defers implementation of Statement No. 133 until fiscal years
beginning after June 15, 2000. The Company has reviewed Statement No. 133 and
has not yet determined the impact, timing of or method to be used in adopting
this statement.
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS SUMMARY
-------------------------------
(Unaudited)
-----------
The following table displays line items in the Consolidated Statements of
Operations as a percentage of net sales.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage of Net Sales
------------------------ --------------------------
Third Quarter Year to Date
------------------------ --------------------------
Thirteen Weeks Ended Nine Months Ended
------------------------ --------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses:
Cost of sales.............................. 51.3 50.6 51.2 51.7
Selling, general and administrative........ 34.7 33.4 36.5 32.6
Research and development................... 7.5 10.8 8.2 10.0
Amortization of goodwill................... .6 .8 .7 .6
Restructuring charge....................... - - 1.9 -
------ ------ ------ ------
94.1 95.6 98.5 94.9
------ ------ ------ ------
Operating income............................. 5.9 4.4 1.5 5.1
Interest and other expense, net.............. .2 1.2 .7 1.0
------ ------ ------ ------
Income before income taxes................... 5.7 3.2 .8 4.1
Provision for income taxes................... 2.3 1.1 .2 1.4
------ ------ ------ ------
Net income................................... 3.4% 2.1% .6% 2.7%
====== ====== ====== ======
</TABLE>
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Third quarter and nine months 2000 compared to third quarter and nine
months 1999
Consolidated results of operations for the third quarter 2000 reflect a
20.8% increase in net sales of $1,109,000 to $6,437,000 and an increase in
operating income of $143,000 to $378,000. Net income of $219,000 was recorded
for the third quarter 2000 compared to $110,000 reported for the third quarter
of the prior year. Diluted net income per share was $.09 for the third quarter
2000 compared to diluted net income per share of $.06 reported for the third
quarter of the prior year.
Consolidated results of operations for the first nine months of 2000
reflected an increase in net sales of $1,106,000 to $16,298,000 and operating
income of $239,000, after a restructuring charge of $315,000, compared to
operating income of $768,000 for the first nine months of the prior year. Net
income of $94,000 was recorded for the first nine months of 2000, after the
$189,000 net effects of the first quarter restructuring charge. Net income of
$405,000 was reported for the first nine months of the prior year. Diluted net
income per share for the first nine months of 2000 was $.04, reflecting the
first quarter restructuring charge of $.09 per diluted share. Diluted net income
per share of $.23 was reported for the first nine months of the prior year.
The increase in third quarter 2000 consolidated net sales of $1,109,000 was
attributable to an increase in electronic components shipments of $576,000 or
11.9%, resulting from a higher firm order backlog that existed as of the
beginning of this fiscal quarter, and an increase in microwave micro-circuitry
product net sales from the Company's Filtran Microcircuits Inc. ("FMI")
subsidiary of $533,000 or 49.7% over net sales reported in the third quarter of
the prior year.
The increase in consolidated net sales of $1,106,000 for the first nine
months of 2000 was partly attributable to a reduction in electronic components
shipments of $750,000 or 5.9%, resulting from a smaller firm order backlog that
existed as of the beginning of this fiscal year, which was offset by the
inclusion of microwave micro-circuitry product net sales of $4,345,000 from FMI,
which was acquired on February 25, 1999, an increase of $1,856,000 compared to
the net sales amount of $2,489,000 included in the results of the first nine
months of the prior year from the date of FMI's acquisition.
