UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549





FORM
10-Q





x
                      QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended July 4, 2009





 ̈
                      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 Registrant as Specified in Its Charter)




DELAWARE
            
            22-1642321(State
      or Other Jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or Organization)
            
            Identification
      No.)





41
FAIRFIELD PLACE


WEST
CALDWELL, NEW JERSEY 07006


(Address
of Principal Executive Offices) (Zip Code)





(973)
575-1300


(Registrant’s
Telephone Number)





Former name, former address and former fiscal year, if changed since last
report:    N/A





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈           No
 ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See definition of "accelerated filer”, “large accelerated filer” and a
      “smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check
      one):Large accelerated filer   
       ̈
            Accelerated filer   
       ̈Non-accelerated filer     
       ̈
            Smaller reporting company   
      x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈           No
x





As of August
14, 2009, there were 2,983,856
shares of Common Stock, par value $.01 per share,
outstanding.







MERRIMAC
INDUSTRIES, INC.





INDEX





PagePART
      I.      FINANCIAL
INFORMATIONItem
      1.        Financial
      StatementsCondensed
      Consolidated Statements of Operations
              for
      the Quarters and Six Months Ended July 4, 2009 and June 28, 2008
      (Unaudited)
            1Condensed
      Consolidated Balance Sheets-July 4, 2009 (Unaudited) and
              January
      3, 2009
            2Condensed
      Consolidated Statement of Stockholders’ Equity for the Six
      Months
              Ended
      July 4, 2009 (Unaudited)
            3Condensed
      Consolidated Statements of Cash Flows for the Six Months
              Ended
      July 4, 2009 and June 28, 2008 (Unaudited)
            4Notes
      to Condensed Consolidated Financial Statements
            5Item
      2.         Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
            14Item
      3.         Quantitative and
      Qualitative Disclosures about Market Risk
            21Item
      4(T).    Controls and Procedures
            21PART
      II.     OTHER INFORMATIONItem
      1.         Legal
      Proceedings
            22Item
      1A.      Risk Factors
            22Item
      4.        Submission of Matters to
      a Vote of Security Holders
            22Item
      5.        Other
      Information
            23Item
      6.        Exhibits
            23Signatures
            24







PART I.
FINANCIAL INFORMATION





ITEM 1.
FINANCIAL STATEMENTS





MERRIMAC
INDUSTRIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Quarters
      Ended
                                          
                                          
                                          Six
      Months EndedJuly
      4,
                                          
                                          
                                          June
      28,
                                          
                                          
                                          July
      4,
                                          
                                          
                                          June
      28,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008(Restated)
                                          
                                          
                                          
                                          
                                          
                                          (Restated)Net
      sales
                                          
                                          $
                                          8,089,056
                                          
                                          
                                          $
                                          7,490,266
                                          
                                          
                                          $
                                          15,695,588
                                          
                                          
                                          $
                                          13,247,952Costs
      and expenses:Cost
      of sales
                                          
                                          
                                          4,722,539
                                          
                                          
                                          
                                          4,691,040
                                          
                                          
                                          
                                          8,946,623
                                          
                                          
                                          
                                          8,635,721Selling,
      general and administrative
                                          
                                          
                                          2,313,217
                                          
                                          
                                          
                                          2,350,695
                                          
                                          
                                          
                                          4,671,619
                                          
                                          
                                          
                                          4,595,265Research
      and development
                                          
                                          
                                          157,127
                                          
                                          
                                          
                                          374,581
                                          
                                          
                                          
                                          216,522
                                          
                                          
                                          
                                          747,399Gain
      on sale of asset
                                          
                                          
                                          (40,579
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (40,579
                                          )
                                          
                                          
                                          -7,152,304
                                          
                                          
                                          
                                          7,416,316
                                          
                                          
                                          
                                          13,794,185
                                          
                                          
                                          
                                          13,978,385Operating
      income (loss)
                                          
                                          
                                          936,752
                                          
                                          
                                          
                                          73,950
                                          
                                          
                                          
                                          1,901,403
                                          
                                          
                                          
                                          (730,433
                                          )Interest
      and other expense, net
                                          
                                          
                                          (68,697
                                          )
                                          
                                          
                                          (48,607
                                          )
                                          
                                          
                                          (134,042
                                          )
                                          
                                          
                                          (109,180
                                          )Income
      (loss) from continuing operations beforeincome
      taxes
                                          
                                          
                                          868,055
                                          
                                          
                                          
                                          25,343
                                          
                                          
                                          
                                          1,767,361
                                          
                                          
                                          
                                          (839,613
                                          )Provision
      for income taxes
                                          
                                          
                                          199,909
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          242,735
                                          
                                          
                                          
                                          -Income
      (loss) from continuing operations
                                          
                                          
                                          668,146
                                          
                                          
                                          
                                          25,343
                                          
                                          
                                          
                                          1,524,626
                                          
                                          
                                          
                                          (839,613
                                          )Income
      (loss) from discontinued operations, afterincome
      taxes
                                          
                                          
                                          50,505
                                          
                                          
                                          
                                          (55,036
                                          )
                                          
                                          
                                          50,505
                                          
                                          
                                          
                                          (55,036
                                          )Net
      income (loss)
                                          
                                          $
                                          718,651
                                          
                                          
                                          $
                                          (29,693
                                          )
                                          
                                          $
                                          1,575,131
                                          
                                          
                                          $
                                          (894,649
                                          )Income
      (loss) per common share from continuingoperations
      - basic
                                          
                                          $
                                          .23
                                          
                                          
                                          $
                                          .01
                                          
                                          
                                          $
                                          .52
                                          
                                          
                                          $
                                          (.29
                                          )Income
      (loss) per common share from discontinuedoperations
      - basic
                                          
                                          $
                                          .01
                                          
                                          
                                          $
                                          (.02
                                          )
                                          
                                          $
                                          .01
                                          
                                          
                                          $
                                          (.01
                                          )Net
      income (loss) per common share - basic
                                          
                                          $
                                          .24
                                          
                                          
                                          $
                                          (.01
                                          )
                                          
                                          $
                                          .53
                                          
                                          
                                          $
                                          (.30
                                          )Income
      (loss) per common share from continuingoperations
      - diluted
                                          
                                          $
                                          .22
                                          
                                          
                                          $
                                          .01
                                          
                                          
                                          $
                                          .51
                                          
                                          
                                          $
                                          (.29
                                          )Income
      (loss) per common share from discontinuedoperations
      - diluted
                                          
                                          $
                                          .02
                                          
                                          
                                          $
                                          (.02
                                          )
                                          
                                          $
                                          .02
                                          
                                          
                                          $
                                          (.01
                                          )Net
      income (loss) per common share - diluted
                                          
                                          $
                                          .24
                                          
                                          
                                          $
                                          (.01
                                          )
                                          
                                          $
                                          .53
                                          
                                          
                                          $
                                          (.30
                                          )Weighted
      average number of shares outstanding-basic
                                          
                                          
                                          2,961,157
                                          
                                          
                                          
                                          2,939,788
                                          
                                          
                                          
                                          2,956,741
                                          
                                          
                                          
                                          2,936,155Weighted
      average number of shares outstanding-diluted
                                          
                                          
                                          3,016,583
                                          
                                          
                                          
                                          2,945,203
                                          
                                          
                                          
                                          2,993,204
                                          
                                          
                                          
                                          2,936,155





See
accompanying notes.




1





MERRIMAC
INDUSTRIES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





July
      4,
            
            
            January
      3,2009
            
            
            2009(UNAUDITED)
            
            
            (NOTE
      1)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            1,643,662
            
            
            $
            1,191,768Accounts
      receivable, net
            
            
            6,766,944
            
            
            
            5,765,575Inventories,
      net
            
            
            5,336,447
            
            
            
            4,899,706Other
      current assets
            
            
            625,185
            
            
            
            542,320Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
            
            
            3,009,354
            
            
            
            1,880,338Total
      current assets
            
            
            17,381,592
            
            
            
            14,279,707Property,
      plant and equipment
            
            
            37,939,546
            
            
            
            37,765,928Less
      accumulated depreciation and amortization
            
            
            29,791,229
            
            
            
            28,556,441Property,
      plant and equipment, net
            
            
            8,148,317
            
            
            
            9,209,487Other
      assets
            
            
            474,564
            
            
            
            543,217Total
      assets
            
            $
            26,004,473
            
            
            $
            24,032,411LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt
            
            $
            291,667
            
            
            $
            291,667Accounts
      payable
            
            
            539,508
            
            
            
            794,351Accrued
      liabilities
            
            
            1,323,463
            
            
            
            1,432,124Customer
      deposits
            
            
            1,150,935
            
            
            
            654,133Income
      taxes payable
            
            
            40,286
            
            
            
            17,448Total
      current liabilities
            
            
            3,345,859
            
            
            
            3,189,723Long-term
      debt, net of current portion
            
            
            2,408,076
            
            
            
            2,611,111Deferred
      liabilities
            
            
            55,773
            
            
            
            64,254Total
      liabilities
            
            
            5,809,708
            
            
            
            5,865,088Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, par value $.01 per share:Authorized:  1,000,000
      sharesNo
      shares issued
            
            
            –
            
            
            
            –Common
      stock, par value $.01 per share:20,000,000
      shares authorized; 3,346,761 and 3,315,229 shares issued; and 2,983,856
      and 2,952,324 shares outstanding, respectively
            
            
            33,468
            
            
            
            33,153Additional
      paid-in capital
            
            
            20,831,920
            
            
            
            20,379,924Retained
      earnings
            
            
            2,451,541
            
            
            
            876,41023,316,929
            
            
            
            21,289,487Less
      treasury stock, at cost – 362,905 shares at July 4, 2009 and January 3,
      2009
            
            
            (3,122,164
            )
            
            
            (3,122,164
            )Total
      stockholders’ equity
            
            
            20,194,765
            
            
            
            18,167,323Total
      liabilities and stockholders’ equity
            
            $
            26,004,473
            
            
            $
            24,032,411





See
accompanying notes.


