UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-11201 Merrimac Industries, Inc. (Exact Name of Small Business Issuer as Specified in Its Charter) DELAWARE 22-1642321 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 41 FAIRFIELD PLACE WEST CALDWELL, NEW JERSEY 07006 (Address of Principal Executive Offices) (973) 575-1300 (Issuer's Telephone Number) Former name, former address and former fiscal year, if changed since last report: N/A Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 13, 2004, there were 3,130,944 shares of Common Stock, par value $0.01 per share, outstanding. Transitional Small Business Disclosure Format (check one): Yes No X --- --- MERRIMAC INDUSTRIES, INC. 41 Fairfield Place West Caldwell, NJ 07006 INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months and Six Months Ended July 3, 2004 and June 28, 2003.................................................. 1 Consolidated Balance Sheets as of July 3, 2004 and January 3, 2004................................................ 2 Consolidated Statement of Stockholders' Equity as of July 3, 2004....................................................... 3 Consolidated Statements of Cash Flows for the Six Months Ended July 3, 2004 and June 28, 2003........................ 4 Notes to Consolidated Financial Statements......................... 5 Item 2. Management's Discussion and Analysis or Plan of Operation ................................................. 11 Item 3. Controls and Procedures ........................................... 17 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................ 17 Item 6. Exhibits and Reports on Form 8-K .................................. 18 Signatures................................................................... 23 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MERRIMAC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended Six Months Ended ----------------------- -------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- OPERATIONS Net sales ................................... $7,896,044 $6,612,597 $15,543,872 $13,124,241 ---------- ---------- ----------- ----------- Costs and expenses: Cost of sales ............................. 4,587,619 4,058,517 8,887,550 8,118,220 Selling, general and administrative ....... 2,453,115 2,584,877 4,907,534 4,914,271 Research and development .................. 396,038 424,254 967,623 1,023,985 Restructuring charge....................... - 74,180 - 74,180 ---------- ---------- ---------- ---------- 7,436,772 7,141,828 14,762,707 14,130,656 ---------- ---------- ---------- ---------- Operating income (loss)...................... 459,272 (529,231) 781,165 (1,006,415) Interest and other expense, net ............. (70,286) (53,375) (151,248) (112,576) Gain on disposition of assets................ - 70,951 - 70,951 ---------- ---------- ---------- ---------- Income (loss) before income taxes............ 388,986 (511,655) 629,917 (1,048,040) Provision (benefit) for income taxes ........ (55,000) (36,685) (45,000) (117,685) ---------- ---------- ---------- ---------- Net income (loss)............................ $ 443,986 $ (474,970) $ 674,917 $ (930,355) ========== ========== ========== ========== Net income (loss) per common share-basic..... $ .14 $ (.15) $ .22 $ (.30) ========== ========== ========== ========== Net income (loss) per common share-diluted... $ .14 $ (.15) $ .21 $ (.30) ========== ========== ========== ========== Weighted average number of shares outstanding: Basic ..................................... 3,123,512 3,120,591 3,122,202 3,120,343 ========== ========== ========== ========== Diluted.................................... 3,163,861 3,120,591 3,146,416 3,120,343 ========== ========== ========== ========== COMPREHENSIVE INCOME (LOSS) Net income (loss)............................ $ 443,986 $ (474,970) $ 674,917 $ (930,355) Comprehensive income (loss): Foreign currency translation adjustment.... (34,556) 426,692 (143,307) 742,128 ---------- ---------- ---------- ---------- Comprehensive income (loss).................. $ 409,430 $ (48,278) $ 531,610 $ (188,227) ========== ========== ========== ========== See accompanying notes. 1 MERRIMAC INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS July 3, January 3, 2004 2004 ---- ---- (UNAUDITED) (AUDITED) ASSETS Current assets: Cash and cash equivalents............................... $ 1,838,885 $ 452,633 Accounts receivable, net................................ 5,866,283 6,299,258 Income tax refunds receivable........................... 127,718 135,520 Inventories, net........................................ 3,005,042 3,187,946 Other current assets.................................... 504,960 482,633 Deferred tax assets..................................... 783,000 611,000 ----------- ----------- Total current assets.................................. 12,125,888 11,168,990 ----------- ----------- Property, plant and equipment............................. 37,639,383 37,203,977 Less accumulated depreciation and amortization.......... 21,454,330 19,982,378 ----------- ----------- Property, plant and equipment, net........................ 16,185,053 17,221,599 Restricted cash........................................... 1,500,000 1,500,000 Other assets.............................................. 816,844 854,487 Deferred tax assets....................................... 138,000 221,000 Goodwill.................................................. 3,028,077 3,122,563 ----------- ----------- Total Assets.......................................... $33,793,862 $34,088,639 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....................... $ 868,381 $ 954,405 Accounts payable........................................ 1,409,646 1,239,925 Accrued liabilities..................................... 1,951,936 1,711,875 Customer deposits....................................... 167,761 389,211 ----------- ----------- Total current liabilities............................. 4,397,724 4,295,416 Long-term debt, net of current portion.................... 3,225,522 4,208,106 Deferred compensation..................................... 71,214 88,362 Deferred liabilities...................................... 40,994 48,014 Deferred tax liabilities.................................. 630,000 611,000 ----------- ----------- Total liabilities..................................... 8,365,454 9,250,898 ----------- ----------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share: Authorized: 1,000,000 shares No shares issued...................................... - - Common stock, par value $.01 per share: Authorized: 20,000,000 shares Issued: 3,213,044 and 3,202,991 shares................ 32,130 32,030 Additional paid-in capital.............................. 18,745,871 18,686,914 Retained earnings....................................... 7,156,422 6,481,505 Accumulated other comprehensive income.................. 579,851 723,158 ----------- ----------- 26,514,274 25,923,607 Less 82,100 shares of treasury stock, at cost .......... (573,866) (573,866) Less loan to officer-stockholder........................ (512,000) (512,000) ----------- ----------- Total stockholders' equity............................ 25,428,408 24,837,741 ----------- ----------- Total Liabilities and Stockholders' Equity............ $33,793,862 $34,088,639 =========== =========== See accompanying notes. 2 MERRIMAC INDUSTRIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JULY 3, 2004 (UNAUDITED) Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Treasury Stock Shares Amount Capital(A) Earnings Income(Loss) Shares Amount ------------------------------------------------------------------------------------------- Balance, January 3, 2004.... 3,202,991 $32,030 $18,686,914 $6,481,505 $723,158 82,100 $(573,866) Net income.................. 674,917 Stock Purchase Plan sales... 953 9 5,098 Exercise of options......... 9,100 91 53,859 Foreign currency translation (143,307) ------------------------------------------------------------------------------------------- Balance, July 3, 2004....... 3,213,044 $32,130 $18,745,871 $7,156,422 $579,851 82,100 $(573,866) =========================================================================================== Loan to Officer- Stockholder Total ------------------------------- Balance, January 3, 2004.... $(512,000) $24,837,741 Net income.................. 674,917 Stock Purchase Plan sales... 5,107 Exercise of options......... 53,950 Foreign currency translation (143,307) ------------------------------- Balance, July 3, 2004....... $(512,000) $25,428,408 =============================== (A) Tax benefits associated with the exercise of employee stock options are recorded to additional paid-in capital when such benefits are realized. See accompanying notes. 3 MERRIMAC INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended ------------------ July 3, June 28, 2004 2003 ---- ---- Cash flows from operating activities: Net income (loss) .................................................... $ 674,917 $ (930,355) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ...................................... 1,646,794 1,609,251 Amortization of deferred financing costs............................ 24,962 72,842 Amortization of deferred income .................................... - (21,822) Gain on disposition of assets....................................... - (70,951) Deferred and other compensation .................................... 4,923 3,801 Deferred tax benefit................................................ (75,000) (146,000) Changes in operating assets and liabilities: Accounts receivable ............................................... 412,330 (1,557,361) Income tax refunds receivable ..................................... 5,459 259,422 Inventories ....................................................... 178,722 154,807 Other current assets .............................................. (23,942) (225,702) Other assets ...................................................... 