Orders of $7,345,000 were received for the third quarter 2000, an increase
of $2,900,000 or 65.2% compared to $4,445,000 in orders received for the third
quarter of 1999. Third quarter 2000 sales orders included $1,372,000 in new
orders for FMI. The backlog at the end of the third quarter 2000 was
$11,747,000, an increase of $5,629,000 or 92.0% over year-end 1999, and an
increase of $3,773,000 or 47.3.0% when compared to the third quarter 1999
backlog. Orders received during the third quarter were 14.1% above the third
quarter 2000 sales level. Orders received for the first nine months 2000 of
$21,927,000 increased $4,928,000 or 29.0% compared to $16,999,000 in orders
received for the first nine months of 1999, which exceeded the nine months 2000
sales level by 34.5%. Sales orders for the first nine months 2000 included
$5,817,000 in new orders for FMI.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cost of sales increased $608,000 or 22.6%, and as a percentage of net sales
increased 0.7% to 51.3% for the third quarter 2000. The increase in quarterly
cost of sales is primarily related to the increase in sales volume. For the
first nine months 2000, cost of sales increased $496,000 or 6.3%, and as a
percentage of net sales decreased 0.5% to 51.2%. Additional reductions were
achieved from manufacturing efficiencies attributable to a reduction in direct
labor and manufacturing overhead costs, partly related to the increasing
transfer of production to the Costa Rica manufacturing facility, and other
manufacturing cost improvements resulting from the first quarter 2000
restructuring. Depreciation expense increased $67,000 for the third quarter 2000
and $201,000 for the first nine months of 2000 resulting from higher capital
equipment purchases in the current and prior years and the inclusion of
depreciation expense from FMI.
Gross profit for the electronic components segment of $2,316,000 was 47.7%
of segment net sales of $4,832,000 in the third quarter 2000 compared to
$2,148,000, which was 50.5% of segment net sales of $4,256,000 in the third
quarter of 1999. The percentage of gross profit margin declined 2.8 percentage
points although the gross profit amount increased $168,000 or 7.8% because of
the increase in this segment's sales. Gross profit for the microwave
micro-circuitry segment was $819,000 or 51.0 % of segment net sales of
$1,605,000 in the third quarter 2000 compared to $486,000 or 45.4% of segment
net sales of $1,072,000 in the third quarter of 1999, resulting from the
increase in this segment's sales.
Gross profit for the electronic components segment of $5,873,000 was 48.9%
of segment net sales of $11,953,000 for the first nine months 2000 compared to
$6,249,000, which was 49.2% of segment net sales of $12,703,000 in the first
nine months of 1999. The percentage of gross profit margin declined by 0.3
percentage points, and the gross profit amount decreased $376,000 or 6.0%
because of the decline in sales. Gross profit for the microwave micro-circuitry
segment was $2,082,000 or 47.9 % of segment net sales of $4,345,000 for the
first nine months of 2000 compared to $1,096,000 or 44.0% of the 1999 period's
segment net sales of $2,489,000 included in the results of the first nine months
of 1999 from the date of FMI's acquisition.
Selling, general and administrative expenses of $2,231,000 for the third
quarter 2000 increased $449,000 or 25.2%, and when expressed as a percentage of
net sales, increased 1.3% to 34.7%. These increases included an increase of
$100,000 from FMI to $279,000 for the third quarter 2000 compared to $179,000
that was included in third quarter of 1999, increased sales commission expenses
and other increases that were related to new product samples activity, and
higher selling and marketing expenses in connection with the Company's new
Multi-Mix(TM) Microtechnology product line.
Selling, general and administrative expenses of $5,948,000 for the first
nine months 2000 increased $986,000 or 19.9%, and when expressed as a percentage
of net sales, increased 3.9% to 36.5%. These increases included an increase of
$316,000 from FMI to $728,000 for the first nine months 2000 compared to
$412,000 included in the results of the first nine months of 1999 from the date
of FMI's acquisition, resulting from increased sales commission expenses and
other increases that were related to new product samples activity, and higher
selling and marketing expenses in connection with the Company's new
Multi-Mix(TM) Microtechnology product line.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Amortization expense of $42,000 for the third quarter of 2000 is
attributable to goodwill arising from the acquisition of FMI, which is being
amortized on a straight-line basis over a life of twenty years compares to last
year's quarterly expense. Amortization expense of $120,000 for the first nine
months of 2000 compares to last year's short post-acquisition period
amortization expense of $91,000.
