MERRIMAC INDUSTRIES INC, 10KSB, 1997-03-27

MERRIMAC INDUSTRIES INC
10KSB, 1997-03-27
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-KSB

Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934

For the fiscal year ended December 28, 1996

Commission file Number 0-11201

Merrimac Industries Inc.
(Name of small business issuer as specified in its charter)

New Jersey 22-1642321
(State of incorporation) I.R.S Employer Identification No

41 Fairfield Place West Caldwell, New Jersey 07006
(Address of principal executive offices)

Registrant's telephone number including area code 201-575-1300

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class Name of each Exchange on which registered
- ------------------- -----------------------------------------
Common stock American Stock Exchange

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will not
be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

State registrant revenues for its most recent fiscal year were $14,152,970.

The aggregate market value of voting Stock held by non-affiliates based
upon the average price of such stock as quoted on AMEX for March 13, 1996 was
$13,368,735. Shares of Common Stock held by each officer and director, have been
excluded in that such persons may be deemed to be affiliates.

Registrant's Common Stock outstanding at March 13,1997 was 1,515,063
shares.

DOCUMENTS INCORPORATED BY REFERENCE

part I - Certain information contained in the Annual Report to Stockholders
& for Fiscal Year Ended December 28, 1996,
part II filed as Exhibit 13 herewith.

part III - Certain information contained in the Proxy Statement for May 12,
1997 Annual Meeting of Stockholders.

Exhibit index on page 12.

<PAGE>

PART I

Merrimac Industries, Inc., was incorporated in 1954 under the laws of the
State of New York. Merrimac Industries, Inc. was reincorporated in New Jersey
in 1994 and is hereinafter sometimes referred to as the "Company".

ITEM 1. DESCRIPTION OF BUSINESS

General
- -------

The Company manufactures and sells approximately 1, 500 components and
subsystems used in signal processing systems (the extraction of usable
information from radio signals) in the frequency spectrum of D.C. to 65 GHz. The
Company's products are designed to process signals in a wide bandwidth and are
of relatively small size and lightweight. When integrated into subsystems,
advantages of lower cost and smaller size are realized due to the removal of
connectors, cases and headers. The Company" components range in price from
$20 to $10,000 and its subsystems range from $500 to $75,000 or more.

The Company has traditionally developed and offered for sale products built
to specific customer needs and standard catalog items. The sales of components
and sub-assemblies for use in government applications accounted for
approximately 50% of 1996 revenues. Approximately 24% of 1996 revenues were
derived from initial orders for products custom designed for specific customer
applications, 43% from repeat orders for such products, and 33% from catalog
sales.

The Company's strategy is to be a reliable supplier of high quality,
technically innovative signal processing products. The Company coordinates its
marketing, research and development, and manufacturing operations to develop new
products and expand its markets. The Company's marketing and development
activities focus on identifying and producing prototypes for new military and
commercial programs and applications in aerospace, navigational systems,
telecommunications and cellular analog and digital (PCS) electronics. The
Company's research and development efforts are targeted towards providing
customers with more complex, reliable, and compact products at lower costs.
Improved production efficiencies coupled with the capacity of the newly
operational low-cost manufacturing facility in Costa Rica and more extensive use
of automated test equipment such as Hewlett Packard network analyzers (models
3577, 8505, 8510, 8720 and 8753) have resulted in a considerable reduction of
the set-up time to take measurements, calibrate test equipment and print out
hard copy of data. In addition, computerized cost controls such as closed job
history, up-to-date work in process costs and selling prices are also enhancing
the Company's competitive position. Laser marking continues to be incorporated
into the process of metal packages, providing totally permanent marking, greater
flexibility and lower costs. See also discussion of CAD/CAM in "Research and
Development" below.

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<PAGE>

For a discussion of financial information about the nature of business,
foreign and domestic operations and export sales, reference is made to Note 9 to
Consolidated Financial Statements in the Company's Annual Report to Stockholders
for Fiscal Year Ended December 28, 1996 which note is incorporated herein by
reference.

Products
- --------

The Company's major product categories are: (1) power dividers/combiners
that equally divide input signals or combine coherent signals for nearly
lossless power combinations; (2) I&Q networks (a subassembly of circuits which
allows two information signals (incident and quadrature) to be carried on a
single radio signal for use in digital communication and navigational
positioning; (3) directional couplers that allow for signal sampling along
transmission lines; (4) phase shifters that accurately and repeatedly alter a
signal's phase transmission to achieve desired signal processing or
demodulation; (5) hybrid junctions that serve to split input signals into two
output signals 180 degrees out of phase or combine equal amplitude signals with
0 degree or 180 degrees out of phase; (6) balanced mixers that convert two input
frequencies to another frequency; (7) variable attenuators that serve to control
or reduce power flow with distortion; (8) beamformers that permit an antenna to
electronically track or transmit a signal; (9) quadrature couplers that serve to
split input signals into two output signals 90 degrees out of phase or combine
equal amplitude quadrature signals; and (10) solid-state switches that control
signal routing. The Company's other product categories include single side band
modulators, vector modulators and a wide variety of specialized integrated
assemblies. In the last fiscal year, no one product accounted for more than ten
percent of total net sales.

About 36% of the Company's sales were derived from the sales of products
for use in high-reliability aerospace, satellite, and missile applications in
1996. These products are designed to withstand severe environments without
failure or maintenance over prolonged periods of time (5-20 years). The Company
provides facilities dedicated to the design, development, manufacture, and
testing of these products along with special program management and
documentation personnel. The Company offers products in each of its major
categories for high-reliability applications.

The Company's products are also used in a broad range of other defense and
commercial applications, including radar, navigation, missiles, electronic
warfare and countermeasures, cellular analog and digital electronics and
communications equipment. The Company's products are also utilized in systems to
receive and distribute television signals from satellites and through other
microwave networks including cellular radio.

-2-
<PAGE>

Marketing
- ---------

The Company markets its products in the United States and Canada directly
to customers through a marketing staff comprised of 10 employees and through 15
independent domestic sales organizations The Company's marketing program focuses
on identifying new programs and applications for which the Company can develop
prototypes leading to volume production orders.

The Company utilizes approximately 17 independent sales organizations to
market its products elsewhere in the world. Sales to foreign customers amounted
to: $4,390,000 (31.0% of sales) in fiscal 1996; $4,229,000 (29.4% of sales) in
fiscal 1995; and $3,526,000 (25.9% of sales) in fiscal 1994.

The Company's customers are primarily major industrial corporations that
incorporate the Company's products into a wide variety of defense and commercial
systems. The Company's customers include Raytheon, Boeing, Northrop Grumman,
Lockheed Martin, Harris Corp., Litton Industries, Hughes Aircraft, TRW,
Southwest Research and Motorola. Sales to any one foreign geographic area did
not exceed 10% of net sales for 1996, 1995 or 1994. Sales to Lockheed Martin
(1996) and Raytheon Company (1994) amounted to 10.8% and 10.0% of net sales,
respectively. No one company accounted for more than 10% of net sales in 1995.

The Company has obtained an internet uniform resource locator ("URL")
address and has established a commercial presence which includes its product
catalog available on the World Wide Web as http://www.merrimacind.com.

Research and Development
- ------------------------

During fiscal 1996, 1995 and 1994, research and development expenditures
amounted to $246,000, $275,000 and $398,000, respectively. The Company plans to
invest development funds at the same level in 1977 as in 1996 and will focus its
efforts at specific customer applications requiring further miniaturization,
precision and volume applications.

The Company's research and development activities include development of
prototypes for new programs and applications and the implementation of new
technologies to enhance the Company's competitive position. Projects focusing on
surface mounted devices (SMD) and micro-electronic assemblies are directed
toward development of more circuitry in smaller, lower cost, and more reliable
packaging that is easier for customers to integrate into their products. The
Company continues to expand its use of computer aided design and manufacturing
(CAD/CAM) in order to reduce design and manufacturing costs as well as
development time.

-3-
<PAGE>

Backlog
- -------

The Company manufactures specialized components and subsystems pursuant to
firm orders from customers and standard components for inventory. At December
28, 1996, the Company had a firm backlog of orders of approximately $8,200,000.
The Company estimates that approximately 90% of the orders in its backlog as of
December 28, 1996 will be filled within one year. The Company does not consider
its business to be seasonal.

Competition
- -----------

The Company encounters competition in all aspects of its business. The
Company competes both domestically and internationally in the military and
commercial markets and specifically within the aerospace and communications
areas. The Company's competitors consist of entities of all sizes. Generally,
the smaller companies offer lower prices due to lower overhead expenses, and
often larger companies have greater financial resources than the Company. The
Company competes with all on a basis of technological performance, quality
reliability and dependability in meeting shipping schedules as well as on the
basis of price. The Company believes that the above factors have served well in
earning the respect and loyalty of many customers in the industry. These factors
have enabled the Company over the years to successfully maintain a stable
customer base and have directly contributed to the Company's ability to attract
new customers.

Manufacturing, Assembly and Source of Supply
- --------------------------------------------

Manufacturing operations consist principally of assembly an testing of
components and subsystems built from purchased electronic materials and
components, fabricated parts, and printed circuits. Manual and semi-automatic
methods are utilized depending principally upon production volumes. The Company
has its own machine shop employing CAD/CAM techniques and etching facilities to
handle soft and hard substrate materials. In addition, the Company maintains
testing and inspection procedures intended to minimize production errors and
enhance product reliability. The Company's low cost manufacturing facility in
Costa Rica became operational in the second half of 1996.

During 1996, the Company continued to both implement programs to improve
the efficiency of manufacturing operations and reduce costs. The Company
continues to establish more stringent procedures and documentation standards to
provide for the prompt transfer of the production of prototype products from
engineering to manufacturing. To enhance the structure and quality of these
functions, ISO-9001 certification is being sought. Documentation improvements
are being implemented which will also strengthen our position as a world class
quality supplier upon competition.

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<PAGE>

It is the Company's policy to use manufacturing cost savings to enhance,
its competitive position.

Electronic components and raw materials used in the Company products are
generally available from a sufficient number of qualified suppliers. Some
materials are standard items and others are manufactured to the Company's
specifications by subcontractors. The Company is not dependent upon any single
supplier for any of its components or materials.

Employee Relations
- ------------------

As of December 28, 1996 the Company employed approxmately 160 persons, of
which 28 are employed at the Company's Costa Rica facility. None of the
Company's employees are represented by a labor organization. The Company has
never experienced a work stoppage or interruption due to a labor dispute.
Management believes that its relations with its employees are satisfactory.

Patents
- -------

The Company owns 15 patents with respect to certain inventions it
developed. Although it has from time to time filed patent applications in
connection with the inventions which it believes patentable the Company does not
believe that patents or other similar intangible rights afford significant
protection from competitors or are material to its business.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company's administrative offices, research and principal production
facilities are located in West Caldwell, New Jersey, on a five acre parcel owned
by the Company. A 12,000 square-foot plant was built in November 1966; a 13,500
square-foot addition was completed in December 1971; and a 26,500 square-foot
addition was completed in July 1980, aggregating 52,000 square feet presently.

The Company owns all of its land, buildings, laboratory, production and
office equipment, as well as its furniture and fixtures. The Company believes
that its plant and facilities are well suited for the Company's business and are
properly utilized, suitably located and in good repair.

In 1996 the Company entered into a lease for a 3,000 square foot production
facility in Costa Rica.

The Company does not make any investments in real estate other than in
connection with its operations.

-5-
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

On July 1, 1993, the Company filed a $750,000 amended complaint against the
former principals of an acquired Canadian Business, in the United States
District Court for the District of New Jersey, for misrepresentations made by
them in conjunction with the Stock Purchase Agreement between the parties. On or
about November 1, 1993, the former principals filed an action in Ontario Court
against the Company for breach of the same Stock Purchase Agreement, fraud,
breach of employment agreements, wrongful dismissal, breach of lease and damage
to leased premise. The former principals have demanded $(Canadian) 1,000,000 in
compensatory and punitive damages. During 1995 the Company and former principles
settled the lawsuit filed in United States district Court without compensation
to either party, however the litigation in Ontario is continuing and the Company
has filed a counter claim demanding $1,500,000 in compensation and punitive
damages. The Company believes that the former principals' action is without
merit and intends to pursue its action and vigorously contest the former
principals' lawsuit.

