<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 1996 Commission file No. 0-14880
Microlog Corporation (Exact name
of registrant as specified in its charter).
State of Incorporation: Virginia
I.R.S. Employer Identification No.: 52-0901291
20270 Goldenrod Lane
Germantown, Maryland 20876
(Address of principal executive offices).
Registrant's Telephone No., Including Area Code: 301-428-9100
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
----- ------
As of June 3, 1996, 4,095,964 shares of common stock were outstanding.
<PAGE>
MICROLOG CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1996 1995
------------------ ------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $304,728 $922,763
Receivables, net 3,767,529 3,046,160
Inventories 2,066,147 1,436,889
Other current assets 184,907 110,365
------------------ ------------------------
Total current assets 6,323,311 5,516,177
Fixed assets, net 2,962,650 3,006,528
Licenses, net 466,667 523,810
Other assets 149,362 232,491
Goodwill, net 111,500 146,710
------------------ ------------------------
Total assets $10,013,490 $9,425,716
================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $0 $45,455
Borrowings under line-of-credit agreement 150,000 0
Accounts payable 979,491 1,388,122
Accrued compensation and related expenses 2,149,306 2,103,316
Other accrued expenses 864,860 1,230,310
------------------ ------------------------
Total current liabilities 4,143,657 4,767,203
Deferred officers' compensation 263,265 269,218
Other liabilities 170,831 227,641
------------------ ------------------------
Total liabilities 4,577,753 5,264,062
------------------ ------------------------
Stockholders' equity:
Serial preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued 0 0
Common stock, $.01 par value, 10,000,000 shares authorized,
4,675,704 and 4,507,968 shares issued 46,757 45,079
Capital in excess of par value 15,251,466 15,015,344
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (8,685,949) (9,722,232)
------------------ ------------------------
Total stockholders' equity 5,435,737 4,161,654
------------------ ------------------------
Total liabilities and stockholders' equity $10,013,490 $9,425,716
================== ========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MICROLOG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended April 30, Ended April 30,
1996 1995 1996 1995
------------------ ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net sales $6,537,208 $5,306,899 $12,452,481 $10,735,705
------------------ ----------------- ------------------ ----------------
Costs and expenses:
Cost of sales 3,675,608 3,008,931 7,168,788 6,344,836
Selling, general and administrative 1,731,948 1,559,988 3,245,714 2,994,256
Research and development 535,038 397,643 946,676 775,302
------------------ ----------------- ------------------ ----------------
5,942,594 4,966,562 11,361,178 10,114,394
------------------ ----------------- ------------------ ----------------
Operating income 594,614 340,337 1,091,303 621,311
Net other income (expense) (12,011) (37,646) (40,620) (54,776)
------------------ ----------------- ------------------ ----------------
Income before income taxes 582,603 302,691 1,050,683 566,535
Provision for income taxes 11,470 0 14,400 0
------------------ ----------------- ------------------ ----------------
Net income 571,133 302,691 1,036,283 566,535
Accumulated deficit:
at beginning of period (9,722,232) (10,845,519) (9,722,232) (11,109,363)
------------------ ----------------- ------------------ ----------------
at end of period $(9,151,099) $(10,542,828) $(8,685,949) $(10,542,828)
================== ================= ================== ================
Weighted average shares outstanding 4,541,464 3,960,301 4,469,261 3,920,399
------------------ ----------------- ------------------ ----------------
Income per common share $0.13 $0.08 $0.23 $0.14
================== ================= ================== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MICROLOG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Six Months Six Months
Ended Ended
April 30, 1996 April 30, 1995
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,036,283 $566,535
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 267,897 210,647
Amortization of goodwill and other 92,353 137,356
Loss from disposition of fixed assets 1,946
Changes in assets and liabilities:
Receivables (721,369) (528,319)
Inventories (629,258) (320,679)
Other current assets (74,542) (8,377)
Accounts payable and accrued expenses (728,091) (8,510)
Deferred officers' compensation (5,953)
Other liabilities (56,810) (103,574)
------------------ -------------------
Net cash used in operating activities (817,544) (54,921)
------------------ -------------------
Cash flows from investing activities:
Purchases of fixed assets (225,965) (309,248)
Proceeds from sale of fixed assets 3,009
Other assets 83,129 (22,865)
------------------ -------------------
Net cash used in investing activities (142,836) (329,104)
------------------ -------------------
Cash flows from financing activities:
Reduction of long-term debt (45,455) (262,909)
Borrowings under line-of-credit agreement 150,000
Issuance of common stock 237,800 112
------------------ -------------------
Net cash provided by (used in) financing activities 342,345 (262,797)
------------------ -------------------
Cash and cash equivalents:
Net increase (decrease) during period (618,035) (646,822)
Balance at beginning of period 922,763 1,166,194
------------------ -------------------
Balance at end of period $304,728 $519,372
================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MICROLOG CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996 (unaudited) and OCTOBER 31, 1995
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Microlog Corporation as of April 30, 1996 and October 31,
1995, and the results of its operations and cash flows for the six month period
ended April 30, 1996. The results of operations presented are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 1996.
