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 1, 2000
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Commission file number 0-11201
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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 (I.R.S. Employer Identification No.)
of 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
Securitiesregistered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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. ( X )
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State registrant's revenues for its most recent fiscal year: $20,397,000
The aggregate market value of voting stock held by non-affiliates based
upon the average price of such stock as quoted on The American Stock Exchange on
March 24, 2000, was $13,800,000. Shares of Common Stock held by each executive
officer and director have been excluded in that such persons may be deemed to be
affiliates.
Registrant's Common Stock outstanding at March 24, 2000, was 1,762,063
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for Fiscal
Year Ended January 1, 2000, are incorporated into Parts I and II of Form 10-KSB.
Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Shareholders are incorporated into Part III of Form 10-KSB.
Exhibit index on page 12.
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CAUTIONARY STATEMENT
This Annual Report on Form 10-KSB contains statements relating to
future results of Merrimac (including certain projections and business trends)
that are "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. 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 Merrimac's Securities and
Exchange Commission filings. These forward-looking statements are made only as
of the date hereof, and Merrimac undertakes no obligation to update or revise
the forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Merrimac Industries, Inc. ("Merrimac" or the "Company") 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,
military 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.
In 1998, Merrimac introduced Multi-Mix(TM) Microtechnology to the
marketplace. Multi-Mix(TM) is an enabling technology that employs
three-dimensional designs of multiple circuit layers bonded together using a
fusion bonding process to help build components and subassemblies at a fraction
of the size, weight and cost of conventional microstrip and stripline products.
In February 1999, Merrimac completed the acquisition of all the
outstanding stock of Filtran Microcircuits Inc. ("FMI"), a manufacturer of
microwave micro circuitry. FMI produces technically intricate microstrip, banded
stripline and thick metal-backed Teflon(R) circuits for satellite, aerospace,
telecommunications, automotive adaptive cruise control, navigation and defense
applications worldwide. Merrimac acquired FMI to enable Merrimac to incorporate
FMI's competency in fine line etching into Multi Mix(TM) Microtechnology and
accelerate Merrimac's penetration into the satellite communications, defense and
wireless markets. FMI is operated as a wholly owned subsidiary of Merrimac.
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Merrimac was originally incorporated as Merrimac Research and
Development, a New York corporation, in 1954. Merrimac Industries was
reincorporated as a New Jersey corporation in 1994.
DESCRIPTION OF BUSINESSES
Core Business
In 1998, Merrimac introduced Multi-Mix(TM) Microtechnology, a new
innovative process for microwave, multilayer integrated circuits and
micro-multifunction modules (MMFM(TM)) and subsystems. This process is based on
fluoropolymer composite substrates, which are bonded together into a multilayer
structure using a fusion bonding process. The fusion process provides a
homogeneous dielectric medium for superior electrical performance at microwave
frequencies. This 3-dimensional Multi-Mix design consisting of stacked circuit
layers permits the manufacture of components and subsystems that are a fraction
of the size and weight of conventional microstrip and stripline products.
Merrimac 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.
Merrimac'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 reduced number
of connectors, cases and headers. Merrimac's components range in price from $20
to $10,000 and its subsystems range from $500 to more than $100,000.
Merrimac has traditionally developed and offered for sale products
built to specific customer needs, as well as, standard catalog items.
Approximately 31% of 1999 revenues were derived from initial orders for products
custom designed for specific customer applications, 50% from repeat orders for
such products and 19% from catalog sales.
Merrimac maintains a current electronic catalog on its Internet
website. The Merrimac catalog includes hundreds of standard components, and
provides a selection 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
and other features are tailored for a specific customer application.
Merrimac's strategy is to be a reliable supplier of high quality,
technically innovative signal processing products. Merrimac coordinates its
marketing, research and development, and manufacturing operations to develop new
products and expand its markets. Merrimac's marketing and development activities
focus on identifying and producing prototypes for new military and commercial
programs and applications in aerospace, navigational systems, telecommunications
and cellular analog and digital wireless telecommunications electronics.
Merrimac's research and development efforts are targeted towards providing
customers with more complex, reliable, and compact products at lower costs.
Today, the major aerospace companies purchase from Merrimac components
and subsystems that include many complex I&Q networks, quadraphase modulators
and antenna beamformers.
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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
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 Merrimac'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 the discussion of CAD/CAM in "Research and Development" below.
Merrimac has also begun to use the Internet to reach its customers more
efficiently. Merrimac's On-Line Co-Design(TM) system, an innovative service,
allows RF and microwave circuit designers to create and test their products
on-line over the Internet. The customer uses the latest design tools from
Hewlett-Packard EEsof, together with proprietary circuit elements from the
Multi-Mix(TM) library of pre-engineered components and assemblies. This service
allows Merrimac engineers to work more directly with customers as they design
their products.
For a discussion of financial information about Merrimac's business
segments and geographic data, reference is made to Note 11 of Notes to
Consolidated Financial Statements in Merrimac's Annual Report to Shareholders
for the Fiscal Year Ended January 1, 2000, which note is incorporated herein by
reference.
Products
Merrimac'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. Merrimac'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.
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Approximately 55% of Merrimac's sales in 1999 were derived from the
sales of products for use in high-reliability aerospace, satellite, and missile
applications. These products are designed to withstand severe environments
without failure or maintenance over prolonged periods of time (from 5 to 20
years). Merrimac provides facilities dedicated to the design, development,
manufacture, and testing of these products along with special program management
and documentation personnel. Merrimac offers products in most of its major
categories for high-reliability applications.
Merrimac'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 wireless
telecommunications electronics and communications equipment. Merrimac's products
are also utilized in systems to receive and distribute television signals from
satellites and through other microwave networks including cellular radio.
Filtran Microcircuits Inc.
General
Established in 1983, FMI is a leading manufacturer of microwave micro
circuitry for the high frequency communications industry. FMI produces
microstrip, bonded stripline, and thick metal-backed Teflon(R) (PTFE)
microcircuits for wireless telecommunications, including satellite, aerospace,
PCS, fiber optic telecommunications, automotive, navigational and defense
applications worldwide. FMI participates in the market for millimeter-wave
applications, a technology experiencing high growth. Merrimac believes that
FMI's technical capability and ability to provide the reliable processing
required by customers enable it to address this market. FMI also supplies mixed
dielectric multilayer and high speed interconnect circuitry to meet customer
demand for high performance and cost-effective packaging.
FMI's strong technical team, proprietary processes and equipment allow
FMI to manufacture precise circuits, with edge resolution of .0005 inches or
better. The accuracy provided by FMI is particularly valued by customers in
high-end applications who require microwave circuitry with significant
reliability.
FMI, through its innovative processing, has developed a proprietary
sodium etch formulation for plated-through hole ("PTH") and edge plating which
gives tight control of processing, thereby easing the difficult process of
achieving reliable plated through holes. FMI has also successfully pioneered
sputtering techniques for PTH applications on thick-metal backed PTFE circuitry
that offer superior reliability, performance and mechanical strength.
FMI has also achieved significant results in the area of accuracy of
circuit board imaging. FMI employs specially developed processes using liquid
photo-resists and high-intensity, collimated UV exposure techniques in fine line
processing for both single and double-sided PTH boards.
Products
FMI produces precision microwave circuitry, having operating
frequencies that typically range from 500 MHz to 100 GHz, through the processing
of microstrip, bonded stripline, thick metal-backed
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PTFE and mixed dielectric multilayer. FMI also produces aluminum, copper and
brass backed circuits. Although FMI generally purchases pre-bonded materials, it
also has the capability to bond substrates to thick metal carriers when
requested by customers. FMI also processes hard substrates such as ceramic,
ferrite and glass.
FMI has developed innovative processing that provides customers with
reliable and high performance circuitry. FMI has the capability to process: (1)
1 mil lines and spaces with +/- 2 mil tolerance; (2) embedded resistors; (3)
proprietary sodium etch formulation for reliable PTH and edge plating; (4)
proprietary sputtering techniques for blind holes in thick metal-backed PTFE;
(5) proprietary copper Thin Film metallization on ceramic; (6) high purity,
wire-bondable gold; and (7) aspect ratios up to 10:1. FMI has machining
capabilities in computer numerically controlled routing, milling and laser
machining. Machining tolerance ranges from +/- .005 inches to +/- .001 inches.
FMI maintains a quality assurance program which involves a stringent
program of in-house inspection to assure that, when customers request specified
standards based on certain needs, such as MIL-P-5510, IPC-RB-276 and IPC-HF-318,
FMI meets such standards.
Worldwide applications include: millimeter wave (PCS backhaul, local
and multipoint distribution systems automotive radar, sensors and point to
multipoint), satellite, aerospace, automotive and defense.
Marketing
Merrimac markets its products in the United States and Canada directly
to customers through a marketing staff comprised of 16 employees, including five
employees located at FMI in Ottawa, Canada, and through 22 independent domestic
sales organizations. Merrimac utilizes approximately 19 independent sales
organizations to market its products elsewhere in the world. Merrimac's
marketing program focuses on identifying new programs and applications for which
Merrimac can develop prototypes leading to volume production orders.
Merrimac's customers are primarily major industrial corporations that
integrate Merrimac's products into a wide variety of defense and commercial
systems. Merrimac'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 country did not exceed
10% of net sales for 1999, 1998 or 1997. Sales to Hughes Aircraft in 1999 and
1998 were 10.9% of net sales, sales to Boeing Aircraft were 10.4% in 1999 and
sales to Lockheed Martin in 1998 and 1997 amounted to 10.0% and 13.4% of net
sales, respectively.