The Company is a party to other lawsuits, both as a plaintiff and a
defendant, arising in the normal course of business. It is the opinion of
Management, after consultation with counsel, that the disposition of these
various lawsuits, including the lawsuit described above, will not individually
or in the aggregate materially adversely affect the consolidated financial
position or the results of operations of the Company.

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

Not applicable.

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<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock began trading on the American Stock Exchange on
July 11, 1988 under the symbol MRM and is still listed there.

Reference is made to the table captioned "Quarterly Common Stock Data" page
22 of the Company's Annual Report to Stockholder for Fiscal Year Ended December
28, 1996, which is incorporated herein in by reference for information with
respect to the high and low bid prices of the Company's Common Stock during the
Company's past two fiscal years.

The Company had approximately 200 holders of record on March 13, 1997.

Reference is made to Note 8 to the Consolidated Financial Statements in the
Company's Annual Report to Stockholders for fiscal Year Ended December 28, 1996,
which note is incorporated herein by reference for information with respect to
payment of cash dividend in 1996, 1995 and 1994.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION

Reference is made to pages 8 and 9 of the Company's Annual Report to
Stockholders for the fiscal year ended December 28, 1996, which pages are
incorporated herein by reference.

ITEM 7. FINANCIAL STATEMENTS

Reference is made to pages 10 through 22 of the Company' Annual Report to
Stockholders for fiscal year ended December 28, 1996, which pages are
incorporated herein by reference with respect to the Company's financial
position as of December 28, 1996 and December 30, 1995, and the results of
operations and cash flows for the years ended December 28, 1996 Decemebr 30,
1995 and December 31, 1994 and the report of J.H. Cohn LLP, also included
therein as follows:

Page in
Annual Report
to Stockholders
1996

Consolidated Balance Sheets at December 28,
1996 and December 30, 1995 .............................. 11

For the fiscal years ended December 28, 1996
December 30, 1995 and December 31, 1994:

Consolidated Statements of Income ....................... 10
Consolidated Statements of Stockholders'
Equity ................................................. 12
Consolidated Statements of Cash Flows ................... 13

Notes to Consolidated Financial Statements ................... 14-21

Report of Independent Public Accountants ..................... 22

ITEM 8. CHANGES IN AND DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOUSRE

Not applicable.

-7-
<PAGE>

PART III

Pursuant to General Instruction E1. to Form 10-KSB, portions of information
required by items 9-12 and indicated below are hereby incorporated by reference
to the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders (the "Proxy Statement") which the Company will file with the
Securities and Exchange Commission by April 12, 1997.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The following is a list of the Company's executive officers, their ages and
their positions as of December 28, 1996. Generally each executive officer is
elected for a term of one year at the organizational meeting of the Board of
Directors following the Annual Stockholders Meeting.

Name Age Position
------------------- --- --------------------------

Charles F. Huber II 67 Chairman of the Board

Mason N. Carter 50 President and
Chief Executive Officer

Eugene W. Niemiec 57 Vice Chairman and
Chief Technology Officer

Reynold K. Green 38 Vice President, Manufacturing

John J. Antonich 63 Vice President,
Secretary/Controller
(retired December 31, 1996)

John Z. Blahosky 65 Vice President,
Special Projects

Robert V. Condon 50 Vice President, Finance and
Chief Financial Officer

Brian R. Dornan 48 Vice President, Technology and
Engineering

Norman A. Holden 52 Vice President, Quality Assurance
Control and Technical Services

Walter N. Joswick 44 Vice President, Engineering

Anthony N. Ramsden 52 Vice President
Sales, Marketing

Family Relationships

There are no family relationships among the officers listed. All elected
officers hold office for one year and until their successors are elected and
qualified.

-8-
<PAGE>

Business Experience of Executive Officers During Past Five Years

Mr. Huber, effective September 9, 1994, was elected Chairman of Merrimac
Industries, Inc. In addition, he is currently Chairman of Transnational
Industries, Inc., a manufacturing company in Chadds Ford, Pennsylvania and
Director, Vice President, Secretary and Treasurer of Prodo-Pak Corp., a
manufacturer of Packaging machinery, Garfield, New Jersey. He has been a
Managing Director of William D. Witter, Inc., an investment banking organization
in New York, New York since 1981 where he specializes in leveraged buyouts.

Mr. Carter, on December 16, 1996, was elected President and Chief Executive
Officer. From 1994 to 1996 he was President of the Products and Systems Group of
Datatec Industries, Inc., Fairfield, New Jersey, a leading provider of data
network implementation services. He was President and CEO of Kentile, Inc.,
Chicago, Illinois, a manufacturer of resilient flooring from 1992 to 1994. From
1987 to 1992, he was President and CEO of Metex Corp., Edison, New Jersey, a
manufacturer of industrial and automotive products. He was a Director of United
Capital Corp., Great Neck New York from 1989 to 1994.

Mr. Niemiec, on December 16, 1996, was elected Vice Chairman and Chief
Technology Officer of the Company. From September 1994 to December 1996 he held
the offices of President, Chief Executive Officer and Chief Operating Officer.
He was President and Chief Operating Officer from 1990 to 1994.

Mr. Green, effective April 1996, was appointed Vice President of
Manufacturing. Over the past five years Mr. Green has held the positions of
Director of Manufacturing, National Sales Manager and Director of Quality
Control and High-Reliabilitys service at Merrimac.

Mr. Antonich was Vice President Secretary/Controller since prior to
1991. Mr. Antonich retired December 31, 1996.

Mr. Blahosky, effective October 1996, was appointed Vice President, Special
Projects. He had been executive Vice President since 1990.

-9-
<PAGE>
Mr. Condon has been Vice President, Finance and Chief Financial Officer
("CF0") since joining the Company in March 1996, and was appointed Secretary and
Treasurer in January 1997. Prior to joining the comapany he was with Berkeley
Educational Services as Vice President, Finance, Treasurer, and CFO from 1995 to
February 1996. During 1994 Mr Condon was involved in consulting and
entrepreneurial activities. From 1987 to 1993, he was Senior Vice President,
Finance and CFO of SCS Communications, a private holding company.

Mr. Dornan, effective October 1996, was appointed Vice President of
Technology and Engineering. He had been Group Vice President of Manufacturing
since 1986.

Mr. Holden, effective October 1996, was appointed Vice President of Quality
Assurance, Control and Technical Services. He had been Director of Quality since
1991.

Mr. Joswick, effective October 1996, was appointed Vice President of
Engineering. He had been Director of I.F. Engineering since 1991.

Mr. Ramsden, has been Vice President of Sales and Marketing since joining
the Company in 1986.

Information relating to compliance with Section 16 of the Exchange Act is
incorporated herein by reference to page 7 of the proxy statement.

ITEM 10. EXECUTIVE COMPENSATION

See the information under the caption "EXECUTIVE COMPENSATION" contained in
the Proxy Statement, which information is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See the information in the table and the notes thereto, under the caption
"SHARE OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICE AND CERTAIN STOCKHOLDERS"
contained in the Proxy Statement, which information is incorporated herein by
reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

-10-
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, therein duly authorized.

MERRIMAC INDUSTRIES, INC.
(Registrant)

Date: March 24, 1997 By: /s/ Mason N. Carter
---------------------------
(President and
Chief Executive officer)

Date: March 24, 1997 By: /s/ Robert V. Condon
---------------------------
(Vice President Finance,
Treasurer, Secretary and
Chief Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Date Title
------------------------- ------- --------

/s/ Charles F. Huber II 3-24-97 Director
------------------------- ------- --------
(Charles F. Huber II)

/s/ Mason N. Carter 3-24-97 Director
------------------------- ------- --------
(Mason N. Carter)

/s/ Reynold K. Green 3-24-97 Director
------------------------- ------- --------
(Reynold K. Green)

/s/ Eugene W. Niemiec 3-24-97 Director
------------------------- ------- --------
(Eugene W. Niemiec)

/s/ Arthur A. Oliner 3-24-97 Director
------------------------- ------- --------
(Arthur A. Oliner)

-11-

<PAGE>

ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit No.

3 (a) By-Laws of the Company are hereby incorporated
by reference to Exhibit C to the Proxy Statement
of the Company dated March 18, 1994.

(b) Certificate of Incorporation of the Company is
hereby incorporated by reference to Exhibit B of
the Proxy Statement of the Company dated
March 18, 1994.

10 (a) Profit Sharing Plan of the Company is hereby
incorporated by reference to Exhibit 10(n) to
the Company's Registration Statement
(No. 2-79455). *

(b) 1993 Stock Option Plan of the Company effective
March 31, 1993 is hereby incorporated by
reference to Exhibit 4(c) to the Company's
Registration Statement on Form S-8 which was
filed with the Securities and Exchange Commision
on September 14, 1993. *

(c) 1995 Stock Purchase Plan of the Company is hereby
incorporated by reference to Exhibit A of the Proxy
Statement of the Company dated March 17,1995.

(d) 1996 Stock Option Plan for Non-Employee Directors of the
Company effective September 5, 1996.

(e) Employment Agreement between the Company and Mason N. Carter
dated as of December 19, 1996. *

(f) Employment Agreement between the Company and Eugene W. Niemiec
dated as of December 16, 1996. *

(g) 1983 Key Employees Stock Option Plan of the Company effective
March 21, 1983 is hearby incorporated by reference to
Exhibit 10(m) to the Form 10-K Annual Report which was filed
with the Securities and Exchange Commission on March 31,
1983.

13 Annual Report to Stockholders for Fiscal Year
Ended December 28, 1996.

21 Subsidiaries of the Registrant.

23 Consent of J.H. Cohen LLP

27 Financial Data Schedule for Fiscal Year Ended December 28,1996

(b) - Reports on Form 8-K

A report on Form 8-K was filed on November 4, 1996 reporting the
Company's results of operations, restructuring charge, and stock
repurchase program for the 3rd quarter of 1996.

* Indicates that exhibit is a management contract or compensatory
plan or arrangement.

-12-

MERRIMAC INDUSTRIES, INC.

STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

Section 1. Purpose

The purpose of the Merrimac Industries, Inc. Stock Option Plan for
Non-Employee Directors is to enable Merrimac Industries, Inc. to provide its
Non-Employee Directors (as defined below) with options to purchase shares of the
common stock of Merrimac Industries, Inc. and thereby to attract and retain
non-employee directors of exceptional ability and to enable the 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.

Section 2. Definitions

As used in the Plan:
"Act" means the Securities Exchange Act of 1934, as amended.

"Code" means the Internal Revenue Code of 1986, as amended from
time to time.

"Board" means the Board of Directors of the Company.

"Closing Price" means the closing price of a share of Common Stock on the
American Stock Exchange or, if not listed on such exchange, on any other
national exchange on which the Common Stock is listed or on NASDAQ.

"Committee" means the entire Board.

"Company" means Merrimac Industries, Inc. and any present or future parent
or subsidiary corporations (as defined in Section 424 of the Code) or any
successor to such corporations.

"Common Stock" or "Stock" means the Common Stock, $.50 par value, of the
Company.

"Fair Market Value" means, with respect to Common Stock, the fair market
value as determined by the Committee in good faith or in the manner established
by the Committee from time to time; provided, however, that so long as the
Common Stock is listed on the American Stock Exchange, the Fair Market Value of
Common Stock subject to an Option shall be equal to the Closing Price on the
date the Option is granted.

"Non-Employee Director" means a director of the Company who is not at the
time of receipt of options to purchase shares of Common Stock pursuant to the
Plan a full-time employee of the Company or any subsidiary thereof.

"Non-Qualified Stock Option" means an option to purchase shares of Common
Stock granted to a Non-employee Director under the Plan which is not intended to
meet the requirements by Section 422 of the Code or any successor provision.

"Option" means a Non-Qualified Stock Option.

"Plan" means the Merrimac Industries, Inc. Non-Employee Director Stock
Option Plan.

-1-
<PAGE>

Section 3. Administration

(a) The Plan shall be administered by the Committee. Among other things,
the Committee shall have the power and authority, subject to the terms of the
Plan, to administer, construe and interpret the Plan.

