<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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.
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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 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
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. 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 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 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.
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
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.
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 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 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.
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 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 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.
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
(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/
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>
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 re- certification 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 m $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>
30
<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 five 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>
Exhibit 13
Annual Report to Shareholders for the fiscal year ended
October 31, 1994
<PAGE>
Exhibit 24
Consent of Price Waterhouse LLP
<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>
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
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
<PAGE>
- 2 -
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 Filed by the Registrant [] Filed by a Party other than the
Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ]
Confidential, for Use of the commission Only (as permitted by Rule 14a-6(e)(2)
[] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting
Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Microlog Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2), or
Item 22(a)(2) of Schedule 14A..
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1/
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
1/ Set forth the amount on which the filing fee is calculated and state how
it was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing. 1) Amount previously
paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
January _29, 1996
<PAGE>
MICROLOG CORPORATION
20270 Goldenrod Lane
Germantown, MD 20876-4070
(301) 428-9100
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MARCH 26, 1996
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Microlog Corporation, a
Virginia corporation (the "Company"), for use at the 1996 Annual Meeting of
Shareholders to be held on March 26, 1996 at 10:00 a.m., local time, at the
Gaithersburg Marriott Washingtonian Center, 9751 Washingtonian Blvd.,
Gaithersburg, Maryland, 20878, and at any adjournments thereof (the "Annual
Meeting").
The Annual Meeting is being called for the following purposes:
(1) to elect two directors to serve for a term of three
years;
(2) to ratify the appointment of Price Waterhouse LLP as
independent accountants of the Company for the fiscal
year ending October 31, 1996;
(3) to consider and vote upon a proposed new Stock Option
Plan with 1,000,000 shares of the Company's common
stock reserved for issuance upon the exercise of
options granted under such new Stock Option Plan;
(4) to consider and vote upon proposed amendments to the
Company's Non-Employee Director Stock Option Plan
which would, among other things, (i) increase from
75,000 to 125,000 the number of shares reserved for
issuance upon the exercise of options granted under
the Non-Employee Director Stock Option Plan, (ii)
provide for annual grants of an option to purchase
3,000 shares (rather than 1,000 shares) of the
Company's common stock to each non-employee director
of the Company, and provide that such grants will
occur in December (rather than March) of each fiscal
year, and (iii) extend the term of the plan to April
30, 2001; and
(5) to transact such other business as may properly come
before the Annual Meeting or any adjournments
thereof.
Record holders of the Company's common stock, par value $.01
per share ("Common Stock"), at the close of business on February 2, 1996, the
record date, are entitled to notice of, and to vote at, the Annual Meeting. As
of January 19, 1996, there were outstanding 3,964,073 shares of Common Stock.
Each shareholder will be entitled to one vote for each share of Common Stock
held at the close of business on the record date. At the Annual Meeting, votes
will be counted by written ballot.
This Proxy Statement, and the accompanying notice of the
Annual Meeting and proxy card, will first be sent or given to shareholders on or
about February 20, 1996. The Company's Annual Report to Shareholders for the
fiscal year ended October 31, 1995 accompanies this Proxy Statement.
The shares of Common Stock represented by valid proxies
received by the Company in time for the Annual Meeting will be voted as
specified in such proxies. Executed but unmarked proxies will be voted:
(1) FOR the election of the Board of Directors' nominees
for director;
(2) FOR the ratification of the appointment of Price
Waterhouse LLP as independent accountants of the
Company for the fiscal year ending October 31, 1996;
(3) FOR the approval of the new Company's Stock Option
Plan with 1,000,000 shares of the Company's Common
Stock reserved for issuance upon the exercise of
options granted under such new Stock Option Plan; and
(4) FOR the approval of the amendments to the Company's
Non-Employee Director Stock Option Plan which would,
among other things, (i) increase from 75,000 to
125,000 the number of shares reserved for issuance
upon the exercise of options granted under the
Non-Employee Director Stock Option Plan, (ii) provide
for annual grants of an option to purchase 3,000
shares (rather than 1,000 shares) of the Company's
Common Stock to each non-employee director of the
Company, and provide that such grants will occur in
December (rather than March) of each fiscal year, and
(iii) extend the term of the plan to April 30, 2001.
If any other matters properly come before the Annual Meeting,
the persons named as proxies will, unless the shareholder otherwise specifies in
the proxy, vote upon such matters as determined by a majority of the Board of
Directors.
The election of the Board of Directors' nominees for director
will require the affirmative vote of a plurality of the shares entitled to vote
in the election of directors. Approval of the ratification of independent
accountants, the new Stock Option Plan, and the amendment to the Non-Employee
Director Stock Option Plan requires the affirmative vote of the holders of a
majority of the shares of Common Stock of the Company entitled to vote thereon
and who vote in person or by proxy at the Annual Meeting. In order to approve
the transaction of any other business as may properly come before the Annual
Meeting, or any adjournments thereof, the votes cast at the Annual Meeting
approving the action must exceed the votes cast opposing the action. Abstentions
and broker non-votes will not be counted as either approving or opposing the
action.
Any shareholder giving a proxy has the right to revoke it at
any time before it is exercised by attending the Annual Meeting and voting in
person or by delivering to the Secretary of the Company at 20270 Goldenrod Lane,
Germantown, MD 20876-4070, a written notice of revocation or duly executed proxy
bearing a later date.
The cost of soliciting proxies will be borne by the Company.
In addition to the use of the mails, proxies may be solicited personally or by
telephone, facsimile or telegraph by officers, directors, and employees of the
Company who will not be specially compensated for such solicitation activities.
Arrangements will also be made with brokerage houses and other custodians,
nominees, and fiduciaries for forwarding solicitation materials to the
beneficial owners of such shares held of record by such persons, and the Company
will reimburse such persons for their reasonable expenses incurred in connection
therewith.
The Company is required to file an Annual Report on Form 10-K
for the fiscal year ended October 31, 1995 with the Securities and Exchange
Commission ("SEC"). Shareholders can obtain, free of charge, a copy of such
Annual Report by writing to Microlog Corporation, 20270 Goldenrod Lane,
Germantown, MD 20876-4070, Attention: Corporate Secretary.
<PAGE>
STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth information as of January 19,
1996 with respect to the ownership of shares of Common Stock by (i) owners of
more than 5% of the Company's outstanding Common Stock, (ii) each director and
nominee for director of the Company, (iii) each of the named executive officers
of the Company, and (iv) all directors and officers of the Company as a group.
The information is based on the most recent filings with the SEC by such persons
or upon information provided by such persons to the Company. Unless otherwise
indicated, the persons shown in the table are believed to have sole voting and
investment power with respect to the entire number of shares reported.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of
Beneficial Owner (1) Beneficially Owned Ownership (2)
- -------------------- ------------------ -------------
<S> <C> <C>
Joe J. Lynn 453,350 11.4%
20270 Goldenrod Lane
Germantown, MD 20876-4070
J. Graham Hartwell 404,050 10.2%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Hathaway & Associates, Ltd 314,000 7.9%
119 Rowayton Avenue
Rowayton, Connecticut 06853
Steven R. Delmar 135,305 (3) 3.3%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Richard A. Thompson 112,000 (4) 2.8%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Deborah M. Grove 41,599 (5) 1.0%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Robert E. Gray, Jr. 36,520 (6) *
20270 Goldenrod Lane
Germantown, MD 20876-4070
David M. Gische 29,000 (6) *
20270 Goldenrod Lane
Germantown, MD 20876-4070
All officers and directors as
a group (9 persons) 1,239,233 (7) 29.3%
- ----------------------------
<FN>
* Less than 1% of the shares outstanding.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner of a security for purposes of
the Rule if he or she has or shares voting power or investment power with
respect to such security or has the right to acquire such ownership within
60 days. As used herein, "voting power" is the power to vote or direct the
voting of shares, and "investment power" is the power to dispose or direct
the disposition of shares.
(2) For the purpose of computing the percentage of ownership of each
beneficial owner, any securities which were not outstanding but which were
subject to options, warrants, rights, or conversion privileges held by
such beneficial owner exercisable within 60 days were deemed to be
outstanding in determining the percentage owned by such person but are not
deemed outstanding in determining the percentage owned by any other
person.
(3) Includes 12,000 shares held by the Company's Money Purchase Pension Plan,
of which Mr. Delmar is a trustee. Mr. Delmar disclaims beneficial
ownership of such shares. Also includes 85,000 shares that may be acquired
by Mr. Delmar within 60 days of the record date upon the exercise of stock
options. Does not include 15,000 shares that may be acquired by Mr. Delmar
more than 60 days after the record date upon the exercise of stock
options, which grants are subject to approval by shareholders as described
in Proposal No. 3 below.
(4) Includes 12,000 shares held by the Company's Money Purchase Pension Plan,
of which Mr. Thompson is a trustee. Mr. Thompson disclaims beneficial
ownership of such shares. Also includes 100,000 shares that may be
acquired by Mr. Thompson within 60 days of the record date upon the
exercise of stock options. Does not include 250,000 shares that may be
acquired by Mr. Thompson more than 60 days after the record date upon the
exercise of stock options, which grants are subject to approval by
shareholders as described in Proposal No. 3 below.
(5) Includes 18,333 shares that may be acquired by Ms. Grove within 60 days of
the record date upon the exercise of stock options. Does not include
21,667 shares that may be acquired by Ms. Grove more than 60 days after
the record date upon the exercise of stock options, of which 15,000 shares
are subject to approval by shareholders as described in Proposal No. 3
below.
(6) Includes 26,000 shares that may be acquired within 60 days of the record
date upon the exercise of stock options that have been granted.
(7) Includes 262,000 shares that may be acquired within 60 days of the record
date upon the exercise of stock options. Does not include 320,033 shares
that may be acquired more than 60 days after the record date upon the
exercise of stock options. Includes 12,000 shares held by the Company's
Money Purchase Pension Plan, of which Messrs. Thompson and Delmar are
trustees. Messrs. Thompson and Delmar each disclaims beneficial ownership
of such shares.
</FN>
</TABLE>
<PAGE>
MATTERS TO BE ACTED UPON
ELECTION OF DIRECTORS
(Proposal No. 1)
The By-Laws of the Company currently provide that the
membership of the Board be divided into three classes. The Board of Directors
currently consists of six directors with each class having two directors. The
term of only one class of directors expires each year, and their successors are
elected for a term of three years and until their successors are duly elected
and qualified. Any director elected to fill any vacancy occurring in the Board
of Directors, including any vacancy created by an increase in the number of
directors, shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or in which the vacancy
occurred. There is currently one vacancy on the Board.
At the Annual Meeting, two directors will be elected. The
nominees, David M. Gische and Richard A. Thompson, currently are serving as
directors and have indicated their willingness to continue serving if elected.
Two directors were elected in 1995 for three-year terms ending in 1998, and one
director was elected in 1994 for a three-year term ending in 1997. The Board is
presently searching for a suitable candidate to fill the vacancy on the Board.
The following table provides information as to the nominees
for director of the Company for terms ending in 1999, and as to directors whose
terms in office will continue.
Expiration
Name Age of Term
Nominee
David M. Gische 46 1999
Richard A. Thompson 49 1999
Continuing Directors
J. Graham Hartwell 65 1998
Joe J. Lynn 64 1998
Robert E. Gray, Jr. 54 1997
David M. Gische has been a director of the Company since April
1985. Mr. Gische, an attorney, has been associated with the law firm of Ross,
Dixon & Masback in Washington, D.C. since November 1983. From September 1978
until November 1983, Mr. Gische was associated with the Washington, D.C. law
firm of Hogan & Hartson LLP, counsel to the Company.
Richard A. Thompson has been President and Chief Operating
Officer of the Company since June 1992 and was elected a director of the Company
in September 1992. Prior to joining Microlog Corporation, Mr. Thompson was
President and a director of General Kinetics, Inc., a diversified manufacturing
company from October 1989 to December 1991. Other positions he has held have
been as President of Thompson Associates, a management consulting firm from 1988
to 1989 and as Marketing Manager with General Electric Company from 1985 to
1988. Mr.
Thompson is also a Captain in the U. S. Naval Reserve.
J. Graham Hartwell has been Chairman of the Board since March
1986 and a director of the Company since 1969. He was President of the Company
from its organization in 1969 until October 1989. In October 1989, Mr. Hartwell
became Chief Executive Officer of the Company and served in that capacity until
his retirement on April 30, 1991.
Joe J. Lynn became Chief Executive Officer of the Company on
May 1, 1991. He served as President of the Company from October 1989 to June
1992. Before this, Mr. Lynn was Executive Vice President of the Company and
served as President of the Company's subsidiary, Microlog Corporation of
Maryland. He has been a director of the Company since its formation in 1969.
From 1966 until 1970, Mr. Lynn was employed as a manager with DBA Systems, Inc.
Prior thereto, from 1961 to 1966, he served as a manager at the Kennedy Space
Flight Center for RCA, which is presently a subsidiary of General Electric
Company.
Robert E. Gray, Jr. has been a director of the Company since
1977. He is currently Senior Vice President of Prosperity Bank and Trust, in
Springfield, Virginia. He was employed by Hallmark Bank & Trust Co. from 1985 to
1992 - as Director and Executive Vice President from 1989 to 1992, and prior
thereto as Senior Vice President and Chief Lending Officer. From 1992 to 1993,
he served as Senior Vice President of Suburban Bank of Virginia, NA in McLean,
Virginia.
During fiscal year 1995, there were 6 meetings (including
regularly scheduled and special meetings) of the Board of Directors. All
directors attended more than 75% of such meetings.
The Board has an Audit Committee, a Management Compensation
Committee, and a Stock Option Committee, but does not have a nominating
committee. The Audit, Management Compensation, and Stock Option Committees each
consists of Messrs. Gische and Gray.
The Audit Committee is primarily responsible for approving the
services performed by the Company's independent accountants. The Audit Committee
met 1 time during fiscal year 1995. All members of the Audit Committee attended
this meeting.
The function of the Management Compensation Committee is to
make recommendations to the Board of Directors with respect to the compensation
of certain officers and employees, including the executive officers. The
Management Compensation Committee met 1 time during fiscal year 1995. Each
member of the Management Compensation Committee attended this meeting.
The function of the Stock Option Committee is to make
recommendations to the Board of Directors with respect to the grant of stock
options to officers and employees. The Stock Option Committee met 5 times during
fiscal year 1995. Each member of the Stock Option Committee attended these
meetings.
<PAGE>
MANAGEMENT
The executive officers of the Company, and their respective
ages as of January 19, 1996, are as follows:
Name Age Offices and Positions Held
Joe J. Lynn 64 Chief Executive Officer and Director
Richard A. Thompson 49 President, Chief Operating Officer and
Director
Steven R. Delmar 39 Executive Vice President and Chief
Financial Officer
Deborah M. Grove 43 President of subsidiary, Old Dominion
Systems Incorporated of Maryland
Steven R. Delmar has been Executive Vice President of the
Company since October 1989 and was President of Microlog Corporation of
Maryland, a wholly-owned subsidiary of the Company, from May 1991 to July 1992.