12,681 99,582 Accounts payable .................................................. 176,570 (89,380) Accrued liabilities ............................................... 244,410 (77,253) Customer deposits.................................................. (221,450) 167,325 Income taxes payable .............................................. (16,469) Deferred compensation ............................................. (22,071) (20,460) Other liabilities ................................................. (7,020) 67,107 ------------ ------------ Net cash provided by (used in) operating activities .................... 3,032,285 (721,616) ------------ ------------ Cash flows from investing activities: Purchase of capital assets ........................................... (642,566) (802,114) Proceeds from termination of lease.................................... - 19,235 ------------ ------------ Net cash used in investing activities .................................. (642,566) (782,879) ------------ ------------ Cash flows from financing activities: Repayment of borrowings .............................................. (1,053,667) (362,302) Proceeds from the exercise of stock options........................... 53,950 6,743 Proceeds from Stock Purchase Plan sales............................... 5,107 - ------------ ------------ Net cash used in financing activities .................................. (994,610) (355,559) ------------ ------------ Effect of exchange rate changes ........................................ (8,857) 140,366 ------------ ------------ Net increase (decrease) in cash and cash equivalents ................... 1,386,252 (1,719,688) Cash and cash equivalents at beginning of year ......................... 452,633 3,610,798 ------------ ------------ Cash and cash equivalents at end of period ............................. $ 1,838,885 $ 1,891,110 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes ....................................................... $ 46,685 $ 52,815 ============ ============ Interest on credit facilities....................................... $ 143,492 $ 134,454 ============ ============ Non-cash activities- Unpaid purchases of capital assets ................................. $ 223,000 $ 127,000 ============ ============ See accompanying notes. 4 MERRIMAC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and therefore do not include all information and footnote disclosures otherwise required by generally accepted accounting principles for a full fiscal year. The financial statements do, however, reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position of the Company as of July 3, 2004 and its results of operations and cash flows for the periods presented. Results of operations of interim periods are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements in the Company's Annual Report on Form 10-KSB for the year ended January 3, 2004. Certain prior year amounts have been reclassified to conform to the current presentation. 2. CONTRACT REVENUE RECOGNITION Contract revenue and related costs on fixed-price and cost-reimbursement contracts that require customization of products to customer specifications are recorded when title transfers to the customer, which is generally on the date of shipment. Prior to shipment, manufacturing costs incurred on such contracts are recorded as work-in-process inventory. Anticipated losses on contracts are charged to operations when identified. Revenue related to non-recurring engineering charges is generally recognized upon shipment of the initial units produced or based upon contractually established stages of completion. The cost rates utilized for cost-reimbursement contracts are subject to review by third parties and can be revised, which can result in additions to or reductions from revenue. Revisions which result in reductions to revenue are recognized in the period that the rates are reviewed and finalized; additions to revenue are recognized in the period that the rates are reviewed, finalized, accepted by the customer, and collectability from the customer is assured. 3. ACCOUNTING PERIOD The Company's fiscal year is the 52-53 week period ending on the Saturday closest to December 31. The Company has quarterly dates that correspond with the Saturday closest to the last day of each calendar quarter and each quarter consists of 13 weeks in a 52-week year. Periodically, the additional week to make a 53-week year (fiscal year 2003 was the last and fiscal year 2008 will be the next) is added to the fourth quarter, making such quarter consist of 14 weeks. 4. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes all changes in stockholders' equity during a period except those resulting from investments by or distributions to stockholders. The Company has determined that the only adjustment to net income (loss) to determine comprehensive income (loss) impacting the Company is cumulative translation adjustments. 5. STOCK-BASED COMPENSATION SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", to require more prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. As permitted by SFAS No. 148, the Company will continue to apply the provisions of APB Opinion No. 25, "Accounting for Stock-Based Compensation," for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs. 5 MERRIMAC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below sets forth the pro forma net income (loss) and the pro forma net income (loss) per share information as calculated in accordance with SFAS No. 123 for the three-month and six-month periods ended July 3, 2004 and June 28, 2003: Three Months Ended Six Months Ended -------------------------- -------------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ------------ ----------- ------------ ----------- Net income (loss) - as reported ........................ $ 443,986 $ (474,970) $ 674,917 $ (930,355) Plus: stock-based compensation expense included in reported net income (loss) .... - - - - Less: Stock-based compensation expense determined using the fair value method ............ (36,000) (76,000) (88,000) (150,000) ----------- ----------- ----------- ----------- Net income (loss) - pro forma ........................ $ 407,986 $ (550,970) $ 586,917 $(1,080,355) =========== =========== =========== =========== Basic net income (loss) per share: As reported ......................................... $ .14 $ (.15) $ .22 $ (.30) Pro forma ........................................... $ .13 $ (.18) $ .19 $ (.35) Diluted net income (loss) per share: As reported ......................................... $ .14 $ (.15) $ .21 $ (.30) Pro forma ........................................... $ .13 $ (.18) $ .19 $ (.35) The SFAS 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. The fair value of each of the options and purchase plan subscription rights granted in 2004 and 2003 was estimated on the date of grant using the Black-Scholes option valuation model. The following weighted average assumptions were utilized: 2004 2003 ---- ---- Expected option life (years)....................... 2.7 2.6 Expected volatility................................ 50.00% 45.00% Risk-free interest rate............................ 1.50% 3.50% Expected dividend yield............................ 0.00% 0.00% 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. 6. GOODWILL The changes in the carrying amount of goodwill for the six-month periods ended July 3, 2004 and June 28, 2003 are as follows: 2004 2003 ---- ---- Balance, beginning of year..................... $3,122,563 $2,491,146 Foreign currency adjustment.................... (94,486) 476,093 ---------- ---------- Balance, end of period......................... $3,028,077 $2,967,239 ========== ========== 7. INVENTORIES Inventories consist of the following: July 3, January 3, 2004 2004 ---- ---- Finished goods................................. $ 136,421 $ 121,613 Work in process................................ 1,443,994 1,806,000 Raw materials and purchased parts.............. 1,424,627 1,260,333 ---------- ---------- Total.......................................... $3,005,042 $3,187,946 ========== ========== 6 MERRIMAC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total inventories are net of valuation allowances for obsolescence and cost overruns of $1,996,000 at July 3, 2004 and $1,787,000 at January 3, 2004. 8. CURRENT AND LONG-TERM DEBT The Company was obligated under the following debt instruments at July 3, 2004 and January 3, 2004: July 3, January 3, 2004 2004 ----------- ----------- The CIT Group/Business Credit, Inc. (A): Revolving line of credit, interest 1/2% above prime ..................... - $ 498,416 Term loan A, due October 8, 2008, variable interest above LIBOR or prime. $1,225,000 1,425,000 Term loan B, due October 8, 2010, variable interest above LIBOR or prime. 2,455,358 2,651,786 The Bank of Nova Scotia (B): Capital leases, interest 6.7%, due October 2004 ........................... 20,473 43,339 Capital leases, interest 8.7%, due June 2005 .............................. 142,146 180,841 Capital leases, interest 7.3%, due April 2006 ............................. 135,272 161,287 Capital leases, interest 7.9%, due June 2006 .............................. 115,654 136,628 First Insurance Funding Corp.- Note payable, insurance premiums, interest 6.75% due April 1, 2004......... - 65,214 ---------- ---------- 4,093,903 5,162,511 Less current portion ....................................................... 