FMI's key customers include Telaxis Corporation, M/A Com, Inc.,
Communication Techniques Inc., IntegraTech, Sierracom, Filtronic Solid State,
Nortel Networks and Raytheon.
Merrimac has a uniform resource locator ("URL") Internet address
(www.merrimacind.com) and has established a commercial presence on the World
Wide Web. Merrimac's product catalog is available on the Merrimac website.
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Research and Development
During fiscal 1999, 1998 and 1997, research and development
expenditures amounted to $2,096,000, $1,053,000 and $556,000, respectively.
Merrimac plans to commit development funds at the same level in 2000 as in 1999,
which funds were expended for new Multi-Mix(TM) Microtechnology, and will focus
its efforts on new product development for specific customer applications
requiring integration of circuitry and further miniaturization, precision and
volume applications.
Merrimac's research and development activities include the development
of prototypes for new programs and applications and the implementation of new
technologies to enhance Merrimac's competitive position. Projects focusing on
surface mounted devices, multilayer, 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. Merrimac 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. Current research and development programs at FMI
include: laser machining, resistors on organic materials, high-resolution
circuit techniques, resistor trimming and electroless nickel on aluminum
housings.
Backlog
Merrimac manufactures specialized components and subsystems pursuant to
firm orders from customers and standard components for inventory. At January 1,
2000, Merrimac had a firm backlog of orders of approximately $6,118,000.
Merrimac estimates that approximately 90% of the orders in its backlog as of
January 1, 2000, will be shipped within one year. Merrimac does not consider its
business to be seasonal.
Competition
Merrimac encounters competition in all aspects of its business.
Merrimac competes both domestically and internationally in the military and
commercial markets and specifically within the aerospace and telecommunications
areas. Merrimac'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
Merrimac and well-recognized brand names. Merrimac competes with all such
corporations on a basis of technological performance, quality, reliability and
dependability in meeting shipping schedules as well as on the basis of price.
Merrimac believes that its performance with respect to the above factors have
served well in earning the respect and loyalty of many customers in the
industry. These factors have enabled Merrimac over the years to successfully
maintain a stable customer base and have directly contributed to Merrimac's
ability to attract new customers.
Manufacturing, Assembly and Source of Supply
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. Merrimac has its own machine shop employing CAD/CAM techniques and
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etching facilities to handle soft and hard substrate materials. In addition,
Merrimac maintains testing and inspection procedures intended to minimize
production errors and enhance product reliability. Merrimac began manufacturing
in Costa Rica in the second half of 1996. In January 1998, these operations were
moved to a larger facility.
FMI's manufacturing facility consists of CAD/CAM, chemical and
mechanical processes, quality systems and R&D of bare circuit board materials
specifically selected for high frequency applications. Manual and automatic
methods are utilized depending upon the circuit volumes, complexity and existing
technologies available to the printed wiring board industry. During the past
year, FMI has added new equipment and procedures to reduce cost and improve
efficiencies in operations. Notably, FMI added a new PTH line, a new gold
plating line and a laser-machining center. Merrimac is working towards ISO 9002
certification, targeted for the second half of 2000.
Microwave materials used in FMI's products are available from Rogers,
Arlon and Taconic. Laminate materials are available from a small number of
qualified suppliers. The suppliers that provide materials to FMI specialize in
the manufacture of microwave materials. Customers often direct FMI to use a
particular vendor for laminates based upon particular design specifications.
During 1999, Merrimac continued to implement programs to improve the
efficiency of manufacturing operations and reduce costs. Merrimac 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. In October of 1999 Factory Mutual Research awarded the ISO 9001
certification to Merrimac's Multi-Mix(TM) Microtechnology Group manufacturing
facility. The ISO 9001 certification verifies that the Multi-Mix(TM)
Microtechnology Group of Merrimac complies with the internationally recognized
standard for quality systems and the model for quality assurance in design,
development, production, installation and servicing. Merrimac's manufacturing
subsidiary located in Costa Rica obtained ISO 9002 certification prior to fiscal
1999.
Generally, Merrimac uses manufacturing cost savings to enhance its
competitive position.
Electronic components and raw materials used in Merrimac's products are
generally available from a sufficient number of qualified suppliers. Some
materials are standard items. Subcontractors manufacture certain materials to
Merrimac's specifications. Merrimac is not dependent upon any single supplier
for any of its components or materials.
Employee Relations
As of January 1, 2000, Merrimac employed approximately 220 full time
persons, including employees of its subsidiary, FMI. 30 of Merrimac's employees
are employed at Merrimac's Costa Rica facility. None of Merrimac's employees are
represented by a labor organization. Merrimac has never experienced a work
stoppage or interruption due to a labor dispute. Management believes that its
relations with its employees are satisfactory.
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Patents
Merrimac owns 18 patents with respect to certain inventions it
developed. No assurance can be given that the protection that Merrimac has
acquired through patents is sufficient to deter others, legally or otherwise,
from developing or marketing competitive products. There can be no assurance
that any of the patents will be found valid, if validity is challenged. Although
Merrimac has from time to time filed patent applications in connection with the
inventions which it believes are patentable, there can be no assurance that
these applications will issue into patents.
ITEM 2. DESCRIPTION OF PROPERTY
Merrimac's administrative offices, research and principal production
facilities are located in West Caldwell, New Jersey, on a five-acre parcel owned
by Merrimac. 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.
Merrimac owns all of its land, buildings, laboratories, production and
office equipment, as well as its furniture and fixtures in West Caldwell, New
Jersey. Merrimac believes that its plant and facilities are well suited for
Merrimac's business and are properly utilized, suitably located and in good
condition.
In December 1997, Merrimac 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.
In February 1999, Merrimac entered into a seven-year lease on a 20,000
square-foot manufacturing facility in Ottawa, Ontario, Canada in connection with
Merrimac's acquisition of FMI.
Merrimac does not make any investments in real estate other than in
connection with its operations.
ITEM 3. LEGAL PROCEEDINGS
Merrimac is a party to lawsuits, both as a plaintiff and a defendant,
arising in the normal course of business. It is the opinion of Merrimac
management that the disposition of these various lawsuits will not individually
or in the aggregate have a material adverse effect on the consolidated financial
position or the results of operations of Merrimac.
ITEM 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
Merrimac's Common Stock has been listed and traded on The American
Stock Exchange since July 11, 1988, under the symbol MRM. On March 24, 2000,
Merrimac had approximately 200 holders of record. Merrimac believes there are
approximately 1300 additional holders in "street name" through broker nominees.
Reference is made to the table captioned "Quarterly Common Stock Data"
of Merrimac's Annual Report to Shareholders for the Fiscal Year Ended January 1,
2000, filed as Exhibit 13 hereto (the "Annual Report"), which is incorporated
herein by reference, for information with respect to the high and low bid prices
of Merrimac's Common Stock during the past two fiscal years.
Reference is made to Note 9 of Notes to Consolidated Financial
Statements in the Annual Report to Shareholders, which note is incorporated
herein by reference for information with respect to payment of cash dividends in
1998 and 1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to the information under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Annual Report, which information is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the information in the Report of Independent
Public Accountants, the Consolidated Statements of Operations and Comprehensive
Income, Consolidated Balance Sheets, Consolidated Statements of Shareholders'
Equity, Consolidated Statements of Cash Flows and Notes to Consolidated
Financial Statements contained in the Annual Report, which information is
incorporated herein by reference with respect to Merrimac's financial position
as of January 1, 2000, and January 2, 1999, and the results of operations and
cash flows for the years ended January 1, 2000, January 2, 1999, and January 3,
1998, and the report of Arthur Andersen LLP. For unaudited selected quarterly
financial data, see the table captioned "Quarterly Financial Information"
contained in the Annual Report, which table is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS 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 Merrimac's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders (the "Proxy Statement") which Merrimac 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
Information under the caption "Election of Directors" contained in the
Proxy Statement with respect to the Board of Directors is incorporated herein by
reference.
The following is a list of Merrimac's executive officers, their ages
and their positions as of January 1, 2000. 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 Shareholders.
Name Age Position
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Mason N. Carter 53 Chairman, President and
Chief Executive Officer
Robert V. Condon 53 Vice President, Finance,
Treasurer,Secretary and
Chief Financial Officer
Richard E. Dec 56 Vice President, Marketing
Brian R. Dornan 51 Vice President, Research
and Development
Reynold K. Green 41 Vice President, Sales
James J. Logothetis 39 Vice President, Advanced
Technology
Joseph McAndrew 45 Vice President, Multi-Mix
(TM)Operations
Dr. Kovilvila N. Ramachandran 59 President and Technical
Director, FMI
Crag A. Sutton 42 Chief Executive Officer, FMI
Family Relationships
There are no family relationships among the officers listed.
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Business Experience of Executive Officers During Past Five Years
Mr. Carter has served as Chairman of the Board since July 24, 1997, and
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.
Mr. Condon has been Vice President, Finance and Chief Financial Officer
("CFO") since joining Merrimac in March 1996 and was appointed Secretary and
Treasurer in January 1997. Prior to joining Merrimac, he was with Berkeley
Educational Services as Vice President, Finance, Treasurer and CFO from 1995 to
February 1996.
Mr. Dec has been Vice President, Marketing since joining Merrimac in
March 1997. Prior to joining Merrimac, 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.