Mr. Delmar was Microlog's Chief Financial Officer from January 1987 to May 1991.
He served as Chief Operating Officer of Microlog (rather than Chief Financial
Officer) from May 1991 until July 1992, and following the hiring of Mr. Thompson
as President and Chief Operating Officer, Mr. Delmar resumed his position as
Chief Financial Officer. He was Vice President of the Company from January 1987
to October 1989. Since 1979, Mr. Delmar has held various offices with the
Company and its subsidiaries, including Assistant Comptroller, Comptroller,
General Manager and Vice President. A certified public accountant, Mr. Delmar
held accounting positions with Bechtel Power Corporation, a commercial
construction firm, and the Veterans Administration prior to his employment with
Microlog.
Deborah M. Grove became President of Old Dominion Systems
Incorporated of Maryland, a wholly-owned subsidiary of the Company, in May 1991.
From 1983 until May 1991, Ms. Grove was Vice President of Old Dominion Systems
Incorporated of Maryland and from 1985 until May 1991, Vice President of Old
Dominion Services, Inc. Ms. Grove holds a Master of Science degree in Business
and Finance and a Bachelor of Science degree in Business Administration.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal years ending October
31, 1993, 1994, and 1995, the salary, bonus and certain other forms of
compensation paid or accrued for those years by the Company and its subsidiaries
to the Chief Executive Officer and each of the three other executive officers
whose salary and bonus compensation exceeded $100,000 in fiscal 1995 ("named
executive officers").
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
- --------------------------------------------------------------------------- -----------------------------------
- --------------------------------------------------------------------------- ---------------------- ------------ -----------
Awards Payouts
Other
Annual Restricted All Other
Compen-sationStock Options/SALTIP Compen-sation
Name and Principal Fiscal Salary Bonus ($)(b) Award(s) (#) Payouts ($) ($)(c)
------- ------ --- --- ------
Position Year ($)(a) ($) ($)
-------- ---- ------ --- ---
<S> <C> <C> <C> <C> <C>
Joe J. Lynn 1995 169,919 50,000 7,715 10,851
Chief Executive Officer 1994 169,207 4,513 12,027
1993 162,344 35,500 682 4,904
Richard A. Thompson 1995 160,000 90,000 4,622 100,000 12,125
President and Chief 1994 157,453 5,947 12,500
Operating Officer 1993 144,997 34,776 5,552 3,867
Steven R. Delmar 1995 130,000 40,000 3,980 15,000 10,255
Executive Vice President 1994 129,163 3,873 11,164
and Chief Financial 1993 126,025 29,000 1,669 4,688
Officer
Deborah M. Grove 1995 110,000 40,000 10,039 15,000 8,784
President of subsidiary, 1994 106,386 9,498 8,520
Old Dominion Systems 1993 95,969 16,000 7,464 7,462
Incorporated of Maryland
- --------------------------- ----------- ------------ --------- ------------ ------------ --------- ------------ -----------
<FN>
(a) Includes deferred compensation
For fiscal 1995, 1994, and 1993 Mr. Lynn's deferred compensation included
in his salary was $4,919, $151, and $11,853 respectively. For fiscal 1995,
1994, and 1993 Mr. Delmar's deferred compensation included in his salary
was $0, $149, and $1,017, respectively. For fiscal 1995, 1994, and 1993
Mrs. Grove's deferred compensation included in her salary was $0, $124, and
$847, respectively.
(b) Other annual compensation consists of reimbursements under the Company's
Executive Medical Reimbursement Plan and paid personal leave.
(c) All other compensation consists of 401k matching contributions and pension
plan contributions. For fiscal 1995 Mr. Lynn's 401k matching and pension
contributions were $1,851 and $9,000, respectively. For fiscal 1995 Mr.
Thompson's 401k matching and pension contributions were $3,200 and $9,000,
respectively. For fiscal 1995 Mr. Delmar's 401k matching and pension
contributions were $2,275 and $7,980, respectively. For fiscal 1995 Mrs.
Grove's 401k matching and pension contributions were $1,798 and $6,986,
respectively.
</FN>
</TABLE>
<PAGE>
Stock Options
The following table contains information with respect to
grants of stock options to each of the named executive officers during the
fiscal year ended October 31, 1995. All such grants were made under the prior
stock option plan or the new Stock Option Plan (subject to shareholder
approval).
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value at
Assumed Annual Rates
Individual Grants Rates of Stock Price
Appreciation for
% of Total Option Term (a)
Number of Options Granted Exercise Expiration
Options Granted to Employees Price ($/sh) Date 5% ($) 10% ($)
--------------- ------------ ------------ ---- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Thompson (b) 100,000 17.0% $4.375 9/28/05 275,500 697,500
Steven R. Delmar (c) 15,000 2.6% $4.375 9/28/05 41,325 104,625
Deborah M. Grove (c) 15,000 2.6% $4.375 9/28/05 41,325 104,625
10,000 1.7% $1.000 12/20/04 61,300 103,500
- --------------------
<FN>
(a) Share prices for Mr. Thompson assuming a 5% and 10% annual appreciation at
the end of the term of his option are $7.13 and $11.35, respectively;
shares prices for Mr. Delmar assuming a 5% and 10% annual appreciation at
the end of the term of his option are $7.13 and $11.35, respectively; and
shares prices for Ms. Grove assuming a 5% and 10% annual appreciation at
the end of the term of her option are $7.13 and $11.35, respectively.
(b) These options vest over a three-year period with 33.3% vesting at the end
of each year.
(c) These options vest at the end of a five year period. The achievement of
specific objectives could accelerate the vesting to one year.
</FN>
</TABLE>
The following table provides information concerning the
exercise of stock options by the named executive officers during fiscal 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR, AND FY-END OPTION VALUES
Number of Securities Value of Unexercised In-the
Underlying Unexercised Money Options at FY-End
Options at FY End (#) ($)(a)
Shares Acquired on Value Exercisable/ Exercisable/
NAME Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Richard A. Thompson -- -- 100,000/100,000 425,000/425,000
Deborah M. Grove -- -- 18,333/21,667 77,915/92,085
Steven R. Delmar -- -- 75,000/25,000 318,750/106,250
- ----------------------------
<FN>
(a) Calculations based on closing price of stock of $4.25 on October 31, 1995.
</FN>
</TABLE>
Employment, Deferred Compensation, and Consulting Agreements
The Company is a party to employment agreements with Messrs.
Lynn and Delmar, which provide for employment of these officers through December
31, 1996. The annual salaries of these individuals under the employment
agreements are subject to increase each year as determined by the Board of
Directors, and each individual is entitled to receive discretionary bonuses as
determined by the Board. On December 26, 1995, the Board of Directors set
salaries, to become effective as of November 1, 1995, under these agreements
(exclusive of deferred compensation) for Messrs. Lynn and Delmar of $170,000 and
$135,000, respectively, which represent 3% and 4% increases from the prior year.
The employment contracts entitle the two individuals to certain fringe benefits,
including insurance coverage and various executive perquisites. Upon termination
of employment without cause, each individual will be entitled to receive a lump
sum cash payment equal to the individual's then current salary calculated for
the remaining period of the agreement (without any present value discount). In
the event of a change in control of the Company (as defined in the agreement)
and subsequent termination of the individual's employment, voluntarily or
involuntarily, within two years, the individual will be entitled to receive a
lump sum payment equal to approximately three times his average annual salary
during the five most recent fiscal years of the Company. It currently is
estimated that the amount payable to Messrs. Lynn and Delmar in the event of
their termination following a change in control of the Company would be $474,000
and $381,000, respectively. Further, under the agreements, each individual has
agreed that for a period of one year after termination of employment other than
a termination by the Company without cause, he will not, among other things,
compete with the Company, solicit employees to leave the Company, or solicit
customers to reduce their level of business with the Company.
The Company is a party to an employment agreement with Mr.
Thompson. The agreement provides for employment of Mr. Thompson through December
31, 1998. Mr. Thompson's annual salary under his employment agreement is subject
to increase and discretionary bonuses each year as determined by the Board of
Directors. On December 20, 1995, the Board of Directors set a salary to become
effective as of November 1, 1995 under this agreement for Mr. Thompson of
$165,000, which represents a 3% increase from the prior year. The employment
contract entitles Mr. Thompson to certain fringe benefits, including insurance
coverage and various executive perquisites. Upon termination of employment
without cause, the existing base salary, plus all benefits, will be paid in
monthly installments for twelve months. In the event of his termination without
cause, Mr. Thompson would receive approximately $206,250. The employment
agreement also entitles Mr. Thompson to continue to serve as a director of the
Company for so long as he continues to be an officer of the Company.
The Company is a party to a noncontributory deferred
compensation agreement with Mr. Lynn under which the Company is obligated to
make payments to Mr. Lynn (or his beneficiaries) over the ten-year period
subsequent to his retirement (on or after age 65), permanent disability, or
death. The aggregate amount owed to Mr. Lynn under this agreement is payable
either in equal monthly installments over the ten-year period or in an
appropriately discounted single sum payment (at the election of Mr. Lynn). This
amount is determined by multiplying $2,500 by the number of months of employment
during the period April 1, 1988 to January 1, 1995 and adding an initial
contribution of $10,000. During the fiscal year ended October 31, 1995, the
Company accrued $-0- in deferred compensation and interest for Mr. Lynn under
this contract.
The Company is a party to a consulting and noncompetition
agreement with Mr. Hartwell, who retired from his position as Chief Executive
Officer of the Company effective April 30, 1991. Mr. Hartwell continues to serve
as a director of the Company. The agreement provides for the consulting services
of Mr. Hartwell through May 1, 1996, with an annual consulting fee payment of
$80,000. In addition, the agreement provides Mr. Hartwell with medical insurance
coverage.
Management Compensation Committee Report on Executive Compensation
Decisions on compensation of the Company's executives
generally are made by the two-member Management Compensation Committee of the
Board. Each member of the Management Compensation Committee is a non-employee
director. All decisions by the Management Compensation Committee relating to the
compensation of the Company's executive officers are reviewed by the full Board.
Set forth below is a report submitted by the Management Compensation Committee
addressing the Company's compensation policies for fiscal 1995 as they affected
the Company's executive officers, including the Chief Executive Officer and the
named executive officers.
Compensation Policies for Executive Officers. The Company's executive
compensation policies are designed to provide competitive levels of
compensation, assist the Company in attracting and retaining qualified
executives, reward superior corporate performance, and recognize individual
initiative and achievement. Measurement of corporate performance is primarily
based upon Company goals and industry performance levels. The Company considers
compensation paid to its executive officers to be deductible for purposes of
Section 162(m) of the Internal Revenue Code. Target levels of the executive
officers' overall compensation are intended to be consistent with other
executives in the Company's industry, including members of its peer group,
taking into account the size and financial results of these respective
companies. The Management Compensation Committee believes that stock ownership
by management and stock-based performance compensation arrangements are
beneficial in aligning management's and shareholders' interests in the
enhancement of shareholder value.
Relationship of Performance to Executive Compensation. Compensation paid to the
Company's executive officers in fiscal 1995, which related to the performance of
the Company, consisted of the following components: base salary, cash bonuses,
grants of stock options under stock option plans, and executive perquisites.
Base Salary. The Management Compensation Committee reviews
executive base salaries on a regular basis. In view of the Company's improved
financial performance during fiscal 1995 and the lack of any salary increases
during four of the prior five years, base salaries were increased $5,000 per
officer for fiscal 1996.
Cash Bonuses. The Management Compensation Committee also
determines, generally on an annual basis, whether to award bonuses to executive
officers based upon their individual performance or on the performance of the
Company as a whole. In prior years, the Board, at the recommendation of the
Management Compensation Committee, has adopted specific incentive compensation
arrangements for executive officers which consist of cash bonuses payable if the
Company achieved certain pre-tax (and pre-bonus) profit and sales goals. The
Company utilizes an executive bonus plan under which a pool of funds, determined
by formula, are set aside for selected executives. The amount of funds set aside
for the bonus pool is based on the Company's sales and pre-tax income. A new
Executive Bonus Plan with new performance goals was adopted for fiscal 1996.
Bonuses of $244,000 were paid for fiscal 1995 under the Executive Bonus Plan in
effect for fiscal 1995.
Stock Options. The Company provided a long-term incentive
through a stock option plan which was adopted in 1986, and intends to continue
this incentive through a new stock option plan adopted in 1995, subject to
shareholder approval. The stock option plans were and are intended to foster
management team cohesion and align management and shareholder interests. Key
employees, including executive officers, were and are eligible for grants under
the stock option plans. The stock option plans were and are administered by the
Stock Option Committee, which consists exclusively of non-employee directors.
Awards are intended to provide incentives for executive officers to enhance
long-term corporate performance, as reflected in stock price, thereby increasing
shareholder value, and to provide non-cash compensation to such officers as part
of their overall compensation package. The Company believes that the stock
option plans encourage superior performance that can result in significantly
enhanced shareholder value. The option price of shares granted under the stock
option plans may be less than the fair market value of the shares underlying the
option on the date of grant, but such options generally have been granted at
fair market value. Options granted under the stock option plans generally
terminate automatically upon termination of employment or service with the
Company, except in cases of disability or death.
In September 1995, Mr. Thompson was awarded options to
purchase 100,000 shares (as was the case in Mr. Thompson's prior contract). As
part of his new three year employment contract, based upon the Board's view that
Mr. Thompson's continued performance as President and Chief Operating Officer is
very important to the Company, particularly as Mr. Lynn, the Chief Executive
Officer, approaches retirement age, the Board recommended (and the Stock Option
Committee of the Board granted) additional options for Mr. Thompson to purchase
150,000 shares of Common Stock, vesting in ten years ending in December 2005.
The additional options contain an accelerated vesting provision based upon the
trading price of the Company's Common Stock in June of each of 1996 ($3.50),
1997 ($5.00), and 1998 ($10.00). The Company's Common Stock was trading at a
price of less than $3.00 when these price targets were initially agreed upon,
and had traded at significantly lower levels in the prior year. Each of the
options granted to Mr. Thompson are subject to approval by shareholders of the
new stock option plan described in Proposal No. 3 below.
With respect to other named executive officers, after
considering the numbers of options held by such officers, the Stock Option
Committee awarded options to purchase 15,000 shares to each of Mr. Delmar and
Ms. Grove, are subject to approval by shareholders of the new stock option plan
described in Proposal No. 3 below.
Executive Perquisites. In prior years the Company has provided
certain perquisites for its executive officers which the Management Compensation
Committee has determined are customary for similar companies. With respect to
fiscal 1996, the Management Compensation Committee decided to set aside
approximately $115,000 for executives and a group of other key employees,
collectively, for executive perquisites selected by such employees. The
Committee determined that self-selection of perquisites would probably be most
efficient for this portion of compensation of the executive and other key
employees, taking advantage of available cost savings, tax benefits, and other
factors.