868,381 954,405 ---------- ---------- Long-term portion .......................................................... $3,225,522 $4,208,106 ========== ========== (A) On October 8, 2003, the Company completed the refinancing of its revolving credit and term loan obligations with a new credit facility provided by The CIT Group/Business Credit, Inc. ("CIT") that provides for a three-year secured revolving credit, term loan and letter of credit facility for $9,250,000. All obligations due to its prior bank were repaid from the proceeds of such refinancing. The new financing agreement with CIT consists of a $5,000,000 revolving line of credit, that is temporarily reduced by $250,000 until certain conditions are met, a $1,500,000 machinery and equipment term loan ("Term Loan A") and a $2,750,000 real estate term loan ("Term Loan B"). In connection with this new financing agreement, the Company was required to place, over the life of the loan, $1,500,000 as restricted cash with CIT. The revolving line of credit is subject to an availability limit under a borrowing base calculation (85% of eligible accounts receivable as defined in the financing agreement plus 100% of the $1,500,000 restricted cash). At July 3, 2004, the Company had available borrowing capacity under its revolving line of credit of $4,200,000. The revolving line of credit bears interest at the prime rate plus 1/2 percent (currently 5.0%). The principal amount of Term Loan A is payable in 60 equal monthly installments of $25,000 and bears interest at the prime rate plus one percent (currently 5.50%). The principal amount of Term Loan B is payable in 84 equal monthly installments of $32,738 and bears interest at the prime rate plus one percent (currently 5.50%). At July 3, 2004, the Company, under the terms of its agreement with CIT, elected to convert $1,000,000 of Term Loan A and $2,000,000 of Term Loan B from their prime rate base to LIBOR-based interest rate loans. The current interest rates on such LIBOR interest rate loans was 4.485%. The previous LIBOR interest rate options, at an interest rate of 4.44%, expired on April 13, 2004. The current LIBOR interest rate options will expire October 12, 2004. The revolving line of credit and the term loans are secured by substantially all of the Company's assets located within the United States and the pledge of 65% of the stock of the Company's subsidiaries located in Costa Rica and Canada. The provisions of the financing agreement require the Company to maintain certain financial and other covenants. The Company was in compliance with these covenants at July 3, 2004. (B) Capital leases included in property, plant and equipment, net, have a depreciated cost of approximately $565,000 at July 3, 2004 and $590,000 at January 3, 2004. 9. INCOME TAXES The Company's effective tax rate for the quarter and six months ended July 3, 2004 reflects U.S. Federal Alternative Minimum Tax and State income taxes that are due based on certain statutory limitations on the use of the Company's net operating loss carryforwards. A benefit was recorded in the amount of $75,000 based on available Canadian tax credits due to the increased profitability of Filtran Microcircuits Inc. 7 MERRIMAC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company currently has significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences, which should reduce taxable income in future periods. A valuation allowance (or write-down) is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company's 2002 and 2003 domestic net losses weighed heavily in the Company's overall assessment. As a result of the assessment, the Company established a full valuation allowance for its remaining net domestic deferred tax assets at December 28, 2002. This assessment continued unchanged in fiscal years 2003 and 2004. The Company has reclassified the domestic valuation allowance on its deferred tax assets as of January 3, 2004 to conform to the current presentation. Internal Revenue Service Code Section 382 places a limitation on the utilization of net operating loss carryforwards when an ownership change, as defined in the tax law, occurs. Generally, an ownership change occurs when there is a greater than 50 percent change in ownership. If such change should occur, the actual utilization of net operating loss carryforwards, for tax purposes, would be limited annually to a percentage of the fair market value of the Company at the time of such change. 10. BUSINESS SEGMENT 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 applications. Of the identifiable assets, 80% are located in the United States and 20% are located in Costa Rica. Included in such segment are the Multi-Mix(R) Microtechnology net assets. Microwave micro-circuitry: Design, manufacture and sale of microstrip, bonded stripline and thick metal-backed Teflon (R) (PTFE) and mixed dielectric multilayer circuits for communications, defense and aerospace applications. All of the identifiable assets are located in Canada. Information about the Company's operations in different industries follows. Operating income is net sales less operating expenses. Operating expenses exclude interest expense, other income and income taxes. Corporate assets consist principally of cash and corporate expenses are immaterial. Intersegment sales and the resulting intersegment assets are principally due to intercompany sales from the microwave micro-circuitry segment to the electronic components segment. Three Months Ended Six Months Ended --------------------------- --------------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 --------- --------- --------- --------- (In thousands of dollars) (In thousands of dollars) Industry segments: Sales to unaffiliated customers: Electronic components $ 6,384 $ 5,837 $ 12,780 $ 11,793 Microwave micro-circuitry 1,522 879 2,861 1,520 Intersegment sales (10) (103) (97) (189) --------- --------- --------- --------- Consolidated $ 7,896 $ 6,613 $ 15,544 $ 13,124 ========= ========= ========= ========= Income (loss) before income taxes: Operating income (loss): Electronic components $ 288 $ (511) $ 498 $ (863) Microwave micro-circuitry 171 (18) 283 (143) Interest and other expense, net (70) (54) (151) (113) Gain on disposition of assets - 71 - 71 --------- --------- --------- --------- Consolidated $ 389 $ (512) $ 630 $ (1,048) ========= ========= ========= ========= Depreciation and amortization: Electronic components $ 769 $ 755 $ 1,528 $ 1,497 Microwave micro-circuitry 58 57 119 112 --------- --------- --------- --------- Consolidated $ 827 $ 812 $ 1,647 $ 1,609 ========= ========= ========= ========= Capital expenditures: Electronic components $ 361 $ 331 $ 578 $ 759 Microwave micro-circuitry 5 1 65 43 --------- --------- --------- --------- Consolidated $ 366 $ 332 $ 643 $ 802 ========= ========= ========= ========= 8 MERRIMAC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 3, June 28, 2004 2003 --------- --------- Identifiable assets: Electronic components $ 26,061 $ 28,518 Microwave micro-circuitry 5,913 5,696 Corporate 1,839 1,891 Intersegment (19) (99) --------- --------- Consolidated $ 33,794 $ 36,006 ========= ========= 11. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The calculation of diluted net income (loss) per common share is similar to that of basic net income (loss) per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally those issuable under stock options and warrants, were issued during the reporting period to the extent they are not anti-dilutive. The following table summarizes the calculation of basic and diluted net income (loss) per share: Three Months Ended Six Months Ended ---------------------------- ---------------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---------------------------- ---------------------------- Numerator- Net income (loss) available to common stockholders ........ $ 443,986 $ (474,970) $ 674,917 $ (930,355) ============= =========== ============= =========== Basic net income(loss) per share -------------------------------- Weighted average number of shares outstanding for basic net income (loss) per share- Common stock .............................................. 3,123,512 3,120,591 3,122,202 3,120,343 ============= =========== ============= =========== Net income (loss) per common share - basic ................ $ .14 $ (.15) $ .22 $ (.30) ============= =========== ============= =========== Diluted net income (loss) per share ----------------------------------- Weighted average number of shares outstanding for diluted net income (loss) per share: Common stock .............................................. 3,123,512 3,120,591 3,122,202 3,120,343 Effect of dilutive securities - stock options (1) ......... 40,349 - 24,214 - ------------- ----------- ------------- ----------- Weighted average number of shares outstanding for diluted net income (loss) per share ....................... 3,163,861 3,120,591 3,146,416 3,120,343 ============= =========== ============= =========== Net income (loss) per common share - diluted .............. $ .14 $ (.15) $ .21 $ (.30) ============= =========== ============= =========== (1) Represents additional shares resulting from assumed conversion of stock options less shares purchased with the proceeds therefrom. Diluted earnings per share excludes 392,000 and 456,000 shares underlying stock options for the three months ended July 3, 2004 and June 28, 2003, respectively, and 408,000 and 456,000 shares underlying stock options for the six months ended July 3, 2004 and June 28, 2003, respectively, as the exercise price of these options was greater than the average market value of the common shares, resulting in an anti-dilutive effect on earnings per share. For the quarter and six months ended June 28, 2003, 429,775 common stock warrants outstanding were excluded from the calculation of dilutive securities because the warrant exercise price of $17.80 was greater than the average market value of the common shares. 