<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1995 Commission File No. 0-14880
MICROLOG CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA 52-0901291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20270 Goldenrod Lane 20876-4070
Germantown, Maryland (Zip Code)
(Address of principal executive offices)
(301) 428-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statement incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 19, 1996 closing price of these shares) was approximately
$20.8 million. The Common Stock is traded over-the-counter and quoted through
the Nasdaq SmallCap Market.
As of January 19, 1996, 3,964,073 shares of the Registrant's Common Stock were
outstanding.
- ------------------------------------------------------------------------------
<PAGE>
Documents Incorporated by Reference
Parts I and III incorporate information by reference from portions of the
Company's definitive Proxy Statement dated January 29, 1996 (the "Proxy
Statement"). Parts I, II and IV incorporate information by reference from
portions of the Company's Annual Report to Shareholders for the fiscal year
ended October 31, 1995 (the "Annual Report to Shareholders").
<PAGE>
PART I
ITEM 1. BUSINESS
General
Microlog Corporation ("Microlog" or the "Company") designs, assembles, markets,
and services a variety of microprocessor-based voice processing systems which
allow users to store, retrieve, and transmit digitized voice messages and to
access information on computer databases. In addition, the Company provides
performance analysis and technical and administrative support services to the
Applied Physics Laboratory ("APL"), and American Telephone and Telegraph
("AT&T"), prime contractors to the U.S. Navy. Although this segment of its
business historically has provided a stable source of sales and profits, the
Company believes that its principal opportunities for growth are in the voice
processing segment and has been concentrating its efforts on that segment.
The results of the Company's performance during fiscal 1995, 1994, and 1993 are
discussed in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," incorporated by reference into
Item 7 of the report. That section should be read in its entirety in conjunction
with the discussion of the Company's business in this Item 1. Information
concerning the Company's operations by business segment is hereby incorporated
by reference from Note 1 of the Notes to Consolidated Financial Statements
incorporated by reference into Item 8 of this Report.
Microlog, a Virginia corporation, was organized in 1969. The Company's wholly
owned subsidiaries are Microlog Corporation of Maryland, Genesis Electronics
Corporation, and Old Dominion Systems Incorporated of Maryland.
VOICE PROCESSING
Voice Processing Industry
Voice processing systems are designed to serve the needs of organizations which
are searching for an efficient, cost-effective means to deliver and communicate
information and complete business transactions in a timely manner. These systems
use specialized computer hardware and software to store, retrieve, and transmit
digitized voice messages and to access information on computer databases. They
are accessible through touch-tone and rotary telephones. Voice processing
systems range from small systems with basic voice processing features to larger
more complex systems. Many voice processing systems focus on only one
application.
Microlog offers through its Intela, a Graphical User Interface ("GUI")-based
interactive voice information processing system designed to run multiple voice
processing applications simultaneously. Through its DOS-based VCS 3500, Microlog
offers customized systems which can include up to eleven primary applications,
each supported by separate software modules, and also offers, through its
CallStar, products which are standard and can be sold in volume through
distribution channels.
Products
The Company's voice processing systems are comprised of a specially-configured
microprocessor-based hardware platform and versatile proprietary application
software which allows users to store, retrieve, and transmit digitized voice
messages and to access information on computer databases. The Company's voice
processing products include a new addition to its product line, the Intela
("Intela"), which is a UNIX-based voice processing system capable of running
multiple voice processing applications simultaneously. The Company also offers
the DOS-based VCS 3500 voice processing system, which performs up to eleven
voice processing applications, and the CallStar series of voice mail and
automated attendant products.
Interactive Information Response ("IIR") connects the voice processing system to
an external computer which contains data of interest to callers. With touch-tone
or voice commands (using speech recognition software), which often include
passwords, codes or account numbers, callers can query the computer and have
data read back
1
<PAGE>
to them in voice form. Depending on the customer's application, callers may also
change data on the computer or input new data with touch-tone or voice commands.
IIR is widely used for functions such as reporting account balances, checking on
inventory in stock and determining the status of applications or permits in
process. A special application of IIR is also used by taxpayers who are in
arrears in paying their Federal income taxes to call the Intela IIR system from
a touch-tone telephone and automatically establish a repayment plan with the
IRS. Microlog IIR software interfaces to the most popular types of host
mini-computers, mainframe computers, and local area networks ("LANs"). Microlog
emphasizes the IIR applications of its new Intela product, but also provides IIR
applications through the VCS 3500. The CallStar product provides primarily voice
mail, automated attendant and fax-on-demand features.
The following voice processing applications are provided by the Intela and VCS
3500 products:
Local Database provides very similar functions to IIR, but allows the
data of interest, up to 100,000 records, to reside on the voice
processing system rather than a host mini- or mainframe computer. This
provides a cost-effective approach for smaller IIR applications. It
also allows large IIR applications to do local batch processing of data
by downloading to the voice processing system for data manipulation.
Audiotex is used by organizations to construct a "library" of
pre-recorded messages which outside callers can access through
touch-tone or voice commands without live operator assistance.
Customers can record and change menus and messages themselves over the
telephone at any time. Libraries of information may be presented in
different languages, and callers with rotary telephones may also access
menus and information. Up to 5,000 messages may be presented. Audiotex
software finds wide use by organizations which receive large volumes of
highly-repetitive telephone requests for information. Major advantages
of audiotex over live information operators include the availability of
information at every hour of the day and the consistency in the content
of information dispensed.
Voice Mail provides an organization with "voice mailboxes" in which
internal or external callers may leave detailed, confidential messages
at any time. Messages may be left for groups of people as well as
individuals. Callers have many options to review and may record their
messages until satisfied, and mailbox owners have many options to
review, save, forward or discard voice messages.
Voice Mail overcomes many limitations of telephone systems, allowing
people to exchange information and transact business without having to
be on the phone simultaneously. It eliminates paperwork and adds
meaning and content which written messages can't reflect. Primary
benefits are, increased office productivity through fewer
interruptions, timely, accurate message delivery, and increased message
detail, eliminating callbacks and "telephone tag." Although all of the
Company's voice processing products provide voice mail, the CallStar is
a less expensive product designed specifically for voice mail and
automated attendant applications.
Automated Attendant uses touch-tone or voice commands to route and
connect inbound calls to extensions faster and more accurately than
live operators. Microlog's software allows different phone lines to be
answered with different greetings and different menus of options to be
presented to different callers. In the event extensions are busy or not
answered, the software permits callers to hold, transfer, leave a
message or disconnect. The system can be name-based, in which callers
input the first three letters of the called party's last name, or
extension-based, in which callers dial an extension number. For
extension-based systems, the software incorporates a directory of
names, allowing callers to use touch-tone commands to find extension
numbers they do not know.
Transaction Processing allows the inbound caller to place orders,
request information, respond to surveys or complete other transactions
without personal handling by a live operator, using either touch-tone
or voice commands. The caller can make the transaction any hour of any
day, and the company can process the transaction at its convenience.
Such transactions allow orders and requests to be filled faster and at
lower cost than traditional methods.
Outbound Dialing permits an organization to send messages automatically
to large lists of external phone numbers and to record responses to
those messages, if necessary. This very flexible software can handle
2
<PAGE>
multiple lists with up to 10,000 names per list. It can draw from a
library of 1,000 messages and send different combinations of messages
to individual phone numbers as directed. The software also generates
management reports about the number of successful connections, length
of calls, and content of responses.
Multiple Languages including Telecommunications Device for the Deaf
("TDD") Interface software allows system messages to be played in up to
24 different languages. It also interfaces TDD terminals to VCS 3500
systems over telephone lines. The interface enables TDD users to
interact with most VCS 3500 software modules no differently than if
voice communications were being used. Users simply type messages onto
their TDD terminals and send them to the voice processing system, which
understands the input and responds with menus, prompts and messages
which are printed on the TDD terminal. It has broad application in
areas where the hearing-impaired must have access to information
sources.
Speech Recognition allows the caller to speak responses that are
understood by the VCS 3500 and Intela systems. Continuous and discrete
speech recognition are available on a single product. A standard
vocabulary includes digits "0-9" and "yes" and "no" responses.
Microlog's speech recognition is speaker independent and therefore
requires no special training or development to recognize individual
voice or speech patterns.
Text-to-Speech converts typed ASCII data, resident on host computers or
databases, to computer-generated synthetic speech on demand. It creates
an extensive vocabulary, since it can pronounce any string of letters
which are sent to it. Microlog's text-to-speech module is ideal for
applications requiring information from large text databases. Because
text-to-speech works with external databases, the module works with the
interactive voice response module which provides the link between the
VCS 3500 or Intela voice processing system and the customer's database.
Fax software allows voice processing system users to automatically send
stored fax documents on demand from within the voice processing system.
Customer service and sales support operations are frequent users of fax
software. A service representative can take a request for documents
from the voice processing system and designate faxes to be sent in
response without exiting the voice processing system.
Intela
Intela is an IIR system designed for simultaneous support of multiple
applications and interactive information solutions. Prices for Intela systems
are dependent on the number of ports in the system (from 4 to over 1000), the
amount of voice storage, the need for additional equipment, and in the case of
direct sales, the time needed to develop a customized application. The Company
is currently working on additional releases of the product with expanded
features.
Microlog has employed the Intela in projects for the Internal Revenue Service.
Some of these projects included Voice Balance Due ("VBD"), which enables
eligible taxpayers to check the status of their debt to the U.S. government and
set up repayment plans. The Refund Inquiry Application enables taxpayers to call
the IRS and, by selecting the Refund Inquiry on Intela, automatically obtain
their refund status, including the amount of the refund.
The Company has incorporated all of the interface features of its DOS-based VCS
3500 with Graphical User Interface-based tools for application development in
Intela. Intela is based on a Pentium hardware platform utilizing a UNIX
operating system and is capable of supporting 4 to over 1000 ports. Intela has a
non-proprietary open architecture. It supports foreign language user screens,
voice prompts and documentation. Intela also supports text-to-speech, speech
recognition, remote and local databases, host connectivity, and fax.
Each Intela system contains multiple microprocessors with hard disk storage and
several voice cards. Intela uses distributed microprocessors, each of which
handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the voice processing systems with a
greater number of ports and hours of message storage.
3
<PAGE>
Depending upon customer specifications, systems are provided as tabletop,
floor-standing or rack mounted units. These units can be networked to create a
larger system with more than 1000 ports.
Product Architecture. The basic Intela architecture consists of four major
system components: the Application Server(s), the Port Server(s), the Voice
Distributed and Control Network and the Intelaware Software Platform.
Application Server. The application server defines the computing environment in
which Intelaware resides and provides centralized management and control, as
well as optional secure voice storage. The application server can be a personal
computer, a workstation or minicomputer. It interfaces to a voice processing
peripheral, or Intela Port Server, via a command link on Ethernet or an RS-232-C
link.
Port Server. Microlog's Intela T100 and Intela R100 are voice processing
peripherals, each providing call and speech processing, as well as voice
storage. Interfacing to either a CO- or PBX-based, telephone system, these units
answer calls, process and store speech, all under the direction of commands
coming from Intelaware software on the application server across a command link.
Voice Distribution and Control Network. An Ethernet-based, high-speed network is
used to control the port server and transfer voice files between the Intelas and
the application server, as well as among the Intelas themselves.
Intelaware Software Platform. Microlog's Intelaware is an application
development and deployment environment for both Interactive Information Response
("IIR") and voice messaging applications, supporting the on-line creation and
administration of multiple applications. From an X-Windows graphic terminal
connected to the application server, users access major functions of the
software through several interfaces: Application Editor, Prompt Loading and
Management, System Administration, Reports and Database Access, Integration
Manager, Agency Manager and the Calendar Manager.
Through these interfaces, users control the development and operation of their
voice applications, using OSF Motif-based graphical user interface. This
interface provides the developer with a set of tools to create voice
applications. Following is a description of each of these interfaces.
Application Editor. The Application Editor is used to create and edit
applications and is oriented towards programmer productivity, with
several developers able to access different applications
simultaneously. The editor is GUI based and allows programmers to
develop call flows using a click-and-place approach similar to many
standard drawing packages. Cells from a palette are placed onto a
Drawing Pane and connected using a set of mouse actions. Standard
Windows-like pull down menus allow file control, editing features (cut,
copy, and paste), object search (by cell number, name, or type), and
user preferences for appearance of the palette. Applications can be
developed and tested on-line without interrupting those currently
running.
Prompt Loading and Management Facility. A major function in voice
applications is prompt creation. With the Intelaware prompt loading
facility, prompts can be reviewed, recorded, installed, deleted, backed
up to removable media, restored, and distributed over a wide-area data
("WAN") network. They can be loaded on-line over the telephone, a
microphone, or from a tape, and the process can be semi- or fully-
automatic, depending on whether DTMF (dual-tone multifrequency) tones
are coded on the tape to identify the prompts. Users can record
individual prompts, a list of prompts, or record with DTMF prompt
numbers, and they will be replaced only after they've been reviewed and
accepted. New or updated prompts will be phased in automatically while
applications remain on-line.
Prompt Manager. The Intelaware prompt management facility has a
Graphical Prompt Manager. This editor allows users to retrieve a prompt
from storage on a port server or Intela and have the graphical
representation shown in a window. The user can modify the prompt simply
by clicking on the window and performing any of the following actions:
cut, copy, paste, delete, trim silence, adjust again, convert sections
of a prompt to silence, and change sampling rate.
System Administration. The load/unload of applications and the
management of the Port Servers connected to the application processor
are done through the System Administration interface. If a system
4
<PAGE>
has network hardware in the system configuration, administration can be
performed through one central point. Administrators can bring up a new
revision of an application or move an application to another trunk
while the system is on-line. If a caller happens to be on the line at
the time, the changes on that trunk will take effect after the caller
hangs up. Intelaware can support multiple Intelas to expand to larger
port and storage capacity by networking systems and clusters of systems
together. Expansions depend on the application server the systems are
connected to.
Centralized System Management. The system monitor menu under system
administration provides a graphical means to address the central
administration of a distributed system. It provides a graphical
representation of the application server and its attached Intelas,
including the command link mode used, Ethernet or serial links.
Further, by clicking on the Intela icon, an additional window is
displayed. In this window, a graphic of the Intela display panel, with
active trunk status indicators and disk usage indicators, is shown.
Clicking on a trunk status indicator opens an additional window that
depicts information on the application that is running, shows what cell
it is in, and so forth.
Reports. To track significant statistical information for such
activities as billing and to justify services, Intelaware offers a
choice of reports that can be created and viewed without interrupting
the operation of an application, and these reports can be sent to a
printer for a hard copy print-out. Reports available are call detail,
cell usage, trunk usage, subscriber information, and transaction log.
If requirements include other than these standard reports, they can be
customized using the underlying statistics.
Database Access. Interfaces can be built between Intelaware and SQL
relational databases, such as Oracle, Sybase, Informix and Ingress. The
Application Editor contains an "SQL" cell type, which allows
information to be extracted from databases to support interactive
information applications. This cell type allows users to delete,
insert, select, and update data. Intelaware also supports two internal
proprietary databases: message and information databases. The message
database, used in voice mail applications, consists of mailboxes
associated with a number, usually the phone number of the user who will
access the box for the messages deposited in it. More than one message
database can be supported within Intelaware to accommodate multiple
applications. Messages can be retrieved either FIFO (first in, first
out) or LIFO (last in, first out), determined on a system basis.
The Microlog Intela platform architecture supports a variety of configurations
that meet varying functional, processing, and voice port and storage needs. This
platform is designed for simultaneous support of multiple applications,
including both voice response and voice messaging services. Within the Microlog
platform architecture, particular hardware configurations may be proposed to
provide cost-effective solutions to a wide range of system requirements. All
systems can be configured with built-in redundancy so that at least 50% of total
system capacity is maintained across any single component failure. Growth
capability is achieved by the modular upgrade of application servers, port
servers, disk storage, additional communications links, and additional voice
processing units.
The Intela system includes a monitor, keyboard, and printer, which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity. Customers that contract
for the Company's system maintenance services also purchase modems so that the
Company can perform remote diagnostic procedures.
The Company has entered into non-exclusive distribution agreements with
international companies, including Philips Communication Systems B.V.
("Philips") of The Netherlands and Communication & Network System PTE Ltd. of
Singapore, along with 4 other companies in Europe, Asia, and the Middle East, to
market and support the Intela product line worldwide. Philips markets the Intela
IIR system as the VoiceManager 800 series.
VCS 3500
The Microlog VoiceConnect System 3500 ("VCS 3500") line of systems consists of a
microprocessor-based hardware platform which can accommodate varying numbers of
ports and, due to its proprietary software modules, can support up to eleven
separate voice response or voice messaging applications. Prices for VCS 3500
systems range from $10,000 to over $250,000 and are dependent upon the number of
ports in the system (from 2
5
<PAGE>
ports to 96 or more), the number of voice processing applications desired, the
amount of voice storage, the need for additional equipment (in the case of large
or unique systems), and the extent to which the product must be adapted to the
customer's specific needs.
The VCS 3500 system may be purchased with up to eleven different voice
processing applications: voice mail, automated attendant, automated transaction
processing, audiotex, interactive voice response, local database, outbound
dialing, multiple languages including Telecommunications Device for the Deaf
("TDD), speech recognition, text-to-speech, and fax. The Company also provides
other applications and customization where required. The Company has developed a
separate software module for each voice processing application, making it
possible to provide customers with any combination of these eleven voice
processing applications. Additional software modules may be added after a system
has been installed, thereby allowing customers to expand their systems
gradually, as the need arises, without substantial additional cost.
Microlog's voice processing software modules include a proprietary application
software matrix which allows users to customize the systems without the need for
additional software. The VCS 3500 system's application software provides a
series of menus containing instructions for the entry of data into the matrix
which will result in a customized system. For example, the automated attendant
application of the VCS 3500 can be customized to forward calls based on the
recipient's last name, extension number, or other code of up to 20 letters or
numbers. The features in the application software matrix may be set to specific
dates or times, allowing the system to activate or de-activate different
information menus, greetings, or other features on particular dates or at
particular times. The complexity of the interactive voice response application
presently requires that most customizing of this application be performed by
Microlog.
The Company's VCS 3500 has a flexible system architecture. All of the VCS 3500
systems use similar hardware platforms and the Company activates one or more of
the eleven software modules to enable a system to perform the desired voice
processing applications. In the case of complex systems performing extra or
unusual applications as requested by a particular user, the Company can
customize the voice processing systems' architecture. By using similar hardware
platforms for VCS 3500 systems, the Company has been able to achieve greater
system reliability and more efficient assembly, testing, and maintenance.
Each VCS 3500 system contains multiple microprocessors with hard disk storage
and several voice cards. The VCS 3500 uses distributed microprocessors, each of
which handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the voice processing systems with a
greater number of ports and hours of message storage. Depending upon customer
specifications, systems are provided as tabletop, floor-standing or rack-mounted
units. These units can be networked to create a larger system with more than 48
ports.
The VCS 3500 includes a monitor, keyboard, and printer, which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity. Customers that contract
for the Company's system maintenance services also purchase modems so that the
Company can perform remote diagnostic procedures.
The VCS 3500 voice response applications can be used with most customer
telephone systems. When used in connection with a PBX, Centrex or other
telephone system having a switch capable of transferring calls automatically,
the system can provide a direct connection between the caller and the customer's
telephone system. The system can also be designed to allow callers to transfer
their calls to a live operator on the customer's telephone system.
CallStar
CallStar 2000, developed during fiscal 1991 and available for delivery early in
fiscal 1992, and CallStar 1200, introduced at the end of fiscal 1993, are based
on Microlog's flexible, industry-standard hardware platform and operating
system, and incorporate new user interfaces and software standardization and
improved integration features.
6
<PAGE>
The CallStar 2000 has capacity of up to 24 ports, and is available with voice
mail and automated attendant software. CallStar 1200 was designed for the
small-to-medium organization with capacities of 2 to 12 ports and a standard 18
hours of storage with up to 50 hours of storage optional. These models combine
features of the VCS 3500 with the popular user interface, model standardization
and integration technology from the former CINDI product line of Genesis
Electronics Corporation, a company based in Rancho Cordova, California that was
acquired by the Company in November 1990.
Prior Systems. With the introduction of CallStar, the Company discontinued the
manufacturing and sales of the Genesis CINDI systems. The Company is continuing
to provide parts and service to the over 4,500 CINDI's sold.
Application Solutions
During 1995, the Company dedicated development efforts to repackage and market
existing applications previously developed for the government sector for
commercial customers. The first suite of applications targeted for the
commercial market is called the Retail Solution. Retail Solution consists of
several applications designed and manufactured specifically for the retail
pharmacy industry. These applications include the Automated Prescription Refill
System ("APRS"), Photo Ready, Prescription Ready, the ProNouncer(R), and Call
Routing. APRS allows users to place their prescription refill orders 24 hours a
day by entering their prescription information via telephone. Photo Ready and
Prescription Ready automatically dials individuals who have not picked up their
complete prescription orders or processed film, and the ProNouncer is a digital
in-store automated announcement system. Call Routing answers incoming lines and
automatically directs callers to the desired store department without the need
for a human operator.
Sales and Marketing
The Company's Applications and VCS 3500 systems are sold primarily through
direct sales, while the CallStar products have been sold principally through a
distribution network. Intela is also being sold through both direct sales and a
distribution network.
Direct Sales Force The Direct Sales force has a Director in charge of Federal
systems sales, a sales manager for commercial sales, and five salesmen. The
Company's direct sales force is presently based in the Washington-Baltimore
metropolitan area with satellite offices in Illinois, California, and
Pennsylvania. The Company provides training to its direct sales persons and
furnishes ongoing technical support to these persons through its systems
engineers and other personnel. The Company compensates its direct and
distribution sales personnel through a base salary plus commissions, which
generally represent a percentage of the net sales for which they are
responsible.
The Company's Direct Sales personnel will continue to focus on national accounts
assigned to them and on certain vertical markets, including Retail, Health Care,
Federal, state and local government. The principal potential customers for the
Company's voice processing applications and products in these vertical markets
are organizations which receive or make a large volume of telephone calls that
primarily are repetitive in nature.
Distribution Sales The Distribution Sales force currently has a director in
charge of international sales, one salesmen, and one sales engineer. The Company
has established distribution relationships with GTE, Sprint North Supply, and a
variety of smaller independent companies in the domestic market. In the
international market, Microlog has established a distribution agreement with
Philips Communication Systems B.V. ("Philips") of The Netherlands to market and
support the Intela product line initially in Europe, then worldwide, under the
name VoiceManager 800. The Company has established or is negotiating
distribution agreements in other countries in Europe, the Middle East, and the
Far East.
Marketing. The marketing organization currently has a director who manages the
Company's product and marketing related activities, one product manager, one
application business development manager, and two assistant marketing managers.
This organization interfaces with Direct and Distribution Sales in marketing and
7
<PAGE>
selling the company's products, applications, and services. The Company's
Training and Documentation groups are also under the marketing organization.
Promotional Activities The Company's promotional efforts during fiscal 1995
included advertising in industry trade publications, direct mail, product
presentations at trade shows and similar events, and public relations. The
Company also conducted seminars for potential customers in certain industries,
such as Federal, state and local governments. The Company expects to continue
these promotional activities during fiscal 1996.
Services
The Company provides limited warranties for parts and labor on its products
ranging from 90 days to two years, from the date of delivery. The Company also
offers its customers annual maintenance contracts under which the Company
maintains and services the systems. Microlog charges an annual fee of
approximately 10% to 16% of the purchase price of the VCS 3500 and Intela
systems for maintenance contracts covering normal business hours. The fee is
highest for maintenance contracts providing for 24-hour or weekend assistance.
Distributors generally perform the maintenance required on systems sold by them,
and most of the Company's distributors offer annual maintenance contracts, which
the Company believes are similar to those offered by the Company and provided at
comparable prices.
The Company performs maintenance for its VCS 3500 and Intela voice processing
systems in the Washington, D.C. metropolitan area from its Germantown, Maryland
headquarters, where an inventory of spare parts is maintained. Microlog also has
an agreement with a subcontractor to perform on-site maintenance on Microlog's
voice processing systems nationwide. The Company operates a hotline which
customers with maintenance contracts may use to request assistance or to ask
questions concerning operation of the Company's voice processing systems.
Microlog can perform many diagnostic procedures over the telephone and
historically has been able to correct most of the difficulties experienced by
its customers through telephone consultation.
Microlog also offers a variety of other services to its customers. Microlog will
customize voice processing systems to a customer's specific needs by using the
application software matrix in the VCS 3500 or the Graphical User Interface in
its Intela, or by making appropriate changes in the underlying source code. The
Company may charge for this service on a time and materials basis, or may
include the service in the price of the system being sold. Training on system
operations also is offered to customers. In addition, the Company generally
provides certain improvements to its voice processing software modules free of
charge to customers who contract for its system maintenance services.
Customer service and support for voice processing products sold through the
distribution network generally is provided by the distributor. Most of the
distributors offer annual maintenance contracts to customers with varying levels
of support. CallStar products sold through distributors would also receive
service and support from distributors, and CallStar models sold to customers on
a direct basis are covered by the VCS 3500 customer service and support program.
The Company provides a limited warranty for parts and labor on its CallStar
products for one-year, with the exception of CallStar 1200 which has a two-year
warranty on voice boards and up to a four-year extended service warranty.
Backlog
As of October 31, 1995, the Company had a backlog of existing orders for voice
processing systems totaling $3.7 million. The backlog, as of October 31, 1994,
was also $3.7 million. The Company has experienced fluctuations in its backlog
at various times during the past two fiscal years attributable primarily to the
seasonality of governmental purchases. In addition, the Company has observed a
lengthening of the period between the date of booking an order and the date of
shipment, with the shipment depending on any customer delivery schedules and any
customization needed for VCS 3500 or Intela applications. The Company
anticipates that all of the outstanding orders at October 31, 1995 will be
shipped and the sales recognized during fiscal 1996. Although the Company
believes that its entire backlog of orders consists of firm orders, because of
the possibility of customer changes in delivery schedules and delays inherent in
the government contracting process, the Company's backlog as of any particular
date may not be indicative of actual sales for any future period.
8
<PAGE>
Competition
The voice processing industry is highly competitive and the Company believes
that competition will intensify. The Company competes with a large number of
companies which produce voice processing products offering one or more of the
eleven voice processing applications performed by the Company's products.
Microlog's competitors include companies such as AT&T, Computer Communication
Specialists ("CCS"), InterVoice, Inc., Perception Technology Corporation, and
Syntellect, that have emphasized sales of systems with audiotex or interactive
voice response applications. Direct competition with the Company's voice
processing systems also arises from a substantial number of companies, such as
AVT, Centigram, and Active Voice, that focus on the market for small or
medium-size voice messaging (voice mail or automated attendant) systems. In
addition, the Company also competes with dealers and distributors that sell
voice processing products of these and other competitors.
New or enhanced products can be expected from the Company's competitors. It is
also likely that there will be new entrants into the voice processing industry
because of the absence of any major technological barriers to entry.
Competition for the sale of voice processing systems has been based in part on
the application required by the customer. In marketing its VCS 3500 and Intela
products, the Company places emphasis on the eleven voice processing
applications that can be performed and the ability of these systems to be
expanded to incorporate additional applications. Although many of its primary
competitors continue to develop new voice processing applications, the Company
believes that no competing microprocessor-based system presently offers all
eleven voice processing applications on a single hardware platform. The Company
also believes that many of its competitors' products cannot be customized as
easily to the user's specific needs as the VCS 3500 and Intela.
In marketing its Retail Solution, the Company places emphasis on the suite of
applications and solutions that these applications offer. Potential customers
have the ability to add additional solutions as the need arises. The Company is
also able to customize these applications to meet the user's needs. The Company
is actively developing additional features to the Retail Solution and new
solutions for release in fiscal 1996.
In marketing its CallStar products, the Company places emphasis on the extensive
features, and the ease of use and installation of its products in comparison to
competition. The Company believes that the user interface for these products is
presently one of the best accepted interfaces in the market. In addition, the
dealer support programs, including sales support, service support and others,
help differentiate Microlog from the competition.
Marketing and product recognition also play a substantial role in competition
within the voice processing industry and within particular vertical markets.
Most of the Company's competitors have considerably greater financial,
marketing, and sales resources than the Company. Many of these competitors have
concentrated on one or two voice processing applications or on specific vertical
markets and may enjoy advantages in selling to customers seeking only those
applications or to companies in those markets. The Company believes that it has
advantages over some competitors in sales to government customers because of its
experience in marketing products to these customers and in participating in
competitive procurements.
The Company believes that the other principal factors affecting competition in
the voice processing market are product applications and features, quality and
reliability, customer support and service, and price. The Company believes that
it competes favorably with respect to these factors.