2




MERRIMAC
INDUSTRIES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


SIX
MONTHS ENDED JULY 4, 2009


(UNAUDITED)





Common
      Stock
            
            
            Additional
              Paid-in
            
            
            Retained
            
            
            Treasury StockShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Shares
            
            
            Amount
            
            
            TotalsBalance,
      January 3, 2009
            
            
            3,315,229
            
            
            $
            33,153
            
            
            $
            20,379,924
            
            
            $
            876,410
            
            
            362,905
            
            
            $
            (3,122,164
            )
            
            $
            18,167,323Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,575,131
            
            
            
            
            
            
            
            
            
            
            
            1,575,131Share-based
      compensation
            
            
            
            
            
            
            
            
            
            
            220,933
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            220,933Exercise
      of stock options
            
            
            31,532
            
            
            
            315
            
            
            
            231,063
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            231,378Balance,
      July 4, 2009
            
            
            3,346,761
            
            
            $
            33,468
            
            
            $
            20,831,920
            
            
            $
            2,451,541
            
            
            
            362,905
            
            
            $
            (3,122,164
            )
            
            $
            20,194,765





See
accompanying notes.


3




MERRIMAC INDUSTRIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)




Six
      Months EndedJuly
      4,
              2009
            
            
            June
      28,
              2008RestatedCash
      flows from operating activities:Net
      income (loss)
            
            $
            1,575,131
            
            
            $
            (894,649
            )Income
      (loss) from discontinued operations
            
            
            50,505
            
            
            
            (55,036
            )Income
      (loss) from continuing operations
            
            
            1,524,626
            
            
            
            (839,613
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            1,290,804
            
            
            
            1,270,228Gain
      on sale of assets
            
            
            (40,579
            )
            
            
            –Amortization
      of deferred financing costs
            
            
            56,309
            
            
            
            16,080Share-based
      compensation
            
            
            220,933
            
            
            
            257,560Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,001,369
            )
            
            
            (2,309,499
            )Inventories
            
            
            (436,741
            )
            
            
            (547,446
            )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
            
            
            (1,129,016
            )
            
            
            –Other
      current assets
            
            
            (82,865
            )
            
            
            125,749Other
      assets
            
            
            12,344
            
            
            
            125,891Accounts
      payable
            
            
            (254,843
            )
            
            
            141,534Accrued
      liabilities
            
            
            (108,661
            )
            
            
            (298,214
            )Customer
      deposits
            
            
            496,802
            
            
            
            154,034Income
      taxes payable
            
            
            22,838
            
            
            
            –Deferred
      liabilities
            
            
            (8,481
            )
            
            
            1,478Net
      cash provided by (used in) operating activities of continuing
      operations
            
            
            562,101
            
            
            
            (1,902,218
            )Income
      (loss) from discontinued operations
            
            
            50,505
            
            
            
            (55,036
            )Net
      cash provided by (used in) operating activities
            
            
            612,606
            
            
            
            (1,957,254
            )Cash
      flows from investing activities:Purchases
      of capital assets
            
            
            (246,257
            )
            
            
            (612,893
            )Cash
      proceeds from sale of asset
            
            
            57,202
            
            
            
            664,282Net
      cash (used in) provided by investing activities
            
            
            (189,055
            )
            
            
            51,389Cash
      flows from financing activities:Borrowings
      under revolving credit facility
            
            
            –
            
            
            
            500,000Repayment
      of long-term debt
            
            
            (203,035
            )
            
            
            (525,000
            )Restricted
      cash returned
            
            
            –
            
            
            
            250,000Proceeds
      from the exercise of stock options
            
            
            231,378
            
            
            
            28,331Proceeds
      from Stock Purchase Plan sales
            
            
            –
            
            
            
            57,437Net
      cash provided by financing activities
            
            
            28,343
            
            
            
            310,768Net
      increase (decrease) in cash and cash equivalents
            
            
            451,894
            
            
            
            (1,595,097
            )Cash
      and cash equivalents at beginning of period
            
            
            1,191,768
            
            
            
            2,004,471Cash
      and cash equivalents at end of period
            
            $
            1,643,662
            
            
            $
            409,374Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest on credit
      facilities
            
            $
            147,779
            
            
            $
            112,717Income
      taxes
            
            $
            220,000
            
            
            $
            –




See
accompanying notes


4
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


1. BASIS
OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and footnote disclosures otherwise required by
accounting principles generally accepted in the United States of America for a
full fiscal year. The financial statements do, however, reflect all adjustments
of a normal recurring nature, which are in the opinion of management, necessary
for a fair presentation of the financial position of Merrimac Industries, Inc.
(“Merrimac” or the “Company”) as of July 4, 2009 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.





The
consolidated balance sheet at January 3, 2009 has been derived from the audited
financial statements at that date but does not include all the information
required by accounting principles generally accepted in the United States of
America for complete financial statements.  For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 20, 2009 for the year ended January 3, 2009.  See
the summary of Significant Accounting Policies in the Company’s 2008 Annual
Report on Form 10-K for a discussion of the accounting policies utilized by the
Company.




We evaluated subsequent events through
August 17, 2009, the date of financial statement issuance.





2.
RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In April
2009, the Company’s management determined that there were misstatements in the
Company’s previously reported fiscal year 2008 quarterly financial
statements.  These misstatements were due to a combination of factors
and primarily affected work in process inventories and cost of goods sold as
well as having a minor impact on accrued liabilities and selling, general and
administrative expenses.  The main factors causing the misstatements
were control deficiencies following the Company-wide conversion to an enterprise
resource planning (ERP) software system and as a result of changes in personnel
in the Company’s financial operations department.  The unaudited
condensed impact of the errors found affected all three previously reported
quarters of fiscal year 2008 and the restatement of the quarterly consolidated
financial statements were presented in the Company’s fiscal year 2008 Form 10-K.
The condensed consolidated statement of operations for the quarter and six
months ended June 28, 2008 and condensed consolidated statements of cash flows
for the six months ended June 28, 2008 presented herein are the restated
condensed consolidated financial statements and throughout this Form 10-Q,
where applicable, the restated condensed consolidated financial statements for
the quarter ended and six months ended June 28, 2008 are presented.




3.
DISCONTINUED OPERATIONS





Company
management determined, and the Board of Directors approved on August 9, 2007,
that the Company should divest its FMI operations. The divestiture enables
Merrimac to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable
growth.  Beginning with the third quarter of 2007, the Company
reflected FMI as a discontinued operation and the Company reclassified prior
consolidated financial statements to reflect the results of operations,
financial position and cash flows of FMI as discontinued
operations.





On
December 28, 2007, the Company sold substantially all of the assets of its
wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), a
manufacturer of high technology/high reliability printed circuit boards, that
has operations in Toronto, Ontario, Canada and Chatsworth, California. The
transaction was effected pursuant to an asset purchase agreement entered into
between Merrimac, FMI and FTG. The total consideration payable by FTG was
$1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities of
approximately $368,000 (Canadian $360,000). FTG paid $818,000 (Canadian
$800,000) of the purchase price at closing and the balance was paid on February
21, 2008 following the conclusion of a transitional period.


5
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




The
operating results of FMI, which were formerly represented as Merrimac’s
microwave micro-circuitry segment for the quarters and six months ended July 4,
2009 and June 28, 2008 are summarized as follows:





Quarter
      Ended
            
            
            Six
      Months EndedJuly 4, 2009
            
            
            June 28, 2008
            
            
            July 4, 2009
            
            
            June 28, 2008Net
      sales
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Income
      (loss) from discontinued operations before provision for income
      taxes
            
            $
            50,505
            
            
            $
            (55,036
            )
            
            $
            50,505
            
            
            $
            (55,036
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Income
      (loss) from discontinued operations
            
            $
            50,505
            
            
            $
            (55,036
            )
            
            $
            50,505
            
            
            $
            (55,036
            )





4.
CONTRACT REVENUE RECOGNITION





The
Company derives its revenues from sales of the following: customized products,
which include amounts billable for non-recurring engineering services and in
some instances the production and delivery of prototypes, and the subsequent
production and delivery of units under short-term, firm-fixed price contracts;
the design, documentation, production and delivery of a series of complex
components under long-term firm-fixed price contracts; and the delivery of
off-the-shelf standard products.





The
Company accounts for all contracts, except those for the sale of off-the-shelf
standard products, in accordance with AICPA Statement of Position No. 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts” (“SOP 81-1”).








The
Company recognizes all amounts billable under short-term contracts, including
those involving non-recurring engineering (“NRE”) services for customization of
products, in net sales and all related costs in cost of sales under the
completed-contract method when the customized units are delivered. The Company
periodically enters into contracts with customers for the development and
delivery of a prototype prior to the shipment of units. Under those
circumstances, the Company recognizes all amounts billable for NRE services in
net sales and all related costs in cost of sales when the prototype is delivered
and recognizes all of the remaining amounts billable and the related costs when
the units are delivered.





Periodically,
the Company has complex, long-term contracts for the engineering design,
development and production of space electronics products for which revenue is
recognized under the percentage-of-completion method. Sales and related contract
costs for design and documentation services under this type of contract are
recognized based on the cost-to-cost method. Sales and related contract costs
for products delivered under these contracts are recognized on the
units-of-delivery method. The Company has one contract which is primarily
related to the design and development (and to a lesser extent, the production of
space electronics) for which revenue under the entire contract is recognized
under the percentage-of-completion method using the cost-to-cost method. For
such contract, the Company has recognized costs and estimated earnings in excess
of billings of approximately $3,009,000 at July 4, 2009.





Pursuant
to SOP 81-1, anticipated losses on all contracts are charged to operations in
the period when the losses become known.





Sales of
off-the-shelf standard products and related costs of sales are recorded when
title transfers to our customer, which is generally on the date of shipment,
provided persuasive evidence of an arrangement exists, the sales price is fixed
or determinable and collection of the related receivable is
probable.





5.
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 is added to the fourth quarter, making such quarter consist of 14 weeks
(fiscal year 2014 will be the next 53 week year).





6. RECENT
ACCOUNTING PRONOUNCEMENTS





In
October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) FAS 157-3, “Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active”. The FSP clarifies the
application of Statement of Financial Accounting Standards (“SFAS”) Statement
No. 157, “Fair Value Measurements” (“FAS 157”) in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. The FSP is effective for prior periods for which financial statements
have not been issued. Management currently believes that FAS 157-3 will have no
material impact on the Company’s consolidated financial statements.





In
April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with FAS
157 when the volume and level of activity for the asset or liability have
significantly decreased and re-emphasizes that regardless of market conditions
the fair value measurement is an exit price concept as defined in FAS 157. The
FSP amends FAS 157 to require interim disclosures of the valuation techniques
and related inputs used to measure fair value and any changes to those valuation
techniques and inputs. The FSP also provides additional guidance on defining the
major categories of equity and debt securities measured at fair value in meeting
the disclosure requirements of FAS 157. FSP FAS 157-4 is applied prospectively
to all fair value measurements where appropriate and is effective for the
Company’s interim and annual periods beginning in the second quarter of fiscal
year 2009. The adoption of FSP FAS 157-4 did not have a material impact on the
Company’s consolidated financial statements.