12. RELATED PARTY TRANSACTIONS In May 1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter, Chairman, President and Chief Executive Officer of the Company, at a price of $11.60 per share, which approximated the average closing price of the Company's Common Stock during the first quarter of 1998. The Company lent Mr. Carter $255,000 in connection with the purchase of these shares and combined that loan with a prior loan to Mr. Carter in the amount of $105,000. The resulting total principal amount of $360,000 was payable May 4, 2003 and bore interest at a variable interest rate based on the prime rate of the Company's lending bank. This loan was further 9 MERRIMAC INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amended on July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing the new principal amount of the loan to $400,000, the due date was extended to May 4, 2006, and interest (at the same rate as was previously applicable) is now payable monthly. Mr. Carter has pledged 33,000 shares of Common Stock as security for this loan, which is a full-recourse loan. On August 31, 2000, in connection with an amendment to Mr. Carter's employment agreement, the Company loaned Mr. Carter an additional $280,000. Interest on the loan varies and is based on the prime rate of the Company's lending bank, payable in accordance with Mr. Carter's employment agreement. Each year the Company is required to forgive 20% of the amount due under this loan and the accrued interest thereon. During 2003, the Company forgave $56,000 of principal and $7,000 of accrued interest and paid a tax gross-up benefit of $8,300. The Company estimates that $56,000 of principal and $4,000 of accrued interest will be forgiven in fiscal year 2004. During the second quarter and first six months of 2004, the Company's outside general counsel KMZ Rosenman was paid $65,000 and $152,000, respectively, for providing legal services to the Company. During the second quarter and first six months of 2003, KMZ Rosenman was paid $118,000 and $157,000, respectively. A director of the Company is counsel to KMZ Rosenman but does not share in the fees that the Company pays to such law firm and his compensation is not based on such fees. During 2004 and 2003 the Company retained Career Consultants, Inc. and SK Associates to perform executive searches and to provide other services to the Company. The Company paid an aggregate of $1,000 and $17,000 to these companies during the second quarter and first six months of 2004, respectively. The Company paid an aggregate of $29,000 to these companies during the first six months of 2003. A director of the Company is the chairman and chief executive officer of these companies. During the second quarter and first six months of 2003, a director of the Company was paid $3,000 and $12,000, respectively, for providing financial-related consulting services to the Company. This agreement terminated in April 2003. During the second quarter and first six months of 2004, a director of the Company was paid $9,000 and $18,000, respectively, for providing technology-related consulting services to the Company. For the second quarter and first six months of 2003, such director was paid $9,000 and $18,000, respectively. During the second quarter and first six months of 2004, DuPont Electronic Technologies (DuPont"), a stockholder, was paid $36,000 and $57,000, respectively, for providing technological and marketing-related personnel and services on a cost-sharing basis to the Company. During the second quarter and first six months of 2003, DuPont was paid $25,000 and $50,000, respectively. Each director who is not an employee of the Company receives a monthly director's fee of $1,500, plus an additional $500 for each meeting of the Board and of any Committees of the Board attended. Beginning in fiscal year 2004, the Chair of the Audit Committee receives an annual fee of $2,500 for his services in such capacity. The directors are also reimbursed for reasonable travel expenses incurred in attending Board and Committee meetings. In addition, pursuant to the 2001 Stock Option Plan, each non-employee director is granted an immediately exercisable option to purchase 2,500 shares of the Common Stock of the Company on the date of each Annual Meeting of Stockholders. Each such grant is at the fair market value on the date of such grant and will expire on the tenth anniversary of the date of the grant. On June 17, 2004, non-qualified stock options to purchase an aggregate of 20,000 shares were issued to eight directors at an exercise price of $9.01 per share. Infineon Technologies AG ("Infineon") and DuPont hold registration rights which currently give them the right to register an aggregate of 1,003,413 shares of Common Stock of the Company. Infineon has informed the Company of the exercise of such rights as to 475,000 shares and, accordingly, the Company intends to commence the registration process of such shares. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CRITICAL ACCOUNTING ESTIMATES AND POLICIES The Company's management makes certain assumptions and estimates that impact the reported amounts of assets, liabilities and stockholders' equity, and revenues and expenses. The management judgments that are currently the most critical are related to the accounting for the Company's investments in Multi-Mix (R) Microtechnology, contract revenue recognition, inventory valuation, valuation of goodwill and valuation of deferred tax assets. Evaluation of Multi-Mix(R) Assets Under SFAS No. 144 Following is a summary of the carrying amounts of the Multi-Mix (R) Microtechnology net assets included in the Company's consolidated financial statements at July 3, 2004 and the related future planned purchases and lease obligation commitments through January 2006. Net assets: Property, plant and equipment, at cost.............................. $13,968,000 Less accumulated depreciation and amortization...................... 4,905,000 ----------- Property, plant and equipment, net.................................. 9,063,000 Inventories......................................................... 237,000 Other assets, net................................................... 312,000 ----------- Total net assets at July 3, 2004.................................... $ 9,612,000 ----------- Commitments: Planned equipment purchases for the remainder of 2004............... $ 250,000 Lease obligations through January 2006.............................. 475,000 ----------- Total commitments................................................... $ 725,000 ----------- Total net assets and commitments.................................... $10,337,000 =========== The Company anticipates receiving additional orders during the remainder of 2004 and 2005 for its Multi-Mix (R) Microtechnology products, for which substantial research and development costs have also been incurred. Due to economic and market conditions in the wireless industry over the past several years, the telecommunications system service providers substantially reduced their capital equipment purchases from our customers. While these circumstances have resulted in the delay or cancellation of Multi-Mix (R) Microtechnology product purchases that had been anticipated from certain specific customers or programs, in connection with the recent slightly improved conditions in the industry, the Company has recently implemented a strategic plan utilizing product knowledge and customer focus to expand specific sales opportunities. However, continued extended delay or reduction from planned levels in new orders expected from customers for these products could require the Company to pursue alternatives related to the utilization or realization of these assets and commitments, the net result of which could be materially adverse to the financial results and position of the Company. In accordance with the Company's evaluation of Multi-Mix(R) under SFAS No. 144, the Company has determined no provision for impairment is required at this time. Contract Revenue Recognition Contract revenue and related costs on fixed-price and cost-reimbursement contracts that require customization of products to customer specifications are recorded when title transfers to the customer, which is generally on the date of shipment. Prior to shipment, manufacturing costs incurred on such contracts are recorded as work-in-process inventory. Anticipated losses on contracts are charged to operations when identified. Revenue related to non-recurring engineering charges is generally recognized upon shipment of the initial units produced or based upon contractually established stages of completion. The cost rates utilized for cost-reimbursement contracts are subject to review by third parties and can be revised, which can result in additions to or reductions from revenue. Revisions which result in reductions to revenue are recognized in the period that the rates are reviewed and finalized; additions to revenue are recognized in the period that the rates are reviewed, finalized, accepted by the customer, and collectability from the customer is assured. Inventory Valuation Inventories are valued at the lower of average cost or market. Inventories are periodically reviewed for their projected manufacturing usage utilization and, when slow-moving or obsolete inventories are identified, a provision for a potential loss is made and charged to operations. Total inventories are net of valuation allowances for obsolescence and cost overruns of $1,996,000 at July 3, 2004 and $1,787,000 at January 3, 2004. 11 Valuation of Goodwill With the adoption of SFAS No. 142 by the Company on December 30, 2001, goodwill is no longer subject to amortization over its estimated useful life. However, goodwill is subject to at least an annual assessment for impairment and more frequently if circumstances indicate a possible impairment. The Company performed the annual assessment during the fourth quarter of 2003 and determined there was no impairment. Valuation of Deferred Tax Assets The Company currently has significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences, which should reduce taxable income in future periods. A valuation allowance (or write-down) is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company's 2002 and 2003 net losses weighed heavily in the Company's overall assessment. As a result of the assessment, the Company established a full valuation allowance for its remaining net domestic deferred tax assets at December 28, 2002. This assessment continued unchanged in fiscal years 2003 and 2004. CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY (UNAUDITED) The following table reflects the percentage relationships of items from the Consolidated Statements of Operations as a percentage of net sales. Percentage of Net Sales Percentage of Net Sales ----------------------- ----------------------- Three Months Ended Six Months Ended ----------------------- ----------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ------ ------ ------ ------- Net sales.................................... 