Mr. Dornan has been Vice President, Research and Development of
Merrimac since February 1998 and was Group Vice President of Technology and
Engineering of Merrimac from October 1996 to February 1998. He had been Group
Vice President of Manufacturing from 1986 to October 1996.
Mr. Green has been Vice President, Sales since March 1997 and from
April 1996 to March 1997 he was Vice President of Manufacturing. He was a member
of the Board of Directors from April 1996 to May 1997 and did not seek
re-election to the Board. Prior to April 1996, Mr. Green held positions of
Director of Manufacturing, National Sales Manager and Director of Quality
Control and High-Reliability Services at Merrimac.
Mr. Logothetis was appointed Vice President, Advanced Technology in May
1998 after rejoining Merrimac in January 1997 to serve as Director, Advanced
Technology. Prior to rejoining Merrimac, he served as a director for
Electromagnetic Technologies, Inc. in 1995 and became Vice President of
Microwave Engineering at such corporation in 1996.
Mr. McAndrew was appointed Vice President, Multi-Mix(TM) Operations in
June 1999 after serving as Director of Manufacturing Engineering from 1997 to
1999. From 1984 through 1997, Mr. McAndrew held various engineering positions at
Merrimac including Manager, Manufacturing and Process Engineering.
Dr. Ramachandran has been President of FMI since January 1996 and has
been Technical Director of FMI since co-founding FMI in 1983. Dr. Ramachandran
served as a member of FMI's Board of Directors prior to Merrimac's acquisition
of FMI. Prior to 1983, Dr. Ramachandran held a position at the National Research
Council of Canada.
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Mr. Sutton has been Chief Executive Officer of FMI since January 1996.
From 1986 to January 1996, Mr. Sutton held the position of General Manager of
FMI. Prior to Merrimac's acquisition of FMI, Mr. Sutton served as a member of
FMI's Board of Directors.
Information under the caption "Section 16 (a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Statement relating to compliance
with Section 16 of the Exchange Act is incorporated herein by reference.
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
Shareholders" contained in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information in the subheading "Certain relationships and
related transactions" under the caption "Executive Compensation" contained in
the Proxy Statement, which information is incorporated herein by reference.
ITEM 13. 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 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.
12
<PAGE>
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.
10(a) Stock Purchase Agreement dated as of December 15,
1998, among Merrimac, FMI and the shareholders of FMI
and others party thereto is hereby incorporated by
reference to Exhibit 10(a) to Merrimac's Annual
Report on Form 10-KSB dated March 30, 1999.
10(b) Profit Sharing Plan of Merrimac is hereby
incorporated by reference to Exhibit 10(n) to
Merrimac's Registration Statement on Form SO-1
(No. 2-79455).*
10(c) 1983 Key Employees Stock Option Plan of Merrimac
effective March 21, 1983, is hereby incorporated by
reference to Exhibit 10(m) to Merrimac's Annual
Report on Form 10-KSB dated March 31, 1983.*
10(d) 1993 Stock Option Plan of Merrimac effective March
31, 1993, is hereby incorporated by reference to
Exhibit 4(c) to Merrimac's Registration Statement on
Form S-8 (No. 33-68862) dated September 14, 1993.*
10(e) 1997 Long-Term Incentive Plan of Merrimac is hereby
incorporated by reference to Exhibit (a) to
Merrimac's Proxy Statement dated May 12, 1997.*
10(f) Resolutions of the Stock Option Committee of the
Board of Directors of Merrimac adopted June 3, 1998,
amending the 1983 Key Employees Stock Option Plan of
Merrimac, the 1993 Stock Option Plan of Merrimac and
the 1997 Long-Term Incentive Plan of Merrimac and
adjusting outstanding awards thereunder to give
effect to Merrimac's 10% stock dividend paid June 5,
1998, are hereby incorporated by reference to Exhibit
10(f) to Merrimac's Annual Report on Form 10-KSB
dated March 30, 1999.*
10(g)(1) 1995 Stock Purchase Plan of Merrimac is hereby
incorporated by reference to Exhibit A of the Proxy
Statement of Merrimac dated March 17, 1995.*
10(g)(2) Resolutions of the Stock Purchase Plan Committee of
the Board of Directors of Merrimac adopted June 3,
1998, amending the 1995 Stock Purchase Plan of
Merrimac and adjusting outstanding awards thereunder
to give effect to Merrimac's 10% stock dividend paid
June 5, 1998, are hereby incorporated by reference to
Exhibit 10(g)(2) to Merrimac's Annual Report on Form
10-KSB dated March 30, 1999.*
13
<PAGE>
10(h)(1) 1996 Stock Option Plan for Non-Employee Directors of
Merrimac is hereby incorporated by reference to
Exhibit 10(d) to Merrimac's Annual Report on Form
10-KSB dated March 24, 1997.*
10(h)(2) Resolutions of the Board of Directors of Merrimac,
adopted June 3, 1998, amending the 1996 Stock Option
Plan for Non-Employee Directors of Merrimac and
adjusting outstanding awards thereunder to give
effect to Merrimac's 10% stock dividend paid June 5,
1998, are hereby incorporated by reference to Exhibit
10(h)(2) to Merrimac's Annual Report on Form 10-KSB
dated March 30, 1999.*
10(i) Amended and Restated Employment Agreement dated as
of January 1, 1998, between Merrimac and Mason N.
Carter is hereby incorporated by reference to
Exhibit 10(a) to Merrimac's Quarterly Report on
Form 10-QSB dated August 14, 1998.*
10(j) Stock Purchase Agreement dated as of May 4, 1998,
between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(b) to
Merrimac's Quarterly Report on Form 10-QSB dated
August 14, 1998.*
10(k) Amended and Restated Pledge Agreement dated as of
May 4, 1998, between Merrimac and Mason N. Carter is
hereby incorporated by reference to Exhibit 10(c) to
Merrimac's Quarterly Report on Form 10-QSB dated
August 14, 1998.*
10(l) Amended Promissory Note dated as of May 4, 1998,
executed by Mason N. Carter in favor of Merrimac is
hereby incorporated by reference to Exhibit 10(l) to
Merrimac's Annual Report on Form 10-KSB dated March
30, 1999.*
10(m) Registration Rights Agreement dated as of May 4,
1998, between Merrimac and Mason N. Carter is hereby
incorporated by reference to Exhibit 10(e) to
Merrimac's Quarterly Report on Form 10-QSB dated
August 14, 1998.*
10(n)(1) Form of Severance Agreement entered into with certain
officers of Merrimac is hereby incorporated by
reference to Exhibit 10(i) to Merrimac's Annual
Report on Form 10-KSB dated March 30, 1998.*
10(n)(2) Schedule of officers with substantially identical
agreements to the form filed as Exhibit 10(n)(1)
hereto is hereby incorporated by reference to
Exhibit 10(j) to Merrimac's Annual Report on Form
10-KSB dated March 30, 1998.*
10(o) Consulting Agreement dated as of January 1, 1998,
between Merrimac and Arthur A. Oliner is hereby
incorporated by reference to Exhibit 10 to Merrimac's
Quarterly Report on Form 10-QSB dated May 14, 1998.*
14
<PAGE>
10(p) Separation Agreement dated as of December 31, 1998,
between Merrimac and Eugene W. Niemiec is hereby
incorporated by reference to Exhibit 10(p) to
Merrimac's Annual Report on Form 10-KSB dated March
30, 1999.*
10(q) Stockholder's Agreement dated as of October 30, 1998,
between Merrimac and Charles F. Huber, II is hereby
incorporated by reference to Exhibit 10 to Merrimac's
Quarterly Report on Form 10-QSB dated November 16,
1998.
10(r) Separation Agreement dated as of December 16, 1998,
between Merrimac and Jacob Lin is hereby incorporated
by reference to Exhibit 10(r) to Merrimac's Annual
Report on Form 10-KSB dated March 30, 1999.*
10(s) Shareholder's Agreement dated as of June 3, 1999,
among Merrimac, William D. Witter, Inc. and
William D. Witter is hereby incorporated by reference
to Exhibit 10 to Merrimac's Quarterly Report on Form
10-QSB dated August 12, 1999.
13 Portions of Merrimac's Annual Report to Shareholders
for Fiscal Year Ended January 1, 2000.
21 Subsidiaries of Merrimac.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Fiscal Year Ended
January 1, 2000.
_________________
*Indicates that exhibit is a management contract or compensatory plan
or arrangement.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on November 5, 1999,
reporting Merrimac's results of operations for the third
quarter 1999.
A Current Report on Form 8-K was filed on March 22, 2000,
reporting Merrimac's results of operations for the fourth
quarter and 1999 fiscal year.
15
<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, 2000 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 March 30, 2000 Director
- ------------------------
(Mason N. Carter)
/s/ Albert H. Cohen March 30, 2000 Director
- ------------------------
(Albert H. Cohen)
/s/ Edward H. Cohen March 30, 2000 Director
- ------------------------
(Edward H. Cohen)
/s/ Joel H. Goldberg March 30, 2000 Director
- ------------------------
(Joel H. Goldberg)
/s/ Arthur A. Oliner March 30, 2000 Director
- ------------------------
(Arthur A. Oliner)
/s/ Robert V. Condon March 30, 2000 Vice President,
- ------------------------ Finance,
(Robert V. Condon) Treasurer,
Secretary
and Chief
Financial Officer
16
Exhibit 13
----------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1999 compared to 1998
Results of operations for 1999 reflect an increase in net sales of $295,000
to $20,397,000 and an increase in operating income of $188,000 to $498,000,
although a restructuring charge of $510,000 was reported in 1998 that reduced
prior year operating income to $310,000. Net income of $242,000 for 1999
decreased 29% compared to net income of $340,000 for 1998, after the 1998
restructuring charge net of tax of $327,000. Diluted net income per share of
$.14 decreased 26% compared to diluted net income per share of $.19, after the
1998 restructuring charge of $.18 per share.