Research and Development and Product Engineering
The Company believes that both the development of new voice processing
applications and features for its existing products and the development of new
products are necessary to remain competitive in the rapidly-changing voice
processing market. The Company has continued to improve its voice processing
product line and is currently developing new products and enhancements to its
existing products. In March 1994, the Company introduced the first release of
its Intela product and in October, a new software release for CallStar was
introduced. The Company's product engineering staff also is engaged in the
development of special product
9
<PAGE>
features for current or potential customers. Unless prohibited by government
regulation or customer contract, the Company retains ownership of all software
applications and features that it develops.
The following table sets forth for the periods indicated the Company's research
and development expenditures and the percentage of voice processing net sales
represented by these expenditures.
Research and Development Expenditures
(In thousands, except percentage amounts)
Year Ended October 31,
----------------------
1993 1994 1995
---- ---- ----
Research and development expense $1,512 $1,644 $1,592
Percentage of voice
processing net sales 11% 16% 11%
====== ====== ======
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
Manufacturing and Operations
The Company assembles its own equipment using standard parts obtained from
outside sources. The proprietary aspects of the Company's systems are primarily
in the software provided with the equipment and in the specific applications
development designed for the customer. Systems are built to order as they vary
in size and sophistication of software modules. The CallStar is the only product
that comes in a standard equipment format, although the Company is standardizing
some vertical market applications. Equipment assembly, along with testing and
quality control, are performed at its Gaithersburg, Maryland facility. In fiscal
1994, the Company signed a five-year lease for a new manufacturing and training
facility located in Gaithersburg, Maryland which became operational in March
1995. Microlog currently has 11 employees in its manufacturing group. The
Company generally uses standard parts and components obtained from a variety of
computer vendors and specially configures these components to produce the
hardware for its systems. Certain components used in the Company's products are
presently available from limited sources. To date, the Company has been able to
obtain supplies of these components in a timely manner from these sources.
Software Protection, Technology Licenses, and Trademarks
The Company regards its software as proprietary and has implemented protective
measures both of a legal and a practical nature to ensure that the software
retains that status. The Company derives protection for its software by
licensing only the object code to customers and keeping the source code
confidential. Like many other companies in the voice processing industry,
Microlog does not have patent protection for its software (although some of the
inventions for which Microlog has received patents can be implemented in
software). It therefore relies upon the copyright laws to protect against
unauthorized copying of the object code of its software, and upon copyright and
trade secret laws for the protection of the source code of its software. Despite
this protection, competitors could copy certain aspects of the Company's
software or hardware or obtain information which the Company regards as a trade
secret.
The Company has patents on Digital Switching, Voice Messaging, Multiple-Language
Automated Telephone Systems, Telecommunications Device for the Deaf ("TDD")
compatibility, and Release Line Trunking ("RLT"), and pending patent
applications on Automated Announcement Systems, TDD Message Storage, and other
TDD-related innovations. EVR, Microlog, Call Installer, Truant, CINDI,
ProNouncer, CallStar, and APRS, are all registered trademarks owned by the
Company. Intela, Intelaware, Intelaview, AACS, AARS, ACIS, and
10
<PAGE>
CALLSTAR FXD are all trademarks or service marks which are the subject of
applications for registration owned by the Company which are pending in the
United States Patent and Trademark Office. INTEL Corporation has filed with the
U.S. Trademark Trial and Appeal Board requests for extnesion of time in which to
file opposition to registration by the Company of the marks INTELA, VCS INTELA,
INTELAWARE, INTELAVIEW. Settlement discussions between the Company and INTEL
Corporation on these matters are currently on going. The Company is currently
using, and claims common law rights in the following additional unregistered
marks: Voice Connect, Genesis, Voice Path, and VCS 3500. In addition, the
Company enters into confidentiality agreements with its employees, distributors,
and customers and limits access to and distribution of its software,
documentation, and other proprietary information. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate to deter misappropriation of its technology. Further, there can be no
assurance that any patent issued or that its registered copyrights can be
successfully defended. In any event, the Company believes that factors such as
technological innovation and expertise and market responsiveness are more
important than the legal protections described above.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES
General
Since the early 1970s, the Company and its subsidiaries have been providing
performance analysis and technical and administrative support services
(principally in the form of technical data processing and analysis, engineering
and scientific analysis, and computer services) to government and commercial
customers. These services, which comprised the Company's original business,
presently are provided through the Company's subsidiary, Old Dominion Systems
Incorporated of Maryland. The Company believes that its performance analysis and
support services business will continue to provide a stable stream of sales,
although its voice processing business offers greater potential for growth.
The principal customer for the Company's performance analysis and technical and
administrative support services is The Johns Hopkins University's Applied
Physics Laboratory ("APL"), a United States Navy contractor, for which the
Company or its subsidiaries have been performing services since 1972. Another
important customer is American Telephone and Telegraph ("AT&T"), for which the
Company has been performing services since 1988. Sales from contracts with APL
(primarily) and AT&T accounted for 36%, 43% and 37% of the Company's net sales
for fiscal 1993, 1994, and 1995, respectively. The Company's contracts with AT&T
were significantly reduced during fiscal 1993 as a result of decreases in levels
of work associated with these contracts. Net sales from performance analysis and
support services through AT&T for fiscal 1995 was significantly less than the
fiscal 1994 net sales. Net sales through AT&T for fiscal 1996 are expected to be
less than those in fiscal 1995. The Company is seeking to diversify its
operations for performance analysis and support services by seeking contracts in
non-defense related areas.
The Company's performance analysis and support services personnel perform a
variety of analytical and science-related support services under several
contracts. These services usually are performed on the customer's premises or at
test-site locations. The Company's technical staff works jointly with the
customer's scientists and engineers in the acquisition, processing, analysis,
and management of certain major weapon systems data. This work is directed to
quantifying and reducing the impact of current and future threats to the United
States' submarine fleet through the use of ocean sensor systems. The technical
support rendered by the Company includes real-time data acquisition, digital
signal processing, software development and systems applications, data
management, and data analysis.
In addition, the Company supports naval strategic programs through its role as
an independent evaluator of the performance of submarine-based strategic missile
systems. This is accomplished through extensive data processing, technical
evaluation, and data analysis relating to sonar, fire control, missile,
launcher, and navigation subsystems.
The Company's performance analysis and support services employees also engage in
communications testing and evaluation for mobile communications network
exercises. The Company's communications analysts assist in preparing
presentations to the Navy and in designing and implementing communications
analysis software.
11
<PAGE>
The Company's employees perform various technical support services in connection
with several Ballistic Missile Defense Organization ("BMDO") projects. These
include advanced technical support in the design, development, and
implementation of space-qualified equipment, systems analysis, and the operation
of a VAX computer-based mission control center for the MSX mission.
Contracts
The Company's contracts are generally one-year in duration, and many of such
contracts contain two one-year extension options, with a fixed level of work
authorized under the contract. Several of the Company's larger contracts with
APL have been renewed or re-awarded to the Company annually, and the level of
work authorized at the time of contract renewal has provided for, in the
aggregate, the same or a greater level of services.
The Company provides services under three types of contracts. The majority of
contracts are on a time-and-materials basis, pursuant to which the Company
receives a pre-set fee for all services provided under the contract, without
regard to the Company's cost of supplying these services, and is reimbursed only
for the cost of materials. Other contracts are on a purchase order basis which
operates similar to a time and materials contract, and on a cost plus fixed fee
bases. Occasionally, the Company experiences delays in contract awards, contract
funding, and payment, which the Company believes is customary under contracts
which involve performance of services for Federal Government agencies.
The Company monitors performance under existing contracts and requests for
proposal ("RFPs") for performance analysis and support services by contractors
or government agencies. The Company has received a number of blanket contracts
by responding to RFPs. In order to increase the new contracts, the Company must
locate skilled programmers and other technical personnel with the qualifications
specified by the open requisitions. The Company uses agencies and internal
resources to locate these personnel. The Company believes that its reputation in
the industry enables it to attract qualified individuals for inclusion in the
Company's proposals.
Competition
The Company's Government contracts can be opened to competitive bidding upon
their expiration at the discretion of the contractor or agency. Although
contracts presently comprising a substantial percentage of the Company's sales
have been renewed annually, these contracts may and have been open to
competitive bidding. There can be no assurance that these contracts will be
awarded to the Company if competitive bidding occurs.
The Company encounters substantial competition in its procurements. The
Company's competitors include Hadron, Inc., SAIC, Fairchild, Sonalysts, and
Comsys. The Company has instituted policies and procedures designed to maintain
a low overhead to enhance its ability to compete with respect to new contracts
and to existing contracts that are to be renewed or extended. During the last
three years, the contracts that have been lost through competitive bidding or
otherwise have not been material to the Company, either individually or in the
aggregate. During this three-year period, the Company has received several new
contracts as a result of competitive procurements and also increases in the
level of work authorized under contracts which have been renewed or re-awarded
to the Company.
The Company has had no success in obtaining contracts with government agencies
or contractors other than APL or AT&T. Many of these contracts have been renewed
with the incumbent on a sole source basis, rather than being competitively bid.
In the case of contracts that have been opened to competitive bidding, the
contract incumbents generally have had advantages because of their prior
relationships with the agencies and the experience of their personnel in
performing the requested services. In addition, incumbents or other competitors
often have substantially greater financial and other resources than the Company.
Backlog
As of October 31, 1995, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $7.8 million.
By comparison, the backlog as of October 31, 1994 was $4.6 million. The increase
in backlog is attributable primarily to a significant multi-year contract award
and increased funding levels on existing or new contracts. The Company
anticipates that these services will be provided during the next three
12
<PAGE>
fiscal years. The Company estimates that of the $7.8 million of backlog at
October 31, 1995, $3.9 million will be recognized as sales beyond fiscal 1996.
Because of the delays inherent in the government contracting process or possible
changes in defense priorities or spending, the Company's backlog as of any
particular date may not be indicative of actual sales for any future period.
Although the Company believes that its backlog of funding on existing contracts
is firm, the possibility exists that funding for some contracts on which the
Company is continuing to work, in the expectation of renewal, may not be
authorized (and the Government has the right to cancel contracts at any time),
although to date this has not occurred.
Government Regulation
In order to maintain contracts with contractors or Government agencies, the
Company must comply with a variety of regulations and Department of Defense
guidelines, including regulations or guidelines covering security, record
keeping, and employment practices. The majority of the employees assigned to the
Company's contracts with contractors or agencies are required to have security
clearances. The Company historically has not experienced any significant
difficulty in obtaining the necessary security clearances. The Company's sales
under these contracts are subject to audit by the Defense Contract Audit Agency
(the "DCAA"). The DCAA has completed audits through fiscal 1992, and any
adjustments required as a result of these audits have been minor and are
included in the Company's fiscal 1995 consolidated financial statements. The
implementation by the Federal Government of spending cutbacks, or a change in
national defense priorities, could reduce the Company's sales.
Employees
At January 19, 1996, the Company and its subsidiaries employed a total of 236
persons, including 6 part-time employees. Of these personnel, 86 are engaged
principally in the Company's voice processing systems operations, 142 are
engaged in performance analysis and support services, and 8 serve as officers or
managers or perform administrative services for the Company and all of its
subsidiaries.
The Company believes that its success will continue to depend, in part, on its
ability to attract and retain skilled sales and marketing, technical, and
management personnel. Because of the high turnover rate typically associated
with sales and marketing personnel, the Company anticipates that it will need to
replace some of the sales and marketing personnel who do not meet the Company's
performance expectations. The Company has not experienced any significant
difficulty in hiring qualified technical personnel. Neither the Company nor any
of its subsidiaries is a party to a collective bargaining agreement, and the
Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company occupies a 24,000 square foot building in Germantown, Maryland,
which it uses for its principal executive offices and its voice processing
operations center. The Company also leases 22,700 square feet of office space in
Rancho Cordova, California which was Genesis' headquarters and 12,000 square
feet in Gaithersburg, Maryland which it uses for production and warehouse of its
voice processing products. In February 1993, the Company entered into a sublease
for its Rancho Cordova facility. The sublease is for a five-year term and began
in June 1993.
The Company also owns one 850 square foot office condominium unit located at 4
Professional Drive, Gaithersburg, Maryland (formerly used for the Company's
principal executive offices), which it leases.
ITEM 3. LEGAL PROCEEDINGS
Microlog and its subsidiaries, Microlog Corporation of Maryland, and Genesis
Electronics Corporation, were sued in February 1991 in the United States
District Court for the Northern District of Texas by VMX, Inc., ("VMX") and
Dytel Corporation ("Dytel"). The lawsuit alleged nonpayment of royalties owed
under a license granted by VMX to Genesis with respect to certain voice mail
technology and infringement by all three defendant corporations of certain
patents involving call processing technology held by VMX and/or Dytel. VMX and
Dytel
13
<PAGE>
were seeking an accounting of royalties allegedly owed under the Genesis
agreement and were seeking an injunction and an accounting with respect to the
alleged infringement of the call processing technology patents.
On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel. Under the terms of the settlement, the litigation was dismissed with
prejudice and the products of Microlog's subsidiaries, Microlog Corporation of
Maryland, and Genesis Electronics Corporation, are fully licensed under VMX's
and Dytel's voice mail and automatic call processing patents. Microlog and its
subsidiaries paid VMX $275,000 upon execution of the settlement documents and
issued to VMX $225,000 of Microlog common stock (102,857 shares), which was
subject to redemption as discussed in Note 11. Additionally, Microlog and its
subsidiaries will pay to VMX a total of $500,000 in eleven quarterly
installments starting on July 31, 1993. Of the settlement amount, $444,704 was
attributed to the receipt by Microlog of Maryland and Genesis of a fully paid
voice mail license, and $555,296 was attributed to a license under VMX and Dytel
automatic call processing patents. The Company recorded the new licenses at a
cost of $800,000, and is amortizing the licenses over seven years.
The Company is subject to other litigation from time to time arising from its
operations and receives occasional letters alleging infringement of patents
owned by third parties. Management believes that such litigation and claims are
without merit and will not have a material effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated herein by reference from
"Price Range of Common Stock" and "Dividend Policy" on page 29 of the Company's
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference on
pages 29 and 30 of the Company's Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference from
pages 23 through 30 of the Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including Consolidated
Statements of Operations for the years ended October 31, 1993, 1994, and 1995,
Consolidated Balance Sheets as of October 31, 1994, and 1995, Consolidated
Statements of Changes in Stockholders' Equity for the years ended October 31,
1993, 1994, and 1995, Consolidated Statements of Cash Flows for the years ended
October 31, 1993, 1994, and 1995, and Notes to Consolidated Financial
Statements, together with the report thereon of Price Waterhouse LLP dated
December 22, 1995, are incorporated by reference from pages 6 through 22 of the
Company's Annual Report to Shareholders.
14
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and certain executive officers of the Company
found under the caption "Election of Directors" and the caption "Section 16(a)
Disclosure" on pages 6 through 15 is incorporated herein by reference from the
Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information found under the caption "Executive Compensation and Other
Information", found on pages 8 through 15, of the Company's Proxy Statement is
incorporated herein by reference (excluding specifically the sections captioned
"Comparative Company Performance" and "Management Compensation Committee Report
on Executive Compensation").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information found under the caption "Stock Owned by Management and Principal
Stockholders" on pages 4 and 5 of the Company's Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information found under the caption "Compensation Committee Interlocks and
Insider Participation" on page 14 of the Company's Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included on pages 6 through 22 of the
Company's Annual Report to Shareholders and are incorporated herein by
reference.
Consolidated Statements of Operations for the years ended October 31,
1993, 1994, and 1995
Consolidated Balance Sheets as of October 31, 1994, and 1995
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 1993, 1994, and 1995
Consolidated Statements of Cash Flows for the years ended October 31,
1993, 1994, and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
15
<PAGE>
(a)(2) Financial Statement Schedules
Unaudited supplementary data entitled "Selected Quarterly Financial Data
(unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 17).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages F-1 and F-2:
F-1 Schedule VIII Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent Accountants on Financial Statement Schedule
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of Registrant,
as amended 1/
3.2 By-laws of Registrant, as amended 1/
4.1 Specimen Stock Certificate 1/
10.1 Employment Agreements between the Company and Joe J. Lynn and
Steven R. Delmar, respectively 5/
10.2 Deferred Compensation Agreements between the Company and J.
Graham Hartwell and Joe J. Lynn, respectively 3/
10.3 Consulting and Non-Competition Agreement with J. Graham
Hartwell 5/
10.4 Employment Agreement between the Company and Richard A.
Thompson 5/
10.5 Microlog Corporation Executive Deferred Bonus Plan 2/
10.6 Microlog Corporation Medical Reimbursement Plan 5/
10.7 Microlog Corporation 1986 Stock Option Plan, as amended 6/
-
10.8 Microlog Corporation 1989 Non-Employee Director Non-Qualified
Stock Option Plan 6/ -
10.9 Agreements with Farmers & Mechanics National Bank
10.10 Sub-contracting Agreement with Aspect Telecommunications
Corporation 6/
10.11 Sub-contracting Agreement with Applied Physics Laboratory 6/
10.12 Agreement with Philips Communication Systems B.V.*/ 7/
13 Annual Report to Shareholders for the fiscal year ended
October 31, 1995
22 Subsidiaries of the Registrant 5/
16
<PAGE>
24 Consent of Price Waterhouse LLP
- ---------
*/ Confidential treatment has been granted for portions of this
document.
1/ Filed as an Exhibit to Registration Statement on Form S-1, File No.
33-31710, and incorporated herein by reference.
2/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1987.
3/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1988.
4/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1990.
5/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1992.
6/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1993.
7/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1994.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal year ended
October 31, 1995.
<PAGE>
OTHER MATTERS
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8, Nos.
33-30965 (filed September 11, 1989) and 33-34094 (filed March 30, 1990):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Germantown, State of Maryland on January 26, 1996.
MICROLOG CORPORATION
By /s/ Joe J. Lynn
---------------
Joe J. Lynn
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Joe J. Lynn January 26, 1996
- --------------------------------------------
Joe J. Lynn
Chief Executive Officer
/s/ Richard A. Thompson January 26, 1996
- --------------------------------------------
Richard A. Thompson
President and Chief Operating Officer
/s/ Steven R. Delmar January 26, 1996
- --------------------------------------------
Steven R. Delmar
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
/s/ J. Graham Hartwell January 26, 1996
- --------------------------------------------
J. Graham Hartwell
Chairman of the Board and Director
/s/ David M. Gische January 26, 1996
- --------------------------------------------
David M. Gische
Director
/s/ Robert E. Gray, Jr. January 26, 1996
- --------------------------------------------
Robert E. Gray, Jr.
Director
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL SCHEDULE REQUIRED
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE BALANCE
FISCAL YEAR ENDED 10/31/95 11/1 ADDITIONS DELETIONS 10/31
- -------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
RECEIVABLES
ALLOWANCE FOR DOUBTFUL ACCTS 233,081 15,422 81,292 167,211
INVENTORY
RESERVE FOR OBSOLESCENCE 1,144,694 321,117 411,196 1,054,615
FISCAL YEAR ENDED 10/31/94
- --------------------------------------------------
RECEIVABLES
ALLOWANCE FOR DOUBTFUL ACCTS 174,454 72,000 13,373 233,081
INVENTORY
RESERVE FOR OBSOLESCENCE 777,575 1,137,039 769,920 1,144,694
FISCAL YEAR ENDED 10/31/93
- --------------------------------------------------
RECEIVABLES
ALLOWANCE FOR DOUBTFUL ACCTS 187,715 22,000 35,261 174,454
INVENTORY
RESERVE FOR OBSOLESCENCE 824,173 46,598 777,575
</TABLE>
F-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors and Stockholders
Microlog Corporation
Our audits of the consolidated financial statements referred to in our report
dated December 22, 1995 appearing on page 22 of the 1995 Annual Report to
Shareholders of Microlog Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Washington, DC
December 22, 1995
F-2
<PAGE>
EXHIBIT 10.9
Farmers and Mechanics National Bank
Promissory Note
PROl~EISSORY NOTE
Borrower:
'or
Iliorolog COrp-Ion5 MIciolog Cor;lo'et~ of
1--. old Doivinion Syatema incoreoreteel of
'I--WI -Ii Gleicale Ac~ialtion corpnaoa~
Jointly and
3O~7~ Oo~olt Lane
Gemsan~m 20W71
document 10
tnd~r: Fimiem and ~ National ~nik
COIIImeilal Lendin. De;~~nt
p~itor51e
Fredetda,MO 21705
Priricipal Amount: $210005000.00 Enmal Rate: 10.OOO~~ Date of Note: December 14,
1995 PROMISE TO ~V. Microlog Coupo~ioo, Wcmiog Oooorailon Of 'kr-. Old Dominion
Syalenia lncorr~ted 0' Muiffand. --~ Geneils A~qotatton Cof~IWI, JOEIIPV - ~ ~
pNaLI~ to -, to Farmwa and Neh~ica National Bwi~ ~ or onier, 115 luwlill money
of U'. Unitod Statae 0' AmfIce, 'he ~ mount 0' Two ~on & WIOO Dollara (*2~~OOO~)
or ao ~~ch aemy be oiiIaIMdEIIu tolo-har with inluest on the imp-d out~ding pd-I
~ance of mc?' evance. interesi shall be calculated Ire. the dale 0' each advulce
'Mill' fm~EIfnant of mcli advance.
PAY~. U~ WE tiai' list. ~ in en. ~mni of all eIiIda~ng princip.' PlEA. all
accw'i WIpl~d inIemt en FebiuMy 2851917.115 addition, ~ WE pq set-mr nenIh~ ~ Of
~ ~d intered bu~ning Jmwa'y 28, 1n, and - ei~aeiienl inierasi ~~anta are dua en
theam day 0' each nont?' after tlie~ interm~ on tIle Note is oompubd on a
3861360 si~~ie interast bass; that Is, by apPlying the rato of 'he annual irrte~
rate over a year 0,360 days, muipled by the outsWdng Pd- be~enaa, mit~ied by thu
- -'4"''' number of days 'he pTfn- beianoa Is outsIandIng. Bon'ower wilt pay
Len~mr at IAndr'i address Wiown above or ii su~h othef as Lender 'flay del~nalo
in wvttIng~ uviess o'he~ a~ or ruqlered by ap-abla law5 payments WI be appled I~
to accrued unpaid Intws~ then to pdrtclpai, and any la'aif*ig amount to any
unpaid colecton ocitli and late ~
VARIABLE IKTEIitEST RATL The interest nate on this Nole is subj~ct to change
loin Eme to L.e based on changes in an fridpendert index which is the Prirne
rate as published 115Th. Wall ~eet Jownat Money Ratea Table. or the hg heal nate
if more than one mlii' p~lshed (the ~nda'). The index is not rmcisarity the
lowest nate char- by Lender on Is loans. if the index beco,naa Unavailable
dunrrt the lam' of tttta loan, Lender may da-rate a subalituta Index after
nottoe to Bwmwer. Lender will tell Borrower the current index late upon
Borr~~Nir's ~ Borrower understands that Lender ray meke loana bmed on other mias
as weL The irterest late change WI nol occir wwre oflen than each day. The Index
ciniently IC L75~ perI-NEL The interest rate to be a-.d to the un~ Pri-al
balance of vita Nole will be at a rate of 1~ percenlage PDkita ever Ilsa Index,
maiifllig in an ini of 1g~O% per -InWIL NOTiCE: Under no crcums~es WI the
Int~est late on ~ Note be more than the inmamurn rate allowed by ap~~te law.
PREPAYMENT. Boivower -___that all ioaii teca and other p~d finance charom ate
earned ~ as of ihe date of 'he loan and WE not be si*~Jmct Ic retund upon eaey
paynwit (wheiher veitifliwy or as a raselt of dutaull). eo~ as otherwise
required by lew. IEeept tor the tor~Ing, Borrower may pay without Pe~ all or a
- -015 of the ano'ml owed eatlier Ilian I Ia due. Eady payments WE not, unleas
agreed to by Lander in WrHi~ ~WIeve Sor'Owgr of 30~TD~s eltll~ton to continua to
make payments ~' coorued u~ lnterm~ Rithef, they will ~uci 'he ~drot- balance
due.
LATE CKII,RGL lie payment Ia 15 dive or meee Imle, Bonewer wilt be charged I~O%
0' the wi~ portion of 'he regularly ed~UIed pwment or *2.co, wilkilever le
greater.
DEFAULT. Borecaer WI be In dolallit If any of Ih tolow~ig IaiOpens: (a) Borrower
falls Ia make any payment when due. {b) Brrower bmiks any promise Borrower has
made to Lender, or Borrower talls to ~ with or to ~ when due any oIlier tern's
001loa10n5 cc~ranI. or conditlon contained In 'he Note or any aoraen,t raea'et
to this Note, or In any other agniemeni or loan Borrower has with Lender. (c)
B~ir oefauils under any loan, eatension of cr~ securIty atrree~nt, pixciwee or
ulea ~eemenL or any other agreement, in favor of 'any other creltor or pwson
that 'flay naIwti~~ efledl any' of Borroweds propety or sorrewerss abIlity to
repay this Note or ~em Borrower's obigatons under this Note or any of the
Related DocIRn-L (d) My mpreeentaUon or titatemeni made or furnished to Lender
by Borrower or on Bcr~ers behal is false or ir~sIoading In any material rssoect
elie' now, or at 'he time wade or lirnsh~ (0) BoreeWer beconeea ~~nt, a ~eiver
is eppoinled for any - of Bocmw~~
<PAGE>
properly, Borrower makes an ~nnerl fort'. beneEl 0, creditors, or any pnomding
is camn'inced either by Bonoar or -nat Borrow' under any bankruptcy or
lnsoh'ency EawL (I) Any credltor tries to laise any 0, 3orr~ pmpny on or in
which Lunder has a lien or secudly InlereaL ~ Includes a garns'vn- - any -
Borrower's acceunts with Lender. (0) Myof 'he ovents ~ ow~nlor of thill Note.
(11)A meterlal adverse change occwi in Borrowers financial codition.
LENOIDR'il RIORrI. L~n ~ Lender may dedam theenire unpaid pdnc~ai b~e onthis
Note and aN arcri~d unpaid intera, to;ie"5er w~h at olher ap-able fees. cestu
and chi-, il any, immuitaty due and Pa-ge, witt'oul nolic~~ and then B~~~wer WI
pay that amou~ Firlhwmo'e. subjod to any Emits under ~ law, '~-, dilauti.
Ileorrowef also agreee to pay Lender's allorneys' i~, and as Of Lend,r1a other
colecuon expersas, whether or not thum Is a lawsuit and in;fuding without
limitation - aoenaoe for bankruptcy p'oceed~~ I,,,,, Note shall be governed by,
construed and enfo'oed In aocordenoe wtththe laws 0, the Slate of Ma~d, LENDER
AND BORROWER EACH HEREBY WAIVE TRIAL BY J'JRY IN ANY ACTION OR PROCEEDING TO
WHICH LENDER OR BOROWER NIAY PE PARTIES1 ARISING OIIT OF1 OR IN ANY WAY
PERTAINING TO, THIS NOTE, IT IS AGREED ThAT THIS WMVER CONSTITUrES A WAIVER OF
TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINOL
THIS WAIVER IS KNOWINGLY, WILLINGLY AND YOU~ARDLY MADE Dy LENDEIR AND BORROWER.
AND LENDER AND DORROWIER EACH IIEREIISY REPRESENT TIIAT NO REPRESENTATIONIS OF
PACT OR OPiNiON HAVE BEEN MADE BY ANY IIODIVIIDIt~ TO INOUCE THIS WAIVER OF
TRiAL BY JURY OR TO IN ANY WAY MODIFY OR NILLIPY ITS IlFI'ECT. BORROWER RJRTIIER
REPRESD~S ThAT BORROWER HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN
THE MAKiNG OF This WAIVER BY INDEPENDENT LEGAL COIIINSEL5 SELECTED OF
IBetROWER~S OWN FREE WILL, AND ThAT BORROWER HAS HAD THE OPPORTUNITY TO DISCUSS
THIS WAIEER WITh COtINSEL
CONFESSED JL~GMENT. UPON THE OCCURR~E OF A DEFAULT, BORROWER HEREBY AI'THORIZES
ANY ATTORNEY DESIGIIATED BY LENDER OR ANY CLERK OF ANY COURT OF RECORD TO APPEAR
FOR BORROWER IN ANY COURT OF RECORD ANO CONFESS JUDGMEIT I 12-1~1995 PROI~1SSORY
NOTE Page 2 Loan No 00001 (Conllnu.~
PRiOR IAiARIND A~ST BORROWER IN FAYOR OF LENDER FOR. AND IN THE AMO~ OF. THE
UNPAID BALANCE CF ThE PRINCIPAL AMOUNT OF THIS NO~ ALL UITEREIT ACCRUED AND
IRWAlO THEREON, ALL OTtER AMOUNTS PAYABL~ BY NORROWER TO LENDER UNDER THE ~~Me
OF THIS Nom OR ANY uiI~ AWIEBtiENT, DOCUM~iTh~ INSTR~IE~ ~Y~aNG. SECICliNG OR
GUARMIrYING THE Q~UQATtOI~ EiiIDENCRD BY THIS NO~ COST. CF Su~9 AND ATTORNEYS'
FRIES OF FIItTlEN PEROE~ (11%) OF THE WIPAID BALANCE OF THE PRINCIPAL AMOWIT OF
THIS awE AND IMTRliIT iI~ DUE tiREIWFi.