6
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS Statement No. 142, “Goodwill and Other
Intangible Assets”. The intent of this FSP is to improve the consistency between
the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R), and other accounting principles generally accepted in the
United States of America. This FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The adoption of FSP FAS 142-3 did not have a material impact
on the Company’s consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) established principles and
requirements for how an acquiring company recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquired company and the goodwill acquired.
SFAS 141(R) also established disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination. SFAS 141R is
effective for fiscal periods beginning after December 15, 2008. The adoption of
SFAS 141(R) did not have a material impact on the Company’s consolidated
financial statements.





On April
1, 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
This FSP amends and clarifies FASB Statement No. 141 (revised 2007), “Business
Combinations”, to
address application issues raised by preparers, auditors, and members of the
legal profession on initial recognition and measurement, subsequent measurement
and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination. FSP No. FAS 141(R)-1 shall be effective
for assets or liabilities arising from contingencies in business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  The
adoption of SFAS 141(R)-1 did not have a material impact on the Company’s
consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an Amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting
standards of ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal
periods beginning after December 15, 2008. The adoption of SFAS No. 160 did not
have a material impact on the Company’s consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities—an amendment of SFAS No. 133” (“SFAS No. 161”). SFAS No.
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedge items
affect an entity’s financial position, financial performance, and cash flows.
SFAS No. 161 is effective for fiscal years beginning after November 15, 2008.
The adoption of SFAS No. 161 did not have a material impact on the Company’s
consolidated financial statements.





In
November 2008, the FASB ratified the Emerging Issues Task Force ("EITF") Issue
No. 08-6, "Equity Method Investment Accounting Considerations."  EITF
08-6 applies to all investments accounted for under the equity
method.  It states that an entity shall measure its equity investment
initially at cost.  Contingent consideration should only be included
in the initial measurement of the equity method investment if it is required to
be recognized by specific authoritative guidance other than SFAS
141(R).  However, if any equity method investment agreement involves a
contingent consideration arrangement in which the fair value of the investor's
share of the investee's net assets exceeds the investor's initial cost, a
liability should be recognized.  An equity method investor is required
to recognize other-than-temporary impairments of an equity method investment and
shall account for a share issuance by an investee as if the investor had sold a
proportionate share of its investment.  Any gain or loss to the
investor resulting from an investee's share issuance shall be recognized in
earnings. EITF 08-6 shall be effective in fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years and shall be
applied prospectively.  The adoption of EITF 08-6 did not have a
material impact on the Company’s consolidated financial statements.


7
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes general standards for accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS
No. 165, among other things, sets forth the period after the balance sheet
date during which management should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures an entity should make about events or transactions that occurred
after the balance sheet date. SFAS No. 165 is effective for this fiscal
quarter ending July 4, 2009. The adoption of SFAS No. 165 did not have a
material impact on the Company’s interim or annual financial statements or the
disclosures in those financial statements.





In June
2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles - a replacement of
FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 replaces SFAS
No. 162 and establishes the FASB Accounting Standards Codification as the single
source of authoritative U.S. generally accepted accounting principles recognized
by FASB to be applied by non-governmental entities. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. Rules and interpretive releases of the
Securities and Exchange Commission ("SEC") under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. SFAS
No. 168 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of FAS 168 will not have
any impact on the Company's results of operations or financial
position.





7.
SHARE-BASED COMPENSATION





On
January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS 123R") which requires that the costs resulting from all share-based
payment transactions be recognized in the financial statements at their fair
values. The Company adopted SFAS 123R using the modified prospective application
method under which the provisions of SFAS 123R apply to new awards and to awards
modified, repurchased, or cancelled after the adoption date. Additionally,
compensation cost for the portion of the awards for which the requisite
service has not been rendered that are outstanding as of the adoption date is
recognized in the consolidated statement of operations over the remaining
service period after the adoption date based on the award's
original estimate of fair value.





Because
of the Company’s net operating loss carryforwards, no tax benefits resulting
from the exercise of stock options have been recorded, thus there was no effect
on cash flows from operating or financing activities.





The
components of share-based compensation expense in the statements of operations
are as follows:





Quarters
      Ended
            
            Six
      Months EndedJuly
      4,
              2009
            
            June
      28,
              2008
            
            July
      4,
              2009
            
            June
      28,
              2008Stock
      options
            $
            92,000
            
            $
            100,000
            
            $
            187,000
            
            $
            198,000Restricted
      stock
            
            17,000
            
            
            32,000
            
            
            34,000
            
            
            47,000Employee
      stock purchase plan
            
            -
            
            
            6,000
            
            
            -
            
            
            13,000Total
      share-based compensation
            $
            109,000
            
            $
            138,000
            
            $
            221,000
            
            $
            258,000





For the
quarters and six months ended July 4, 2009 and June 28, 2008, share-based
compensation expense was allocated as follows:




Quarters
      Ended
            
            Six
      Months EndedJuly
      4,
              2009
            
            June
      28,
              2008
            
            July
      4,
              2009
            
            June
      28,
              2008Cost
      of sales
            $
            40,000
            
            $
            45,000
            
            $
            82,000
            
            $
            90,000Selling,
      general and administrative
            
            69,000
            
            
            93,000
            
            
            139,000
            
            
            168,000Total
      share-based compensation
            $
            109,000
            
            $
            138,000
            
            $
            221,000
            
            $
            258,000





The fair
value of the options granted was estimated on the date of grant using the
Black-Scholes option valuation model.


8
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




The
following weighted average assumptions for options granted in the quarter and
six months ended July 4, 2009 and June 28, 2008 were utilized:





2009
            
            
            2008Expected
      option life (years)
            
            
            6.0
            
            
            
            6.0Expected
      volatility
            
            
            63.75
            %
            
            
            37.56
            %Risk-free
      interest rate
            
            
            2.13
            %
            
            
            3.14
            %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.




Share-Based
Compensation Plans:





At July
4, 2009, the Company maintains share-based compensation arrangements under the
following plans: (i) 1997 Long Term Incentive Plan; (ii) 2001 Stock Option Plan;
(iii) 2006 Stock Option Plan; (iv) 2006 Key Employee Incentive Plan; and (v)
2006 Non-Employee Directors' Stock Plan (see Note 7 of Form 10-K).





The 2006
Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
common stock to employees, directors and consultants of the
Company.  Under the 2006 Stock Option Plan, the Company may grant to
eligible individuals incentive stock options, as defined in Section 422 of the
Internal Revenue Code of 1986 (the “Code”), and/or non-qualified stock options.
The purpose of the 2006 Stock Option Plan is to attract, retain and motivate
employees, compensate consultants, and to enable employees, consultants and
directors, including non-employee directors, to participate in the long-term
growth of the Company by providing for or increasing the proprietary interests
of such persons in the Company, thereby assisting the Company to achieve its
long-range goals.





At July
4, 2009, there were 292,068 options outstanding under the 2006 Stock Option Plan
of which 195,449 were exercisable. Options are granted at the closing price of
the Company’s shares on the American Stock Exchange on the date immediately
prior to grant, pursuant to the 2006 Stock Option Plan.  Options
available for grant under the 2006 Stock Option Plan were 207,800 at July 4,
2009.





At July
4, 2009, there were 80,500 options outstanding under the 1997 Long Term
Incentive Plan and the 2001 Stock Option Plan, of which all were
exercisable.  No options are available for future grant under the 1997
Long Term Incentive Plan or the 2001 Stock Option Plan.  Under the
1993 Stock Option Plan, there were no options outstanding or available for
future grant.





A summary
of all stock option activity and information related to all options outstanding
for the six months ended July 4, 2009 follows:





Weighted-
                                              Average
                                              Exercise
                                              Price
                                            
                                            
                                            Number
                                              of
                                              Shares
                                            
                                            
                                            Average
                                              Contractual
                                              Term (Years)
                                            
                                            
                                            Aggregate
                                              Intrinsic
                                              ValueOutstanding at January
      3, 2009
                                            
                                            $
                                            9.12
                                            
                                            
                                            
                                            435,400Granted
                                            
                                            
                                            7.82
                                            
                                            
                                            
                                            17,500Exercised
                                            
                                            
                                            7.34
                                            
                                            
                                            
                                            (31,532
                                            )
                                            
                                            
                                            
                                            
                                            
                                            $
                                            96,000Expired
                                            
                                            
                                            7.82
                                            
                                            
                                            
                                            (39,700
                                            )Forfeited
                                            
                                            
                                            9.58
                                            
                                            
                                            
                                            (9,100
                                            )Outstanding
      at July 4, 2009
                                            
                                            
                                            9.33
                                            
                                            
                                            
                                            372,568
                                            
                                            
                                            
                                            6.9
                                            
                                            
                                            $
                                            79,000Exercisable
      at July 4, 2009
                                            
                                            $
                                            9.59
                                            
                                            
                                            
                                            275,949
                                            
                                            
                                            
                                            6.4
                                            
                                            
                                            $
                                            31,000





As of
July 4, 2009, the total future compensation cost related to nonvested stock
options not yet recognized in the statement of operations was
$336,000.  Of that total, $171,000, $121,000, $32,000 and $12,000, are
expected to be recognized in 2009, 2010, 2011 and 2012, respectively. As of July
4, 2009, there is no future compensation cost related to the employee stock
purchase plan. There were 89,857 and 112,880 options vested during the six
months ended July 4, 2009 and June 28, 2008, respectively.





The 2006
Non-Employee Directors’ Stock Plan is a plan that authorizes the grant of an
aggregate of 100,000 shares of Common Stock to the non-employee directors of the
Company.  The plan authorizes each non-employee director to receive
1,500 shares of restricted stock beginning in 2006, and 1,500 shares or such
other amount as the Board of Directors may, from time to time, decide for each
year in the future following the Company’s Annual Meeting of
Stockholders.


9
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




The
Company issued a grant of 9,000 shares of restricted stock, 1,500 shares each,
to its six non-employee directors, on June 24, 2009 and June 26, 2008. The
per-share price of the grant was $7.82 and $5.15, respectively (the closing
price of the Company’s shares on The American Stock Exchange on the date
immediately prior to the grant, pursuant to the terms of the plan). One third of
such restricted stock vests on each anniversary of the grant date over a
three-year period.  Share-based compensation expense for the quarter
and six months ended July 4, 2009, related to the grants of restricted stock,
was approximately $17,000 and $34,000, respectively, which was based on a
straight-line amortization. Share based compensation expense for the quarter and
six months ended June 28, 2008, related to the grants of restricted stock, was
approximately $32,000 and $47,000, respectively, which was based on a
straight-line amortization. Restricted shares of common stock available for
grant under the 2006 Non-Employee Directors’ Stock Plan were 62,500 at July 4,
2009.