The significant accounting principles and practices followed by the Company are
set forth in the Notes to Consolidated Statements in Microlog Corporation's
Annual Report and Form 10-K for the year ended October 31, 1995.
Note 1 - Inventories
- --------------------
Inventories consist of the following: (Unaudited)
April 30, October 31,
1996 1995
-------------- ---------------
Components and finished goods $2,389,410 $1,999,192
Work-in-process 668,837 492,312
-------------- ---------------
3,058,247 2,491,504
Less: reserve for obsolescence (992,100) (1,054,615)
-------------- ---------------
$2,066,147 $1,436,889
============== ===============
Note 2 - Fixed Assets
- ---------------------
The cost of property and equipment consists of the following:
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1996 1995
------------------ -------------------
<S> <C> <C>
Land $520,000 $520,000
Buildings and improvements 2,534,642 2,532,567
Furniture and equipment 3,399,656 3,621,890
Vehicles 23,642 23,642
Leasehold improvements 181,575 211,021
------------------ -------------------
6,659,515 6,909,120
Less: accumulated depreciation and amortization (3,696,865) (3,902,592)
------------------ -------------------
$2,962,650 $3,006,528
================== ===================
</TABLE>
5
<PAGE>
Note 3 - Restructuring of Operations
- ------------------------------------
The following table set forth the Company's restructuring reserves for the six
months ended April 30, 1996.
<TABLE>
<CAPTION>
Asset
Writedowns Facilities Other Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserve balance, October 31, 1995 $10,402 $174,889 $52,459 $237,750
Cash payments (28,598) (44,964) $(73,562)
Non-cash items (10,402) $(10,402)
---------------------------------------------------------------------
=====================================================================
Reserve balance, April 30, 1996 $0 $146,291 $7,495 $153,786
=====================================================================
</TABLE>
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Microlog Corporation designs, manufactures, markets, and supports a complete
line of UNIX- and DOS-based voice processing systems and application solutions
which allow users to store, retrieve and transmit digitized voice messages and
to access information on computer data bases. The Company's voice processing
products include the VCS Intela, Retail Solutions (APRS(R)), VCS 3500, and
CallStar(R) models, which are comprised of specially configured
microprocessor-based hardware platforms and versatile proprietary applications
software that enables the systems to perform multiple voice processing
applications.
The Company also provides performance analysis and technical and administrative
support services ("performance analysis") through its wholly-owned subsidiary,
Old Dominion Systems Inc. of Maryland, primarily to the Applied Physics
Laboratory ("APL"), a prime contractor to the U.S. Navy.
The percentage of the Company's sales generated by the Company's two business
segments has varied significantly from period to period, but the Company
anticipates that any significant growth in sales will be derived primarily from
increases in sales from voice processing operations.
The following table sets forth for the periods indicated the percentage of
revenues of certain items from the Company's condensed consolidated statements
of income and retained earnings:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
Three Months Ended Six Months Ended
April 30, April 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Voice processing 61.3% 59.6% 63.5% 60.2%
Performance analysis and support services 38.7% 40.4% 36.5% 39.8%
------ ------- ------- -------
Total 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales 56.2% 56.7% 57.6% 59.1%
Selling, general and administrative 26.5% 29.4% 26.0% 27.8%
Research and development 8.2% 7.5% 7.6% 7.3%
-------- -------- -------- --------
Total 90.9% 93.6% 91.2% 94.2%
------- ------- ------- -------
Operating income 9.1% 6.4% 8.8% 5.8%
Interest and other expense, net 0.2% 0.7% 0.4% 0.5%
------- ------- -------- --------
Income before income taxes 8.9% 5.7% 8.4% 5.3%
Provision for income taxes 0.2% 0.0% 0.1% 0.0%
------- -------- -------- -------
Net income 8.7% 5.7% 8.3% 5.3%
======= ======= ======= ======
</TABLE>
7
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The Company had a net income of $571,000 ($.13 per share) for the quarter ended
April 30, 1996 and a net income of $1,036,000 ($.23 per share) for the six
months ended April 30, 1996. This compares to a net income of $303,000 ($.08 per
share) and $567,000 ($.14 per share) for the comparable periods in fiscal 1995.