Boameer hrnmtly 1~-a so U'. ~teel ~ ~ ~ EUWI all wiem m' all vWil8 0' uwimpiton,
~ 'w .1 exi~~n, hiqiiWIuoq~ and elher iWji te WinII 8onewer mw ethemlee he
eDillilleet ultir U. laws.' the LWImd stales if Amutite er 0' fliv iii. or ~. 0'
U'. IieiEmd Ugmeel Amnic. n~w 1' jbice and wtich mw hereuller he mIlkL The suth~
and te appear ter and enter -I-I -- Umuewer 'hall a.' he uzhuuulel iw en~ er mei
emvetaee 1-el er by my hnp~ -wonolee Uwnuel Mid ehaili not he ez:-ieheil by my ~
eutand isiumni MIU-- Such -I- -w he Ii on one er mom eccaitoil. er.. WEe to n.e
In U'. mm or jiflrersl ~ - eltei es Lander lIME dmiii nm-elf or deelra~. ter all
0' which lihie Note aheli he a 8utlliciunl wuruiL
DISHONORED ITETI PEL ileiower WE pay a lea to L.nder of $1~ if B~ower makes a
payment on ~ loin and the check or prmutorlorl charge with wtich Sanower Ia
later ishonoied.
REGKT OF SEITOFF. 9o'rwer ti's-s to lender a nolliractuel popsemawy securtly
intamul Ir', and hereby as~rs, comay.. dlyers, ~ e~d Innate's to Lender all
8orrowe~ light. U. and In',-' in and tc, Bagrower's accounts with Lender
(whather ch.ckmg~ saalnga, Or some other mccoIJnD, in~ WNhcul tetaton all
anceuna held jokiy withaemeone elm end all anceuns 9orrowar may opun inliw
tutors, UWLP*~O ~ all ~A i~-:~' end kiul acoowiL Baivower aulherbtea Lender. to
the mdent ~nteti by ~ i"w. 10 chaq~ or aetoff all swins owl~ on this Note igrnl~
any' and all such aoo~.
COLLATERAL Tilis Note Ia by. in addItion toany other coEm~~, a Oeeei otTmsl
outed December T41 1995. to a trulim in tavor of Lander on raul pmpwtV iooaleei
in M~- Coonly' Slut. ~'-Ind. all the terms end cordilons of which as hereby
inoorooated and made a pait of Its Non, Tb. Ilmi Preperty orb addeaa is commonly
Imown as WO Goideneel Lane, Germantown, MO WS.
LINE OF C-IT. This Note :~ a myoh'Ing tine - ~ Advanoee under ~ Nola, - wel -
for peynmid *om Barmw~~a anceuis, may he mqLirngI,d er-br in wilung by Boirer or
by an a'iIhorlsad person, Lender may. but need not, i~ie Itast all oral requeds
be cw*med in ~ Thu ~l~wing itarty or trari- ate a~ithodsed to request - under
'he line of oedll until Lender -~ trom Borrower al Land's adateua ihown aboi~
wri.' notoe of neoooaIion - their a~~: Joe ~ Lym, Richard ~ m.mp~ir' and Slum R
Ineiruer. 9orrower agaes to he Umble for all al-u uIthar: (a) ~ in -~~- with 'he
inancins - an auIhoiorl PWSOfl or ~) eteteled to any' of ~~.,,-::p.s mounta with
Lander. Thu impelilPIg- Owing en this Note at any lime flay he -duoed by
endoesemonts on this Note or by Lender's inlemel - - duiiycwv~ter pik:~y'a leder
WE ha~ no ~atn to adymicce fthndi under this Note ~ (a) Bomower or any guarsn~or
is in deluit under the temnsefIiius Note or any eomint that Bwii~ or any' ~ has
with Lander, Induding any' agruemeri mad' In conneclon with the ~ - lids Noi; ~
sorrower or any' guarantor ceaaea doing liusiness or is insotneni; (c) any
gummnlor~ Glaima or -. atteulipta to L. ~, or iwiloke such gu~ntor'a gL-antm ol
this or other with La ~ in-ant toni. Hole tor piw-. other than these aullued by
Lencor'
<PAGE>
CON~ To .15~SWCflC~ ~ bryeroabiy sutWN~ta to the jurisilictlo:' ofany Iltate or
terlerat ccorl siWuig In the Slate of Mn- over any SIA acilon, or pmceeding
ansing out of or misting 10 this NOIL Borrower Irrevocably wasss, to the ~est
adeni perin~Id by law, any' ob-ion ihal BWYCwer may now, or teueefeur have te
the laying - 'eunue of any' such SLit, acilon. or pioceir~ brougit in any suon
ocixi aft' any otam ttaal any such suit, acilon. or____~ b'oi~hi inani' such
aourl has b'-t~ in an lgic~~mniwi lerum. lanai iuci-nl in any such suit, acilon.
or pfoc..ing bm~~hi in any' auch couri shall be conduslye and binding upon
Borrower and may be enioroed in any court in wuch Bon~wer is Subject to IL~itoa
by a sult '~.. such ju~nt ~ded that srnrdce of ~coms Is ellcctod upon Borrower
as prootoed '1' this Note or aa :~~~;::
p.m'mmd by ~ law.
GENEIAL ~OVISlONL ThEa loan Is ~ made under the ~ and ~ of the Maryland Interest
and lisury Law. V 'any - of this Note cannot he ~ this tect WE not elliot 'he
weul of the IIo~ In parkular, this secllon means (among other thTrtgs) that
Bonuer does not agi.. or Inlend to ~y. and Lender dom not agree or ireend to
coi*~ tor. cha~ colecit, t.ke, 'esenfe or receive (coseclelly re~rr~ to hereki
as "charge or any amouni in the .-~-- of iritereal or in the ~ture of a lea lor
this loan. which would In any way or e"enI ~n~ng demand, pfetteymert, or
a~ce~w'at~) oaum Lwider to clie or cotect more for this loin than the mammum
Lender would be pennilled to chaine or cotect by Ied'rai law or the law oft'.
Stats of Iauila~ (as ap~~b), Any such eiom inluast or unautieeied toe shell,
Instead of anylhing ~ted to the ~ be aetied lirsl to .-~""" the ~~' Ioaianoe of
this loan, and when the hue been - in tuli, he netunded to Borrower iesnder may
delay or forgo enl~clng any of h itg~ or mimim under this Note without losing
them. Borrower and any other ierrson who ~, g~aiintou or endorses this Note.
tot'. esilent allowed by law. wmhiw ~miw*mn'~ deinand for payment, prnirnsl and
noilbe of ..ioonor. tipon any' -oe in the tenns of this Note, and Wim ~iareise
u~VuIy SIted in ~ no -V who agna this Note, 'wttether as makir, gusiantor,
aicoiinodalion a'k~ or endorser. uhall he naie-eei from Imbimy. M ~-ieaaeneethai
Lender may nenew or 1 (rn--and torany i-ft of time) this loan, or nulese any
i,a,ty or gInaiW~ or oeilaler~ cr ~~tuiltomrnl~ upon or pullect i,unoer,s
s,cLrtty intest in the collateral; and Iske any' other acilon deemed neomawy by
Lender wiliout the coneant of or noitoe to an~ M such PffRIms also eeree thai
Lender may modify this loan without the Consent of or to anyone other Itaun the
- -V with whom the modlilcalon is MaciL
PRIOR TO SIGNING THIS IiOTiE, BORROWEM READ AND UNDERSTOOD ALL THE PROViSiONS OF
THIS NOTE, INCIWING THE YARIALLE Ji(TEFIEST IlIATE itt~ISIONL DORROWEFI AGREES
TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE
NOTL OLD ~ F&M LOAN AGREEMENT
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<C> <C> <C> <C> <C> <C> <C> <C>
$2,000,000.00 12-14-1995 02-28-1997 00001 220 B3 New LPA
References in the shaded area are for Lender's use ony and do not limit the
applicabillity of this document to any particular loan or item.
Borrower: Microlog Corporation, Microlog Corporation of Lender: Farmers and Mechanics National Bank
Maryland, Old Dimonion Systems incorporated of Commercial Lending Department
Maryland, and Genesis Acquisition Corporation P.O. Box 618
jointly and severally Frederick, MD 21705
20270 Goldenrod Lane
Germantown, MD 20876
============================================================================================================
</TABLE>
THIS LOAN AGREEMENT between Microlog Corporation, Microlog Corporation of
Maryland, Old Dominion Systems Incorporated of Maryland, and Genesis Acquisition
Corporation, jointly and severally ("Borrower") and Farmers and Mechanics
National Bank ("Lender") is made on the following terms and conditions. Borrower
has received prior commercial loans from Lender or has applied to Lender for a
commercial loan or loans and other financial accommodations, including those
which may be described on any exhibit or schedule attached t this Agreement. All
such loans and financial accommodations, together with all future loans and
financial accommodations from Lender to Borrower, are referred to in this
Agrteement individually as the "Loan" and collectively as the "Loans." Borrower
understands and agrees that: (a) in gaining, renewing, or extending any Lan,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in this Agreements: (b) the granding, renewing, r extending of any
Loan by Lender at all times shakl be subject to Borrower's continuied compliance
with this agreement; and (c) all such loans shall be and shall remain subject to
the following terms and conditions of this Agreement.
TERM. This Agreements shall be effective as of December 14, 1995, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in fuill and the parties termainte this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commerical Code. All references
to dollar amounts shall mean amounts in lawfulf money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Accunt" means a trade account, acccount receivable, or other
right to payment for goods sold or services rendered owing to Borrower (or to a
third parter grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entitly obligated
upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means Microlog Corporation, Microlog Corporation
of Maryland, Old Dominion Systems Incorporated if Maryland, and Genesis
Acquisition Corporation, jointly and severally and its successors and assigns.
The word "Borrower" also includes, as acclicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled "Subsidiaries
and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from
time to time, the lessor of (a) $2,000.000.00; or (b) 70,000% of the aggregate
amount of Eligible Accounts.
Business Day. The words "Business Day" mean a day on which commercial banks are
open for business in the State of Maryland.
CERCLA. The world "CERCLA" means the Comprehensive Environment Response,
Cmpensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of
extraordinary gains and income, plus depreciation and amoritization.
Collateral. The word "Collateral" means andincludes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgagej, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt lien, charge,
lien or ftitle retention contract, lease or consignment intended as a security
device, or any other security or lien interest whathsaoever, whther cretaed by
law, contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated
Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all f
Borrower's Accounts which contain selliong terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may borrow
shall exclude all returns, discounts, credits, and offsets of any nature. Unless
otherwise agreed to by Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of,
or affiliated with or related to Borrower or its shareholoders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consaignment,
guarantted sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to whch Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(g) Accounts with respect to which Lender, in its sole discretion, deems
the creditworthiness or financial condition of the Account Debtor to
be unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed against
it a petitin in bankruptcy or an applicabtion for rellief under any
provision of any state ir federal bankruptcy, insolvency, or
debtory-in-relief acts; or which has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or who
has made an assignbment for the benefit of creditors or has become
insolvent or fails generally to pay its debts (including its payrolls)
as such debts become due.
(i) Accounts with respect to which the Account Debtor is the United States
government or any department or agency of the United States with the
exception of those accounts which aggregate to less than $100,000.00
during any one fiscal year of the Borrower.
(j) Accounts which have not been paid in full iwthin 90 days from the
invoice date.
ERISA. The word "ERISA" means the Employee Retirement Income Suecirty Act of
1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events if Default set forth below in the section titled
"EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the maturity date or earlier
date of termination of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and all
of the persons or entitles granting a Security interest in any Collateral for
the indebtedness, and their personal representatives, successors and assigns.
Gurantor. The word "Guarantor" means and includes without limitation each and
all of the gurantors, sureties, and accommodation parties in connection with
any indebtedness and their personal representatives, successors and assigns.
Indebtedness. The word "Indebtedness" means and includes without limitation all
Loans, including all principal, interest and other fees, costs and charges, if
any, toghether with all other present and future liabilities and obligations of
Borrower, or any one or more of them, to Lender whether direct or indirect,
matured or unmatured, and whether absolute or contingent, joint, several, or
joint and several, and no matter how the same may be evidenced or shall arise.
Lender. The word "Lender" means Farmers and MEchanics National Bank, its
successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility described in
the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's receivables.
Loan. The word "Loan" or "Loans" means and includes without limitation any and
all commercial loans and financial accommodations from Lender Borrower, whether
now or hereafter existing, and however evidenced, including without limitation
those loans and financial accommodations described herein or described on any
exhibit or schedule attached to this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note jor
notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interest securing indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similaR charges either not yet due or being contested in good
faith; (c) liens or materialmen, mechanics, warehousemen, or carriers,or other
like liens arising in the ordinary couse of business and securign oblligations
whicha re not yet delinquent; (d) purchase money lliens or purchase money
security interest upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreementor permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens," (e) liens and security interest which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f) those liens and security interest which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include without
limitatIon any and all types of liens and encumbrances, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendements and Reauthorization Act of
1966 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean Indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owedby Birriwer to Lenderinformand substandce acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets
excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current assets,
excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amunt of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
Conditons precedent to Each Advance. LEnder's obligation to make any Advance to
or for the account of Borrower under this Agreement is subject to the following
conditions precedent, with all documents, instruments, opinions, reports, and
other items required under this Agreement to be in form aNd substance
satisfactory to Lender:
(a) Lender shall have received evidence that this AGreementand all Related
Documents haVe been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall haVe received such documents as Lender may request.
(c) The security interests in the Collateral shall be been duly
authorized, created, and perfected with first llien pririty and shall
be in full force and effect.
(e) Lender, at its option and for its sole benefit, shall have conducted
an audit of Borrower's Accounts, books, records, and operations, and
Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the credit facility, as well as directions
for payment from Borrower's accounts, may be requested orally or in writing by
authorized persons. Lender may, but need not, require that all oral requests be
confirmed in writing. Each Advance shall be conclusively deemed to haVe been
made at the quest if and for the benefit of Borrower (a) when credited to any
deposit account of Borrower maintained with Lender or (b) when advanced idn
accordance with the instructions of an authorized person. Lender, all its
option, amy set a cutoff time, after which all requests for Advances will be
treated as having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of the
oustanding Advances shall exceed the applicable Borrowing Base, Borrower,
Immediately upon written or oral notice from Lender, shakl pay to Lender an
amunt equal to the difference between the oustanding principal balance of the
Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate upaind principal amount of all Advances then
outstanding and all accrued lupaind interest, together with all other applicaBle
fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain onits books a record of account in which
Lender shall make entries for each Advance and suchother debits and credits as
shall be appripriate in connection with the credit facility. Lender shall
provide Borrower with peridic statements of Borrower's account, wich statements
shall be considered to be correct and conclusively binding on Borrower unkess
Borroer notifies Lender to the contrary with thirty (30) days afterj Borrower's
receipt of any such statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performace of all other
Loans, obligations and duties owed by Borrower to LEnder. Borrower shall grant
to Lender Security Interests in such property and assets as Lender may require
(the "Collateral"), including without limitation Borrower's present and future
Accounts and general intangibles. Lender's Security interests in the COllateral
shall be continuing lliens and shall include the proceeds and products of the
Collateral, including without limitation the proceeds of any insurance. With
respedct to the Collateral, Borrower agrees and represents and warrants to
Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to perfect
and continue Lender's Security Interests in the Collateral. Upon request of
LEnder, Borrower will deliver to Lender any and all of the documents evidencing
or constituting the Collateral, and Borrower will note Lender's Interest upnany
and all chattel paper if not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this AGreement, Brrower will execute one
or more UCC financing statem,enmts and any similar statements as may be required
by applicaBle law, and will file such financing statements and all such similar
statements documents necessary to perfect or to continue any Security Interest.
Lender may at any time, and without futher authorization from Borrower, file a
carbon, photograph, facsimile, or other reproduction of any financing statement
for use as a financing statement. Birrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the perfection
of Lender's security interest in the Collateral. Borrower promtply will notify
Lender of any change in Borrower's name including any change to the assumed
business names of Borrower. Borrower also prmptly will notify Lender of any
change in Borrower's Social Security Number of Employer Identification Number.
Borrower futher agrees to notify Lender in writing prior to any change in
address or location of Borrower's principal governance office or should Borrower
merge or consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall, keep
correct and accurate records of the Collaterla, all of wich records shall be
available to Lender or Lender's representative upon demand for inspection and
copying at any reasonable time. jWith respect to the Accounts, Borrower agrees
to keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances and
agings.
Collateral Schedules. Cuncurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts
and Eligible Accounts,in form and substance satisfactory to the Lender.
Thereafter Borrower shall execute and deliver to Lender suchd supplemental
schedules of Eligible Accounts and such other matters and information relating
to Borrower's Accounts as Lender may request. Supplemental schedules sahll be
delivered according the following schedule: within fifteen (15) days if each
month end. Schedules shall itemize Accounts and Eligible Accounts in the
following categories: 0-30 days, 31-60 days, 61-90 days.
Representation and Warranties Concerning Accounts. With respect to the Accounts,
Borrower represents and warrants to Lender: (a) Each Account represented by
Borrower to be an Eligible Account for purposes of this Agreement conforms to
the requirements of the definintion of an Eligible Account; (b) All Account
information listed on schedules delivered to Lender will be true and correct,
subject to immaterial variance; and (c) Lender, its assigns, ir agents shall
haVe the right at any time and at Borrower's expense to inspect, examine, and
audit Borrower's records and to confirm with Account Debtorsthe accurancy of
such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
Organization. Borrower is a corporatin which is duly organized, validity
existing, and in good standing under the laws of the State of Maryland and is
validity existing and in good standing in all states in which Borrower is doing
business. Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently proposes
to engage. Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would have a
material adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, dellivered or
performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with, result in a violation
of, or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other instrument
binding upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to Lender
truly and completey disclosed Borrower's financial condition as of the date of
the statement and there has been no material adverse change in Borrower's
financial conditon subsequent to the date of the most recent financial statement
supplied to Lender, Borrower has no material
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceale against Borrower in
accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good titke to all
of Borrower's properties free and clear of all Security Interests, and has not
exectued any secuyrity documents or financing statements relating to such
properties. ALl of Borrower's properties are titked in Borrower's legal name and
Borrower has not used, or filed a financing statement under, any other name for
at least the last five (5) years.
Hazardus Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules or regulations adopted pursuant to any
of the foregoing. Except as disclosed to and acknowledged by Lender in writing,
Borrower represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation, manufacture,
storage, treatment, disposal, release or threatened release of any hazardous
waste or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowlege of, or reason to believe that there has been (i)
any use, generation, manufacture, storage, treatment, disposal, releate, or
threatened relase of any hazardous waste or substance on, under, abut or from
the properties by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any person
rleating to such matters. (c) Neither Borrower nor any tenant, contractor, agent
or other authorized user of any of the prperties shall use, generate,
manufacture, store, treat, dispose, of, or release any hazardous waste or
substance on, under, abo;ut or from any of the properties; and any such activity
shall be conducted in compliance wioth all applicable federal, state, and local
laws, regulations, and ordinances, including witout limitation those kaws,
regulations and ordinances described above. Borrower authorized Lender and its
agents to enter upon the properties to make such inspections and tests as Lender
may deem appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at Borrower's
expense and for Lender's purposes only and shall not be construed to create any
responsibility or liabilty in the part of Lender to Borrower or to any other
person. The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages penalities, and expenses which Lender may directly or
indirectly suystain or suffer resulting from a breachof this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disopsal, release or threatened release occuring prior to Borrower's ownership
or interest in the properties, whether ir not the same was or should have been
known to Borrower. The provisions of this section of the Agreement, including
the obligation to indemnify, shall survive the payment of the indebtedness and
the termination or expiration of this Agreement and shall not be affected by
Lender's acquistion of any interest in any of the properties, whether by
foreclosure or otherwise.
Ungatlon end CI~ No Ut-on. cwn~ ir,veeu~on, adminlainalve proceeding or simlier
adon (~g thorn for unxaat taxes) Sgainat Borrower is pending or tiresateriad.
and no other event has occurred which may mairilty ~ aI~md Borrower's 'Inanciat
condition or Pm-I. other than Egaton, claims, or other events, if any, that have
been cllsclosesl to and acknowledged by Lander in wrttfng. Turn. To the best ci
Borrower's knowtedg~. all tax netuens and -sorts of Borrower that are or warn
required to be ftlsd, have bean lied, and 'Ir taxes, aaeaas and ether
governmental charges have been paid in ft~ esoept those presently being or 10 be
oontesbd by Borroer in good faftil in the ordinary Coum. of business and for
which adequate reserves have been ~ced. U." Prlodt~. Unim otherwiss prevlc~ -I-
to Lendar in "rittr,g, Borrower has nol enis'ed into or granted My smaurty
Agreements, or the Ung or altacimeant of any Security Inlereeta on or etheUng
any of the Colateral dreciy or indima- securing repayment of Borrower's Loan and
Mote. that wourd be prior or that raay in any wsr be suresor to Lender's Securry
~ and lights in and to such Cokteral~ Uing EffeoL This -I-nt, the Note, all
S~urlty Agraements d'dtv or ini-ify sectakig repayment of Borrower's Loan and
Nola and all of the ieelated Documents are binding upon Borrower as well U Upon
~ower'a sccceaaors, rep'esenllativea and assigns. and are legally nIorcmbls in
accordanes with their resceetive ~,.- C~~clal Pw~L BorrOwer Inendi to use the
Loan proceeds sefey for business or commorcimi related purpOeeL
<PAGE>
Einployee Benefit Plans. Each employm benell plan as to which Borrower may have
~V ilabilly com-es in all material respeos with all app~alle requrrets of law
and iggutettons, and (i) no Reporabie Event nor IrroNibed Transaction (as dened
in ERISA) has occurred with resi- 10 any such -. (1) Borrower has nol 'ttlhdrnwn
from any such - or Initiated stopa to do so. and (11l) no steps have been ~aken
te trtrrate any such ~L
Locatton of Borrower's Offices and Recortlie. BorrO~rs pisce of burinees, or
Borrower's chW :.-ll onion, if Borrower has more than ore place of business, is
iccated at wt'D Bokienrod inane, Geranwitown, MD WL uraesa Borrower has
designated ofherwtse In writing this location is aiso the cittos or oetces wise
Borrower keups its .,,,~ us ~ the ColeteraL
twitortoeleL M infomnallen hanaloatre or conteporancousty harewith t~id~hed by
Borroirer to lesnoer for the purposes of or in cow.cIion wUil this Agreement or
any' iran-dion conlemptaled trereby is, and all information laaeabr ~nishekl by
or en behaif of Borrower to Lender will be, true and accurate in every material
mspect on the date -of which such information la elated or cermed; and none of
such inlormation is or will be Irmompisee by omttinlf to state any ~ fect
nacessary to n,ake such loformalion not misladling.
Survival of Representations and Wasasnilpa- Borroor understands and agirses that
teander. without indefsndent Irn-alon, is rehing upon the above representattons
and ~ietes in asiending Lowi Advances to Borrower. Borrower luther agrees that
the tofeg~ Iep~ntatiors and warranties shall be corilnuing in nature and shall
rensain in full foroe and enact until such tithe as Borr~ Indeotedness shall be
- - In fuit. or uni this Agreement shall be terfunated in the manner ~derl a~
wivehever is the last to cocor.
AFFIttMATIVE COVENANT:. Borrower' c~rats and agrees with Lender thet, w~~e this
Ag,ee- is in elbaf, Borrower w; Utitiot~ Prompity ~ Lander in wrttlng of (a) all
material adverse dilanees in Borrower's financial condition, and ~) all esising
and all tl'reatened litigation, cw~ investigatons, admirtistalive procoedings or
stmllar acttons ~tcctirg Borrower or any Gueranlor wllch co~d mat~ aftuct the
unanctal ccndtion of Borrower or the ilnancial corolition of any Guarantor.
FinanaW IOecO~a- llaintaln lis bcoks and reoords In ecoordaocs wllhger~ly wasp
led accounting prtnctptes, applied on a ~slstent basis, and permit Lanclar to
earnire and audit Borrower's books and records at all raascnabb Um~ lccnclal
SWenenia- Furrish tender WII~ as acon as avalable. but In no event later than
on. hundmd twenty (120) days alter the end of eacl' fiscal year, Borrower's
balence sleest and income slalernent for the year -ti audited by a certtod
pubilo accountant Saustactory to Lender, end, U Soon U mmkbie, but in no event
later than thirty (30) days alter the and of each ltscet qualter, ~ balance
shesi and profit and loss sa~t for the -ied ended, prepared and apriled as
correct to the best kn-sdge and beluf by Borrower's chic' financial cfker or
other -Eb.rioer or person aconittabis to Lender. M itnancal mpods 'qutred to be
prc,,lded under this Agreement shall be prepared In accordance with pun-dy
acoepted accounllng pfln~ apIsUed en a cor,sstent basts, and rerttaxl by
Sorroweras being trrre and coract. Addittoarni informatton. Furelsil such
addlionel Wormation and stalemurtis, lists of asasla end '-~~f, agl~u of
raevablas and psyables, Invenlory schediius, bu~t~ ~casts, tax nefwns, and other
reports wilh respeci to Borrower's financial rondilon and busIness operation" a"
tender may r~quest from ume to Iftie. Financial Covenants and RatioL Co~ly with
the following covenants and ratios:
Tengilee Ne~WDnh. Reflect a, m,,',,,~Te~~1e Ne?Woith8fnof ieee th~ 9~.520.OOO.~O
by January 31. 15I~ end Inc~~a.ing the minimum Tangible NetWorth by e2OO.OOO~Oo
each quarter therealte,. U 12~1~199S L~un No 00001 LOAN AGREEMENT Page 5
(ConUmied) I ~ ~ Net Worili Rallo. lialsiIn a silo ci Total lasbEtles
toTa~~~lalfel Worth of tern than US to ISL
cunani Ratio. Ntalnleln a silo of Cimunt A-mt' 10 CuIttani Umblililas in eem of
iao to i~ ~mpt as ~ded a~oyw. alit con-ahona ma~to ~ comollance with tile
netiUkWments centained in INs t:aragm~ shall be mmd. in accordance wlIh
ganenally acoceed accounting ~les. api:lled on a coruistent baste, and ceeliled
by Borowerm being trim and su,~:
iiwwance~ Maintain Ilire and other 115k Insunance. P'-~~u liabItEy ~msnce, and
such other Inswance as Lender may lirom Ime to lime
IUI$Onet~ re:lirlre with naspentlo ~ properties and epersUone,, in lorrn,
amotanla. covensees and with InsLiuflO. compan~ ~ to ~mncler. ~tower,- upon re~
ci Lencler. wit daleer to Lender from lime to lime tile policies or ceruficafes
of Insurance in
lorm saistactory 10 Lencier. ln~ding sliptiliattons that ~:: wit not be
Cancellel or diminishafi without at laaat Ilitty ~) days' - wrfIen noflorn to
Lender. Each insisanom polley alao thai Incltidi an endorsement pr~ding that
noterage in fever Of Lender wi' not be "n-md in any way by any act, omlaelon or
deatilit of Borrower or any other person. in connection with alit pcllciea -mit.
'mets in whi EAndier heios or Is .. a sacLNftv inlerest for tile Loans. Borrower
will prov~e Lender with such loss pnyatlle or other endorsements as Lender may
laattrwicu U-IL Furrish Ia Lender, upon raci- ci Lender,m~ on each aesing
in,~nom ~Icy aloowing such i#Ww~stlen as Lander may masnabty nae-. Inciwding
without llmftton the following: (a) tilem of the irsurar, ~) the risks insured:
(c) tile amo~ ci the poi~~; (d) the properlim ln:ur~: (a) the then oturent
peopety vlitues on tile basis ci wtycn fruwance has been Obtalnad, and tile
mannur of detorntinlno tilesa varrn~ and (1) the -ration dete ci tilep~. in
adillon, upon reqLiesI of t"ander ~ow~ notmore often than arnua~ly), Borrower WE
have an indq~~rt appiubw uhftectorr' to Lender dotmine, as appicable, 'he actual
cash value or r-.fcerr.nt cost of any
<PAGE>
Coateral. The cost ci such appraisal shill be palel by Borrower.