A summary of unvested restricted stock activity
and information related to all restricted stock outstanding
follows:





Weighted-Average
              Grant-Day Fair Value
            
            
            SharesOutstanding
      at January 3, 2009
            
            $
            7.36
            
            
            
            17,500Granted
            
            
            7.82
            
            
            
            9,000Vested
            
            
            8.07
            
            
            
            (8,500
            )Outstanding
      at July 4, 2009
            
            $
            7.25
            
            
            
            18,000





As of
July 4, 2009, the total future compensation cost related to the 2006
Non-Employee Directors’ Stock Plan not yet recognized in the statement of
operations was $125,000.  Of that total, $34,000, $51,000, $30,000 and
$10,000 are expected to be recognized in 2009, 2010, 2011 and 2012,
respectively.





The
Company elected to adopt the detailed method provided in SFAS 123(R) for
calculating the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the tax effects of employee stock-based compensation awards that
are outstanding upon adoption of SFAS 123(R).





8.
INVENTORIES





Inventories
are stated at the lower of cost or market, using the average cost method. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories.





Inventories
consist of the following:





July
      4,
              2009
            
            
            January 3,
              2009Finished
      goods
            
            $
            528,175
            
            
            $
            700,174Work
      in process
            
            
            2,227,131
            
            
            
            1,837,324Raw
      materials and purchased parts
            
            
            2,581,141
            
            
            
            2,362,208Total
            
            $
            5,336,447
            
            
            $
            4,899,706





9.
CURRENT AND LONG-TERM DEBT





The
Company was obligated under the following debt instruments at July 4, 2009 and
January 3, 2009:





July
      4, 2009
                    
                    
                    January 3, 2009Wells
      Fargo Bank N.A.:Revolving
      line of credit, 1.00% above prime (prime having a 5% floor limit for loan
      purposes)
                    
                    $
                    
                    
                    
                    $
                    Equipment
      loan, due September 29, 2011, 1.00% above prime (prime having a 5% floor
      limit for loan purposes) 6.00% at July 4, 2009
                    
                    
                    338,632
                    
                    
                    
                    458,333Mortgage loan, due September 29, 2011, 1.50%
      above prime (prime having a 5% floor limit for loan purposes) or LIBOR
      plus 3.5%, 6.50% at July 4, 2009
                    
                    
                    2,361,111
                    
                    
                    
                    2,444,4452,699,743
                    
                    
                    
                    2,902,778Less
      current portion
                    
                    
                    291,667
                    
                    
                    
                    291,667Long-term
      portion
                    
                    $
                    2,408,076
                    
                    
                    $
                    2,611,111




10
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




On September 29, 2008, the Company entered into a credit facility
with Wells Fargo Bank, N.A. (“WFB”) (the “Wells Fargo Credit Facility”) which
replaced the credit facility with Capital One, N.A. On September 30, 2008, the
Company repaid all outstanding amounts under the credit facility with Capital
One, N.A. with the proceeds of the Wells Fargo Credit Facility.  The
Wells Fargo Credit Facility consists of a three-year $5,000,000 collateralized
revolving credit facility, a three-year $500,000 equipment term loan and a
three-year $2,500,000 real estate term loan.  The revolving line of
credit is subject to an availability limit under a borrowing base calculation of
85% of eligible domestic accounts receivable with a sublimit of $5,000,000 and
30% of eligible inventories with a sublimit of $400,000.  The
revolving line of credit is also subject to a minimum borrowing base
availability of $500,000.  As of July 4, 2009, the Company had a
borrowing base of approximately $3,730,000 and availability under the credit
facility as of July 4, 2009 of approximately $3,230,000.The revolving line of
credit expires September 29, 2011.  The revolving line of credit bears
interest at the prime rate plus one percent, with the prime rate having a floor
limit of 5% for loan purposes.  The Company may request a LIBOR quote
for an initial minimum of $1,000,000 with subsequent requests at a minimum of
$500,000.  No more than three such requests may be active at any point
in time.  LIBOR advances bear interest at the LIBOR rate plus 3.25%
for a credit advance, or 3.50% for a term loan.   The equipment
loan is required to be repaid in equal monthly installments of $13,900 based on
a four-year amortization period.  The real estate loan is required to
be paid in equal monthly installments of $10,400 amortized over a 180 month time
period, with any unpaid principal and interest due and payable on the
termination date of September 29, 2011.




Interest
expense for the six months ended July 4, 2009 was approximately
$148,000.





In the
second quarter of 2009 the Company sold equipment for approximately $57,000 and
all of the proceeds were used to pay down the Wells Fargo equipment
loan.





The Wells
Fargo Credit Facility is collateralized by substantially all of the Company’s
assets.





The
credit facility requires the Company to maintain certain financial covenants,
including a minimum debt service coverage ratio of not less than 1.1 to 1.0 and
minimum net income.  For the quarter ended July 4, 2009 and for the
quarters ended July 4, 2009 and beyond, net income is not to be less than 75% of
the Company’s projected net income or not more than 100% of the Company’s
projected net loss.  Additionally, the credit facility prohibits
incurring or contracting to incur capital expenditures exceeding $600,000 in the
year ending January 2, 2010 and $600,000 in each subsequent year.  The
Company also must also not permit the amount due from its affiliate in Costa
Rica, Multi-Mix Microtechnology S.R.L., to exceed $4,750,000 through the quarter
ended July 4, 2009 and $5,000,000 through the quarter ending October 3, 2009 and
each fiscal quarter thereafter.  The credit agreement contains other
standard covenants related to the Company’s operations, including prohibitions
on the creation of additional liens, the incurrence of additional debt, the
payment of dividends, the sale of certain assets and other corporate
transactions, without Wells Fargo’s consent.  The Company was in
compliance with all of its financial covenants as of July 4, 2009.





At July
4, 2009 and January 3, 2009, the fair value of the Company's debt approximates
carrying value. The fair value of the Company's long-term debt is estimated
based on current interest rates.





10.
WARRANTIES





The
Company's standard catalog items, as well as products sold under contracts, have
warranty obligations. With the exception of a very limited number of contracts,
all of the Company’s products have a one-year warranty.  For items
sold with extended warranties, estimated warranty costs for each contract are
determined based on the contract terms and technology-specific issues. The
Company accrues estimated warranty costs at the time of sale and any additional
amounts are recorded when such costs are probable and can be reasonably
estimated. Warranty expense was approximately $13,000 and  $15,000 for
the quarters ended July 4, 2009 and June 28, 2008,
respectively.  Warranty expense was approximately $26,000
and  $65,000 for the six months ended July 4, 2009 and June 28, 2008,
respectively. The warranty reserve was $180,000 and $200,000 at July 4, 2009 and
January 3, 2009, respectively.





11.
INCOME TAXES




The
Company recorded a tax provision of $200,000 for the quarter ended July 4, 2009,
based on income from continuing operations before taxes of
$868,000.  In 2008, the Company did not record a tax benefit for
the quarter ended June 28, 2008 based on income from continuing operations
before taxes of $25,000.  The Company’s effective tax rate for the
quarters ended July 4, 2009 and June 28, 2008 was 23% and 0%,
respectively.




11
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




The
Company recorded a $247,000 provision for income taxes for the six months ended
July 4, 2009 based on income from continuing operations before taxes of
$1,767,000.  For the six months ended June 28, 2008, the Company did
not record a benefit for income taxes based on the loss from continuing
operations before taxes of $840,000.  The Company’s effective tax rate
for the six months ended July 4, 2009 and June 28, 2008 is 14% and 0%,
respectively.  The provision for income taxes is based on federal, state
and foreign income taxes, and has been reduced due to the utilization of net
operating loss carryovers.




As of
January 3, 2009, the Company had deferred tax assets of approximately $1.5
million related to net operating loss carryforwards, tax credit carryforwards
and deductible temporary differences, a portion of which has been used to reduce
the Company’s taxable income in the first six months of 2009. A valuation
allowance is required when management assesses that it is more likely than not
that all or a portion of a deferred tax asset will not be realized. The
Company's 2002, 2003, 2006 and 2007 net losses have weighed heavily in the
Company's overall assessments. As a result of the original assessment, the
Company established a full valuation allowance for its remaining U.S. net
deferred tax assets. This assessment continued unchanged from 2003 through the
second quarter of 2009. The Company will continue to evaluate the realizability
of its deferred tax assets and liabilities on a periodic basis, and will adjust
such amounts in light of changing facts and circumstances.





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 a 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.  The Company may become
subject to these limitations in 2009 depending on the extent of the changes in
its ownership.




On
December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
for uncertainty in tax positions.  As of that date the Company had no
uncertain tax positions and did not record any additional benefits or
liabilities.  At July 4, 2009 and January 3, 2009, the Company had no
uncertain tax positions and did not record any additional benefits or
liabilities.  The Company will recognize any accrued interest or
penalties related to unrecognized tax benefits within the provision for income
taxes.




12.
BUSINESS SEGMENT DATA





The
Company's continuing operations are conducted primarily through one business
segment, electronic components and subsystems. This segment involves the 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, 89% are located
in the United States and 11% are located in Costa Rica.





13. 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, were issued during the reporting period to the
extent they are not anti-dilutive, using the treasury stock method.





Because
of the net loss for the six months ended June 28, 2008 approximately 425,000
shares underlying stock options were excluded from the calculation of diluted
net loss per share, respectively, as the effect would be anti-dilutive. For the
quarter and six months ended July 4, 2009, 32,600 shares underlying options were
excluded from the calculation of diluted net income per share, because the
options did not have any intrinsic value.