(b) Subject to the provisions of Section 7(a), the Committee shall have
authority to adopt, alter and repeal such administrative rules, guidelines and
practices governing the operation of the Plan as it shall from time to time
consider advisable and to decide all disputes arising in connection with the
Plan. The Committee's decision and interpretations shall be final and binding.
Any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote or by the unanimous written consent of its
members.

(c) The Committee may employ such legal counsel, consultants and agents as
it may deem desirable for the administration of the Plan and may rely upon any
opinion received from any such counsel or consultant and any computation
received from any such consultant or agent. The Committee shall keep minutes of
its actions under the Plan.

Section 4. Eligibility

All Non-Employee Directors of the Company shall participate in the Plan.

Section 5. Shares of Stock Available for Options

Options may be granted under the Plan for up to 50,000 shares of Common
Stock. If any Option in respect of shares of Common Stock expires or is
terminated before exercise or is forfeited for any reason, the shares of Common
Stock subject to such Option, to the extent of such expiration, termination or
forfeiture, shall not be available for any future grant under the Plan. Shares
of Common Stock issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.

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<PAGE>

Section 6. Nondiscretionary Grants of Options to Non-Employee Directors

(a) On the date of adoption of the Plan by the Board, the Chairman of the
Board shall receive the grant of a Non-Qualified Stock Option to purchase 20,000
shares of Common Stock and each other current Non-Employee Director shall
receive the grant of a Non-Qualified Stock Option to purchase 15,000 shares of
Common Stock.

Options granted to Non-Employee Directors shall be immediately exercisable.
The number and nature of Shares subject to any Option held by a Non-Employee
Director shall be subject to adjustment only to the extent set forth in Section
6(f).

(b) The term of each Option granted a Non-Employee Director shall be ten
(10) years from its date of grant, unless sooner terminated or extended in
accordance with Section 6(e).

(c) The purchase price of the Shares subject to each Option granted to a
Non-Employee Director shall be the Closing Price on the date the Option is
granted.

(d) Unless permitted by the Committee in the applicable award agreement, no
Options shall be transferable by a Non-Employee Director.

(e) If a Non-Employee Director dies while serving as a Director, such
Non-Employee Director's Options shall be exercisable by either his or her
executor or administrator or, if not so exercised, by the legatees or the
distributees of his or her estate, only during the twelve (12) months following
his or her death.

If a Non-Employee Director's membership on the Board terminates for any
reason other than death, such Non-Employee Director's Options shall be
exercisable only during the three (3) months following the date of termination.

(f) In the event of a stock dividend, stock split or combination of shares
of Common Stock, recapitalization or other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the
Company, appropriate and proportionate adjustment shall be made in the number,
kind and per share exercise price of shares subject to Options then outstanding
and to be granted to Non-Employee Directors under this Section 6.

-3-
<PAGE>
Section 7. General Provisions Applicable to Options

(a) Each Option under the Plan shall be evidenced by a writing signed by
the Company and the Non-Employee Director specifying the terms and conditions
thereof and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or comply with applicable tax and regulatory
laws and accounting principles.

(b) If, and to the extent, Federal income tax withholding (and state and
local income tax withholding, if applicable) may be required by the Company in
respect of taxes on income realized by the Non-Employee Director upon or after
exercise of the Option or upon disposition of the shares acquired thereby, such
income tax withholding may be paid by the Non-Employee Director in (1) cash or
(2) by electing either (i) to have the Company withhold a portion of the shares
of Common Stock otherwise issuable upon exercise of the Option or (ii) to
deliver other shares owned by the Non-Employee Director, in either case having a
Fair Market Value (on the date that the amount of tax elected to be withheld is
to be determined) of the amount to be withheld. The Company has no obligation to
issue any shares of Common Stock upon exercise of an Option until any required
taxes have been satisfied.

(c) Upon exercise of an Option, the Non-Employee Director shall deliver to
the Company an amount equal to the purchase price of the Shares with respect to
which the Option is being exercised times the number of shares subject to the
Option being exercised. Such payment may be made in accordance with procedures
established by the Committee.

Section 8. Miscellaneous

(a) Nothing contained herein shall be deemed to create the right in any
Non-Employee Director to remain a member of the Board of Directors of the
Company, to be nominated for re-election or to be re-elected as such or, after
ceasing to be such a member, to receive any Options under the Plan to which he
or she is not already entitled.

(b) The Options granted hereunder shall be in addition to any other fees to
which a Non-Employee Director may be entitled.

(c) Subject to the provisions of the applicable Option, no Non-Employee
Director shall have any rights as a shareholder with respect to any shares of
Common Stock to be distributed under the Plan until he or she becomes the holder
thereof.

(d) Notwithstanding anything to the contrary expressed in this Plan, any
provisions hereof that vary from or conflict with any applicable Federal or
State securities laws (including any regulations promulgated thereunder) shall
be deemed to be modified to conform to and comply with such laws.

(e) No member of the Board of Directors or the Committee shall be liable
for any action or determination taken or granted in good faith with respect to
this Plan nor shall any member of the Board of Directors or the Committee be
liable for any agreement issued pursuant to this Plan or any grants under it.
Each member of the Board of Directors and the Committee shall be indemnified by
the Company against any losses incurred in such administration of the Plan,
unless his action constitutes serious and willful misconduct.

(f) The Plan shall be effective on the date of adoption by the Board.

(g) The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, provided that it shall have no power to change the terms of
any award theretofore granted under the Plan so as to impair the rights of a
Non-Employee Director without the consent of the Non-Employee Director whose
rights would be affected by such change except to the extent, if any, provided
in the Plan or in the award.

(h) To the extent that State laws shall not have been preempted by any laws
of the United States, the Plan shall be construed, regulated, interpreted and
administered according to the other laws of the State of New Jersey.

-4-

EMPLOYMENT AGREEMEMENT

This Employment Agreement (the "Agreement"), entered into as of December
19, 1996, is by and between MERRIMAC INDUSTRIES, INC. (the "Company") and MASON
N. CARTER (the "Executive").

In consideration of the promises in this Agreement, the mutuality and
sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment. The Company hereby employs the Executive and the Executive
hereby accepts employment by the Company under the terms and conditions set
forth in this Agreement. The Executive shall be based at the principal executive
offices of the Company in West Caldwell, New Jersey, except for reasonable
required travel on Company business.

2. Term. Subject to the provisions of Paragraph 6 herein ("Termination of
Employment"), the initial term of the Executive's employment under this
Agreement will commence on December 19, 1996 and will end on December 31, 1999
(the "Initial Term"), and will automatically renew for successive twelve month
periods commencing January 1, 2000, unless:

(A) either party gives written notice of termination of this Agreement to
the other at least six (6) months prior to the end of the then present term, in
which case the Executive's employment will terminate at the end of the then
present term; or

(B) the Executive's employment is terminated under Paragraph 6, in which
event the Agreement will terminate on the date set forth in Paragraph 6.

3. Title and Duties.

(a) The Executive will serve as the President and Chief Executive Officer
of the Company. The Executive shall be responsible for performing such duties
and responsibilities that are consistent with his position or that may be
assigned to him from time to time by the Board of Directors of the Company
consistent therewith. The Executive agrees to devote substantially all of his
working time, attention, skill and energy to the duties set forth herein and to
the operations of the Company, to use his efforts to promote the success of the
Company, and to cooperate fully with the Board of Directors in the advancement
of the best interests of the Company. Nothing in this Agreement prevents
Executive from engaging in additional activities in connection with personal
investments and community affairs, or serving as a director for one or more
other corporations, as are consistent with the Executive's duties hereunder.

(b) The Executive currently serves as a director of the Company. During the
period of Executive's service as a director of the Company, the Executive shall
not entitled to receive any additional compensation as a director, but shall be
entitled to reimbursement of expenses reasonably incurred as a director, in
accordance with the Company's policies for such reimbursement as are in effect
from time to time. The Company will indemnify the Executive as an officer and
director, to the same extent as it indemnifies other officers and directors,
consistent with the Company's by-laws.

-1-
<PAGE>

4. Compensation and Related Matters. (a) In consideration for Executive's
services to the Company during the first year of employment, Executive shall
receive a base salary at the annual rate of Two Hundred Thousand Dollars (U.S. $
200,000) ("Base Salary"). The Base Salary shall be payable in accordance with
the Company's regular payroll schedule, from which the Company shall withhold
and deduct all federal and state income, social security and disability taxes
and other deductions as required by applicable laws. The Base Salary will be
reviewed by the Board of Directors on an annual basis and may be adjusted to
reflect the Executive's performance and the scope and success of the Company;
[provided, however, that during the Initial Term of this Agreement, the
Executive's Base Salary shall not be less than $200,000].

(b) Sign-On Bonus. (i) In connection with the execution of this Agreement,
the Company shall grant to the Executive stock options (the "Options") to
purchase 50,000 shares of the common stock of the Company, such Options to be
exercisable at the market price of the common stock at the close of trading on
December 31, 1996 and to have a term of ten (10) years. The Options shall vest
as follows:

Options to purchase 20,000 shares shall vest on the first anniversary of
the execution of this Agreement

Options to purchase 15,000 shares shall vest on the second anniversary of
the execution of this Agreement

Options to purchase 15,000 shall vest on the third anniversary of the
execution of this Agreement.

(ii) For purposes of paragraphs (d) through (g), inclusive, of Section 6 of
the Stock Option Plan, it shall be deemed to have been determined at the time of
grant that the Options, once vested, may be exercised at any time on or before
the end of their 10 year term. The Company shall cause all stock issued upon
exercise of the Options to be fully registered under the federal securities
laws.

(iii) Except as otherwise provided in this Agreement, the provisions of the
Stock Option Plan shall govern in respect of the Executive's rights and
obligations relating to the Options.

5. Employment Benefits. During the term of this Agreement, Executive shall
be eligible for the following benefits:

(a) Employee Benefits. The Executive shall be entitled to participate in
the Company's employee benefit plans, including but not limited to medical
benefits, life insurance, Employee Stock Purchase Plans, Stock Option Plan,
401(k) plan and profit sharing plans, as may be in effect from time to time, on
terms and conditions at least as favorable as any other executive officer of the
Company.

(b) Vacation and Holidays. The Executive shall be entitled to four (4)
weeks paid vacation per year, plus those paid holidays to which other similarly
situated employees of the Company shall be entitled.

(c) Bonuses and Stock Options. The Executive is eligible to receive bonuses
and stock options, to the extent bonuses and stock options are awarded by the
Company as determined within the sole discretion of the Board of Directors.

(d) Automobile. The Executive shall be entitled to the use of an automobile
at the Company's expense, up to $700 per month, for the Executive's performance
of his duties under this Agreement. The automobile allowance shall be provided,
at the Executive's option, either through a Company car, either owned or leased
by the Company, or through prompt reimbursement by the Company for the costs of
an automobile owned or leased by the Executive. The costs for which the Company
shall be responsible are the costs of maintenance and repair, applicable
insurance and gasoline costs incurred by the Executive for business purposes in
connection with the Executive's use of such automobile, provided that the
Executive submit on a timely manner appropriate documentation supporting such
costs. If the Company leases the car, the Executive shall have the option to
purchase the car at the end of the lease term.

(e) Expenses. During his employment hereunder, the Executive shall be
entitled to receive prompt reimbursement for all reasonable and necessary
expenses incurred by him in performing services hereunder (including as a
director if appropriate), provided that the Executive properly accounts for such
expenses in accordance with the Company's policy then in effect.

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<PAGE>

6. Termination of Employment.

(a) Death. The Executive's employment under this Agreement shall terminate
immediately upon his death. In such event, the Company shall pay to the
Executive's estate all salary and benefits accrued but unpaid through the date
of death, and the Company shall not have any further obligations under this
Agreement, except for any accrued or vested benefits under this Agreement, the
Stock Option Plan or otherwise, or as may be required by law.