Other ~ ~ with afl tmC und aoi'dklora ef as other matartaf aenlenanti whether
flow er heimifter exbtlng. between ionte'~ - any ~,,4 paity efti ro"'yL8f~er
kuwefately fri wTftkig of any defaut in IoMig~Im~n with any J~- uucli
agreements.
Loan Proceeds. Us. all Loan proceeds solely '0' tile lottowing sPcEc purocaes:
to srotrlde at3ort term wofictog c-tel. Tacis, Citargug end tlte~ Pay and d~rge
when due all of ifs lnd~ladress and Obigationa. including witheut ilvitaton alit
assessments, taxes, g~mmental char!-, levies and tie'., of every kind and
nature, -osad upon Bo'mwar or 115 properties. income, or proftis, priorto tile
date on which -ties would atlach, and all tewiul cirnirni that. if unpaid, might
become a lien or charge upon any ci Borrower's pro-.s, income, or cr~ Provided
howevter. Boroower wit not be required to pay and discharge any such naeeirmant,
tax. charg., levy. lien or claim 50 long as (a) the legmitly of the sam, shalt
be contested in go~ fisith by appropriele proaa:llngi, and (b) Borrower shall
have establlshad on its beaks adequale reeervea with naspect to such contested
aisessment, tar. cherge. ~,, tian, or cialm in accordance with ~ accepted
accounting pracli. Borrower, upon demand of Lender. will futTlish to Lender
evidence of payment of tile assessments, taxes. ciages. tev:ei~ ~ and claims and
wit authort~ the appropriate governmental official to deilver to Lender at any
time a written statement of any assessments, till,, charges, ~ lief~ and caima
sgalnsl Borrower's properties. income, or profits.
Performance. Perl'rm and compry with ill terms. conditiona, and provisions set
forth in this -I-ni and In tile Relai~ Documents in a Mfm~ manner, and promptly
notify Lender if Borrower learns ci tile occunence of any event which
constitutes an Event of Default under this Agreornent or under any of the
Related Oocument~
Operationa. Melntain eeecullve and management pemonni' with subsianialty tile
sarn, qumlicalons and expedence as tile pnsaent executive and management
personreel: ~de written neltoe to Lender ci any change in executive and
na~e,r'ent p~mannel; condud its businam aflii~ in a reaao~le and prudent manner
and in corn-Ice with alit app~a:le federal. state and municipal laws,
oroinancea, rules and reglidions respecting its properbm, charters, busi~aes end
Operalons, inctuding ~out limitation, c~aro:e with the Americana Wih Disaltiltea
Ad and with all minimum funding standards and other requlrements ci EIIIISA and
other laws appicatila to Borrcwers employee benelit i:la~
Inspecuon. Permit employms or agents of Lender at any ~onable lime 10 Inspect
any and alit Collateral for the Loan or Loans and Bortower's ether properlies
and to ~ or audit Borrower's books. accounts, and records and to make copies and
menroranda of Borrower's books, accounts, and recordL if Bcrronee now or at any
time hereafter maintains any records ~ncludlng without Imitaliton computer
generated records and cornputer softwane programs for the generation of ~uch
necords) in tile poeeessiion cia third -V. Borrower, upon request of Lender.
shalt flout' such party Ia permit Lander free access to such rucords at alit
reasonable times and to provide Lender with cooles of any ri~ttls U may request.
all at Borrower's e:q:,nss,
Compliance Cenitficate. Uniess waived In writing by leder, provide Lender at
least annually and at the tima of each disbursement ci Loan proceeds with a
certificate executed by Borrower's oteaf finencimi olftcer, or other ortlcer or
I:erson acceptacle to Lender, aertlying that the representations and warranitee
set forth in this Agreement are true and correct as of the date ci the
certifteate and further certielnill that. as of the date of the certlilcate, no
Event of Default asists under tills Agreement
Environmental Contilo-ance and Raporta. Borrower shall ccmpiy In all nesp~ with
alit environmental proteetlon ladosil, state and local laws. statutes,
regtlations and ordinances: not osulse or penn to exist, as a ."s'~ of an
Intentional or unlintentional action or omission on its - or on the part of any
third patty, on pro-V owned andfor cocupied by Borrower, any em~onmental
aattvtty where damage may nasult to tile en~onment, uniess such envlnonmentai
acivilyis pursuent to and In co~Ian~~ with tile contiltions of a permit lesued
by tile aporapriato federal, state or local governreental authorilies: shall
turnish to Lander promptly and in any event wtihin thity ~) days after receipt
themof a copy of any notice, summons, Ian, cielon, diractive, latter or other
communication tram any gc"ernmental agency or instrumentallty concerning any
inlenUonal or unintentional ~ion or omission en Borrower's part in connection
with any environmental ~ whether or not there is damage Ia the environment
andlor other nalural nasGWc~
Additional Amura,,c~ Make, exu'cute and delivar to Lender such prcmlsscry notes,
mcrtgages, deits of trust, securtty agfn~rts, inancing statements, instruments,
documents and other agreements as Lender or its attorneys may reasonably request
to evidence and aecure the Loans and to perfect alit ~trtly inleresta.
RECOVERY OF ADDiTIONAL COSTS. if the Imposition of or any change in any law.
rule. regulation or gui:telira, or the Interpratatton or applicalion of any
thereof by any court or udmirsa live or governnaantal authodly (including any
request or policy not having the force of law) shall impose. madly or mako
applicable any taxes (except U.S. federal, slate or tacal Income or franchise
taxes imposed on Lender), nesar"e requirements. -~' adequacy requirements or
other obligations which would (a) incrasse tile cost to Lender for extending or
raelntaining the credit facilities to which tills Agreement relates, ~) reduce
the amounts payable to Lender under tills -I-nt or tile Related Documents, or
(c) reduce tile rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facIlities to which this Agremnt relates.
Ihen Borrower agnees to pay Lender such addlUonal amounts as wit compensate
Lender itteafor, w.*i Uve (5) days atter Lender's written demand for such
payment, which demand shsU be accompanied by an eppianation ci such l,nposition
or chw~ and a calculation in reasonable deteif of the additional amounts pavable
by Borrower, which erparation and caicuetions shall be conclusive In the absence
of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is In effect, Borrower shall not, without the IOlcr wrttten consent of
Lender:
indebtedness and Liena. (a) Except for trade debt incurred In ihe normal course
of business and indebtedness to Lender contemplated by this
<PAGE>
U 1 2-1~1995 LOAN AGREEMENT Page 6 Loati ND 00001 - (ConUmi.d) A'wn.n~ Oea~ ~ Cr
assume iteebtedness for b~EYowW money. Iftoluding C- ""'- ~) -epi as allowedas a
Parirrited u.n, :.'~ inansfer. morl~ge, assign, -cige, ~ grant a aecurily iniest
in, or any of 8wmw~~ mu~%r (0)... withnecoue any of ~ mogowis, to leandar. "~m
aeg~~ "~ in -w .n. taraeaa,,, e~- 20.OOO.OO Oon~ of O-omL (a) Erigeog in any
buelnees ~ aialsuii~ eellanant than thorn in whoh sorrow~ Ia prasently angageel
~) orceaseSsil ~teralEonR. Equidmia, "~h ~ acqdlre or cioidsle with anyother ~,
- - nwn~ iwove or transfer out el the ortllnary course of bwinm, Co) pay any ohis
en B~ywier'e afok (other than ~ pm~ In as st~dc). ~ that outwIiluIm~ the ~ but
only ee fooli as no Event of D~bij has o~wi and IC ecotinuing or would result
Irom the payment of ~ V ~ tea ~$ub-tar $ Corporrtlien~ - daithati in the ~ ""-
Coda - 1~ as en~n;ied), ilonower may pay cash ~ on illa 'toll. shrn~~wm *wn urn
to lima in minourie naoeeeey to enaille the aharehokters topay incaoe taxi. and
- -ake ~n'ated kiobma fa'r payments to ~ their "'~ undar '~' and state tear which
aissa - - their ea~ - ~ of a ~ohi~ $ COvpWdon bmum of their ow~ of ~raa of stook
of Boiv~wur, or (d) pINchum or naera any of uorr~ autsta~~ng haaaa or aMer or
amend 8orroww'e C- ekuci~~
- -~. Aee-Im and ~eraali~ (a) Loan, Insset in or ed~ai~ rnoney or aeaete, ~ p~eae,
cnaafe or acquire any lnierestinanv oiher n~f~ Or Wily, or (c) iflOLv any
~ltgaton ass-or guarantor ether then in the ~ course of bUII-L
CEBSATION OF ~~MIICEI. if leandar his made any oommlrnent to malee any Loan to
~mowar, whelter undor thip -I-nt or under any other agraament~ ~dar ahit have no
o~llon to make Loan Aduenoas or to dieburee Lean pmmeeda V'. (a) 9on'orer or any
Oue~nior is in delauri under the terms of Ihie Ag~ or any of the flawed
Documenis Or any ether aiire~ that Berreer or any Guarantor has wilh Lender; ~)
Borrower or any ~wnatoor Inaavt, ill-a -Eon in bankruptcy or similar pm--. or IC
~u;lgnd a bankrupt; (c) there occurs a material ~ change in Boirowere llaanlai
cond~ in Rh. Unanclal oo~IIOn of any Guarantor, or in the value of any
Collateral ee'~ any Loan; (dl arw Guarantor i.eks, deima Or otl'eh-ee ~ to
llmlt. madifr or ~voke such Gimrrnnr'a guaranty of the Loan or any other loan
with Lender
NON~~~OE ~ Borrower aems lopay Lender ragutar q~terry payments of d aoorued un~d
naf~~ge lees due as of each payrnent dale, ~ 10.1906 with all sueeect- no~~ge
toe payments due on the mme - of each ~tor, ~raaflor. m. daly noi~~ge tee is
compofef on a 3851~ ~e Intrest basis; that Is, by ipplying the ratio of 03%
annuai nor~e rate over a year of 355 days, Inultipied by the unused --ilisal
liaia~
RIGKr OF SETOFF, Borrewer grants to Lender a contractual posmm~ mcis~ lIlSareat
in, and ftereby aeatgna, convays, delh,w:~ pJadges, and ~stare to Lender all
Borrower'. vighi. III. and Interest In and to, Bwt~ socourts with Lender
(whether olkoking, sa'4"g:~ Or eome other account), Endudng ~ 5mllatlen all
aooounts bald Jolnity with someone ellea and all accounte Borrower may open in
the hiure, ecoluding ho~~~ever all RA, Keogh. end Irsart anceunte. Iloorrowe'
LIIhwsia Lender1 to the extent permitled by appkbte law, to charge Cr seloff all
sums owing on the lndebtadr~ against any and a' such anceunts.
EVDITS OF DEFAILT. Each of the tolawing shall constit~j an EvenI of Defeut under
thie ~
Defeuft on ~bledlneas, Fallure of Borivwgr to make any payment when due on the
Indebt~~
Other ~. Fallure of Borrower or any Grantor to co-v with or to irerlorm when due
any other terrn, obligetion, cove~mrt or condi~on conlalned in lie Agree- or in
any of the Related Documeria, or liallure of Borrower to co'npty with or to ~rn
any other terrn, obfpation, covenant or ~ onrtte'ned in any other aQreanant
between Lender and lerewer.
Deltaull in Favor of Thlnf l",,~-t Skoidd Bormw'ar or any Grsnlor deteult under
any loan. exteraslon of or~~ security agreement, pursh~ or satee agfi~ or any
ether egreggent. in llaor of any other or pemon tfaat "lay mmiu~mly ..I any of
aorrowarrt propeny or Bwr~r'p or any ~aiir'a ibmv to rppay the Loin. or ~,,,,..,
their 'uapeclh. onggalons under tt,ts -I-nt or any of the Related Documw~
Fallee 8talemats, Anr' warranty, -raaenta- or utaterr~ made or turniphed to
Lender by or on behalf of Boreower or any Grantor under this Agreement or the
Related Documents la false or rnielmding in any malitat -tat the tirn made or
ftwrished, Cr beooroos jelse or misloading at any time l,,,,--'6.
DeItfOItrre COBfl~fall~Ion. This Agrewnpnt or any of the Related Dccurrents
ceeees 10 be in t% force and effect (Including allure of any ~ec'1ItV Agreement
to create a Vald and pml~ctd ~ interest) al any Iu and for any rrns~
loeolYenaV. The diaolution or lenninsiton of Borrowr~ uditeos as a golog
busfneas, or a trustee or ..~ is appointed for Borrower or for alt Ore a~tatiei
porlon of the of Borrower, or Borrower makes age- ~reeent for the benuft of
Borrower's oreditom or B~ur film for Ixi.Ir~y, or en InOoluntery bsrk~ -Eon is
tilad agalnst Borrower and such Involuntary pgan rerttalns un~~lad for ~bdV (60)
days,
Ciedilor or Forteflum P~Ocein~ Commanoernent of foreclosure Or fortlittre
proomings, whether by ~ pmc~n~ sef~,
<PAGE>
raposseasion or any ether ~titd, by any creditor of Borrower, any ofedlor of any
Grantor against any oollateral securtng the Indebtednes, or by any governmental
~ancy. Tha includesa I;arnlshmw~ attach-I, or levy on or of any of Borrower's
deposit accounis wth Lerider.
AEe,rera,e CIimii~AmaIrlal adverpe onange ~ in lorrower'e Ir"arcal.cond~~on,~
EFFECT OF AN EVENT OF DEFAIAILT. if any ~vant of Iieieuit shall coolir, m'oept
wares otherwisa prvvi~ in it'is Agrernineni or the F~lated 0ocixn~, all com~ntns
and Dbligattons of Lender under this -'II- or the Related OocWTI.a or any other
agreement ir',medlatellr wil terMInate (including any obligelon to make Loan
Advanoas or disbureamants), and, al l"ender,a optioo, allaun's owing in
connecuon with the Loans, indudng all p'fr- lr,iereat. and all other laes' costs
and clesrges, if any, wllll becorn lmmantsleiy due and payable, all without
nollorn of any kind to o,,ower, except that in the - of en Event of Dofault of
the typa dmoribe:l in the ~reef',e~ subsectIon ibowa, such mocelaration shall be
automulic and flot optionaL in addItion, Lender shall have all the rights and
,u..w51 provided in the Related Daurents or avallable at law, In equty, or
otherwe. Exoe- as may be proIiltt~ by aooIlcable law, all of Lender's rights and
remulee shall be cumulative and may be execteed singularly Cr concurrentty.
Election by Lender to pursue any remady Shall not eaclude pws,'tl of anyothor
remedy, and an elecion to make ewpDndltures or to take ~on to -~orm a,,
obigallon of Borrower or or any Grantor shall not aftoct Lender's right to ~LC a
detaul and to axerolse Its ~hts and remedies.
MISCELLANEOUS PROVISIOIIS. The fofowing miscellaneous prov~sicns are a pert ci
this Agreement:
Amen'fmentL This Agreemerif, together wjth any R~lated Documents, consUtutes Ihe
entire understandluig and agreement of thu parties as to the
I
I
1~-1~1995 LOAN AGREEMENT Page 7
Lo.nHoOO~~1 (ConUiwed~.
metier,..' toth in Itil Agneemeni No alteralon of or amendment to thls AGreement
shati be elbdve unim grvmn w' wrling and "oneel by the party or-i--Il to be
char- or bound by the alteration or anieridmeriL
Appllcbllle La.. ml. Agreement shalt be Oovernd by. con*u.d and e~meel in ~-
with the laws of the slat. of Ma~Mmr-L LENDER AND BORROWER EACH ilEREBY WAIVE
ThIAL BY ~RNiY IN MW ATTION OR PROEEDIN~ TO WIIICK LENDER OR BORIIIDWIR MAY BE
PAliiITI~ ARISING our OF, OR itl ANY WAY PERTAINING To, TilIlS ~ IT 18 AGREED
TIIIAT THIS WAIVER CON&rn~S A WAIVER OF TRIAL IllY JWIY OF ALL. CLAIMS A~EIST
ALL PARTIES TO aUCH ACTIORS OR PROCEEDIMG8. THIS WAIVER IS KNOWINGLY, WILILINGLY
AND VOLWIrARILY MA~ BY LIND~ AND BORROWER, AND LENDER AND IIloRROWER EACH
IIEREBY EIlEI'RESIBlT TIIIAT ND REPRESENTATIONS OF FACT OR OPINiON HAVE BEEN
MADE IBY ANY INDIVIDLIAL TO INDUCE THIS WAIVER OF TRIAL BY JWUY OR To EN ANY WAY
MODIFY OR NILUFY ITS EFFECT. BORROWER RJRT~~ RIltRAISENTS THAT DOF~WIER HAS
BIDEN REPRE~ED IN TIE SIGNING OF THIS AOREEMIBNT AND IN ml MAAING OF THIS WAIVER
BY INOEPEI~ IEGAL COLPIS~ SELECTED OF BORROWER'S OWN FREE WILL, AND TIIIAT
BORROWER HAS HAD THE OPt,OIIIIIINITY TO DISCUSS THIS WAIVER WITh COUNS~ CapIlon
Heedin~~ Caption lecadings in this -I-nt are for convenience purposes only and
are not 10 be used to in'.- or define iha of the AgreemmnL
Niumpia Parties, Cor;-e Authority. A" obligations of Borrower under Ills
Agraement sIsali be jolnt~and several, and all retirrencea to BorrOwer shall
mean each and every Borrower. Thts means Ihat each of the Borrowem sigrrrg below
Is miponsibte for WI obNgetton. in this Agreement.
ConaenI to ~xtm~Ictlon. Borrower Irrevocably submits to the Jwisdlcllon of any
state or bderal cowt aitting in the Stale of IaarI-nd over any suit, motion, or
pr-dlng arIsing rut of or relatlng to this AgreewienL Borrower irrevocably
welvea, to the issleat m(ient pefmied by law. any ob~n thai Borrower may now or
irereafter have to the taying of venue of any such suit, action. or procmdtrg
brought in any such court and any claim Ihal any such suit, action. or pro~~oing
brought in any such Cowl ha. been braught In an Inconvenlenl looi~ Rnal Judgment
in any such suit, edion, or prooci'irg bnougl"l in any such court shall be
conclusive and binding upon Borrower and may be enforced in any cowl In which
Borrower is subject to jurtsCSclion by a sull upon such judgment provided that L
of procea, Is e~ctett upon Borrower as provided in this -I-nt or as oth~se
per,nlttetl by applicable law.
Consent to Lean ParUcipalion. Borrower agrees and consenis to Lendet's Sale or
trarster. ~ now Or laler. of one or more particifetion interests in ihe Loans to
one or more purchasers, whether reatal or unrelated to Lender. Lender may
provide. without any Unitatori whaIscevet, to any one or nrore purchasers. or
potential p~asers. eny information or knowtedge Lender may have about Borrower
or about any other matter relating to the Loan, and Borrower hereby wah~as any
rghts to -lacy it may have wiih nesoeci to such matte's. Borrower additionally
waives any and at notices of sate of l'artclpailon Interests, as well as an
noticm of any ripurciusa of such panielpation interests. Borrower also agrees
that the purchases of any such partlcipallan interests witi be considered as the
tbsol~ owners of such Interests In the Loans and win have all the rights granted
under the partielpation agreemeni or aereernents governing the sale of such
participation interes~ Borrower hxther wihms at rights of olfset or counterclaim
that II may have now or laler agaInst Lender or against any purchaser of such a
piatl~aIon intersst and unconditionally agrees that either Lender or such
purchaser may intorce liorrower's obIloation under the Loans ir'anpactva of the
failure or Insolvency of any holder of any interest in the Loans. Borrower ~iher
agrees thai the purchaser of any such pattielpation Interests may enforoe its
<PAGE>
interests irr',Spective of any persoraal dalme or deferises that Borrower may
have against Lender. 4
Cosie - Expenese. Borrower agrees to pay upon demand alt ol ~ incurred in
connection with this Agreement \ or in connection with the Loans made pursrrant
10 this Agreement. ~ject to any uffis under applicable dew, if Lender hines an
attorney to haip enforce this Agreement or to colect any Indebtedness, Borrower
agrees to pay Lender's altorneys' tees, and all of Lender's olher collection
expenses whether or not Ifteig is a lawsuit ansi PncIi~~ng legal ~cpnses lor
bankruptcy pro~ecingL
NoticeL M notices required to be -~ under this Agreement ahel be given in
wiling, may be sent by tetelscsimi1, and staill be el~mctve when actually
delivered if hand deilvered or when deposhed witi, a nationally reeognI~d
~vefliglil courter or deposited as certilied or mgiiteeed rrieil in the United
s'atea mat, lirsI clasa, p-- prepaiil. addressed to the -V to wiurt the notlee
is to be given at the addmm shown abovL Any ~ may change Its address for
r,otices under this Agreement by giving tornael wiffiwi nottee to the other
parties, specifying that the purpose of tP'e notice is to change the patty's
address. To the m~ant pennined by applicabte law, Ii there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers. For
notIce purposes. Borrower agrees lo keep Lender Informed at ati limes of
9orrower's cunent addressias).
&evereblldiy. If a court of cornpeterttt JurisdIction Inds any provision of it's
Agreement 10 lii in~i~Ud or unenforceable as to any person or circumstance, such
Ilndtng shall not render that provtsion Invatid or unenforceabte as to any other
persons or circumstances, if lea~le, any such offending provIsion shalt be
deemsd to be m~ied to be within the Imits of enfoeceability or vafldiiy;
however, if the offending peoyI$E.on canrict be so modified, If shall be
siricken and all OIlier provIsIons of this Agreement In all other respects shall
remain valId and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the conled of any
provIsions of this Agreement makes it appropriate, including without Iimi~iott
any ruoresenlation, warranty or coveaant, the word "Itorrower' - used herein
shalt Include all subsidiaries and aUlates of Borrower. Notwithstanditg the
foregoing however, under no circumstances shalt this Agreement be consirued to
require Lender 10 make any Loan or other tinancii,I accommodalion to any
subsidlary or affIlIate of Borrower.
Succassiors end Assigns. M covenants and agmenerts contained by or on behalf of
Borrower shall bind its successors and assigns and shall inure to the benefit of
Lender, Its successors and assigns. Borrower shall not. however, have the right
to assign its rights under this Agreement or any interest therein, without the
prior written consent of Lender.
SurvIval. M warranties, represenlatlons, and agreements of Borrower in this
Agreement shall survive the mal~ng of the Loan or Loans conte~~lated hereby, and
shall be deemed made and redated by Borrower at the time of the ma~ng of each
disbursement of Loan proceeds. Time Is of the Essence. Time is of the essence in
the performance of this -I-ni.
Waiver. indugacce by Lender with respect to any of the terms and conditions of
this Agreement or the failure of Lender to exencstt any of its rights under this
Agneernent shall not Constitute a waiver thereof, and Borrower shall remain
liable for the strict pwformanc~ ol such terms and conditions unti this
Agreement shall be terminated. No provision of this Agreement may be walved or
modfted orally, but all such waivers or modifications shalt be In writing.
Whenever the consent of Lender is requimd under this A~nwit, the granting of
such conaent by Landw in one Instance shal not constifute Lendet's continuing
consent in subsequent instance's, and In eti ceaes such consent rnsy be gmnied
or withheld in the sole discretion of Lender. 1~-1~1995 LOAN AGREEMENT Page 7
LnanNoOOOOl (ConUmi.d~.
matters aet torth ~ this AgreumwnL No alteration of or amandment to this A'eem~
sIasIl be eIb~e unlem ~n in wrung and SlEnesi by the party or pwIiee IOU~ht lobe
char- or bowid by tha alteration or amendment.
ApplIcab~ Lalir. ml: Aoresrnertt shil be goverieri by. rrors~erl and u:l~rcri in
locordence with the "WI oft. State of M-InCL LENDER AND BORROWER EACH ~RElBY
WAIVE ThIAL BY ~AIY IN ANY ATTION OR PA~IEEEDliG TO WIliCH LENDER OR BORl'tO~
MAY BE PARTIES, ARISING our OF, OR IN ANY WAY PERTAIIfING To, ThIS AilI-MEN~. IT
IS AGREED THAT TIfES WA~VER CONSTETurES A WAIVER OF TRIAL BY JLMIY OF ALL CLAIMS
AGAINST ALL PARTIES TO SUCIt ACTIONS OR PFIOCEIBDIMG5. THIS WAIVER IS KNOWINGLY1
WILLINGLY AND VOLWrrARLY MADE By IlIENDER AND 8O~IIOWE~ AND L~ER AND BORROWER
IEACII IIIIEREBY REPRESENT THAT NO ~PRESENTATIONS OF FACT OR OPINIOII HAVE DEEN
MADE BY AMY IMOIVIDIIiAL To I~CE THIS WAIEER OF ThIAL BY ~Y OR TO EN ANY WAY
MODIFY OR NILIUFY ITS EFFECT. BORROWER FURTHER R~IIBell'S THAT BORROWER IlAtti
BEEN REPRESENTED IN ThE SIGNING OF This AGREEMENT AND IN THE MAKING OF ThIS
WAIVER BY INDEPENDENT I,E~AL COWISEL, SELECTED OF BORROWER'S OWN FREE WILL, AND
THAT BORROWER HAS KAD TrIE OPPOFmMITY TO DISCUSS THIS WAIVER WITh COIINSEIL,
Caption IllsedIn~ Caption headings in this Agnaement are tor conventence
purposes oriy and are not to be used 10 interpret or define thu provisions of
this -I-~
Multipla Partles, Co~e Authority. M obtigallons of Borrower under this Agreement
shell be jdnt~and several, and all relerenoes to Borrower shatirroan each and
every Borrower. Tills means that each of the Borrowers signing below is
nesponsillis for all obtigelons in lils ~ement.
Conamit 30 ~wimdictlon. Bovevww Irrevocably submIts to the jwlsdiion of any
tltate or federal court ~ in thu Slate of Mag$and over any suil, action, or
prcoerl~ artelng cut of or nelaling to this Agreewmnt. Borrower ~ waives1 to the
fuest urtent ~,,,,,I:j by law, any abjedian that Borrower may now or teseefter
have to the Taying of venue of any such suit, action, or proseeding brought in
any such court and
<PAGE>
any claim that any such suit, action. or prooeeding brougI't in any such Court
has haer, brought in an Inconvenient forum. Rnai Judgment in any such suit.
act,on, or prooseing brought in any such court shall be conclusive and tindirg
upon Borrower and may be ent~n~d in any court In which Borrower Is sub~ to
MiEdiction bye suit upon such Iudgment provideet that sorvIoe of process ts
efected upon Borrower as provtded In this Agreement or as otherwise perrnttterl
hy appiloable law.
Consent to Loan PartIcipsilon. Borrower agrees and consents to Lender's sale or
transfer. whether now or later. of one or more part~pation interests in thu
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide, without any umitatten whaisoaver, to any one or more puechasers, or
potential purchasers, any information or kno*~ge Lender may have about Borrower
or about any other matter relating to the Loan, and Borrower i~uLy waives any
rrghts to prlvaoy itmay have with respect to such matters. Borrower additionally
welves any and a' notices of sale of participation interests, as well as a'
notices of any repurchase of such pailiepation interests. Borrower also agrees
that the purchasers of any such participalon inlerests wiil be con:idersd as thu
absolute owners of such Inierests In the Loans end wit have a~ the rights graht~
under the particlpatfon agreement or agreements govuaning the sate of such
participation intenes~ Borrower ttrther waives all rights of cilset or
counterclaim that Ii may have now or later agaInst Lender or against any
purchaser of such a participalon intersst and unconditionally agrees that either
Lender or such purchaser may intwc Borrower's oblicatlon under the Loans
insspactivi of the failure or irncnc'ency of any holder of any intreat in the
LoariL Borrower further agrees tiat the purchaser of any such participation
Interests may enforce, its interests irresteective of any personal olain's or
defsnses that Borrower may have against Lender.
Coate and Expanase. Borrower aorses to pay upon demand all of
tender's*~~~I~perses incurred in connection with this Agreement \ or In
connection with the loans made pursuant to this AgreemenL Sub~ to any Ilmas
under applicable iew, if Lender hses an attorney to help enforce this Agreemant
or to ooilect any Intlebtedness, Borrower agrees to pay Lefiders aftorneys'
tees. end a' of Lender's other cotoction expenses. whether or not there Is a
lawsulI and lnciuotng legal axpenaes for bankruptcy proc~~~
NoticeL All roticas r'estuired to be given under 11,15 Agreement shall be given
in writlng. may be sent by tetefscsii~ie, and shalt be eftecli"e when actu,ty
delivered if hand delivered or when deposited with a nationally recogrilsed
overnight courier or deposited as certilled or rggisteent maD in the Unted
Stales mel, first class, P05-a prepaid, addressed to the party to whom the
notice is to be gIven at the address shown above. Any pa'rr may change 115
address for nokes under this Agreement by giving format Wrfflen notice to the
other partles, apeoifvirg Ihal the purpose of t~ig notice is to change the
patty's address. To the extent permilled by applicable law, if tirera Is more
than one Borrower, notice to any Borrower w'U constitute notice to all
Borrowers. For notice purposes. Borrower agrees to keep Lender informed at CU
times of Borrower's current address(es).