The
weighted average number of shares outstanding basic and diluted is as
follows:





Quarter Ended
            
            
            Six Months EndedJuly
      4,
              2009
            
            
            June
      28,
              2008
            
            
            July
      4,
              2009
            
            
            June
      28,
              2008Net
      income (loss) for basic and diluted computations
            
            $
            718,651
            
            
            $
            (29,693
            )
            
            $
            1,575,131
            
            
            $
            (894,649
            )Weighted
      average number of shares outstanding - basic
            
            
            2,961,157
            
            
            
            2,939,788
            
            
            
            2,956,741
            
            
            
            2,936,155Dilutive
      effect of options and restricted stock
            
            
            55,426
            
            
            
            5,415
            
            
            
            36,463
            
            
            Weighted
      average number of shares outstanding - diluted
            
            
            3,016,583
            
            
            
            2,945,203
            
            
            
            2,993,204
            
            
            
            2,936,155Earnings
      per common shareBasic
            
            $
            .24
            
            
            $
            (.01
            )
            
            $
            .53
            
            
            $
            (.30
            )Diluted
            
            $
            .24
            
            
            $
            (.01
            )
            
            $
            .53
            
            
            $
            (.30
            )




12
 MERRIMAC
INDUSTRIES, INC.
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS




14.
RELATED PARTY TRANSACTIONS





During
the second quarter and first six months of 2009, the Company's outside general
counsel Katten Muchin Rosenman LLP was paid $63,000 and $161,000, respectively,
for providing legal services to the Company. During the second quarter and first
six months of 2008, the Company's outside general counsel Katten Muchin Rosenman
LLP was paid $96,000 and $169,000, respectively, for providing legal services to
the Company. A director of the Company is counsel to Katten Muchin Rosenman LLP
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
2009 and 2008, 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 $7,000 and $17,000 to these companies during the
second quarter and first six months of 2009, respectively.  The
Company paid an aggregate of $2,000 and $3,000 to these companies during the
second quarter and first six months of 2008, respectively. A director of the
Company is the chairman and chief executive officer of these
companies.





During
each of the second quarter and first six months of 2009 and 2008, a director of
the Company was paid $9,000 and $18,000, respectively, for providing
technology-related consulting services to the Company.





The
Company has an agreement with DuPont Electronic Technologies (“DuPont”), a
stockholder and the employer of a director, for providing technological and
marketing-related personnel and services on a cost-sharing basis to the Company
under the Technology Agreement dated February 28, 2002. No payments were made to
DuPont during the second quarter and the first six months of 2009 or 2008. A
director of the Company is an officer of DuPont, but does not share in any of
these payments.




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. In addition, 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 2006 Stock Option Plan, each non-employee director is granted an
option to purchase 2,500 shares of the Common Stock of the Company on the date
of each Annual Meeting of Stockholders. Such options have a three-year vesting
period.  Each such grant has an exercise price equal to the fair
market value on the date of such grant and will expire on the tenth anniversary
of the date of the grant. Pursuant to the 2006 Non-Employee Directors’ Stock
Plan, each non-employee director is granted 1,500 shares of restricted Common
Stock of the Company on the date of each Annual Meeting of Stockholders. One
third of such restricted stock vests on the anniversary of the grant date over a
three-year vesting period.





DuPont
and two entities affiliated with Ludwig Kutner, one of our directors, hold
registration rights, which currently give them the right in perpetuity to
register an aggregate of 1,003,413 shares of Common Stock of the Company. There
are no settlement alternatives and the registration of the shares of Common
Stock would be on a "best efforts" basis.





15.  STOCKHOLDER
RIGHTS PLAN





On March
5, 1999, the Board of Directors of the Company approved a stockholder rights
plan and declared a dividend of one common share purchase right (a "Right") for
each outstanding share of Common Stock of the Company. The dividend was payable
on March 19, 1999 (the "Record Date") to stockholders of record as of the close
of business on that date. Each Right will entitle the holder to purchase from
the Company, upon the occurrence of certain events, one share of Common Stock
for $25.00.





Generally,
if any person or group acquires beneficial ownership of 12.5% or more of the
Company's outstanding Common Stock, each Right (other than Rights held by such
acquiring person or group) will be exercisable, at the $25.00 purchase price,
for a number of shares of Common Stock having a market value of $50.00. Upon an
acquisition of the Company, each Right (other than Rights held by the acquiror)
will generally be exercisable, at the $25.00 purchase price, for a number of
shares of common stock of the acquiror having a market value of $50.00. In
certain circumstances, each Right may be exchanged by the Company for one share
of Common Stock. On March 19, 2009 the plan was amended to extend the expiration
date, from March 19, 2009 to December 31, 2009 unless earlier exchanged or
redeemed at $0.01 per Right.





16.  LEGAL
PROCEEDINGS





On March
10, 2008, a statement of claim in Ontario Superior Court of Justice was filed by
nineteen former FMI employees against the Company, FMI and FTG seeking damages
for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
following the sale of FMI’s assets to FTG. The former FMI employees are alleging
that an employment contract existed between FMI and the plaintiffs and are
seeking additional damages for termination of the alleged
contract.  The Company has an Employment Practices Liability insurance
policy that extends coverage to the Company’s subsidiaries.  The
insurance carrier agreed to provide a defense in this matter on April 24, 2008
and they retained Canadian counsel to defend this claim.  Thus far the
Company has paid fees and legal costs of $25,000 related to the matter, which is
the deductible amount of the insurance policy. In accordance with the
requirements of SFAS No. 5, after discussions with counsel, the Company believed
at January 3, 2009 that an unfavorable outcome was probable and management
estimated the amount of the probable loss, net of insurance coverage, to be
$50,000 for which a provision was made. As of July 4, 2009, the Company believed
the probable loss, net of insurance coverage, to be $20,000. Accordingly the
Company adjusted their provision by approximately $30,000 in the second quarter
of 2009. The Company and their insurance carrier are defending these claims
vigorously.




17. FAIR
VALUE OF FINANCIAL INSTRUMENTS
  The
carrying amounts of financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable approximated fair value as of July 4,
2009 and January 3, 2009 because of the relative short maturity of these
instruments. At July 4, 2009 and January 3, 2009, the fair value of the
Company's debt approximates carrying value. The fair value of the Company's
long-term debt is estimated based on current interest
rates.


13


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





FORWARD-LOOKING
STATEMENTS


This
Quarterly Report on Form 10-Q contains statements relating to future results of
Merrimac (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995.   In this report, the words “we”, “us” and
“our” refer to Merrimac and its subsidiaries.  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® products; risks associated with adequate capacity to
obtain raw materials and reduced control over delivery schedules and costs due
to reliance on sole source or limited suppliers; slower than anticipated
penetration into the satellite communications, defense and wireless markets;
failure of our Original Equipment Manufacturer or OEM customers to successfully
incorporate our products into their systems; changes in product mix resulting in
unexpected engineering and research and development costs; delays and increased
costs in product development, engineering and production; reliance on a small
number of significant customers; the emergence of new or stronger competitors as
a result of consolidation movements in the market; the timing and market
acceptance of our or our OEM customers' new or enhanced products; general
economic and industry conditions; the ability to protect proprietary information
and technology; competitive products and pricing pressures; our ability and the
ability of our OEM customers to keep pace with the rapid technological changes
and short product life cycles in our industry and gain market acceptance for new
products and technologies; 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 as
are detailed from time to time in the Company's Securities and Exchange
Commission filings. The words “believe,” “expect,” “plan,” “anticipate,” and
“intend” and similar expressions identify forward-looking statements. These
forward-looking statements are made only as of the date of the filing of this
Form 10-Q, and the Company undertakes no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.




OVERVIEW





Continuing
operations.




Merrimac
Industries, Inc. was originally incorporated as Merrimac Research and
Development, a New York corporation, in 1954. In 1994 we were reincorporated as
a New Jersey corporation and subsequently reincorporated as a Delaware
corporation in 2001.




We
design, manufacture and sell electronic components, integrated circuits and
subsystems offering extremely broad frequency coverage, high performance
characteristics and extraordinary thermal management. Our operations are
conducted through two operating facilities located in West Caldwell, New Jersey
and San Jose, Costa Rica.




We are a
versatile technology company specializing in radio frequency and microwave
applications solutions. We specialize in Multi-Mix®, stripline, microstrip,
discreet element, bonded stripline and thick metal-backed Teflon® and mixed
dielectric multilayer circuit technologies for defense, aerospace and commercial
applications.  Of special significance has been the combination of two
or more of these technologies into single components and integrated
multifunction subassemblies to achieve a unique and proprietary solution
offering superior performance and reliability while minimizing package size and
weight. Our components and integrated assemblies are found in applications as
diverse as satellites, military and commercial aircraft, radar, radio systems,
medical diagnostic instruments communications systems and wireless connectivity.
We maintain ISO 9001:2000 and AS 9100 registered quality assurance programs. Our
components range in price from $0.50 to more than $10,000 and our subsystems
range from $500 to more than $1,500,000.




Strategically,
we position our marketing, research and development, and manufacturing
operations to develop new products and expand our existing markets. Our research
and development efforts, driven by our marketing strategy, are targeted at
providing customers with more complex, reliable, and compact products
competitively priced.




Our
Multi-Mix® product development is focused on the military and space market
segments.  While we will carefully monitor and be alert to commercial
opportunities for our Multi-Mix® technology, where the customer is willing to
compensate us for our design work, we will limit the speculative funding of this
commercial segment.  The self-funded investment that we have
previously made has created a library of pre-engineered designs, especially in
RF Module Amplifiers, which provide platform families for both commercial and
military final customization.




We market
and sell our products domestically and internationally through a direct sales
force as well as independent domestic and international sales
organizations.  We develop and offer for sale products built to
specific customer specifications, as well as standard catalog
items.




14





We had a
strong backlog at the end of 2007 and a high volume of orders throughout 2008,
which resulted in a significant increase in sales in 2008 of 33.5%. The higher
sales volume in 2008 generated a 25.9% improvement in gross profit, which
combined with reductions in our research and development costs and our efforts
to keep selling, general and administrative expenses from growing relative to
sales, restored us to profitability in fiscal year 2008. We continue to have a
strong backlog and a high volume of orders in 2009 and expect an increase in
sales in 2009 over 2008. Due to the expected sales increase and our efforts to
keep overall costs down we anticipate that we will remain profitable in 2009.




Our cost
of sales consists of materials, salaries and related expenses, and outside
services for manufacturing and certain engineering personnel and manufacturing
overhead. Our products are designed and manufactured in our facilities located
in West Caldwell, NJ and Costa Rica. Our manufacturing and production facilities
infrastructure overhead are relatively fixed and are based on our expectations
of future net revenues. Should we experience a reduction in net revenues in a
quarter, we could have difficulty adjusting short-term expenditures and
absorbing any excess capacity expenses. If this were to occur, our operating
results for that quarter would be negatively impacted. In order to remain
competitive, we must continually reduce our manufacturing costs through design
and engineering innovations and increases in manufacturing efficiencies. There
can be no assurance that we will be able to reduce our manufacturing
costs.





We
anticipate that depreciation and amortization expenses will exceed capital
expenditures in fiscal year 2009 by approximately $2,000,000. We intend to issue
commitments to purchase approximately $350,000 of capital equipment from various
vendors for the remainder of 2009 and we anticipate that such equipment will be
purchased and become operational during the remainder of 2009.  Our planned
equipment purchases and other commitments are expected to be funded through cash
resources and cash flows expected to be generated from operations, and
supplemented by our $5,000,000 revolving credit facility with Wells
Fargo.





