# **Exhibit 13**

#  

# FiveYear Financial Summary

 
|                                    |   | **2001**                                   |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|-----------------------------------------|--------|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| **Years  Ended December 31,**           |   | **(in  thousands, except per share data)** |   |
| Continuing  operations:                 |   |                                       |   |     |   |     |   |     |   |     |   |
| Net sales                               |   | $                                          | 16,897 |     | $      | 26,408   |   | $        | 14,026 |     | $      | 12,062 |   | $ | 12,915 |   |
| Gross profit                            |   | 2,287                                      |   | 7,861    |   | 3,332    |   | 2,672    |   | 3,189    |   |
| Earnings before  income taxes           |   | 4,294                                      |   | 5,019    |   | 226      |   | 192      |   | 93       |   |
| Income (taxes)  benefit                 |   | (1,543                                     | )      | (1,950   | )      | (68      | )      | 13       |   | (27      | )      |
| Earnings                                |   | 2,751                                      |   | 3,069    |   | 158      |   | 205      |   | 66       |   |
| Discontinued  operations — net     |   | —                                     |   | (90      | )      | 809      |   | 680      |   | 422      |   |
| Net earnings                            |   | $                                          | 2,751  |     | $      | 2,979    |   | $        | 967    |     | $      | 885 |   | $ | 488 |   |
| Basic earnings  (loss) per share: (1)   |   |                                       |   |     |   |     |   |     |   |     |   |
| Continuing  operations                  |   | $                                          | .66    |     | $      | .75      |   | $        | .04    |     | $      | .05 |   | $ | .02 |   |
| Discontinued  operations                |   | —                                     |   | (.02     | )      | .20      |   | .17      |   | .10      |   |
|                                    |   | $                                          | .66    |     | $      | .73      |   | $        | .24    |     | $      | .22 |   | $ | .12 |   |
| Diluted earnings  (loss) per share: (1) |   |                                       |   |     |   |     |   |     |   |     |   |
| Continuing  operations                  |   | $                                          | .64    |     | $      | .70      |   | $        | .04    |     | $      | .05 |   | $ | .02 |   |
| Discontinued  operations                |   | —                                     |   | (.02     | )      | .20      |   | .17      |   | .10      |   |
|                                    |   | $                                          | .64    |     | $      | .68      |   | $        | .24    |     | $      | .22 |   | $ | .12 |   |
| Cash dividends  per share (1)           |   | $                                          | — |     | $      | .13      |   | $        | — |     | $      | 1.17 |   | $ | — |   |
| Total assets,  end of year:             |   |                                       |   |     |   |     |   |     |   |     |   |
| Continuing  operations                  |   | $                                          | 18,841 |     | $      | 19,654   |   | $        | 16,532 |     | $      | 16,502 |   | $ | 14,782 |   |
| Discontinued  operations                |   | —                                     |   | —   |   | —   |   | —   |   | 7,144    |   |
|                                    |   | $                                          | 18,841 |     | $      | 19,654   |   | $        | 16,532 |     | $      | 16,502 |   | $ | 21,926 |   |
| Long-term debt,  end of year            |   | $                                          | 1,277  |     | $      | —   |   | $        | — |     | $      | 1,993 |   | $ | 1,989 |   |

 

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(1)          Amounts reflect a 3 for 2 stock split distributed onNovember 27, 2000.

 

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# Management’sDiscussion and Analysis

 

**Financial Condition**

 

Cash and cash equivalentsamounted to $5,960,000 at December 31, 2001 and have increased $4,333,000 fromthe December 31, 2000 level. The cash increase resulted primarily from the saleof marketable equity securities and proceeds received from long-term debt.

 

Accounts receivable, net decreased $2,150,000 from the 2000 levelmainly as a result of the lower fourth quarter sales in 2001 compared to thecomparable period in 2000.  Inventorydecreased $1,944,000 from the 2000 level mainly as a result of an additional  $1,700,000 inventory provision for excessinventory due to the lower sales volume. The $1,742,000 decrease in accounts payable is mainly due to the timingof inventory and capital equipment purchases. Accrued liabilities decreased $1,201,000 from last year primarily due tothe decreased provisions for profit sharing and incentive compensation expenseand lower sales commission expense.

 

Capital expenditures amounted to $2,176,000 in 2001 as the Companycompleted its installations of a semi-automatic production line, a new computerinformation system, and building improvements. The Company’s capital budget for2002 is approximately $450,000.

 

During 2001, the Company sold its investment in marketable equitysecurities and received  $5,951,600 incash and sold its ownership share of real estate located in New Jersey andreceived $182,700 in cash after estimated expenses.  The Company recorded a total pre-tax gain of $5,671,000 on thesesales.

 

Under a revolving line of credit and term noteagreement with a bank, the Company borrowed $2 million under the term noteportion of the agreement and repaid $319,000 of this debt during 2001.  At December 31, 2001, the Company had anunused revolving line of credit of $1,250,000 under this agreement.

 

The Company believes that, based on its current working capital, theexpected cash flows from operations and its current debt arrangements, itsresources are sufficient to meet the financial needs and to fund the capitalexpenditures for the projected levels of business in 2002.

 

 

# **Results of Operations - 2001 versus2000**

 

Net sales from continuing operations decreased $9,511,000 or 36% from2000.  The main reason for the salesdecrease from last year was the sharp drop in the demand for the Company’sproducts from the telecommunications, networking, and wireless markets. TheCompany began to experience a drop-off in market demand during the firstquarter of 2001 as customers began reporting slower growth rates and excessinventory levels.  This drop-off indemand continued through the end of 2001. In addition, some customers requested order cancellations and push-outof deliveries.  As a result of thiscontinued market weakness, the Company’s backlog at December 31, 2001 was $1.4million compared to $16.4 million at December 31, 2000.

 

The gross profit percentage decreased to 14% in 2001 from 30% in 2000.The decrease in the margin percentage for 2001 was mainly due to an additional$1.7 million inventory provision for excess inventory and the negative impactof allocating the fixed overhead expenses over the lower sales level.  Direct labor costs increased about 1.3%points over 2000 and material costs decreased about 2% points from 2001 mainlyas a result of changes in sales mix.

 

Selling and advertising expenses decreased $626,000 (21%) from 2000mainly due to lower sales commission expense to both the Company’s employeesand outside manufacturers’ representatives as a result of the decrease insales.

 

General and administrative expenses decreased $267,000 (16%) from 2000.  The reduction in the provision for themanagement incentive bonus offset in part by increased personnel expenses wasthe primary reason for the lower expense.

 

During 2001, the Company sold its investment in marketable equitysecurities and its ownership share of real estate located in New Jersey andrecorded a total pre-tax gain of $5,671,000 on these sales.  Interest income decreased $62,000 from 2000due to a combination of both lower average cash balance and lower interestrates in 2001.  Interest expenseincreased $85,000 from 2000 due to increased levels of debt outstanding during2001.

 

The effective income tax rate for 2001 was 36% compared to 39% in 2000.The lower rate in 2001 was primarily due to a lower effective state tax rate inthe current year.

 

 

2

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Based on the significant decreases in sales and gross profit in 2001,the Company reported an operating loss of $1,458,000 in 2001 compared to anoperating profit of $3,222,000 in 2000. Nonoperating income amounted to $5,753,000 in 2001 versus $1,796,000 in2000.  As a result, the Company reportedpre-tax earnings from continuing operations of $4,294,000 in 2001 compared to $5,019,000 in 2000.  Earnings from continuing operations amountedto $2,751,000 in 2001 versus $3,069,000 in 2000.  Discontinued operations reported a loss of $90,000 in 2000.  In total, the Company reported net earningsof $2,751,000 in 2001 compared to $2,979,000 in 2000.