The increase in net sales was attributable to the inclusion of $3.4 million
of net sales of microwave micro-circuitry products from Filtran Microcircuits
Inc. ("FMI"), which was acquired on February 25, 1999, partly offset by reduced
electronic components shipments of $3.1 million, resulting from a smaller firm
order backlog that existed as of the beginning of the year, and a reduction in
orders, resulting from decreased demand for the Company's core products which
occurred during 1999.
Orders of $19,464,000 were received for 1999, which included $2,900,000 in
new orders for FMI, an increase of $2,952,000 or 17.9% compared to $16,512,000
in orders received for 1998. Compared to year-end 1998, backlog decreased
$50,000 to $6,118,000. Customer requests for design work have increased and are
currently under development utilizing the Company's proprietary Multi-Mix(TM)
Microtechnology. Softness in core business orders resulted from the deferment of
purchases by major satellite and defense customers due to delays in and
cancellations of certain programs. Although the Company believes that its
satellite and defense customers will start to increase their orders during
fiscal 2000, an extended delay or reduction in new orders for Company products
could have a material financial impact on future sales and earnings.
Cost of sales decreased $931,000 or 8.1%. Cost of sales as a percentage of
net sales decreased 5.5% to 52.0% for 1999. The decrease in cost of sales was
achieved from manufacturing efficiencies, reduction in labor expense, and a
favorable sales product mix. These decreases were primarily attributable to a
reduction in direct labor and manufacturing overhead costs partly related to
efficiency improvements resulting from last year's fourth quarter restructuring.
Depreciation expense increased $401,000 for the year resulting from higher
capital equipment purchases in the current and prior years and due to the
acquisition of FMI.
Gross profit for the electronics components segment of $8,319,000 was 48.9%
of segment net sales of $17,003,000 in 1999 compared to $8,554,000, which was
42.6% of segment net sales of $ 20,102,000 in 1998. Although the percentage of
gross profit margin improved 6.3 percentage-points, the gross profit amount
decreased $235,000 or 2.7% as a result of the sales decline. Gross profit for
the FMI microwave micro-circuitry segment, which was acquired on February 25,
1999, was $1,462,000 or 43.0 % of segment net sales of $3,394,000 in 1999.
Selling, general and administrative expenses of $7,056,000 in 1999
increased $375,000 or 5.6%, and when expressed as a percentage of net sales,
increased 1.4% to 34.6% for the year. Increases in these expenses during 1999
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, and the inclusion of expenses from recently acquired FMI. Also,
the increases in selling, general and administrative expenses arose from higher
depreciation expense of $69,000, and were partially offset by a reduction in
compensation costs as a result of last year's restructuring.
-1-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Amortization expense of $132,000 is attributable to goodwill of $3,179,000
arising from the acquisition of FMI, which is being amortized on a straight-line
basis over a life of twenty years.
Research and development expenses for new products, primarily the
Multi-Mix(TM) Microtechnology, and the inclusion of $443,000 in expenses from
FMI, were $2,096,000 for 1999, an increase of $1,043,000 or 99% compared to the
prior year. The Company anticipates spending similar amounts for product
development in fiscal year 2000.
Operating income for the electronics components segment was $241,000 in
1999 or 1.4% of segment net sales compared to $310,000 or 1.5% of net sales in
1998, which was after the restructuring charge of $510,000 in 1998. Operating
income for the FMI microwave micro-circuitry segment was $256,000 or 7.6% of
segment net sales.
Interest expense, net was $220,000 for 1999 and was principally incurred on
borrowings of $2,500,000 for capital expenditures under a term loan facility,
and borrowings of $2,000,000 under a revolving credit facility in connection
with the acquisition of FMI during the first quarter of 1999, which was
partially offset by interest income. During 1998, the Company earned interest
income of $110,000 on its invested cash balances.
1998 compared to 1997
Results of operations reflect an increase in net sales of $1,443,000 or
7.7% and a decrease in operating income (before the 1998 restructuring charge of
$510,000) of $1,175,000 or 58.9%. Net income of $340,000 (after the effects of
the restructuring charge of $327,000 for 1998) decreased $1,063,000 or 75.8%
compared to net income of $1,402,000 in 1997. Diluted net income per share of
$.19 (after the effects of the restructuring charge of $.18 per share for 1998)
decreased $.60 per share or 76.0% compared to diluted net income per share of
$.79 in the prior year. The restructuring charge consisted of severance and
early retirement benefits to fourteen employees.
The overall net sales increase was partially attributable to increased
shipments against a firm order backlog where customers' order release dates
coincided with the Company's production and shipment schedules, process
improvement initiatives, customer service focus and reduction of
total-cycle-time to market.
Orders decreased $3,674,000 or 18.2% to $16,512,000 in 1998 and the backlog
of firm unfilled orders decreased $3,590,000 or 36.8% to $6,168,000 at year-end
1998. Softness in core business orders resulted from the deferment of purchases
by major satellite and defense customers due to delays in certain programs. The
Company believes that many of the satellite constellation programs that have
been delayed may resume and translate into orders during 1999. While this trend
in order delays is not expected to be long-term, an extended continuation in the
delay of or reduction in new orders for Company products could have a material
financial impact on future sales and earnings. Customer requests for design work
are on the increase and are currently under development utilizing the Company's
proprietary Multi-Mix(TM) Microtechnology. This technology provides greater per
unit content and enables the Company's entry into new markets for increased
order opportunities.
Cost of sales increased $1,600,000 or 16.1%. The primary reason for the
increase was the effect of the increase in sales. Cost of sales as a percentage
of net sales increased 4.1% to 57.5% for 1998. These increases are due to
compensation increases for the hourly, certain salaried engineering and
supervisory workforce effective in mid-1998, an increase in levels of overtime
worked, additional manufacturing personnel hired for the Costa Rica facility and
additional manufacturing overhead expenses. Some of these costs were incurred in
order to further efforts on improving delivery performance by reducing the
number of late ship days in the backlog.
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses of $6,681,000 increased
$520,000 or 8.5% and as a percentage of net sales increased .2% to 33.2%.
Increases in selling costs were primarily attributable to additional sales
commissions due to the increase in sales revenue. The opening, support and
staffing of a European sales office added to higher selling costs. General and
administrative expenses partially increased due to compensation costs related to
the hiring of additional administrative and marketing personnel and higher
compensation expenses resulting from the 1997 mid-year merit increases to
certain employees. Further increases in these expenses were related to market
development research and associated new product launch costs.
Research and development expenses for new products, primarily the recently
introduced Multi-Mix(TM) Microtechnology, were $1,053,000 for 1998, an increase
of $497,000 or 89.5% compared to the prior year. Research and development
expenses in prior years have been reclassified to conform to the current
presentation.
Liquidity and Capital Resources
The Company had liquid resources comprised of cash and cash equivalents
totaling approximately $1,100,000 at the end of 1999 compared to approximately
$1,800,000 at the end of 1998. The Company's working capital was approximately
$4,200,000 and its current ratio was 1.8 at the end of 1999 compared to
$7,400,000 and 3.5, respectively, at the end of 1998. Current liabilities at
year-end 1999 include $2,000,000 of indebtedness under a revolving credit
facility, which the Company believes will be re-extended for one year beyond the
June 30, 2000 renewal date.
The Company's operating activities provided cash flows of $2,115,000 in
1999 compared to $2,241,000 in 1998. The primary reasons for the slight decrease
in operating cash flows in 1999 are the decrease in net income and payments made
on accounts payable, accrued liabilities and deferred compensation, which was
partially offset by decreases in accounts receivable and inventories, and higher
depreciation and amortization charges. The Company made net investments in
property, plant and equipment of $2,463,000 in 1999 compared to $3,100,000 in
1998. 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 cost to the Company for its acquisition of FMI, which included $203,000
in acquired cash and included the assumption of $451,000 in debt, was
$4,700,000, which was financed by borrowings under a previously unused credit
facility.
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
unused portion of $2,500,000 of the revolving credit facility is available for
working capital and general corporate purposes.
Management believes that the $4,500,000 revolving credit facility, which is
up for renewal June 30, 2000, will be re-extended to June 30, 2001, and with its
present liquid resources and the expected remaining $2.5 million line of credit
available, along with cash flows expected to be provided by operations, the
Company will have sufficient resources for currently contemplated operations in
fiscal year 2000.
The Company's capital expenditures for new projects and production
equipment are anticipated to exceed its depreciation and amortization expenses
in fiscal 2000. The Company has issued purchase order commitments to processing
equipment manufacturing vendors for approximately $700,000 of capital equipment
and building improvements. The Company anticipates that during fiscal 2000 such
equipment will be purchased and become operational and building improvements
will be completed.
-3-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is contemplating the purchase of the FMI facility, consisting
of approximately 20,000 square feet and 1.7 acres it currently occupies under a
long-term lease agreement, for approximately $1,200,000 from the present
lessors. The Company is in the process of negotiating terms and conditions with
the property owners and is investigating financing alternatives. It is
anticipated that the purchase of the facility would close during the second
quarter of fiscal year 2000. Upon acquiring the facility, the Company intends to
expand the facility by approximately 12,500 square feet and make certain other
improvements for approximately $600,000, and that such building addition should
be available for use during the latter part of fiscal year 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.