(b) Disability. The Executive's employment under this Agreement shall
terminate if the Executive has a "Disability" (as defined herein) as reasonably
determined by the Board of Directors. For purposes of this Agreement, the term
"Disability" means that (i) as a result of physical or mental illness or injury,
the Participant is unable to perform the essential duties of his position or
poses a direct threat to the safety and health of Participant or others and
there is no reasonable accommodation that can be provided by the Company that
would allow Participant to perform the essential functions of Participant's
position as determined under applicable law; or (ii) the Participant is absent
from Participant's position for a period of ninety (90) consecutive work days or
for a period of 120 non-consecutive work days in a twelve-month period.

(c) For Cause. Notwithstanding any of the foregoing provisions of this
Agreement, the Company may, at any time during the term of this Agreement
without prior notice, discharge the Executive for "Cause" (as hereinafter
defined). For the purposes of this Agreement, the Company shall be deemed to
have Cause to terminate the Executive's employment hereunder for: (i) willful
failure to perform normal and customary duties for an extended period for any
reason other than death or total disability; (ii) gross negligence or willful
misconduct, including but not limited to, fraud, embezzlement or intentional
misrepresentation; (iii) commission of, or indictment or conviction for, a
felony; (iv) willfully engaging in competitive activities against the Company or
purposely aiding a competitor of the Company; (v) misappropriation of a material
opportunity of the Company; or (vi) violation of any material term of this
Agreement and failure to cure within ten days after receipt of written notice of
such violation or, if reasonable under the circumstances, such additional period
of time during which the Executive is using his best efforts to so cure, not to
exceed thirty (30) days in total. If the Executive is dismissed for Cause, the
Company shall pay to Executive all salary and benefits accrued but unpaid
through the date of Termination, and the Company shall not have any further
obligations under this Agreement, except for any accrued or vested benefits
under this Agreement, the Stock Option Plan or otherwise, or as may be required
by law.

(d) Notice of Termination. Any termination of employment by the Company
shall be communicated by a written notice of termination to the Executive.

(e) Certain Payments Upon Termination. If the Executive's employment is
terminated by the Company before the end of the term other than by death,
Disability or for Cause, the Company shall provide the following to the
Executive: (i) payment on a monthly basis of Base Salary (less applicable
withholdings) as in effect on the date of termination, from the date of
termination to the end of the then present term, (ii) continued group medical
coverage, under the Company's group medical plan in effect from time to time,
under the same terms and conditions as provided to comparable employees, for the
same period as payment of the Base Salary above, (iii) payment of an amount
representing annual bonuses (calculated and paid as set forth herein) and
(iv) continuation of the car allowance set forth in Paragraph 5(d) for the
lesser of one year from the date of termination or for the period from date of
termination to the end of the Agreement and, further, all unvested stock Options
held by the Executive shall immediately vest, and be exercisable in accordance
with their terms. In the event that the Executive's employment is terminated by
the Company before the end of the term of the Agreement other than as by
contemplated by Paragraph 6(a), (b) or (c), including any termination of
employment under Paragraph 7 upon a Change in Control, the annual bonus to which
the Executive might otherwise be entitled shall be an amount equal to 20% of the
Executive's Base Salary in effect on the date of termination, which amount shall
be paid in respect of each period of twelve months remaining during the then
term of this Agreement, and a pro-rated amount shall be paid in respect of any
period of less than twelve months. Any such payments for bonus shall be made at
the time that other annual bonuses are paid to other executive officers of the
Company (or if no annual bonus is paid during a particular year, in December of
the applicable year).

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<PAGE>

7. Change in Control. If the Executive resigns from his employment with the
Company for Good Reason (as defined herein) or is dismissed without Cause within
twelve (12) months following the date of a Change in Control (as defined
herein), the Company agrees to pay Executive the greater of (a) twelve month
salary and benefits (including bonus as calculated in Paragraph 6(e)) or (b)
salary and benefits from the date of resignation to the end of then present term
of the Agreement. In the event of a Change in Control, all unvested stock
options held by the Executive shall become immediately exercisable and all
rights and benefits relating to such options may be exercised and shall become
fixed and not subject to change or revocation by the Company. "Good Reason" is
defined as a material diminution of the Executive's duties and responsibilities
or a substantial reduction in the Executive's compensation and benefits. A
"Change in Control" will be deemed to have occurred if (a) the Company is merged
or consolidated with, or, in any transaction or series of transactions, all or
substantially all of the business or assets of the Company shall be sold or
otherwise acquired by, another corporation or entity and, as a result thereof,
the stockholders of the Company immediately prior thereto shall not have at
least 50% or more of the combined voting power of the surviving, resulting or
transferee corporation or entity; or

(b) any person (as that term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended,) who is not now a current affiliate
or a 5% or more holder, is or becomes the beneficial owner (as that term is used
in Section 13(d) of the Exchange Act and the applicable rules and regulations)
of stock of the Company entitled to cast more than (25%) of the votes at the
time entitled to be cast generally for the election of directors.

8. Confidential Information.

(a) The Executive agrees not to disclose, either while in the Company's
employ or at any time thereafter, to any person not employed by the Company, or
not engaged to render services to the Company, any confidential information
obtained by him while in the employ of the Company, including, without
limitation, any of the Company's inventions, software, data lists, client lists,
trading policies, pricing policies, business plans, or customer or trade
secrets; provided, however, that this provision shall not preclude the Executive
from use or disclosure of information which is in the public domain or from
disclosure required by law or court order. The Executive also agrees that upon
leaving the Company's employ he will not take with him, without the prior
written consent of the Board of Directors, any document of the Company, which is
of a confidential nature relating to the Company or its affiliates, or, without
limitation, relating to its or their customers or trade secrets.

-4-
<PAGE>

9. Non-Competition.

(a) The Executive agrees that if his employment with the Company terminates
for Cause, or he leaves the Company voluntarily without Good Reason, he will
not, without the prior written consent of the Company, for a period of twelve
(12) months thereafter, alone or with or for others, in whatever capacity,
directly or indirectly, solicit or attempt to solicit for business in
competition with the Company clients or customers of the Company with whom he
did business during his employment with the Company, or solicit or attempt to
solicit employees of the Company to leave the Company's employ.

(b) The Executive expressly acknowledges and understands that the remedy of
law for any breach by him of this Section-9 will be inadequate, and that the
damages flowing from such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that upon the Executive's
violation of any provision of this Section-9, the Company shall be entitled to
immediate injunctive relief and may obtain a temporary order restraining any
threatened or further breach. Nothing in this Section-9 shall be deemed to limit
the Company's remedies at law or in equity for any breach by the Executive of
any of the provisions of this Section-9 which may be pursued or availed of by
the Company.

(c) If following termination of the Executive's employment any of the
restrictions pursuant to this Section-9 shall for any reason be held by to be
excessively broad as to duration, geographical scope, activity or subject, such
restrictions shall be construed so as to thereafter be limited or reduced to the
extent required to be enforceable in accordance with applicable law; it being
understood and agreed that by execution of this Agreement the parties hereto
regard such restrictions as reasonable and compatible with their respective
rights.

10. Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the subject matter of this Agreement and supersedes
all prior agreements and understandings, oral or written, between the parties
with respect to the subject matter of this Agreement. This Agreement may be
amended only by an agreement in writing signed by both parties.

11. Governing Law; Arbitration. This Agreement will be governed by and
construed in accordance with the laws of the State of New Jersey, without giving
effect to the principles of conflicts of laws.

All disputes concerning the Executive's employment with the Company, the
termination thereof, the breach by either party of the terms of this Agreement
or any other matters relating to or arising from Executive's employment with the
Company shall be resolved in binding arbitration in a proceeding administered by
and under the rules and regulations of the American Arbitration Association, in
the AAA office located in New York, New York. The arbitrator shall not have
authority to modify or change any of the terms of this Agreement. Both parties
and the arbitrator will treat the arbitration process and the activities which
occur in the proceedings as confidential. If the Executive brings a claim
against the Company to enforce the terms of this Agreement and achieves a
successful result, other than as a result of a negotiated settlement, the
Company shall be liable to pay reasonable attorneys' fees and expenses incurred
by the Executive.

12. Binding Effect; Delegation of Duties Prohibited. This Agreement will
inure to the benefit of and will be binding upon the parties and their
respective successors, heirs and legal representatives. Neither the Company nor
the Executive may assign or delegate their respective performance of this
Agreement.

-5-
<PAGE>

13. Notices. All notices and other communications that are required or may
be given under this Agreement must be in writing and will be deemed to have been
duly given when delivered in person, when received by telecopy (provided that
the sender has retained a copy of the notice showing the date and time of
receipt), upon delivery by a nationally recognized overnight courier service, or
three days after being mailed by registered or certified first class mail,
postage prepaid, return receipt requested, to the party to whom the notice is
being given, as follows:

If to the Company:

Merrimac Industries, Inc.
41 Fairfield Place
West Caldwell, New Jersey 07006
Facsimile: (201) 575-0531
Attention: Chairman of the Compensation Committee

With a Copy to:

Chadbourne & Parke, LLP
30 Rockefeller Plaza
New York, New York 10112
Facsimile: (212) 541-5369
Attention: Thomas C. Meriam, Esq.

If to the Executive:

Mason N. Carter
Box 775
Old Farm Road
Bedminster, New Jersey 07921

With a copy to:

Mail To:

Pitney, Hardin, Kipp & Szuch
P.O. Box 1945
Morristown, New Jersey 07962-1945
Attn: Henry Nelson Massey, Esq.
Facsimile No.: (201) 966-1550

Delivery To:

Pitney, Hardin, Kipp & Szuch
200 Campus Drive
Florham Park, New Jersey 07932-0950
Attn: Henry Nelson Massey, Esq.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.

MERRIMAC INDUSTRIES, INC.

By: Reynold K. Green
------------------------
Name: Reynold K. Green

MASON N. CARTER
---------------
Mason N. Carter

-6-

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement"), entered into as of December
16, 1996, is by and between MERRIMAC INDUSTRIES, INC. (the "Company") and EUGENE
W. NIEMIEC (the "Executive").

In consideration of the promises in this Agreement, the mutuality and
sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment. The Company hereby employs the Executive and the Executive
hereby accepts employment by the Company under the terms and conditions set
forth in this Agreement.

2. Term. Subject to the provisions of Paragraph-6 herein ("Termination of
Employment"), the initial term of the Executive's employment under this
Agreement will commence on December 16, 1996 and will end on December 31, 1999,
and will continue from year to year thereafter, unless:

(A) either party gives notice of termination of this Agreement to the other
at least ninety (90) days prior to the end of the then present term, in which
case the Executive's employment will terminate at the end of the then present
term; or

(B) the Executive's employment is terminated under Paragraph 6, in which
event the Agreement will terminate on the date set forth in Paragraph 6.

3. Title and Duties. The Executive will serve as the Vice Chairman of the
Company. The Executive shall be responsible for, among other things, assisting
the President and Chief Executive Officer of the Company and performing such
other duties and responsibilities that are consistent with his position,
including duties consistent with his position that may be assigned to him from
time to time by the President and Chief Executive Officer. The Executive shall
report exclusively to the President and Chief Executive Officer. The Executive
agrees to devote his full time, attention, skill and energy to the duties set
forth herein and to the operations of the Company, to use his efforts to promote
the success of the Company, and to cooperate fully with the President and Chief
Executive Officer in the advancement of the best interests of the Company. The
Executive will serve, without additional compensation, as a director of the
Company. Nothing in this Agreement prevents Executive from engaging in
additional activities in connection with personal investments and community
affairs that are not inconsistent with the Executive's duties4. Compensation and
Related Matters. (a) In consideration for Executive's services to the Company
during the first year of employment, Executive shall receive a base salary at
the annual rate of One Hundred and Eighty Thousand Dollars (U.S. $ 180,000)
("Base Salary"). The Base Salary shall be payable in accordance with the
Company's regular payroll schedule, from which the Company shall withhold and
deduct all federal and state income, social security and disability taxes and
other deductions as required by applicable laws. The Base Salary will be
reviewed by the Board of Directors on an annual basis and may be adjusted upward
but not downward to reflect the Executive's performance and the scope and
success of the Company.