 

# **Results of Operations - 2000 versus1999**

 

Net sales from continuing operations increased $12,382,000 or 88% over1999.  Strong bookings during 2000coupled with a $4.1 million higher backlog at the beginning of 2000 compared tothat at the beginning of 1999 were the main reasons for the sales increase.  Bookings during 2000 amounted to $36.4million compared to $18.1 million in 1999. The book to bill ratio in 2000 was 1.4 to 1 compared to 1.3 to 1 in1999. The backlog at December 31, 2000 was $16.4 million compared to $6.4million at December 31, 1999.  Thestrong market demand from the networking, telecommunications, and wirelessmarkets were mainly responsible for the increases in the sales, bookings andbacklog amounts.  During 2000, theCompany experienced some late deliveries to customers with some of itsproducts.  In an effort to improve itsresponse to customer delivery demands, the Company continued its expansionplans which included a semi-automatic production line and process improvementsin its Hopkinton, MA facility, further equipment investment in its Russianoperation and additional outside supplier relationships.

 

The gross profit percentage increased to 30% in 2000 from 24% in 1999.The increase in the margin percentage was mainly due to the favorable effectsof allocating the fixed overhead expenses over the increased sales volume.  Overall direct labor and material costs aspercentages of sales remained fairly consistent during both years.

 

Selling and advertising expenses increased $789,000 (36%) over 1999mainly due to higher sales commission expense to the Company’s outsidemanufacturers’ representatives as a result of the increase in sales.

 

General and administrative expenses increased $567,000 (53%) over 1999mainly as a result of the increased provision for the management incentivebonus and increased personnel expense.

 

During 2000, the Company sold a common stock investment, a real estatecomplex and a portion of one of its product lines and recorded a total gain of$1,511,000 on these sales.  Interestincome decreased $77,000 from 1999 mainly as a result of lower interest

income earned on the notes receivable generated from the sales ofdiscontinued operations.  Interestexpense decreased $145,000 from 1999 as a result of lower levels of debtoutstanding during 2000.

 

The effective income tax rate for 2000 was 39% compared to 30% in 1999.The primary reason for the difference in rates was the nontaxable effect of thedividend exclusion in 1999.  Based onthe lower level of taxable income in 1999, the dividend exclusion had a more significanteffect on the effective rate in 1999 compared to that in 2000.

 

As a result of the significant increases in sales and gross profit,offset in part by higher operating expenses in 2000, the Company reported anoperating profit of $3,222,000 in 2000 compared to an operating profit of$51,000 in 1999.  Nonoperating incomeamounted to $1,796,000 in 2000 compared to $176,000 in 1999.  As a result, the Company reported pre-taxearnings from continuing operations of $5,019,000 in 2000 versus $226,000 in1999.  Earnings from continuingoperations amounted to $3,069,000 in 2000 compared to $158,000 in 1999.  Discontinued operations reported a  loss of $90,000 in 2000 compared to earningsof $809,000 in 1999.  In total, theCompany reported net earnings of $2,979,000 in 2000 compared to $967,000 in1999.

 

 

3

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**Quantitativeand Qualitative Disclosures about Market Risk**

 

The Company’s cash balances in excess of operatingrequirements are currently invested in money market accounts. These moneymarket accounts are subject to interest rate risk and interest income willfluctuate in relation to general money market rates. Based on the cash and cashequivalent balance at December 31, 2001, and assuming the balance was totallyinvested in money market instruments for the full year, a hypothetical 1% pointdecline in interest rates would result in an approximate $59,500 decrease ininterest income.

 

The Company purchases certain inventory from and sellsproduct in foreign countries. As these activities are currently transacted inU.S. dollars, they are not subject to foreign currency exchange risk. However,significant fluctuation in the currencies where the Company purchases inventoryor sells product could make the U.S. dollar equivalent of such transactionsmore or less favorable to the Company and the other involved parties.

 

**Forward-LookingStatements**

 

This Annual Report, including Management’s Discussionand Analysis, the Letter to Stockholders and Operations, containforward-looking statements that involve risks and uncertainties that couldcause actual results to differ materially from those in the forward-lookingstatements. Words such as “expects”, “believes”, “estimates”, “plans” orsimilar expressions are intended to identify such forward-looking statements.The forward-looking statements are based on the Company’s current views andassumptions and involve risks and uncertainties that include, but not limitedto: the ability to develop, market and manufacture new innovative productscompetitively, the fluctuations in product demand of the telecommunicationsindustry, the ability of the Company and its suppliers to produce and delivermaterials and products competitively, and the ability to limit the amount of thenegative effect on operating results caused by pricing pressure.

 

**Recentaccounting pronouncements**

 

The Company adopted Statement of Financial AccountingStandards (SFAS) No. 133, “Accounting for Derivative Instruments and HedgingActivities”, for the year beginning January 1, 2001.  The adoption of the standard had no material effect on theCompany’s results of operations or financial position.  In July 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 141 “Business Combinations”.  SFAS No. 141 eliminates thepooling-of-interest method of accounting for business combinations and  modifies the application of the purchaseaccounting method for all business combinations initiated after June 30, 2001.  The adoption of SFAS No. 141 had no impact on the financial statements ofthe Company.

 

In July 2001, the Financial Accounting Standards Board(FASB) issued SFAS No. 142 “Goodwill and Intangible Assets”.   SFAS No. 142, effective for fiscal yearsbeginning after December 15, 2001, requires that upon adoption, amortization ofgoodwill will cease and instead, the carrying values of goodwill and certainintangible assets will be evaluated for impairment on an annual basis.  In August 2001, the FASB issued SFAS No.143, “Accounting for Asset Retirement Obligations”, effective for yearsbeginning after June 15, 2002.  SFAS No.143 addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  In October 2001, theFASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”, effective for years beginning after December 15, 2001. SFASNo. 144 addresses the financial accounting and reporting for the impairment ordisposal of long-lived assets and supersedes SFAS No. 121 and the accountingand certain reporting provisions of APB No. 30 relating to the disposal of asegment of business.  The Company iscurrently evaluating the effects of these Statements, however, the adoption ofSFAS Nos. 142, 143, and 144 is not expected to have a material effect on theCompany’s financial position, results of operations and cash flows.

 

 