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 2 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," 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.
Year 2000 Readiness Disclosure
The Company recognized the need to assure that its operations would not be
adversely impacted by Year 2000 software failures. The Company's manufactured
products do not contain software of any kind and therefore are not subject to
Year 2000 problems. All of the Company's existing mission-critical manufacturing
and financial computer applications are Year 2000 compliant. Key suppliers have
confirmed in writing that they are Year 2000 compliant. Software revisions have
been performed by Company employees and the total estimated cost for achieving
Year 2000 compliance was not material to the Company's financial position or
results of operations.
The Year 2000 potential problem dates of January 1 and February 29, 2000
have passed without any significant software failures. The Company is confident
that its computer systems are fully Year 2000 compliant, and that its operations
should not be adversely affected in the future as a result of a Year 2000
software failure.
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Costs to Company to Address Year 2000 Issues
The Company expended approximately $50,000 for software and to replace
outdated non-compliant systems in 1999. In 1998, the Company spent approximately
$60,000 (exclusive of internal Company personnel compensation costs) to perform
programming remediation to non-compliant programs and for training and other
consultation fees. The Company does not anticipate spending additional funds on
Year 2000 issues during the remainder of 2000. No other information technology
projects were deferred as a result of the Year 2000 project.
Forward-Looking Statements
This Annual Report 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.
-5-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Merrimac Industries, Inc.
We have audited the accompanying consolidated balance sheets of Merrimac
Industries, Inc. and subsidiaries as of January 1, 2000 and January 2, 1999 and
the related consolidated statements of operations and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended January 1, 2000. 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 auditing standards generally
accepted in the United States. 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 audits provide 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 1, 2000 and January 2, 1999 and
their results of operations and cash flows for each of the three years in the
period ended January 1, 2000 in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 13, 2000
-6-
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
OPERATIONS
<S> <C> <C> <C>
Net sales ........................................... $20,397,031 $20,101,835 $18,659,106
---------------------------------------
Costs and expenses:
Cost of sales .................................... 10,616,404 11,547,529 9,947,774
Selling, general and administrative .............. 7,055,785 6,680,968 6,160,516
Research and development ......................... 2,095,498 1,052,812 555,671
Amortization of goodwill ......................... 131,718 - -
Restructuring charge ............................. - 510,311 -
---------------------------------------
19,899,405 19,791,620 16,663,961
---------------------------------------
Operating income .................................... 497,626 310,215 1,995,145
Interest and other expense (income), net ............ 220,371 (110,085) (162,264)
---------------------------------------
Income before income taxes .......................... 277,255 420,300 2,157,409
Provision for income taxes .......................... 35,000 80,000 755,000
---------------------------------------
Net income .......................................... $ 242,255 $ 340,300 $ 1,402,409
=======================================
Net income per common share-basic ................... $.14 $.19 $.83
Net income per common share-diluted ................. $.14 $.19 $.79
---------------------------------------
Weighted average number of shares outstanding-basic.. 1,746,968 1,766,120 1,693,363
Weighted average number of shares outstanding-diluted 1,765,831 1,805,212 1,780,173
---------------------------------------
COMPREHENSIVE INCOME
Net income........................................... $ 242,255 $ 340,300 $ 1,402,409
Other comprehensive income, net of tax:
Foreign currency translation adjustment............ 142,589 - -
Adjustment for unrealized holding gain
of available-for-sale securities................. - - (6,162)
---------------------------------------
Comprehensive income $ 384,844 $ 340,300 $ 1,396,247
=======================================
The basic and diluted weighted average number of shares outstanding and net
income per share information for 1997 reflects the effects of the 10% stock
dividend which became effective June 5, 1998.
</TABLE>
See accompanying notes.
-7-
<PAGE>
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and January 2, 1999
<TABLE>
<CAPTION>
1999 1998
---------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................................... $ 1,108,141 $ 1,852,666
Accounts receivable, net............................................................ 3,774,796 3,755,131
Inventories ........................................................................ 2,913,423 3,101,256
Income tax refund receivable ....................................................... 427,330 413,018
Other current assets ............................................................... 386,507 357,906
Deferred tax assets ................................................................ 744,000 899,600
---------------------------
Total current assets ................................................ 9,354,197 10,379,577
---------------------------
Property, plant and equipment, at cost ................................................ 19,213,264 16,539,251
Less accumulated depreciation and amortization ..................................... 11,337,477 10,322,958
---------------------------
Net property, plant and equipment ..................................................... 7,875,787 6,216,293
Other assets .......................................................................... 563,507 319,512
Goodwill, net of accumulated amortization of $131,718 ................................. 3,047,623 -
---------------------------
Total Assets ........................................................ $20,841,114 $16,915,382
===========================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt .................................................. $2,627,267 $ -
Accounts payable ................................................................... 1,164,584 1,479,284
Accrued liabilities ................................................................ 1,311,791 1,499,917
---------------------------
Total current liabilities ........................................... 5,103,642 2,979,201
Long-term debt, net of current portion ................................................ 1,769,447 -
Deferred compensation ................................................................. 234,734 459,322
Deferred tax liabilities .............................................................. 232,000 54,600
---------------------------
Total liabilities ................................................... 7,339,823 3,493,123
---------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.50 per share;
5,000,000 shares authorized; 2,698,309 and 2,690,405 shares issued ....... ...... 1,349,154 1,345,203
Additional paid-in capital ......................................................... 11,256,532 11,220,873
Retained earnings .................................................................. 9,192,310 8,950,055
Accumulated comprehensive income ................................................... 142,589 -
---------------------------
21,940,585 21,516,131
Less treasury stock, at cost - 958,904 and 902,549 shares ......................... (8,079,294) (7,733,872)
Less loan to officer-shareholder .................................................. (360,000) (360,000)
---------------------------
Total shareholders' equity .......................................... 13,501,291 13,422,259
---------------------------
Total Liabilities and Shareholders' Equity .......................... $20,841,114 $16,915,382
===========================
</TABLE>
See accompanying notes.
-8-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
Additional Accumulated Loan to
Common Stock Paid-In Retained Comprehensive Treasury Stock Officer-
Shares Amount Capital Earnings Income Shares Amount Shareholder
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1996 2,585,749 $1,292,875 $9,005,330 $10,051,720 $ 6,162 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- (6,162)
sale securities
Cash dividends (459,043)
Loan to officer-shareholder 105,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998 2,651,131 1,325,566 9,709,244 10,995,086 - 1,074,839 9,227,065 105,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 340,300
Issuance of stock options** 53,100
Exercise of options 39,274 19,637 326,811
Tax benefit-stock options* 40,122
Cash dividends (1,009)
Stock dividends 1,008,288 (2,384,322) (160,290) (1,376,026)
Purchase of common stock 8,000 54,525
Sale of common stock 83,308 (20,000) (171,692)
Loan to officer-shareholder 255,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1999 2,690,405 1,345,203 11,220,873 8,950,055 - 902,549 7,733,872 360,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 242,255
Exercise of options 7,904 3,951 35,659
Purchase of common stock 56,355 345,422
Foreign currency translation 142,589
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 2,698,309 $1,349,154 $11,256,532 $9,192,310 $142,589 958,904 $8,079,294 $360,000
===================================================================================================================================
</TABLE>
* Tax benefit resulting from exercise and disposition of stock options and
subsequent disposition of stock.
** Compensation expense, net of tax effects, from issuance of stock options at
a discount from fair market value.
See accompanying notes.
-9-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
<TABLE>
<CAPTION>
1999 1998 1997
Cash flows from operating activities: -----------------------------------------
<S> <C> <C> <C>
Net income .............................................. $ 242,255 $ 340,300 $1,402,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 1,503,752 1,103,142 953,705
Gain on sale of available-for-sale securities ....... (65,006)
Amortization of goodwill ............................ 131,718
Deferred compensation ............................... 37,084 287,622 238,600
Deferred income taxes ............................... 330,000 88,000 22,000
Stock-based compensation expense .................... 87,400 20,700
Changes in operating assets and liabilities:
Net of Acquisition in 1999
Income tax refund receivable ...................... (7,686) (413,018)
Accounts receivable ............................... 695,392 (663,844) (1,241,245)
Inventories ....................................... 391,911 1,407,313 (342,751)
Other current assets .............................. 65,053 (209,703) 98,607
Deferred tax assets ............................... 3,000 25,313 (8,700)
Other assets ...................................... (206,977) (205,736) (163,336)
Accounts payable .................................. (497,055) 337,505 391,016
Accrued liabilities ............................... (297,103) 154,748 158,789
Income taxes payable .............................. (15,114) (45,825) 186,325
Deferred compensation ............................. (261,272) (52,500) (30,000)
-----------------------------------------
Net cash provided by operating activities ................... 2,114,958 2,240,717 1,621,113
-----------------------------------------
Cash flows from investing activities:
Cash acquired with acquisition............................. 203,323
Acquisition of business ................................... (4,700,402)
Purchase of capital assets ................................ (2,465,277) (3,149,336) (1,805,294)
Proceeds from sales of capital assets ..................... 1,683 23,645 5,461
Proceeds from sales and maturities
of available-for-sale securities ........................ 1,340,454
Purchase of available-for-sale securities ................. (146,152)
-----------------------------------------
Net cash used in investing activities ....................... (6,960,673) (3,125,691) (605,531)
-----------------------------------------
Cash flows from financing activities:
Debt assumed with acquisition ........................... 451,126
Borrowing under term loan ............................... 2,500,000
Borrowing under revolving credit facility ............... 3,000,000
Repayment of borrowings ................................. (1,554,412)
Repurchase of common stock .............................. (345,422) (54,525)
Proceeds from the issuance of common stock .............. 39,610 378,449 592,605
Payments of dividends ................................... (1,009) (459,043)
-----------------------------------------
Net cash provided by financing activities ................... 4,090,902 322,915 133,562
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents. 10,288 - -
Net increase (decrease) in cash and cash equivalents ........ (744,525) (562,059) 1,149,144
Cash and cash equivalents at beginning of year .............. 1,852,666 2,414,725 1,265,581
-----------------------------------------
Cash and cash equivalents at end of year .................... $1,108,141 $1,852,666 $2,414,725
=========================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ........................................... $ 139,000 $ 390,000 $ 675,000
Loan interest .......................................... $ 278,929
=========================================
Supplemental disclosure of non-cash investing activity:
Loan to officer-shareholder ............................ $ 255,000 $ 105,000
=========================================
</TABLE>
See accompanying notes.