SeverablIfty. If a court of Oonpetent jurisdiction md: any provision of Ihis
Agreemeni 10 be Invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or Linenforceabte as to any
other persons or circumstances, if ~aslble, any such offending provision shalt
be deereed to be moditted to be within the llmlts of enforceability or veidlly;
however, H the offending provision cannot be so modIfied, it shalt be Sfricken
end a' other provslons of this Agreement in all other nespects shell remaIn
"slid and enforceable.
Subakitarlee a,,,f Affillataa of Bormwer. To the extent the ~tie't of any
provisions of this Agreement mekes it appropriate. including wuhout limlIstlon
any representation, warranty or covenant, the word "lIOrroWW~ as used leren
still Include all eubeldiu~ and atellalea of Borrower. ~olwitsanding the
foregoing however, under no circumstances shall this Agreement be consfruef to
restule Lender to make any Loan or other financial accommodation to any
subeldiary or affiata of Borrower.
Succaaaors and Asaigna. All covenants and agreements contained by or on behalf
of Borrower shall bind Its successors and assigns and shalt inure to the benefit
of Lender, Its suooessors and assigns. Borrower shall not, howevur, have the
eight to assign its rights under this Agreemeni or any interest therein, without
the prior wrltten consent of Lender.
SurvIval. All warranties, represenlations, and agreements of Borrower in this
Agreement shalt survive the r,,ai,ing of the Loan or Loans conter"piated hereby.
and shalt be deemed made and reclateol by Borrower at the time ol the maidng of
eech disbursement of Loan proceeds.
Time 1101 the Essence. Time is of the essence In the performance of this
AgreemenI,
Waiver. Indutgerice by Lender with respect to any of the terms and conditiors of
this Agreernent or the falure of Lender to e~~se any of its rights under this
Agremant shalt not constitute a waiver ihereof, and Borrower shall remain Ilable
for the strict performance of such terms and conditions unIl this Agreement
shall be terminated. l'lo provision of this Agreement may be waived or modified
orally, bul at such waivsrs or moditteations shalt be In writing. Whenever the
consent of Lender is required under this Agree-I, the granting of such consent
by Lander in one instance shall not constitute Lende~ continwing corssenl in
subsequent inutancss, and In ati cases such consent nay be granted or wilineid
in the sole discretion of Lender. I
Ungatlon end CI~ No Ut-on. cwn~ ir,veeu~on, adminlainalve proceeding or simlier
adon (~g thorn for unxaat taxes) Sgainat Borrower is pending or tiresateriad.
and no other event has occurred which may mairilty ~ aI~md Borrower's 'Inanciat
condition or Pm-I. other than Egaton, claims, or other events, if any, that have
been cllsclosesl to and acknowledged by Lander in wrttfng. Turn. To the best ci
Borrower's knowtedg~. all tax netuens and -sorts of Borrower that are or warn
required to be ftlsd, have bean lied, and 'Ir taxes, aaeaas and ether
governmental charges have been paid in ft~ esoept those presently being or 10 be
oontesbd by Borroer in good faftil in the ordinary Coum. of business and for
which adequate reserves have been ~ced. U." Prlodt~. Unim otherwiss prevlc~ -I-
to Lendar in "rittr,g, Borrower has nol enis'ed into or granted My smaurty
Agreements, or the Ung or altacimeant of any Security Inlereeta on or etheUng
any of the Colateral dreciy or indima- securing repayment of Borrower's Loan and
Mote. that wourd be prior or that raay in any wsr be suresor to Lender's Securry
~ and lights in and to such Cokteral~ Uing EffeoL This -I-nt, the Note, all
S~urlty Agraements d'dtv or ini-ify sectakig repayment of Borrower's Loan and
Nola and all of the ieelated Documents are binding upon Borrower as well U Upon
~ower'a sccceaaors, rep'esenllativea and assigns. and are legally nIorcmbls in
accordanes with their resceetive ~,.- C~~clal Pw~L BorrOwer Inendi to use the
Loan proceeds sefey for business or commorcimi related purpOeeL
<PAGE>
Einployee Benefit Plans. Each employm benell plan as to which Borrower may have
~V ilabilly com-es in all material respeos with all app~alle requrrets of law
and iggutettons, and (i) no Reporabie Event nor IrroNibed Transaction (as dened
in ERISA) has occurred with resi- 10 any such -. (1) Borrower has nol 'ttlhdrnwn
from any such - or Initiated stopa to do so. and (11l) no steps have been ~aken
te trtrrate any such ~L
Locatton of Borrower's Offices and Recortlie. BorrO~rs pisce of burinees, or
Borrower's chW :.-ll onion, if Borrower has more than ore place of business, is
iccated at wt'D Bokienrod inane, Geranwitown, MD WL uraesa Borrower has
designated ofherwtse In writing this location is aiso the cittos or oetces wise
Borrower keups its .,,,~ us ~ the ColeteraL
twitortoeleL M infomnallen hanaloatre or conteporancousty harewith t~id~hed by
Borroirer to lesnoer for the purposes of or in cow.cIion wUil this Agreement or
any' iran-dion conlemptaled trereby is, and all information laaeabr ~nishekl by
or en behaif of Borrower to Lender will be, true and accurate in every material
mspect on the date -of which such information la elated or cermed; and none of
such inlormation is or will be Irmompisee by omttinlf to state any ~ fect
nacessary to n,ake such loformalion not misladling.
Survival of Representations and Wasasnilpa- Borroor understands and agirses that
teander. without indefsndent Irn-alon, is rehing upon the above representattons
and ~ietes in asiending Lowi Advances to Borrower. Borrower luther agrees that
the tofeg~ Iep~ntatiors and warranties shall be corilnuing in nature and shall
rensain in full foroe and enact until such tithe as Borr~ Indeotedness shall be
- - In fuit. or uni this Agreement shall be terfunated in the manner ~derl a~
wivehever is the last to cocor.
AFFIttMATIVE COVENANT:. Borrower' c~rats and agrees with Lender thet, w~~e this
Ag,ee- is in elbaf, Borrower w; Utitiot~ Prompity ~ Lander in wrttlng of (a) all
material adverse dilanees in Borrower's financial condition, and ~) all esising
and all tl'reatened litigation, cw~ investigatons, admirtistalive procoedings or
stmllar acttons ~tcctirg Borrower or any Gueranlor wllch co~d mat~ aftuct the
unanctal ccndtion of Borrower or the ilnancial corolition of any Guarantor.
FinanaW IOecO~a- llaintaln lis bcoks and reoords In ecoordaocs wllhger~ly wasp
led accounting prtnctptes, applied on a ~slstent basis, and permit Lanclar to
earnire and audit Borrower's books and records at all raascnabb Um~ lccnclal
SWenenia- Furrish tender WII~ as acon as avalable. but In no event later than
on. hundmd twenty (120) days alter the end of eacl' fiscal year, Borrower's
balence sleest and income slalernent for the year -ti audited by a certtod
pubilo accountant Saustactory to Lender, end, U Soon U mmkbie, but in no event
later than thirty (30) days alter the and of each ltscet qualter, ~ balance
shesi and profit and loss sa~t for the -ied ended, prepared and apriled as
correct to the best kn-sdge and beluf by Borrower's chic' financial cfker or
other -Eb.rioer or person aconittabis to Lender. M itnancal mpods 'qutred to be
prc,,lded under this Agreement shall be prepared In accordance with pun-dy
acoepted accounllng pfln~ apIsUed en a cor,sstent basts, and rerttaxl by
Sorroweras being trrre and coract. Addittoarni informatton. Furelsil such
addlionel Wormation and stalemurtis, lists of asasla end '-~~f, agl~u of
raevablas and psyables, Invenlory schediius, bu~t~ ~casts, tax nefwns, and other
reports wilh respeci to Borrower's financial rondilon and busIness operation" a"
tender may r~quest from ume to Iftie. Financial Covenants and RatioL Co~ly with
the following covenants and ratios:
Tengilee Ne~WDnh. Reflect a, m,,',,,~Te~~1e Ne?Woith8fnof ieee th~ 9~.520.OOO.~O
by January 31. 15I~ end Inc~~a.ing the minimum Tangible NetWorth by e2OO.OOO~Oo
each quarter therealte,. U 12~1~199S L~un No 00001 LOAN AGREEMENT Page 5
(ConUmied) I ~ ~ Net Worili Rallo. lialsiIn a silo ci Total lasbEtles
toTa~~~lalfel Worth of tern than US to ISL
cunani Ratio. Ntalnleln a silo of Cimunt A-mt' 10 CuIttani Umblililas in eem of
iao to i~ ~mpt as ~ded a~oyw. alit con-ahona ma~to ~ comollance with tile
netiUkWments centained in INs t:aragm~ shall be mmd. in accordance wlIh
ganenally acoceed accounting ~les. api:lled on a coruistent baste, and ceeliled
by Borowerm being trim and su,~:
iiwwance~ Maintain Ilire and other 115k Insunance. P'-~~u liabItEy ~msnce, and
such other Inswance as Lender may lirom Ime to lime
IUI$Onet~ re:lirlre with naspentlo ~ properties and epersUone,, in lorrn,
amotanla. covensees and with InsLiuflO. compan~ ~ to ~mncler. ~tower,- upon re~
ci Lencler. wit daleer to Lender from lime to lime tile policies or ceruficafes
of Insurance in
lorm saistactory 10 Lencier. ln~ding sliptiliattons that ~:: wit not be
Cancellel or diminishafi without at laaat Ilitty ~) days' - wrfIen noflorn to
Lender. Each insisanom polley alao thai Incltidi an endorsement pr~ding that
noterage in fever Of Lender wi' not be "n-md in any way by any act, omlaelon or
deatilit of Borrower or any other person. in connection with alit pcllciea -mit.
'mets in whi EAndier heios or Is .. a sacLNftv inlerest for tile Loans. Borrower
will prov~e Lender with such loss pnyatlle or other endorsements as Lender may
laattrwicu U-IL Furrish Ia Lender, upon raci- ci Lender,m~ on each aesing
in,~nom ~Icy aloowing such i#Ww~stlen as Lander may masnabty nae-. Inciwding
without llmftton the following: (a) tilem of the irsurar, ~) the risks insured:
(c) tile amo~ ci the poi~~; (d) the properlim ln:ur~: (a) the then oturent
peopety vlitues on tile basis ci wtycn fruwance has been Obtalnad, and tile
mannur of detorntinlno tilesa varrn~ and (1) the -ration dete ci tilep~. in
adillon, upon reqLiesI of t"ander ~ow~ notmore often than arnua~ly), Borrower WE
have an indq~~rt appiubw uhftectorr' to Lender dotmine, as appicable, 'he actual
cash value or r-.fcerr.nt cost of any
<PAGE>
Coateral. The cost ci such appraisal shill be palel by Borrower.
Other ~ ~ with afl tmC und aoi'dklora ef as other matartaf aenlenanti whether
flow er heimifter exbtlng. between ionte'~ - any ~,,4 paity efti ro"'yL8f~er
kuwefately fri wTftkig of any defaut in IoMig~Im~n with any J~- uucli
agreements.
Loan Proceeds. Us. all Loan proceeds solely '0' tile lottowing sPcEc purocaes:
to srotrlde at3ort term wofictog c-tel. Tacis, Citargug end tlte~ Pay and d~rge
when due all of ifs lnd~ladress and Obigationa. including witheut ilvitaton alit
assessments, taxes, g~mmental char!-, levies and tie'., of every kind and
nature, -osad upon Bo'mwar or 115 properties. income, or proftis, priorto tile
date on which -ties would atlach, and all tewiul cirnirni that. if unpaid, might
become a lien or charge upon any ci Borrower's pro-.s, income, or cr~ Provided
howevter. Boroower wit not be required to pay and discharge any such naeeirmant,
tax. charg., levy. lien or claim 50 long as (a) the legmitly of the sam, shalt
be contested in go~ fisith by appropriele proaa:llngi, and (b) Borrower shall
have establlshad on its beaks adequale reeervea with naspect to such contested
aisessment, tar. cherge. ~,, tian, or cialm in accordance with ~ accepted
accounting pracli. Borrower, upon demand of Lender. will futTlish to Lender
evidence of payment of tile assessments, taxes. ciages. tev:ei~ ~ and claims and
wit authort~ the appropriate governmental official to deilver to Lender at any
time a written statement of any assessments, till,, charges, ~ lief~ and caima
sgalnsl Borrower's properties. income, or profits.
Performance. Perl'rm and compry with ill terms. conditiona, and provisions set
forth in this -I-ni and In tile Relai~ Documents in a Mfm~ manner, and promptly
notify Lender if Borrower learns ci tile occunence of any event which
constitutes an Event of Default under this Agreornent or under any of the
Related Oocument~
Operationa. Melntain eeecullve and management pemonni' with subsianialty tile
sarn, qumlicalons and expedence as tile pnsaent executive and management
personreel: ~de written neltoe to Lender ci any change in executive and
na~e,r'ent p~mannel; condud its businam aflii~ in a reaao~le and prudent manner
and in corn-Ice with alit app~a:le federal. state and municipal laws,
oroinancea, rules and reglidions respecting its properbm, charters, busi~aes end
Operalons, inctuding ~out limitation, c~aro:e with the Americana Wih Disaltiltea
Ad and with all minimum funding standards and other requlrements ci EIIIISA and
other laws appicatila to Borrcwers employee benelit i:la~
Inspecuon. Permit employms or agents of Lender at any ~onable lime 10 Inspect
any and alit Collateral for the Loan or Loans and Bortower's ether properlies
and to ~ or audit Borrower's books. accounts, and records and to make copies and
menroranda of Borrower's books, accounts, and recordL if Bcrronee now or at any
time hereafter maintains any records ~ncludlng without Imitaliton computer
generated records and cornputer softwane programs for the generation of ~uch
necords) in tile poeeessiion cia third -V. Borrower, upon request of Lender.
shalt flout' such party Ia permit Lander free access to such rucords at alit
reasonable times and to provide Lender with cooles of any ri~ttls U may request.
all at Borrower's e:q:,nss,
Compliance Cenitficate. Uniess waived In writing by leder, provide Lender at
least annually and at the tima of each disbursement ci Loan proceeds with a
certificate executed by Borrower's oteaf finencimi olftcer, or other ortlcer or
I:erson acceptacle to Lender, aertlying that the representations and warranitee
set forth in this Agreement are true and correct as of the date ci the
certifteate and further certielnill that. as of the date of the certlilcate, no
Event of Default asists under tills Agreement
Environmental Contilo-ance and Raporta. Borrower shall ccmpiy In all nesp~ with
alit environmental proteetlon ladosil, state and local laws. statutes,
regtlations and ordinances: not osulse or penn to exist, as a ."s'~ of an
Intentional or unlintentional action or omission on its - or on the part of any
third patty, on pro-V owned andfor cocupied by Borrower, any em~onmental
aattvtty where damage may nasult to tile en~onment, uniess such envlnonmentai
acivilyis pursuent to and In co~Ian~~ with tile contiltions of a permit lesued
by tile aporapriato federal, state or local governreental authorilies: shall
turnish to Lander promptly and in any event wtihin thity ~) days after receipt
themof a copy of any notice, summons, Ian, cielon, diractive, latter or other
communication tram any gc"ernmental agency or instrumentallty concerning any
inlenUonal or unintentional ~ion or omission en Borrower's part in connection
with any environmental ~ whether or not there is damage Ia the environment
andlor other nalural nasGWc~
Additional Amura,,c~ Make, exu'cute and delivar to Lender such prcmlsscry notes,
mcrtgages, deits of trust, securtty agfn~rts, inancing statements, instruments,
documents and other agreements as Lender or its attorneys may reasonably request
to evidence and aecure the Loans and to perfect alit ~trtly inleresta.
RECOVERY OF ADDiTIONAL COSTS. if the Imposition of or any change in any law.
rule. regulation or gui:telira, or the Interpratatton or applicalion of any
thereof by any court or udmirsa live or governnaantal authodly (including any
request or policy not having the force of law) shall impose. madly or mako
applicable any taxes (except U.S. federal, slate or tacal Income or franchise
taxes imposed on Lender), nesar"e requirements. -~' adequacy requirements or
other obligations which would (a) incrasse tile cost to Lender for extending or
raelntaining the credit facilities to which tills Agreement relates, ~) reduce
the amounts payable to Lender under tills -I-nt or tile Related Documents, or
(c) reduce tile rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facIlities to which this Agremnt relates.
Ihen Borrower agnees to pay Lender such addlUonal amounts as wit compensate
Lender itteafor, w.*i Uve (5) days atter Lender's written demand for such
payment, which demand shsU be accompanied by an eppianation ci such l,nposition
or chw~ and a calculation in reasonable deteif of the additional amounts pavable
by Borrower, which erparation and caicuetions shall be conclusive In the absence
of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is In effect, Borrower shall not, without the IOlcr wrttten consent of
Lender:
indebtedness and Liena. (a) Except for trade debt incurred In ihe normal course
of business and indebtedness to Lender contemplated by this
<PAGE>
U 1 2-1~1995 LOAN AGREEMENT Page 6 Loati ND 00001 - (ConUmi.d) A'wn.n~ Oea~ ~ Cr
assume iteebtedness for b~EYowW money. Iftoluding C- ""'- ~) -epi as allowedas a
Parirrited u.n, :.'~ inansfer. morl~ge, assign, -cige, ~ grant a aecurily iniest
in, or any of 8wmw~~ mu~%r (0)... withnecoue any of ~ mogowis, to leandar. "~m
aeg~~ "~ in -w .n. taraeaa,,, e~- 20.OOO.OO Oon~ of O-omL (a) Erigeog in any
buelnees ~ aialsuii~ eellanant than thorn in whoh sorrow~ Ia prasently angageel
~) orceaseSsil ~teralEonR. Equidmia, "~h ~ acqdlre or cioidsle with anyother ~,
- - nwn~ iwove or transfer out el the ortllnary course of bwinm, Co) pay any ohis
en B~ywier'e afok (other than ~ pm~ In as st~dc). ~ that outwIiluIm~ the ~ but
only ee fooli as no Event of D~bij has o~wi and IC ecotinuing or would result
Irom the payment of ~ V ~ tea ~$ub-tar $ Corporrtlien~ - daithati in the ~ ""-
Coda - 1~ as en~n;ied), ilonower may pay cash ~ on illa 'toll. shrn~~wm *wn urn
to lima in minourie naoeeeey to enaille the aharehokters topay incaoe taxi. and
- -ake ~n'ated kiobma fa'r payments to ~ their "'~ undar '~' and state tear which
aissa - - their ea~ - ~ of a ~ohi~ $ COvpWdon bmum of their ow~ of ~raa of stook
of Boiv~wur, or (d) pINchum or naera any of uorr~ autsta~~ng haaaa or aMer or
amend 8orroww'e C- ekuci~~
- -~. Aee-Im and ~eraali~ (a) Loan, Insset in or ed~ai~ rnoney or aeaete, ~ p~eae,
cnaafe or acquire any lnierestinanv oiher n~f~ Or Wily, or (c) iflOLv any
~ltgaton ass-or guarantor ether then in the ~ course of bUII-L
CEBSATION OF ~~MIICEI. if leandar his made any oommlrnent to malee any Loan to
~mowar, whelter undor thip -I-nt or under any other agraament~ ~dar ahit have no
o~llon to make Loan Aduenoas or to dieburee Lean pmmeeda V'. (a) 9on'orer or any
Oue~nior is in delauri under the terms of Ihie Ag~ or any of the flawed
Documenis Or any ether aiire~ that Berreer or any Guarantor has wilh Lender; ~)
Borrower or any ~wnatoor Inaavt, ill-a -Eon in bankruptcy or similar pm--. or IC
~u;lgnd a bankrupt; (c) there occurs a material ~ change in Boirowere llaanlai
cond~ in Rh. Unanclal oo~IIOn of any Guarantor, or in the value of any
Collateral ee'~ any Loan; (dl arw Guarantor i.eks, deima Or otl'eh-ee ~ to
llmlt. madifr or ~voke such Gimrrnnr'a guaranty of the Loan or any other loan
with Lender
NON~~~OE ~ Borrower aems lopay Lender ragutar q~terry payments of d aoorued un~d
naf~~ge lees due as of each payrnent dale, ~ 10.1906 with all sueeect- no~~ge
toe payments due on the mme - of each ~tor, ~raaflor. m. daly noi~~ge tee is
compofef on a 3851~ ~e Intrest basis; that Is, by ipplying the ratio of 03%
annuai nor~e rate over a year of 355 days, Inultipied by the unused --ilisal
liaia~
RIGKr OF SETOFF, Borrewer grants to Lender a contractual posmm~ mcis~ lIlSareat
in, and ftereby aeatgna, convays, delh,w:~ pJadges, and ~stare to Lender all
Borrower'. vighi. III. and Interest In and to, Bwt~ socourts with Lender
(whether olkoking, sa'4"g:~ Or eome other account), Endudng ~ 5mllatlen all
aooounts bald Jolnity with someone ellea and all accounte Borrower may open in
the hiure, ecoluding ho~~~ever all RA, Keogh. end Irsart anceunte. Iloorrowe'
LIIhwsia Lender1 to the extent permitled by appkbte law, to charge Cr seloff all
sums owing on the lndebtadr~ against any and a' such anceunts.
EVDITS OF DEFAILT. Each of the tolawing shall constit~j an EvenI of Defeut under
thie ~
Defeuft on ~bledlneas, Fallure of Borivwgr to make any payment when due on the
Indebt~~
Other ~. Fallure of Borrower or any Grantor to co-v with or to irerlorm when due
any other terrn, obligetion, cove~mrt or condi~on conlalned in lie Agree- or in
any of the Related Documeria, or liallure of Borrower to co'npty with or to ~rn
any other terrn, obfpation, covenant or ~ onrtte'ned in any other aQreanant
between Lender and lerewer.
Deltaull in Favor of Thlnf l",,~-t Skoidd Bormw'ar or any Grsnlor deteult under
any loan. exteraslon of or~~ security agreement, pursh~ or satee agfi~ or any
ether egreggent. in llaor of any other or pemon tfaat "lay mmiu~mly ..I any of
aorrowarrt propeny or Bwr~r'p or any ~aiir'a ibmv to rppay the Loin. or ~,,,,..,
their 'uapeclh. onggalons under tt,ts -I-nt or any of the Related Documw~
Fallee 8talemats, Anr' warranty, -raaenta- or utaterr~ made or turniphed to
Lender by or on behalf of Boreower or any Grantor under this Agreement or the
Related Documents la false or rnielmding in any malitat -tat the tirn made or
ftwrished, Cr beooroos jelse or misloading at any time l,,,,--'6.
DeItfOItrre COBfl~fall~Ion. This Agrewnpnt or any of the Related Dccurrents
ceeees 10 be in t% force and effect (Including allure of any ~ec'1ItV Agreement
to create a Vald and pml~ctd ~ interest) al any Iu and for any rrns~
loeolYenaV. The diaolution or lenninsiton of Borrowr~ uditeos as a golog
busfneas, or a trustee or ..~ is appointed for Borrower or for alt Ore a~tatiei
porlon of the of Borrower, or Borrower makes age- ~reeent for the benuft of
Borrower's oreditom or B~ur film for Ixi.Ir~y, or en InOoluntery bsrk~ -Eon is
tilad agalnst Borrower and such Involuntary pgan rerttalns un~~lad for ~bdV (60)
days,
Ciedilor or Forteflum P~Ocein~ Commanoernent of foreclosure Or fortlittre
proomings, whether by ~ pmc~n~ sef~,
<PAGE>
raposseasion or any ether ~titd, by any creditor of Borrower, any ofedlor of any
Grantor against any oollateral securtng the Indebtednes, or by any governmental
~ancy. Tha includesa I;arnlshmw~ attach-I, or levy on or of any of Borrower's
deposit accounis wth Lerider.
AEe,rera,e CIimii~AmaIrlal adverpe onange ~ in lorrower'e Ir"arcal.cond~~on,~
EFFECT OF AN EVENT OF DEFAIAILT. if any ~vant of Iieieuit shall coolir, m'oept
wares otherwisa prvvi~ in it'is Agrernineni or the F~lated 0ocixn~, all com~ntns
and Dbligattons of Lender under this -'II- or the Related OocWTI.a or any other
agreement ir',medlatellr wil terMInate (including any obligelon to make Loan
Advanoas or disbureamants), and, al l"ender,a optioo, allaun's owing in
connecuon with the Loans, indudng all p'fr- lr,iereat. and all other laes' costs
and clesrges, if any, wllll becorn lmmantsleiy due and payable, all without
nollorn of any kind to o,,ower, except that in the - of en Event of Dofault of
the typa dmoribe:l in the ~reef',e~ subsectIon ibowa, such mocelaration shall be
automulic and flot optionaL in addItion, Lender shall have all the rights and
,u..w51 provided in the Related Daurents or avallable at law, In equty, or
otherwe. Exoe- as may be proIiltt~ by aooIlcable law, all of Lender's rights and
remulee shall be cumulative and may be execteed singularly Cr concurrentty.
Election by Lender to pursue any remady Shall not eaclude pws,'tl of anyothor
remedy, and an elecion to make ewpDndltures or to take ~on to -~orm a,,
obigallon of Borrower or or any Grantor shall not aftoct Lender's right to ~LC a
detaul and to axerolse Its ~hts and remedies.
MISCELLANEOUS PROVISIOIIS. The fofowing miscellaneous prov~sicns are a pert ci
this Agreement:
Amen'fmentL This Agreemerif, together wjth any R~lated Documents, consUtutes Ihe
entire understandluig and agreement of thu parties as to the I I 1~-1~1995 LOAN
AGREEMENT Page 7 Lo.nHoOO~~1 (ConUiwed~.
metier,..' toth in Itil Agneemeni No alteralon of or amendment to thls AGreement
shati be elbdve unim grvmn w' wrling and "oneel by the party or-i--Il to be
char- or bound by the alteration or anieridmeriL
Appllcbllle La.. ml. Agreement shalt be Oovernd by. con*u.d and e~meel in ~-
with the laws of the slat. of Ma~Mmr-L LENDER AND BORROWER EACH ilEREBY WAIVE
ThIAL BY ~RNiY IN MW ATTION OR PROEEDIN~ TO WIIICK LENDER OR BORIIIDWIR MAY BE
PAliiITI~ ARISING our OF, OR itl ANY WAY PERTAINING To, TilIlS ~ IT 18 AGREED
TIIIAT THIS WAIVER CON&rn~S A WAIVER OF TRIAL IllY JWIY OF ALL. CLAIMS A~EIST
ALL PARTIES TO aUCH ACTIORS OR PROCEEDIMG8. THIS WAIVER IS KNOWINGLY, WILILINGLY
AND VOLWIrARILY MA~ BY LIND~ AND BORROWER, AND LENDER AND IIloRROWER EACH
IIEREBY EIlEI'RESIBlT TIIIAT ND REPRESENTATIONS OF FACT OR OPINiON HAVE BEEN
MADE IBY ANY INDIVIDLIAL TO INDUCE THIS WAIVER OF TRIAL BY JWUY OR To EN ANY WAY
MODIFY OR NILUFY ITS EFFECT. BORROWER RJRT~~ RIltRAISENTS THAT DOF~WIER HAS
BIDEN REPRE~ED IN TIE SIGNING OF THIS AOREEMIBNT AND IN ml MAAING OF THIS WAIVER
BY INOEPEI~ IEGAL COLPIS~ SELECTED OF BORROWER'S OWN FREE WILL, AND TIIIAT
BORROWER HAS HAD THE OPt,OIIIIIINITY TO DISCUSS THIS WAIVER WITh COUNS~ CapIlon
Heedin~~ Caption lecadings in this -I-nt are for convenience purposes only and
are not 10 be used to in'.- or define iha of the AgreemmnL
Niumpia Parties, Cor;-e Authority. A" obligations of Borrower under Ills
Agraement sIsali be jolnt~and several, and all retirrencea to BorrOwer shall
mean each and every Borrower. Thts means Ihat each of the Borrowem sigrrrg below
Is miponsibte for WI obNgetton. in this Agreement.
ConaenI to ~xtm~Ictlon. Borrower Irrevocably submits to the Jwisdlcllon of any
state or bderal cowt aitting in the Stale of IaarI-nd over any suit, motion, or
pr-dlng arIsing rut of or relatlng to this AgreewienL Borrower irrevocably
welvea, to the issleat m(ient pefmied by law. any ob~n thai Borrower may now or
irereafter have to the taying of venue of any such suit, action. or procmdtrg
brought in any such court and any claim Ihal any such suit, action. or pro~~oing
brought in any such Cowl ha. been braught In an Inconvenlenl looi~ Rnal Judgment
in any such suit, edion, or prooci'irg bnougl"l in any such court shall be
conclusive and binding upon Borrower and may be enforced in any cowl In which
Borrower is subject to jurtsCSclion by a sull upon such judgment provided that L
of procea, Is e~ctett upon Borrower as provided in this -I-nt or as oth~se
per,nlttetl by applicable law.