4

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Consolidated Balance Sheets

###  

| **December  31,**                                                                                                   |   | **2001**   |       | **2000**   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Assets                                                                                                              |   |       |       |       |   |
| Current assets:                                                                                                     |   |       |       |       |   |
| Cash and cash  equivalents                                                                                          |   | $          | 5,959,755  |       | $      | 1,626,626 |   |
| Receivables, net                                                                                                    |   | 2,307,353  |       | 4,457,745  |   |
| Inventories                                                                                                         |   | 4,469,315  |       | 6,413,273  |   |
| Deferred income  taxes and other current assets                                                                     |   | 1,468,446  |       | 860,086    |   |
| Total current  assets                                                                                               |   | 14,204,869 |       | 13,357,730 |   |
| Property, plant  and equipment, at cost:                                                                            |   |       |       |       |   |
| Land and  improvements                                                                                              |   | 242,546    |       | 222,552    |   |
| Buildings and  improvements                                                                                         |   | 1,996,354  |       | 1,436,773  |   |
| Machinery and  equipment                                                                                            |   | 7,671,229  |       | 6,263,494  |   |
|                                                                                                                |   | 9,910,129  |       | 7,922,819  |   |
| Less accumulated  depreciation                                                                                      |   | 5,382,954  |       | 4,871,039  |   |
|                                                                                                                |   | 4,527,175  |       | 3,051,780  |   |
| Other assets:                                                                                                       |   |       |       |       |   |
| Marketable  equity securities                                                                                       |   | —     |       | 2,975,780  |   |
| Miscellaneous                                                                                                       |   | 108,854    |       | 268,819    |   |
|                                                                                                                |   | $          | 18,840,898 |       | $      | 19,654,109 |   |
| Liabilities and  Stockholders’ Equity                                                                          |   |       |       |       |   |
| Current  liabilities:                                                                                               |   |       |       |       |   |
| Current portion  of long-term debt                                                                                  |   | $          | 403,390    |       | $      | — |   |
| Accounts payable                                                                                                    |   | 475,405    |       | 2,216,582  |   |
| Accrued  liabilities                                                                                                |   | 835,640    |       | 2,037,173  |   |
| Income taxes                                                                                                        |   | 120,992    |       | 191,542    |   |
| Total current  liabilities                                                                                          |   | 1,835,427  |       | 4,445,297  |   |
| Deferred income  taxes                                                                                              |   | 754,045    |       | 1,349,513  |   |
| Long-term debt                                                                                                      |   | 1,277,401  |       | —     |   |
| Stockholders’  equity:                                                                                         |   |       |       |       |   |
| Preferred stock,  $1.00 par value-Authorized 1,000,000 shares; issued, none                                         |   | —     |       | —     |   |
| Common stock,  $.05 par value-Authorized 10,000,000 shares; issued and outstanding:  4,152,515 and 4,131,015 shares |   | 207,626    |       | 206,550    |   |
| Capital surplus                                                                                                     |   | 4,810,220  |       | 4,761,522  |   |
| Retained  earnings                                                                                                  |   | 9,956,179  |       | 7,204,831  |   |
| Accumulated  other comprehensive income                                                                             |   | —     |       | 1,686,396  |   |
| Total  stockholders’ equity                                                                                    |   | 14,974,025 |       | 13,859,299 |   |
|                                                                                                                |   | $          | 18,840,898 |       | $      | 19,654,109 |   |

 

See notes to consolidated financial statements.

 

 

5

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# ConsolidatedStatements of Operations

 
| **For the  Years Ended December 31,**                      |   | **2001**   |       | **2000**   |   | **1999**   |   |
|------------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|
| Net sales                                                  |   | $          | 16,897,138 |       | $      | 26,407,735 |   | $ | 14,026,229 |   |
| Cost of sales                                              |   | 14,609,911 |       | 18,547,183 |   | 10,693,902 |   |
| Gross profit                                               |   | 2,287,227  |       | 7,860,552  |   | 3,332,327  |   |
| Selling and  advertising expenses                          |   | 2,365,802  |       | 2,991,528  |   | 2,202,113  |   |
| General and administrative  expenses                       |   | 1,379,880  |       | 1,646,587  |   | 1,079,663  |   |
|                                                       |   | 3,745,682  |       | 4,638,115  |   | 3,281,776  |   |
| Operating profit  (loss)                                   |   | (1,458,455 | )          | 3,222,437  |   | 50,551     |   |
| Other income  (expense):                                   |   |       |       |       |   |       |   |
| Gains on sales  of marketable equity securities and assets |   | 5,670,873  |       | 1,511,384  |   | —     |   |
| Interest income                                            |   | 67,760     |       | 130,151    |   | 206,791    |   |
| Interest expense                                           |   | (94,511    | )          | (9,890     | )      | (154,718   | )      |
| Other, net                                                 |   | 108,681    |       | 164,820    |   | 123,532    |   |
|                                                       |   | 5,752,803  |       | 1,796,465  |   | 175,605    |   |
| Earnings from  continuing operations before income taxes   |   | 4,294,348  |       | 5,018,902  |   | 226,156    |   |
| Income tax  expense                                        |   | (1,543,000 | )          | (1,950,000 | )      | (68,000    | )      |
| Earnings from  continuing operations                       |   | 2,751,348  |       | 3,068,902  |   | 158,156    |   |
| Earnings (loss)  from discontinued operations              |   | —     |       | (90,000    | )      | 809,000    |   |
| Net earnings                                               |   | $          | 2,751,348  |       | $      | 2,978,902  |   | $ | 967,156 |   |
|                                                       |   |       |       |       |   |       |   |
| Basic earnings  (loss) per share:                          |   |       |       |       |   |       |   |
| Continuing  operations                                     |   | $          | .66        |       | $      | .75        |   | $ | .04 |   |
| Discontinued  operations                                   |   | .00        |       | (.02       | )      | .20        |   |
|                                                       |   | $          | .66        |       | $      | .73        |   | $ | .24 |   |
|                                                       |   |       |       |       |   |       |   |
| Diluted earnings  (loss) per share:                        |   |       |       |       |   |       |   |
| Continuing  operations                                     |   | $          | .64        |       | $      | .70        |   | $ | .04 |   |
| Discontinued  operations                                   |   | .00        |       | (.02       | )      | .20        |   |
|                                                       |   | $          | .64        |       | $      | .68        |   | $ | .24 |   |

 

See notes to consolidated financial statements.

 

 

6

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### Consolidated Statements of Cash Flows

 
| **For the  Years Ended December 31,**                                                                               |   | **2001**   |      | **2000**   |   | **1999**   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
| Cash Flows from  Operating Activities:                                                                              |   |       |      |       |   |       |   |
| Earnings from  continuing operations                                                                                |   | $          | 2,751,348 |       | $      | 3,068,902  |   | $ | 158,156 |   |
| Adjustments to  reconcile earnings from continuing operations to net cash provided (used) by  operating activities: |   |       |      |       |   |       |   |
| Depreciation and  amortization                                                                                      |   | 700,915    |      | 610,411    |   | 568,051    |   |
| Changes in  deferred income taxes                                                                                   |   | (491,000   | )         | (75,000    | )      | (120,000   | )      |
| Gains on sales  of marketable equity securities and assets                                                          |   | (5,670,873 | )         | (1,511,384 | )      | —     |   |
| Other                                                                                                               |   | —     |      | 2,280      |   | 4,440      |   |
| Changes in  assets and liabilities:                                                                                 |   |       |      |       |   |       |   |
| Receivables, net                                                                                                    |   | 2,340,924  |      | (1,429,878 | )      | (1,171,322 | )      |
| Inventories                                                                                                         |   | 1,943,958  |      | (3,159,863 | )      | (536,758   | )      |
| Other current  assets                                                                                               |   | (71,313    | )         | (10,335    | )      | 14,505     |   |
| Accounts payable  and accrued liabilities                                                                           |   | (2,942,710 | )         | 1,762,600  |   | 805,973    |   |
| Income taxes,  net                                                                                                  |   | (137,065   | )         | (204,957   | )      | (528,541   | )      |
| Net cash (used)  by operating activities                                                                            |   | (1,575,816 | )         | (947,224   | )      | (805,496   | )      |
| Cash Flows from  Investing Activities:                                                                              |   |       |      |       |   |       |   |
| Capital  expenditures                                                                                               |   | (2,176,310 | )         | (1,275,764 | )      | (716,324   | )      |
| Collection of  notes receivable                                                                                     |   | 228,498    |      | 159,553    |   | 149,411    |   |
| Proceeds from  sales of assets                                                                                      |   | 6,134,257  |      | 1,909,308  |   | —     |   |
| Other, net                                                                                                          |   | (8,065     | )         | (8,065     | )      | (8,065     | )      |
| Net cash  provided (used) by investing activities                                                                   |   | 4,178,380  |      | 785,032    |   | (574,978   | )      |
| Cash Flows from  Financing Activities:                                                                              |   |       |      |       |   |       |   |
| Proceeds from  long-term debt                                                                                       |   | 2,000,000  |      | —     |   | —     |   |
| Payments on  long-term debt                                                                                         |   | (319,209   | )         | (745,000   | )      | (1,000,000 | )      |
| Purchases of  common stock                                                                                          |   | (31,602    | )         | —     |   | (242,623   | )      |
| Dividends paid                                                                                                      |   | —     |      | (547,830   | )      | —     |   |
| Stock options  exercised                                                                                            |   | 81,376     |      | 53,967     |   | —     |   |
| Net cash  provided (used) by financing activities                                                                   |   | 1,730,565  |      | (1,238,863 | )      | (1,242,623 | )      |
| Cash Provided  (Used) by Discontinued Operations                                                                    |   | —     |      | (90,000    | )      | 1,225,000  |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                                                               |   | 4,333,129  |      | (1,491,055 | )      | (1,398,097 | )      |
| Cash and Cash  Equivalents at beginning of year                                                                     |   | 1,626,626  |      | 3,117,681  |   | 4,515,778  |   |
| Cash and Cash  Equivalents at end of year                                                                           |   | $          | 5,959,755 |       | $      | 1,626,626  |   | $ | 3,117,681 |   |
| Supplemental  Disclosures of Cash Flow Information                                                                  |   |       |      |       |   |       |   |
| Cash paid during  the year by continuing operations for:                                                            |   |       |      |       |   |       |   |
| Interest                                                                                                            |   | $          | 94,511    |       | $      | 9,980      |   | $ | 154,718 |   |
| Income taxes                                                                                                        |   | $          | 2,281,262 |       | $      | 2,423,941  |   | $ | 340,929 |   |