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Costs and expenses: Cost of sales.............................. 58.1 61.4 57.2 61.9 Selling, general and administrative........ 31.1 39.1 31.5 37.4 Research and development................... 5.0 6.4 6.2 7.8 Restructuring charges...................... - 1.1 - .6 ------ ------ ------ ------ 94.2 108.0 94.9 107.7 ------ ------ ------ ------ Operating income (loss)...................... 5.8 (8.0) 5.1 (7.7) Interest and other expense, net.............. (.9) (.8) (1.0) (.8) Gain on disposition of assets................ - 1.1 - .5 ------ ------ ------ ------ Income (loss) before income taxes............ 4.9 (7.7) 4.1 (8.0) Provision (benefit) for income taxes......... (.7) (.5) (.3) (.9) ------ ------ ------ ------ Net income (loss)............................ 5.6% (7.2)% 4.4% (7.1)% ====== ====== ====== ====== SECOND QUARTER AND THE FIRST SIX MONTHS OF 2004 COMPARED TO THE SECOND QUARTER AND FIRST SIX MONTHS OF 2003 Consolidated results of operations for the second quarter of 2004 reflect an increase in net sales from the second quarter of 2003 of $1,283,000 (or 19.4%) to $7,896,000. This increase was attributable to a $547,000 increase in net sales of electronic components and a $643,000 increase in sales of microwave micro-circuitry products from the Company's wholly-owned subsidiary Filtran Microcircuits Inc. ("FMI"). Consolidated results of operations for the first six months of 2004 reflect an increase in net sales compared to the first six months of 2003 of $2,420,000 (or 18.4%) to $15,544,000. For the first six months of 2004, net sales for the electronic components segment increased $987,000. The increase in net sales for the electronic components segment for the second quarter and first six months of 2004 is attributable to improved orders in 2004 and a higher backlog at the beginning of 2004 as compared to the beginning of 2003; the higher backlog reflected new orders from existing customers in the Company's defense business. Sales of microwave micro-circuitry products from FMI increased $1,341,000 for the first six months of 2004. The increase in sales of the microwave micro-circuitry segment for the second quarter and first six months of 2004 was due to new orders from both existing and new customers due to the continued efforts to diversify FMI into wireless base stations, automotive and defense applications. FMI anticipates much of this new order volume to renew in future periods. Orders of $6,913,000 were received during the second quarter of 2004, a decrease of $182,000 or 2.6% compared to $7,095,000 in orders received during the second quarter of 2003. Orders of $15,522,000 were received for the first six months of 2004, an increase of $293,000 or 1.9% compared to $15,229,000 in orders received for the first six months of 2003. Backlog decreased by $22,000 to $12,373,000 at the end of second quarter 2004 compared to $12,395,000 at year-end 2003. 12 The Company believes that the recent economic downturn, resulting in reduced spending by wireless telecommunications service providers, has caused many wireless telecommunications companies to delay or forego purchases of the Company's products. However, the Company expects that its defense customers should continue to maintain their approximate current levels of orders during fiscal year 2004, although there are no assurances they will do so. The Company also anticipates increased levels of orders during fiscal year 2004 for its new Multi-Mix (R) Microtechnology products, for which the Company has made a significant capital investment and incurred substantial research and development costs. The Company expects that previous weaknesses in the telecommunications sector that FMI serves will improve in 2004 and the continued efforts to diversify FMI into wireless base stations, automotive and defense applications has produced additional orders. Consolidated gross profit for the second quarter of 2004 increased by $754,000 to $3,308,000 or 41.9% of consolidated sales of $7,896,000 compared to gross profit of $2,554,000 or 38.6% of consolidated sales of $6,613,000 in the second quarter of 2003. Consolidated gross profit for the first six months of 2004 increased by $1,650,000 to $6,656,000 or 42.8% of consolidated sales of $15,544,000 compared to gross profit of $5,006,000 or 38.1 % of consolidated sales of $13,124,000 for the first six months of 2003. Gross profit for the second quarter of 2004 for the electronic components segment increased by $507,000 to $2,811,000 or 44.0% of segment net sales of $6,384,000 compared to gross profit of $2,304,000 or 39.5% of segment net sales of $5,837,000 in the second quarter of 2003. Gross profit for the first six months of 2004 for the electronic components segment increased by $1,135,000 to $5,753,000 or 45.0% of segment net sales of $12,780,000 compared to gross profit of $4,617,000 or 39.2% of segment net sales of $11,793,000 for the first six months of 2003. The increases in gross profit for the second quarter and first six months of 2004 for the electronic components segment were due to the overall increase in segment sales along with savings resulting from the increased utilization of the Company's West Caldwell, New Jersey and Costa Rica manufacturing production facilities, better product mix and the benefits of the cost containment and restructuring programs instituted during 2003. Cost of sales for the electronic components segment also reflects a reduction of intersegment purchases from FMI of $93,000 and $92,000 for the second quarter and first six months of 2004, respectively. Gross profit for the second quarter of 2004 for the microwave micro-circuitry segment increased by $247,000 to $497,000 or 32.7% of segment net sales of $1,522,000, compared to $250,000 or 28.5% of segment net sales of $879,000 in the second quarter of 2003. FMI sales include intersegment sales of $10,000 and $103,000 in the second quarter of 2004 and 2003, respectively. Gross profit for the first six months of 2004 for the microwave micro-circuitry segment increased by $515,000 to $904,000 or 31.6% of segment net sales of $2,861,000, compared to $389,000 or 25.6% of segment net sales of $1,520,000 in the first six months of 2003. FMI sales include intersegment sales of $97,000 and $189,000 in the first six months of 2004 and 2003, respectively. The improved gross margin percents for FMI for the second quarter and first six months of 2004 are due to the higher sales level and improved absorption of fixed costs. Selling, general and administrative expenses of $2,453,000 for the second quarter of 2004 decreased by $132,000 or 5.1%, and when expressed as a percentage of net sales, decreased by 8.0 percentage points to 31.1%. 2003 selling, general and administrative expenses included expenses associated with bank modification agreements entered into during the second quarter and additional professional fees that were incurred totaling approximately $300,000. This decrease was offset by higher commissions from the higher quarterly sales level and certain higher administrative expenses. Selling, general and administrative expenses of $4,908,000 for the first six months of 2004 decreased by $6,000 or 0.1%, and when expressed as a percentage of net sales, decreased by 5.9 percentage points to 31.5% compared to the first six months of 2003. The 2003 expenses described above were offset by higher commissions from the higher sales level, higher marketing costs and certain higher administrative expenses. Research and development expenses for new products were $396,000 for the second quarter of 2004, a decrease of $28,000 or 6.7% and when expressed as a percentage of net sales, a decrease of 1.4 percentage points to 5.0% compared to the second quarter of 2003. Except for $61,000 of expenses in the second quarter of 2004 at FMI, an increase of $17,000 from the second quarter of the prior year, substantially all of the research and development expenses were related to Multi-Mix (R) Microtechnology and Multi-Mix PICO (TM) products. Research and development expenses for new products were $968,000 for the first six months of 2004, a decrease of $56,000 or 5.5% and when expressed as a percentage of net sales, a decrease of 1.6 percentage points to 6.2% compared to the first six months of 2003. Except for $118,000 of expenses at FMI (an increase of $36,000 from the first six months of 2003) substantially all of the research and development expenses were related to Multi-Mix (R) Microtechnology and Multi-Mix (R) PICO products. During the second quarter of 2003 the Company reduced its head count by 11 persons, principally involved in production, manufacturing support, sales and administration. The Company recorded a personnel restructuring charge of $74,000, consisting of severance and certain other personnel costs during the second quarter of 2003. 