Other Compensation. In addition to the compensation paid to
executive officers as described above, executive officers and other key
employees receive benefits under the Company's Medical Reimbursement Plan (along
with supplemental health benefits of up to $7,500 per executive), and executive
officers receive, along with and on the same terms as other employees,
contributions by the Company pursuant to the Company's Pension Plan and matching
contributions under the Company's Pre-Tax Savings Plan (401k).
CEO Compensation. In setting the Chief Executive Officer's
salary and incentive compensation for fiscal 1996, the Management Compensation
Committee reviewed the Company's fiscal 1995 financial performance in revenues,
expenses and pre-tax net income. Based upon its review at the outset of fiscal
1996, the Committee approved a modest increase in Mr. Lynn's salary for fiscal
1996 of $5,000. The Committee believes that any significant increase in Mr.
Lynn's compensation for 1996 will come from the executive bonus plan, which is
based on achieving the Company's revenue and net income targets, and that Mr.
Lynn has substantial motivation to increase the value of the Company's Common
Stock due to the large number of shares that he holds. The Committee believes a
significant performance-based component of total compensation serves the
interests of shareholders by directly linking management compensation with
corporate performance.
Management Compensation Committee Report
Submitted by the Members of the Management Compensation Committee:
David M. Gische
Robert E. Gray, Jr.
Compensation Committee Interlocks and Insider Participation
None.
Comparative Company Performance
The following line graph compares cumulative total shareholder
return for the Company with a performance indicator of the NASDAQ stock market,
and a peer group index over the last five fiscal years. The peer group consists
of Active Voice, Boston Technology, Brite Voice Systems, Centigram
Communications Inc., Cognitronics, Comverse Technology, Davox Corp., Digital
Sound, Intervoice Inc., Octel Communications, CP., Perception Inc., Syntellect,
Inc.
[GRAPHIC OMITTED]
<PAGE>
Compensation of Directors
Compensation of Mr. Gische and Mr. Gray, through fiscal 1995,
consisted of $500 per meeting with a maximum of $5,000 per year for each such
director. Effective December 20, 1995, the per meeting fee was increased to
$1,000 per meeting with a maximum of $10,000 per year for each director.
Employee directors are not paid for attending meetings of the Board of
Directors.
The Company has a non-employee director stock option plan (the
"Non-Employee Director Plan"), which was approved by the shareholders, pursuant
to which 75,000 shares of Common Stock have been reserved for issuance to
non-employee directors of the Company upon exercise of options granted under the
Non-Employee Director Plan. The Company believes that options issued under the
Non-Employee Director Plan create an incentive for non-employee directors to
expend maximum effort for the growth and success of the Company. Options for
1,000 shares of Common Stock were granted during fiscal 1995 to each of Messrs.
Gische and Gray under the Non-Employee Director Plan. The option price of all
options granted under the Non-Employee Director Plan equal the fair market value
of the shares underlying the option on the date of grant. Options granted under
the Non-Employee Director Plan expire if not exercised within ten years from the
date of the grant of the option. The terms of the Non-Employee Director Plan and
options to be granted thereunder is proposed to be amended, as described in
Proposal No. 4 below.
Section 16(a) Disclosure
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers and directors, and persons who own more than ten-percent
of a registered class of the Company's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission. Officers, directors, and greater than ten-percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Form 5's, other than two Form 5's which were filed late for two Directors,
were required for those persons, the Company believes that, during fiscal 1995,
all filing requirements applicable to its officers, directors, and greater than
ten-percent beneficial owners were complied with.
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
(Proposal No. 2)
The Board of Directors has appointed the firm of Price
Waterhouse LLP as independent accountants of the Company for the fiscal year
ending October 31, 1996, subject to ratification of such appointment by the
shareholders. The appointment of this firm was recommended to the Board of
Directors by its Audit Committee. Price Waterhouse LLP has been acting as
independent accountants of the Company since 1979.
The submission of this matter to shareholders at the Annual
Meeting is not required by law or by the By-Laws of the Company. Nevertheless,
the Board of Directors of the Company is submitting it to the shareholders to
ascertain their views. If this appointment is not ratified by the holders of at
least a majority of the shares of Common Stock of the Company at the Annual
Meeting, the Board of Directors intends to reconsider its appointment of Price
Waterhouse LLP as independent accountants of the Company.
Representatives of Price Waterhouse LLP will be present at the
Annual Meeting and will be available to respond to questions or make a
statement, if they so desire.
<PAGE>
NEW STOCK OPTION PLAN
(Proposal No. 3)
On September 28, 1995 and December 20, 1995, the Board of
Directors, subject to shareholder approval, adopted the Microlog 1995 Stock
Option Plan (the "New Stock Option Plan") with 1,000,000 shares of Common Stock
of the Company reserved for issuance upon the exercise of options granted
thereunder. Based upon the closing price of the Company's Common Stock on
January 19, 1996, the aggregate market value of the total number of shares of
Common Stock underlying the stock options available for grant, including the
shares reserved for issuance that are subject to shareholder approval, is
$2,315,160.75.
The principal provisions of the New Stock Option Plan are
summarized below. Such summary does not, however, purport to be complete and is
qualified in its entirety by the terms of the New Stock Option Plan, the entire
text of which is attached hereto as Exhibit 1 and incorporated herein by
reference.
Reason for Adoption of the New Stock Option Plan
Approval of adoption of the New Stock Option Plan is being
sought primarily because the prior stock option plan expires by its terms in
April 1996 and no new options may be granted thereunder after such date. In
addition, no shares of authorized but unissued Common Stock remain available for
future grant under the terms of the prior stock option plan. With the recent
streamlining of personnel and in light of the Company's current cash resources,
the Company intends to continue to rely heavily on stock options to encourage
the continued employment of key personnel and to provide an important incentive
for superior performance. The Board of Directors believes that adoption of the
New Stock Option Plan with 1,000,000 shares available for grant thereunder is
appropriate at this time in order to assure that a meaningful number of stock
options will be available for grant to employees of the Company and its
subsidiaries.
Description of the New Stock Option Plan
The New Stock Option Plan was adopted by the Board of
Directors in September 1995 and amended on December 20, 1995, subject to
shareholder approval. Under the terms of the New Stock Option Plan, 1,000,000
shares of Common Stock of the Company will be reserved for issuance to employees
of the Company and its subsidiaries upon exercise of options granted under the
New Stock Option Plan. The Stock Option Committee, consisting of two directors
of the Company, Messrs. Gische and Gray (neither of whom is an officer or
salaried employee of the Company), has authority to administer the New Stock
Option Plan and grant options thereunder.
Incentive stock options may be granted under the New Stock
Option Plan from time to time to any full-time employee of the Company or any of
its subsidiaries, including employees who are officers of the Company and its
subsidiaries (approximately 240 in number as of January 19, 1996). The maximum
number of shares of Common Stock subject to options that may be granted under
the New Stock Option Plan to any executive officer or other employee is 500,000
shares. Non-employee directors are not eligible to receive options under the New
Stock Option Plan. No option may be granted under the New Stock Option Plan
after the tenth anniversary of the effective date of the New Stock Option Plan,
September 28, 2005.
Under the New Stock Option Plan, the option price of incentive
stock options may not be less than the fair market value of the shares
underlying the option on the date the option is granted (or less than 110% of
the fair market value in the case of a person who owns more than 10% of the
Company's Common Stock). The option price of nonqualified options may not be
less than the par value of the shares underlying the option. The aggregate fair
market value of Common Stock (determined at the time the option is granted),
with respect to which incentive stock options granted under the New Stock Option
Plan (and all other benefit plans of the Company) are exercisable for the first
time by any employee during any calendar year, may not exceed $100,000. Payment
for shares purchased under the New Stock Option Plan may be made either in cash
or cash equivalents, in shares of Common Stock with a fair market value equal to
the option price, or a combination of cash and shares of Common Stock. The New
Stock Option Plan also allows for "cashless exercise," in which a licensed
broker tenders to the Company cash equal to the exercise price (plus taxes
required to be withheld) at the time the Company issues the stock certificates.
Options granted under the New Stock Option Plan generally are
not transferable during the lifetime of the employee and Common Stock acquired
prior to six months after the grant of any option may not be transferred.
Options granted under the New Stock Option Plan are expected
to expire if not exercised within ten years from the date of grant and will
terminate automatically upon an optionee's termination of employment or service
with the Company (or three months thereafter, in the case of normal retirement
in accordance with Company policy) unless otherwise provided in the option
agreement pertaining to such option. If any optionee dies while in the employ or
service of the Company or a subsidiary, his or her options, whether or not then
exercisable, may be exercised by his or her estate or by a person who acquires
the right to exercise such option by bequest or inheritance, within one year
after the date of such death (but not later than the date the option would
otherwise expire), unless otherwise provided in the option agreement. If an
optionee's service or employment with the Company or a subsidiary is terminated
by reason of permanent and total disability, his or her options, whether or not
then exercisable, may be exercised within one year after such termination of
service or employment (but not later than the date on which the option would
otherwise expire), unless otherwise provided in the option agreement. In the
event of a change in control of the Company (as defined in the New Stock Option
Plan), all outstanding options generally would immediately become exercisable.
The New Stock Option Plan is intended to qualify for the
exemption provided by Rule 16b-3 under the Securities Exchange Act. To the
extent any provision does not comply with the requirements of Rule 16b-3, it
shall be deemed inoperative to the extent permitted by law and deemed advisable
by the Board.
If the outstanding shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of any recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend or other distribution payable in Common Stock, or other
increase or decrease in the outstanding shares of Common Stock effected without
receipt of consideration by the Company, occurring after the effective date of
the New Stock Option Plan, the number and kinds of shares for the purchase of
which options may be granted under the New Stock Option Plan will be adjusted
proportionately and accordingly by the Company. In addition, the number and kind
of shares for which options are outstanding will be adjusted proportionately and
accordingly so that the proportionate interest of the holder of the option
immediately following such event will, to the extent practicable, be the same as
immediately prior to such event. Any such adjustment in outstanding options will
not change the aggregate option price payable with respect to shares subject to
the unexercised portion of the option outstanding, but will include a
corresponding proportionate adjustment in the option price per share.
Upon dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation or other business combination of the
Company with one or more other entities in which the Company is not the
surviving entity, or upon the sale of all or substantially all of the assets of
the Company to another entity, or upon any transaction (including, without
limitation, a merger or reorganization in which the Company is the surviving
corporation) approved by the Board which results in any person or entity (or
persons or entities acting as a group or otherwise in concert) owning 80 percent
or more of the combined voting power of all classes of stock of the Company, the
New Stock Option Plan and all options outstanding thereunder will terminate,
except to the extent a provision is made in connection with such transaction for
the continuation of the New Stock Option Plan and/or the assumption of the
options or for the substitution for such options of new options covering the
stock of a successor employer corporation, or parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and the per option
exercise prices, in which event the New Stock Option Plan and options
theretofore granted will continue in the manner and under the terms so provided.
In the event of such termination, all outstanding options will be exercisable in
full during such period immediately prior to the occurrence of such termination
as the Board of Directors, in its sole discretion, may determine and designate
whether or not such options are exercisable during such period.
Subject to the foregoing, if the Company is the surviving
corporation in any reorganization, merger, or consolidation of the Company with
one or more corporations, any option granted pursuant to the New Stock Option
Plan will pertain to and apply to the securities to which a holder of the number
of shares of Common Stock subject to such option would have been entitled
immediately following such reorganization, merger, or consolidation, with a
corresponding proportionate adjustment of the per share option exercise price so
that the aggregate option exercise price thereafter will be the same as the
aggregate option exercise price of the shares remaining subject to the option
immediately prior to such reorganization, merger, or consolidation.
The Board of Directors of the Company may, at any time and
from time to time, amend, suspend or terminate the New Stock Option Plan as to
shares of Common Stock as to which options have not been granted. However, the
Board of Directors may not amend the New Stock Option Plan, except subject to
the approval of the Company's shareholders, if such amendment would (1)
materially increase the benefits accruing to eligible individuals under the New
Stock Option Plan; (2) change the requirements as to eligibility to receive
options under the New Stock Option Plan; or (3) increase the maximum number of
shares that may be sold pursuant to options granted under the New Stock Option
Plan, other than adjustments upon changes in capitalization.
Unless previously terminated, the New Stock Option Plan will
terminate automatically on September 28, 2005, the tenth anniversary of the
effective date of the New Stock Option Plan. No termination, suspension or
amendment of the New Stock Option Plan may adversely affect the rights of the
holder of an option without such holder's consent.
Federal Income Tax Consequences
The grant of an incentive stock option will not be a taxable
event for the optionee or the Company. Generally, the grant of a nonqualified
option should not be a taxable event for the optionee or the Company provided
that, if the per-share exercise price of the option is less than the market
value of a share of the Company Common Stock on the date of grant, there is a
substantial risk, on the basis of all the facts and circumstances, that the
value of the Company stock could be less than the option price during the term
of the option.
With respect to "incentive stock options", an optionee will
not recognize taxable income upon the grant or exercise of an incentive option,
and any gain realized upon a disposition of shares acquired pursuant to exercise
of an incentive option will be taxed as long-term capital gain, if the optionee
holds the shares for at least two years after the date the incentive option was
granted and for at least one year after the date the option was exercised.
However, the excess of the fair market value of the Common Stock subject to an
incentive option on the date of exercise (or, in some cases, on the date of
expiration of certain securities laws restrictions as to the disposition of the
shares unless the optionee files a special tax election within 30 days after
exercise) over the option exercise price will be includable in alternative
minimum taxable income in the year of exercise (or the year in which such
restrictions expire) for purposes of the alternative minimum tax. This excess
increases the optionee's basis in the stock for purposes of the alternative
minimum tax but not for purposes of the regular income tax. An optionee may be
entitled to a credit against regular tax liability in future years for minimum
taxes paid with respect to the exercise of incentive options. The Company and
its subsidiaries will not be entitled to any business expense deduction with
respect to the grant or exercise of an incentive option, except as discussed
below.
For the exercise of an incentive option to qualify for
favorable tax treatment, the optionee generally must be an employee of the
Company or a subsidiary from the date the option is granted through a date
within three months before the date of exercise. In the case of an optionee who
is disabled, within the meaning of Section 22(e)(3) of the Internal Revenue Code
of 1986, as amended, (the "Code")(or the corresponding provision of any
subsequently enacted tax statute), the three-month period for exercise following
termination of employment is extended to one year. In the case of an employee
who dies, the time for exercising incentive options after termination of
employment and the holding period for stock received pursuant to the exercise of
the option are waived. The New Stock Option Plan generally requires, however,
that incentive options be exercised within one year following the date of death
of an employee, but not later than the time the option would expire by its
terms.