Noncash Investingand Financing Activities:

 

In connection with the sale of certain assets of aproduct line in 2000, the Company recorded a receivable of $295,000.

During 2000, the Company issued 127,500 common sharesupon the conversion of the lender’s warrants as payment for $255,000 of debt.(See Note 10)

 

See notes to consolidated financial statements.

 

 

7

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Consolidated Statements of Stockholders’ Equity

 
|                                                                    |   |       |   |       |    |        |   |         |   | **Accumulated**   |      |
|-------------------------------------------------------------------------|--------|------------|--------|------------|---------|-------------|--------|--------------|--------|-------------------|-----------|
|                                                                    |   |       |   |       |    |        |   |         |   | **Other**         |      |
|                                                                    |   | **Common** |   | **Stock**  |    | **Capital** |   | **Retained** |   | **Comprehensive** |      |
|                                                                    |   | **Shares** |   | **Amount** |    | **Surplus** |   | **Earnings** |   | **Income**        |      |
| Balance, January  1, 1999                                               |   | 4,075,369  |   | $          | 203,768 |        | $      | 4,572,905    |   | $                 | 3,931,658 |   | $ | 1,783,123 |   |
| Net earnings                                                            |   | —     |   | —     |    | —      |   | 967,156      |   | —            |      |
| Purchases and  retirement of common stock                               |   | (100,200   | )      | (5,010     | )       | (112,558    | )      | (125,055     | )      | —            |      |
| Unrealized  (loss) on marketable equity securities                      |   | —     |   | —     |    | —      |   | —       |   | (38,690           | )         |
| Balance,  December 31, 1999                                             |   | 3,975,169  |   | 198,758    |    | 4,460,347   |   | 4,773,759    |   | 1,744,433         |      |
| Net earnings                                                            |   | —     |   | —     |    | —      |   | 2,978,902    |   | —            |      |
| Cash dividend  paid ($.13 per share)                                    |   | —     |   | —     |    | —      |   | (547,830     | )      | —            |      |
| Exercise of  stock options                                              |   | 28,346     |   | 1,417      |    | 52,550      |   | —       |   | —            |      |
| Conversion of  debt                                                     |   | 127,500    |   | 6,375      |    | 248,625     |   | —       |   | —            |      |
| Unrealized  (loss) on marketable equity securities                      |   | —     |   | —     |    | —      |   | —       |   | (58,037           | )         |
| Balance,  December 31, 2000                                             |   | 4,131,015  |   | 206,550    |    | 4,761,522   |   | 7,204,831    |   | 1,686,396         |      |
| Net earnings                                                            |   | —     |   | —     |    | —      |   | 2,751,348    |   |              |      |
| Exercise of  stock options                                              |   | 31,500     |   | 1,576      |    | 79,800      |   | —       |   | —            |      |
| Purchases and  retirement of common stock                               |   | (10,000    | )      | (500       | )       | (31,102     | )      | —       |   | —            |      |
| Reclassification  adjustment for realized gain included in net earnings |   | —     |   | —     |    | —      |   | —       |   | (1,686,396        | )         |
| Balance,  December 31, 2001                                             |   | 4,152,515  |   | $          | 207,626 |        | $      | 4,810,220    |   | $                 | 9,956,179 |   | $ | — |   |

 

See notes to consolidated financial statements.

 

 

Consolidated Statements of Comprehensive Income (Loss)

 
| **For the  Years Ended December 31,**                                                                                |   | **2001**   |      | **2000** |   | **1999**  |   |
|----------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|----------|--------|-----------|--------|
| Net earnings                                                                                                         |   | $          | 2,751,348 |     | $      | 2,978,902 |   | $ | 967,156 |   |
| Other  comprehensive income (loss), before tax:                                                                      |   |       |      |     |   |      |   |
| Less  reclassification adjustment for realized gain included in net earnings, net  of income tax expense of $575,000 |   | (1,686,396 | )         | —   |   | —    |   |
|                                                                                                                 |   |       |      |     |   |      |   |
| Unrealized  (loss) on marketable equity securities, net of  income tax benefit of $39,000 and $26,000           |   | —     |      | (58,037  | )      | (38,690   | )      |
| Other comprehensive  (loss), net of tax                                                                              |   | (1,686,396 | )         | (58,037  | )      | (38,690   | )      |
| Comprehensive  income                                                                                                |   | $          | 1,064,952 |     | $      | 2,920,865 |   | $ | 928,466 |   |

 

See notes to consolidated financial statements.

 

 

8

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### Notes to Consolidated Financial Statements

 

**(1)****        ****Description of Business** — The Company’s business is conducted through itsValpey-Fisher subsidiary, which

 is involved inthe design, production, import, and sale of quartz crystals and oscillators andultrasonic transducer devices.

 

**(2)****        ****Summary of Significant Accounting Policies:**

**        Principles of consolidation —**The accompanying consolidated financialstatements include the accounts of MATEC

Corporation and its wholly owned subsidiaries.  Significant intercompany balances and transactionshave been eliminated in consolidation.

**        Use of estimates —**The preparation of the Company’sconsolidated financial statements in conformity with generally acceptedaccounting principles necessarily requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the balance sheetdates.  Estimates include reserves foraccounts receivable and inventory, useful lives of property, plant and equipment,accrued liabilities, and deferred income taxes.

**        Fair value of financial instruments —** The carrying amounts of cash, cash equivalents, accounts payable andaccrued expenses approximate fair value because of their short-termnature.  Marketable equity securitieswere recorded in the financial statements at aggregate fair value. The carryingamounts of the Company’s debt instruments approximate fair value (Notes 9 and10).

**        Cash equivalents —** The Company considers all highly liquidinvestments with a maturity of three months or less when purchased to be cashequivalents.  Cash equivalents arestated at cost plus accrued interest, which approximates market value.  The Company reduces its exposure to creditrisk by maintaining such deposits with high quality financialinstitutions.  At December 31, 2001, themajority of the Company’s cash and cash equivalents balance were in excessof  the applicable insurance limits.

**        Inventories —** Inventories are stated at the lower ofcost or market and are determined by the first-in, first out method (FIFO).