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
1. Summary of significant accounting policies
Principles of consolidation: The financial statements include the accounts
of the Company and its wholly-owned susidiaries. All significant 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.
Revenue related to non-recurring engineering charges is generally recognized
upon shipment of initial production units or based on contractually established
stages of completion.
Investments: The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Available-for-sale securities are carried at quoted
market values. Unrealized gains and losses are included as a separate component
of shareholders' equity. Realized gains and losses, determined using the
specific identification method, are included in income in the period incurred.
Inventories: Inventories are valued at the lower of average cost or market.
Provision is made for potential losses on slow moving and obsolete inventories
when identified.
Foreign currency translation: The financial statements of the Company's
foreign subsidiaries have been translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." This statement provides that all balance sheet accounts be
translated at year-end rates of exchange, except shareholders' equity accounts
translated at historical rates. Income and expense accounts are translated at
the average of exchange rates in effect during the year. The resulting
translation adjustment is reported as a separate component of shareholders'
equity and accumulated comprehensive income. Realized foreign exchange
transaction gains and losses, which are not material, are included in income.
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 the components of comprehensive income impacting the Company consists
primarily of cumulative translation adjustments (unrealized holding gain on
marketable equity securities in 1997).
Reclassifications: Certain prior-year amounts have been reclassified to
conform with the 1998 presentations.
-11-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
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 income
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 1, 2000 and January 2, 1999 amounted to $7,218,000 and $7,277,000,
respectively.
Long-lived assets: The Company applies 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.
Goodwill: Goodwill represents the excess of cost over the fair value of net
assets of an acquired business. The cost is being amortized over a 20 year life
using the straight-line method. Goodwill is reviewed for impairment whenever
events and changes in circumstances indicate that the carrying amount may not be
recoverable.
Advertising: The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were $195,000 in 1999,
$213,000 in 1998 and $139,000 in 1997.
Income taxes: The Company uses the 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.
-12-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
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 $165,000 in 1999, $167,000 in 1998 and $147,000 in 1997. 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. No contribution amounts were authorized for 1999 and
1998.
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 7).
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
$2,096,000 in 1999, $1,053,000 in 1998 and $556,000 in 1997 were expensed as
incurred.
Interest expense: Interest expense, net was $220,000 in 1999. Interest
expense was not material in 1998 and 1997.
Net income 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 per common share. Under the standard, both basic and diluted net
income per common share are presented. 1997 net income per common share
information has been restated.
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 (see Notes
7 and 12).
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 calender
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
latest and fiscal year 2002 will be the next) is added to the fourth quarter,
making such quarter consist of 14 weeks.
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," 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.
-13-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
2. 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
$4,700,000 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 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 periods
presented for 1999 and 1998, as if FMI had been acquired at the beginning of
1998, are estimated to be as follows:
<TABLE>
<S> <C> <C>
1999 1998
----------- -----------
Net sales ...................................... $21,027,000 $23,425,000
Net income ..................................... 201,000 88,000
Diluted net income per share ................... $.11 $.05
</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.
3. Inventories
Inventories consist of the following:
1999 1998
---------- ----------
Finished goods ....................... $ 666,186 $ 607,738
Work in process ...................... 1,004,037 1,597,215
Raw materials and
purchased parts .................... 1,243,200 896,303
---------- -----------
$2,913,423 $3,101,256
========== ===========
Total inventories are net of valuation allowances for obsolescence of
$1,166,000 in 1999 and $1,501,000 in 1998. The Company disposed of $414,000 and
$236,000 of obsolete inventories in 1999 and 1998, respectively.
4. Property, plant and equipment
Property, plant and equipment consists of the following:
1999 1998
----------- -----------
Land and land improvements ........... $ 658,776 $ 547,446
Building ............................. 2,816,542 2,606,225
Machinery and equipment .............. 9,643,004 8,103,055
Office equipment,
furniture and fixtures ............ 6,094,942 5,282,525
----------- -----------
$19,213,264 $16,539,251
=========== ===========
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
5. Current and long-term debt:
The Company was obligated under the following debt instruments at
January 1, 2000:
Summit Bank:
Revolving credit facility, interest 1/2 % below prime,
due June 2000 (A)................................................... $2,000,000
Term loan, interest 1/2 % below prime, due December 2003............ 2,041,667
The Bank of Nova Scotia:
Equipment loans, interest prime plus 1%, due November 2000 (B)...... 56,042
Capital leases, interest 7.0%, due October 2003..................... 299,005
-------
4,396,714
Less current portion................................................ 2,627,267
---------
Long-term portion................................................... $1,769,447
==========
(A) The provisions of the revolving credit and term loan agreement require
the Company to maintain certain financial ratios. At January 1, 2000, the
Company was not in compliance with certain of these covenants. The Company has
received waivers in connection with such noncompliance and the bank has modified
the applicable terms of the agreement to ensure compliance prospectively. The
Company is presently in the process of extending its revolving credit facility
due date to June 2001.
The Company has 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 was available at year-end for future borrowing needs of
the Company for working capital and general corporate purposes.
The weighted average interest rate on borrowings during 1999 was 7.5% and
the rate at the end of 1999 was 8.0%. There were no borrowings in 1998.
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.
(B) The weighted average interest rate on equipment loans during 1999 was
7.4% and the rate at the end of 1999 was 7.5%.
At 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 at January 1, 2000
have a depreciated cost of approximately $138,000.
The payments required under the long-term obligations listed above during
the years following January 1, 2000 are set forth below:
2000 ........... $2,627,267
2001 ........... 575,501
2002 ........... 579,680
2003 ........... 614,266
6. Accrued liabilities
Accrued liabilities consist of the following:
1999 1998
---------- ----------
Commissions .......................... $ 181,720 $ 320,064
Vacation ............................. 103,041 78,138
Employee compensation ................ 145,290 176,384
Warranty reserve ..................... 150,000 150,000
Deferred compensation ................ 248,504 263,500
Other ............................... 483,236 511,831
---------- ----------
$1,311,791 $1,499,917
========== ==========
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
7. Stock option and stock purchase plans
Under the Company's 1993 Stock Option Plan, 324,360 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.
In 1997, the Company's Shareholders approved a long-term incentive plan
("LTIP") pursuant to which 275,000 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 110,000 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. In 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.
During 1998 discounted options were granted for the purchase of 10,825 shares at
$9.75, a discount of $1.50 below the fair market value at the date of grant and
7,200 shares at $11.75, a discount of $2.88 below fair market value at the date
of grant. As of January 1, 2000, options for the purchase of 226,821 shares
remain outstanding of which 44,000 are exercisable.
As of January 1, 2000, options for the purchase of a total of 235,455
shares remained outstanding and exercisable under the 1993 Option Plan, and
options for 30,855 shares were available for future grant. In addition, (i)
qualified options for the purchase of a total of 5,458 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 33,000 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.
-16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
7. Stock option and stock purchase plans (continued)
A summary of all stock option activity and information related to all
options outstanding follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
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 ............... $10.66 392,893 $11.24 289,212 $ 9.76 181,612
Stock dividend adjustment ....... 36,558
Granted ....................... 6.79 158,500 12.71 96,625 12.32 156,400
Exercised ....................... 9.83 (23,800) 9.17 (47,400)
Cancelled ....................... 9.93 (50,659) 10.46 (5,702) 8.67 (1,400)
- ---------------------------------------------------------------------------------------------------------------
Outstanding at end of year....... 9,51 500,734 10.66 392,893 11.24 289,212
- ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year....... $10.24 318,008 $10.40 303,503 $11.24 282,312
- ---------------------------------------------------------------------------------------------------------------
Option price range at end of year $5.00-$13.64 $5.00-$13.64 $5.50-$15.00
- ---------------------------------------------------------------------------------------------------------------
Weighted average estimated fair
value of options granted during
the year........................ $2.57 $4.62 $4.71
- ---------------------------------------------------------------------------------------------------------------
The approximate weighted average of the remaining contractual life of the
outstanding options at January 1, 2000 was 7.4 years.