Research and development expenses for new products were $484,000 for the
third quarter 2000, a decrease of $94,000 or 16.2% compared to the third quarter
of the prior year. Except for $78,000 at FMI, most of the research and
development expenses were for Multi-Mix(TM) Microtechnology. Research and
development expenses for new products were $1,333,000 for the first nine months
2000, a decrease of $191,000 or 12.5% compared to the first nine months of the
prior year. Except for $237,000 at FMI, most of the research and development
expenses were for Multi-Mix(TM) Microtechnology.
The operating loss for the electronic components segment was $43,000 in the
third quarter 2000 compared to operating income of $104,000 or 2.5% of segment
net sales in the third quarter of 1999. Operating income for the microwave
micro-circuitry segment was $421,000 or 26.2% of this segment's net sales
compared to operating income of $131,000 or 12.2% in the third quarter of 1999.
The restructuring charge of $315,000 relates to severance and certain other
costs incurred for the termination of fifteen persons during the first quarter
of fiscal 2000, of which $296,000 was related to the electronic components
segment and $19,000 was related to the microwave micro-circuitry segment. The
operating loss after the restructuring charge for the electronic components
segment was $739,000 in the first nine months 2000 compared to operating income
of $475,000 or 3.7% of segment net sales in the first nine months of 1999.
Operating income after the restructuring charge for the microwave
micro-circuitry segment was $978,000 or 22.5% of this segment's net sales
compared to operating income of $293,000 or 11.8% in the first nine months of
1999.
Interest expense, net was $9,000 for the third quarter 2000 compared to
$66,000 for the third quarter of last year and was principally incurred on
borrowings under a term loan and revolving credit facility in connection with
the acquisition of FMI during the first quarter of 1999, which was partially
offset by interest income that arose from proceeds related to the issuance of
common stock. Interest expense, net was $115,000 for the first nine months of
2000 compared to $145,000 for the first nine months of last year.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company had liquid resources comprised of cash and cash equivalents
totaling approximately $1,300,000 at the end of third quarter of 2000 compared
to approximately $1,100,000 at year-end of 1999. The Company's working capital
was approximately $6,800,000 and its current ratio was 2.6 at the end of the
third quarter of 2000 which compared to $4,200,000 and 1.8, respectively, at the
end of 1999. Current liabilities at year-end 1999 included $2,000,000 of
indebtedness under a revolving credit facility, which the Company repaid on
April 7, 2000.
The Company's operating activities provided cash flows of $981,000 in the
first nine months of 2000 compared to $1,444,000 in the first nine months of
1999. The primary reasons for the reduction in operating cash flows are due to a
decrease in net income, increases in accounts receivable, which was offset by
increases in accounts payable, income taxes payable, accrued liabilities and
higher depreciation and amortization charges. The Company made investments in
property, plant and equipment of $2,304,000 in the first nine months of 2000
compared to $1,717,000 in the first nine months of 1999. These capital
expenditures are related to new production and test equipment capabilities in
connection with the introduction of new products and enhancements to existing
products.
The Company has a $7,000,000 revolving credit and term loan agreement with
Summit Bank with an interest rate at one-half percent below the bank's floating
prime rate. The Company borrowed $2,500,000 for capital expenditures under the
term loan facility and $2,000,000 under its revolving credit facility in
connection with the acquisition of FMI during the first quarter of 1999. The
$2,000,000 outstanding under the revolving credit facility was repaid on April
7, 2000. The full amount of $4,500,000 of the revolving credit facility is
available for working capital and general corporate purposes.
Management believes that the Company's $4,500,000 revolving credit
facility, which has been extended to June 2001, together with its present liquid
resources and cash flows expected to be provided by operations, will be
sufficient resources for currently contemplated operations in fiscal year 2000.