**        Property, plant and equipment —** The Company uses the straight-linemethod of providing for depreciation and amortization of property, plant andequipment for financial reporting purposes and accelerated methods for taxpurposes. The estimated lives used to compute depreciation and amortization areas follows: land improvements — 10 years, building and improvements - 15 to 40years and machinery and equipment — 3 to 10 years.

**        Marketable equity securities —** At December 31, 2000, marketable equitysecurities consisted of common stocks and were valued under Statement ofFinancial Accounting Standards (“SFAS”) No. 115 “Accounting for CertainInvestments in Debt and Equity Securities”. Under SFAS No. 115, the Company hadclassified these securities as “available for sale” and were carried at fairvalue, with unrealized gains, net of taxes excluded from earnings and reportedas a component of stockholders’ equity.

**       **During 2001, the Company sold its investment inmarketable equity securities which consisted of 517,527 shares of MetroWestBank common stock and realized a gross gain of $5,519,200.  At December 31, 2000, this investment had a fairmarket value (based on quoted market prices) of $2,975,780.  The gross unrealized gains amounted to$2,265,396 at December 31, 2000.  Priorto the sale of the MetroWest Bank common stock, The Chairman and Chief ExecutiveOfficer of the Company was the Chairman of MetroWest Bank and a Director of theCompany was the Chief Executive Officer of MetroWest Bank.

**        Revenue recognition —** In December 1999, the Securities andExchange Commission (“SEC”) released Staff Accounting Bulletin (“SAB”) No. 101,“Revenue Recognition”, which sets forth the SEC’s views on appropriate revenuerecognition practices.  The Companybelieves that its current revenue recognition practices are in accordance withSAB No. 101.  Revenue is recognized whenproducts are shipped.

**        Income taxes —** The Company computes deferred incometaxes based on the differences between the financial statement and tax basis ofassets and liabilities using enacted rates in effect in the years in which thedifferences are expected to reverse.

**        Common stock split**- On October 23, 2000, the Companyannounced a 3 for 2 common stock split in the form of a stock dividend toresult in the issuance of one additional share of common stock for every twoshares of common stock outstanding.  Thestock split was effective for stockholders of record on November 9, 2000 andwas distributed on November 27, 2000. For periods prior to the effective date, all common share and per shareamounts contained in this report were restated to reflect the split.

**        Earnings per share —** Basic earnings per share is computed bydividing net earnings by the weighted average number of common sharesoutstanding. Diluted earnings per share is computed by dividing net earningsadjusted for the after-tax interest expense reduction that would arise from theassumed conversion of the warrants, if dilutive, by the diluted weightedaverage shares outstanding. Diluted weighted average shares includes theweighted average number of common shares outstanding, the weighted averagenumber of common shares that would have been outstanding if potentiallydilutive common shares relating to stock options had been issued using thetreasury stock method and the weighted average number of shares issued upon theconversion of the warrants, if dilutive.

 

 

9

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**        Stock compensation plans —** The Company applies the intrinsic valuemethod, APB Opinion No. 25 “Accounting for Stock Issued to Employees” andrelated interpretations in accounting for its stock option plans.

**        Comprehensive income (loss) —** Comprehensive income (loss) is defined as the change in equity of abusiness enterprise during a period from transactions and other events andcircumstances from nonowner sources. At December 31, 2000, the only componentof other comprehensive income (loss) for the company was unrealized holdinggains (losses) on available for sale marketable equity securities.

**        Recent accounting pronouncements -** The Company adopted SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”, on January 1,2001.  The impact of the adoption wasnot material to the financial statements of the Company.  In June 2001, the Financial AccountingStandards Board (“FASB”) approved for issuance SFAS No. 141 “BusinessCombinations”.  SFAS No. 141 requiresthat the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001 and eliminates the pooling-of-interestmethod.  The adoption of SFAS No. 141had no impact on the financial statements of the Company.

**       **In June 2001, the FASB approved for issuance SFAS No.142 “Goodwill and Intangible Assets”.  SFAS No. 142, effective for fiscal years beginning after December 15,2001, requires that upon adoption, amortization of goodwill will cease and instead,the carrying values of certain intangible assets will be evaluated forimpairment on an annual basis.  InAugust 2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations”, effective for years beginning after June 15, 2002.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  In October 2001, the FASB issued SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,effective for years beginning after December 15, 2001.

SFAS No. 144 addresses financial accounting andreporting for the impairment of long-lived assets and for long-lived assets tobe disposed of.  The Company is currentlyevaluating the effects of these Statements, however, the adoption of SFAS Nos.142, 143, and 144 is not expected to have a material effect on the Company’sfinancial position, results of operations and cash flows.

 

 

**(3)****                ****Gains on Sales of Marketable Equity Securities and Assets:**In the fourthquarter of 2001, the Company sold its investment in marketable equitysecurities which consisted of 517,527 shares of MetroWest Bank common stock for$5,951,600 in cash.  The Companyrecorded a pre-tax gain of  $5,519,200on the sale.  The Company had valued these securities under SFAS No.115 “Accounting for Certain Investments in Debt and Equity Securities” and hadclassified these securities as “available for sale”.  At December 31, 2000, this investment had a fair market value(based on quoted market prices) of $2,975,780 and the net unrealized gainincluded in  “Accumulated OtherComprehensive Income” amounted to $1,686,400.

**       **As part of the proceeds fromthe sale of its Bergen Cable Technologies, Inc. subsidiary, (BCT”) in 1998 (seeNote 4), the Company received a 10% stock and membership interest in theacquiring entities, Bergen Cable Technology, Inc. (“BCTI”) and Bergen RealEstate L.L.C. (“BRE”).   In the second quarterof 2001, the real estate owned by BRE was sold.  The Company received $182,700 in cash after estimated expensesfor its ownership share in this company and recorded a pre-tax gain of $151,700on the sale.

**       **In the first quarter****of 2000, the Company soldits common stock investment in BCTI received $1,319,000 in cash after estimatedexpenses and recorded a pre-tax gain of $1,226,000 on the sale.  The above gain did not include the Company’sshare of the sale escrow balance, less any claims for indemnity thereon, ifany, to be distributed to the Company on or before January 4, 2002.  The Company received $155,000 in cash inJanuary 2002 as its estimated share of the escrow balance, less estimatedclaims thereon.  The Company will recorda gain on this escrow balance in 2002.

**       **In the fourth quarter of 2000, the Company sold itsreal estate complex located in Northborough, Massachusetts for $550,000 incash.  None of the Company’s operationswere located in this facility.  TheCompany recorded a pre-tax gain of $272,000 on the sale.

**       **In the fourth quarter of 2000, the Company soldcertain assets of its piezoelectric and optical components product line.  Sales proceeds consisted of approximately$40,000 in cash, a secured promissory note in the principal amount of $210,000bearing interest at prime rate (4.75% at December 31, 2001) and a $103,000noninterest bearing receivable discounted to $85,000 based on an imputedinterest rate of 9.5%.  The Companyrecorded a pre-tax gain of $13,000 on this sale.  Sales from this product line amounted to approximately $987,000in 2000 and $1,082,000 in 1999.

 

 

**(4)****        ****Discontinued Operations:**In 1998, the Company sold all the assets of BCT.  As a result of this sale, the Company wasrequired

to perform environmental cleanup at the BCT site.  During the first quarter of 2000, theCompany expensed $150,000 to increase the environmental expense accrual toreflect the revised estimate to complete the remediation.  This after-tax expense of  $90,000 is presented in the ConsolidatedStatements of Operations under the caption “Earnings (loss) from discontinuedoperations”.  As of December 31, 2001,$800,000 has been expensed for the cleanup and $38,000 is accrued for futurepayments.  These costs represent theCompany’s best estimate, but the ultimate costs will not be known until theremediation is complete.