</TABLE>
In 1995, the Company's Shareholders approved a stock purchase plan pursuant
to which 215,492 shares of the Company's common stock were initially reserved
for sale to eligible employees. Under this plan, the Company may grant employees
the right to subscribe to purchase shares of common stock from the Company at
85% of the market value on specified dates and pay for the shares through
payroll deductions over a period of up to 27 months.
A summary of stock purchase plan subscription activity is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
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 ........ $10.35 11,806 $9.93 16,056 $8.66 18,274
Subscribed ................ 5.95 53,969 11.03 16,308 10.09 17,923
Stock dividend adjustment.. 2,626
Purchased ................. 4.82 (7,904) 7.61 (15,474) 8.82 (17,982)
Cancelled ................. 7.02 (7,479) 9.84 (7,710) 9.70 (2,159)
- --------------------------------------------------------------------------------------------------------------
Subscribed at end of year.. $6.14 50,392 $10.35 11,806 $9.93 16,056
- --------------------------------------------------------------------------------------------------------------
Subscription price
range, end of year $5.95-$11.03 $9.18-$11.03 $9.46-$10.09
- --------------------------------------------------------------------------------------------------------------
Weighted average estimated
fair value of rights granted
during the year ........ $2.68 $4.29 $3.75
- --------------------------------------------------------------------------------------------------------------
</TABLE>
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
7. Stock option and stock purchase plans (continued)
The weighted average remaining contractual life of an outstanding stock
subscription at January 1, 2000 was approximately 1.7 years.
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 1999, 1998
and 1997 except for the discounted stock options granted in 1998 and 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>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported ................... $ 242,255 $340,300 $1,402,409
Net income (loss) - pro forma .............. (75,745) 78,400 1,230,409
- --------------------------------------------------------------------------------
Net income per share - as reported .......... $.14 $.19 $.79
Net income (loss) per share - pro forma ..... $(.04) $.04 $.69
- --------------------------------------------------------------------------------
The Statement No. 123 method of accounting has been applied to options
granted in periods after December 31, 1994 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 1999, 1998 and 1997 was estimated on the date of grant using the
Black-Scholes option valuation model. For 1999, the following weighted average
assumptions were utilized: no dividend yield; expected volatility of 40%; a risk
free interest rate of 6.25%; and expected lives of three years. For 1998, the
following weighted average assumptions were utilized: no dividend yield;
expected volatility of 35%; a risk free interest rate of 5.5%; and expected
lives of five years. For 1997, the following weighted average assumptions were
utilized: expected volatility of 30%; a risk free interest rate of 6%; and
expected lives of five 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.
-18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
8. Income taxes
The provision (benefit) for income taxes consists of the following
components:
1999 1998 1997
Current tax provision (benefit): ---------------------------------------
Federal ......................... $219,000) $ 1,000 $569,000
Foreign ......................... (12,000)
State ........................... (64,000) (9,000) 164,000
---------------------------------------
(295,000) (8,000) 733,000
---------------------------------------
Deferred tax provision (benefit):
Federal ......................... 256,000 63,000 17,000
State ........................... 74,000 25,000 5,000
---------------------------------------
330,000 88,000 22,000
---------------------------------------
Provision for income taxes.......... $ 35,000 $80,000 $755,000
=======================================
Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities at January 1, 2000 and January 2, 1999 are as
follows:
1999 1998
-----------------------
Current deferred tax assets:
Inventory valuation allowance ................... $458,500 $600,500
Capitalized inventory costs ..................... 48,000 45,200
Warranty cost ................................... 64,500 64,500
Deferred compensation ........................... 76,000 113,300
Other ........................................... 97,000 76,100
-----------------------
744,000 899,600
-----------------------
Non-current deferred tax assets:
Deferred compensation ........................... 132,500 197,500
Non-current deferred tax liabilities:
Depreciation and amortization ................... (316,500) (177,600)
State income taxes .............................. (48,000) (74,500)
-----------------------
(232,000) (54,600)
-----------------------
Net deferred tax assets .................... $512,000 $845,000
=======================
-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
8. Income taxes (continued)
The statutory federal income tax rate is reconciled to the effective tax
rate computed by dividing the provision for income taxes by income before income
taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Statutory rate ....................................... 34.0% 34.0% 34.0%
Effect of:
State income tax, net of federal income tax effects 3.2 2.5 5.2
Tax exempt dividends and interest ................. ( .5)
Foreign sales corporation income .................. (15.7) (12.9) (2.7)
Foreign subsidiary income ......................... (2.3)
Research and development credits .................. (48.1) (4.9) (.8)
Goodwill amortization ............................. 31.4
Other ............................................. 7.8 2.6 (.2)
-------------------------------
Effective tax rate ................................... 12.6% 19.0% 35.0%
===============================
</TABLE>
9. Cash dividends
During the first three quarters of fiscal 1997, the Company paid a $.091
per share dividend (previously $.10 per share, adjusted for the 10% stock
dividend in May 1998). The dividend was eliminated by the Board of Directors on
August 28, 1997.
10. Stock dividend
The Board announced on May 5, 1998, the declaration of a 10% stock dividend
payable on June 5, 1998 to shareholders of record on May 15 1998. Fractional
shares were cashed-out and payments were made to shareholders in lieu of
fractional shares on June 5, 1998. The basic and diluted weighted average number
of shares outstanding and net income per share information for 1997 have been
restated to reflect the effects of the stock dividend.
11. Business segment and geographic data
The Company's operations are conducted primarily through two business
segments: (1) electronic components and (2) microwave micro-circuitry. These
segments, and the principal operations of each, are as follows:
Electronic components: Design, manufacture and sale of electronic component
devices offering extremely broad frequency coverage and high performance
characteristics for communications, defense and aerospace industries. Of the
identifiable assets, 96% are located in the United States and 4% are located in
Costa Rica.
Microwave micro-circuitry: Design, manufacture and sale of microstrip,
bonded stripline and thick metal-backed Teflon (PTFE) and mixed dielectric
multilayer circuits for satellite, aerospace, telecommunications, automotive,
navigation and defense applications. Identifiable assets are located in Canada.
-20-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
Information about the Company's operations in different industries and
geographic areas follows. Operating income is net sales less operating expenses.
Operating expenses exclude interest expense, other income, and income taxes.
Assets are identified with the appropriate operating segment and are all located
in North America geographic area. Corporate assets consist principally of cash
and goodwill. Corporate expenses and inter-segment sales are immaterial.
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands of dollars)
<S> <C> <C> <C>
Industry segments:
Sales to unaffiliated customers:
Electronic components $17,003 $20,102 $18,659
Microwave micro-circuitry 3,394 - -
------- ------- -------
Consolidated $20,397 $20,102 $18,659
======= ======= =======
Income before provision for income taxes:
Operating income:
Electronic components $ 241 $ 310 $ 1,995
Microwave micro-circuitry 256 - -
Interest and other (expense)
income, net (220) 110 162
------- ------- ------
Consolidated $ 277 $ 420 $2,157
======= ======= ======
Identifiable assets:
Electronic components $14,939 $15,062 $13,040
Microwave micro-circuitry 4,794 - -
Corporate 1,108 1,853 2,415
------- ------- -------
Consolidated $20,841 $16,915 $15,455
======= ======= =======
Depreciation and amortization:
Electronic components $ 1,331 $ 1,103 $ 954
Microwave micro-circuitry 305 - -
------- ------- -------
Consolidated $ 1,636 $ 1,103 $ 954
======= ======= =======
Capital expenditures:
Electronic components $ 2,166 $ 3,126 $ 1,800
Microwave micro-circuitry 297 - -
------- ------- -------
Consolidated $ 2,463 $ 3,126 $ 1,800
======= ======= =======
Geographic areas:
Sales to unaffiliated customers:
North America $17,060 $17,008 $15,925
Europe 1,792 2,134 1,291
Far East 1,527 914 1,408
Other 18 46 35
------- ------- -------
Consolidated $20,397 $20,102 $18,659
======= ======= =======
</TABLE>
-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
The Company's customers are primarily major industrial corporations that
integrate 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 1999, 1998 or 1997. Sales to Hughes Aircraft in
1999 and 1998 were 10.9% of net sales, sales to Boeing Aircraft were 10.4% in
1999 and sales to Lockheed Martin in 1998, 1997 and 1996 amounted to 10.0%,
13.4% and 10.8% of net sales, respectively.
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 48.6% of its
receivables at January 1, 2000 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.
12. Net income per common share
The following table summarizes the calculation of basic and diluted net
income per common share for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Numerator:
Net income available to common shareholders ................................ $ 242,255 $ 340,300 $1,402,409
- ------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average shares outstanding for basic net income per share ......... 1,746,968 1,766,120 1,693,363
Effect of dilutive securities - stock options 18,863 39,092 86,810
- ------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding for diluted net income per share ....... 1,765,831 1,805,212 1,780,173
- ------------------------------------------------------------------------------------------------------------------------
Net income per share - basic ............................................... $.14 $.19 $.83
Net income per share - diluted ............................................. $.14 $.19 $.79
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
At January 1, 2000, there were 344,201 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.
-22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
13. Commitments and contingencies
Lease commitments:
The Company leases real estate and equipment under operating leases
expiring at various dates through February 2006. The leases include provisions
for rent escalation, renewals and purchase options, and the Company is generally
responsible for taxes, insurance, maintenance and repairs.