The increase in earnings is primarily attributable to an increase in voice
processing sales and performance analysis and support services sales.
NET SALES
- ---------
Net sales for the quarter ending April 30, 1996 were $6.5 million, which
represents an increase of 23% as compared to $5.3 million of net sales in the
quarter ending April 30, 1995. Net sales were $12.5 million for the six months
ended April 30, 1996, which represents an increase of 17% as compared to $10.7
million of net sales for the six months ended April 30, 1995. The increase in
net sales is primarily attributable to increases in voice processing net sales
and performance analysis and support services sales.
VOICE PROCESSING NET SALES
- --------------------------
Net sales of voice processing products were $4.0 million for the quarter ended
April 30, 1996, which represents a 25% increase from voice processing net sales
of $3.2 million for the quarter ended April 30, 1995. Net sales were $7.9
million for the six months ended April 30, 1996, which represents a 22% increase
from voice processing net sales for the six months ended April 30, 1995 of $6.5
million. The increase in sales for the six months ended June 30, 1996 is
primarily attributable to an increase of 325% in sales of the Company's products
to large multiple unit commercial customers and an increase of 55% in sales to
international customers.
As of April 30, 1996, the Company had a backlog of existing orders for voice
processing systems totaling $3.6 million. By comparison, the backlog as of April
30, 1995 was $3.3 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 customization needed for the particular VCS 3500 or VCS Intela
applications. Of the $3.6 million of backlog at April 30, 1996, $1.3 million
will be recognized as sales beyond 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 were $2.5 million for
the quarter ended April 30, 1996 which represents a 19% increase as compared to
$2.1 million for the same period in fiscal 1995. Net sales were $4.5 million for
the six months ended April 30, 1996, which represents a 5% increase as compared
to $4.3 million for the same period in fiscal 1995. This increase is primarily
attributable to increases in the level of work authorized under existing
contracts from Johns Hopkins Applied Physics Laboratory (APL), the Company's
principal customer for these services.
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
additional changes in defense priorities or spending will result in any material
adverse affect over the remainder of this fiscal year on its net sales from
performance analysis and support services nor
8
<PAGE>
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 April 30, 1996, the Company had a backlog of funding on existing contracts
for performance analysis and support services totaling $ 7.4 million. By
comparison, the backlog as of April 30, 1995 was $3.1 million. The increase in
backlog is primarily attributable to a significant multi-year 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. Of the
$7.4 million of backlog at April 30, 1996, $2.2 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.
COSTS AND EXPENSES
- ------------------
Cost of sales was $3.7 million or 56.2% of net sales for the quarter ended April
30, 1996, and $7.2 million or 57.6% of net sales for the six months ended April
30, 1996. By comparison, cost of sales was $3.0 million or 56.7% of net sales
for the quarter ended April 30, 1995, and $6.3 million or 59.1% of net sales for
the six months ended April 30, 1995. The decrease in cost of sales, as a
percentage of net sales, is primarily attributable to the higher percentage of
voice processing net sales as compared to performance analysis and support
services net sales. Performance analysis and support services has a
significantly higher cost of sales compared to voice processing.
Selling, general and administrative expenses were $1.7 million or 26.5% of net
sales for the quarter ended April 30, 1996, as compared to $1.6 million or 29.4%
of net sales for the quarter April 30, 1995. For the six months ended April 30,
1996, selling, general and administrative expenses were $3.2 million or 26.0% of
net sales as compared to $3.0 million or 27.8% of net sales for the same six
month period last year. The Company expects that the decrease in selling,
general and administrative expenses, as a percentage of net sales, will continue
to be the trend for the balance of fiscal 1996.