(b) Sign-On Bonus. (i) In connection with the execution of this Agreement,
the Company shall grant to the Executive stock options (the "Options") to
purchase 50,000 shares of the common stock of the Company, such Options to be
exercisable at the fair market price of the common stock at the close of trading
on December 31, 1996 and to have a term of ten (10) years. The Options shall
vest as follows:

Options to purchase 20,000 shares shall vest on the first anniversary of
the execution of this Agreement

Options to purchase 15,000 shares shall vest on the second anniversary of
the execution of this Agreement

Options to purchase 15,000 shall vest on the third anniversary of the
execution of this Agreement.

(ii) Except as otherwise provided in this Agreement, the provisions of the
Stock Option Plan shall govern in respect of the Executive's rights and
obligations relating to the Options.

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<PAGE>

5. Employment Benefits. During the term of this Agreement, Executive shall
be eligible for the following benefits:

(a) Employee Benefits. The Executive shall be entitled to participate in
the Company's employee benefit plans, including but not limited to medical
benefits, life insurance, Employee Stock Purchase Plans, Stock Option Plan,
401(k) plan and profit sharing plans, as may be in effect from time to time,
under the same terms and conditions as similarly situated employees.

(c) Bonuses and Stock Options. The Executive is eligible to receive bonuses
and stock options, in addition to and separate from the stock options specified
in paragraph 4(b), to the extent bonuses and stock options are awarded by the
Company as determined within the sole discretion of the Board of Directors.

(d) Automobile. The Executive shall be entitled to the use of an automobile
at the Company's expense, up to $700 per month, for the Executive's performance
of his duties under this Agreement. The car shall be provided either by the
Company, either owned or leased, or through reimbursement by the Company for the
costs of the car. The costs for which the Company shall be responsible are the
costs of maintenance and repair, applicable insurance and gasoline costs
incurred by the Executive for business purposes in connection with the
Executive's use of such automobile.

(e) Expenses. During his employment hereunder, the Executive shall be
entitled to receive prompt reimbursement for all reasonable and necessary
expenses incurred by him in performing services hereunder, provided that the
Executive properly accounts for such expenses in accordance with the Company's
policy then in effect.

(f) Deferral of Compensation. The Company and the Executive agree to create
a deferred compensation arrangement for some portion of the Executive's
compensation hereunder for retirement purposes, consistent with applicable law
as in effect from time to time.

6. Termination of Employment.

(a) Death. The Executive's employment shall terminate immediately upon his
death. In such event, the Company shall pay to the Executive's estate all salary
and benefits accrued but unpaid through the date of death, and the Company shall
not have any further obligations under this Agreement, except as set forth in
paragraphs 6(e), 6(f), 6(g) and as except for any accrued or vested benefits or
as may otherwise be required by law.

(b) Disability. The Executive's employment under this Agreement shall
terminate if the Executive is deemed to have a "Disability" (as defined herein)
as determined by the Board of Directors. For purposes of this Agreement, the
term "Disability" means that (i) as a result of physical or mental illness or
injury as determined under applicable law and as confirmed by a medical doctor
of appropriate experience, the Executive is unable to perform the essential
duties of his position for a period of four consecutive months; or (ii) the
Executive is absent from his position for a period of ninety (90) consecutive
work days or for a period of 120 non-consecutive work days in a twelve-month
period. In such event, the Company shall pay to Executive all salary and
benefits accrued but unpaid through the date of termination, and the Company
shall not have any further obligations under this Agreement, except as set forth
in paragraphs 6(e), 6(f) and 6(g), and as except for any accrued or vested
benefits or as may otherwise be required by law.

(c) For Cause. Notwithstanding any of the foregoing provisions of this
Agreement, the Company may, at any time during the term of this Agreement
without prior notice, discharge the Executive for "Cause" (as hereinafter
defined). In such event, the Company shall pay to Executive all salary and
benefits accrued but unpaid through the date of termination, and the Company
shall not have any further obligations under this Agreement, except for any
accrued or vested benefits or as may otherwise be required by law. For the
purposes of this Agreement, the Company shall be deemed to have Cause to
terminate the Executive's employment hereunder for: (i) willful failure to
perform normal and customary duties for an extended period for any reason other
than death or total disability; (ii) gross negligence or willful misconduct,
including but not limited to, fraud, embezzlement or intentional
misrepresentation; (iii) commission of, or indictment or conviction for, a
felony; (iv) willfully engaging in competitive activities against the Company or
purposely aiding a competitor of the Company; (v) misappropriation of a material
opportunity of the Company; and (vi) violation of any material term of this
Agreement and failure to cure within ten days after receipt of notice of such
violation. If the Executive is dismissed for Cause, the Company shall pay to
Executive all salary and benefits accrued but unpaid through the date of
Termination, and the Company shall not have any further obligations under this
Agreement, except for any accrued or vested benefits or as may otherwise be
required by law.

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<PAGE>

(d) Notice of Termination. Any termination of employment by the Company
shall be communicated by a written notice of termination to the Executive.

(e) Severance Benefits. If the Executive's employment is terminated before
the end of the term as a result of death or Disability, or if the Company gives
notice of termination pursuant to Section 2(A), or the Executive's employment
ends and the Company elects not to renew the Agreement, then (i) the Company
shall pay to the Executive (or his estate), on a monthly basis, the Base Salary
(less applicable withholdings) as in effect on the date of termination, from the
date of termination to (x) the end of the then present term or (y) eighteen (18)
months, whichever period is greater (the "Severance Period"); (ii) the Company
shall continue the Executive's group medical coverage for the Executive and his
spouse under the Company's group medical plan in effect from time to time, under
the same terms and conditions as provided to comparable employees, during the
Severance Period; (iii) the Company shall provide life insurance benefits and
long-term disability insurance benefits for the Executive during the Severance
Period; and (iv) all unvested stock Options held by the Executive shall
immediately vest and be exercisable by the Executive of his estates'
representative in accordance with their terms. During the Severance Period, the
Executive agrees to provide consulting services to the Company as reasonably
requested.

(f) Consulting Agreement. At the conclusion of the Severance Period, the
Company and the Executive shall enter into a Consulting Agreement, pursuant to
which the Executive shall provide consulting services to the Company as
reasonably requested for a period of ten (10) years. In consideration of the
Executive's services under the Consulting Agreement, during the term of the
Consulting Agreement the Company (i) shall pay to the Executive an annual amount
equal to one-half of his Base Salary as in effect as of the date of termination
of employment, (ii) provide to the Executive and his spouse continued coverage
under the Company's group health plan as in effect from time to time; and (iii)
maintain life insurance for the Executive in the amount of $500,000 and
long-term disability insurance intended to provide the Executive with 2/3 of his
compensation under the Consulting Agreement in the event that the Executive
becomes disabled. In the event that the Executive dies or becomes disabled
during the Severance Period or during the term of the Consulting Agreement, the
Company's obligations to the Executive cease and the Executive (or his estate)
shall be eligible to receive the benefits provided under the applicable
insurance policy as provided therein, and any other accrued or vested benefits
or other benefits as required by law.

(g) Severance Benefit Agreement. To the extent the Executive's employment
is terminated by the Company, and the Executive is otherwise entitled to receive
benefits under a Severance Benefit Agreement between the Company and the
Executive, the Executive shall receive either the benefits provided under this
Agreement or the benefits provided under the Severance Benefit Agreement if
applicable, whichever are greater.

7. Confidential Information.

-3-
<PAGE>

8. Non-Competition.

(a) The Executive agrees that if his employment with the Company terminates
for Cause, or he leaves the Company voluntarily, he will not, without the prior
written consent of the Company, for a period of twelve (12) months thereafter,
alone or with or for others, in whatever capacity, directly or indirectly,
solicit or attempt to solicit clients or customers of the Company with whom he
did business during his employment with the Company, or solicit or attempt to
solicit employees of the Company to leave the Company's employ.

(b) The Executive expressly acknowledges and understands that the remedy of
law for any breach by him of this Section-8 will be inadequate, and that the
damages flowing from such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that upon the Executive's
violation of any provision of this Section-8, the Company shall be entitled to
immediate injunctive relief and may obtain a temporary order restraining any
threatened or further breach. Nothing in this Section-8 shall be deemed to limit
the Company's remedies at law or in equity for any breach by the Executive of
any of the provisions of this Section-8 which may be pursued or availed of by
the Company.

(c) If following termination of the Executive's employment any of the
restrictions pursuant to this Section-8 shall for any reason be held by to be
excessively broad as to duration, geographical scope, activity or subject, such
restrictions shall be construed so as to thereafter be limited or reduced to the
extent required to be enforceable in accordance with applicable law; it being
understood and agreed that by execution of this Agreement the parties hereto
regard such restrictions as reasonable and compatible with their respective
rights.

9. Indemnification. The Executive agrees to indemnify and hold harmless the
Company and its directors, officers, employees and agents, for all damages,
losses, claims and expenses, including reasonable attorneys' fees, arising out
of any violation by Executive of the terms of this Agreement, or from any acts
of intentional wrongdoing by the Executive. The Company agrees to indemnify and
hold harmless the Executive for all damages, losses, claims and expenses,
including reasonable attorneys' fees, arising out of any violation by the
Company of the terms of this Agreement.

11. Governing Law; Arbitration. This Agreement will be governed by and
construed in accordance with the laws of the State of New Jersey, without giving
effect to the principles of conflicts of laws.

-4-
<PAGE>

If to the Company:

Merrimac Industries, Inc.
41 Fairfield Place
West Caldwell, New Jersey 07006
Facsimile: (201) 575-0531
Attention: Chairman of the Compensation Committee

If to the Executive:

Eugene W. Niemiec
66 Skytop Rd.
Cedar Grove, New Jersey 07009

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.

MERRIMAC INDUSTRIES, INC.

By: Reynold K. Green
-----------------------
Name: Reynold K. Green

EUGENE W. NIEMIEC
---------------------
By: Eugene W. Niemiec

-5-

Exhibit 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

1996 compared to 1995

In 1996 net sales were $14,153,000 compared to $14,397,000 in 1995.
Operations generated a loss of $589,000 in 1996. After excluding the $1,382,000
restructuring charge recognized in 1996, operations generated income of $793,000
compared to operating income of $2,309,000 in 1995. A net loss of $297,000 in
1996 compares to net income of $1,652,000 in 1995. The operating loss is
primarily due to the increases in cost of sales and selling, general and
administrative expenses coupled with the restructuring charge.

Net foreign sales amounted to $4,390,000 or 31.0% of net sales, an increase
of $161,000 or 3.8% compared to prior year's foreign sales of $4,229,000. Net
domestic sales amounted to $9,763,000 or 69.0% of net sales, a decrease of
$405,000 or 4.0% compared to prior year's domestic sales of $10,168,000.
Management attributes approximately $200,000 of the decrease to the continued
decline of net domestic defense activity.

Orders increased $1,776,000 or 11.9% to $16,729,000 in 1996 and the backlog
of firm unfilled orders increased $2,575,000 or 45.5% to $8,231,000 at year-end.

Cost of sales as a percentage of net sales increased 8.1% to 58.2%, which
amounted to an increase of $1,032,000. The primary reasons for the increases
were the loss of production time from Total Quality Management (TQM) and
ISO-9001 quality standards program training and implementation, as well as the
setup costs for the new manufacturing facility in Costa Rica, which items in the
aggregate were $811,000. In addition, higher compensation rates due to the merit
pay increases that became effective at midyear 1995; additional manufacturing
personnel hired to reduce the number of backlog ship days; the doubling of the
matching contribution rate by the Company to the Company's 401(k) Plan; and
fixed overhead increases not fully absorbed because the shipment shortfall
impacted cost of sales.

Selling, general and administrative expenses increased $331,000 and as a
percentage of net sales increased from 32.7% in 1995 to 35.6% in 1996. The
increases are due primarily to aggregate costs of $464,000 for TQM and ISO-9001
training, instruction and implementation costs and a comprehensive marketing
analysis utilizing an outside consulting firm, as well as higher compensation
expenses resulting from 1995 midyear merit increases to all employees.

1995 compared to 1994

Results of operations reflect increases in: net sales of $804,000 or 5.9%;
operating income of $215,000 or 10.3%; net income of $221,000 or 15.4%; and net
income per share of $.14 or 17.3%.