The Company entered into a stock purchase and exclusivity agreement on
April 7, 2000 with Ericsson Microelectronics, A.B. ("Ericsson") and Ericsson
Holding International, B.V. ("EHI") pursuant to which the Company sold to EHI
375,000 shares of Company Common Stock from its treasury, representing
approximately 17.5% of the Company's outstanding common stock after giving
effect to the sale, for an aggregate cash purchase price of $3,375,000.
On October 26, 2000, the Company entered into subscription agreements for
common stock and warrants with each of three groups of investors including (i)
investors led by Adam Smith Investment Partners, L.P. and certain of its
affiliates (the "Adam Smith Investors"), (ii) Ericsson Holding International,
B.V. ("EHI") and (iii) three members of the board of directors of the Company
(the "Director Investors"). Pursuant to the subscription agreements, The Company
sold to the investors units at a price of $12.80 per unit, each unit consisting
of one share of common stock of the Company and one three-year warrant to
purchase one additional share of common stock of the Company with an exercise
price of $21.25 ("Units"). Pursuant to the subscription agreements, the Adam
Smith Investors purchased 240,000 Units, EHI purchased 100,000 Units and the
Director Investors purchased 20,000 Units, the common stock portion of which
representing approximately 14% of the outstanding stock of the Company after
giving effect to the sales, for an aggregate purchase price of $4,608,000.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In connection with the purchase by the Adam Smith Investors and EHI of
Merrimac common stock and warrants, the Company, the Adam Smith Investors and
EHI also entered into registration rights agreements which provide the Adam
Smith Investors and EHI each with two demand registrations at any time following
October 26, 2002.
The Company's capital expenditures for new projects and production
equipment has exceeded its depreciation and amortization expenses in fiscal
2000. The Company has issued purchase order commitments to processing equipment
vendors for approximately $1,500,000 of capital equipment and building
improvements. The Company anticipates that such equipment will be purchased and
become operational and building improvements will be completed during fiscal
2000.
The Company has been authorized by its Board of Directors to repurchase up
to 110,000 shares (adjusted for the 10% stock dividend on June 5, 1998) of its
common stock, from time to time, depending on market conditions, and has
repurchased approximately 68,000 shares of common stock to date. During 1999,
the Company repurchased 56,000 shares of common stock at a cost of $346,000. The
Company repurchased 8,000 shares of common stock during 1998, no shares during
1997, and 4,000 shares in 1996. The Company is authorized to repurchase up to
42,000 additional shares under the program. No shares have been repurchased
during fiscal 2000.
Periodically, the Company explores the possibility of acquiring similar
manufacturers of electronic devices or companies in related fields. 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. In February 1999, the Company acquired Filtran Microcircuits
Inc. See Note B of Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards
requiring that all derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as an
asset or liability and measured at its fair value. In June 1999, the Financial
Accounting Standards Board issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133, an amendment of FASB No. 133," which
defers implementation of Statement No. 133 until fiscal years beginning after
June 15, 2000. The Company has reviewed Statement No. 133 and has not yet
determined the impact, timing of or method to be used in adopting this
statement.
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to: general economic and industry conditions;
slower than anticipated penetration into the satellite communications, defense
and wireless markets; the risk that the benefits expected from the acquisition
of Filtran Microcircuits Inc. are not realized; the ability to protect
proprietary information and technology; competitive products and pricing
pressures; risks relating to governmental regulatory actions in communications
and defense programs; and inventory risks due to technological innovation, as
well as other risks and uncertainties, including but not limited to those
detailed from time to time in the Company's Securities and Exchange Commission
filings. These forward-looking statements are made only as of the date hereof,
and the Company undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or otherwise.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No.
-----------
3(a) By-laws of Merrimac, as amended, is hereby incorporated by
reference to Exhibit 3(a)(2) to Merrimac's Quarterly Report
on Form 10-QSB dated August 12, 1999.