If all of the requirements for incentive option treatment are
met except for the special holding period rules set forth above, the optionee
will recognize ordinary income upon the disposition of the stock, generally in
an amount equal to the excess of the fair market value of the stock at the time
the incentive option was exercised over the option exercise price. The balance
of the realized gain, if any, will be long-or short-term capital gain, depending
upon whether the stock was sold more than one year after the incentive option
was exercised. If the optionee sells the stock prior to satisfaction of the
holding period rules but at a price below the fair market value of the stock at
the time the incentive option was exercised, the amount of ordinary income will
be limited to the excess of the amount realized on the sale over the option
exercise price. If the optionee sells the stock prior to satisfaction of the
holding period rules, the Company will be allowed a business expense deduction
to the extent it complies with applicable reporting requirements and the
optionee recognizes ordinary income.
The New Stock Option Plan provides that optionees may exercise
an incentive option by tendering shares of Common Stock with a fair market value
equal to part or all of the option exercise price. An exchange of common shares
for common shares of the same corporation is ordinarily a nontaxable exchange,
and the tax basis of the shares exchanged is treated as the substituted basis
for the shares received. The shares tendered would be treated as exchanged for
an equivalent number of option shares, which would take the tax basis of the
tendered shares, and the additional option shares would have a zero basis. These
rules would apply to use of shares of Common Stock to exercise an incentive
option unless the shares used to effect the exchange have been received pursuant
to exercise of an incentive option or another statutory option and the requisite
holding period requirements have not been met, in which case the tender of such
shares would be a taxable transaction (with the excess of the fair market value
of the shares tendered over the optionee's basis in those shares being taxable
gain).
Upon exercise of a nonqualified option, however, the optionee
will recognize ordinary income in an amount equal to the difference between the
option exercise price and the fair market value of the Common Stock on the date
of exercise (or, if the optionee is subject to certain restrictions imposed by
the securities laws, upon the lapse of those restrictions, unless the optionee
makes a special tax election within 30 days after exercise). If the Company
complies with the applicable reporting requirements, it will be entitled to a
business expense deduction in the same amount and at the same time as the
optionee recognizes ordinary income. Upon a subsequent sale or exchange of
shares acquired pursuant to the exercise of a nonqualified option, the optionee
will have taxable gain or loss, measured by the difference between the amount
realized on the disposition and the tax basis of the shares (generally, the
amount paid for the shares plus the amount treated as ordinary income at the
time the option was exercised). Provided that the shares have been held for more
than one year, such gain or loss would constitute long-term capital gain or
loss.
If an optionee surrenders shares of Common Stock in payment of
part or all of the exercise price of a nonqualified option, no gain or loss will
be recognized with respect to the shares surrendered, and the optionee will be
treated as receiving an equivalent number of shares pursuant to the exercise of
the option in a nontaxable exchange. The basis of the shares surrendered will be
treated as the substituted tax basis for an equivalent number of option shares
received. However, the fair market value of any shares received in excess of the
number of shares surrendered (i.e., the difference between the aggregate option
exercise price and the aggregate fair market value of the shares received
pursuant to exercise of the option) will be taxed as ordinary income. The
optionee's basis of such additional shares is equal to the amount included in
the optionee's income.
Under current federal income tax law, the highest tax rate on
ordinary income is 39.6% and long-term capital gains are subject to a maximum
tax rate of 28%. Because of certain provisions in the law relating to the "phase
out" of personal exemptions and certain limitations on itemized deductions, the
federal income tax consequences to a particular taxpayer of receiving additional
amounts of ordinary income or capital gain may be greater than would be
indicated by application of the foregoing tax rates to the additional amount of
income or gain.
Recommendation of the Board of Directors
Approval of the New Stock Option Plan requires the affirmative
vote of the holders of a majority of the shares of Common Stock of the Company
present, or represented by proxy, and entitled to vote thereon at the Annual
Meeting. The Board of Directors recommends that shareholders vote FOR approval
of the New Stock Option Plan.
<PAGE>
AMENDMENT TO NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
(Proposal No. 4)
On December 20, 1995, the Board of Directors, subject to
shareholder approval, approved an amendment to the Non-Employee Director Stock
Option Plan (i) to increase from 75,000 to 125,000 the number of shares of
Common Stock of the Company reserved for issuance upon the exercise of options
granted under the Non-Employee Director Stock Option Plan, (ii) to provide for
annual grants of an option to purchase 3,000 shares (rather than 1,000 shares)
of the Company's common stock to each non-employee director of the Company, and
provide that such grants will occur in December (rather than March) of each
fiscal year, and (iii) to extend the term of the plan to April 30, 2001. On
January 19, 1996, the Board further amended the Non-Employee Director Stock
Option Plan to provide for the exercise of options by the surrender of shares
held by the optionee or by "cashless" exercise through a broker and to make a
variety of minor changes to conform certain provisions of the Non-Employee
Director Plan to those of the New Stock Option Plan. Based upon the closing
price of the Company's Common Stock on January 19, 1996, the aggregate market
value of the total number of shares of Common Stock underlying the stock options
available for grant, including the shares that were added to the plan subject to
shareholder approval, is $73,500.
The principal provisions of the Non-Employee Director Stock
Option Plan are summarized below. Such summary does not, however, purport to be
complete and is qualified in its entirety by the terms of the Non-Employee
Director Stock Option Plan, the entire text of which, as amended and restated,
is attached as Exhibit 2 and incorporated herein by reference.
Reasons for Amendment of the Stock Option Plan
The Non-Employee Director Stock Option Plan is intended to
advance the interests of the Company by providing each member serving on the
Board of Directors of the Company who is not an officer or other salaried
employee of the Company or any subsidiary (a "Non-Employee Director") with an
opportunity to acquire or increase a proprietary interest in the Company. The
Board of Directors believes that the opportunity to acquire stock under the
Non-Employee Director Stock Option Plan will create another strong incentive for
Non-Employee Directors to expend maximum effort for the growth and success of
the Company and to remain in the service of the Company. For this reason, the
Board of Directors believes that it is appropriate to extend the term of the
plan to April 30, 2001, which will result in options being granted to
Non-Employee Directors for an additional three years. In addition, the Board of
Directors believes that it is appropriate at this time to increase the annual
grants of options thereunder to purchase 3,000 shares to each of the
Non-Employee Directors. The compensation of the members of the Board of
Directors is believed to be at the lower end for public companies, and the
Company wishes to increase the level of compensation to retain its existing
directors and attract qualified new directors. The use of stock options to
increase director compensation helps conserve the Company's cash resources. The
increase in the number of shares reserved for grant under the Non-Employee
Director Stock Option Plan is being sought to permit the extension of the plan
an increase in annual grants to be implemented. Prior to December 20, 1995,
14,000 shares of authorized but unissued Common Stock remained available for
future grants under the terms of the Non-Employee Director Stock Option Plan.
Finally, the Board believes it is appropriate to permit Non-Employee Directors
to exercise options by exchanging shares held by them or by a "cashless"
exercise procedure.
Description of the Non-Employee Director Stock Option Plan
Under the terms of the Non-Employee Director Stock Option Plan
prior to adoption of the amendment, up to 75,000 shares of Common Stock were
reserved for issuance under the Non-Employee Director Stock Option Plan. The
stock options granted under the Non-Employee Director Stock Option Plan are
non-incentive options.
Under the terms of the Non-Employee Director Stock Option
Plan, each Non-Employee Director serving on the Board of Directors on the
effective date of the Non-Employee Director Stock Option Plan (June 10, 1989)
was granted an option to purchase 5,000 shares of Common Stock. Each
Non-Employee Director subsequently elected to the Board of Directors was
entitled to receive an option to purchase 5,000 shares of Common Stock. In
addition, each continuing Non-Employee Director received an automatic grant of a
non-incentive stock option to purchase 1,000 shares of Common Stock in March of
each year from 1990 through 1995, and a special one-time grant of options to
purchase 10,000 shares in December 1992.
The option exercise price under the Non-Employee Director
Stock Option Plan is equal to one hundred percent (100%) of the fair market
value of Common Stock on the date the option is granted. Options granted under
the Non-Employee Director Stock Option Plan expire if not exercised within ten
(10) years from the date of grant.
Payment for shares purchased under the Non-Employee Director
Stock Option Plan, as amended, may be made either in cash or cash equivalents,
in shares of Common Stock with a fair market value equal to the option price, or
a combination of cash and shares of Common Stock. The Non-Employee Director
Stock Option Plan, as amended, also allows for "cashless exercise," in which a
licensed broker tenders to the Company cash equal to the exercise price (plus
taxes required to be withheld) at the time the Company issues the stock
certificates.
Options granted under the Non-Employee Director Stock Option
Plan continue to be in effect for the remainder of their respective terms
notwithstanding termination of any optionee's service with the Company or a
subsidiary.
If the outstanding shares of Common Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of any recapitalization,
reclassification, stock split, combination of shares, exchange of shares, stock
dividend or other distribution payable in Common Stock, or other increase or
decrease in the outstanding shares of Common Stock, occurring after the
effective date of the Non-Employee Director Stock Option Plan, the number and
kinds of shares for the purchase of which options may be granted under the
Non-Employee Director Stock Option Plan will be adjusted proportionately and
accordingly by the Company. In addition, the number and kind of shares for which
options are outstanding will be adjusted proportionately and accordingly so that
the proportionate interest of the holder of the option immediately following
such event will, to the extent practicable, be the same as immediately prior to
such event. Any such adjustment in outstanding options will not change the
aggregate option price payable with respect to shares subject to the unexercised
portion of the option outstanding but will include a corresponding proportionate
adjustment in the option price per share.
Upon the dissolution or liquidation of the Company, or upon a
merger, consolidation or reorganization of the Company with one or more other
corporations in which the Company is not the surviving corporation, or upon a
sale of all or substantially all of the assets of the Company to another
corporation, or upon any transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving corporation) approved by
the Board which results in any person or entity owing 80 percent or more of the
combined voting power of all classes of stock of the Company, the Non-Employee
Director Stock Option Plan and all options outstanding hereunder will terminate,
except to the extent provision is made in writing in connection with such
transaction for the continuation of the Non-Employee Director Stock Option Plan
and/or the assumption of the options theretofore granted, or for the
substitution for such options of new options covering the stock of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kinds of shares and exercise prices, in which event the
Non-Employee Director Stock Option Plan and options theretofore granted will
continue in the manner and under the terms so provided.
Subject to the foregoing, if the Company is the surviving
corporation in any reorganization, merger, or consolidation of the Company with
one or more other corporations, any option granted pursuant to the Non-Employee
Director Stock Option Plan will pertain to and apply to the securities to which
a holder of the number of shares of Common Stock subject to such option would
have been entitled immediately following such reorganization, merger, or
consolidation, with a corresponding proportionate adjustment of the option price
per share so that the aggregate option price thereafter will be the same as the
aggregate option price of shares remaining subject to the option immediately
prior to such reorganization, merger, or consolidation.
The Board of Directors may, at any time and from time to time,
amend, suspend or terminate the Non-Employee Director Stock Option Plan as to
any shares of Common Stock as to which options have not been granted. However,
the Company's shareholders must approve any amendment that would (1) materially
change the requirements as to eligibility to receive options under the
Non-Employee Director Stock Option Plan; (2) increase the maximum number of
shares that may be sold pursuant to options granted under the Non-Employee
Director Stock Option Plan, other than adjustments upon changes in
capitalization; (3) change the minimum option price, other than adjustments upon
changes in capitalization; (4) increase the maximum period during which options
may be exercised; (5) extend the term of the Non-Employee Director Stock Option
Plan; or (6) materially increase the benefits accruing to eligible individuals
under the Non-Employee Director Stock Option Plan.
Under the terms of the Non-Employee Director Stock Option Plan
prior to adoption of this amendment, the plan will terminate automatically on
April 30, 1997, unless previously terminated. No termination, suspension or
amendment of the Non-Employee Director Stock Option Plan may, without the
consent of the optionee to whom an option has been granted, adversely affect the
rights of the holder of the option.
Federal Income Tax Consequences
No gain or loss is recognized by the optionee at the time such
an option is granted. Upon exercise of an option, the federal income tax
consequences will be substantially the same as described above with respect to
nonqualified options granted under the New Stock Option Plan.
Option Grants
In December 1995, Messrs. Gische and Gray each were given
annual grants of options to purchase 3,000 shares of Common Stock, subject to
shareholder approval. Each will receive automatic grants of options to purchase
3,000 shares of Common Stock in December of each year through 2001, subject to
shareholder approval. If shareholder approval of the amendment of the
Non-Employee Director Stock Option Plan is not approved, they will instead
receive annual grants of 1,000 shares in March of 1996 and 1997.
Recommendation of the Board of Directors
Approval of the amendment to the Non-Employee Director Stock
Option Plan requires the affirmative vote of the holders of a majority of the
shares of Common Stock of the Company entitled to vote thereon and who vote in
person or by proxy at the Annual Meeting. The Board of Directors recommends that
shareholders vote FOR approval of the amendment to the Non-Employee Director
Stock Option Plan.
<PAGE>
SHAREHOLDER PROPOSALS
AND OTHER MATTERS
Proposals of shareholders intended to be presented at the
Company's 1997 Annual Meeting of Shareholders must be received at the Company's
principal executive offices not later than October 31, 1996 in order for such
proposals to be included in the Company's proxy statement and proxy relating to
the 1997 Annual Meeting of Shareholders. Nothing in this paragraph shall be
deemed to require the Company to include in the proxy statement and proxy
relating to the 1997 Annual Meeting of Shareholders any shareholder proposal
that does not meet all of the requirements for such inclusion in effect at that
time.
The Board of Directors does not intend to present, and has not
been informed that any other person intends to present, any matters for action
at the Annual Meeting other than those specifically referred to herein. If,
however, any other matters should properly come before the Annual Meeting, it is
the intention of the person named in the enclosed proxy to vote the shares
represented thereby in accordance with the determination of a majority of the
Board of Directors.
The Board of Directors of the Company urges each shareholder,
whether or not he or she intends to be present at the Annual Meeting, to
complete, sign and return the enclosed proxy as promptly as possible.
By Order of the Board of Directors
Joe J. Lynn
Chief Executive Officer
<PAGE>
February , 1996
Dear Shareholder:
You are cordially invited to attend the 1996 Annual Meeting of
Shareholders of Microlog Corporation (the "Company") to be held March 26, 1996,
at 10:00 a.m., at the Gaithersburg Marriott Washingtonian Center, 9751
Washingtonian Blvd., Gaithersburg, Maryland, 20878.
The Annual Meeting has been called for the following purposes:
(1) to elect two directors to serve for a term of three
years;
(2) to ratify the appointment by the Board of Directors
of the firm of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending
October 31, 1996;
(3) to consider and vote upon a proposed new Stock Option
Plan with 1,000,000 shares of the Company's common
stock reserved for issuance upon the exercise of
options granted under such new Stock Option Plan;
(4) to consider and vote upon proposed amendments to the
Company's Non-Employee Director Stock Option Plan
which would, among other things, (i) increase from
75,000 to 125,000 the number of shares reserved for
issuance upon the exercise of options granted under
the Non-Employee Director Stock Option Plan, (ii)
provide for annual grants of an option to purchase
3,000 shares (rather than 1,000 shares) of the
Company's common stock to each non-employee director
of the Company, and provide that such grants will
occur in December (rather than March) of each fiscal
year, and (iii) extend the term of the plan to April
30, 2001; and
(5) to transact such other business as may properly come
before the Annual Meeting or any adjournments
thereof.