Selling,
general and administrative expenses consist of personnel costs for
administrative, selling and marketing groups, sales commissions to employees and
manufacturing representatives, travel, product marketing and promotion costs, as
well as legal, accounting, information technology and other administrative
costs. In 2009 we may need to increase our expenditures for selling, general and
administrative expenses, especially in connection with the implementation of our
strategic plan for generating and expanding sales of Multi-Mix®
products.





Research
and development expenses consist of materials, salaries and related expenses of
certain engineering personnel, and outside services related to product
development projects. We charge all research and development expenses to
operations as incurred. We believe that continued investment in research and
development is critical to our long-term business success.  We intend
to continue to invest in research and development programs in future periods
focusing our efforts on Multi-Mix® process enhancements for military and space
market applications.  However, overall we expect to reduce our
research and development expenditures in fiscal 2009 as a result of limiting our
investment in speculative funding of the commercial segment.





We
anticipate 2009 orders from our defense and satellite customers will increase
compared to fiscal year 2008 levels. Nevertheless, in times of armed conflict or
war, military spending is concentrated on armaments build up, maintenance and
troop support, and not on the research and development and specialty
applications that are the Company’s core strengths and revenue
generators.





Discontinued
operations.





Filtran
Microcircuits Inc. (“FMI”) was established in 1983, and we acquired FMI in
February 1999. FMI is a manufacturer of microwave micro-circuitry for the high
frequency communications industry. FMI has been engaged in the production of
microstrip, bonded stripline, and thick metal-backed Teflon® (PTFE)
microcircuits for RF applications including satellite, aerospace, PCS, fiber
optic telecommunications, automotive, navigational and defense applications
worldwide. FMI has supplied mixed dielectric multilayer and high speed
interconnect circuitry to meet customer demand for high performance and
cost-effective packaging.





Our
management determined, and the Board of Directors approved on August 9, 2007,
that we should divest our FMI operations with the view to enable us to
concentrate our resources on RF Microwave and Multi-Mix® Microtechnology product
lines to generate sustainable, profitable growth. Beginning with the third
quarter of 2007, we reflected FMI as a discontinued operation and we
reclassified prior financial statements to reflect the results of operations,
financial position and cash flows of FMI as discontinued
operations.





On
December 28, 2007, we sold substantially all of the assets of FMI to Firan
Technology Group Corporation, a manufacturer of high technology/high reliability
printed circuit boards that has operations in Toronto, Ontario, Canada and
Chatsworth, California. The transaction was effected pursuant to an asset
purchase agreement entered into between Merrimac, FMI and FTG. The total
consideration payable by FTG was $1,482,000 (Canadian $1,450,000) plus the
assumption of certain liabilities of approximately $368,000 (Canadian $360,000).
FTG paid $818,000 (Canadian $800,000) of the purchase price at the closing on
December 28, 2007 and the balance was paid on February 21, 2008 following the
conclusion of a transitional period.




15





The
operating results of FMI, formerly represented as our microwave micro-circuitry
segment, on the condensed consolidated financial statements for the quarters and
six months ended July 4, 2009 and June 28, 2008 are summarized as
follows:


Quarter
      Ended
            
            
            Six
      Months EndedJuly 4, 2009
            
            
            June 28, 2008
            
            
            July 4, 2009
            
            
            June 28, 2008Net
      sales
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Income
      (loss) from discontinued operations before provision for income
      taxes
            
            $
            50,505
            
            
            $
            (55,036
            )
            
            $
            50,505
            
            
            $
            (55,036
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Income
      (loss) from discontinued operations
            
            $
            50,505
            
            
            $
            (55,036
            )
            
            $
            50,505
            
            
            $
            (55,036
            )





CRITICAL
ACCOUNTING ESTIMATES AND POLICIES





Our
management makes certain assumptions and estimates that impact the reported
amounts of assets, liabilities and stockholders' equity, and sales and expenses.
These assumptions and estimates are inherently uncertain. The management
judgments that are currently the most critical are related to the accounting for
our investments in Multi-Mix® Microtechnology, contract revenue recognition,
inventory valuation and valuation of deferred tax assets. Below is a further
description of these policies as well as the estimates involved.





Contract
Revenue Recognition





We derive
our revenues from sales of the following: customized products, which include
amounts billable for non-recurring engineering services and in some instances
the production and delivery of prototypes, and the subsequent production and
delivery of units under short-term, firm-fixed price contracts; the design,
documentation, production and delivery of a series of complex components under
long-term firm-fixed price contracts; and the delivery of off-the-shelf standard
products.





We
account for all contracts, except those for the sale of off-the-shelf standard
products, in accordance with AICPA Statement of Position No. 81-1, “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts”
(“SOP 81-1”).





We
recognize all amounts billable under short-term contracts, including those
involving non-recurring engineering (“NRE”) services for customization of
products, in net sales and all related costs in cost of sales under the
completed-contract method when the customized units are delivered. We
periodically enter into contracts with customers for the development and
delivery of a prototype prior to the shipment of units. Under those
circumstances, we recognize all amounts billable for NRE services in net sales
and all related costs in cost of sales when the prototype is delivered and
recognizes all of the remaining amounts billable and the related costs when the
units are delivered.





Periodically,
we have complex, long-term contracts for the engineering design, development and
production of space electronics products for which revenue is recognized under
the percentage-of-completion method. Sales and related contract costs for design
and documentation services under this type of contract are recognized based on
the cost-to-cost method. Sales and related contract costs for products delivered
under these contracts are recognized on the units-of-delivery method. We have
one contract, which is primarily related to the design and development (and to a
lesser extent, the production of space electronics) for which revenue under the
entire contract is recognized under the percentage-of-completion method using
the cost-to-cost method. For such contract, we have recognized revenues, costs
and estimated earnings in excess of billings of approximately $3,009,000 at July
4, 2009.





Pursuant
to SOP 81-1, anticipated losses on all contracts are charged to operations in
the period when the losses become known.





Sales of
off-the-shelf standard products and related costs of sales are recorded when
title transfers to our customer, which is generally on the date of shipment,
provided persuasive evidence of an arrangement exists, the sales price is fixed
or determinable and collection of the related receivable is
probable.





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, they are charged to
operations.





Procurement
of inventories is based on specific customer orders and forecasts. Customers
have certain rights of modification with respect to these orders and forecasts.
As a result, customer modifications to orders and forecasts affecting
inventories previously procured by us and our purchases of inventories beyond
customer needs may result in excess and obsolete inventories for the related
customers. Although we may be able to use some of these excess components and
raw materials in other products we manufacture, a portion of the cost of this
excess inventories may not be recoverable from customers, nor may any excess
quantities be returned to the vendors. We also may not be able to recover the
cost of obsolete inventories from vendors or customers.




16




Write
offs or write-downs of inventories generally arise from:





·
            declines
      in the market value of inventories;·
            changes
      in customer demand for inventories, such as cancellation of orders;
      and·
            our
      purchases of inventories beyond customer needs that result in excess
      quantities on hand and that we are not able to return to the vendor or
      charge back to the customer.




Valuation of Deferred Tax Assets





As of
July 4, 2009, we have 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 is required when management assesses that it is more likely than not
that all or a portion of a deferred tax asset will not be realized. The
Company's 2002, 2003, 2006 and 2007 net losses have weighed heavily in the
Company's overall assessments. The Company established a full valuation
allowance for our remaining U.S. net deferred tax assets as a result of our
assessment at December 28, 2002. This assessment continued unchanged from 2003
through the second quarter of 2009.





The
following table reflects the percentage relationships of items from the
Condensed Consolidated Statements of Operations as a percentage of net
sales.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY


(UNAUDITED)





Percentage
      of Net Sales
                
                
                Percentage
      of Net SalesQuarters
      Ended
                
                
                Six
      Months EndedJuly
      4,
                
                
                June
      28,
                
                
                July
      4,
                
                
                June
      28,2009
                
                
                2008
                
                
                2009
                
                
                2008Restated
                
                
                
                
                
                RestatedNet
      sales
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Costs
      and expenses:Cost
      of sales
                
                
                58.4
                
                
                
                62.6
                
                
                
                57.0
                
                
                
                65.2Selling,
      general and administrative
                
                
                28.6
                
                
                
                31.4
                
                
                
                29.8
                
                
                
                34.7Research
      and development
                
                
                1.9
                
                
                
                5.0
                
                
                
                1.4
                
                
                
                5.6Gain
      on sale of asset
                
                
                (0.5
                )
                
                
                -
                
                
                
                (0.3
                )
                
                
                -88.4
                
                
                
                99.0
                
                
                
                87.9
                
                
                
                105.5Operating
      income (loss)
                
                
                11.6
                
                
                
                1.0
                
                
                
                12.1
                
                
                
                (5.5
                )Interest
      and other expense, net
                
                
                (0.9
                )
                
                
                (0.7
                )
                
                
                (0.8
                )
                
                
                (0.8
                )Income
      (loss) from continuing operations before income taxes
                
                
                10.7
                
                
                
                0.3
                
                
                
                11.3
                
                
                
                (6.3
                )Provision
      for income taxes
                
                
                2.4
                
                
                
                -
                
                
                
                1.6
                
                
                
                -Income
      (loss) from continuing operations
                
                
                8.3
                
                
                
                0.3
                
                
                
                9.7
                
                
                
                (6.3
                )Income
      (loss) from discontinued operations after income taxes
                
                
                0.6
                
                
                
                (0.7
                )
                
                
                0.3
                
                
                
                (0.4
                )Net
      income (loss)
                
                
                8.9
                %
                
                
                (0.4
                )%
                
                
                10.0
                %
                
                
                (6.7
                )%




17
 
  SECOND QUARTER AND FIRST SIX MONTHS OF 2009 COMPARED TO THE SECOND
QUARTER AND FIRST SIX MONTHS OF 2008





Net
sales.





Net
sales increased for the second quarter and the first six months of
2009.  Net sales in the second quarter increased $599,000 or 8.0% to
$8,089,000, from the second quarter of 2008 net sales of $7,490,000. For the
first six months of 2009 net sales increased 18.5% or $2,448,000, to $15,696,000
compared to net sales of $13,248,000 for the first six months of 2008. Net sales
for the second quarter and the first six months of 2009 increased due to the
higher level of orders received during 2008 resulting in a larger backlog of
orders to fulfill in fiscal year 2009 including increased sales of Multi-Mix®
products to defense industry related customers.