 

10

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**       **As part of the purchaser price for the sale of BCT’sassets in 1998, the Company received a 12% subordinated promissory note in theprincipal amount of $1.25 million (“BCT Note”) and a 10% stock and membershipinterest in BCTI and BRE.  Since theacquiring entity had significant third-party debt compared to its equity andthe Company’s note was subordinated to the third party debt, the Companydeferred any gain on the BCT note and did not assign any value to the stockportions of the sale until cash payments were received by the Company in1999.  In 1999, the Company received$1.2 million in note payments and recorded a corresponding pre-tax gain on thedisposal of discontinued operations during 1999. The $1.2 million in notepayments were accepted as payment in full for the $1.25 million outstandingnote receivable balance. After full payment of the note receivable balance in1999, the Company recorded a pre-tax gain of $1,349,000 ($809,000 after-tax)and recognized the fair market value of the common stock received of$124,000.  This gain is presented in theConsolidated Statements of Operations under the caption “Earnings (loss) fromdiscontinued operations”.

 

 

**(5)****Receivables, net:**Receivables, net ofallowances, consist of the following:
|                                                                                |   | **2001** |      | **2000** |   |
|-------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
| Accounts  receivable, less allowance for doubtful accounts of $396,000 and $175,000 |   | $        | 1,909,324 |     | $      | 4,250,248 |   |
| Refundable  income taxes                                                            |   | 282,000  |      | —   |   |
| Amounts due from  the sales of discontinued operations and assets                   |   | 116,029  |      | 207,497  |   |
|                                                                                |   | $        | 2,307,353 |     | $      | 4,457,745 |   |

 

**(6)Inventories, net:**Inventories,net of reserves, consist of the following:
|            |   | **2001** |      | **2000**  |   |
|-----------------|--------|----------|-----------|-----------|--------|
| Raw materials   |   | $        | 3,572,844 |      | $      | 3,088,730 |   |
| Work in process |   | 306,087  |      | 2,009,636 |   |
| Finished goods  |   | 590,384  |      | 1,314,907 |   |
|            |   | $        | 4,469,315 |      | $      | 6,413,273 |   |

 

**(7)Income Taxes:**Thecomponents of the provision (benefit) for income taxes are as follows:
|                 |   | **2001**   |   | **2000**   |   | **1999** |   |
|----------------------|--------|------------|--------|------------|--------|----------|--------|
| Current  provision:  |   |       |   |       |   |     |   |
| Federal              |   | $1,726,000 |   | $1,607,000 |   | $149,000 |   |
| State                |   | 308,000    |   | 418,000    |   | 39,000   |   |
|                 |   | 2,034,000  |   | 2,025,000  |   | 188,000  |   |
| Deferred  (benefit): |   |       |   |       |   |     |   |
| Federal              |   | (388,000   | )      | (70,000    | )      | (105,000 | )      |
| State                |   | (103,000   | )      | (5,000     | )      | (15,000  | )      |
|                 |   | (491,000)  | )      | (75,000    | )      | (120,000 |   |
| Total                |   | $1,543,000 |   | $1,950,000 |   | $68,000  |   |

 

   The totalincome tax provision (benefit) differs from that computed by applying thefederal income tax rate to income before income taxes. The reasons for thedifference are as follows:
|                                         |   | **2001** |      | **2000** |   | **1999**  |   |
|----------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
| Income taxes at statutory rates              |   | $        | 1,460,100 |     | $      | 1,706,400 |   | $ | 76,900 |   |
| State income tax, net of federal tax benefit |   | 135,300  |      | 272,600  |   | 15,800    |   |
| Other, net including dividend exclusion      |   | (52,400  | )         | (29,000  | )      | (24,700   | )      |
|                                         |   | $        | 1,543,000 |     | $      | 1,950,000 |   | $ | 68,000 |   |

 

 

11

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   The tax effects of significant itemscomprising the Company’s net deferred tax liability as of December 31, 2001 and2000 are as follows:
|                                             |   | **2001**  |      | **2000**  |   |
|--------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Deferred tax assets:                             |   |      |      |      |   |
| Inventory  reserves                              |   | $         | 1,090,500 |      | $      | 593,800 |   |
| Accrued expenses                                 |   | 155,000   |      | 168,100   |   |
| Allowance for  doubtful accounts                 |   | 103,400   |      | 50,100    |   |
| Total deferred  tax assets                       |   | 1,348,900 |      | 812,000   |   |
|                                             |   |      |      |      |   |
| Deferred tax  liabilities:                       |   |      |      |      |   |
| Depreciation                                     |   | 379,400   |      | 346,700   |   |
| DISC commissions                                 |   | 374,600   |      | 428,100   |   |
| Unrealized gain  on marketable equity securities |   | —    |      | 574,700   |   |
| Total deferred  tax liabilities                  |   | 754,000   |      | 1,349,500 |   |
| Net deferred tax  assets (liabilities)           |   | $         | 594,900   |      | $      | (537,500 | ) |

Other current assets include deferred income taxes ofapproximately $1,349,000 in 2001 and $812,000 in 2000.

 

**(8)Profit Sharing and Savings Plan:** The Company has a trusteed profit sharing 401(k) planthat covers all qualified employees. Under the profit sharing section of theplan, the Company may make contributions to the plan at the discretion of theBoard of Directors. Profit sharing expenses amounted to $ 0 in 2001, $186,000in 2000, and $35,000 in 1999.  Under the401(k) section of the plan, the Company matched 50% of employee contributionsup to 6% of compensation. Total Company contributions charged to operationswere $58,000 in 2001, $79,000 in 2000, and $58,000 in 1999.

 

**(9)Accrued Liabilities:**Accrued liabilities consist of the following items:
|                   |   | **2001** |    | **2000** |   |
|------------------------|--------|----------|---------|----------|--------|
| Employee  compensation |   | $        | 199,200 |     | $      | 1,195,000 |   |
| Other                  |   | 636,440  |    | 842,173  |   |
|                   |   | $        | 835,640 |     | $      | 2,037,173 |   |

 

**(10)Borrowing Arrangements: **On February 27, 2001, the Company enteredinto a bank credit arrangement which includes an unsecured $2 million 5 yearterm promissory note and an unsecured $1.25 million revolving line ofcredit.  The interest rate on the termnote is 6.62% and borrowings under the line of credit bear interest at LIBORplus either 1.4% or 1.5% based on the option term chosen by the Company.  There are no compensating balance orcommitment fees under the arrangement. The credit arrangement includes certain typical financial covenants,including among other things, a minimum tangible net worth, an interestcoverage ratio, and a limit on the total amount of capital stockrepurchases.  The Company was incompliance with all such covenants at December 31, 2001.  The Company borrowed $2 million under theterm note agreement and repaid $319,200 during 2001.  The principal payments due subsequent to December 31, 2001 are asfollows: $403,400 in 2002 through 2005 and $67,200 in 2006.  The Company had no borrowings outstandingunder the line of credit at December 31, 2001.

###  

**       **In January 2000, the Company paid $745,000 in cash andissued 127,500 shares of common stock as payment in full for the $1 millionremaining portion of a 10% $2 million Term Debt Note due on June 30, 2000.  As part of this transaction, the Companyissued the lender transferable common stock warrants to purchase 127,500 sharesof the Company’s common stock at $3.17 per share less certain adjustments.

 

**(11)Stockholders’ Equity:** The Company has 4,152,515 and 4,131,015 shares of its $.05 par valueCommon Stock outstanding at December 31, 2001 and 2000, respectively.  During 2001, the Company acquired 10,000shares of common stock at a cost of $31,600 and retired the shares.  During 1999, the Company acquired 100,200shares of common stock at a cost of $242,600 and retired the shares.