13 Consolidated operating income for the second quarter of 2004 was $459,000 compared to a consolidated operating loss of $529,000 in the second quarter of 2003. Consolidated operating income for the first six months of 2004 was $781,000 compared to a consolidated operating loss of $1,006,000 for the first six months of 2003. Operating income for the electronic components segment was $288,000 for the second quarter of 2004 compared to an operating loss of $511,000 in the second quarter of 2003. Operating income for the microwave micro-circuitry segment was $171,000 for the second quarter of 2004 compared to an operating loss of $18,000 for the second quarter of 2003. For the first six months of 2004, the Company's operating income for its electronic component segment was $498,000 compared to an operating loss of $863,000 for the first six months of 2003. For the first six months of 2004, operating income for the microwave micro-circuitry segment was $283,000 compared to an operating loss of $143,000 for the first six months of 2003. Interest and other expense, net was $70,000 for the second quarter of 2004 compared to interest and other expense, net of $54,000 for the second quarter of 2003. Interest and other expense, net was $151,000 for the first six months of 2004 compared to interest and other expense, net of $113,000 for the first six months of 2003. Interest expense for the second quarter and first six months of 2004 was principally incurred on borrowings under the new revolving line of credit and term loans which the Company consummated during the fourth quarter of 2003 at higher interest rates than the previous facility. Interest expense for the second quarter and first six months of 2003 was principally incurred on borrowings under the previous mortgage loan and the term loan facility entered into during fiscal year 2002. Net income for the second quarter of 2004 was $444,000 compared to a net loss of $475,000 for the second quarter of 2003. Net income per diluted share for the second quarter of 2004 was $.14 compared to a net loss of $.15 per share for the second quarter of 2003. Net income for the first six months of 2004 was $675,000 compared to a net loss of $930,000 for the first six months of 2003. Net income per diluted share for the first six months of 2004 was $.21 compared to a net loss of $.30 per share for the first six months of 2003. LIQUIDITY AND CAPITAL RESOURCES The Company had liquid resources comprised of cash and cash equivalents totaling approximately $1,800,000 at the end of the second quarter of 2004 compared to approximately $450,000 at the end of 2003. The Company's working capital was approximately $7,700,000 and its current ratio was 2.8 to 1 at the end of the second quarter of 2004 compared to $6,900,000 and 2.6 to 1, respectively, at the end of 2003. The Company's operating activities generated positive cash flows of $3,032,000 during the first six months of 2004 compared to the utilization of $722,000 of cash flows during the first six months of 2003. The primary sources of operating cash flows for the first six months of 2004 were net income of $675,000 which was reduced by depreciation and amortization of $1,647,000, the reduction of accounts receivable of $412,000, a reduction in inventories of $179,000,and an aggregate increase in accounts payable and accrued expenses of $421,000 partly offset by a reduction of customer deposits. The Company made net cash investments in property, plant and equipment of $643,000 during the first six months of 2004 (and had unpaid invoices for such investments of $223,000 at July 3, 2004), compared to net cash investments made in property, plant and equipment of $802,000 (and unpaid invoices for such investments of $127,000 at June 28, 2003) during the first six months of 2003. These capital expenditures are related to new production and test equipment capabilities in connection with the introduction of new products and enhancements to existing products. The depreciated cost of capital equipment associated with Multi-Mix (R) Microtechnology was $9,063,000 at the end of the second quarter of 2004, a decrease of $1,001,000 compared to $10,064,000 at the end of fiscal year 2003. The Company's planned equipment purchases and other commitments are expected to be funded through its new revolving credit facility of $5,000,000, which becomes due October 8, 2006, supplemented by cash resources and cash flows that are expected to be provided by operations. On October 8, 2003, the Company completed the refinancing of its revolving credit and term loan obligations with a new credit facility provided by The CIT Group/Business Credit, Inc. ("CIT") that provides for a three-year secured revolving credit, term loan and letter of credit facility for $9,250,000. All obligations due to its prior bank were repaid from the proceeds of such refinancing. The new financing agreement with CIT consists of a $5,000,000 revolving line of credit, that is temporarily reduced by $250,000 until certain conditions are met, a $1,500,000 machinery and equipment term loan ("Term Loan A") and a $2,750,000 real estate term loan ("Term Loan B"). In connection with this new financing agreement, the Company was required to place, 14 over the life of the loan, $1,500,000 as restricted cash with CIT. The revolving line of credit is subject to an availability limit under a borrowing base calculation (85% of eligible accounts receivable as defined in the financing agreement plus 100% of the $1,500,000 restricted cash). At July 3, 2004, the Company had available borrowing capacity under its revolving line of credit of $4,200,000. The revolving line of credit bears interest at the prime rate plus 1/2 percent (currently 5.0%). The principal amount of Term Loan A is payable in 60 equal monthly installments of $25,000 and bears interest at the prime rate plus one percent (currently 5.50%). The principal amount of Term Loan B is payable in 84 equal monthly installments of $32,738 and bears interest at the prime rate plus one percent (currently 5.50%). At July 3, 2004, the Company, under the terms of its agreement with CIT, elected to convert $1,000,000 of Term Loan A and $2,000,000 of Term Loan B from their prime rate base to LIBOR-based interest rate loans. The current interest rates on such LIBOR interest rate loans was 4.485%. The previous LIBOR interest rate options, at an interest rate of 4.44%, expired on April 13, 2004. The current LIBOR interest rate options will expire October 12, 2004. The revolving line of credit and the term loans are secured by substantially all of the Company's assets located within the United States and the pledge of 65% of the stock of the Company's subsidiaries located in Costa Rica and Canada. The provisions of the financing agreement require the Company to maintain certain financial and other covenants. The Company was in compliance with these covenants at July 3, 2004. Depreciation and amortization expenses exceeded capital expenditures for production equipment during the first six months of 2004 by approximately $1,005,000, and the Company anticipates that depreciation and amortization expenses will exceed capital expenditures in fiscal year 2004 by approximately $2,000,000. The Company intends to issue commitments to purchase $450,000 of capital equipment from various vendors. The Company anticipates that such equipment will be purchased and become operational during 2004. The functional currency for the Company's wholly-owned subsidiary FMI is the Canadian dollar. The change in accumulated other comprehensive income for the first quarters of 2004 and 2003 reflect the changes in the exchange rates between the Canadian dollar and the United States dollar for those respective periods. The functional currency for the Company's Costa Rica operations is the United States dollar. The Company entered into an agreement effective January 2001, with a customer to relinquish to this customer approximately half of the Company's 17,000 square-foot leased manufacturing facility in Costa Rica. Associated with the transaction, the Company entered into a new four-year lease agreement with a five-year renewal option with its Costa Rica landlord for the reduced space. In addition, the Company transferred certain employees to its customer, agreed to share certain personnel resources and common costs, and committed to provide certain management, administrative and other services to its customer. On March 31, 2003, the Company relinquished the balance of the space to its customer. The completion of these transactions resulted in a gain of $71,000 during the second quarter of 2003. In connection with the 2001 agreement, the Company received $450,000 from its customer. The Company reduced its facility occupancy expenses by approximately $22,000 in the first quarter of 2003. RELATED PARTY TRANSACTIONS In May 1998, the Company sold 22,000 shares of Common Stock to Mason N. Carter, Chairman, President and Chief Executive Officer of the Company, at a price of $11.60 per share, which approximated the average closing price of the Company's Common Stock during the first quarter of 1998. The Company lent Mr. Carter $255,000 in connection with the purchase of these shares and combined that loan with a prior loan to Mr. Carter in the amount of $105,000. The resulting total principal amount of $360,000 was payable May 4, 2003 and bore interest at a variable interest rate based on the prime rate of the Company's lending bank. This loan was further amended on July 29, 2002. Accrued interest of $40,000 was added to the principal, bringing the new principal amount of the loan to $400,000, the due date was extended to May 4, 2006, and interest (at the same rate as was previously applicable) is now payable monthly. Mr. Carter has pledged 33,000 shares of Common Stock as security for this loan, which is a full-recourse loan. On August 31, 2000, in connection with an amendment to Mr. Carter's employment agreement, the Company loaned Mr. Carter an additional $280,000. Interest on the loan varies and is based on the prime rate of the Company's lending bank, payable in accordance with Mr. Carter's employment agreement. Each year the Company is required to forgive 20% of the amount due under this loan and the accrued interest thereon. During 2003, the Company forgave $56,000 of principal and $7,000 of accrued interest and paid a tax gross-up benefit of $8,300. The Company estimates that $56,000 of principal and $4,000 of accrued interest will be forgiven in fiscal year 2004. During the second quarter and first six months of 2004, the Company's