The Board of Directors of Microlog Corporation unanimously recommends that you
vote "FOR" proposals (1), (2), (3), and (4) to be considered at the Annual
Meeting.
Your vote is important, regardless of the number of shares you
own. On behalf of the Board of Directors, I urge you to vote, sign, date, and
return the enclosed proxy card as soon as possible, even if you plan to attend
the Annual Meeting. Signing this proxy will not prevent you from voting in
person should you be able to attend the meeting. Signing the proxy will assure
that your vote is counted if, for any reason, you are unable to attend.
Sincerely yours,
Joe J. Lynn
Chief Executive Officer
<PAGE>
MICROLOG CORPORATION
20270 Goldenrod Lane
Germantown, MD 20876-4070
(301) 428-9100
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS;
TO BE HELD MARCH 26, 1996
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of
Shareholders of Microlog Corporation (the "Company") will be held on March 26,
1996, at 10:00 a.m., local time, at the Gaithersburg Marriott Washingtonian
Center, 9751 Washingtonian Blvd., Gaithersburg, Maryland, 20878, for the
following purposes:
1. To elect two directors to serve for a term of three
years;
2. To ratify the appointment by the Board of Directors
of the firm of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending
October 31, 1996;
3. To consider and vote upon a proposed new Stock Option
Plan with 1,000,000 shares of the Company's common
stock reserved for issuance upon the exercise of
options granted under such new Stock Option Plan;
4. to consider and vote upon proposed amendments to the
Company's Non-Employee Director Stock Option Plan
which would, among other things, (i) increase from
75,000 to 125,000 the number of shares reserved for
issuance upon the exercise of options granted under
the Non-Employee Director Stock Option Plan, (ii)
provide for annual grants of an option to purchase
3,000 shares (rather than 1,000 shares) of the
Company's common stock to each non-employee director
of the Company, and provide that such grants will
occur in December (rather than March) of each fiscal
year, and (iii) extend the term of the plan to April
30, 2001; and
5. To transact such other business as may properly come
before the Annual Meeting or any adjournments
thereof.
Pursuant to the By-Laws of the Company, the Board of Directors
has fixed February 2, 1996 as the record date for the Annual Meeting with
respect to this solicitation. Only shareholders of record at the close of
business on that date will be entitled to notice of and to vote at the Annual
Meeting or any adjournments thereof.
In the event there are not sufficient votes to approve one or
more of the foregoing proposals at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit further solicitation of proxies by
the Company.
By Order of the Board of Directors
Joe J. Lynn
Chief Executive Officer
Germantown, Maryland
February 20, 1996
<PAGE>
PLEASE FILL OUT, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE
ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.
<PAGE>
REVOCABLE PROXY
MICROLOG CORPORATION
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned shareholder hereby appoints Joe J. Lynn,
Richard A. Thompson, or Steven R. Delmar, or any of them, attorneys and proxies
of the undersigned, with full power of substitution and with authority in each
of them to act in the absence of the other, to vote and act for the undersigned
at the Annual Meeting of Shareholders of the Company to be held at the
Gaithersburg Marriott Washingtonian Center, 9751 Washingtonian Blvd.,
Gaithersburg, Maryland, 20878, on March 26, 1996 at 10:00 a.m., local time, and
at any adjournments thereof, in respect of all shares of the Common Stock of the
Company which the undersigned may be entitled to vote, on the following matters:
1. Election of two directors for a three year term ending in 1999:
David M. Gische
Richard A. Thompson
|_| FOR the nominees listed above.
|_| WITHHOLD AUTHORITY to vote for the following nominee(s):
2. Proposal to ratify the appointment of Price Waterhouse LLP as
the independent accountants of the Company for the fiscal year
ending October 31, 1996
|_| FOR |_| AGAINST |_| ABSTAIN
3. The approval of the new Company's Stock Option Plan with
1,000,000 the number of shares of the Company's Common Stock
reserved for issuance upon the exercise of options granted
under such new Stock Option Plan;
|_| FOR |_| AGAINST |_| ABSTAIN
4. The approval of the amendments to the Company's Non-Employee
Director Stock Option Plan which would, among other things,
(i) increase from 75,000 to 125,000 the number of shares
reserved for issuance upon the exercise of options granted
under the Non-Employee Director Stock Option Plan, (ii)
provide for annual grants of an option to purchase 3,000
shares (rather than 1,000 shares) of the Company's common
stock to each non-employee director of the Company, and
provide that such grants will occur in December (rather than
March) of each fiscal year, and (iii) extend the term of the
plan to April 30, 2001; and
|_| FOR |_| AGAINST |_| ABSTAIN
5. In their discretion, on any other matters that may properly
come before the meeting, or any adjournments thereof, in
accordance with the recommendations of a majority of the Board
of Directors.
(Continued and to be dated and signed on reverse side.)
<PAGE>
(continued from other side)
This proxy, when properly executed, will be voted as directed herein by the
undersigned shareholder. However, if no direction is given, this proxy will be
voted FOR the nominees in proposal 1, and FOR proposals 2, 3 and 4.
The undersigned hereby acknowledges prior receipt of a copy of
the Notice of Annual Meeting of Shareholders and proxy statement dated February
, 1996 and the 1995 Annual Report to Shareholders, and hereby revokes any proxy
or proxies heretofore given. This Proxy may be revoked at any time before it is
voted by delivering to the Secretary of the Company either a written revocation
of proxy, or a duly executed proxy bearing a later date, or by appearing at the
Annual Meeting and voting in person.
If you receive more than one proxy card, please sign and
return all cards in the accompanying envelope.
| | I PLAN TO ATTEND THE MARCH 26, 1996 ANNUAL SHAREHOLDERS MEETING
Date: , 1996.
- --------------------------------------------------------------------------------
Signature of Shareholder or Authorized
Representative
Please date and
sign exactly as
name appears
hereon. Each
executor,
administrator,
trustee, guardian,
attorney-in-fact
and other
fiduciary should
sign and indicate
his or her full
title. In the case
of stock ownership
in the name of two
or more persons,
both persons
should sign.
PLEASE MARK, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY TO ENSURE A QUORUM
AT THE MEETING. IT IS IMPORTANT WHETHER YOU OWN FEW OR MANY SHARES. DELAY IN
RETURNING YOUR PROXY MAY SUBJECT THE COMPANY TO ADDITIONAL EXPENSE.
<PAGE>
- --------------------------------------------------------------------------------
- 14 -
- --------------------------------------------------------------------------------
EXHIBIT 1
MICROLOG CORPORATION
1995 STOCK OPTION PLAN
Microlog Corporation (the "Corporation") sets forth herein the
terms of this 1995 Stock Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the
Corporation by providing eligible individuals (as designated pursuant to Section
4 below) with an opportunity to acquire or increase a proprietary interest in
the Corporation, which thereby will create a stronger incentive to expend
maximum effort for the growth and success of the Corporation and its
subsidiaries, and will encourage such eligible individuals to remain in the
employ of the Corporation or one or more of its subsidiaries. Each stock option
granted under the Plan (an "Option") is intended to be an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
or the corresponding provision of any subsequently-enacted tax statute, as
amended from time to time (the "Code") ("Incentive Stock Option"), except (i) to
the extent that any such Option would exceed the limitations set forth in
Section 7 below; and (ii) for Options specifically designated at the time of
grant as not being "incentive stock options."
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the Board of
Directors of the Corporation (the "Board"), which shall have the full power and
authority to take all actions, and to make all determinations required or
provided for under the Plan or any Option granted or Option Agreement (as
defined in Section 8 below) entered into hereunder and all such other actions
and determinations not inconsistent with the specific terms and provisions of
the Plan deemed by the Board to be necessary or appropriate to the
administration of the Plan or any Option granted or Option Agreement entered
into hereunder. All such actions and determinations shall be by the affirmative
vote of a majority of the members of the Board present at a meeting at which any
issue relating to the Plan is properly raised for consideration or without a
meeting by written consent of the Board executed in accordance with the
Corporation's Certificate of Incorporation and By-Laws, and with applicable law.
The interpretation and construction by the Board of any provision of the Plan or
of any Option granted or Option Agreement entered into hereunder shall be final
and conclusive.
(b) Committee. The Board may from time to time appoint a Stock
Option Committee (the "Committee") consisting of not less than two members of
the Board, none of whom shall be an officer or other salaried employee of the
Corporation or any of its subsidiaries, and each of whom shall qualify in all
respects as a "disinterested person" as defined in Rule l6b-3 of the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Board, in its sole discretion, may provide that the
role of the Committee shall be limited to making recommendations to the Board
concerning any determinations to be made and actions to be taken by the Board
pursuant to or with respect to the Plan, or the Board may delegate to the
Committee such powers and authorities related to the administration of the Plan,
as set forth in Section 2(a) above, as the Board shall determine, consistent
with the Certificate of Incorporation and By-Laws of the Corporation and
applicable law. The Board may remove members, add members, and fill vacancies on
the Committee from time to time, all in accordance with the Corporation's
Certificate of Incorporation and By-Laws, and with applicable law. The majority
vote of the Committee, or acts reduced to or approved in writing by a majority
of the members of the Committee, shall be the valid acts of the Committee.
(c) No Liability. No member of the Board or of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option granted or Option Agreement entered into hereunder.
(d) Delegation to the Committee. In the event that the Plan or
any Option granted or Option Agreement entered into hereunder provides for any
action to be taken by or determination to be made by the Board, such action may
be taken by or such determination may be made by the Committee if the power and
authority to do so has been delegated to the Committee by the Board as provided
for in Section 2(b) above. Unless otherwise expressly determined by the Board,
any such action or determination by the Committee shall be final and conclusive.
(e) Action by the Board. The Board may act under the Plan with
respect to any Option granted to or Option Agreement entered into with an
officer, director or shareholder of the Corporation who is subject to Section 16
of the Exchange Act other than by, or in accordance with the recommendations of,
the Committee, constituted as set forth in Section 2(b) above, only if the Board
satisfies the requirements of Rule 16b-3 of the Securities and Exchange
Commission under the Exchange Act relating to "disinterested administration."
3. STOCK
The stock that may be issued pursuant to Options granted under
the Plan shall be shares of Common Stock, par value $.01 per share, of the
Corporation (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted under the Plan shall not exceed in the aggregate 1,000,000
shares. The foregoing number of shares are subject to adjustment as provided in
Section 17 below. If any Option expires, terminates, or is terminated or
canceled for any reason prior to exercise in full, the shares of Stock that were
subject to the unexercised portion of such Option shall be available for future
Options granted under the Plan.
4. ELIGIBILITY
Options may be granted under the Plan to any employee of the
Corporation or any "subsidiary corporation" (a "Subsidiary") thereof within the
meaning of Section 424(f) of the Code (including any such employee who is an
officer or director of the Corporation or any Subsidiary) as the Board shall
determine and designate from time to time prior to expiration or termination of
the Plan. The maximum number of shares of Stock subject to Options that may be
granted under the Plan to any executive officer or other employee of the
Corporation or any Subsidiary is 500,000 shares (subject to adjustment as
provided in Section 17 hereof). An individual may hold more than one Option,
subject to such restrictions as are provided herein.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective as of the date
of adoption by the Board, which date is set forth below, subject to approval of
the Plan within one year of such effective date by the affirmative votes of the
holders of a majority of the Stock of the Corporation present, or represented,
and entitled to vote at a meeting duly held in accordance with applicable law;
provided, however, that upon approval of the Plan by the shareholders of the
Corporation as set forth above, all Options granted under the Plan on or after
the effective date shall be fully effective as if the shareholders of the
Corporation had approved the Plan on the effective date. If the shareholders
fail to approve the Plan within one year of such effective date, any options
granted hereunder shall be null and void and of no effect.
(b) Term. The Plan shall terminate on the date ten years from
the effective date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, prior to the date of termination of the
Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions which may be necessary to qualify such Options as Incentive Stock
Options. The date on which the Board approves the grant of an Option (or such
later date as is specified by the Board) shall be considered the date on which
such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) of
Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value (determined at the time the option is granted) of
the stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations within the meaning of Section 422(d) of the Code) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"), to be executed by the Corporation and
by the Optionee, in such form or forms as the Board shall from time to time
determine. Option Agreements covering Options granted from time to time or at
the same time need not contain similar provisions; provided, however, that all
such Option Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option (the "Option Price") shall be fixed by the Board and stated in each
Option Agreement, except that the Option Price of a share of Stock subject to an
Option that is intended to constitute an Incentive Stock Option shall be not
less than 100 percent of the fair market value of a share of the Stock on the
date the Option is granted (as determined in good faith by the Board); provided,
however, that in the event the Optionee would otherwise be ineligible to receive
an Incentive Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than ten percent), the
Option Price of an Option that is intended to be an Incentive Stock Option shall
be not less than 110 percent of the fair market value of a share of Stock at the
time such Option is granted. In the event that the Stock is listed on an
established national or regional stock exchange, is admitted to quotation on the
National Association of Securities Dealers Automated Quotation System, or is
publicly traded on an established securities market, in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock on
such exchange or System or in such market (the highest such closing price if
there is more that one such exchange or market) on the trading date immediately
before the Option is granted (or, if there is no such closing price, then the
Board shall use the mean between the high and low prices on such date), or, if
no sale of the Stock had been made on such day, on the next preceding day on
which any such sale shall have been made.
10. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall terminate
and all rights to purchase shares thereunder shall cease upon the expiration of
ten years from the date such Option is granted, or on such date prior thereto as
may be fixed by the Board and stated in the Option Agreement relating to such
Option; provided, however, that in the event the Optionee would otherwise be
ineligible to receive an Incentive Stock Option by reason of the provisions of
Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more
than ten percent), an Option granted to such Optionee that is intended to be an
Incentive Stock Option shall in no event be exercisable after the expiration of
five years from the date it is granted.
(b) Option Period and Limitations on Exercise. Each Option
shall be exercisable, in whole or in part, at any time and from time to time,
over a period commencing on or after the date of grant and ending upon the
expiration or termination of the Option, as the Board shall determine and set
forth in the Option Agreement relating to such Option. Without limiting the
foregoing, the Board, subject to the terms and conditions of the Plan, may in
its sole discretion provide that an Option may not be exercised in whole or in
part for any period or periods of time during which such Option is outstanding;
provided, however, that any such limitation on the exercise of an Option
contained in any Option Agreement may be rescinded, modified or waived by the
Board, in its sole discretion, at any time and from time to time after the date
of grant of such Option, so as to accelerate the time at which the Option may be
exercised. Each Option shall be exercisable, in whole or in part, at any time
and from time to time, over a period commencing on the date of grant and ending
upon the expiration of the Option. Notwithstanding any other provision of the
Plan, no Option granted to an Optionee under the Plan shall be exercisable in
whole or in part prior to the date the Plan is approved by the shareholders of
the Corporation as provided in Section 5 above.