**       **Under prior authorizations from the Board ofDirectors, the Company is authorized to purchase up to an additional

101,000 shares of stock through the open market ornegotiated transactions

 

 

12

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**       **The MATEC Corporation 2001, 1999 and 1992 Stock OptionPlans allow for the granting of options to officers, key employees, and otherindividuals to purchase a maximum of 800,000 shares of the Company’s commonstock. The option price and terms are determined by the Company’s Stock Option-CompensationCommittee. The options granted may qualify as incentive stock options(“ISO’s”). Through December 31, 2001, all options granted except for 90,000options were ISO’s. At December 31, 2001, the 1992 Plan has 132,250 optionsavailable for future grant and 211,854 common shares reserved for issuance uponexercise of the outstanding stock options. At December 31, 2001, the 1999 Planhas 47,416 options available for future grants and 102,584 common sharesreserved for issuance upon exercise of the outstanding stock options.  At December 31, 2001, the 2001 Plan has200,000 options available for future grants.

**       **A summary of the status of the Company’s two fixedstock option plans as of December 31, 2001, 2000, and 1999, and changes duringthe years ended on those dates is presented below:

 
|                      |   | **2001**              |   | **2000**                          |   | **1999**              |    |
|---------------------------|--------|-----------------------|--------|-----------------------------------|--------|-----------------------|---------|
|                      |   | **Number of  shares** |   | **Weighted-Avg.  Exercise Price** |   | **Number of  shares** |    | **Weighted-Avg.  Exercise Price** |   | **Number of  shares** |   | **Weighted-Avg.  Exercise Price** |   |
| Outstanding,  January 1   |   | 473,188               |   | $                                 | 3.48   |                  | 239,035 |   | $ | 2.37 |   | 69,997 |   | $ | 1.99 |   |
| Granted                   |   | 10,000                |   | 4.23                              |   | 270,000               |    | 4.26 |   | 180,000 |   | 2.52 |   |
| Exercised                 |   | (31,500               | )      | 2.59                              |   | (28,347               | )       | 1.92 |   | — |   | — |   |
| Forfeited                 |   | (137,250              | )      | 2.81                              |   | (7,500                | )       | 2.39 |   | (10,962 | ) | 2.29 |   |
| Outstanding,  December 31 |   | 314,438               |   | 3.89                              |   | 473,188               |    | 3.48 |   | 239,035 |   | $ | 2.37 |   |
| Exercisable,  December 31 |   | 80,941                |   | 3.40                              |   | 53,494                |    | $ | 2.31 |   | 25,551 |   | $ | 1.90 |   |
|                           |        |                       |        |                                   |        |                       |         |  |  |  |  |  |  |  |  |  |

 

The following table summarizes information about fixedstock options outstanding at December 31, 2001:

 
| **Options Outstanding** |        | **Weighted-Average** |    | **Options Exercisable** |      |
|-------------------------|-------------|----------------------|---------|-------------------------|-----------|
| **Range of**            |        | **Number**           |    | **Remaining**           |      |   |   | **Number** |   | **Weighted** |   |
| **Exercise**            |        | **Outstanding**      |    | **Contractual**         |      | **Exercise** |   | **Exercisable** |   | **Avg. Exercise** |   |
| **Prices**              |        | **at 12/31/01**      |    | **Life**                |      | **Price** |   | **at 12/31/01** |   | **Price** |   |
| $                       | 1.83 - 1.95 |                 | 26,188  |                    | 5.6 years |   | $ | 1.85 |   | 21,391 |   | $ | 1.86 |   |
| $                       | 2.39 - 2.54 |                 | 19,500  |                    | 7.3       |   |   2.39 |   | 7,800 |   | 2.39 |   |
| $                       | 3.42 - 4.28 |                 | 242,500 |                    | 8.2       |   |   3.45 |   | 46,500 |   | 3.42 |   |
| $                       | 11.04       |                 | 26,250  |                    | 8.8       |   | 11.04 |   | 5,250 |   | 11.04 |   |
|                    |        | 314,438              |    | 8.1                     |      | $ | 3.89 |   | 80,941 |   | $ | 3.40 |   |
|                         |             |                      |         |                         |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**       **Pro forma net earnings and earnings per shareinformation, as required by SFAS No. 123, “Accounting for Stock-BasedCompensation”, has been determined as if the Company had accounted for itsemployee stock options under the fair value method described by SFAS No. 123.The fair value of these options was estimated at the grant date using theBlack-Scholes option pricing model with the following assumptions for 2001,2000 and 1999: dividend yield of 0%, an expected option life of 7 years and anexpected stock price volatility of the Company’s common stock of 55% for 2001,50% for 2000 and 40% for 1999.  Theweighted average risk-free interest rates were 5.1% in 2001, 6.6% in 2000, and6.1% in 1999. The estimated weighted-average fair value per option at the dateof grant for options was $2.60 in 2001, $2.56 in 2000, and $2.00 in 1999. Forpurposes of the pro forma disclosures, the estimated fair value of the optionsis amortized to expense over the five-year vesting period of the options. Thepro forma effects of recognizing compensation expense under SFAS No. 123 wouldhave decreased earnings from continuing operations by $73,000, $95,000 and$27,000 in 2001, 2000, and 1999, respectively. These pro forma decreases of net earnings would have reduced earningsper share by $.02 in 2001 and 2000, and $.01 in 1999.

 

13

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**(12)Earnings Per Share:**Thecomputation of basic and diluted earnings per share from continuing operationsis as follows:

 
|                                                                                                |   | **2001**  |      | **2000**  |   | **1999**  |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| **Basic:**                                                                                          |   |      |      |      |   |      |   |
| Earnings from  continuing operations                                                                |   | $         | 2,751,348 |      | $      | 3,068,902 |   | $ | 158,156 |   |
| Weighted average  shares outstanding                                                                |   | 4,138,363 |      | 4,107,079 |   | 4,022,675 |   |
| Basic earnings  per share from continuing operations                                                |   | $         | .66       |      | $      | .75       |   | $ | .04 |   |
|                                                                                                |   |      |      |      |   |      |   |
| **Diluted:**                                                                                        |   |      |      |      |   |      |   |
| Earnings from  continuing operations                                                                |   | $         | 2,751,348 |      | $      | 3,068,902 |   | $ | 158,156 |   |
| Add: interest  impact, net of tax, from the assumed debt reduction from the conversion of  warrants |   | —    |      | 4,420     |   | 8,925     |   |
| Adjusted  earnings from continuing operations                                                       |   | $         | 2,751,348 |      | $      | 3,073,322 |   | $ | 167,081 |   |
| Weighted average  shares outstanding                                                                |   | 4,138,363 |      | 4,107,079 |   | 4,022,675 |   |
| Dilutive effect  of stock options outstanding, using the treasury stock method                      |   | 139,125   |      | 241,849   |   | 19,731    |   |
| Conversion of  warrants                                                                             |   | —    |      | 9,432     |   | —    |   |
| Diluted weighted  average shares outstanding                                                        |   | 4,277,488 |      | 4,358,360 |   | 4,042,406 |   |
| Diluted earnings  per share from continuing operations                                              |   | $         | .64       |      | $      | .70       |   | $ | .04 |   |

 

In 1999 the effect of the outstanding warrants topurchase 127,500 shares was antidilutive.