Backlog
represents the amount of orders we have received that have not been shipped as
of the end of a particular fiscal period.  The orders in backlog are a
measure of future sales and determine our upcoming material, labor and service
requirements.  The book-to-bill ratio for a particular period
represents orders received for that period divided by net sales for the same
period.  We look for this ratio to exceed 1.0, indicating the backlog
is being replenished by new orders at a higher rate than the sales being removed
from the backlog.





The
following table presents key performance measures that we use to monitor our
operating results for the six months ended July 4, 2009 and June 28,
2008:





Six
      Months EndedJuly
      4, 2009
            
            
            June
      28, 2008Beginning
      backlog
            
            $
            20,967,000
            
            
            $
            17,991,000Plus
      orders
            
            
            15,267,000
            
            
            
            15,393,000Less
      net sales
            
            
            (15,696,000
            )
            
            
            (13,248,000
            )Ending
      backlog
            
            $
            20,538,000
            
            
            $
            20,136,000Book-to-bill
      ratio
            
            
            .97
            
            
            
            1.16





Orders of
$15,267,000 were received during the first six months of 2009, a decrease of
$126,000 or 0.8% compared to $15,393,000 in orders received during the first six
months of 2008. Backlog increased by $402,000 or 2.0% to $20,538,000 at the
end of the first six months of 2009 compared to $20,136,000 at the end of the
first six months of 2008. The book-to-bill ratio for the first six months of
2009 was .97 to 1 and for the first six months of 2008 was 1.16 to 1.
Our book-to-bill ratio was lower in the first six months of 2009 compared
to 2008 primarily due to the high sales volume in the first six months of 2009
and a delay in the receipt of expected orders. Our technology is incorporated
into a wide variety of defense and commercial systems and due to program
complexities inherent in these programs, the exact timing of orders is difficult
to predict.  However, we continue to receive a consistently high level
of orders that are in line with our projections and we expect our book to bill
ratio to exceed 1.0 to 1 for 2009.





The
backlog of unfilled orders includes amounts based on signed contracts as well as
agreed letters of intent, which we have determined are legally binding and
likely to proceed.  Although backlog represents only business that is
considered likely to be performed, cancellations or scope adjustments may and do
occur.  The elapsed time from the award of a contract to completion of
performance may be up to approximately four years.  The dollar amount
of backlog is not necessarily indicative of our future earnings related to the
performance of such work due to factors outside our control, such as changes in
project schedules, scope adjustment or project cancellations.  We
cannot predict with certainty the portion of backlog to be performed in a given
year.  Backlog is adjusted quarterly to reflect project cancellations,
deferrals, revised project scope and cost, and sales of subsidiaries, if
any.





Cost
of sales and gross profit.





Gross
profit and gross profit percentage increased for both the second quarter and
first six months of 2009 compared to the same periods in 2008. Gross profit for
the second quarter of 2009 increased $568,000 or 20.3%, to $3,367,000 compared
to $2,799,000 for the second quarter of 2008.  Gross profit margin for
the second quarter of 2009 was 41.6% compared to 37.4% for the second quarter of
2008. Gross profit for the first six months of 2009 increased 46.3% or
$2,137,000 to $6,749,000 from $4,612,000 in the first six months of 2008. Gross
profit margin for the first six months of 2009 was 43.0% compared to 34.8% for
the first six months of 2008.





The
increase in consolidated gross profit in the second quarter and first six months
of 2009 compared to the same periods in 2008 was primarily due to the increase
in sales.  The increase in sales also had a favorable impact on our
gross profit percentage in the second quarter and first six months of 2009,
allowing us to better absorb fixed manufacturing costs.  Additionally,
the improvement in the gross profit percentage was due in part to improved
market conditions in the first half of 2009 compared to the soft market and
competitive pricing pressure that existed in the first half of
2008.




18





Selling,
general and administrative expenses.





Selling,
general and administrative expenses were $2,313,000 for the second quarter of
2009, a slight decrease of $38,000 or 1.6%, compared to $2,351,000 in the second
quarter of 2008.  The decrease in such expenses for the second quarter
of 2009 was primarily due to a decrease in selling and marketing expenses that
were largely offset by higher professional fees. When expressed as a
percentage of net sales, selling, general and administrative expenses decreased
from 31.4% of sales in the second quarter of 2008 to 28.6% of sales in the
second quarter of 2009. For the first six months of 2009 selling, general and
administrative expenses were $4,672,000 compared to $4,595,000 in the first six
months of 2008 an increase of $77,000 or 1.7%. The increase in such expenses for
the first six months of 2009 was primarily due to higher professional fees that
were largely offset by a decrease in selling and marketing expense. When
expressed as a percentage of net sales, selling, general and administrative
expenses decreased from 34.7% of sales in the first six months of 2008 to 29.8%
of sales in the first six months of 2009.





Research
and development expenses.





Research
and development costs decreased in both the second quarter and first six months
of 2009.  Research and development costs in the second quarter of 2009
were $157,000 compared to $374,000 in 2008, a decrease of $217,000 or 58.0%.
Research and development costs for the first six months of 2009 were $217,000
compared to $747,000 in 2008, a decrease of $531,000 or 71.1%. The decreases
reflect our decision to focus our research and development efforts on military
and space applications and reduce our investment in speculative commercial
applications. Substantially all of the research and development expenses were
related to Multi-Mix® Microtechnology process enhancements.





Operating
income (loss)




Operating
income for the second quarter and first six months of 2009 was $937,000 and
$1,901,000, respectively, compared to an operating income of $74,000 for the
second quarter of 2008 and an operating loss of $730,000 in the first six months
of 2008. The improvement in operating income for the second quarter and first
six months of 2009 was primarily due to the improved gross profit resulting from
increased sales and gross profit margins as well as the decrease in research and
development costs compared to the first six months of 2008.





Interest
and other expense, net.





Interest
and other expense, net was $69,000 for the second quarter of 2009 compared to
interest and other expense, net of $49,000 for the second quarter of 2008.
Interest and other expense, net was $134,000 for the first six months of 2009
compared to interest and other expense, net of $109,000 for the first six months
of 2008. The interest expense was principally incurred on borrowings under the
term loans, which were financed by Wells Fargo in the second quarter and first
six months of 2009 and Capital One in the second quarter and first six months of
2008. The increase in interest expense in the second quarter and first six
months of 2009 compared to 2008 was primarily due to increased amortization of
loan costs for the Wells Fargo Credit Facility compared to the amortization of
the Capital One loan costs.




Income
taxes.





Income
tax expense was $200,000 and $243,000 in the second quarter and first six months
of 2009 compared to $0 in the second quarter and first six months of 2008. The
provision for income taxes in the second quarter and first six months of 2009 is
based on the expectation that we will fully utilize our net operating loss
carryforwards in 2009.





As of
January 3, 2009, we had deferred tax assets of approximately $1.5 million
related to net operating loss carryforwards, tax credit carryforwards and
deductible temporary differences, a portion of which has been used to reduce our
taxable income in the first six months of 2009. A valuation allowance is
required when management assesses that it is more likely than not that all or a
portion of a deferred tax asset will not be realized. Our 2002, 2003, 2006 and
2007 net losses have weighed heavily in our overall assessments. As a result of
the original assessment, we established a full valuation allowance for our
remaining U.S. net deferred tax assets. This assessment continued unchanged from
2003 through the first six months of 2009.





On
December 31, 2006, we adopted FIN 48, which clarifies the accounting for
uncertainty in tax positions.  As of that date we had no uncertain tax
positions and did not record any additional benefits or
liabilities.  At July 4, 2009 and June 28, 2008, we had no uncertain
tax positions and did not record any additional benefits or
liabilities.  We will recognize any accrued interest or penalties
related to unrecognized tax benefits within the provision for income
taxes.





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 a change should
occur, the actual utilization of net operating loss carryforwards, for tax
purposes, would be limited annually to a percentage of our fair market value at
the time of such change.  We may become subject to these limitations
in 2009 depending on the extent of the changes in our ownership.




19





Discontinued
operations.





Income
from discontinued operations was $51,000 in the second quarter and first six
months of 2009 compared to a loss from discontinued operations of $55,000 in the
second quarter and first six months of 2008. Accordingly the income from
discontinued operations for the second quarter and first six months of 2009 was
$0.01 per share, basic, compared to a loss from discontinued operations for
the second quarter and first six months of 2008 of $0.02 and $0.01 per
share, basic, respectively. Income from discontinued operations for the second
quarter and first six months of 2009 was $0.02 per share, diluted, compared to a
loss from discontinued operations for the second quarter and first six months of
2008 of $0.02 and $0.01 per share, diluted, respectively. Although there was
income from discontinued operations in the second quarter and six months of
2009, there may be some costs later in the year of 2009 that pertain to
discontinued operations.





Net
income (loss).





For the
reasons set forth above, net income for the second quarter and first six months
of 2009 was $719,000 and $1,575,000, respectively, compared to a net loss of
$30,000 for the second quarter of 2008 and a net loss of $895,000 in the first
six months of 2008. Net income per share, basic and diluted, for the second
quarter and first six months of 2009 was $0.24 and $0.53, respectively, compared
to a net loss per share, basic and diluted, of $0.01 and $0.30 per share,
respectively, for the second quarter and first six months of 2008.





LIQUIDITY
AND CAPITAL RESOURCES





We had
liquid resources comprised of cash and cash equivalents totaling approximately
$1,644,000 at the end of the first six months of 2009 compared to approximately
$1,192,000 at the end of 2008. The cash position increased primarily as a result
of our operating income during the last two quarters. Our working capital was
approximately $14,000,000 and our current ratio was 5.2 to 1 at the end of the
first six months of 2009 compared to $11,100,000 and 4.5 to 1, respectively, at
the end of 2008.  At July 4, 2009, we had available borrowing capacity
under our revolving line of credit of $3,230,000.





Our
operating activities from continuing operations provided cash flows of $562,000
during the first six months of 2009 compared to a use of $1,902,000 of operating
cash flows during the first six months of 2008. The cash provided by operating
activities in the first six months of 2009 was mainly due to the net income from
continuing operations of $1,525,000, depreciation and amortization of $1,291,000
and an increase in customer deposits of $497,000.  These were offset
in part by an increase in accounts receivable of $1,001,000, resulting from
higher sales, an increase in inventories of $437,000 needed to meet production
needs, and increase in costs and estimated earnings in excess of billing
of $1,129,000. The primary uses of operating cash flows from continuing
operations for the first six months of 2008 were the net loss from continuing
operations of $840,000 and increase in accounts receivable of $2,309,000, due to
higher sales levels, and an increase in inventories of $547,000 needed to meet
production needs.  These were offset in part by depreciation and
amortization of $1,270,000.