(c) Method of Exercise. An Option that is exercisable
hereunder may be exercised by delivery to the Corporation on any business day,
at its principal office, addressed to the attention of the Committee, of written
notice of exercise, which notice shall specify the number of shares with respect
to which the Option is being exercised. The minimum number of shares of Stock
with respect to which an Option may be exercised, in whole or in part, at any
time shall be the lesser of 100 shares or the maximum number of shares available
for purchase under the Option at the time of exercise. Except as provided below,
payment in full of the Option Price of the shares for which the Option is being
exercised shall accompany the written notice of exercise of the Option and shall
be made either (i) in cash or in cash equivalents; (ii) through the tender to
the Corporation of shares of Stock, which shares shall be valued, for purposes
of determining the extent to which the Option Price has been paid thereby, at
their fair market value (determined in the manner described in Section 9 above)
on the date of exercise; or (iii) by a combination of the methods described in
(i) and (ii); provided, however, that the Board may in its discretion impose and
set forth in the Option Agreement such limitations or prohibitions on the use of
shares of Stock to exercise Options as it deems appropriate. If shares of Stock
that are acquired by the Optionee through exercise of an Option or an option
issued under another stock option plan maintained by the Corporation are
surrendered in payment of the Option Price, the Stock surrendered in payment
must have been (i) held by the Optionee for more than six months at the time of
surrender, or (ii) acquired under an Option granted not less than six months
prior to the time of surrender. Unless the Board shall provide otherwise in the
case of an Option Agreement, payment in full of the Option Price need not
accompany the written notice of exercise provided the notice of exercise directs
that the Stock certificate or certificates for the shares for which the Option
is exercised be delivered to a licensed broker acceptable to the Corporation as
the agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the Corporation
cash (or cash equivalents acceptable to the Corporation) equal to the Option
Price for the shares of Stock purchased pursuant to the exercise of the Option
plus the amount (if any) of federal and other taxes which the Corporation may,
in its judgment, be required to withhold with respect to the exercise of the
Option. An attempt to exercise any Option granted hereunder other than as set
forth above shall be invalid and of no force and effect. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the individual exercising the Option shall be entitled
to the issuance of a Stock certificate or certificates evidencing his ownership
of such shares. A separate Stock certificate or certificates shall be issued for
any shares purchased pursuant to the exercise of an Option which is an Incentive
Stock Option, which certificate or certificates shall not include any shares
which were purchased pursuant to the exercise of an Option which is not an
Incentive Stock Option. An individual holding or exercising an Option shall have
none of the rights of a shareholder until the shares of Stock covered thereby
are fully paid and issued to him and, except as provided in Section 17 below, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date of such issuance.
(d) Restrictions on Transfer of Stock. If an Option is
exercised prior to the date that is six months from the later of (i) the date of
grant of the Option or (ii) the date of shareholder approval of the Plan and the
individual exercising the Option is a reporting person under Section 16(a) of
the Exchange Act, then such certificate or certificates shall bear a legend
restricting the transfer of the Stock covered thereby until the expiration of
six months from the later of the date specified in clause (i) above or the date
specified in clause (ii) above.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is
granted, only such Optionee (or, in the event of legal incapacity or
incompetence, the Optionee's guardian or legal representative) may exercise the
Option. No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.
12. TERMINATION OF EMPLOYMENT
Upon the termination of the employment of an Optionee with the
Corporation or a Subsidiary, other than by reason of the death or "permanent and
total disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, any Option granted to an Optionee pursuant to the Plan shall
terminate, and such Optionee shall have no further right to purchase shares of
Stock pursuant to such Option; provided, however, that in the event that such
termination of employment is by reason of the Optionee's retirement in
accordance with the normal retirement policies of the Corporation or a
Subsidiary, as the case may be, then such Optionee shall have the right, at any
time within three months after the date of such retirement (or such shorter
period as may be specified in an Option Agreement), and prior to termination of
the Option pursuant to Section 10(a) above, to exercise, in whole or in part,
any Option held by such Optionee at the date of such retirement, whether or not
such Option was exercisable immediately before such retirement; provided,
further, that the Board may provide, by inclusion of appropriate language in any
Option Agreement, that the Optionee may (subject to the general limitations on
exercise set forth in Section 10(b) above), in the event of termination of
employment of the Optionee with the Corporation or a Subsidiary, exercise an
Option, in whole or in part, at any time subsequent to such termination of
employment and prior to termination of the Option pursuant to Section 10(a)
above, either subject to or without regard to any installment limitation on
exercise imposed pursuant to Section 10(b) above. Whether a termination of
employment is to be considered by reason of retirement in accordance with the
normal retirement policies of the Corporation or a Subsidiary, as the case may
be, and whether a leave of absence or leave on military or government service
shall constitute a termination of employment for purposes of the Plan shall be
determined by the Board, which determination shall be final and conclusive. For
purposes of the Plan, a termination of employment with the Corporation or a
Subsidiary shall not be deemed to occur if the Optionee is immediately
thereafter employed by the Corporation or any Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH, DISABILITY OR CHANGE IN CONTROL
(a) Death of an Employee. If an Optionee dies while in the
employ of the Corporation or a Subsidiary or within the period following the
termination of employment during which the Option is exercisable under Section
12 above or Section 13(b) below, the executors or administrators or legatees or
distributees of such Optionee's estate shall have the right (subject to the
general limitations on exercise set forth in Section 10(b) above), at any time
within one year after the date of such Optionee's death and prior to termination
of the Option pursuant to Section 10(a) above (or such shorter period as may be
specified in an Option Agreement), to exercise any Option held by such Optionee
at the date of such Optionee's death, whether or not such Option was exercisable
immediately prior to such Optionee's death; provided, however, that the Board
may provide by inclusion of appropriate language in any Option Agreement that,
in the event of the death of the Optionee, the executors or administrators or
legatees or distributees of such Optionee's estate may exercise an Option
(subject to the general limitations on exercise set forth in Section 10(b)
above), in whole or in part, at any time subsequent to such Optionee's death and
prior to termination of the Option pursuant to Section 10(a) above, either
subject to or without regard to any installment limitation on exercise imposed
pursuant to Section 10(b) above.
(b) Disability of an Employee. If an Optionee terminates
employment with the Corporation or a Subsidiary by reason of the "permanent and
total disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
one year after such termination of employment and prior to termination of the
Option pursuant to Section 10(a) above (or such shorter period as may be
specified in an Option Agreement), to exercise, in whole or in part, any Option
held by such Optionee at the date of such termination of employment, whether or
not such Option was exercisable immediately prior to such termination of
employment; provided, however, that the Board may provide, by inclusion of
appropriate language in any Option Agreement, that the Optionee may (subject to
the general limitations on exercise set forth in Section 10(b) above), in the
event of the termination of employment of the Optionee with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the meaning
of Section 22(e)(3) of the Code) of such Optionee, exercise an Option in whole
or in part, at any time subsequent to such termination of employment and prior
to termination of the Option pursuant to Section 10(a) above, either subject to
or without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above. Whether a termination of employment is to be considered by
reason of "permanent and total disability" for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive.
(c) Change in Control. Except as otherwise provided in Section
17(f) below, in the event of the occurrence of a Change in Control (as defined
below) or in the event that the Board, in its sole and absolute discretion,
determines that there exists a threat of a Change in Control, each Option issued
before the date of such occurrence or such determination, which Option has not
theretofore terminated as provided in Section 10(a) above, shall immediately
become exercisable in full as of the date of such occurrence or such
determination, whether or not such Option was otherwise exercisable immediately
before such occurrence or such determination. For purposes of this Plan, a
"Change in Control" shall be deemed to occur if, at any time, any person
(including, without limitation, any individual, sole proprietorship,
partnership, trust, corporation, association, joint venture, pool, syndicate or
other entity, whether or not incorporated), or any two or more persons acting as
a syndicate or group and thereby deemed collectively to be a "person" within the
meaning of Section 13(d)(3) of the Exchange Act, shall acquire shares of stock
of the Corporation, which acquisition results in such person or persons owning
in the aggregate shares of stock of the Company possessing 20 percent or more of
the total combined voting power of all classes of stock of the Corporation,
unless prior to such acquisition the full Board shall by at least a two-thirds
vote have specifically approved such acquisition and determined that such
acquisition shall not constitute a Change in Control for purposes of the Plan.
Whether there exists a threat of a Change in Control for purposes of this Plan
shall be determined by the Board, which determination shall be final and
conclusive.
14. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of
Stock pursuant to Options granted under the Plan shall constitute general funds
of the Corporation.
15. REQUIREMENTS OF LAW
(a) Violations of Law. The Corporation shall not be required
to sell or issue any shares of Stock under any Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or the Corporation of any provisions of any law or regulation of any
governmental authority, including without limitation any federal or state
securities laws or regulations. Specifically in connection with the Securities
Act of 1933 (as now in effect or as hereafter amended), upon exercise of any
Option, unless a registration statement under such Act is in effect with respect
to the shares of Stock covered by such Option, the Company shall not be required
to sell or issue such shares unless the Board has received evidence satisfactory
to it that the holder of such Option may acquire such shares pursuant to an
exemption from registration under such Act. Any determination in this connection
by the Board shall be final, binding, and conclusive. The Company may, but shall
in no event be obligated to, register any securities covered hereby pursuant to
the Securities Act of 1933 (as now in effect or as hereafter amended). The
Corporation shall not be obligated to take any affirmative action in order to
cause the exercise of an Option or the issuance of shares pursuant thereto to
comply with any law or regulation of any governmental authority. As to any
jurisdiction that expressly imposes the requirement that an Option shall not be
exercisable unless and until the shares of Stock covered by such Option are
registered or are subject to an available exemption from registration, the
exercise of such Option (under circumstances in which the laws of such
jurisdiction apply) shall be deemed conditioned upon the effectiveness of such
registration or the availability of such an exemption.
(b) Compliance with Rule 16b-3. The intent of this Plan is to
qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the
extent any provision of the Plan does not comply with the requirements of Rule
16b-3, it shall be deemed inoperative to the extent permitted by law and deemed
advisable by the Board and shall not affect the validity of the Plan. In the
event Rule 16b-3 is revised or replaced, the Board, or the Committee acting on
behalf of the Board, may exercise discretion to modify this Plan in any respect
necessary to satisfy the requirements of the revised exemption or its
replacement.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been granted; provided, however, that no amendment by the Board shall,
without approval by a majority of the votes present and entitled to vote at a
duly held meeting of the shareholders of the Corporation at which a quorum
representing a majority of all outstanding voting stock is, either in person or
by proxy, present and voting on the amendment, or by written consent in
accordance with applicable state law and the Certificate of Incorporation and
By-Laws of the Corporation, materially increase the benefits accruing to
participants under the Plan, change the requirements as to eligibility to
receive Options or increase the maximum number of shares of Stock in the
aggregate that may be sold pursuant to Options granted under the Plan (except as
permitted under Section 17 hereof). Except as permitted under Section 17 hereof,
no amendment, suspension or termination of the Plan shall, without the consent
of the holder of the Option, alter or impair rights or obligations under any
Option theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of Stock are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Corporation by reason of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by the Corporation, occurring after the effective date
of the Plan, the number and kinds of shares for the purchase of which Options
may be granted under the Plan shall be adjusted proportionately and accordingly
by the Corporation. In addition, the number and kind of shares for which Options
are outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the holder of the Option immediately following such
event shall, to the extent practicable, be the same as immediately prior to such
event. Any such adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised portion
of the Option outstanding but shall include a corresponding proportionate
adjustment in the Option Price per share.
(b) Reorganization in Which the Corporation Is the Surviving
Corporation. Subject to Subsection (c) hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) Reorganization in Which the Corporation Is Not the
Surviving Corporation or Sale of Assets or Stock. Upon the dissolution or
liquidation of the Corporation, or upon a merger, consolidation, reorganization
or other business combination of the Corporation with one or more other entities
in which the Corporation is not the surviving entity, or upon a sale of all or
substantially all of the assets of the Corporation to another entity, or upon
any transaction (including, without limitation, a merger or reorganization in
which the Corporation is the surviving corporation) approved by the Board which
results in any person or entity (or persons or entities acting as a group or
otherwise in concert) owning 80 percent or more of the combined voting power of
all classes of stock of the Corporation, the Plan and all Options outstanding
hereunder shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan and/or the
assumption of the Options theretofore granted, or for the substitution for such
Options of new options covering the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan and Options theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan, each individual holding an Option
shall have the right (subject to the general limitations on exercise set forth
in Section 10(b) above and except as otherwise specifically provided in the
Option Agreement relating to such Option), immediately prior to the occurrence
of such termination and during such period occurring prior to such termination
as the Board in its sole discretion shall determine and designate, to exercise
such Option in whole or in part, whether or not such Option was otherwise
exercisable at the time such termination occurs and without regard to any
installment limitation on exercise imposed pursuant to Section 10(b) above. The
Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options not later than the time at which
the Corporation gives notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 17 related to
stock or securities of the Corporation shall be made by the Board, whose
determination in that respect shall be final, binding, and conclusive. No
fractional shares of Stock or units of other securities shall be issued pursuant
to any such adjustment, and any fractions resulting from any such adjustment
shall be eliminated in each case by rounding downward to the nearest whole share
or unit.
(e) No Limitations on Corporation. The grant of an Option
pursuant to the Plan shall not affect or limit in any way the right or power of
the Corporation to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
(f) Parachute Payments. Notwithstanding any other provision of
the Plan, if any payment, grant or acceleration of exercisability of an Option
or other benefit to an Optionee under this Plan (a "Plan Benefit") would
otherwise constitute a "parachute payment" within the meaning of Code Section
280G(b)(2) and if, after reduction for any applicable federal excise tax imposed
by Code Section 4999 (the "Excise Tax") and federal income tax imposed by the
Code, the Optionee's net proceeds from receiving the Plan Benefit would be less
than the amount of the Optionee's net proceeds resulting from the receipt of the
Reduced Amount described below, after reduction for federal income taxes, then
the Optionee's Plan Benefit shall be limited to the Reduced Amount. The "Reduced
Amount" shall be the largest Plan Benefit that could be received by the Optionee
such that no Plan Benefit and no other payment or other benefit under any other
agreement, contract, or understanding heretofore or hereafter entered into
between the Optionee and the Corporation or any Subsidiary (the "Other
Agreements") and any formal or informal plan or other arrangement heretofore or
hereafter adopted by the Corporation or any Subsidiary for the direct or
indirect provision of compensation to the Optionee (including groups or classes
of participants or beneficiaries of which the Optionee is a member), whether or
not such compensation is deferred, is in cash, or is in the form of a benefit to
or for the Optionee (a "Benefit Plan") would be subject to the Excise Tax. In
the event that the Plan Benefit to the Optionee shall be limited to the Reduced
Amount, then the Optionee shall have the right, in the Optionee's sole
discretion, to designate the Plan Benefit and those payments or benefits under
any Other Agreements and any Benefit Plans that should be reduced or eliminated
so as to avoid having the Plan Benefit be subject to the Excise Tax.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ of the Corporation or any
Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation of
any individual at any time, or to terminate any employment or other relationship
between any individual and the Corporation or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt such
other incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
This Plan was duly adopted and approved by the Board of
Directors of the Corporation by resolution at a meeting held on the 28th day of
September, 1995 and amended by the Board of Directors of the Corporation by
resolution at a meeting held on the 20th day of December, 1995.