outside general counsel KMZ Rosenman was paid $65,000 and $152,000, respectively, for providing legal services to the Company. During the second quarter and first six months of 2003, KMZ Rosenman was paid $118,000 and $157,000, respectively. A director of the Company is counsel to KMZ Rosenman but does not 15 share in the fees that the Company pays to such law firm and his compensation is not based on such fees. During 2004 and 2003 the Company retained Career Consultants, Inc. and SK Associates to perform executive searches and to provide other services to the Company. The Company paid an aggregate of $1,000 and $17,000 to these companies during the second quarter and first six months of 2004, respectively. The Company paid an aggregate of $29,000 to these companies during the first six months of 2003. A director of the Company is the chairman and chief executive officer of these companies. During the second quarter and first six months of 2003, a director of the Company was paid $3,000 and $12,000, respectively, for providing financial-related consulting services to the Company. This agreement terminated in April 2003. During the second quarter and first six months of 2004, a director of the Company was paid $9,000 and $18,000, respectively, for providing technology-related consulting services to the Company. For the second quarter and first six months of 2003, such director was paid $9,000 and $18,000, respectively. During the second quarter and first six months of 2004, DuPont Electronic Technologies ("DuPont"), a stockholder, was paid $36,000 and $57,000, respectively, for providing technological and marketing-related personnel and services on a cost-sharing basis to the Company. During the second quarter and first six months of 2003, DuPont was paid $25,000 and $50,000, respectively. Each director who is not an employee of the Company receives a monthly director's fee of $1,500, plus an additional $500 for each meeting of the Board and of any Committees of the Board attended. Beginning in fiscal year 2004, the Chair of the Audit Committee receives an annual fee of $2,500 for his services in such capacity. The directors are also reimbursed for reasonable travel expenses incurred in attending Board and Committee meetings. In addition, pursuant to the 2001 Stock Option Plan, each non-employee director is granted an immediately exercisable option to purchase 2,500 shares of the Common Stock of the Company on the date of each Annual Meeting of Stockholders. Each such grant is at the fair market value on the date of such grant and will expire on the tenth anniversary of the date of the grant. On June 17, 2004, non-qualified stock options to purchase an aggregate of 20,000 shares were issued to eight directors at an exercise price of $9.01 per share. Infineon Technologies AG ("Infineon") and DuPont hold registration rights which currently give them the right to register an aggregate of 1,003,413 shares of Common Stock of the Company. Infineon has informed the Company of the exercise of such rights as to 475,000 shares and, accordingly, the Company intends to commence the registration process of such shares. FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-QSB contains statements relating to future results of Merrimac Industries, Inc. ("Merrimac" and together with its subsidiaries, the "Company"), including certain projections and business trends, that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to which the Company has made significant investments, particularly its Multi-Mix(R) products; 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 and product obsolescence, 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 of the filing of this Form 10-QSB, and Merrimac undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. 16 ITEM 3. CONTROLS AND PROCEDURES As of July 3, 2004 (the end of the period covered by this report), the Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, as of and for the period covered by this report, in timely alerting them to material information relating to the Company (including the Company's consolidated subsidiaries) required to be included in periodic reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In designing and evaluating the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act), management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance. No change occurred in the Company's internal controls concerning financial reporting during the Company's second quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 17, 2004, the Company held its Annual Stockholders Meeting at which the stockholders elected three members to the Company's Board of Directors. The stockholders of the Company elected Edward H. Cohen, Arthur A. Oliner and Harold J. Raveche as Class II Directors whose terms expire at the 2007 Annual Meeting. The following sets forth the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, voted upon at the Company's June 17, 2004 Annual Stockholders Meeting: Election of Directors. For Against --------- ------- Edward H. Cohen 2,997,310 15,972 Arthur A. Oliner 3,002,815 10,467 Harold J. Raveche 3,001,875 11,407 The Company's three Class I directors, Robert C. Cargo, Fernando L. Fernandez and Joel H. Goldberg, and three Class III directors, Mason N. Carter, Albert H. Cohen and David B. Miller, continued as directors after the Annual Stockholders Meeting and are serving terms expiring at the time of the Company's annual meetings in 2006 and 2005, respectively, and until their respective successors have been duly elected and qualified. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 3(a) Certificate of Incorporation of Merrimac is hereby incorporated by reference to Exhibit 3(i)(b) to Post-Effective Amendment No. 2 to the Registration Statement on Form S-8 (No. 33-68862) of Merrimac dated February 23, 2001. 3(b) By-laws of Merrimac are hereby incorporated by reference to Exhibit 3(ii)(b) to Post-Effective Amendment No. 2 to the Registration Statement on Form S-8 (No. 33-68862) of Merrimac dated February 23, 2001. 4(a) Stockholder Rights Agreement dated as of March 9, 1999, between Merrimac and ChaseMellon Stockholder Services, L.L.C., as Rights Agent, is hereby incorporated by reference to Exhibit 1 to Merrimac's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 1999. 4(b) Amendment No. 1 dated as of June 9, 1999, to the Stockholder Rights Agreement dated as of March 9, 1999, between Merrimac and ChaseMellon Stockholder Services, L.L.C., as Rights Agent, is hereby incorporated by reference to Exhibit 1 to Merrimac's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 9, 1999. 4(c) Amendment No. 2 dated as of April 7, 2000, to the Stockholder Rights Agreement dated as of March 9, 1999, between Merrimac and ChaseMellon Stockholder Services, L.L.C., as Rights Agent, is hereby incorporated by reference to Exhibit 1(b) to Merrimac's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2000. 4(d) Amendment No. 3 dated as of October 26, 2000, to the Stockholder Rights Agreement dated as of March 9, 1999, between Merrimac and ChaseMellon Stockholder Services, L.L.C., as Rights Agent, is hereby incorporated by reference to Exhibit 2 to Merrimac's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 27, 2000. 4(e) Amendment No. 4 dated as of February 21, 2001, to the Stockholder Rights Agreement dated as of March 9, 1999, between Merrimac and Mellon Investor Services, L.L.C. (formerly known as ChaseMellon Stockholder Services, L.L.C.), as Rights Agent, is hereby incorporated by reference to Exhibit 1(d) to Merrimac's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 21, 2001. 4(f) Amendment No. 5, dated February 28, 2002, to the Rights Agreement, between Merrimac and Mellon Investor Services LLC (f.k.a. ChaseMellon Shareholder Services, L.L.C.), as Rights Agent is hereby incorporated by reference to Exhibit 99.4 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on March 6, 2002. 4(g) Amendment No. 6, dated September 18, 2002, to the Rights Agreement, between Merrimac and Mellon Investor Services LLC, as Rights Agent is hereby incorporated by reference to Exhibit 99.3 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on October 10, 2002. 10(a) Stock Purchase and Exclusivity Letter Agreement dated April 7, 2000, among Ericsson Microelectronics, A.B., Ericsson Holdings International, B.V. and Merrimac is hereby incorporated by reference to Exhibit 10(a) to Merrimac's Quarterly Report on Form 10-QSB for the period ending July 1, 2000. 10(b) Letter Agreement, dated February 1, 2002, among Merrimac, Ericsson Holding 18 International B.V. and Ericsson Microelectronics, A.B., which amends the Stock Purchase and Exclusivity Letter, dated April 7, 2000 is hereby incorporated by reference to Exhibit 99.4 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on October 10, 2002. 10(c) Registration Rights Agreement dated as of April 7, 2000, between Merrimac and Ericsson Holding International, B.V. is hereby incorporated by reference to Exhibit 10(b) to Merrimac's Quarterly Report on Form 10-QSB for the period ending July 1, 2000. 10(d) Subscription Agreement for Common Stock and Warrants dated October 26, 2000, between Merrimac and Ericsson Holding International, B.V. (with a form of Warrant attached) is hereby incorporated by reference to Exhibit 10(t) to Merrimac's Annual Report on Form 10-KSB for the year ending December 30, 2000. 10(e) Registration Rights Agreement dated October 26, 2000, between Merrimac and Ericsson Holding International, B.V. is hereby incorporated by reference to Exhibit 10(u) to Merrimac's Annual Report on Form 10-KSB dated for the year ending December 30, 2000. 10(f) Subscription Agreement for Common Stock and Warrants dated October 26, 2000, between Merrimac and certain entities and individuals related to Adam Smith Investment Partners, L.P. (with a form of Warrant attached) is hereby incorporated by reference to Exhibit 10(v) to Merrimac's Annual Report on Form 10-KSB for the year ending December 30, 2000. 