Net foreign sales amounted to $4,229,000 or 29.4% of net sales, an increase
of $703,000 or 19.9% compared to prior year's net foreign sales of $3,526,000.
The increase was attributable to further expansion into foreign markets through
our network of 17 sales representative organizations and the rapid expansion of
the space and wireless communications markets in the Far East. Net domestic
sales amounted to $10,168,000 or 70.6% of net sales, an increase of $101,000 or
1.0% compared to prior year's net domestic sales of $10,067,000. Management
attributes this slight change to the continued decline of domestic defense
activity.

Orders increased $1,200,000 or 8.7% to $14,953,000 in 1995 and the backlog
of firm unfilled orders increased $545,000 or 10.7% to $5,656,000 at year-end.

Cost of sales increased $715,000 or 11.0% and, as a percentage of net
sales, increased 2.3%. The primary reasons for that increase were: a diversion
of production labor for the newly adopted TQM and ISO-9001 programs; the
manufacture of prototypes and shipments of products which are considered
developmental; and merit pay increases to the manufacturing and supervisory
staff that became effective at mid-year.

Selling, general and administrative expenses decreased $118,000 or 2.4% and
as a percentage of net sales were 32.7%, a decrease of 2.8%. There were
increases in: sales commissions of $92,000 as net sales increased; professional
fees (legal) of $89,000 from defending our claims regarding a 1992 acquisition
disagreement; contributions to the Company's Savings and Investment Plan of
$54,000 resulting from the doubling of the matching contribution rate by the
Company; and the Profit Sharing Plan contribution increase of $36,000 or 14.3%
to $288,000. These increases were offset by decreases in advertising and
promotion expenses of $36,000 or 20.5%, proposal expenses of $180,000 or 27.2%,
and development expenses of $123,000 or 31.0%, as personnel concentrated their
efforts on expediting shipments.

-1-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Company's financial condition remained strong throughout 1996. At the
end of 1996, the Company had liquid resources comprised of cash, cash
equivalents and investments in available-for-sale securities, totaling
approximately $2,400,000 compared to $4,600,000 at the end of 1995. The
Company's working capital stood at $7,960,000 and its current ratio was 5.7 at
the end of 1996 compared to $10,024,000 and 7.0, respectively, at the end of
1995.

The Company's operating activities generated cash flows of $792,000 in 1996
compared to $2,193,000 in 1995 and $2,263,000 in 1994. The decrease in cash
flows is primarily the result of the decline in 1996 operating income. The
Company made net investments in property, plant and equipment of $1,003,000 in
1996 compared to $447,000 in 1995 and $1,103,000 in 1994. During 1996, the
Company made open market purchases of 154,100 shares of its common stock at a
cost of $1,630,000. Purchases of common stock were $1,035,000 in 1995 and
$904,000 in 1994. The Company paid cash dividends quarterly at the annual rate
of $.40 per share on its common stock amounting to $617,000 in 1996, $676,000 in
1995 and $691,000 in 1994. Lacking clear cut growth opportunities, the Company
in the past has returned a substantial portion of its net income to the
stockholders. Achievement of the growth anticipated by the new Management of
Merrimac will inevitably cause a review of our dividend policy.

The Company has a $3,000,000 unsecured line of credit agreement with The
Bank of New York, at the bank's floating prime rate, and the full line is
available for future borrowing. Management believes that with the liquid
resources and the unused line of credit available at the end of 1996, along with
cash flows expected to be generated from operations, the Company will have
sufficient resources for currently contemplated operations in 1997. The
Company's manufacturing facility in Costa Rica became operational in the second
half of 1996 and expansion plans there are being contemplated for the current
year. The Company's capital expenditure program for new projects and production
equipment is anticipated to exceed its depreciation and amortization expenses in
1997.

The Company was authorized on November 1, 1996 to purchase up to 100,000
shares of its common stock, from time-to-time depending on market conditions,
and has purchased 4,100 shares to date under such authorization.

The Company is also exploring the possibility of acquiring similar
manufacturers of electronic devices, although it currently has no definitive
plans or agreements. Management believes that such acquisitions and business
operations expansion could be financed through the liquid and capital resources
currently available as previously discussed, and/or through additional borrowing
or issuance of equity or debt securities.

-2-
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>

1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Net sales .......................................... $14,152,970 $14,396,633 $13,592,787

Costs and expenses:
Cost of sales .................................. 8,240,639 7,208,152 6,493,598
Selling, general and administrative ............ 5,041,606 4,710,752 4,828,601
Amortization of intangible assets .............. 77,568 169,180 176,735
Restructuring Charge ........................... 1,381,709
----------------------------------------
14,741,522 12,088,084 11,498,934
----------------------------------------
Operating income (loss) ............................ (588,522) 2,308,549 2,093,853
Interest and other income, net...................... 97,300 282,517 174,343
----------------------------------------
Income (loss) before income taxes .................. (491,252) 2,591,066 2,268,196
Provision (credit)for income taxes ................. (194,000) 939,000 837,000
----------------------------------------

Net income (loss) .................................. $ (297,252) $ 1,652,066 $ 1,431,196
========================================
Net income (loss) per common share ................. $(.19) $ .95 $ .81
----------------------------------------
Weighted average number of shares outstanding ...... 1,585,981 1,736,675 1,765,375
----------------------------------------
</TABLE>
See accompanying notes.

-3-
<PAGE>

CONSOLIDATED BALANCE SHEETS

December 28, 1996 and December 30, 1995
<TABLE>
<CAPTION>
1996 1995
---------------------------
Assets

<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 1,265,581 $ 2,295,186
Investments in Available-for-sale securities ...................................... 1,140,832 2,297,705
Accounts receivable ............................................................... 1,850,042 2,373,181
Inventories ....................................................................... 4,165,818 3,920,010
Other current assets .............................................................. 271,810 112,215
Deferred tax assets ............................................................... 968,000 691,200
---------------------------
Total current assets ................................................ 9,662,083 11,689,497
---------------------------
Property, plant and equipment, at cost ................................................ 12,668,930 12,085,514
Less accumulated depreciation and amortization .................................... 9,326,688 8,957,870
---------------------------
Net property, plant and equipment ................................................. 3,342,242 3,127,644
Deferred Tax Assets ................................................................... 47,000
Other assets .......................................................................... 30,440 371,371
---------------------------
Total Assets ........................................................ $13,081,765 $15,188,512
===========================
Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable .................................................................. $ 750,763 $ 386,303
Accrued liabilities ............................................................... 952,880 955,277
Income taxes payable .............................................................. 323,549
---------------------------
Total current liabilities ........................................... 1,703,643 1,665,129
Deferred Compensation ................................................................. 249,100
Deferred tax liabilities .............................................................. 154,500
---------------------------
Total liabilities ................................................... 1,952,743 1,819,629
---------------------------

Contingencies
Stockholders' equity:
Common stock, par value $.50 per share;
5,000,000 shares authorized; 2,585,749 and 2,549,452 shares issued ...... ...... 1,292,875 1,274,726
Additional paid-in capital ........................................................ 9,005,330 8,723,124
Retained earnings ................................................................. 10,051,720 10,965,750
Unrealized holding gain on available-for-sale securities, net ..................... 6,162 1,900
---------------------------
20,356,087 20,965,500

Less treasury stock, at cost - 1,074,839 and 920,739 shares ....................... 9,227,065 7,596,617
---------------------------
Total stockholders' equity .......................................... 11,129,022 13,368,883
---------------------------
Total Liabilities and Stockholders Equity ........................... $13,081,765 $15,188,512
===========================
</TABLE>

See accompanying notes.

-4-
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

Additional Unrealized
Common Stock paid-in holding Retained Treasury Stock
Shares Amount capital gain (loss) earnings Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 2,469,440 $1,234,720 $8,112,426 $ 9,249,440 730,535 $5,657,665
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,431,196
Exercise of options 38,423 19,212 231,238
Shares issued 13,333 6,666 144,996
Tax benefit - stock options* 48,800
Effect of change in fair value of
available-for-sale Securities $(213,720)
Cash dividends (690,939)
Purchase of common stock 100,200 903,907
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,521,196 1,260,598 8,537,460 (213,720) 9,989,697 830,735 6,561,572
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,652,066
Exercise of options 28,256 14,128 164,364
Tax benefit - stock options*
Effect of change in fair value of 21,300
available-for-sale securities 215,620
Cash dividends (676,013)
Purchase of common stock 90,004 1,035,045
- ----------------------------------------------------------------------------------------------------------------------------------
Balance December 30, 1995 2,549,452 1,274,726 8,723,124 1,900 10,965,750 920,739 7,596,617
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (297,252)
Exercise of options 36,297 18,149 268,206
Tax benefit - stock options* 14,000
Effect of change in fair value of
available-for-sale securities 4,262
Cash dividends (616,778)
Purchase of common stock 154,100 1,630,448
- ----------------------------------------------------------------------------------------------------------------------------------
Balance December 28, 1996 2,585,749 $1,292,875 $9,005,330 $ 6,162 $10,051,720 1,074,839 $9,227,065
</TABLE>

*Tax benefit resulting from exercise and disposition of stock options.
See accompanying notes.

-5-
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
Cash flows from operating activities: ------------------------------------------

<S> <C> <C> <C>
Net income (loss) ....................................... $ (297,252) $1,652,066 $ 1,431,196
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ....................... 890,859 850,637 837,863
Loss on available-for-sale securities ............... 17,650
Write-off of intangible assets ...................... 244,500
Deferred compensation ............................... 279,100
Deferred income taxes ............................... (481,248) (46,621) (110,000)
Changes in operating assets and liabilities:
Accounts receivable ............................... 523,139 (321,528) 116,994
Inventories ....................................... (245,808) (272,180) (11,574)
Other current assets .............................. (145,595) 76,685 6,147
Other assets ...................................... 2,178 15,253 (165,000)
Accounts payable .................................. 364,460 68,053 (28,129)
Accured liabilities ............................... (32,397) 120,067 102,670
Income taxes payable .............................. (323,549) 52,492 82,613
------------------------------------------
Net cash provided by operating activities ................... 791,681 2,192,924 2,262,780
------------------------------------------
Cash flows from investing activities:
Purchase of capital assets .............................. (1,012,259) ( 450,977) (1,116,551)
Proceeds from sales of capital assets ................... 9,071 3,690 13,212
Proceeds from sales and maturities
of available-for-sale securities ...................... 2,272,070 1,292,983 400,000
Purchase of investment securities ....................... (1,129,297)
------------------------------------------
Net cash provided by (used in) investing activities ......... 139,585 845,676 (703,339)
------------------------------------------
Cash flows from financing activities:
Repurchase of common stock .............................. (1,630,448) (1,035,045) (903,907)
Proceeds from the issuance of common stock .............. 286,355 178,492 250,450
Payments of dividends ................................... (616,778) (676,013) (690,939)
------------------------------------------
Net cash used in financing activities ....................... (1,960,871) (1,532,566) (1,344,396)
------------------------------------------
Net increase (decrease) in cash and cash equivalents ........ (1,029,605) 1,506,034 215,045
Cash and cash equivalents at beginning of year .............. 2,295,186 789,152 574,107
------------------------------------------
Cash and cash equivalents at end of year .................... $1,265,581 $2,295,186 $ 789,152
------------------------------------------
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Income taxes ........................................... $ 712,500 $ 833,776 $ 885,295
------------------------------------------

Supplemental disclosure of non-cash investing and
financing activity:
Unrealized holding gain (loss) on available-for-sale
securities, less deferred tax provision of $4,200,
$143,000 and benefit of $142,000 ..................... $ 4,262 $ 215,620 $ (213,720)
Tax benefit related to employees' stock options ........ 14,000 21,300 48,800
Decrease in intangible assets .......................... (105,664) (38,666)
Issuance of common stock ............................... 151,662
------------------------------------------
</TABLE>
See accompanying notes.

-6-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

1.Summary of significant accounting policies

Principles of consolidation: The financial statements include the accounts
of the Company, Industrias Merrimac Incorporada, S.A. a wholly-owned subsidiary
located in San Jose, Costa Rica and Merrimac International, Inc. FSC, a
wholly-owned foreign sales corporation. All intercompany accounts have been
eliminated in consolidation.