Secretary of the Corporation
This Plan was duly approved by the shareholders of the
Corporation at a meeting held on the 26th day of March, 1996.
Secretary of the Corporation
<PAGE>
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EXHIBIT 2
(New language is underscored,
deleted language is strickenthrough.)
MICROLOG CORPORATION
1989 NON-EMPLOYEE DIRECTOR NON-QUALIFIED
STOCK OPTION PLAN
(AS AMENDED AND RESTATED)
Microlog Corporation (the "Company") sets forth herein the
terms of this Non-Employee Director Stock Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Company
by providing each member serving on the Board of Directors of the Company who is
not an officer or other salaried employee of the Company or any subsidiary (a
"Non-Employee Director") with an opportunity to acquire or increase a
proprietary interest in the Company, which thereby will create a stronger
incentive to expend maximum effort for the growth and success of the Company and
its subsidiaries, and will encourage such Non-Employee Directors to remain in
the service of the Company or that of one or more of its subsidiaries. The stock
options granted under the Plan (an "Option") are not intended to be "incentive
stock options" within the meaning of Section 422A 422 of the Internal Revenue
Code of 1986 (or the corresponding provision of any subsequently enacted tax
statute).
2. STOCK
The stock that may be issued pursuant to Options granted under
the Plan shall be shares of Common Stock, par value $.01 per share, of the
Company (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Options granted under the Plan shall not exceed in the aggregate 75,000 125,000
shares, which number of shares is subject to adjustment as hereinafter provided
in Section 14 below. If any Option expires, terminates, or is terminated for any
reason prior to exercise in full, the shares of Stock that were subject to the
unexercised portion of such Option shall be available for future Options granted
under the Plan.
3. GRANT OF OPTIONS
(a) Grant on Effective Date. On the effective date of this
Plan as provided in Section 5 below, each Non-Employee Director then serving on
the Board of Directors of the Company shall be granted an Option to purchase
5,000 shares of Stock at the price and upon the other terms and conditions
specified in the Plan. Thereafter, subject to Section 3(c) and to the
availability of shares issued under Section 2 of the Plan, an Option to purchase
5,000 shares of Stock, at the price and upon the other terms and conditions
specified in the Plan, shall be granted under the Plan to each Non-Employee
Director of the Company upon the initial election of such Non-Employee Director
to the Board.
(b) Annual Grants. Subject to Section 3(c) and to the
availability of shares issued under Section 2 of the Plan, on the third
Wednesday in March of each year, commencing on March 21, 1990, each of the
Non-Employee Directors then serving on the Board of Directors of the Company
shall be granted an Option to purchase 1,000 shares of Stock at the price and
upon the other terms and conditions specified in this Plan, except that, subject
to approval not later than December 19, 1996, by the affirmative vote of
shareholders who hold at least a majority of the outstanding shares of stock of
the Company entitled to vote thereon and who vote in person or by proxy at a
duly constituted shareholders' meeting, of an amendment to the Plan adopted by
the Board of Directors of the Company on December 20, 1995, commencing on
December 20, 1995, each such Option shall be granted on the third Wednesday in
December of each year commencing on December 20, 1995, and shall be for 3,000
shares of Stock, subject to adjustment under Section 14 hereof.
(c) Excluded Persons. Notwithstanding anything to the contrary
contained in Section 3 of the Plan, no Non-Employee Director designated by Whale
Securities Corp. pursuant to the terms of the Underwriting Agreement dated as of
May 14, 1986 between Whale Securities Corp. and the Company shall be granted any
Options pursuant to this Plan.
(d) Special Grant. An option to purchase 10,000 shares of
Stock, at the price and upon the other terms and conditions specified in the
Plan, is hereby granted under the Plan effective December 22, 1992 to each
Non-Employee Director then serving on the Board of Directors of the Company at
the price and upon the other terms and conditions specified in the Plan, subject
to Section 3(c) and to the availability of shares to be issued under Section 2
of the Plan, and subject to approval of this Section 3(d) on or before April 30,
1993 by an affirmative vote of shareholders who hold at least a majority of the
outstanding shares of stock of the Company entitled to vote thereon, in person
or by proxy, at a duly called meeting of the shareholders; provided, however,
that upon approval of this Section 3(d) by the shareholders of the Company this
Section 3(d) shall be fully effective as if the shareholders of the Company had
approved this Section 3(d) on December 22, 1992.
4. OPTION PRICE
The purchase price of each share of Stock subject to an Option
(the "Option Price") shall be the greater of par value or one hundred percent
(100%) of the fair market value of a share of Stock on the date the Option is
granted. In the event that the Stock is listed on an established national or
regional stock exchange, is admitted to quotation on the National Association of
Securities Dealers Automated Quotation system, or is publicly traded in an
established securities market, the fair market value shall be deemed to the
closing price of the Stock on such exchange or system or in such market (the
highest such closing price if there is more than one such exchange or market) on
the trading date immediately before the Option is granted (or, if there is no
such closing price, the mean between the highest bid and lowest asked prices or
between the high and low prices on such date), or, if no sale of the Stock has
been made on such day, on the immediately preceding day on which any such sale
shall have been made.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. This Plan shall be effective as of the
date this Plan is adopted by the Board of Directors of the Company, subject to
approval of the Plan before or within one year after such effective date by an
affirmative vote of shareholders who hold at least a majority of the outstanding
shares of stock of the Company entitled to vote thereon, in person or by proxy,
at a duly called meeting of the shareholders; provided, however, that upon
approval of the Plan by the shareholders of the Company as set forth above, all
Options granted under the Plan on or after the effective date shall be fully
effective as if the shareholders of the Company had approved the Plan on the
effective date. If the shareholders fail to approve the Plan before or within
one year of such effective date, any options granted hereunder shall be null and
void and of no effect.
(b) Term. This Plan shall terminate on April 30, 1997 2001.
6. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements"), to be executed by the Company and by
the Optionee, substantially in the form attached as Exhibit A to this Plan, with
such changes as the officer or officers executing such Option Agreements may
determine to be necessary or advisable (such determination to be conclusively
evidenced by the execution thereof by such officer or officers).
7. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall terminate
and all rights to purchase shares thereunder shall cease upon the expiration of
ten (10) years from the date such Option is granted.
(b) Option Period and Limitations on Exercise. Each Option
granted under the Plan shall be exercisable, in whole or in part, at any time
and from time to time, over a period commencing on or after the date of grant
and ending upon the expiration of the Option. Notwithstanding any other
provisions of this Plan, no Option granted to an Optionee under this Plan,
except that Options granted on or after December 20, 1995 shall be exercisable
in whole or in part prior to the date the Plan is approved by the shareholders
of the Company as provided in Section 5(a) above. to the extent of 1,000 shares
only until such time as the amendment to the Plan adopted by the Board of
Directors of the Company on December 20, 1995 has been approved by shareholders
in accordance with Section 13 hereof. If an Option is exercised prior to the
date that is six months from the later of (i) the date of grant of the Option or
(ii) the date of shareholder approval of the amendment to the Plan adopted on
December 20, 1995 (to the extent such Option was granted subject to such
approval) and the individual exercising the Option is a reporting person under
Section 16(a) of the Exchange Act, then such certificate or certificates shall
bear a legend restricting the transfer of the Stock covered thereby until the
expiration of six months from the date specified in clause (i) above or the date
specified in clause (ii) above, whichever is applicable to such shares of Stock.
(c) Method of Exercise. An Option that is exercisable
hereunder may be exercised by delivery to the Company on any business day, at
its principal office, addressed to the attention of the Secretary of the
Company, of written notice of exercise, which notice shall specify the number of
shares with respect to which the Option is being exercised, and except as
provided below, shall be accompanied by payment in full of the Option Price of
the shares for which the Option is being exercised in cash. The minimum number
of shares of Stock with respect to which an Option may be exercised, in whole or
in part, at any time shall be the lesser of 100 shares or the maximum number of
shares available for purchase under the Option at the time of exercise. Payment
of Except as provided below, payment in full of the Option Price of the shares
for which the Option is being exercised shall accompany the written notice of
exercise of the Option and shall be made (i) in cash or in cash equivalents;
(ii) subject to approval not later than December 19, 1996, by the affirmative
vote of shareholders who hold at least a majority of the outstanding shares of
stock of the Company entitled to vote thereon and who vote in person or by proxy
at a duly constituted shareholders' meeting, of the amendment to the Plan
adopted by the Board of Directors of the Company on December 20, 1995, through
the tender to the Company of shares of Stock, which shares shall be valued, for
purposes of determining the extent to which the Option Price has been paid
thereby, at their fair market value (determined in the manner described in
Section 4 above) on the date of exercise; or (iii) subject to such approval, by
a combination of the methods described in (i) and (ii); provided, however, that
the Board may in its discretion impose and set forth in the Option Agreement
such limitations or prohibitions on the use of shares of Stock to exercise
Options as it determines to be necessary or appropriate under applicable
securities or other laws. If shares of Stock that are acquired by the Optionee
through exercise of an Option or an option issued under another stock option
plan maintained by the Company are surrendered in payment of the Option Price,
the Stock surrendered in payment must have been (i) held by the Optionee for
more than six months at the time of surrender, or (ii) acquired under an Option
granted not less than six months prior to the time of surrender. Subject to
approval not later than December 19, 1996, by the affirmative vote of
shareholders who hold at least a majority of the outstanding shares of stock of
the Company entitled to vote thereon and who vote in person or by proxy at a
duly constituted shareholders' meeting, of the amendment to the Plan adopted by
the Board of Directors of the Company on December 20, 1995, payment in full of
the Option Price need not accompany the written notice of exercise provided the
notice of exercise directs that the Stock certificate or certificates for the
shares for which the Option is exercised be delivered to a licensed broker
acceptable to the Company as the agent for the individual exercising the Option
and, at the time such Stock certificate or certificates are delivered, the
broker tenders to the Company cash (or cash equivalents acceptable to the
Company) equal to the Option Price for the shares of Stock purchased pursuant to
the exercise of an Option shall be made in cash the Option plus the amount (if
any) of federal and other taxes which the Company may, in its judgment, be
required to withhold with respect to the exercise of the Option. An attempt to
exercise any Option granted hereunder other than as set forth above shall be
invalid and of no force and effect. Promptly after the exercise of an Option and
the payment in full of the Option Price of the shares of Stock covered thereby,
the individual exercising the Option shall be entitled to the issuance of a
Stock certificate or certificates evidencing his ownership of such shares. An
individual holding or exercising an Option shall have none of the rights of a
shareholder until the shares of Stock covered thereby are fully paid and issued
to him and, except as provided in Section 14 below, no adjustment shall be made
for dividends or other rights for which the record date is prior to the date of
such issuance.
8. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is
granted, only such Optionee (or, in the event of legal incapacity or
incompetency, the Optionee's guardian or legal representative) may exercise the
Option. No Option shall be assignable or transferable by the Optionee to whom it
is granted, other than by will or the laws of descent and distribution.
9. TERMINATION OF SERVICE
Subject to the provisions of Section 10 of the Plan, upon the
termination of the service of an optionee with the Company or a subsidiary,
Options granted to such optionee pursuant to this Plan shall continue in effect
for the remainder of their respective terms, and shall not terminate.
10. RIGHTS IN THE EVENT OF DEATH
If an Optionee dies, the executors or administrators or
legatees or distributees of such Optionee's estate shall have the right, at any
time prior to termination of the Option as provided in Section 7(a) above, to
exercise any Option held by such Optionee at the date of such Optionee's death.
11. USE OF PROCEEDS
The proceeds received by the Company from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of the
Company.
12. REQUIREMENTS OF LAW
The Company shall not be required to sell or issue any shares
of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the individual exercising the Option or the Company of
any provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations.
Specifically in connection with the Securities Act of 1933 (as now in effect or
as hereafter amended), upon exercise of any Option, unless a registration
statement under such Act is in effect with respect to the shares of Stock
covered by such Option, the Company shall not be required to sell or issue such
shares unless the holder of such Option may acquire such shares pursuant to an
exemption from registration under such Act. The Company may, but shall in no
event be obligated to, register any securities covered hereby pursuant to the
Securities Act of 1933 (as now in effect or as hereafter amended). The Company
shall not be obligated to take any affirmative action in order to cause the
exercise of an Option or the issuance of shares pursuant thereto to comply with
any law or regulation of any governmental authority. As to any jurisdiction that
expressly imposes the requirement that an Option shall not be exercisable unless
and until the shares of Stock covered by such Option are registered or are
subject to an available exemption from registration, the exercise of such Option
(under circumstances in which the laws of such jurisdiction apply) shall be
deemed conditioned upon the effectiveness of such registration or the
availability of such an exemption. The Plan is intended to comply with Rule
16b-3 of the Securities Exchange Commission under the Securities Exchange Act of
1934. Any provision of the Plan inconsistent with Rule 16b-3 will be inoperative
but will not affect the validity of the Plan.
13. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options have
not been granted; provided, however, that no amendment by the Board shall,
without approval by the affirmative vote of shareholders who hold at least a
majority of outstanding shares of stock of the Company entitled to vote thereon
and who vote in person or by proxy at a duly constituted shareholders' meeting,
(a) materially change the requirements as to eligibility to receive Options; (b)
increase the maximum number of shares of Stock in the aggregate that may be sold
pursuant to Options granted under the Plan (except as permitted under Section 14
hereof); (c) change the Option Price set forth in Section 4 hereof (except as
permitted under Section 14 hereof); (d) increase the maximum period during which
Options may be exercised; (e) extend the term of the Plan; or (f) materially
increase the benefits accruing to eligible individuals under the Plan. Except as
permitted under Section 14 hereof, no amendment, suspension or termination of
the Plan shall, without the consent of the holder of the Option, alter or impair
rights or obligations under any Option theretofore granted under the Plan.
14. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of Stock are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of any
recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of
consideration by the Company, occurring after the effective date of the Plan,
the number and kinds of shares for the purchase of which Options may be granted
under the Plan shall be adjusted proportionately and accordingly by the Company.
In addition, the number and kind of shares for which Options are outstanding
shall be adjusted proportionately and accordingly so that the proportionate
interest of the holder of the Option immediately following such event shall, to
the extent practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate Option Price
payable with respect to shares subject to the unexercised portion of the Option
outstanding but shall include a corresponding proportionate adjustment in the
Option Price per share.