3(b) Restated Certificate of Incorporation of Merrimac filed on
June 14, 1999 is hereby incorporated by reference on Exhibit
3(b)(2) to Merrimac's Quarterly Report on Form 10-QBS dated
August 12, 1999.
4(a) Shareholder Rights Agreement dated as of March 9, 1999 between
Merrimac and ChaseMellon Shareholder Services, L.L.C., as
rights agent, is hereby incorporated by reference to Exhibit 1
to Merrimac's Current Report on Form 8-K dated March 9, 1999.
4(b) Amendment No. 1 dated as of June 9, 1999 to the Shareholder
Rights Agreement dated as of March 9, 1999 between Merrimac
and ChaseMellon Shareholder Services, L.L.C., as rights agent,
is hereby incorporated by reference to Exhibit1 to Merrimac's
Current Report on Form 8-K dated June 9, 1999.
4(c) Amendment No. 2 dated as of April 7, 2000 to the Shareholder
Rights Agreement dated as of March 9, 1999 between Merrimac
and ChaseMellon Shareholder Services, L.L.C., as rights agent,
is hereby incorporated by reference to Exhibit 2 to
Merrimac's Current Report on Form 8-K dated April 10, 2000.
10(a) Amendment dated as of August 31, 2000 to the Amended and
Restated Employment Agreement, entered into as of January 1,
1998, by and between Merrimac Industries, Inc.
and Mason N. Carter.*
11 Statement re: Computation of earnings per share.
27 Financial Data Schedule for the Third Quarter Ended
September 30, 2000.
(b) Reports on Form 8-K.
A Current Report on Form 8-K was filed on August 11, 2000 reporting
Merrimac's results of operations for the second quarter of fiscal 2000.
* 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: November 10, 2000 By: /s/ Mason N. Carter
-------------------------------------
Mason N. Carter
Chairman, President and
Chief Executive Officer
Date: November 10, 2000 By: /s/ Robert V. Condon
-------------------------------------
Robert V. Condon
Vice President, Finance, Treasurer,
Secretary and Chief Financial Officer
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<PAGE>
Sequentially
Numbered Page
Exhibit No.
3(a) By-laws of Merrimac, as amended, is hereby
incorporated by reference to Exhibit 3(a)(2) to
Merrimac's Quarterly Report on Form 10-QSB dated
August 12, 1999.
3(b) Restated Certificate of Incorporation of Merrimac
filed on June 14, 1999 is hereby incorporated by
reference to Exhibit 3(b)(2) to Merrimac's
Quarterly Report on Form 10-QSB dated August 12,
1999.
4(a) Shareholder Rights Agreement dated as of March 9,
1999 between Merrimac and ChaseMellon Shareholder
Services, L.L.C., as rights agent, is hereby
incorporated by reference to Exhibit 1 to
Merrimac's Current Report on Form 8-K dated March
9, 1999.
4(b) Amendment No. 1 dated as of June 9, 1999 to the
Shareholder Rights Agreement dated as of March 9,
1999 between Merrimac and ChaseMellon Shareholder
Services, L.L.C., as rights agent, is hereby
incorporated by reference to Exhibit 1 to
Merrimac's Current Report on Form 8-K dated June
9, 1999.
4(c) Amendment No. 2 dated as of April 7, 2000 to the
Shareholder Rights Agreement dated as of March 9,
1999 between Merrimac and ChaseMellon Shareholder
Services, L.L.C., as rights agent, is hereby
incorporated by reference to Exhibit 2 to
Merrimac's Current Report on Form 8-K dated April
10, 2000.
10(a) Amendment dated as of August 31, 2000 to the Amended
and Restated Employment Agreement, entered into as of
January 1, 1998, by and between Merrimac Industries,
Inc. and Mason N. Carter.*
11 Statement re: Computation of earnings per share.
27 Financial Data Schedule for the Third Quarter Ended
September 30, 2000.
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