Research and development expenses reflect costs associated with the development
of applicable software and product enhancements for the Company's voice
processing systems. Research and development expenses were $535,000 or 8.2% of
net sales for the quarter ended April 30, 1996, as compared to $398,000 or 7.5%
of net sales for the quarter ended April 30, 1995. For the six months ended
April 30, 1996, research and development expenses were $947,000 or 7.6% of net
sales as compared to $775,000 or 7.3% of net sales for the comparable six months
ended April 30, 1995. The Company expects that research and development expenses
during fiscal 1996 will be more than those incurred in fiscal 1995 as the
Company continues to develop new products and enhance its existing products. 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 engineering
development costs.
INTEREST AND OTHER EXPENSE, NET
- -------------------------------
Net other expense was $12,000 and $41,000 for the quarter and six months ended
April 30, 1996 as compared to $38,000 and $55,000 for the same periods last
year. Net other expense consisted primarily of closing costs on the lines of
credit facilities and interest expense on short term borrowings.
PROVISION FOR INCOME TAXES
- --------------------------
The Company has exhausted its ability to carry back losses for income tax
refunds. However, net operating loss and tax credit carry forwards for income
tax reporting purposes of approximately $9.0 million and $156,000, respectively,
at October 31, 1995, will be available to offset taxes generated from future
taxable income. These
9
<PAGE>
potential future tax benefits have not been reflected in the financial
statements since realization is not assured. Tax expense for the quarter and six
months ended April 30, 1996 relates to state income taxes and alternative
minimum tax for federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital as of April 30, 1996 was $2,180,000 as compared to $749,000 as
of October 31, 1995. The increase in working capital is primarily attributable
to the net income in the first six months of the year, as well as the issuance
of additional common stock associated with the exercise of stock options. Cash
and cash equivalents as of April 30, 1996 were $305,000 as compared to $923,000
as of October 31, 1995. The decline in cash is primarily attributable to
payments of accounts payable and accrued expenses of $728,000 and purchases of
inventory of $629,000.
The Company utilized its line of credit during the quarter to meet its
requirements for working capital. The outstanding borrowings at April 30, 1996
were $150,000.
Accounts receivable as of April 30, 1996 were $3.8 million, as compared to $3.0
million as of October 31, 1995, the increase being due to the higher level of
revenue in the most recent six months. Included in the April 30, 1996 balance is
a related party receivable of $41,000 relating to the sale of voice processing
products and services to American Computer, of which a former member of the
Board of Directors is an executive officer and of which a member of the Board of
Directors is a director.
Net fixed assets as of April 30, 1996 were $3.0 million, as compared to $3.0
million as of October 31, 1995. Goodwill as of April 30, 1996 was $112,000 as
compared to $147,000 at October 31, 1995.
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. The Company paid a one-time origination fee of $10,000 in December
1995. 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.
In April 1996, the Company added a $1,000,000 loan facility to its existing
$2,000,000 line of credit. The agreement is secured by the Company's building,
bears 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 contains the same
restrictive covenants as the $2 million line of credit. The agreement also
allows the Company, at its option, to make monthly interest-only payments on the
outstanding principal balance, however, the note would be due in full on
February 28, 1998.
ITEM 1 Legal Proceedings
None
ITEM 2 Changes in Securities
None.
ITEM 3 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on March 26, 1996.
At the meeting, David M. Gische and Richard A. Thompson were appointed
to serve for three year terms as directors by a vote of, FOR 3,548,817
and 3,668,417, with 243,346 and 123,746 shares withholding authority,
respectively. The appointment by the Board of Directors of the firm
Price Waterhouse LLP as independent accountants of the Company for the
fiscal year ending October 31, 996 was ratified by a vote of 3,771,513
in favor, with 11,215 shares voting AGAINST such ratification, and
8,735 shares abstaining. The 1995 Stock Option Plan with 1,000,000
shares of the Company's common stock reserved for issuance upon the
exercise of
10
<PAGE>
options was approved by a vote of, FOR 2,218,829, with 202,021 shares
voting AGAINST, and 29,992 shares withholding authority. Amendments to
the Company's Non-Employee Director Stock Option Plan were approved by
a vote of 2,334,823 FOR, with 84,221 AGAINST, and 31,798 shares
abstaining.
ITEM 4 Other Information
None.
ITEM 5 Exhibits and Reports on Form 8-K
EX-10.13 Employment Agreement between the Company and Richard A.