Cash and cash equivalents: The Company considers all highly liquid
securities with an original maturity of less than three months to be cash
equivalents. The Company maintains cash deposits with banks that at times exceed
applicable insurance limits. The Company reduces its exposure to credit risk by
maintaining such deposits with high quality financial institutions. Because of
their liquidity and short-term maturities, the carrying value of these financial
instruments equals their fair value.

Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.

Contract revenues: Sales and related costs of sales under fixed-price
contracts are recorded as deliveries are made. Prior to shipment, manufacturing
costs incurred on such contracts are recorded as work in process inventory.
Anticipated future losses on contracts are charged to income when identified.

Investments: Effective January 2, 1994, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and classified its portfolio of
investment securities, as available-for-sale securities that were carried at
quoted market values. Unrealized gains and losses are included as a seperate
component of stockholders' equity. Realized gains and losses, determined using
the specific identification method, are included in income in the period
incurred. The cumulative effect of adopting Statement No. 115 as of January 2,
1994 was not material.

Inventories: Inventories are valued at the lower of average cost or market
and consist of the following:

1996 1995
-------------------------------

Finished goods ....................... $ 885,863 $1,079,983
Work in process ...................... 2,134,013 1,404,901
Raw materials and
purchased parts ...................... 1,145,942 1,435,126
-------------------------------
$4,165,818 $3,920,010
===============================

Total inventories are net of valuation allowances for obsolescence of $1,761,000
in 1996 and $1,138,000 in 1995.

Depreciation: Depreciation is computed for financial purposes on the
straight-line method, while accelerated methods are used, where applicable, for
tax purposes. The following estimated useful lives are used for financial
statement purposes:

Land improvements ..................................... 10 years
Building .............................................. 25 years
Machinery and equipment ............................... 3 - 10 years
Office equipment, furniture and fixtures............... 5 - 10 years

Assets under construction are not depreciated until the assets are placed
into service. Fully depreciated assets in use at December 28, 1996 and december
30, 1995 amounted to $6,040,000 and $6,016,000 respectively.

Long-lived assets: Effective December 31, 1995, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
Under Statement No. 121, impairment losses on long-lived assets are recognized
when events or changes in circumstances indicate that the undiscounted cash
flows estimated to be generated by such assets are less than their carrying
value. Impairment losses are then measured by comparing the fair value of assets
to their carrying amounts.

-7-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 28, 1996, Decemeber 30, 1995, and December 31, 1994

1. Summary of significant accounting policies (continued)

During 1996, the Company determined that its intangible assets, comprised
primarily of the excess of cost over the fair value of net assets of acquired
businesses, had become impaired and estimated that they would not generate any
significant cash flows in future periods. Accordingly, the carrying value of the
impaired assets of $244,500 was written off in conjunction with certain other
restructuring charges (see Note 12). Prior to such determination, the intangible
assets were being amortized on a straight-line basis over a period of five
years. The implementation of Statement No.121 did not have any effect on the
determination of the amount written off.

Advertising: The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were $150,000 in 1996,
$140,000 in 1995 and $176,000 in 1994.

Income taxes: The Company uses the asset and liability method to account
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on temporary differences between financial reporting and tax
bases of assets and liabilities, and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.

Profit Sharing Plan: Based on the annual authorization from the Board of
Directors, 10% of pre-tax income as adjusted before the profit sharing provision
($145,000 in 1996, $288,000 in 1995 and $252,000 in 1994) is contributed to a
trust fund and allocated to eligible employees.

Savings and Investment Plan: The Company's Savings and Investment Plan
(401(k) plan) permits eligible employees to save and invest up to 16% of their
regular compensation with 50% (25% prior to 1995) of the first 6% of such
savings matched by the Company. The Company's contributions to the Plan were
$142,000 in 1996, $105,000 in 1995 and $51,000 in 1994.

Stock-based compensation: Effective December 31, 1995, the Company adopted
the provisions of Statement No. 123, "Accounting for Stock-Based Compensation,"
which permitted it to elect to account for stock-based compensation arising
under its stock option and stock subscription plans by using a fair value based
method or continuing to measure compensation expense using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company has elected to continue using the
intrinsic value method and make the pro forma disclosures required by Statement
No. 123 of net income and net income per share as if the fair value based method
of accounting had been applied (see Note 6). Since the Company generally grants
options and rights to subscribe to purchase shares at or near the market price
of the underlying share on the date of grant, it will not be required to
recognize compensation expense as a result of such grants.

Research and development: Research and development expenditures of $246,000
in 1996, $275,000 in 1995 and $398,000 in 1994 were expensed as incurred.

Interest expense: Interest expense was not material in 1996, 1995 and 1994.

Net income (loss) per share: Net income (loss) per share is based upon
weighted average number of common shares and common equivalent shares
outstanding during the year. Common equivalent shares arise from the dilutive
effects of shares that may be purchased under stock option and purchase plans
(see Note 6).

Accounting period: The Company's fiscal year is the 52 - 53 week period
ending on the Saturday closest to December 31. There were 52 weeks in fiscal
year 1996, 1995 and 1994 (see Note 13).

-8-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 28, 1996, Decemeber 30, 1995, and December 31, 1994

2. Investments in available-for-sale securities

The amortized cost of the Company's portfolio of available-for-sale
investments in marketable equity securities at December 28, 1996 and municipal
debt securities at December 30, 1995 is reconciled to the fair market value,
which was also the carrying value, of the portfolio at December 28, 1996 and
December 30, 1995 as follows:

1996 1995
-----------------------
Amortized cost ............................... $1,130,470 $2,294,548
Gross unrealized gains....................... 10,876 8,278
Gross unrealized losses ...................... (514) (5,121)
-----------------------
Fair market value ............................ $1,140,832 $2,297,705
=======================

The net unrealized gains of $10,362 in 1996 and $3,157 in 1995 are included
as a separate component of stockholders' equity, net of deferred tax effects.
Sales of securities totaled $2,275,000 in 1996 and $993,000 in 1995. Realized
gains and losses in 1995 and 1994 were not material.

3. Property Plant and equipment

Property Plant and equipment consist of the following:

1996 1995
------------------------------

Land and land improvements ............... $ 547,446 $ 547,446
Building ................................. 2,238,868 2,245,928
Machinery and equipment .................. 5,850,630 5,654,608
Office equipment,
furniture and fixtures ................ 4,031,986 3,637,532
------------------------------
$12,668,930 $12,085,514
==============================
4.Accrued liabilities

Accrued liabilities consist of the following:
1996 1995
------------------------------
Commissions .......................... $ 140,656 $ 143,833
Vacation ............................. 185,853 152,403
Profit sharing ....................... 144,525 270,960
Employee compensation ................ 164,820 212,373
Warranty reserve ..................... 150,000 100,000
Other ............................... 167,026 75,708
------------------------------
$ 952,880 $ 955,277
==============================

5.Line of credit

The Company has a $3,000,000 unsecured Bank line of credit agreement with
interest payable at the prime rate. There were no borrowing or amounts
outstanding under this line of credit agreement or any previous line of credit
agreements at either December 28, 1996 or December 30, 1995, or December 31,
1994.

-9-

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 28, 1996, Decemeber 30, 1995, and December 31, 1994

6.Stock options and Stock Purchase Plans

Under the Company's 1993 Stock Option Plan, 300,000 shares of the common
stock were initially reserved for issuance. The 1993 Option Plan provides for
issuance of qualified and non-qualified options. The qualified options may not
be issued at less than 100% of the fair market value of the shares on the date
of grant; they may be exercised at any time between one and ten years from the
date of grant. The non-qualified options may be granted to employees at an
exercise price determined by the Stock Option Committee of the Board of
Directors which may not be less than par value. Such options may become
exercisable immediately after the grant and/or at any time before the tenth
anniversary of the grant.

The non-qualified options may also be granted to non-employee directors,
provided the option price is at least equal to the closing price on the date the
option is granted. Such options may become exercisable immediately after the
grant and/or at any time before the fifth anniversary of the grant.

As of December 28, 1996, options for the purchase of a total of 118,150
shares remained outstanding and exercisable under the 1993 Option Plan, and
options for 169,550 shares were available for future grant (however, options for
100,000 of those shares were issued to executive officers on December 31, 1996).
In addition, (i) qualified options for the purchase of a total of 8,962 shares
remained outstanding and exercisable under the Company's 1983 Key Employee Stock
Option Plan (however, options can no longer be granted under this plan); and
(ii) nonqualified options for the purchase of a total of 50,000 shares remained
outstanding and exercisable as a result of grants by the Board of Directors in
1996 to nonemployee directors at fair market value on the date of grant.

A summary of all stock option activity and information related to all
options outstanding follows:
<TABLE>
<CAPTION>

1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average Shares average Shares average Shares
exercise or price exercise or price exercise or price
price per share price per share price per share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year ...... $8.90 140,684 $8.59 54,527 $7.80 73,645
Granted .............. 11.00 60,000 9.00 97,000 9.75 4,500
Exercised .............. 7.82 (20,572) 5.50 (3,493) 6.03 (22,118)
Cancelled .............. 9.10 (3,000) 7.51 (7,350) 10.88 (1,500)
- --------------------------------------------------------------------------------------------------------------
Outstanding at end of year 9.74 177,112 8.90 140,684 8.59 54,527
- --------------------------------------------------------------------------------------------------------------
Exercisable at end of year 9.74 177,112 8.72 49,684 8.59 54,527
- --------------------------------------------------------------------------------------------------------------
Option price range at end
of year $5.50-11.00 $5.50-10.88 $4.45-10.88
- --------------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted during
the year $1.98 $2.88
- --------------------------------------------------------------------------------------------------------------

The approximate weighted average remaining contractual life of the outstanding
options at December 28, 1996 was 8.3 years.
</TABLE>

-10-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

6.Stock Option and Stock Purchase Plans (continued)

In 1995, the Company's stockholders approved a stock purchase plan pursuant
to which 200,000 shares of the Company's common stock were initially reserved
for sale to eligible employees. Under this plan, the Company may grant employees
the right to subscribe to purchase shares of common stock from the Company at
85% of the market value on specified dates and pay for the shares through
payroll deductions over a period of up to 27 months.

The Company's stockholders had approved another stock purchase plan in 1985
pursuant to which 275,000 shares of the Company's common stock were initially
reserved for sale to employees on terms similar to those of the 1995 stock
purchase plan. This plan expired on December 31, 1994.

A summary of Stock Purchase Plan subscription activity is as follows:
<TABLE>
<CAPTION>

1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Shares average Shares average Shares
exercise or price exercise or price exercise or price
price per share price per shares price per share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Subscribed at
beginning of year ....... $7.30 16,932 $ 7.01 43,442 $8.03 29,981
Subscribed ............ 9.46 18,649 6.69 29,766
Purchased ............. 7.98 (15,725) 6.43 (24,763) 7.18 (16,305)
Cancelled ............. 8.70 (1,582) 9.24 (1,747)
- --------------------------------------------------------------------------------------------------------------
Subscribed at end of year 8.66 18,274 7.30 16,932 7.01 43,442
- --------------------------------------------------------------------------------------------------------------
Subscription price
range at end of year $6.69-9.46 $6.69-9.24 $4.68-9.24
- --------------------------------------------------------------------------------------------------------------
Weighted average fair
value of rights granted
during the year ........ $3.10
- --------------------------------------------------------------------------------------------------------------

</TABLE>

The weighted average remaining contractual life of an outstanding stock
subscription at December 28, 1996 was approximately one year.

As explained in Note 1, the Company has adopted the disclosure-only
provisions of Statement 123. Accordingly, no earned or unearned compensation
cost was recognized in the accompanying consolidated financial statements for
stock options and purchase plan subscription rights granted in 1996 and 1995.
Had compensation cost been determined based on the fair value at the grant date
for all awards in 1996 and 1995, consistent with the provisions of Statement
123, the Company's net income (loss) and net income (loss) per share would have
been adjusted to the pro forma amounts set forth below:

1996 1995
- --------------------------------------------------------------------------------
Net income (loss) - as reported ........... $(297,252) $1,652,066
Net income (loss) - pro forma ............. (495,252) 1,395,066
Net income (loss) per share-as reported ... (.19) .95
Net income (loss) per share-pro forma ..... (.31) .80
- --------------------------------------------------------------------------------

The fair value of each of the options and purchase plan subscription rights
granted in 1996 and 1995 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 3.4%; expected volatility of .25%; risk-free
interest rate of 6%; and expected lives of two years. However, the Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options and stock subscription rights.