Consent to Lean ParUcipalion. Borrower agrees and consenis to Lendet's Sale or
trarster. ~ now Or laler. of one or more particifetion interests in ihe Loans to
one or more purchasers, whether reatal or unrelated to Lender. Lender may
provide. without any Unitatori whaIscevet, to any one or nrore purchasers. or
potential p~asers. eny information or knowtedge Lender may have about Borrower
or about any other matter relating to the Loan, and Borrower hereby wah~as any
rghts to -lacy it may have wiih nesoeci to such matte's. Borrower additionally
waives any and at notices of sate of l'artclpailon Interests, as well as an
noticm of any ripurciusa of such panielpation interests. Borrower also agrees
that the purchases of any such partlcipallan interests witi be considered as the
tbsol~ owners of such Interests In the Loans and win have all the rights granted
under the partielpation agreemeni or aereernents governing the sale of such
participation interes~ Borrower hxther wihms at rights of olfset or counterclaim
that II may have now or laler agaInst Lender or against any purchaser of such a
piatl~aIon intersst and unconditionally agrees that either Lender or such
purchaser may intorce liorrower's obIloation under the Loans ir'anpactva of the
failure or Insolvency of any holder of any interest in the Loans. Borrower ~iher
agrees thai the purchaser of any such pattielpation Interests may enforoe its
<PAGE>
interests irr',Spective of any persoraal dalme or deferises that Borrower may
have against Lender. 4
Cosie - Expenese. Borrower agrees to pay upon demand alt ol ~ incurred in
connection with this Agreement \ or in connection with the Loans made pursrrant
10 this Agreement. ~ject to any uffis under applicable dew, if Lender hines an
attorney to haip enforce this Agreement or to colect any Indebtedness, Borrower
agrees to pay Lender's altorneys' tees, and all of Lender's olher collection
expenses whether or not Ifteig is a lawsuit ansi PncIi~~ng legal ~cpnses lor
bankruptcy pro~ecingL
NoticeL M notices required to be -~ under this Agreement ahel be given in
wiling, may be sent by tetelscsimi1, and staill be el~mctve when actually
delivered if hand deilvered or when deposhed witi, a nationally reeognI~d
~vefliglil courter or deposited as certilied or mgiiteeed rrieil in the United
s'atea mat, lirsI clasa, p-- prepaiil. addressed to the -V to wiurt the notlee
is to be given at the addmm shown abovL Any ~ may change Its address for
r,otices under this Agreement by giving tornael wiffiwi nottee to the other
parties, specifying that the purpose of tP'e notice is to change the patty's
address. To the m~ant pennined by applicabte law, Ii there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers. For
notIce purposes. Borrower agrees lo keep Lender Informed at ati limes of
9orrower's cunent addressias).
&evereblldiy. If a court of cornpeterttt JurisdIction Inds any provision of it's
Agreement 10 lii in~i~Ud or unenforceable as to any person or circumstance, such
Ilndtng shall not render that provtsion Invatid or unenforceabte as to any other
persons or circumstances, if lea~le, any such offending provIsion shalt be
deemsd to be m~ied to be within the Imits of enfoeceability or vafldiiy;
however, if the offending peoyI$E.on canrict be so modified, If shall be
siricken and all OIlier provIsIons of this Agreement In all other respects shall
remain valId and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the conled of any
provIsions of this Agreement makes it appropriate, including without Iimi~iott
any ruoresenlation, warranty or coveaant, the word "Itorrower' - used herein
shalt Include all subsidiaries and aUlates of Borrower. Notwithstanditg the
foregoing however, under no circumstances shalt this Agreement be consirued to
require Lender 10 make any Loan or other tinancii,I accommodalion to any
subsidlary or affIlIate of Borrower.
Succassiors end Assigns. M covenants and agmenerts contained by or on behalf of
Borrower shall bind its successors and assigns and shall inure to the benefit of
Lender, Its successors and assigns. Borrower shall not. however, have the right
to assign its rights under this Agreement or any interest therein, without the
prior written consent of Lender.
SurvIval. M warranties, represenlatlons, and agreements of Borrower in this
Agreement shall survive the mal~ng of the Loan or Loans conte~~lated hereby, and
shall be deemed made and redated by Borrower at the time of the ma~ng of each
disbursement of Loan proceeds. Time Is of the Essence. Time is of the essence in
the performance of this -I-ni.
Waiver. indugacce by Lender with respect to any of the terms and conditions of
this Agreement or the failure of Lender to exencstt any of its rights under this
Agneernent shall not Constitute a waiver thereof, and Borrower shall remain
liable for the strict pwformanc~ ol such terms and conditions unti this
Agreement shall be terminated. No provision of this Agreement may be walved or
modfted orally, but all such waivers or modifications shalt be In writing.
Whenever the consent of Lender is requimd under this A~nwit, the granting of
such conaent by Landw in one Instance shal not constifute Lendet's continuing
consent in subsequent instance's, and In eti ceaes such consent rnsy be gmnied
or withheld in the sole discretion of Lender. 1~-1~1995 LOAN AGREEMENT Page 7
LnanNoOOOOl (ConUmi.d~.
matters aet torth ~ this AgreumwnL No alteration of or amandment to this A'eem~
sIasIl be eIb~e unlem ~n in wrung and SlEnesi by the party or pwIiee IOU~ht lobe
char- or bowid by tha alteration or amendment.
ApplIcab~ Lalir. ml: Aoresrnertt shil be goverieri by. rrors~erl and u:l~rcri in
locordence with the "WI oft. State of M-InCL LENDER AND BORROWER EACH ~RElBY
WAIVE ThIAL BY ~AIY IN ANY ATTION OR PA~IEEEDliG TO WIliCH LENDER OR BORl'tO~
MAY BE PARTIES, ARISING our OF, OR IN ANY WAY PERTAIIfING To, ThIS AilI-MEN~. IT
IS AGREED THAT TIfES WA~VER CONSTETurES A WAIVER OF TRIAL BY JLMIY OF ALL CLAIMS
AGAINST ALL PARTIES TO SUCIt ACTIONS OR PFIOCEIBDIMG5. THIS WAIVER IS KNOWINGLY1
WILLINGLY AND VOLWrrARLY MADE By IlIENDER AND 8O~IIOWE~ AND L~ER AND BORROWER
IEACII IIIIEREBY REPRESENT THAT NO ~PRESENTATIONS OF FACT OR OPINIOII HAVE DEEN
MADE BY AMY IMOIVIDIIiAL To I~CE THIS WAIEER OF ThIAL BY ~Y OR TO EN ANY WAY
MODIFY OR NILIUFY ITS EFFECT. BORROWER FURTHER R~IIBell'S THAT BORROWER IlAtti
BEEN REPRESENTED IN ThE SIGNING OF This AGREEMENT AND IN THE MAKING OF ThIS
WAIVER BY INDEPENDENT I,E~AL COWISEL, SELECTED OF BORROWER'S OWN FREE WILL, AND
THAT BORROWER HAS KAD TrIE OPPOFmMITY TO DISCUSS THIS WAIVER WITh COIINSEIL,
Caption IllsedIn~ Caption headings in this Agnaement are tor conventence
purposes oriy and are not to be used 10 interpret or define thu provisions of
this -I-~
Multipla Partles, Co~e Authority. M obtigallons of Borrower under this Agreement
shell be jdnt~and several, and all relerenoes to Borrower shatirroan each and
every Borrower. Tills means that each of the Borrowers signing below is
nesponsillis for all obtigelons in lils ~ement.
Conamit 30 ~wimdictlon. Bovevww Irrevocably submIts to the jwlsdiion of any
tltate or federal court ~ in thu Slate of Mag$and over any suil, action, or
prcoerl~ artelng cut of or nelaling to this Agreewmnt. Borrower ~ waives1 to the
fuest urtent ~,,,,,I:j by law, any abjedian that Borrower may now or teseefter
have to the Taying of venue of any such suit, action, or proseeding brought in
any such court and
<PAGE>
any claim that any such suit, action. or prooeeding brougI't in any such Court
has haer, brought in an Inconvenient forum. Rnai Judgment in any such suit.
act,on, or prooseing brought in any such court shall be conclusive and tindirg
upon Borrower and may be ent~n~d in any court In which Borrower Is sub~ to
MiEdiction bye suit upon such Iudgment provideet that sorvIoe of process ts
efected upon Borrower as provtded In this Agreement or as otherwise perrnttterl
hy appiloable law.
Consent to Loan PartIcipsilon. Borrower agrees and consents to Lender's sale or
transfer. whether now or later. of one or more part~pation interests in thu
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide, without any umitatten whaisoaver, to any one or more puechasers, or
potential purchasers, any information or kno*~ge Lender may have about Borrower
or about any other matter relating to the Loan, and Borrower i~uLy waives any
rrghts to prlvaoy itmay have with respect to such matters. Borrower additionally
welves any and a' notices of sale of participation interests, as well as a'
notices of any repurchase of such pailiepation interests. Borrower also agrees
that the purchasers of any such participalon inlerests wiil be con:idersd as thu
absolute owners of such Inierests In the Loans end wit have a~ the rights graht~
under the particlpatfon agreement or agreements govuaning the sate of such
participation intenes~ Borrower ttrther waives all rights of cilset or
counterclaim that Ii may have now or later agaInst Lender or against any
purchaser of such a participalon intersst and unconditionally agrees that either
Lender or such purchaser may intwc Borrower's oblicatlon under the Loans
insspactivi of the failure or irncnc'ency of any holder of any intreat in the
LoariL Borrower further agrees tiat the purchaser of any such participation
Interests may enforce, its interests irresteective of any personal olain's or
defsnses that Borrower may have against Lender.
Coate and Expanase. Borrower aorses to pay upon demand all of
tender's*~~~I~perses incurred in connection with this Agreement \ or In
connection with the loans made pursuant to this AgreemenL Sub~ to any Ilmas
under applicable iew, if Lender hses an attorney to help enforce this Agreemant
or to ooilect any Intlebtedness, Borrower agrees to pay Lefiders aftorneys'
tees. end a' of Lender's other cotoction expenses. whether or not there Is a
lawsulI and lnciuotng legal axpenaes for bankruptcy proc~~~
NoticeL All roticas r'estuired to be given under 11,15 Agreement shall be given
in writlng. may be sent by tetefscsii~ie, and shalt be eftecli"e when actu,ty
delivered if hand delivered or when deposited with a nationally recogrilsed
overnight courier or deposited as certilled or rggisteent maD in the Unted
Stales mel, first class, P05-a prepaid, addressed to the party to whom the
notice is to be gIven at the address shown above. Any pa'rr may change 115
address for nokes under this Agreement by giving format Wrfflen notice to the
other partles, apeoifvirg Ihal the purpose of t~ig notice is to change the
patty's address. To the extent permilled by applicable law, if tirera Is more
than one Borrower, notice to any Borrower w'U constitute notice to all
Borrowers. For notice purposes. Borrower agrees to keep Lender informed at CU
times of Borrower's current address(es).
SeverablIfty. If a court of Oonpetent jurisdiction md: any provision of Ihis
Agreemeni 10 be Invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or Linenforceabte as to any
other persons or circumstances, if ~aslble, any such offending provision shalt
be deereed to be moditted to be within the llmlts of enforceability or veidlly;
however, H the offending provision cannot be so modIfied, it shalt be Sfricken
end a' other provslons of this Agreement in all other nespects shell remaIn
"slid and enforceable.
Subakitarlee a,,,f Affillataa of Bormwer. To the extent the ~tie't of any
provisions of this Agreement mekes it appropriate. including wuhout limlIstlon
any representation, warranty or covenant, the word "lIOrroWW~ as used leren
still Include all eubeldiu~ and atellalea of Borrower. ~olwitsanding the
foregoing however, under no circumstances shall this Agreement be consfruef to
restule Lender to make any Loan or other financial accommodation to any
subeldiary or affiata of Borrower.
Succaaaors and Asaigna. All covenants and agreements contained by or on behalf
of Borrower shall bind Its successors and assigns and shalt inure to the benefit
of Lender, Its suooessors and assigns. Borrower shall not, howevur, have the
eight to assign its rights under this Agreemeni or any interest therein, without
the prior wrltten consent of Lender.
SurvIval. All warranties, represenlations, and agreements of Borrower in this
Agreement shalt survive the r,,ai,ing of the Loan or Loans conter"piated hereby.
and shalt be deemed made and reclateol by Borrower at the time ol the maidng of
eech disbursement of Loan proceeds.
Time 1101 the Essence. Time is of the essence In the performance of this
AgreemenI,
Waiver. Indutgerice by Lender with respect to any of the terms and conditiors of
this Agreernent or the falure of Lender to e~~se any of its rights under this
Agremant shalt not constitute a waiver ihereof, and Borrower shall remain Ilable
for the strict performance of such terms and conditions unIl this Agreement
shall be terminated. l'lo provision of this Agreement may be waived or modified
orally, bul at such waivsrs or moditteations shalt be In writing. Whenever the
consent of Lender is required under this Agree-I, the granting of such consent
by Lander in one instance shall not constitute Lende~ continwing corssenl in
subsequent inutancss, and In ati cases such consent nay be granted or wilineid
in the sole discretion of Lender. I
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 13
Annual Report to Shareholders for the fiscal year ended
October 31, 1994
To Our Shareholders and Friends:
Fiscal year 1995 was a very exciting and productive year for your Company. We
successfully accomplished most of our primary plan objectives for the year.
These included paying off our bank mortgage on our corporate headquarters
building from operating funds, meeting target revenue and profitability,
shipping our new UNIX product Intela, both domestically and internationally,
introducing our first new standard voice processing application into the
commercial market, maintaining high product quality through our ISO 9001
accreditation, and increasing our performance analysis services revenue.
Financial Performance: The Company generated $1.5 million in operating income on
consolidated net revenues of $22.4 million. These are record results for the
Company. We aggressively managed operating costs and inventory to reduce costs
of goods sold to 58% of net revenues. Revenue per voice processing employee
averaged approximately $168,000 for the year. With the payoff of our outstanding
mortgage, the Company's balance sheet has been strengthened. The Company has in
place a $2 million line of credit and is expecting to close on an additional $1
million loan agreement to provide working capital for the future.
Market Focus: Government - Our government voice processing business enjoyed an
excellent year as approximately 65% of voice processing revenues were generated
from government customers. Of particular note was the acceptance by one of our
major customers, the Internal Revenue Service, of our new Intela voice
processing system. It is Microlog's successful implementation of the IRS' Voice
Balance Due (VBD) application which has helped to initiate a completely new way
for the IRS to collect money owed to the government without traditional labor
intensive collection efforts. The IRS plans to introduce this application in its
larger call centers in 1996. Additionally, our government group secured the
largest single system order for our Intela system at the end of fiscal 1995.
This system, which is able to handle over 900 simultaneous callers, will allow
taxpayers to check the status of important tax related information associated
with income tax filing over the Internet.
Market Focus: Commercial - Although our planned transition to take full
advantage of commercial voice processing opportunities continues to take longer
than we would like, our year-over-year revenue from commercial customers
increased 64%. Late in fiscal 1995, we introduced our first standard commercial
"off the shelf" application - "Retail Solution". Initially, this product
targeted retail pharmacies for use with prescription renewals. By fiscal year
end, we had installed or had orders for approximately 200 units, and have since
received our first significant order for this product. We are optimistic that
this market segment, with over 60,000 pharmacies in North America, offers growth
potential for fiscal 1996 and beyond. We anticipate new applications being
introduced in fiscal 1996.
Market Focus: International - Global demand for voice processing applications
continues to increase. During fiscal 1995, we entered into distribution
agreements with two new international partners in the Middle East Alpha Data in
the United Arab Emirates and Gulf Resources in Kuwait. By year end, we were in
the final stages of new arrangements with several additional partners. During
the year, our major European OEM partner, Philips Communications Systems B.V. of
The Netherlands, introduced Microlog's new UNIX voice processing product,
Intela, in six European countries. Philips generated some initial orders from
certain accounts that offer significant potential for additional business over
the next few years. In the Asia-Pacific region, we installed a 120 line system
at a prestigious customer's site that offers potential for future expansion.
Market Focus: Performance Analysis - Despite the reduction in defense-related
spending, our Old Dominion Systems Incorporated of Maryland (ODSM) subsidiary
continued to perform well, generating $8.3 million in revenue, up $.2 million
from the prior year. During the year, we were successful in adding new
contracts, as well as increasing the level of work authorized under existing
contracts, from the Johns Hopkins University Applied Physics Laboratory (APL),
the Company's principal customer for performance analysis services. Of special
note is ODSM'S award of a continuation contract from APL for a base period of
one year with two one year option years that is valued at $4.4 million over the
next 3 years.
Quality Focus: Fiscal 1995 was your Company's first full year operating under
the most stringent International Standards Organization (ISO) accreditation, ISO
9001. The ISO processes, with the accompanying procedures that we have in place,
enable us not only to consistently deliver very high quality products, but also
to accelerate our new product development activity. ISO provides the internal
discipline associated with designing, developing,
1
<PAGE>
manufacturing, and supporting our voice processing products which, when coupled
with our sound financial controls, enables us to better manage the Company.
These controls and disciplines underscore our commitment to delivering value to
our customers, shareholders, and employees. We are proud to announce that we
received recertification of ISO 9001 in November 1995.
Future Directions: Microlog turned a corner in fiscal 1995. We now believe we
have the product, procedures, organizational depth, and commitment to expand
your Company in the market segments where we compete. Management is solidly
determined to creating value for our customers, employees, and shareholders
alike.
We would like to expressly thank our dedicated employees for their loyalty and
commitment to excellence and our sincere appreciation to our distributors and
business partners. A special thank you is extended to our customers for their
continued commitment to our Company and products. Lastly, we welcome our new
customers, VAR's, and shareholders to the Microlog family.
Richard A. Thompson Joe J. Lynn
President and Chief Operating Officer Chief Executive Officer
2
<PAGE>
Microlog: Building A Strong Foundation for the Future
During 1995 -- a banner year for Microlog -- we generated record revenues of
$22.4 million, representing a 20% increase over 1994. This performance
demonstrates our ability to grow in line with the voice processing market, which
is also currently growing at approximately 20% per year. On the international
front, we continued to expand our global presence by recruiting additional
distribution partners. Here at home, our UNIX-based Intela voice processing
systems helped increase our government business and our new Retail Solution
product aided our entry into major commercial voice response market segments.
Intela: UNIX Voice Processing Platform Becomes Flagship Product
Our Intela product is of critical importance to Microlog's future growth, both
here and abroad. For this reason, we devoted considerable resources to adding
features and functionality to the product in order to further enhance its
marketability.
Intela is our Graphical User Interface ("GUI") based interactive information
response ("IIR") platform designed to run multiple voice processing applications
simultaneously. It is based on a Pentium hardware platform utilizing a UNIX
operating system. Intela is capable of supporting over 1000 voice/data
telecommunication lines or "ports", meeting even the most demanding call volume
requirements. Intela also has a non-proprietary open architecture which enables
us to incorporate emerging technologies quickly and to more easily interface
with customers' various telecommunications and networking equipment. In
addition, Intela supports a wide range of international features including the
localization of user screens and software.
In addition to adding text-to-speech ("TTS") and international digital network
protocol support, we incorporated multilingual continuous speech recognition,
enhanced telephone switch support, support for additional databases, and Analog
Display Services Interface ("ADSI") support -- a protocol allowing our IIR
system to display text on an ADSI screen phone. We also added a number of call
center enhancements designed to enable call centers, such as collection agencies
and credit card companies, to effectively manage high call volumes.
With these enhancements in place, we feel that the Intela product is
well-positioned for strong performance in both domestic and international
markets.
Retail Solution: Major Commercial Market Segment Targeted With New Product Line
During 1995, we also dedicated development efforts to the "Retail Solution"
product line, which was designed and manufactured specifically for the retail
pharmacy industry.
The Retail Solution offers multiple voice processing applications designed to
improve operations and increase profits at retail pharmacies. These applications
include the Automated Prescription Refill System ("APRS(R)"), Prescription
Ready, Photo Ready, the ProNouncer(R), Call Routing, and Voice Messaging. These
Retail Solution applications are designed to improve productivity and reduce
costs, while increasing sales. All applications run on a single voice processing
platform capable of accommodating additional applications as they are
introduced.
In North America, over 60,000 retail pharmacy outlets fill 2 billion
prescriptions annually; approximately two-thirds -- or 1.3 billion -- of these
prescriptions are refills. The APRS improves the efficiency and reduces the cost
of the prescription refill process for pharmacies. Customers can place their
refill orders 24 hours a day by entering their prescription information via
telephone. By using the APRS, pharmacies free their staff to spend more time
consulting with customers, thereby helping to improve customer service and store
loyalty.
Prescription Ready and Photo Ready help improve pharmacy cash flow by placing
reminder phone calls to customers who have not picked up their prescription
orders or their processed film, and the ProNouncer(R) is Microlog's digital
in-store automated announcement system. Call Routing helps improve staff
productivity by answering incoming lines and automatically directing callers to
the desired store department while avoiding the need for a human operator. All
applications in the Retail Solution are available in multiple languages, support
the Telecommunication Device for the Deaf ("TDD") interface for the hearing
impaired, and are available separately
3
<PAGE>
or combined into a single system. The Retail Solution is available running under
both DOS and UNIX operating system software.
Our development of the Retail Solution product line is consistent with plans to
transition our voice processing business increasingly to commercial markets,
specifically to those markets that we believe offer profitable growth
opportunities. During 1996, we will continue to develop and launch new
applications that focus on commercial market segments with strong potential.
VCS 3500: Broad Functionality Continues to Help Drive Sales
The VCS 3500 Interactive Voice Response ("IVR") platform continued to perform
well in 1995. Historically a strong IVR product, especially in the government
sector, the VCS 3500 was significantly enhanced with an eye toward expansion
into the commercial sector. In fact, a number of the basic systems underlying
the Retail Solution were based on VCS 3500 functionality.
We won several significant VCS 3500 contracts in 1995, including an $800,000
order to upgrade sixty-five VCS 3500 systems at U.S. Immigration and
Naturalization Service (INS) offices around the country. These systems drive the
INS "Ask Immigration" hotline, enabling callers to gain access to bilingual
immigration information 24 hours a day, seven days a week. Today, Microlog
systems handle over seven million calls annually and 90% of the callers get the
information they need through the "Ask Immigration" system, without the need of
a human operator.
Microlog also patented two new VCS 3500 features in 1995: the Language Switch,
which makes it possible to run up to 24 different languages, including TDD,
concurrently on a system and Release Line Trunking ("RLT"), which, for example,
makes it possible for a single operator to serve several remote sites.
CallStar: New Markets Opened Abroad
CallStar is our full featured voice mail/automated attendant product. CallStar
remains a reliable and affordable voice processing product. As demand for
traditional voice mail products in developing nations increased, we were able to
expand CallStar's presence abroad, particularly in the Far East.
International Business Significantly Increased
In 1995, international revenues grew by more than 45%. We attribute this success
to the quality of our international distribution partners and to the flexibility
of our voice processing solutions. Throughout the year, we focused on adding
international functionality to our voice processing solutions -- from
text-to-speech in multiple languages, to support of international Integrated
Services Digital Network ("ISDN") protocols.
In 1994, we were proud to announce the signing of Philips Communications Systems
B.V. of The Netherlands to a non-exclusive OEM distribution agreement to market
and support the Intela product line, in a number of European and Asian-Pacific
markets.
During 1995, we continued to identify other high-quality international partners
to distribute our voice processing solutions.
1996 and Beyond
One goal for 1996 is to expand our international markets and to offer new
application solutions to commercial and government sectors. To aid this
expansion, we intend to continue to add additional international global features
for the Intela product, as well as adding support for Computer Telephone
Integration ("CTI"), additional database support, Internet, and network
management capabilities.
4
<PAGE>
MICROLOG SUBSIDIARY
Old Dominion Systems Incorporated of Maryland
Providing Professional Business Services For Nearly 25 Years
Microlog provides defense-oriented technical support and administrative services
to U.S. Government prime contractors through its subsidiary Old Dominion Systems
Incorporated of Maryland (ODSM). ODSM is instrumental in the development and
evaluation of submarine-based strategic missile systems, undersea sonar systems,
mobile communications networks, and space-qualified systems associated with the
Ballistic Missile Defense Organization.
Old Dominion Systems Incorporated of Maryland increased its revenue to $8.3
million, up from $8.1 million in 1994. ODSM's comprehensive technical
capabilities include software development life cycle support, data management
support, systems engineering and integration, computer operations and user
support, and information management services for both government and commercial
organizations.
5
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Statements of Operations
Year Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------
1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Products $10,848,391 $ 7,856,759 $ 9,905,239
Services 9,949,932 10,812,003 12,480,404
- ---------------------------------------------------------------------------------------------------------------------
Total net sales 20,798,323 18,668,762 22,385,643
- ---------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of products 4,387,830 5,760,284 4,746,581
Cost of services 7,715,575 8,625,581 8,173,060
Selling, general and administrative 6,132,231 7,005,470 6,373,764
Research and development 1,511,753 1,643,850 1,591,895
Restructuring costs -- 550,258 --
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 19,747,389 23,585,443 20,885,300
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,050,934 (4,916,681) 1,500,343
Investment income 65,135 38,244 24,078
Interest expense (143,943) (137,416) (112,244)
Other (expense) income, net (15,092) 55,046 (5,046)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 957,034 (4,960,807) 1,407,131
Provision for income taxes 470,255 23,234 20,000
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 486,779 (4,984,041) 1,387,131
Extraordinary item - tax benefit from
utilization of net operating
loss carryforward 433,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 919,779 $(4,984,041) $ 1,387,131
- ---------------------------------------------------------------------------------------------------------------------
Per common share:
Primary:
Income (loss) before extraordinary item $ 0.12 $ (1.29) $ 0.34
Extraordinary item 0.11 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.23 $ (1.29) $ 0.34
- ---------------------------------------------------------------------------------------------------------------------
Fully diluted:
Income (loss) before extraordinary item $ 0.12 $ (1.29) $ 0.34
Extraordinary item 0.10 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.22 $ (1.29) $ 0.34
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Balance Sheets
October 31,
- -----------------------------------------------------------------------------------------------------------------
1994 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,166,194 $ 922,763
Receivables 2,617,337 2,948,538
Receivable from related party 70,237 97,622
Inventories 882,184 1,436,889
Other current assets 157,590 110,365
- ------------------------------------------------------------------------------------------------------------------
Total current assets 4,893,542 5,516,177
Fixed assets, net 2,941,925 3,006,528
Licenses, net 638,095 523,810
Other assets 365,286 232,491
Goodwill, net 217,131 146,710
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 9,055,979 $ 9,425,716
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,463,818 $ 45,455
Accounts payable 1,083,970 1,388,122
Accrued compensation and related expenses 1,634,278 2,103,316
Other accrued expenses 1,415,480 1,230,310
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,597,546 4,767,203
Long-term debt 45,456 --
Deferred officers' compensation 269,218 269,218
Other liabilities 394,865 227,641
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 6,307,085 5,264,062
- ------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable common stock,
102,857 shares issued, redeemable at $2.1875 per share 225,000 --
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
1,000,000 shares authorized, no shares issued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,379,511 and 4,507,968 shares issued 43,795 45,079
Capital in excess of par value 14,765,999 15,015,344
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (11,109,363) (9,722,232)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,523,894 4,161,654
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,055,979 $ 9,425,716
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Statements of Changes in Stockholders' Equity
Serial Common Stock Capital In Treasury Stock
Preferred Stock Excess of Accumulated
Shares Par Value Shares Par Value Par Value Shares Cost Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of October 31, 1992 -- -- 4,338,699 $43,387 $14,715,192 301,870 $(520,287) $(7,045,101) $7,193,191
Settlement of Genesis Electronics
Corporation acquisition escrow -- -- -- -- -- 300,000 (656,250) -- (656,250)
Issuance of common stock -- -- 33,962 339 43,463 -- -- -- 43 ,802
Net income for the year ended
October 31, 1993 -- -- -- -- -- -- -- 919,779 919,779
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1993 -- -- 4,372,661 43,726 14,758,655 601,870 (1,176,537) (6,125,322) 7,500,522
Issuance of common stock -- -- 6,850 69 7,344 -- -- -- 7,413
Net loss for the year ended
October 31, 1994 -- -- -- -- -- -- -- (4,984,041) (4,984,041)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1994 -- -- 4,379,511 43,795 14,765,999 601,870 (1,176,537) (11,109,363) 2,523,894
Issuance of common stock -- -- 25,600 256 25,373 -- -- -- 25,629
Release of mandatorily
redeemable common stock -- -- 102,857 1,028 223,972 -- -- -- 225,000
Net income for the year ended
October 31, 1995 -- -- -- -- -- -- -- 1,387,131 1,387,131
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1995 -- -- 4,507,968 $45,079 $15,015,344 601,870 $(1,176,537) $(9,722,232) $4,161,654
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Statements of Cash Flows
Year Ended October 31,
1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 919,779 $(4,984,041) $1,387,131
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 1,128,656 879,046 474,537
Deferred officers' compensation 33,000 18,000 --
Amortization of goodwill and licensing agreement 271,364 274,713 184,706
Loss on disposition of fixed assets 19,653 18,544 2,869
Changes in assets and liabilities:
Receivables (637,520) 1,433,393 (358,586)
Inventories 304,595 1,042,768 (554,705)
Other current assets 19,927 (78,595) 47,225
Accounts payable 6,842 307,894 304,152
Accrued compensation and related expenses 287,338 43,751 469,038
Other accrued expenses (1,254,806) 729,378 (352,394)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,098,828 (315,149) 1,603,973
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (630,954) (487,103) (543,159)
Proceeds from sale of fixed assets 3,000 65,638 1,150
Sale or maturity of investments 604,550 -- --
Purchase of licenses (275,000) -- --
Other assets (7,592) (212,155) 132,795
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (305,996) (633,620) (409,214)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 29,490 7,413 25,629
Reduction of long-term debt (411,530) (505,244) (1,463,819)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (382,040) (497,831) (1,438,190)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 410,792 (1,446,600) (243,431)
Cash and cash equivalents at beginning of year 2,202,002 2,612,794 1,166,194
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,612,794 $ 1,166,194 $ 922,763
================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
9
<PAGE>
Microlog Corporation
Notes to Consolidated Financial Statements
Note 1: Basis of Presentation and Major Customers
The accompanying consolidated financial statements include the accounts of
Microlog Corporation and its wholly-owned subsidiaries (collectively, the
Company). All intercompany transactions have been eliminated.