Thompson
EX-27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROLOG CORPORATION
BY /s/ Richard A. Thompson
---------------------------------------
Richard A. Thompson
President and Chief Operating Officer
BY /s/ Steven R. Delmar
---------------------------------------
Steven R. Delmar
Executive Vice President and
Chief Financial Officer
June 11, 1996
- -------------
DATE
11
<PAGE>
December 20, 1995 Personal & Confidential
Mr. Richard Thompson
1733 Wind Haven Way
Vienna, Virginia 22182
Dear Dick:
This will confirm our agreement, as amended as of December 20,
1995, in connection with your continued employment, as of 01 June 1995, by
Microlog Corporation (the "Corporation"). Please confirm your acceptance of
these terms by signing at the space provided on the last page of this letter.
1. Duties and responsibilities.
You are to be employed on a full-time basis as President and
Chief Operating Officer of the Corporation, reporting directly to me as the
Corporation's Chief Executive Officer ("CEO"). Your duties and responsibilities
will be those normally associated with such positions. Subject to the direction
of the Board and CEO on matters of general policy, and of the Board as to
matters legally requiring Board approval, you will be responsible for strategic
planning, day to day operations, profitability, and company growth. Your duties
will also include the supervision of all aspects of finance, planning,
operations, marketing, sales, and personnel. With the exception of the CEO all
company employees will be subject to your orders and direction. As I previously
discussed with you, it is my intent to retire as CEO sometime during the term of
this agreement, and to continue on a part time basis as a consultant to the
Corporation. At such time, it is my expectation that you will succeed to the
office of CEO, and your duties and responsibilities will be those normally
associated with that position. I anticipate such a transition to take place
after December 1996. In anticipation of such a transition, you are expected to
prepare a plan of succession for consideration by the Board within the next
year. Pursuant to this understanding, you are authorized to disclose this fact
to others (on a confidential basis) as you consider appropriate and in the best
interest of the Corporation. However, your succession to the office of CEO is
subject to the approval by the Corporation's Board of Directors.
2. Compensation
You will be compensated at the base rate of $160,000 per year,
or such greater amount as determined by the Board from time to time, payable in
24 substantially equal installments twice a month, less normal withholdings and
deductions.
You shall be entitled to participate in all benefit plans
which are generally available to the Corporation's employees, and those
available to executive officers of the Corporation, including, but not limited
to, executive perquisites, incentive stock option plan, and executive bonus
plan. You will be entitled to five weeks of paid vacation per year; this
includes your time to perform your Naval Reserve duty.
You shall be entitled to continued use of a company car,
leased for your business and personal usage, and the Corporation will continue
to pay all related costs such as fuel, maintenance, insurance, and any excess
mileage charges. Upon the expiration of the term of the lease for the car now
provided to you, or earlier if necessary, you shall be provided with a
replacement vehicle of a comparable type.
The Board of Directors will consider the purchase of key man
insurance on your life, and on the lives of other executives if appropriate, in
connection with its review of proposals for executive insurance to be prepared
by you for Board consideration in conjunction with the development of the next
annual budget. You will cooperate fully with the Corporation on matters relating
to such insurance. The Corporation will be the beneficiary of any such key man
life insurance, unless otherwise agreed with you in writing.
1
<PAGE>
3. Stock Options
In September 1995, you were granted an option to purchase
100,000 shares of the Corporation's common stock in consideration of your
acceptance of continued employment (the "ISO Option"). The terms and conditions
of the ISO Option were in accordance with a successor plan to the Corporation's
existing 1986 Stock Option plan (the "New Option Plan"). The ISO Option was
granted subject to stockholder approval of the New Option Plan. The ISO Option
has a term of ten years, will become exercisable over three years at the rate of
thirty three and a third percent per year, and has an option price per share
which was the market price per share at the close of business on the date of the
grant. The ISO Option provides that if the Corporation terminates your
employment other than "termination for cause", as defined below, you will be
permitted to exercise the ISO Option, to the extent that it had become
exercisable before the termination of employment (but not beyond the original
ten year term of the option). To the extent eligible, the ISO Option was issued
as an Incentive Stock Option (ISO), within the meaning and subject to the
limitations of Section 422 of the Internal Revenue Code.