(b) Reorganization in Which the Company Is the Surviving
Corporation. Subject to Subsection (c) hereof, if the Company shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Company with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) Reorganization in Which the Company Is Not the Surviving
Corporation or Sale of Assets or Stock. Upon the dissolution or liquidation of
the Company, or upon a merger, consolidation or reorganization of the Company
with one or more other corporations in which the Company is not the surviving
corporation, or upon a sale of all or substantially all of the assets of the
Company to another corporation, or upon any transaction (including, without
limitation, a merger or reorganization in which the Company is the surviving
corporation) approved by the Board which results in any person or entity owning
eighty percent (80%) or more of the combined voting power of all classes of
stock of the Company, the Plan and all Options outstanding hereunder shall
terminate, except to the extent provision is made in writing in connection with
such transaction for the continuation of the Plan and/or the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
exercise prices, in which event the Plan and Options theretofore granted shall
continue in the manner and under the terms so provided. The Board shall send
written notice of an event that will result in such a termination to all
individuals who hold Options not later than the time at which the Company gives
notice thereof to its shareholders (provided, however, that the options shall
terminate only the consummation or occurrence of such event).
(d) Fractional Shares. No fractional shares of Stock or units
of other securities shall be issued pursuant to any such adjustment, and any
fractions resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.
(e) No Limitations on Company. The grant of an Option pursuant
to the Plan shall not affect or limit in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure or to merge, consolidate, dissolve or
liquidate, or to sell or transfer all or any part of its business or assets.
15. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the service of the Company or any
subsidiary, or to interfere in any way with the right and authority of the
Company or any subsidiary either to increase or decrease the compensation of any
individual at any time, or to terminate any relationship between any individual
and the Company or any subsidiary.
16. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the shareholders of the Company for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt such
other incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan.
* * *
This Plan was duly adopted and approved by the Board of
Directors of the Company by resolution at a meeting held on June 10, 1989,
subject to shareholder approval. This Plan was duly amended by the Board of
Directors, subject to shareholder approval, by resolutions at meetings held on
December 22, 1992 and, January 22, 1993 and December 20, 1995 and January 25,
1996.
This Plan was duly approved by the shareholders of the Company
at a meeting of the shareholders held on the 24th day of February, 1990. An
amendment Amendments to the Plan was were duly approved by the shareholders of
the Company on March 13, 1993 and March 26, 1996.
SECRETARY
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- 8 -
MICROLOG CORPORATION
NON-EMPLOYEE DIRECTOR NON-QUALIFIED
STOCK OPTION AGREEMENT
This Non-Employee Director Non-Qualified Stock Option
Agreement (the "Option Agreement") is made as of the _____ of _______________,
by and between Microlog Corporation (the "Company"), and __________________
____________________, a member of the Board of Directors of the Company who is
not an officer or other employee of the Company or its subsidiaries (the
"Optionee").
WHEREAS, the Board of Directors of the Company has duly
adopted, subject to approval by the shareholders of the Company, a an amended
1989 Non-Employee Director Non-Qualified Stock Option Plan (the "Plan"), which
provides for the grant to members of the Board of Directors of the Company who
are not officers or other employees of the Company or its subsidiaries options
for the purchase of shares of the Company's common stock, $.01 par value
("Stock") according to the terms of the Plan;
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties hereto do hereby agree as follows:
1. Grant of Option. Subject to the terms of the Plan (attached
hereto as Exhibit A, the terms of which are incorporated by reference herein),
the Company hereby grants to the Optionee the right and option (the "Option") to
purchase from the Company, on the terms and subject to the conditions
hereinafter set forth, ( ,000) shares of Stock. This Option shall NOT constitute
an incentive stock option within the meaning of Section 422A 422 of the Internal
Revenue Code of 1986, as amended.
2. Price. The purchase price (the "Option Price") for the
shares of Stock subject to the Option granted by this Option Agreement is
Dollars ($ .00) per share.
3. Exercise of Option. Except as otherwise provided herein,
the Option granted pursuant to this Option Agreement shall be subject to
exercise as follows:
A. Time of Exercise of Option. The Optionee may exercise the
Option (subject to the limitations on exercise set forth in Subsection E below),
in whole or in part, at any time and from time to time, after the date of grant
of the Option, as set forth in Section 13 below, and prior to the tenth (10th)
anniversary of the date of grant of the Option; provided, however, that no
single exercise of the Option shall be for less than 100 shares, unless the
number of shares purchased is the total number available for purchase under this
Option at the time of exercise.
B. Exercise by Optionee. During the lifetime of the Optionee,
only the Optionee (or, in the event of his or her legal incapacity or
incompetency, the Optionee's guardian or legal representative) may exercise the
Option.
C. Termination of Service. Subject to the provisions of
Subsections D and Subsection E below and Section 7, upon the termination of the
service of an optionee with the Company or a subsidiary, Options granted to such
optionee pursuant to this Agreement shall continue in effect for the remainder
of their respective terms, and shall not terminate.
D. Death. If an Optionee dies, the executors or administrators
or legatees or distributees of such Optionee's estate shall have the right, at
any time prior to termination of the Option, to exercise any Option held by such
Optionee at the date of such Optionee's death.
E. Limitations on Exercise of Option. Notwithstanding the
foregoing Subsections of Section 3, in no event may the Option be exercised, in
whole or in part, prior to the date the amended Plan is approved by the
shareholders of the Company as provided therein, or after the occurrence of an
event referred to in Section 7 below which results in termination of the Option.
In no event may the Option be exercised for a fractional share.
4. Method of Exercise of Option. An Option that is exercisable
hereunder may be exercised by delivery to the Company on any business day, at
its principal office, addressed to the attention of the Secretary of the
Company, of written notice of exercise, which notice shall specify the number of
shares with respect to which the Option is being exercised, and shall be
accompanied by payment in full of the Option Price of the shares for which the
Option is being exercised. The minimum number of shares of Stock with respect to
which an Option may be exercised, in whole or in part, at any time shall be the
lesser of 100 shares or the maximum number of shares available for purchase
under the Option at the time of exercise. Payment of the Option Price for the
shares of Stock purchased pursuant to the exercise of an Option shall be made in
cash. either (i) in cash or by check payable to the order of the Company; (ii)
through the tender to the Company of shares of Stock, which shares shall be
valued, for purposes of determining the extent to which the Option Price has
been paid thereby, at their fair market value (determined in the manner
specified in the Plan) on the date of exercise; or (iii) by a combination of the
methods described in (i) and (ii); provided, however, that any shares of Stock
tendered in exchange for shares of Stock to be issued pursuant to the exercise
of the Option must have been held by the Optionee for at least six months before
their tender to the Company or acquired under an Option granted not less than
six months prior to the time of surrender. Payment in full of the Option Price
need not accompany the written notice of exercise provided the notice of
exercise directs that the Stock certificate or certificates for the shares for
which the Option is exercised be delivered to a licensed broker acceptable to
the Company as the agent for the individual exercising the Option and, at the
time such Stock certificate or certificates are delivered, the broker tenders to
the Company cash (or cash equivalents acceptable to the Company) equal to the
Option Price for the shares of Stock purchased pursuant to the exercise of the
Option plus the amount (if any) of federal and/or other taxes which the Company
may, in its judgment, be required to withhold with respect to the exercise of
the Option. An attempt to exercise any Option granted hereunder other than as
set forth above shall be invalid and of no force and effect. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the Company shall deliver to the person exercising the
Option a certificate or certificates for the shares being purchased.
5. Limitations on Transfer. The Option is not transferable by
the Optionee, other than by will or the laws of descent and distribution in the
event of death of the Optionee.
6. Rights as Shareholder. Neither the Optionee nor any
executor, administrator, distributee or legatee of the Optionee's estate shall
be, or have any of the rights or privileges of, a shareholder of the Company in
respect of any shares transferable hereunder unless and until such shares have
been fully paid and certificates representing such shares have been endorsed,
transferred and delivered, and the name of the Optionee (or of such executor,
administrator, distributee or legatee of the Optionee's estate) has been entered
as the shareholder of record on the books of the Company. If the Option is
exercised prior to the date that is six months from the later of (i) the date of
grant of the Option or (ii) the date of shareholder approval of the amendment to
the Plan adopted on December 20, 1995 and the individual exercising the Option
is a reporting person under Section 16(a) of the Exchange Act, then the
certificate or certificates for Stock acquired as a result of the exercise of
the Option shall bear a legend restricting the transfer of the Stock covered
thereby until the expiration of six months from the date specified in clause (i)
above or the date specified in clause (ii) above, whichever is applicable to
such shares of Stock.
7. Effect of Changes in Capitalization.
A. Changes in Stock. If the outstanding shares of Stock are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of any
recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of
consideration by the Company, the number and kinds of shares for the purchase of
which Options may be granted under the Plan shall be adjusted proportionately
and accordingly by the Company. In addition, the number and kind of shares for
which Options are outstanding shall be adjusted proportionately and accordingly
so that the proportionate interest of the holder of the Option immediately
following such event shall, to the extent practicable, be the same as
immediately prior to such event. Any such adjustment in outstanding Options
shall not change the aggregate Option Price payable with respect to shares
subject to the unexercised portion of the Option outstanding but shall include a
corresponding proportionate adjustment in the Option Price per share.
B. Reorganization in Which the Company Is the Surviving
Corporation. Subject to Subsection C hereof, if the Company shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Company with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
C. Reorganization in Which the Company Is Not the Surviving
Corporation or Sale of Assets or Stock. Upon the dissolution or liquidation of
the Company, or upon a merger, consolidation or reorganization of the Company
with one or more other corporations in which the Company is not the surviving
corporation, or upon a sale of all or substantially all of the assets of the
Company to another corporation, or upon any transaction (including, without
limitation, a merger or reorganization in which the Company is the surviving
corporation) approved by the Board which results in any person or entity owning
eighty percent (80%) or more of the combined voting power of all classes of
stock of the Company, the Option hereunder shall terminate, except to the extent
provision is made in connection with such transaction for the continuation
and/or the assumption of the Option, or for the substitution for the Option of
new options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan and Options theretofore
granted shall continue in the manner and under the terms so provided. The Board
shall send written notice of an event that will result in such a termination to
all individuals who hold Options not later than the time at which the Company
gives notice thereof to its shareholders (provided, however, that the options
shall terminate only the consummation or occurrence of such event).
D. Fractional Shares. No fractional shares of Stock or units
of other securities shall be issued pursuant to any such adjustment, and any
fractions resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.
8. General Restrictions. The Company shall not be required to
sell or issue any shares of Stock under the Option if the sale or issuance of
such shares would constitute a violation by the individual exercising the Option
or by the Company of any provision of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion, that
the listing, registration or qualification of any shares subject to the Option
upon any securities exchange or under any state or federal law, or the consent
or approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of shares
hereunder, the Option may not be exercised in whole or in part unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company, and
any delay caused thereby shall in no way affect the date of termination of the
Option. Specifically in connection with the Securities Act of 1933 (as now in
effect or as hereafter amended), unless a registration statement under such Act
is in effect with respect to the shares of Stock covered by the Option, the
Company shall not be required to sell or issue such shares unless the Company
has received evidence satisfactory to it that the holder of the Option may
acquire such shares pursuant to an exemption from registration under such Act.
Any determination in this connection by the Company shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities Act of 1933 (as now in
effect or as hereafter amended). The Company shall not be obligated to take any
affirmative action in order to cause the exercise of the Option or the issuance
of shares pursuant thereto to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that the Option shall not be exercisable unless and until the shares
of Stock covered by the Option are registered or are subject to an available
exemption from registration, the exercise of the Option (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
9. Withholding of Taxes. The parties hereto recognize that the
Company or a subsidiary may be obligated to withhold federal and local income
taxes and Social Security taxes to the extent that the Optionee realizes
ordinary income in connection with the exercise of the Option or in connection
with a disposition of any shares of Stock acquired by exercise of the Option.
The Optionee agrees that the Company or a subsidiary may withhold amounts needed
to cover such taxes from payments otherwise due and owing to the Optionee, and
also agrees that upon demand the Optionee will promptly pay to the Company or a
subsidiary having such obligation any additional amounts as may be necessary to
satisfy such withholding tax obligation. Such payment shall be made in cash or
by certified check payable to the order of the Company or a subsidiary.
10. Disclaimer of Rights. No provision in this Option
Agreement shall be construed to confer upon the Optionee the right to be
employed by the Company or any subsidiary, or to interfere in any way with the
right and authority of the Company or any subsidiary either to increase or
decrease the compensation of the Optionee at any time, or to terminate any
employment or other relationship between the Optionee and the Company or any
subsidiary.
11. Interpretation of this Option Agreement. In the event that
there is any inconsistency between the provisions of this Option Agreement and
of the Plan, the provisions of the Plan shall govern.
12. Governing Law. This Option Agreement is executed pursuant
to and shall be governed by the laws of the Commonwealth of Virginia (but not
including the choice of law rules thereof).
13. Date of Grant. The date of grant of this Option is .
- ------------- -----------------
14. Notification of Disposition. The Optionee agrees to notify
the Company in writing of any disposition of shares of Stock acquired by the
Optionee pursuant to the exercise of this Option within 30 days of such
disposition.15. 14. Approval by Shareholders. This Option Agreement and the
issuance of any shares under it are expressly subject to the approval of the
amended Plan by the shareholders of the Company as provided for therein. The
Option shall not in any event be exercisable in whole or in part prior to the
date the Plan is approved by the shareholders of the Company as provided for
therein.
16 15. Binding Effect. Subject to all restrictions provided
for in this Option Agreement and by applicable law relating to assignment and
transfer of this Option Agreement and the option rights provided for herein,
this Option Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators,
successors, and assigns.
17 16. Notice. Any notice hereunder by the Optionee to the
Company shall be in writing and shall be deemed duly given if mailed or
delivered to the Company at its principal office, addressed to the attention of
the Secretary of the Company, or if so mailed or delivered to such other address
as the Company may hereafter designate by notice to the Optionee. Any notice
hereunder by the Company to the Optionee shall be in writing and shall be deemed
duly given if mailed or delivered to the Optionee at the address specified below
by the Optionee for such purpose, or if so mailed or delivered to such other
address as the Optionee may hereafter designate by written notice given to the
Company.
18 17. Entire Agreement. This Option Agreement constitutes the
entire agreement and supersedes all prior understandings and agreements, written
or oral, of the parties hereto with respect to the subject matter hereof.
Neither this Option Agreement nor any term hereof may be amended, waived,
discharged or terminated except by a written instrument signed by the Company
and the Optionee; provided, however, that the Company unilaterally may waive any
provision hereof in writing to the extent that such waiver does not adversely
affect the interests of the Optionee hereunder or otherwise cause the Option
granted hereunder not to qualify as an "incentive stock option" within the
meaning of Section 422A of the Code, but no such waiver shall operate as or be
construed to be a subsequent waiver of the same provision or a waiver of any
other provision hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Option Agreement, or caused this Option Agreement to be duly executed on their
behalf, as of the day and year first above written.
ATTEST: MICROLOG CORPORATION
By:
Title: Title:
OPTIONEE:
ADDRESS FOR NOTICE TO OPTIONEE:
Number Street
City State Zip Code
<PAGE>
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0
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