10(g) Registration Rights Agreement dated October 26, 2000, between Merrimac and certain entities and individuals related to Adam Smith Investment Partners, L.P. is hereby incorporated by reference to Exhibit 10(w) to Merrimac's Annual Report on Form 10-KSB for the year ending December 30, 2000. 10(h) Subscription Agreement for Common Stock and Warrants dated October 26, 2000, among Merrimac, Edward H. Cohen, Joseph B. Fuller and Joel H. Goldberg (with a form of Warrant attached) is hereby incorporated by reference to Exhibit 10(x) to Merrimac's Annual Report on Form 10-KSB for the year ending December 30, 2000. 10(i) Subscription Agreement, dated February 28, 2002 between Merrimac and DuPont Chemical and Energy Operations, Inc., a subsidiary of E.I. DuPont de Nemours and Company is hereby incorporated by reference to Exhibit 99.2 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on March 6, 2002. 10(j) Registration Rights Agreement, dated February 28, 2002 between Merrimac and DuPont Chemical and Energy Operations, Inc., a subsidiary of E.I. DuPont de Nemours and Company is hereby incorporated by reference to Exhibit 99.3 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on March 6, 2002. 10(k) Consent and Waiver, dated as of September 18, 2002, among Merrimac, Ericsson Holding International B.V. and Infineon Technologies AG is hereby incorporated by reference to Exhibit 99.1 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on October 10, 2002. 10(l) Modification Agreement, dated as of September 27, 2002, between Merrimac and Infineon Technologies AG is hereby incorporated by reference to Exhibit 99.2 to Merrimac's Form 8-K filed with the Securities and Exchange Commission on October 10, 2002. 10(m) Profit Sharing Plan of Merrimac is hereby incorporated by reference to Exhibit 10(n) to Merrimac's Registration Statement on Form S-1 (No. 2-79455).* 10(n) 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 for the year ending March 31, 1983.* 10(o) 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(p) 1997 Long-Term Incentive Plan of Merrimac is hereby incorporated by reference to Exhibit A to Merrimac's Proxy Statement filed with the Securities and Exchange Commission on April 11, 1997.* 19 10(q) Resolutions of the Stock Option Committee of the Board of Directors of Merrimac adopted June 3, 1998, amending the 1983 Key Employees Stock Option Plan of Merrimac, the 1993 Stock Option Plan of Merrimac and the 1997 Long-Term Incentive Plan of Merrimac and adjusting outstanding awards thereunder to give effect to Merrimac's 10% stock dividend paid June 5, 1998, are hereby incorporated by reference to Exhibit 10(f) to Merrimac's Annual Report on Form 10-KSB for the year ending March 30, 1999.* 10(r) 1995 Stock Purchase Plan of Merrimac is hereby incorporated by reference to Exhibit A to Merrimac's Proxy Statement filed with the Securities and Exchange Commission on March 27, 1995.* 10(s) Resolutions of the Stock Purchase Plan Committee of the Board of Directors of Merrimac adopted June 3, 1998, amending the 1995 Stock Purchase Plan of Merrimac and adjusting outstanding awards thereunder to give effect to Merrimac's 10% stock dividend paid June 5, 1998, are hereby incorporated by reference to Exhibit 10(g)(2) to Merrimac's Annual Report on Form 10-KSB for the year ending January 2, 1999.* 10(t) 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 for the year ending December 28, 1996.* 10(u) Resolutions of the Board of Directors of Merrimac, adopted June 3, 1998, amending the 1996 Stock Option Plan for Non-Employee Directors of Merrimac and adjusting outstanding awards thereunder to give effect to Merrimac's 10% stock dividend paid June 5, 1998, are hereby incorporated by reference to Exhibit 10(h)(2)to Merrimac's Annual Report on Form 10-KSB for the year ending January 2, 1999.* 10(v) 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 for the period ending July 4, 1998.* 10(w) Amendment dated August 31, 2000 to the Amended and Restated Employment Agreement dated 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 for the period ending September 30, 2000.* 10(x) 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 for the period ending July 4, 1998.* 10(y) 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 for the year ending January 2, 1999.* 10(z) Registration Rights Agreement dated as of May 4, 1998, between Merrimac and Mason N. Carter is hereby incorporated by reference to Exhibit 10(e) to Merrimac's Quarterly Report on Form 10-QSB for the period ending July 4, 1998.* 10(aa) Consulting Agreement dated as of January 1, 1998, between Merrimac and Arthur A. Oliner is hereby incorporated by reference to Exhibit 10 to Merrimac's Quarterly Report on Form 10-QSB for the period ending April 4, 1998.* 10(bb) Separation Agreement dated as of December 31, 1998, between Merrimac and Eugene W. Niemiec is hereby incorporated by reference to Exhibit 10(p) to Merrimac's Annual Report on Form 10-KSB for the year ending January 2, 1999.* 10(cc) Stockholder's Agreement dated as of October 30, 1998, between Merrimac and Charles F. Huber II is hereby incorporated by reference to Exhibit 10 to Merrimac's Quarterly Report on Form 10-QSB for the period ending October 3, 1998. 10(dd) Shareholder's Agreement dated as of June 3, 1999, among Merrimac, William D. Witter, Inc. and William D. Witter is hereby incorporated by reference to Exhibit 10 to Merrimac's Quarterly Report on Form 10-QSB for the period ending July 3, 1999. 20 10(ee) 2001 Key Employee Incentive Plan is hereby incorporated by reference to Exhibit 4.01 to Merrimac's Form S-8 (No. 333-63434) dated June 20, 2001.* 10(ff) 2001 Stock Option Plan is hereby incorporated by reference to Exhibit 4.01 to Merrimac's Form S-8 (No. 333-63436) dated June 20, 2001.* 10(gg) 2001 Stock Purchase Plan is hereby incorporated by reference to Exhibit 4.01 to Merrimac's Form S-8 (No. 333-63438) dated June 20, 2001.* 10(hh) 2001 Amended and Restated Stock Option Plan is hereby incorporated by reference to Exhibit 4(i) to Merrimac's Quarterly Report on Form 10-QSB for the period ending June 30, 2001.* 10(ii) Third Amended and Restated Credit Agreement, dated December 23, 2002, between Merrimac and Fleet National Bank, which amends the Credit and Security Agreement, dated October 7, 1997 is hereby incorporated by reference to Exhibit 10(mm) to Merrimac's Annual Report on Form 10-KSB for the year ending December 28, 2002. 10(jj) Revolving Loan Modification Agreement, dated April 17, 2003, between Merrimac and Fleet National Bank, which amends the Third Amended and Restated Credit Agreement, dated December 23, 2002 is hereby incorporated by reference to Exhibit 10(nn) to Merrimac's Annual Report on Form 10-KSB for the year ending December 28, 2002. 10(kk) Term Loan and Security Agreement, dated December 23, 2002, between Merrimac and Fleet National Bank is hereby incorporated by reference to Exhibit 10(oo) to Merrimac's Annual Report on Form 10-KSB for the year ending December 28, 2002. 10(ll) Term Loan Modification Agreement, dated April 17, 2003, between Merrimac and Fleet National Bank, which amends the Term Loan and Security Agreement, dated December 23, 2002 is hereby incorporated by reference to Exhibit 10(pp) to Merrimac's Annual Report on Form 10-KSB for the year ending December 28, 2002. 10(mm) Term Loan and Security Agreement, dated March 26, 2002, between Merrimac and Fleet National Bank is hereby incorporated by reference to Exhibit 10(qq) to Merrimac's Annual Report on Form 10-KSB for the year ending December 28, 2002. 10(nn) Term Loan Modification Agreement, dated April 17, 2003, which amends the Term Loan and Security Agreement, dated March 26, 2002 is hereby incorporated by reference to Exhibit 10(rr) to Merrimac's Annual Report on Form 10-KSB for the year ending December 28, 2002. 10(oo) Financing Agreement, dated October 8, 2003, between Merrimac and The CIT Group/Business Credit, Inc. is hereby incorporated by reference to Exhibit 10(rr) to Merrimac's Form 10-QSB for the period ending September 27, 2003. 10(pp) Trademark and Patent Security Agreement, dated October 8, 2003, between Merrimac and The CIT Group/Business Credit, Inc. is hereby incorporated by reference to Exhibit 10(ss) to Merrimac's Form 10-QSB for the period ending September 27, 2003. 10(qq) Mortgage and Security Agreement, dated October 8, 2003, by Merrimac in favor of The CIT Group/Business Credit, Inc. is hereby incorporated by reference to Exhibit 10(tt) to Merrimac's Form 10-QSB for the period ending September 27, 2003. 10(rr)* Merrimac Severance Plan, as adopted September 17, 2003. is hereby incorporated by reference to Exhibit 10(uu) to Merrimac's Form 10-QSB for the period ending September 27, 2003. 31.1+ Chief Executive Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2+ Chief Financial Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1+ Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 21 32.2+ Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Indicates that exhibit is a management contract or compensatory plan or arrangement. + Indicates that exhibit is filed as an exhibit hereto. (b) Reports on Form 8-K o The Company filed a Form 8-K on May 17, 2004, in connection with a press release dated May 17, 2004 announcing its financial results for the first quarter ended April 3, 2004. o The Company filed a Form 8-K on June 17, 2004, reporting the termination of the Company's relationship with its auditor Ernst & Young LLP. The Company reported the hiring of Grant Thornton LLP to serve as the Company's independent auditors. 22 SIGNATURES In accordance with the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERRIMAC INDUSTRIES, INC. Date: August 17, 2004 By: /s/ Mason N. Carter ----------------------- Mason N. Carter Chairman, President and Chief Executive Officer Date: August 17, 2004 By: /s/ Robert V. Condon ----------------------- Robert V. Condon Vice President, Finance and Chief Financial Officer 23