On the date hereof (December 20, 1995), you are being granted
an option to purchase 150,000 shares of the Corporation's common stock in
consideration of your acceptance of continued employment (the "Additional
Option"). The terms and conditions of the Additional Option are in accordance
with the New Option Plan. The Additional Option has a term of ten years, and
will become exercisable 30 days before the tenth anniversary of grant, but the
option will become exercisable prior to such time to the extent specified if the
following conditions are met: one-third shall become exercisable at any time if
the average fair market value per share of the Corporation's common stock equals
or exceeds $3.50 for all trading days during the month of June 1996; one-third
shall become exercisable at any time if the average fair market value per share
of the Corporation's common stock equals or exceeds $5.00 for all trading days
during the month of June 1997; and one-third shall become exercisable at any
time if the average fair market value per share of the Corporation's common
stock equals or exceeds $10.00 for all trading days during the month of June
1998. The Additional Option will have an option price per share which is the
market price per share at the close of business on the date of grant. The
Additional Option will provide that if the Corporation terminates your
employment other than "termination for cause", as defined below, you will be
permitted to exercise the Additional Option, to the extent that it had become
exercisable before the termination of employment (but not beyond the original
ten year term of the option). The Additional Option will be issued as an option
that is not an ISO (a non-qualified stock option) for purposes of the Internal
Revenue Code.
4. Bonuses
You will be entitled to executive bonuses in accordance with
the terms of each Executive Bonus Plan approved by the Board during or with
respect to each year of your continued employment.
5. Board Membership
You will continue to serve as a director of the Corporation
and shall be proposed for re-election at the expiration of your current term of
office as a director for as long as you continue to be an officer of the
Corporation
6. Term of Employment
Your term of employment under this agreement shall be from 1
June 1995 through 31 December 1998 unless earlier terminated as provided below.
The Board of Directors may terminate your employment at any time with or without
cause. You shall have no right to receive compensation or any other benefits
from the Corporation for any period after termination for cause other than such
vested retirement benefits to which you may be entitled under any qualified
employee pension plan maintained by the Corporation, and any deferred
compensation to which you may be entitled. The term "termination for cause"
shall mean termination by the Corporation because of your gross incompetence,
willful and intentional misconduct to the Corporation, breach of fiduciary duty
in connection with your services involving personal profit, intentional failure
to perform the duties
2
<PAGE>
of your office, willful violation of any law, rule or regulation other than
minor traffic violations or similar offenses, or material breach of any
provision of this agreement.
In no event, however, will a termination be deemed to be "for
cause" unless, prior to such termination, the Board of Directors, after giving
you reasonable notice, and the opportunity to be heard, shall have duly adopted
a resolution approved by at least two thirds of its members finding that you
have been guilty of specific conduct as described above, and further finding
that the effect of such conduct has been materially adverse to the interests of
the Corporation. In the event that you do not agree with such findings, the
issue of whether the termination shall be "for cause" will be subject to binding
arbitration under the "Employment Dispute Resolution" rules of the American
Arbitration Association.
If your employment is terminated for any reason other than
"for cause" at any time prior to the expiration of the three year term of your
employment under this agreement, or prior to the expiration of any extension of
the term signed by any authorized representative of the Corporation, your then
existing base salary, plus all benefits or their equivalent value, will continue
for a period of twelve months following the date of such termination, and you
will also receive such vested retirement benefits to which you may be entitled
under any qualified employee pension plan maintained by the Corporation, plus
any deferred compensation to which you may be entitled.
If you continue in the employment of the Corporation following
expiration of the term stated above, in the absence of a new written employment
agreement between you and the Corporation, the term of this agreement shall be
deemed to be extended in one year increments from year to year, unless
terminated earlier as provided above, or terminated by either party effective as
of the end of any incremental extension upon at least sixty days prior written
notice.
7. Noncompetition
During the term of your employment, and for a period of one
year after the termination of your employment, you shall not compete, directly
or indirectly on your own behalf, or on behalf of any other person or entity,
with the Corporation or any of its affiliates; nor shall you solicit or induce,
directly or indirectly on your own behalf, or on behalf of any other person or
entity, any employee of the Corporation or its affiliates to leave the employ of
the Corporation or any of its affiliates; nor shall you solicit or induce,
directly or indirectly, on your own behalf or on behalf of any other person or
entity, any customer of the Corporation or any of its affiliates to reduce its
business with the Corporation or any of its affiliates.
Dick, on behalf of Microlog and the other Board members, I am
pleased to extend this offer of continued employment, and I look forward toward
a long and mutually profitable association.
Yours truly,
Microlog Corporation
By: /s/Joe L. Lynn
------------------------------
Joe L. Lynn
Chief Executive Officer
Accepted:
- -----------------------------------------
Richard A. Thompson
Date:
------------------------------------
3
<PAGE>
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