 

 

**(13) OtherIncome (Expense), net:**Other, net consists of the following items:

 
|                    |   | **2001** |    | **2000** |   | **1999** |   |
|-------------------------|--------|----------|---------|----------|--------|----------|--------|
| Dividends               |   | $        | 108,681 |     | $      | 144,908  |   | $ | 134,557 |   |
| Real estate  operations |   | —   |    | 19,912   |   | (11,025  | )      |
|                    |   | $        | 108,681 |     | $      | 164,820  |   | $ | 123,532 |   |

 

 

**(14)Industry Segment:**The Company operates in one segment: the design, production, import, and saleof quartz crystals and oscillators and ultrasonic transducer devices.

 

**       **One customer accounted for approximately 15% of netsales in 2001.  During 2000, twocustomers accounted for approximately 21% and 13% of net sales.  No customer accounted for more than 10% ofnet sales in 1999.  Export salesamounted to $3,916,000, $6,065,000, and $2,768,000 in 2001, 2000, and 1999,respectively. Sales to customers located in Canada accounted forapproximately   48%, 49%, and 48% oftotal export sales in 2001, 2000, and 1999, respectively.

 

 

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**(15)** **QuarterlyFinancial Data (unaudited):**Selected unaudited quarterly financialdata for 2001 and 2000 is set forth below:
|                                                       |   | **First**                                  |   | **Second** |   | **Third** |   | **Fourth** |   |
|------------------------------------------------------------|--------|--------------------------------------------|--------|------------|--------|-----------|--------|------------|--------|
| **2001**                                                   |   | **(in  thousands, except per share data)** |
| Net sales from  continuing operations                      |   | $                                          | 7,001  |       | $      | 4,913     |   | $          | 3,007  |   | $ | 1,976 |   |
| Gross profit  (loss)                                       |   | 2,016                                      |   | 1,225      |   | 408       |   | (1,362     | )      |
| Earnings (loss)  before income taxes                       |   | 830                                        |   | 289        |   | (409      | )      | 3,584      |   |
| Net earnings  (loss) from:  Continuing operations          |   | 498                                        |   | 173        |   | (245      | )      | 2,325      |   |
| Discontinued  operations                                   |   | —                                     |   | —     |   | —    |   | —     |   |
| Net earnings  (loss)                                       |   | $                                          | 498    |       | $      | 173       |   | $          | (245   | ) | $ | 2,325 |   |
| Basic earnings  (loss) per share:  Continuing operations   |   | $                                          | .12    |       | $      | .04       |   | $          | (.06   | ) | $ | .56 |   |
| Discontinued  operations                                   |   | —                                     |   | —     |   | —    |   | —     |   |
|                                                       |   | $                                          | .12    |       | $      | .04       |   | $          | (.06   | )  | $ | .56 |   |
| Diluted earnings  (loss) per share:  Continuing operations |   | $                                          | .11    |       | $      | .04       |   | $          | (.06   | ) | $ | .55 |   |
| Discontinued  operations                                   |   | —                                     |   | —     |   | —    |   | —     |   |
|                                                       |   | $                                          | .11    |       | $      | .04       |   | $          | (.06   | )  | $ | .55 |   |
| **2000**                                                   |   |                                       |   |       |   |      |   |       |   |
| Net sales from  continuing operations                      |   | $                                          | 5,426  |       | $      | 6,287     |   | $          | 7,219  |   | $ | 7,476 |   |
| Gross profit                                               |   | 1,624                                      |   | 1,893      |   | 2,131     |   | 2,213      |   |
| Earnings (loss)  before income taxes                       |   | 1,881                                      |   | 831        |   | 943       |   | 1,364      |   |
| Net earnings  (loss) from:  Continuing operations          |   | 1,129                                      |   | 499        |   | 565       |   | 876        |   |
| Discontinued  operations                                   |   | (90                                        | )      | —     |   | —    |   | —     |   |
| Net earnings                                               |   | $                                          | 1,039  |       | $      | 499       |   | $          | 565    |   | $ | 876 |   |
| Basic earnings  (loss) per share:  Continuing operations   |   | $                                          | .28    |       | $      | .12       |   | $          | .14    |   | $ | .21 |   |
| Discontinued  operations                                   |   | (.02                                       | )      | —     |   | —    |   | —     |   |
|                                                       |   | $                                          | .26    |       | $      | .12       |   | $          | .14    |   | $ | .21 |   |
| Diluted earnings  (loss) per share:  Continuing operations |   | $                                          | .27    |       | $      | .11       |   | $          | .13    |   | $ | .20 |   |
| Discontinued  operations                                   |   | (.02                                       | )      | —     |   | —    |   | —     |   |
|                                                       |   | $                                          | .25    |       | $      | .11       |   | $          | .13    |   | $ | .20 |   |

 

Earnings per share calculations for each of thequarters are based on the weighted average number of shares outstanding foreach period and the sum of the quarters may not necessarily be equal to thefull year earnings per share amounts.

**       **In the second quarter of 2001, net earnings fromcontinuing operations includes a gain on sale of assets of $91,200 ($.02 basicand diluted earnings per share).  SeeNote 3.

**       **In the fourth quarter of 2001, net earnings fromcontinuing operations includes a gain on sale of assets of $3,460,000 ($.83basic earnings per share and $.82 diluted earnings per share).  See Note 3.

**       **The fourth quarter of 2001gross profit (loss) includesa $1.7 million inventory write-off provision for excess inventory.

**        **Inthe first quarter of 2000, net earnings from continuing operations includes again on sale of assets of $736,000 ($.18 basic earnings per share and $.17diluted earnings per share).  See Note3.

**       **In the fourth quarter of 2000, net earnings fromcontinuing operations includes gains on sale of assets amounting to $171,000

 ($.04 basicand diluted earnings per share).  SeeNote 3.

 

 

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### **Independent Auditors’ Report**

** **

** **

** **

**To the Board of Directorsand Stockholders of MATEC Corporation:**

 

**       **We have audited the accompanyingconsolidated balance sheets of MATEC Corporation and subsidiaries as ofDecember 31, 2001 and 2000, and the related consolidated statements ofoperations, comprehensive income (loss), stockholders’ equity, and cash flowsfor each of the three years in the period ended December 31, 2001.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

**       **We conducted our audits in accordancewith auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

**       **In our opinion, such consolidatedfinancial statements present fairly, in all material respects, the financialposition of MATEC Corporation and subsidiaries as of December 31, 2001 and2000, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States of America.

 
|                            |
|---------------------------------|
| DELOITTE & TOUCHE  LLP |
| Boston, Massachusetts           |
| February 15, 2002               |

 

 

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**Common Stock and StockholderInformation**

 

 

**COMMON STOCK INFORMATION**

MATEC common stock is listed and traded on the American Stock Exchangeunder the symbol MXC.  On October 23,2000, the Company announced a three-for-two stock split in the form of a stockdividend effective November 27, 2000 for stockholders of record on November 9,2000.  The range of high and low prices,adjusted for the three-for-two stock split, during each quarter for the pasttwo years is shown below:

 
|                                  |   | **2001** |   | **2000** |   |
|---------------------------------------|--------|----------|--------|----------|--------|
| **For the  years ended December 31,** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| 4th  quarter                          |   | $        | 5.09   |     | $      | 3.51 |   | $ | 13.29 |   | $ | 5.50 |   |
| 3rd  quarter                          |   | 4.55     |   | 3.00     |   | 15.33 |   | 5.67 |   |
| 2nd  quarter                          |   | 5.65     |   | 3.75     |   | 10.83 |   | 3.67 |   |
| 1st  quarter                          |   | 9.00     |   | 4.25     |   | 5.17 |   | 3.42 |   |
|                                       |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

No dividend was paid in 2001. During 2000, the Company paid a $.13 per share (adjusted for thethree-for-two stock split) cash dividend.

 

The number of stockholders of record on February 22, 2002 was 961. Thisnumber does not include stockholders for whom shares are held in a “nominee” or“street” name.

 

 

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