Total rental expense charged to operations amounted to $198,000 in 1999,
$120,000 in 1998 and $54,000 in 1997. Future minimum lease payments under
noncancellable operating leases with an initial term exceeding one year are as
follows:
2000 ..................................... $220,000
2001 ..................................... 224,000
2002 ..................................... 230,000
2003 ..................................... 108,000
2004 ..................................... 108,000
Thereafter ............................... 126,000
Capital leases included in property, plant and equipment at January 1, 2000
are as follows:
Machinery and equipment ........................... $192,000
Less accumulated depreciation ..................... 54,000
--------
Total ............................................. $138,000
========
Future minimum lease payments under capital leases and the present value of
such payments as of January 1, 2000 is as follows:
2000 ..................................... $ 89,000
2001 ..................................... 89,000
2002 ..................................... 89,000
2003 ..................................... 71,000
--------
Total minimum lease payments ............. 338,000
Less amount representing interest ........ 39,000
--------
Present value of total minimum
lease payments ......................... $299,000
========
Purchase obligations:
The Company has issued purchase order commitments to processing
equipment-manufacturing vendors for approximately $700,000 for capital equipment
and building improvements. The Company anticipates that the equipment will be
purchased and become operational during fiscal 2000.
The Company is contemplating the purchase of the FMI facility, consisting
of approximately 20,000 square feet and 1.7 acres it currently occupies under a
long-term lease agreement, for approximately $1,200,000 from the present
lessors. The Company is in the process of negotiating terms and conditions with
the property owners and is investigating financing alternatives. It is
anticipated that the purchase of the facility would close during the second
quarter of fiscal year 2000. Upon acquiring the facility, the Company intends to
expand the facility by approximately 12,500 square feet and make certain other
improvements for approximately $600,000, and that such building addition should
be available for use during the latter part of fiscal year 2000.
-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
13. Commitments and contingencies (continued)
Consulting and employment agreements; deferred compensation:
The Company is party to an employment agreement with its Chairman,
President and Chief Executive Officer 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.
In connection with the acquisition of FMI, a subsidiary of the Company
entered into employment agreements with the President and with the Chief
Executive Officer that provides each of the executive officers with a minimum
annual salary of $130,000 Canadian. The initial terms of the agreements end on
February 25, 2002 and automatically renew for successive twelve-month periods
thereafter unless terminated pursuant to the terms of the agreements. In
addition, the President of FMI can elect to receive either a bonus of 10% of
compensation or a grant of immediately exercisable stock options determined
pursuant to the terms of the agreement.
The Company is party to a retirement agreement with its former Vice
Chairman and Chief Technology Officer which became effective on December 31,
1998. Pursuant to the retirement agreement, such former officer who received an
initial payment of $151,700 in 1998 and a payment of $185,500 in January 1999,
received a final payment of $185,500 in January 2000. In addition, the agreement
provides for the continuation of certain ongoing benefits, including health
benefits until December 2009.
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 minimum payments of
$24,000 per year and includes health and other certain benefits.
The Company entered into a consulting agreement on January 1, 1998 with a
director of the Company who is also the beneficial owner of more than 10% of the
Company's Common Stock. The term of the consulting agreement, which initially
ended on January 1, 1999, automatically renews for successive twelve-month
periods until terminated pursuant to the terms of the agreement. The consulting
agreement provides this director with an annual fee of $36,000 for his services.
The Company is party to a shareholder's agreement dated as of October 30,
1998 with a former director and Chairman of the Company who is also a beneficial
owner of more than 5% of the Company's Common Stock. Pursuant to the
shareholder's agreement, this former director provides the Company with
consulting services for a fee of $5,000 per month. The term of the consulting
agreement expires October 2001, unless earlier terminated in accordance with the
terms of the shareholder's agreement.
The Company is party to a retirement agreement effective January 1997, with
its former Vice President, Secretary and Controller, that provides him with
annual payments of $30,000 for ten years.
In connection with the consulting and retirement agreements described
above, the Company recognized expense of approximately $37,000 in 1999, $288,000
in 1998 and $239,000 in 1997. 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 2000 are estimated to be
$249,000 and the present value of the estimated future consulting and retirement
benefits payable beyond 2000 and accrued as of January 1, 2000 is approximately
$235,000.
Litigation:
The Company is a party to lawsuits, both as a plaintiff and as a defendant,
arising from the normal course of business. It is the opinion of management,
that the disposition of these various lawsuits will not have a material adverse
effect to the consolidated financial position or results of operations of the
Company.
-24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2000, January 2, 1999 and January 3, 1998
14. Restructuring and related charges
Because of the weakness in orders for its products, the Company announced a
reduction of its workforce and offered early retirement packages to certain
employees during the fourth quarter of 1998. The restructuring charge for 1998
was $510,000, and charges net of tax benefits of $327,000 or $.18 per share, as
a result of the reduction in workforce and voluntary early retirements affecting
fourteen persons. During 1999 all termination benefits pursuant to the
restructuring plan were paid.
15. Transactions with management and loan to shareholder
On May 4, 1998, the Company sold 20,000 (22,000 after giving effect to the
Company's 10% stock dividend) 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, was executed by Mr. Carter in favor of the
Company. Payment of the loan is secured by a pledge of the 33,000 shares of
Common Stock purchased by Mr. Carter with the proceeds of the loans. The Company
recorded compensation expense of $52,000 which was charged to operations over
the one-year period commencing on the date of the transaction, as Mr. Carter
performed services throughout this time period. The sale of these shares of
Common Stock was exempt from registration under the Securities Act of 1933, as
amended, as a transaction not involving a public offering under Section 4(2) of
Act.
16. Shareholder Rights Plan
On March 5, 1999, the Board of Directors of the Company approved a
shareholder rights plan and declared a dividend of one common share purchase
right (a "Right") for each outstanding share of Common Stock of the Company. The
dividend was payable on March 19, 1999 (the "Record Date") to shareholders of
record as of the close of business on that date. Each Right will entitle the
holder to purchase from the Company, upon the occurrence of certain events, one
share of Common Stock for $25.00.
Generally, if any person or group acquires beneficial ownership of 10% or
more of the Company's outstanding Common Stock, each Right (other than Rights
held by such acquiring person or group) will be exercisable, at the $25.00
purchase price, for a number of shares of Common Stock having a market value of
$50.00. Upon an acquisition of the Company, each Right (other than Rights held
by the acquiror) will generally be exercisable, at the $25.00 purchase price,
for a number of shares of common stock of the acquiror having a market value of
$50.00. In certain circumstances, each Right may be exchanged by the Company for
one share of Common Stock. The Rights will expire on March 19, 2009, unless
earlier exchanged or redeemed at $0.01 per Right.
END OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-25-
<PAGE>
QUARTERLY FINANCIAL INFORMATION
Summarized quarterly unaudited financial data reported for 1999 and 1998
follows:
<TABLE>
<CAPTION>
1999 April 3 July 3 October 2 January 1
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ............................. $4,738,531 $5,125,245 $5,328,250 $5,205,005
Gross profit .......................... 2,311,791 2,399,094 2,633,768 2,435,974
Net income (loss) ..................... 212,966 81,919 109,708 (162,338)
- -------------------------------------------------------------------------------------------------------
Net income per (loss) share - basic ... $.12 $.05 $.06 $(.09)
Net income per (loss) share - diluted.. $.12 $.05 $.06 $(.09)
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 April 4 July 4 October 3 January 2
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ............................. $5,792,607 $5,573,659 $5,120,946 $3,614,623
Gross profit .......................... 2,574,755 2,541,932 2,268,970 1,168,649
Net income (loss) ..................... 427,546 408,842 247,803 (743,891)
- -------------------------------------------------------------------------------------------------------
Net income per (loss) share - basic ... $.25 $.23 $.14 $(.42)(A)
Net income per (loss) share - diluted.. $.24 $.22 $.14 $(.42)(A)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
(A) Reflects the effects of a restructuring charge of $510,000 (see Note 14)
which reduced net income by $327,000 or $.18 per share for the fourth
quarter and fiscal 1998.
</TABLE>
QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------
Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Market price per share: ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High ....... $7 $8 3/4 $10 1/4 $8 1/4 $9 3/4 $15 7/8 $13 15/16 $9 7/8
Low ........ 4 5/8 5 5 1/4 5 3/8 9 3/16 13 7 7/8 6 3/8
----------------------------------------------------------------------
</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.
-26-
Exhibit 21
----------
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. 508790 N.B. Inc. Province of 100%
New Brunswick, Canada
3. Filtran Microcircuits Inc. Province of 100%
New Brunswick, Canada
4. Industrias Merrimac
Incorporada, S.A. Costa Rica 100%
Exhibit 23
----------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report to 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, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-1-2000
<PERIOD-END> JAN-1-2000
<CASH> 1,108,141
<SECURITIES> 0
<RECEIVABLES> 3,774,796
<ALLOWANCES> 0
<INVENTORY> 2,913,423
<CURRENT-ASSETS> 9,354,197
<PP&E> 19,213,264
<DEPRECIATION> 11,337,477
<TOTAL-ASSETS> 20,841,114
<CURRENT-LIABILITIES> 5,103,642
<BONDS> 0
0
0
<COMMON> 1,349,154
<OTHER-SE> 12,152,137
<TOTAL-LIABILITY-AND-EQUITY> 20,841,114
<SALES> 20,397,031
<TOTAL-REVENUES> 20,397,031
<CGS> 10,616,404
<TOTAL-COSTS> 19,899,405
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 298,790
<INCOME-PRETAX> 277,255
<INCOME-TAX> 35,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242,255
<EPS-BASIC> .14
<EPS-DILUTED> .14
</TABLE>