Microlog Corporation of Maryland, a subsidiary, designs, assembles, markets, and
services customized voice processing systems and other communications products.
Old Dominion Systems Incorporated of Maryland, a subsidiary, is engaged in
providing performance analysis of certain major weapons systems and related data
processing support to the Federal Government through prime contractors.
A summary of information about the Company's operations by business segment is
as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Net sales:
Voice processing systems and other
communications products $13,337 $10,574 $14,089
Performance analysis and
support services 7,461 8,095 8,297
- ----------------------------------------------------------------------------------------------------------
Net sales $20,798 $18,669 $22,386
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Voice processing systems and other
communications products $ 536 $(5,363) $ 795
Performance analysis and
support services 515 446 705
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations $ 1,051 $(4,917) $ 1,500
- ----------------------------------------------------------------------------------------------------------
Identifiable assets:
Voice processing systems and other
communications products $ 8,838 $ 4,968 $ 6,383
Performance analysis and
support services 2,203 1,785 683
Buildings for common use 2,398 2,303 2,360
- ----------------------------------------------------------------------------------------------------------
Identifiable assets $13,439 $ 9,056 $ 9,426
- ----------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Capital expenditures:
Voice processing systems and other
communications products $ 621 $459 $531
Performance analysis and
support services 1 13 2
Buildings for common use 9 15 10
- ----------------------------------------------------------------------------------------------------------
Capital expenditures $ 631 $487 $543
- ----------------------------------------------------------------------------------------------------------
Depreciation expense:
Voice processing systems and other
communications products $ 917 $781 $358
Performance analysis and
support services 4 5 6
Buildings for common use 208 93 111
- ----------------------------------------------------------------------------------------------------------
Depreciation expense $1,129 $879 $475
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Approximately 36%, 32%, and 38% of the Company's consolidated net sales for
fiscal 1993, 1994, and 1995, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.
Approximately 6%, 4%, and 6% of the Company's consolidated net sales for fiscal
1993, 1994, and 1995, respectively, involved the export of voice processing
systems and other communications products to foreign countries.
Approximately 36%, 43%, and 37% of the Company's consolidated net sales for
fiscal 1993, 1994, and 1995, respectively, involved performance analysis and
support services subcontracts with prime contractors to the U.S. Navy. These
contracts have been extended to various dates in fiscal 1996, 1997, and 1998.
The Company extends credit to its customers and billings are made in accordance
with contract terms.
Note 2: Summary of Accounting Policies
Revenue Recognition
Sales of products and services are recognized at the time deliveries are made or
services are performed.
Contract revenues are recognized on the percentage of completion basis for
fixed-price contracts. Revenues are recorded to the extent costs have been
incurred for cost-plus-fixed-fee contracts, including a percentage of the fixed
fee computed in accordance with the contract provisions. Revenues for time and
materials contracts are recognized at negotiated hourly rates as incurred and as
materials are delivered. Provisions for losses on contracts in progress are
provided when, in the opinion of management, such losses are anticipated.
Certain contracts are subject to audit and possible adjustment by the Federal
Government. Contract costs have been examined and settled through fiscal 1992.
Cash Equivalents and Investments
The Company considers all liquid investments with an original maturity of less
than three months to be cash equivalents. Cash equivalents and investments
consist of U.S. treasury bills, certificates of deposit, repurchase agreements,
(which are collateralized by securities issued or guaranteed by the U.S.
Treasury), and municipal bonds, at cost, which approximates market. The Company
has not experienced any losses on its investments.
11
<PAGE>
Inventories
Inventories are stated at the lower of cost, determined on the first-in
first-out method, or market.
Fixed Assets
Fixed assets are recorded at cost and depreciated on a straight-line basis for
financial reporting purposes and accelerated methods for income tax purposes.
Intangible Assets
Licenses are recorded at cost and amortized on a straight-line basis over the
expected benefit periods. Accumulated amortization at October 31, 1994 and 1995
was $161,905 and $276,190, respectively.
Goodwill arising from the purchase described in Note 3 is amortized on a
straight-line basis over seven years.
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
Warranty Reserve
Normal product warranty for service and repairs is generally provided for 90
days to two years, subsequent to delivery. Based on experience, the Company has
accrued expenses related to warranty obligations.
Net Income (Loss) Per Share
Net income (loss) per common share is computed by dividing net income (loss) for
the period by the weighted average number of shares outstanding, adjusted for
the effect of common stock equivalents arising from the assumed exercise of
stock options, if dilutive. Primary weighted average number of shares
outstanding for the years ended October 31, 1993, 1994, and 1995 were 4,065,000,
3,877,029 and 4,066,705, respectively. Fully diluted weighted average number of
shares outstanding for the years ended October 31, 1993, 1994, and 1995 were
4,116,000, 3,877,029, and 4,066,705, respectively.
Note 3: Acquisition of Genesis Electronics Corporation
On November 29, 1990, the Company acquired Genesis Electronics Corporation
(Genesis), a voice mail provider for small to medium sized businesses, located
in Rancho Cordova, California. Pursuant to the merger agreement, the Company
issued 675,000 shares of its common stock valued at approximately $1,477,000,
paid $500,000 in cash to the Genesis shareholders, and incurred transaction
costs totaling $450,000. Of the merger consideration, $250,000 and 300,000
shares of common stock were deposited into an escrow account to satisfy possible
purchase price reductions and contract indemnities. The shares held in escrow
were considered to be outstanding shares for financial reporting purposes
through March 15, 1993. On March 16, 1993, the Company reached an agreement with
shareholders of Genesis to settle certain price reductions and contract
indemnities. Under the settlement agreement, the $250,000 of cash (plus accrued
interest) was released from escrow to the Genesis shareholders and the Company
received back the 300,000 shares of Microlog stock. The Company recorded the
300,000 shares as treasury stock at a cost of $656,250, reduced goodwill by
$484,930, and reduced an outstanding indemnity receivable by $171,320.
The acquisition has been accounted for as a purchase. The excess of the purchase
price over the fair value of net assets acquired totaled $715,000, as adjusted.
This amount is being amortized on a straight-line basis over seven years.
Accumulated amortization as of October 31, 1994 and 1995 was $498,315, and
$568,736, respectively.
12
<PAGE>
Note 4: Receivables
Receivables consist of the following:
October 31,
1994 1995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Customer accounts receivable $ 2,552,228 $ 2,996,413
Contract retention 71,306 78,742
Accumulated unbilled costs and fees 226,884 40,594
- -------------------------------------------------------------------------------
2,850,418 3,115,749
Less: Allowance for doubtful accounts (233,081) (167,211)
- -------------------------------------------------------------------------------
$ 2,617,337 $ 2,948,538
- -------------------------------------------------------------------------------
Note 5: Inventories
Inventories consist of the following:
October 31,
- ------------------------------------------------------------
1994 1995
- ------------------------------------------------------------
Components and finished goods $ 1,726,615 $ 1,999,192
Work-in-process 300,263 492,312
- ------------------------------------------------------------
2,026,878 2,491,504
Less: Reserve for obsolescence (1,144,694) (1,054,615)
- ------------------------------------------------------------
$ 882,184 $ 1,436,889
- ------------------------------------------------------------
During the third quarter of fiscal 1994, the Company adjusted its reserve for
obsolete inventory by approximately $1.1 million. The Company discontinued
manufacturing the CINDI line of voice processing products in January 1992. The
demand for replacement parts has declined more rapidly than expected, and the
Company believes such demand will continue to decline. As a result, the Company
reserved $375,000 for the CINDI product line. In addition, the introduction of
the Company's VCS Intela product in March 1994 and the switch from 386 CPU's to
486/Pentium CPU's in the Company's voice processing products made it necessary
to reserve $762,000 for its VCS 3500 product line to reflect inventory at the
lower of cost or market.
Note 6: Fixed Assets
Fixed assets consist of the following:
October 31,
- ----------------------------------------------------------------------------
1994 1995
- ----------------------------------------------------------------------------
Buildings $ 2,523,100 $ 2,532,567
Land 520,000 520,000
Office furniture, equipment and capital leases 3,229,416 3,621,890
Vehicles 34,772 23,642
Leasehold improvements 52,702 211,021
- ----------------------------------------------------------------------------
6,359,990 6,909,120
Less: Accumulated depreciation (3,418,065) (3,902,592)
- ----------------------------------------------------------------------------
$ 2,941,925 $ 3,006,528
- ----------------------------------------------------------------------------
Estimated useful lives are as follows:
Buildings 30-40 years
Office furniture, equipment and vehicles 3-7 years
Capital leases and leasehold improvements Shorter of estimated
useful life or lease term
Depreciation expense during fiscal 1993, 1994, and 1995 includes capital lease
amortization of approximately $100,000, $52,000, and $0, respectively.
13
<PAGE>
Note 7: Accrued Expenses
Accrued expenses consist of the following:
October 31,
- -------------------------------------------------------------------
1994 1995
- -------------------------------------------------------------------
Accrued restructuring costs $ 345,936 $ 184,615
Accrued warranty and deferred maintenance 490,750 695,369
Other 578,794 350,326
- -------------------------------------------------------------------
$1,415,480 $1,230,310
- -------------------------------------------------------------------
Note 8: Debt
In December 1995, the Company entered into a new line of credit facility with a
bank. The Company can borrow up to 70% of its eligible receivables to a maximum
of $2,000,000. The line of credit bears interest at the bank's prime rate plus
1.25% and contains a 1/2 of 1% commitment fee on the average unused portion of
the line and a loan origination fee of $10,000. The line of credit subjects the
Company to a number of restrictive covenants, including a requirement to
maintain a minimum consolidated tangible net worth, a ratio of total liabilities
to tangible net worth, and a current ratio. There are restrictions on merger or
acquisitions, payment of dividends, and certain restrictions on additional
borrowings.
The Company is currently negotiating a loan agreement with the same bank for an
additional $1,000,000 for working capital. The agreement will be secured by the
Company's building and will bear interest at the bank's prime rate plus 0.5% and
contains a 0.5% fee on the average unused portion of the loan. This loan
agreement will contain the same restrictive covenants as the $2 million line of
credit.
From July 1, 1993 through December 13, 1995, the Company had no line of credit
facility. From January 1, 1992 through June 30, 1993, the Company maintained a
$1,000,000 revolving credit facility, bearing interest at prime, with any
borrowed amounts collateralized by depository accounts held by the bank. The
Company could borrow up to 95% of the collateralized balance. No amounts were
drawn on this credit facility.
On October 31, 1995, the Company paid the remaining balance of $839,000 of its
mortgage loan, which had an interest rate at the bank's prime rate plus two and
one half percent, on its Corporate Headquarters. The Company was in default
under its mortgage loan covenants and received waivers from its bank of these
covenants through October 31, 1995. In connection with these waivers, the
maturity date of the loan was accelerated by agreement with the bank to
September 30, 1994. The bank subsequently extended the due date of the mortgage
until December 31, 1994, in return for which the Company paid an extension fee
of 1% of the mortgage note balance at September 30, 1994 and $50,000 payments on
October 15, 1994, November 15, 1994, and December 15, 1994. The Company obtained
an additional extension of the due date of the mortgage note until June 30,
1995. This extension required the Company to pay additional principal payments
of $37,500 per month from February 1995 through June 1995. The Company obtained
an additional extension of the due date of the mortgage note until October 31,
1995. This extension required the Company to pay an additional $40,000 of
principal at closing plus a $20,000 principal payment on October 15, 1995. The
remaining balance of $839,000 was paid on October 31, 1995.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
- ---------------------------------------------------------------------------------------------
1994 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable secured by building $1,282,000 $ --
Term note, non-interest bearing, due in quarterly
installments of $45,455 through January 1996 (Note 10) 227,274 45,455
- ----------------------------------------------------------------------------------------------
1,509,274 45,455
Less: Current portion (1,463,818) (45,455)
- ----------------------------------------------------------------------------------------------
Long-term debt $ 45,456 $ --
- ---------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Note 9: Restructuring of Operations
During the third quarter of both fiscal 1992 and 1994, the Company restructured
and consolidated its voice processing operations and incurred restructuring
charges of $1,280,000 and $550,258, respectively. Approximately $980,000 of the
restructuring charge in fiscal 1992 related to leased facilities which were in
excess of the Company's needs. The fiscal 1994 restructuring included
approximately $224,000 for the severance costs of 23 employees, $62,000
associated with the closing of a sales office, $165,000 associated with the
remaining expense of a consulting contract with the Company's former chief
executive officer, and $99,000 associated with fixed assets. At October 31,
1995, the Company had accrued current liabilities and other liabilities
associated with the 1992 and 1994 restructurings of $168,000 and $70,000,
respectively.
The following table sets forth the Company's restructuring reserves for the
years ended October 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
Restructuring Reserves
----------------------
Employee Asset
Separations Writedowns Facilities Other Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total 1992 restructuring
of operations loss $300,000 $100,000 $820,000 $ 60,000 $1,280,000
Cash payments (249,231) -- (521,838) (60,000) (831,069)
Non-cash items -- (100,000) -- -- (100,000)
- -------------------------------------------------------------------------------------------------------------
Reserve balance, October 31, 1993 50,769 -- 298,162 -- 348,931
Total 1994 restructuring
of operations loss 223,987 98,908 62,493 164,870 550,258
Cash payments (185,717) -- (110,522) (22,482) (318,721)
Non-cash items -- (67,702) -- -- (67,702)
- -------------------------------------------------------------------------------------------------------------
Reserve balance, October 31, 1994 89,039 31,206 250,133 142,388 512,766
Cash payments $(89,039) -- (75,244) (89,929) (254,212)
Non-cash items -- (20,804) -- -- (20,804)
- -------------------------------------------------------------------------------------------------------------
Reserve balance, October 31, 1995 -- $ 10,402 $174,889 $ 52,459 $ 237,750
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note 10: Commitments and Contingencies
Compensation Arrangements
In February 1988, the Company entered into non-contributory deferred
compensation contracts with three officers, which concluded on January 1, 1993.
The general provisions of the contracts called for the Company to make payments
to the employees over ten years subsequent to their retirement. The amount of
such payments was based on $72,000 aggregate annual deferred compensation
(limited to certain minimum net income levels under the original five year
contracts) plus interest at prime rates through the individual employee's
retirement date. Effective April 30, 1991, one of these individuals retired from
the Company and elected to receive his deferred compensation over the ten year
period. As of May 1, 1991, the Company ceased making contributions and
accumulating interest to his deferred compensation contract. The Company has
expensed $31,000, $545, and $0, in fiscal 1993, 1994, and 1995, respectively.
In addition to the existing deferred compensation contracts, the Company has an
executive deferred bonus plan which permits the Company, at the discretion of
the Board of Directors, to make deferred bonus awards to key employees based on
their performance, not to exceed 15 percent of the participant's compensation,
plus interest at the prime interest rate. Amounts awarded become vested at the
end of the fourth fiscal year following the award. The Company has expensed
$2,000, $773 and $0, of interest expense in fiscal 1993, 1994, and 1995,
respectively, for these bonuses. No bonuses were granted in fiscal 1993, 1994,
or 1995.
15
<PAGE>
The Company is a party to employment agreements, expiring in 1996 and 1998, with
several of its executive officers. Under certain conditions, these individuals
will be entitled to receive lump sum or monthly payments which aggregate
approximately $1,060,000.
Operating Lease Obligations
The Company has obtained the use of certain facilities and other equipment
through noncancellable operating leases, which expire in various years through
1999. Minimum future noncancellable operating lease payments as of October 31,
1995 are as follows:
Operating Leases
-----------------------------------------------------------------------
Year Ending October 31, Gross Sublease Net
-----------------------------------------------------------------------
1996 $ 552,951 $(277,848) $ 275,103
1997 552,547 (277,848) 274,699
1998 546,637 (180,600) 366,037
1999 323,798 -- 323,798
----------------------------------------------------------------------
$1,975,933 $(736,296) $1,239,637
=======================================================================
As of October 31, 1995, the Company has reserves of $342,000 for the remaining
net operating lease obligation of $698,000 associated with its Rancho Cordova
facility. Rent expense under noncancellable operating lease agreements in fiscal
1993, 1994, and 1995 was approximately $223,000, $225,000, and $267,000 (net of
sublease income of $97,000, $278,000, and $278,000), respectively.
Legal
Microlog and its subsidiaries, Microlog Corporation of Maryland, and Genesis
Electronics Corporation, were sued in February 1991 in the United States
District Court for the Northern District of Texas by VMX, Inc., ("VMX") and
Dytel Corporation ("Dytel"). The lawsuit alleged nonpayment of royalties owed
under a license granted by VMX to Genesis with respect to certain voice mail
technology and infringement by all three defendant corporations of certain
patents involving call processing technology held by VMX and/or Dytel. VMX and
Dytel were seeking an accounting of royalties allegedly owed under the Genesis
agreement and were seeking an injunction and an accounting with respect to the
alleged infringement of the call processing technology patents.
On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel. Under the terms of the settlement, the litigation was dismissed with
prejudice and the products of Microlog's subsidiaries, Microlog Corporation of
Maryland, and Genesis Electronics Corporation, are fully licensed under VMX's
and Dytel's voice mail and automatic call processing patents. Microlog and its
subsidiaries paid VMX $275,000 upon execution of the settlement documents and
issued to VMX $225,000 of Microlog common stock (102,857 shares) which is
subject to redemption as discussed in Note 11. Additionally, Microlog and its
subsidiaries will pay to VMX $500,000 in eleven quarterly installments starting
on July 31, 1993. As of October 31, 1995, ten installments had been made. One
final payment of $45,455 is due in January 1996.
Of the settlement amount, $444,704 was attributed to the receipt by Microlog of
Maryland and Genesis of a fully paid voice mail license, and $555,296 was
attributed to a license under VMX and Dytel automatic call processing patents.
Microlog's subsidiaries also will pay annual license maintenance fees of
$120,000 to VMX under the call processing patents, with the patent expiring in
2007. Microlog of Maryland and Genesis will receive a credit against future
license maintenance fees equal to 12% of the purchase price paid for products
purchased from Rhetorex, a wholly-owned subsidiary of VMX. The Company recorded
the new licenses at a cost of $800,000 and is amortizing the costs over seven
years (See Note 16).
The Company is subject to other litigation from time to time arising from its
operations and receives occasional letters alleging infringement of patents
owned by third parties. Management believes that such litigation and claims are
without merit and will not have a material effect on the Company's financial
position or results of operations.
16
<PAGE>
Note 11: Mandatorily Redeemable Common Stock
In accordance with the settlement discussed in Note 10, the Company issued to
VMX 102,857 shares of Microlog common stock with a market value at the date of
issuance of $225,000. Under certain conditions, the Company was required to
repurchase any such shares held by VMX at April 30, 1996 at a price of $2.1875
per share. On July 26, 1995, VMX sold all of these shares in the open market,
releasing the Company from its obligation to purchase these shares.
Note 12: Stock Option Plans
The Company has two incentive stock option plans. Under the first plan, the
Company may grant options to Directors and employees to purchase up to 750,000
shares of common stock at not less than fair market value at the time of grant.
Under the second plan, which was adopted by the Board of Directors in 1995,
subject to shareholder approval, the Company may grant options to employees to
purchase up to 1,000,000 shares of common stock at not less than fair market
value at the time of grant. Additional information with respect to the incentive
stock option activity is summarized in the following table:
<TABLE>
<CAPTION>
Number Option Amount
of Shares Per Share Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option, October 31, 1992 458,500 $1.00-5.00 $ 750,125
Options granted 144,800 1.00-3.75 413,300
Options canceled (73,790) 1.00-2.75 (132,085)
Options exercised (21,910) 1.00-1.50 (29,490)
- ----------------------------------------------------------------------------------------------------
Shares under option, October 31, 1993 507,600 1.00-5.00 1,001,850
Options granted 36,750 1.00-2.38 39,938
Options canceled (103,750) 1.00-5.00 (308,494)
Options exercised (6,850) 1.00-2.25 (7,413)
- ----------------------------------------------------------------------------------------------------
Shares under option, October 31, 1994 433,750 1.00-5.00 725,881
Options granted 587,167 1.00-4.38 1,877,943
Options canceled (85,785) 1.00-2.38 (144,648)
Options exercised (25,600) 1.00-1.13 (25,629)
- ----------------------------------------------------------------------------------------------------
Shares under option, October 31, 1995 909,532 $1.00-5.00 $ 2,433,547
- ----------------------------------------------------------------------------------------------------
</TABLE>
Options granted under the plans vest at various dates from immediately to
ratably over five years. As of October 31, 1995, options available for granting
were 498,958, and granted options for purchasing 318,650 shares, at prices
ranging from $1.00 to $5.00 per share, were exercisable.
The Company also has reserved 50,000 shares for issuance outside these plans as
stock options or stock bonuses to key employees. These shares may be granted at
such times and under such terms as the Board of Directors may determine. No
grants or issuances had been made as of October 31, 1995.
Additionally, the Company maintains a non-employee director stock option plan.
Under this plan, which was amended in December 1995, the Company may grant up to
125,000 shares, subject to shareholder approval, at not less than the fair
market value at the time of grant. Options are fully exercisable upon granting.
Non-statutory options for 61,000 shares have been granted with an exercise price
of $1.375 to $6.75. As of October 31, 1995, options available for granting were
14,000.
The Company has also issued stock options to non-employee consultants outside of
the above plans. Options for 48,000 shares have been granted with an exercise
price of $1.00 to $2.9375. Options granted vest immediately to ratably over
three years. Compensation expense associated with these options was not
material.
17
<PAGE>
Note 13: Income Taxes
On November 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS109), Accounting for Income Taxes. The adoption of FAS 109
changes the Company's method of accounting for income taxes from the deferred
method (APB 11) to an asset and liability approach. Previously, the Company
deferred the past tax effects of timing differences between financial reporting
and taxable income. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. There was no material cumulative effect from the adoption of
FAS 109.
The provision for income taxes in fiscal 1993, 1994, and 1995 consists of:
Year Ended October 31,
- -------------------------------------------------------------------------------
1993 1994 1995
- -------------------------------------------------------------------------------
Income taxes payable $ 37,255 $ 23,234 $ 20,000
Deferred income taxes -- -- --
Tax effect of net operating loss carryforward 433,000 -- --
- -------------------------------------------------------------------------------
$470,255 $ 23,234 $ 20,000
- -------------------------------------------------------------------------------
Microlog and its subsidiaries file a consolidated Federal income tax return. The
provision for income taxes recorded in fiscal 1993 contains a charge in lieu of
Federal and state income taxes that would be required to be paid had the Company
not been able to utilize its net operating loss carryforwards. The tax benefit
for fiscal 1993 of $433,000 ($.11 per share) resulting from such utilization is
shown as an extraordinary item in the consolidated statement of operations.
Income taxes payable in fiscal 1993 and 1994 related to state income taxes.
Income taxes payable in fiscal 1995 relate to state income taxes and the
alternative minimum tax for Federal income tax.
A reconciliation of the statutory Federal tax rate to the Company's effective
tax rate is as follows:
Year Ended October 31,
1993 1994 1995
- -----------------------------------------------------------------
Statutory Federal tax rate (benefit) 34.0% (34.0%) 34.0%
State income taxes, net of
Federal tax benefit 5.7 (5.0) 5.0
Benefit not recorded due to
net carryforward position -- 36.0 --
Utilization of net operating loss -- -- (42.6)
Goodwill amortization 7.6 3.2 4.4
Other 1.8 .3 .6
- -----------------------------------------------------------------
49.1% 0.5% 1.4%
- -----------------------------------------------------------------
18
<PAGE>
Deferred tax (liabilities) assets are comprised of the following:
October 31,
1994 1995
- --------------------------------------------------------------
Inventory $ (9,364 $ --
- --------------------------------------------------------------
Gross deferred tax liabilities (9,364) --
Accounts receivable reserve 90,902 65,212
Inventory reserves 488,363 360,257
Accrued vacation and benefits 131,967 175,148
Warranty reserves 20,573 52,553
Restructuring reserves 288,914 160,781
Deferred compensation 109,638 104,995
Deferred revenues 170,820 95,444
Sales returns 45,047 21,304
Other 118,221 145,606
Loss carryforwards 4,005,061 3,750,602
- --------------------------------------------------------------
Gross deferred tax assets 5,469,506 4,931,902
Valuation allowance (5,460,142) (4,931,902)
- --------------------------------------------------------------
Net deferred income taxes $ -- $ --
- --------------------------------------------------------------
The net change in the valuation allowance for deferred tax assets was a decrease
of $528,240 during the year and relates primarily to utilization of loss
carryforwards, as well as reversal of other temporary differences.
Approximately $9.6 million of tax loss carryforwards and $156,000 of research
and development tax credits can be utilized by the Company through 2008 and
2007, respectively. If certain substantial changes in the Company's ownership
should occur, there would be an annual limitation on the amount of the
carryforwards which can be utilized.
Note 14: Related Party Transactions
During fiscal 1993, 1994, and 1995, the Company sold products and services
aggregating $1,799,924, $426,725, and $110,986, respectively, to American
Computer and Electronics Corporation (American Computer), of which a former
member of the Company's Board of Directors is an executive officer. The
Company's former Chief Executive Officer, who is a member of the Company's Board
of Directors, was a member of American Computer's Board of Directors. At October
31, 1995, $97,622 was due from this related party.
Note 15: Pension and Profit Sharing Plans
The parent and its subsidiaries have a defined contribution pension plan
covering all employees. After the employee completes one-year of service, the
plan provides for annual contributions by the Company equal to 6% of the
employee's annual earnings, excluding bonuses and commissions. The Company's
contributions to the plan vest after a five-year period. Effective for the
period September 1, 1991 through July 31, 1993, the Board of Directors reduced
the contribution rate to 1% of each employee's annual earnings for all companies
except Old Dominion Systems Incorporated of Maryland. Employees may also make
voluntary contributions to the plan up to a maximum of 10% of their annual
earnings. In accordance with the plan, unvested amounts relating to terminated
employees with a break in service greater than one year are credited against
pension contributions by the Company. Such forfeitures amounted to $115,000,
$115,000, and $111,000 in fiscal 1993, 1994, and 1995, respectively. It is the
Company's policy to fund pension cost accrued. Net expense of the plan was
approximately $199,000, $331,000, and $365,000 in fiscal 1993, 1994, and 1995,
respectively.
The Company also maintains a 401(k) profit sharing plan and trust. The plan
allows for employees to contribute up to 10% of gross salary. The Company
matches 50% of employee contributions not exceeding 4% of eligible
19
<PAGE>
salary. Effective for the period September 1, 1991 through January 31, 1993, the
matching contributions were suspended for all companies except Old Dominion
Systems Incorporated of Maryland. Total expense of the plan was approximately
$67,000, $145,000, and $138,000 in fiscal 1993, 1994, and 1995, respectively.