-11-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

7.Income taxes

The provision for income taxes consists of the following components:

1996 1995 1994
Current tax provisions: ---------------------------------------
Federal ............................ $ 214,000 $ 767,000 $ 739,000
State .............................. 65,000 219,000 208,000
---------------------------------------
279,000 986,000 947,000
---------------------------------------
Deferred tax benefit:

Federal ............................ (369,000) (46,000) (101,000)
State .............................. (104,000) (1,000) (9,000)
---------------------------------------
(473,000) (47,000) (110,000)
---------------------------------------
Provision for income taxes ......... $(194,000) $ 939,000 $ 837,000

Temporary differences which gave rise to a significant portion of deferred
tax assets and liabilities at December 28, 1996 and December 30, 1995 are as
follows:

1996 1995
---------------------
Current deferred tax assets:
Inventory valuation allowance ................... $ 755,000 $489,600
Depreciation and amortization ................... 17,800
Capitalized inventory costs ..................... 69,600 107,400
Warranty cost ................................... 64,500 43,000
Deferred compensation ........................... 131,300
Other ........................................... 66,000 51,200
---------------------
1,104,200 691,200

Non-current deferred tax liabilities:
Depreciation and amortization ................... 101,000
State Income taxes .............................. 89,100 53,400
---------------------
89,100 154,500
---------------------
Net deferred tax assets .................... $1,015,100 $536,700
=====================

The change in net deferred tax assets during 1996 of $478,000 is comprised
of the deferred tax credit of $473,000 included in the provision for income tax
and the deferred tax provision associated with the unrealized holding gain on
available-for-sale securities of $5,000 included in stockholders' equity.

The change in net deferred tax assets during 1995 of $96,000 is comprised
of the deferred tax credit of $47,000 included in the provision for income tax
and the deferred tax provision associated with the unrealized holding gain on
available-for-sale securities of $143,000 included in stockholders' equity.

-12-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

7.Income taxes (continued)

The statutory federal income tax rate is reconciled to the effective tax
rate computed by dividing the provision (credit)for income taxes by income
(loss) before income taxes as follows:

1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Statutory rate ....................................... (34.0)% 34.0% 34.0%

Effect of:
State income tax expense net of federal deduction (5.2) 5.5 6.5
Tax exempt interest ............................... (6.2) (2.2) (2.7)
Foreign Sales Corporation ......................... (3.3) (1.6) (1.3)
Loss on foreign subsidiary ........................ 7.6
Other ............................................. 1.5 .5 .4
-------------------------------
Effective tax rate ................................... (39.6)% 36.2% 36.9%
</TABLE>

8.Cash dividends

The Company has paid dividends of $.10 per share in each of the four
quarters in fiscal 1996, 1995 and 1994.

9.Nature of business

Management considers the Company to be in one business segment: the design,
manufacture and sale of electronic devices offering extremely broad frequency
coverage and high performance characteristics. The Company sells to customers in
the communications, defense and aerospace industries.

Foreign sales amounted to approximately $4,390,000 in 1996, $4,229,000 in
1995 and $3,526,000 in 1994. All sales by the Company's foreign subsidiaries are
intercompany. Sales to any one foreign geographic area did not exceed 10% of net
sales for 1996, 1995 or 1994. Sales to Lockheed Martin (1996) and Raytheon
Company (1994) amounted to 10.8% and 10.0% of net sales, respectively. No one
Company accounted for more than 10% of net sales in 1995.

Accounts receivable are financial instruments that expose the Company to a
concentration of credit risk. A substantial portion of the Company's accounts
receivable are from customers in the defense industry, and 24% of its
receivables at December 28, 1996 were from five customers. Exposure to credit
risk is limited by the large number of customers comprising the remainder of the
Company's customer base, their geographical dispersion and by ongoing
customer credit evaluations, performed by the Company.

-13-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

10. Adjustment to cost of acquired business

In May 1992, the Company acquired the business and assets of an electronic
components manufacturer in a transaction that was accounted for as a purchase.
In addition to an initial payment of cash, the Company agreed to issue up to
40,000 shares of the Company's common stock to the sellers in installments in
January 1993, 1994 and 1995, or make certain cash payments instead of the
issuance of such shares. The number of shares to be issued and/or the amount of
the cash to be paid was contingent upon the market value of the Company's shares
on specified dates. The Company included $249,000 representing the approximate
market value of the 40,000 contingently issuable shares at the date of
acquisition as part of the initial cost of the acquisition and allocated that
amount to intangible assets with an estimated useful life of five years.

Based on the original terms of the agreement, and changes in the market
value of the Company's shares and the resolution of disputes with the sellers,
the Company was required to issue 13,333 shares of common stock with a market
value of $151,662 to the sellers in 1994 and no payments thereafter. As a
result, the Company reduced the carrying value of the intangible asset by
approximately $106,000 in 1995 and $39,000 in 1994.

11. Contingencies

On July 1, 1993, the Company filed a $750,000 amended complaint against the
former principals of an acquired Canadian business in the United States District
Court for the District of New Jersey, for misrepresentations made by them in
conjunction with the Stock Purchase Agreement between the parties. On or about
November 1, 1993, the former principals filed an action in Ontario Court against
the Company for breach of the same Stock Purchase Agreement, fraud, breach of
employment agreements, wrongful dismissal, breach of lease and damage to leased
premises. The former principals have demanded $(Canadian) 1,000,000 in
compensatory and punitive damages. During 1995, the Company and the former
principals settled the lawsuit filed in United States District Court without
compensation to either party; however, the litigation in Ontario is continuing
and the Company has filed a counter claim demanding $1,500,000 in compensatory
and punitive damages. The Company believes that the former principals' action is
without merit and intends to pursue its action and vigorously contest the former
principals' lawsuit.

The Company is a party to other lawsuits, both as a plaintiff and a
defendant, arising from the normal course of business. It is the opinion of
management, after consultation with counsel, that the disposition of these
various lawsuits, including the lawsuit described above, will not materially
affect the consolidated financial position or results of operations of the
Company.

-14-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 28, 1996, December 30, 1995 and December 31, 1994

12. Restructuring and related changes

The restructuring of engineering responsibilities and its attendant refocus
of product lines during 1996 impacted the valuation of inventories. An
additional review by management of inventories, certain intangibles arising from
acquired product designs, a non-compete agreement and deferred compensation for
a retiring senior officer resulted in aggregate charges of $1,382,000, and
charges, net of tax benefits, of $829,000 or $ .52 per share to operations in
1996.

The Company initially recognized aggregate restructuring charges of
$1,822,000 in the third quarter of 1996 and charges, net of tax benefits, of
$1,093,000. The Company reduced its estimate of the total charges by $145,000
and reclassified charges of $295,000 to cost of sales and selling, general and
administrative expenses in the fourth quarter.

13. Quarterly financial information (unaudited)

Summarized quarterly financial data reported for 1996 and 1995 follows:

Quarter ended

1996 (13 week basis) March 30 June 29 September 28 December 28
------------------------------------------------------
Net sales ............ $3,187,345 $3,925,528 $2,997,905 $4,042,192
Gross profit ......... 1,548,312 1,767,288 1,068,489 1,528,242
Net income (loss) .... 252,303 312,949 (1,139,257)(B) 276,753(C)
- -------------------------------------------------------------------------------
Net income
(loss) per share .... $.15 $.20 $(.73)(B) $.18(C)
- -------------------------------------------------------------------------------
1995 (12-12-16-12 March 25 June 17 October 7 December 30
week basis) ------------------------------------------------- ----
Net sales ............ $3,452,193 $3,076,952 $4,355,200 $3,512,288
Gross profit ......... 1,811,073 1,427,368 2,054,914 1,895,126
Net income ........... 449,761 279,808 469,020 453,477
- -------------------------------------------------------------------------------
Net income per share . $.26 $.16 $.26 $.27

(A) Effective in 1996, the Company changed the number of weeks which
comprise its fiscal quarter to 13 weeks and the quarter-end closing dates to the
last Saturday closest to the last day of the calendar quarter. Previously, the
Company had utilized 13 four-week accounting periods for closing its books and
quarterly financial information was reported on a 12-12-16-12 week basis.

(B) Reflects the effects of restructuring charges (see Note 12) which, as
adjusted in the fourth quarter from those amounts originally reported in the
third quarter, reduced net income for the quarter by $916,000 or $ .57 per
share.

(C) Reflects the effects of adjustments to restructuring charges (see Note
12) which increased net income for the quarter by $87,000 or $ .05 per share.

-15-
<PAGE>

QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>

Fiscal 1996 Fiscal 1995
-----------------------------------------------------------------

Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Market price per share: -----------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
High ....... $11 3/8 11 3/8 11 3/8 12 3/8 9 3/8 9 13/16 12 3/8 12 1/4

Low ........ 10 1/8 9 3/4 9 5/8 9 3/4 7 7/8 8 1/2 9 5/8 9 5/8
-----------------------------------------------------------------

</TABLE>

The common stock of the Company is listed on the American Stock Exchange
and trades under the symbol MRM.

The market price information is provided with regard to the high and low
bid prices of the common stock of the Company during the periods indicated.

-16-
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
Merrimac Industries, Inc.

We have audited the accompanying consolidated balance sheets of Merrimac
Industries, Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 28, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Merrimac
Industries, Inc. and Subsidiaries as of December 28, 1996 and December 30, 1995,
and their results of operations and cash flows for each of the three years in
the period ended December 28, 1996, in conformity with generally accepted
accounting principles.

As described in Note 1 to the consolidated financial statements, the
Company changed its method of valuing investments in debt securities in 1994.

/s/ J.H. Cohn LLP
----------------
J.H. Cohn LLP
Roseland, New Jersey
February 18, 1997

-17-
<PAGE>

SUBSIDIARIES OF MERRIMAC INDUSTRIES, INC. (the "Company")

Percentage owned
NAME Jurisdiction of Organization by the Company
---- ---------------------------- ----------------
1. Merrimac International, Virgin Islands,
Inc., FSC U.S.A. 100%

2. Merrimac Industries Province of
(Ontario) Ltd. Ontario, Canada 100%

3. Industrias Merrimac
Incorporada, S.A. Costa Rica 100%

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in (i) the Registration
Statement on Form S-8 (No. 33-68862) pertaining to the 1993 Stock Option Plan,
(ii) the Registration Statement on Form S-8 (No. 333-09633) pertaining to the
1995 Stock Purchase Plan and (iii) the Registration Statement on Form S-8 (No.
2-86405) pertaining to the 1983 Key Employees Stock Option Plan, which were
previously filed by Merrimac Industries, Inc. (the "Company"), of our report on
the consolidated financial statements of the Company and its subsidiaries, dated
February 18, 1997, which report appears on page 22 of the Company's 1996 Annual
Report to Stockholders and is also incorporated by reference in this Annual
Report on Form 10-KSB for the fiscal year ended December 28, 1996.

/s/ J.H. COHN LLP
-----------------
J.H. Cohn LLP
Roseland, New Jersey
March 21, 1997

<ARTICLE> 5
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 1,265,581
<SECURITIES> 1,140,832
<RECEIVABLES> 1,850,042
<ALLOWANCES> 0
<INVENTORY> 4,165,818
<CURRENT-ASSETS> 9,662,083
<PP&E> 12,668,930
<DEPRECIATION> 9,326,688
<TOTAL-ASSETS> 13,081,765
<CURRENT-LIABILITIES> 1,703,643
<BONDS> 0
0
0
<COMMON> 1,292,875
<OTHER-SE> 9,836,147
<TOTAL-LIABILITY-AND-EQUITY> 13,081,765
<SALES> 14,152,970
<TOTAL-REVENUES> 14,152,970
<CGS> 8,240,639
<TOTAL-COSTS> 8,240,639
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (491,252)
<INCOME-TAX> (194,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297,252)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)

</TABLE>