In the
first six months of 2009 our net cash used in investing activities was $189,000
compared to the net cash provided by investing activities of $51,000 in the
first six months of 2008.  The cash used in investing activities in
the first six months of 2009 was attributable to the net cash investments in
property, plant and equipment of $246,000, which was offset in part by proceeds
from the sale of assets of $57,000.  In 2008 the net cash provided by
investing activities was due to the cash proceeds from the sale of discontinued
operations of $664,000, which was largely offset by net cash investments in
property, plant and equipment of $613,000. The capital expenditures in the first
six months of 2009 and 2008 were primarily related to new production and test
equipment.





Our net cash provided by financing activities was $28,000 in the
first six months of 2009 compared to $311,000 in 2008.  In 2009 the
net cash provided by financing activities was due to proceeds from the exercise
of stock options of $231,000, which was largely offset by repayment of long-term
debt of $203,000.  In 2008 the net cash provided by financing
activities was primarily due to borrowings of $500,000 under the revolving line
of credit and the return of restricted cash of $250,000.  These were
offset in part by the repayment of long-term debt of $525,000.





Our
planned equipment purchases and other commitments are expected to be funded
through cash resources and cash flows expected to be generated from operations,
and supplemented by our $5,000,000 revolving credit facility.




20





On
September 29, 2008, we entered into a credit facility with Wells Fargo Bank,
N.A. (“WFB”) (the “Wells Fargo Credit Facility”) which replaced our credit
facility with Capital One, N.A. On September 30, 2008, we repaid all outstanding
amounts under the credit facility with Capital One, N.A. with the proceeds of
the Wells Fargo Credit Facility.  The Wells Fargo Credit Facility
consists of a three-year $5,000,000 collateralized revolving credit facility, a
three-year $500,000 equipment term loan and a three-year $2,500,000 real estate
term loan.  The revolving line of credit is subject to an availability
limit under a borrowing base calculation of 85% of eligible domestic accounts
receivable with a sublimit of $5,000,000 and 30% of eligible inventories with a
sublimit of $400,000.  The revolving line of credit is also subject to
a minimum borrowing base availability of $500,000.  As of July 4,
2009, we had a borrowing base of approximately $3,730,000 and availability under
the credit facility as of July 4, 2009 of approximately $3,230,000. The
revolving line of credit expires September 29, 2011.  The revolving
line of credit bears interest at the prime rate plus one percent, with the prime
rate having a floor limit of 5% for loan purposes.  We may request a
LIBOR quote for an initial minimum of $1,000,000 with subsequent requests at a
minimum of $500,000.  No more than three such requests may be active
at any point in time.  LIBOR advances bear interest at the LIBOR rate
plus 3.25% for a credit advance, or 3.50% for a term loan.   The
equipment loan is required to be repaid in equal monthly installments of $13,900
based on a four-year amortization.  The real estate loan is required
to be paid in equal monthly installments amortized over a 180 month time period,
with any unpaid principal and interest due and payable on the termination date
of September 29, 2011. The two term loans require mandatory prepayment
subject to a prepayment fee of 1%-2% of the outstanding balance should the
appraised value of the collateral fall below certain levels.





The
equipment term loan bears interest at the prime (with a floor of 5%) rate plus
1%.  The real estate term loan bears interest at the prime rate (with
a floor of 5%) plus 1.50% or LIBOR plus 3.50%.





The Wells
Fargo Credit Facility is collateralized by substantially all of our
assets.





The
credit facility requires us to maintain certain financial covenants, including a
minimum debt service coverage ratio of not less than 1.1 to 1.0 and minimum net
income.  For the quarter ended July 4, 2009 and for the quarters
ending July 4, 2009 and beyond, net income is not to be less than 75% of our
projected net income and not more than 100% of our projected net
loss.  Additionally, the credit facility prohibits us from incurring
or contracting to incur capital expenditures exceeding $600,000 in the year
ending January 2, 2010 and $600,000 in each subsequent year-end.  We
also must also not permit the amount due from our affiliate in Costa Rica,
Multi-Mix Microtechnology S.R.L to exceed $4,750,000 through the quarter ending
July 4, 2009 and $5,000,000 through the quarter ending October 3, 2009 and each
fiscal quarter thereafter.  The credit agreement contains other
standard covenants related to our operations, including prohibitions on the
creation of additional liens, the incurrence of additional debt, the payment of
dividends the sale of certain assets and other corporate transactions, without
Wells Fargo’s consent.  We were in compliance with all of our
financial covenants as of July 4, 2009.





In the
second quarter of 2009 we sold equipment for approximately $57,000 and all of
the proceeds were used to pay down the Wells Fargo equipment loan.





As of
July 4, 2009, under the Wells Fargo Credit Facility, we had no amount
outstanding under the revolving credit facility, $338,632 outstanding under the
equipment term loan and $2,361,111 outstanding under the real estate term
loan.





At July
4, 2009 and January 3, 2009, the fair value of our debt approximates carrying
value. The fair value of our long-term debt is estimated based on current
interest rates.





Depreciation
and amortization expenses exceeded capital expenditures for production equipment
during the first six months of 2009 by approximately $1,045,000, and we
anticipate that depreciation and amortization expenses will exceed capital
expenditures in fiscal year 2009 by approximately $2,000,000. We intend to issue
commitments to purchase $350,000 of capital equipment from various vendors for
the remainder of 2009. We anticipate that such equipment will be purchased and
become operational during 2009.





RECENT
ACCOUNTING PRONOUNCEMENTS





See Note
6, " Recent Accounting Pronouncements," to the Company's Condensed Consolidated
Financial Statements for a discussion of recently issued accounting
standards.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





For
quantitative and qualitative disclosures about the market risks affecting
Merrimac, see “Quantitative and Qualitative Disclosures about Market Risk” in
Item 7A of Part II of the Company’s Annual Report on Form 10-K for the fiscal
year ended January 3, 2009, which is incorporated herein by
reference.  Our exposure to market risk has not changed materially
since January 3, 2009.





ITEM
4(T). CONTROLS AND PROCEDURES





As of
July 4, 2009, (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, as of July
4, 2009, the Company's disclosure controls and procedures were
effective.





In
designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934),
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.




21





In
previous periods (quarter ended September 28, 2008, year ended January 3, 2009
and quarter ended April 4, 2009) management identified material weakness in its
internal control over financial reporting. A material weakness is a control
deficiency, or combination of control deficiencies, that results in a reasonably
possible likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.





During
the quarter ended July 4, 2009, the Company made the following changes in its
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, the registrant’s internal control over
financial reporting: an experienced cost accountant was hired, an experienced
controller was hired, new controls and procedures related to job costing
analysis and inventory were added and new review procedures related to the month
end closing and financial statement preparation process were added. Also in the
second quarter, the Company continued its analysis of procedures, key controls,
related reporting and training and is continuing these efforts on an on-going
basis. No other changes occurred in the Company’s internal controls concerning
financial reporting during the Company’s second quarter of 2009 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal controls over financial reporting.





PART II OTHER INFORMATION





ITEM 1.
LEGAL PROCEEDINGS.





We are
party to lawsuits arising in the normal course of business. It is the opinion of
our management that the disposition of these various lawsuits will not
individually or in the aggregate have a material adverse effect on our
consolidated financial position or the results of operations.





On March
10, 2008, a statement of claim in Ontario Superior Court of Justice was filed by
nineteen former FMI employees against Merrimac, FMI and FTG seeking damages for
wrongful dismissal for approximately $1,000,000 (Canadian $977,000) following
the sale of FMI’s assets to FTG. The former FMI employees are alleging that an
employment contract existed between FMI and the plaintiffs and are seeking
additional damages for termination of the alleged contract.  We have
an Employment Practices Liability insurance policy that extends coverage to our
subsidiaries.  The insurance carrier agreed to provide a defense in
this matter on April 24, 2008 and they retained Canadian counsel to defend this
claim.  Thus far we have paid fees and legal costs of $25,000 related
to the matter, which is the deductible amount of the insurance policy. In
accordance with the requirements of SFAS No. 5, after discussions with counsel,
we believed at January 3, 2009 that an unfavorable outcome was probable and we
estimated the amount of the probable loss, net of insurance coverage, to be
$50,000 for which a provision was made. As of July 4, 2009, we believed the
probable loss, net of insurance coverage, to be $20,000. Accordingly we
adjusted their provision by approximately $30,000 in the second quarter of
2009.  We, and our insurance carrier, are defending these claims
vigorously.





ITEM 1A.
RISK FACTORS.





There
have been no material changes to our Risk Factors from those presented in our
Form 10-K for fiscal year 2008.





ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On June
24, 2009, 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 Fernando L.
Fernandez, Joel H. Goldberg and Ludwig G. Kuttner as Class I Directors whose
term expire at the 2012 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 24, 2009 Annual Stockholders Meeting.





Election
of Directors:





For
            
            Withheld
            
            Abstain
            
            Broker
      Non-VotesFernando
      L. Fernandez
            1,909,418
            
            637,499
            
            -0-
            
            -0-Joel
      H. Goldberg
            1,903,673
            
            643,244
            
            -0-
            
            -0-Ludwig
      G. Kuttner
            2,084,481
            
            462,436
            
            -0-
            
            -0-




22




Ratification
of J.H. Cohn LLP as the Company’s independent registered public accounting
firm.





For
            
            Withheld
            
            Abstain2,532,955
            
            608
            
            13,354





The
Company’s, three Class II directors, Edward H. Cohen, Arthur A. Oliner and
Harold J. Raveché, and two Class I directors, Mason N. Carter and Timothy P.
McCann, continued as directors after the Annual Stockholders Meeting and are
serving terms expiring at the time of the Company’s annual meetings in 2010 and
2011, respectively, and until their respective successors have been duly elected
and qualified.





ITEM 5.
OTHER INFORMATION.





None.




ITEM 6.
EXHIBITS.





Exhibits:





EXHIBIT
              NUMBER
            
            DESCRIPTION
      OF EXHIBIT31.1+
            
            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
      2002.32.2+
            
            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 filed as an exhibit hereto.




23




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, 2009By:
            /s/
      Mason N. CarterMason
      N. CarterChairman,
      President andChief
      Executive OfficerDate: August
      17,
      2009
            By:
            /s/
      J. Robert PattersonJ.
      Robert PattersonVice
      President, Finance andChief
      Financial Officer


24