Note 16: Supplemental Cash Flow Information
The Company paid cash for interest expense and income taxes as follows:
Year Ended October 31,
- ---------------------------------------------
1993 1994 1995
- ---------------------------------------------
Interest $123,100 $137,400 $112,243
Income taxes $ 40,800 $ 31,500 $ 23,234
During fiscal 1993, the Company issued 12,052 shares of Common Stock as payment
for deferred officers' compensation totaling $14,312. No shares were issued in
fiscal 1994 or 1995.
As discussed in Note 10, in 1993, the Company purchased patent licenses from VMX
and Dytel in conjunction with the settlement of related litigation as follows:
Cash paid $ 275,000
New term note payable 500,000
Common stock issued 225,000
Existing VMX license 125,000
Existing term note payable (161,759)
Accrued royalties (163,241)
- ---------------------------------------
Licenses acquired $ 800,000
- ---------------------------------------
As discussed in Note 11, in 1995, the Company was released from its obligation
to repurchase common stock from VMX, when all of the 102,857 shares were sold by
VMX in the open market. As a result, the Company's liability to VMX of $225,000
was credited to stockholders' equity in the consolidated balance sheet.
20
<PAGE>
Note 17: Selected Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results and the price
range of common stock for the Company's last eight fiscal quarters.
<TABLE>
<CAPTION>
Jan. 31, April 30, July 31, Oct. 31,
1994 1994 1994 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $4,095,399 $4,421,370 $4,290,151 $5,861,842
Gross margin 1,148,579 1,101,994 (182,852) 2,215,176
Income (loss) from operations (950,309) (966,065) (3,343,347) 343,040
Net income (loss) (976,190) (948,976) (3,379,685) 320,810
Per common share: $(0.25) $(0.24) $(0.87) $0.08
- ----------------------------------------------------------------------------------------------------------
Stock prices
High $3.750 $2.625 $1.500 $1.00
Low 2.375 1.000 0.875 0.50
- ----------------------------------------------------------------------------------------------------------
Jan. 31, April 30, July 31, Oct. 31,
1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------
Net sales $5,428,806 $5,306,899 $5,555,881 $6,094,057
Gross margin 2,092,901 2,297,968 2,418,972 2,656,161
Income from operations 263,844 302,691 361,692 478,929
Net income 263,844 302,691 361,692 458,929
Per common share: $0.07 $0.08 $0.09 $0.11
- ----------------------------------------------------------------------------------------------------------
Stock prices
High $ 1.50 $ 1.813 $ 3.375 $ 5.125
Low 0.50 0.875 1.250 2.750
- ----------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
Microlog Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Microlog Corporation and
its subsidiaries at October 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in
the period ended October 31, 1995, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Washington, DC
December 22, 1995
---------------------------------------------------------------------
22
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table sets forth for the fiscal periods indicated the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of operations and the percentage change in these items
from the prior fiscal period.
<TABLE>
<CAPTION>
Period-to-Period
Percentage Changes
Percentage of Net Sales
Year Ended October 31, 1993 1994
to to
1993 1994 1995 1994 1995
-------------------------------- ------------------
<S> <C> <C> <C> <C> <C>
Net sales:
Voice processing 64.1% 56.6% 62.9% (20.7%) 33.2%
Performance analysis 35.9% 43.4% 37.1% 8.5% 2.5%
--------------------------------
Total net sales 100.0% 100.0% 100.0% (10.2%) 19.9%
-------------------------------
Costs and expenses:
Cost of sales 58.2% 77.1% 57.7% 18.9% 10.2%)
Selling, general and administrative 29.5% 37.5% 28.5% 27.9% (9.0%)
Research and development 7.3% 8.8% 7.1% 8.7% (3.2%)
Restructuring costs 0.0% 2.9% 0.0% 100.0% (100.0%)
-------------------------------
Total costs and expenses 95.0% 126.3% 93.3% 19.4% (11.4%)
-------------------------------
Investment and other income
and (expense), net (0.4%) (0.3%) (0.4%) 53.0% 111.2%
--------------------------------
Income (loss) before income taxes
and extraordinary item 4.6% (26.6%) 6.3% (618.4%) 128.4%
--------------------------------
Provision for income taxes 2.3% 0.1% 0.1% (95.1%) (13.9%)
--------------------------------
Income (loss) before extraordinary item 2.3% (26.7%) 6.2% (1123.9%) 127.8%
--------------------------------
Extraordinary item 2.1% 0.0% 0.0% 0.0% 0.0%
--------------------------------
Net income (loss) 4.4% (26.7%) 6.2% (641.9%) 127.8%
===============================
</TABLE>
Results of Operations
The Company had net income of $1.4 million ($.34 per share) for the fiscal year
ended October 31, 1995. By comparison, the Company incurred a net loss of $5.0
million ($1.29 per share) for the fiscal year October 31, 1994, and had a net
income of $920,000 ($.23 per share) for the fiscal year ended October 31, 1993.
The improvement in earnings in fiscal 1995 was primarily attributable to a
significant increase in voice processing net sales and a restructuring of the
Company's voice processing operations in the third quarter of fiscal 1994,
bringing costs more in line with sales.
On October 31, 1995, the Company paid the remaining balance of $839,000 of its
mortgage loan on its Corporate Headquarters. This repayment resolved the
Company's difficulties under that loan, including non-compliance with certain
mortgage loan covenants and indications from the bank that it was no longer
willing to extend the maturity date of the loan. The Company has since entered
into a new line of credit facility with another bank under which it can borrow
up to 70% of its eligible accounts receivable to a maximum of $2,000,000. The
Company is
23
<PAGE>
currently negotiating an additional $1,000,000 loan agreement with the same
bank, which will be secured by the Company's building. See "Liquidity and
Capital Resources".
Net Sales
Net sales for fiscal 1995 were $22.4 million, which represented an increase of
20% from net sales in fiscal 1994. Net sales for fiscal 1994 were $18.7 million,
which represented a decrease of 10% as compared to $20.8 million of net sales in
fiscal 1993. The increase in fiscal 1995 and the decrease in net sales during
fiscal 1994 are primarily attributable to changes in voice processing net sales.
Voice Processing Net Sales
The Company's voice processing net sales increased 33% in fiscal 1995 to $14.1
million, compared to $10.6 million in fiscal 1994. The increase in net sales
during fiscal 1995 resulted from a increase of 26% in voice processing product
sales, and by an increase of 54% in product support and services sales. The
increase in product sales is primarily attributable to an increase in sales to
government customers ($3.6 million), which the Company believes is primarily due
to the attractiveness to government customers of the Company's Intela and VCS
3500 products, to an increase in sales to commercial customers ($0.7 million) of
the Company's new Retail Solution products, and to an increase in sales to
international customers ($0.4 million).
The Company's voice processing net sales decreased 21% in fiscal 1994 from $13.3
million in fiscal 1993. The decline in net sales during fiscal 1994 resulted
from a decrease of 28% in voice processing product sales offset by an increase
of 9% in product support and services sales. The decline in product sales is
primarily attributable to decreases in sales of the Company's VCS 3500 products
to large multiple unit customers and to international customers.
In 1995, sales to the Company's 10 largest customers accounted for 73% of voice
processing sales. The ten largest customers in fiscal 1993 accounted for 73% of
voice processing sales. By contrast, sales to these customers in fiscal 1994
accounted for only 50% of voice processing sales.
Net sales of voice processing product support and support services increased 54%
in fiscal 1995 to $4.2 million, compared to $2.7 million in fiscal 1994. Product
support and services net sales in fiscal 1993 were $2.5 million. The increase in
service sales in fiscal 1995 is primarily attributable to an increase in the
base of systems covered by maintenance contracts, as well as an increase in the
applications used by the Federal Government.
During fiscal 1995, approximately $9.6 million (68% of voice processing net
sales and 43% of consolidated net sales) were in the government sector. This
compares to $5.9 million (56% of voice processing net sales and 32% of
consolidated net sales) for fiscal 1994 and $7.6 million (57% of voice
processing net sales and 36% of consolidated net sales) for fiscal 1993.
Traditionally the government market segment has been a strong one for the
Company. The increase in sales to government agencies resulted principally from
increased sales of the Company's Intela and VCS 3500 products to the Internal
Revenue Service and for applications such as Voice Balance Due (VBD) and Refund
Inquiry.
Sales to commercial customers increased 69% to $1.6 million (12% of voice
processing net sales) in fiscal 1995. By comparison, sales to commercial
customers were $1.0 million (9% of voice processing net sales) in fiscal 1994
and $1.1 million (8% of voice processing net sales) in fiscal 1993. Commercial
sales increased in fiscal 1995 primarily as a result of increased sales of the
Company's Retail Solution product. The Retail Solution product offers multiple
voice processing applications designed to improve operations at retail
pharmacies.
International voice processing sales increased 49% to $1.3 million (9% of voice
processing net sales) in fiscal 1995. This compares to $.8 million (8% of voice
processing net sales) in fiscal 1994 and $1.2 million (9% of voice processing
net sales) in fiscal 1993. The increase in international sales is the result of
the addition of third party resellers of the Company's products such as
Communication & Network Systems PTE, Ltd. of Singapore and Philips
Communications Systems B.V. of The Netherlands. The Company is actively pursuing
additional third party resellers of the Company's products.
The Company is pursuing a strategy that it believes will increase sales in its
voice processing division. This strategy includes the introduction of additional
features that will enhance the global marketability of Intela,
24
<PAGE>
pursuit of large government procurements, marketing of its Retail Solution
product, development of new applications solutions for commercial markets, and
expansion of third party distributors in the US, Europe, Asia, and the Far East.
Microlog believes that technological improvements to its products and
development of new applications are essential if the Company is to increase its
voice processing revenues. The Company believes that its Intela Interactive
Information Response ("IIR") system is gaining acceptance in government,
commercial and international markets and the Company expects Intela to pass the
VCS 3500 as its principal product in percent of sales.
As of October 31, 1995, the Company had a backlog of existing orders for voice
processing systems totaling $3.7 million. The backlog, as of October 31, 1994,
was also $3.7 million. The Company has experienced fluctuations in its backlog
at various times during the past two fiscal years attributable primarily to the
seasonality of governmental purchases. In addition, the Company has observed a
lengthening of the period between the date of booking an order and the date of
shipment, with the shipment depending on any customer delivery schedules and any
customization needed for VCS 3500 or Intela applications. The Company
anticipates that all of the outstanding orders at October 31, 1995 will be
shipped and the sales recognized during fiscal 1996. Although the Company
believes that its entire backlog of orders consists of firm orders, because of
the possibility of customer changes in delivery schedules and delays inherent in
the government contracting process, the Company's backlog as of any particular
date may not be indicative of actual sales for any future period.
Performance Analysis and Support Services Net Sales
Net sales from performance analysis and support services for fiscal 1995 were
$8.3 million, which represented a 3% increase from the net sales from this line
of business during the prior year. Net sales for fiscal 1994 were $8.1 million,
representing an increase of 8% from $7.5 million in fiscal 1993. These increases
resulted from the addition of new contracts, as well as increases in the level
of work authorized under existing contracts from the Johns Hopkins University
Applied Physics Laboratory ("APL"), the Company's principal customer for these
services.
The Company has another customer for these services, American Telephone and
Telegraph ("AT&T"). However, the Company's contracts with AT&T have been
declining since fiscal 1993 as a result of decreases in levels of work
associated with these contracts. Net sales to this customer were 4%, 5%, and 10%
of performance analysis and support services sales for fiscal 1995, 1994, and
1993, respectively. Net sales through AT&T for fiscal 1996 are expected to be
significantly less than fiscal 1995.
The Company is seeking to diversify its operations for performance analysis and
support services by seeking contracts in non-defense related areas. Because of
the lower profit margins allowed on contracts for performance analysis and
support services and the Company's limited success to date in obtaining new
contracts with contractors and agencies other than APL or AT&T, the Company
believes that this segment of its business is not likely to generate a
substantial increase in profitability. Nevertheless, the Company believes that
its performance analysis contracts are likely to continue to provide a stable
source of sales for the Company. The Company does not anticipate that any
changes in defense priorities or spending will result in any material adverse
affect over the next fiscal year on its net sales from performance analysis and
support services nor alter the manner in which it procures contracts for such
services. However, there is no assurance that changes in defense priorities or
continuing budget reductions will not cause such an effect during the fiscal
year or thereafter.
As of October 31, 1995, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $7.8 million.
By comparison, the backlog as of October 31, 1994 was $4.6 million. The increase
in backlog is attributable primarily to a significant multi-year contract award
and increased funding levels on existing or new contracts. The Company
anticipates that these services will be provided during the next three fiscal
years. The Company estimates that of the $7.8 million of backlog at October 31,
1995, $3.9 million will be recognized as sales beyond fiscal 1996. Because of
the delays inherent in the government contracting process or possible changes in
defense priorities or spending, the Company's backlog as of any particular date
may not be indicative of actual sales for any future period. Although the
Company believes that its backlog of funding on existing contracts is firm, the
possibility exists that funding for some contracts on which the Company is
continuing to work, in the expectation of renewal, may not be authorized (and
the Government has the right to cancel contracts at any time), although to date
this has not occurred.
25
<PAGE>
Costs and Expenses
Cost of sales of products were $4.7 million, or 48% of net sales of products,
for fiscal 1995; $5.8 million, or 73% of net sales of products, for fiscal 1994;
and $4.4 million, or 40% of net sales of products, for fiscal 1993. The decrease
in cost of sales of products for fiscal 1995 is attributable in part to an
increase in the sales of products having a lower cost of sales and to cost
cutting measures taken by the Company during fiscal 1994. The high cost of sales
of products for fiscal 1994 is attributable in large part to a reserve of
$1,137,039 for obsolete inventory; without this reserve, costs of sales of
products for the year ended October 31, 1994 would have equaled $4.7 million, or
59% of net sales. The decrease in cost of sales for fiscal 1993 reflects cost
cutting measures taken by the Company, a restructuring of the Company's
operations (see Restructuring Costs), and a general reduction in raw materials
costs during fiscal 1993. Competitive pressures and technological improvements
in hardware components are anticipated to continue to prevent raw materials
costs from rising.
During the third quarter of fiscal 1994, the Company adjusted its reserve for
obsolete inventory by $1,137,039. The Company discontinued manufacture of the
CINDI line of voice processing products in January 1992. The demand for
replacement parts has declined more rapidly than expected, and the Company now
believes such demand will continue to decline. As a result, the Company has
reserved $375,000 for the CINDI product line. In addition, the introduction of
the Company's VCS Intela product in March 1994 and the switch from 386 CPU's to
486/Pentium CPU's in the Company's voice processing products has made it
necessary to reserve $762,000 for components relating to its VCS 3500 product
line. The Company has not discontinued its VCS 3500 product and does not plan to
do so in the near future. However, with the introduction of its new product and
changes in product design, the Company believed that a reserve against existing
inventory of VCS 3500 products was appropriate.
Cost of sales of services were $8.2 million, or 65% of net sales of services,
for fiscal 1995; $8.6 million, or 80% of net sales of services, for fiscal 1994;
and $7.7 million, or 78% of net sales of services, for fiscal 1993. The decrease
in cost of sales in fiscal 1995 is attributable in part to the increase in net
sales of voice processing services, which have a lower cost of sales than
performance analysis. The decrease is also attributable to a general reduction
in raw material costs and a restructuring of the Company's voice processing
operations in fiscal 1994.
Selling, general and administrative costs were $6.4 million or 28% of net sales,
for fiscal 1995; $7.0 million, or 38% of net sales, for fiscal 1994; and $6.1
million, or 29% of net sales, for fiscal 1993. The decreases in fiscal 1995 and
1993 were attributable primarily to cost cutting measures taken by the Company
and a restructuring of the Company's operations (see Restructuring Costs). The
increase in fiscal 1994 was attributable to increased sales and marketing
activities for both the voice processing and performance analysis segments.
Research and development expenses reflect costs associated with the development
of applicable software and product enhancements for the Company's voice
processing systems. The Company believes that the process of establishing
technological feasibility with its new products is completed approximately upon
release of the products to its customers. Hence, the Company does not anticipate
capitalizing research and development costs. Research and development expenses
were $1.6 million, or 7% of net sales for fiscal 1995; $1.6 million, or 9% of
net sales for fiscal year 1994; and $1.5 million, or 7% of net sales for fiscal
1993. The Company presently plans to maintain its research and development
program at approximately the same level, although research and development
expenses in the next fiscal year are expected to be somewhat higher than fiscal
1995, because of the Company's strategy to continue the development of new
products and the enhancement of existing products.
Restructuring Costs
In the quarter ended July 31, 1994, the Company's voice processing operations
were restructured extensively at a cost of approximately $550,000. This was the
third such restructuring in four years, and resulted from the Company's ongoing
significant losses during fiscal 1991, 1992 and 1994 due to declines in revenues
for voice processing products and/or failure to increase such revenues to keep
pace with planned increases in expenditures. The 1994 restructuring included a
25% reduction in voice processing personnel at a cost of $224,000, a $62,000
charge associated with the closing of a sales office in California, $165,000 of
expenses associated with the consulting contract between the Company and its
former Chief Executive Officer, and $99,000 of fixed assets associated with the
office closing and terminated employees. The Company believes that the
restructuring has had a positive impact on the results of fiscal 1995 by
reducing employment, overhead, and ongoing costs of
26
<PAGE>
approximately $1.4 million annually. The Company does not believe that any
further restructuring will be required in the near future.
Investment and Other Income, Net
The Company had net investment and other expenses of $93,000 for fiscal 1995, as
compared to $44,000 for fiscal 1994 and $94,000 for fiscal 1993. The lower
expense level in fiscal 1994 resulted from a $42,000 gain on the sale of one of
its two office condominium units. Without this gain, the Company would have had
a net other expense of $86,000 in fiscal 1994.
Provision for Income Taxes
The Company has exhausted its ability to carry losses back for income tax
refunds. However, net operating loss and tax credit carryforwards for income tax
reporting purposes of approximately $9.6 million and $156,000, respectively,
will be available to offset taxes generated from future taxable income. These
potential future tax benefits have not been reflected in the financial
statements since realization is not assured.
The 1993 provision for income taxes of $470,255 contained a charge in lieu of
Federal and state income taxes that would be required to be paid had the Company
not been able to utilize its net operating loss carryforwards. The taxes payable
of $23,000 in fiscal 1994, were attributable to the state income taxes on
earnings from a profitable subsidiary. The $20,000 of taxes payable in fiscal
1995 are attributable to state income taxes and the alternative minimum tax for
Federal income tax.
Merger Price Adjustments and Escrowed Shares
On March 16, 1993, Microlog Corporation reached an agreement under which 300,000
shares of Microlog stock, held in escrow since the November 29, 1990 merger of
Genesis Electronics and Microlog Corporation, were returned to Microlog.
Pursuant to the merger agreement, Microlog had acquired Genesis for 675,000
shares of its common stock and paid $500,000 in cash to the Genesis
shareholders, of which $250,000 and 300,000 shares of common stock payable to
the principal Genesis shareholders had been deposited into an escrow account to
satisfy possible purchase price adjustments and contingent liabilities. Claims
had been asserted by Microlog against the amounts held in escrow. Under the
settlement agreement, the $250,000 of cash (plus accrued interest) was released
from escrow to the principal Genesis shareholders and Microlog received back the
300,000 shares of Microlog stock. The Company recorded the 300,000 shares as
treasury stock at a cost of $656,250, reduced goodwill by $484,930, and reduced
an outstanding indemnity receivable by $171,320.
Litigation Settlement
Microlog and its subsidiaries, Microlog Corporation of Maryland, and Genesis
Electronics Corporation, were sued in February 1991 in the United States
District Court for the Northern District of Texas by VMX, Inc., ("VMX") and
Dytel Corporation ("Dytel"). The lawsuit alleged nonpayment of royalties owed
under a license granted by VMX to Genesis with respect to certain voice mail
technology and infringement by all three defendant corporations of certain
patents involving call processing technology held by VMX and/or Dytel. VMX and
Dytel were seeking an accounting of royalties allegedly owed under the Genesis
agreement and were seeking an injunction and an accounting with respect to the
alleged infringement of the call processing technology patents.
On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel. Under the terms of the settlement, the litigation was dismissed with
prejudice and the products of Microlog's subsidiaries, Microlog Corporation of
Maryland, and Genesis Electronics Corporation, are fully licensed under VMX's
and Dytel's voice mail and automatic call processing patents. Microlog and its
subsidiaries paid VMX $275,000 upon execution of the settlement documents and
issued to VMX $225,000 of Microlog common stock (102,857 shares), which was
subject to redemption under certain conditions if still held by VMX at April 30,
1996 at a price of $2.1875 per share, as discussed in Note 10 of The Notes to
Consolidated Financial Statements. As discussed in Note 11, in 1995, the Company
was released from its obligation to repurchase common stock from VMX, when all
of the 102,857 shares were sold by VMX in the open market. As a result, the
Company's liability to VMX of $225,000 was credited to stockholders' equity in
the consolidated balance sheet. Additionally, Microlog and its subsidiaries
agreed to pay to VMX a total of $500,000 in eleven quarterly installments
starting on July 31, 1993; the first ten installments have been paid. Of the
settlement amount, $444,704 was attributed to the receipt by Microlog of
27
<PAGE>
Maryland and Genesis of a fully paid voice mail license, and $555,296 was
attributed to a license under VMX and Dytel automatic call processing patents.
The Company recorded the new licenses at a cost of $800,000 and is amortizing
the licenses over seven years.
Liquidity and Capital Resources
Working capital as of October 31, 1995 was $749,000, as compared to a negative
$704,000 as of October 31, 1994. Cash, and cash equivalents, as of October 31,
1995 were $923,000, as compared to $1.2 million as of October 31, 1994. The
decline in cash and cash equivalents is primarily attributable to the payment of
the remaining balance of $839,000 of the Company's mortgage loan on October 31,
1995.
Accounts receivable as of October 31, 1995 were $3.0 million, as compared to
$2.7 million as of October 31, 1994. The increase in accounts receivable is
attributable to increased voice processing net sales. Included in the 1995 and
1994 balance is a related party receivable of $98,000 and $70,000, respectively,
relating to the sale of voice processing products and services to American
Computer and Electronics Corporation, of which a former member of the Board of
Directors is an executive officer and of which a member of the Board of
Directors was a director.
Fixed assets as of October 31, 1995 were $3.0 million, as compared to $2.9
million as of October 31, 1994. The net increase in fixed assets resulted from
the addition of $542,000 of assets, net of disposals and depreciation expense of
$475,000 for fiscal 1995.
On October 31, 1995, the Company repaid the remaining balance of the mortgage
loan on its Corporate Headquarters. The Company had been in default under
certain mortgage loan covenants during fiscal 1994 and 1995 and had received
waivers from its bank of these covenants through October 31, 1995. The maturity
date of the loan had been accelerated by agreement with the bank to September
30, 1994, and was subsequently extended by the bank on three occasions through
October 31, 1995. In connection with these extensions, the Company paid an
extension fee of 1% of the mortgage note balance at September 30, 1994 and made
additional principal payments in varying amounts (from $37,500 to $50,000 per
month). The remaining balance of $839,000 was paid on October 31, 1995.
In December 1995, the Company entered into a new line of credit facility with a
bank. Under this facility the Company can borrow up to 70% of its eligible
accounts receivable to a maximum of $2 million. The line of credit bears
interest at the bank's prime rate plus 1.25% and contains a 0.5% commitment fee
on the average unused portion of the line. The line of credit subjects the
Company to a number of restrictive covenants, including a requirement to
maintain a minimum consolidated tangible net worth, a ratio of total liabilities
to tangible net worth and a current ratio. There are prohibitions against on
merger or acquisitions, payment of dividends, and certain additional borrowings
without bank approval. The line is secured by all of the Company's tangible
assets.
The Company is currently negotiating with the same bank for a $1 million loan
agreement secured by the Company's building. The proposed terms for the loan
provides for the loan agreement to bear interest at the bank's prime rate plus
0.5% and contains a 0.5% fee on the average unused portion of the loan. This
loan is expected to contain the same restrictive covenants as the $2 million
line of credit. The Company anticipates closing on this credit facility in
February 1996.
The Company believes that, through conservative management of its cash and cash
equivalents, it will not need additional financial resources beyond these
presently expected to be available during fiscal 1996.
In March 1995, the Financial Accounting Standards Board (the "Board") issued
Statement of Financial Accounting Standards No. 121 "Accounting for Impairment
of Long Lived Assets and for Long Lived Assets to be Disposed of," which the
Company expects to adopt in fiscal 1996. Additionally, in October 1995, the
Board issued Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," which the Company expects to adopt in fiscal 1997.
Adoption of these new statements are not expected to have a material impact on
the Company's financial position or results of operations.
28
<PAGE>
Quarterly Results
Note 17 of the Notes to Consolidated Financial Statements of the Company
contained in this Annual Report presents unaudited quarterly operating results
for the Company's last eight fiscal quarters. The Company believes that this
unaudited information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the selected
quarterly information when read in conjunction with the Consolidated Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any subsequent period.
The Company's quarterly results fluctuated significantly, primarily because of
factors affecting the level of net sales and changes in the level of selling,
general, and administrative expenses. The Company was profitable during all four
quarters of fiscal 1993. The Company experienced losses during the first three
quarters of fiscal 1994, including a $3.5 million loss during the third quarter,
which included a $550,000 charge relating to a restructuring of the Company's
voice processing operations and a $1.1 million charge for obsolete inventory.
The Company was profitable in the fourth quarter of fiscal 1994 and in all four
quarters of fiscal 1995.
Fourth quarter net voice processing revenues are typically improved by year-end
incentives to sales employees and the Federal Government's year-end. The Company
anticipates that this trend will continue in fiscal 1996.
Price Range of Common Stock
The Common Stock is presently traded on the over-the-counter market under the
symbol MLOG. As of January 19, 1996, there were approximately 277 holders of
record of the Common Stock. This number does not reflect the number of
individuals or institutional investors holding stock in nominee name through
banks, brokerage firms, and others.
Note 17 of the Notes to Consolidated Financial Statements of the Company
contained in this Annual Report sets forth, for the period indicated, the range
of high and low transaction prices for the Common Stock as reported on the
Nasdaq SmallCap Market. The closing price of the Common Stock on January 19,
1996 was $5.25 per share.
Dividend Policy
The Company has paid dividends twice since its inception in 1969, the most
recent being a $.10 cash dividend ($.033 as adjusted for a three-for-one stock
split in April 1986) in November 1985. Certain of the Company's debt agreements
restrict the payment of dividends. See Note 8 of the Notes to Consolidated
Financial Statements. The Company does not anticipate paying any cash dividends
in the foreseeable future.
Microlog Corporation
Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
Income Statement Data:
<TABLE>
<CAPTION>
Year Ended October 31,
- -------------------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $19,614,230 $19,526,503 $20,798,323 $18,668,762 $22,385,643
Income (loss) from
operations (6,916,544) (3,465,726) 1,050,934 (4,916,681) 1,500,343
Net income (loss) (6,780,139) (3,454,284) 919,779 (4,984,041) 1,387,132
Per common share:
Primary $ (1.71) $ (.86) $ .23 $ (1.29) $ .34
Fully diluted $ (1.71) $ (.86) $ .22 $ (1.29) $ .34
</TABLE>
29
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
October 31,
- -------------------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 6,494,495 $ 3,396,862 $ 4,945,780 ($ 704,004) $ 748,974
Total assets 17,798,042 14,084,965 13,438,828 9,055,979 9,425,716
Long-term debt, net
of current maturities 1,949,023 1,669,204 1,659,273 45,456 --
Stockholders' equity 10,632,995 7,193,191 7,500,522 2,523,894 4,161,654
(1) Net income for fiscal 1993 includes the tax benefit related to utilization
of net operating loss carryforwards. See Note 13 of the Notes to
Consolidated Financial Statements.
</TABLE>
30
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-30965 and 33-34094) of Microlog Corporation of
our report dated December 22, 1995 appearing on page 22 of the 1995 Annual
Report to Shareholders of Microlog Corporation which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears on page F-2 of
this Form 10-K.
Price Waterhouse LLP
Washington, DC
January 29, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<CASH> 922,763
<SECURITIES> 0
<RECEIVABLES> 3,115,749
<ALLOWANCES> (167,211)
<INVENTORY> 1,436,889
<CURRENT-ASSETS> 5,516,177
<PP&E> 6,909,120
<DEPRECIATION> (3,902,592)
<TOTAL-ASSETS> 9,425,716
<CURRENT-LIABILITIES> 4,767,203
<BONDS> 0
<COMMON> 45,709
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,425,716
<SALES> 22,385,643
<TOTAL-REVENUES> 22,385,643
<CGS> 12,919,641
<TOTAL-COSTS> 20,886,300
<OTHER-EXPENSES> 5,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,244
<INCOME-PRETAX> 1,407,131
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 1,387,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,327,131
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
