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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, 1999 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 statements 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 14, 2000 closing price of these shares) was approximately
$9.6 million. The Common Stock is traded over-the-counter and quoted through the
Nasdaq Smallcap Market.
As of January 14, 2000 6,989,113 shares of the Registrant's
Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts I and III of this Form 10-K incorporate information by reference to
portions of the Company's definitive Proxy Statement to be filed within 120 days
after the end of the fiscal year (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, 1999 attached as an
exhibit hereto (the "Annual Report to Shareholders").
TABLE OF CONTENTS
PAGE
Part I. Item 1. Business ..................................................1
Item 2. Properties.................................................15
Item 3. Legal Proceedings..........................................15
Item 4. Sumission of Matters to a Vote of Security Holders.........16
Part II. Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................16
Item 6. Selected Financial Data....................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.16
Item 8. Financial Statements and Supplementary Data................16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................16
Part III. Item 10. Directors and Executive Officers of the Registrant.........17
Item 11. Executive Compensation.....................................17
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................17
Item 13. Certain Relationships and Related Transactions.............17
Part IV. Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K....................................17
ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in it contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends the forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements in these sections. All
statements regarding the Company's expected financial position and operating
results, business strategy, financing plans, forecasted trends relating to our
industry, its ability to realize anticipated cost savings and similar matters
are forward-looking statements. These statements can sometimes be identified by
the use of forward-looking words such as "may," "will," "anticipate,"
"estimate," "expect," "believe" or "intend." The Company cannot promise you that
our expectations in such forward-looking statements will turn out to be correct.
Some important factors that could cause our actual results to be materially
different from our expectations include those discussed under the caption
"Business--Factors That May Effect Future Results of Operations."
iii
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references in this report to Microlog or
the Company are to Microlog Corporation and its consolidated subsidiaries.
GENERAL
Microlog Corporation has two major subdivisions: the Voice Processing division,
and the Old Dominion Systems division. The Voice Processing division is a
software development and systems integration services company. The charter of
the division is to help the Company's customers to serve their customers better
through the use of technology in formal and informal corporate contact centers.
Specifically, the Company builds custom self-service and customer interaction
solutions that manage telephony type contacts (a historical focus and strength
of the Company) and Internet-based contacts (sometimes known in the industry as
"new media types"). In providing these solutions, the Company uses core voice
and data platforms and toolkits (the Company's products) combined with
professional services. This means that Microlog's products and solutions address
interactive voice response (IVR), inbound and outbound phone calls, e-mail, fax,
world-wide Web interactions, chat, Web bulletin board, and voice-over-IP types
of contacts. Services associated with this business include technology
assessment, project management, application and software development, telephony
integration, installation, system administration, quality assurance testing, and
on-going maintenance and support. While the scope of this business has expanded
far beyond simply processing telephone calls, the area has traditionally been
identified as Voice Processing, and will be identified as such throughout the
remainder of this document.
Through its Old Dominion Systems division, the Company provides performance
analysis and technical and administrative support services to the Applied
Physics Laboratory (APL), a prime contractor to the U.S. Navy. Although this
segment of the business has historically provided a stable source of sales and
profits, the Company believes that its principal opportunities for growth are in
the Voice Processing area, specifically related to customer contact centers. The
Company has been concentrating its investments and efforts on the Voice
Processing area.
The Company had a net loss of $4.7 million (($1.02) per basic and diluted share)
for the fiscal year ended October 31, 1999. By comparison, the Company had a net
loss of $8.6 million (($2.02) per basic and diluted share) for the fiscal year
ended October 31, 1998, which included a $2.15 million (($.50) per basic and
diluted share) reversal of an income tax benefit associated with the expected
future realization of the Company's net operating loss carryforwards. The
Company had net income of $3.7 million ($.89 per basic share and $.82 per
diluted share) for the fiscal year ended October 31, 1997, which included a $1.5
million ($.36 per basic share and $.33 per diluted share) income tax benefit.
The net loss of $4.7 million for fiscal year 1999 was attributable to the
Company's voice processing operations. Approximately $4.2 million of this loss
was due primarily to insufficient voice processing revenues. The loss was also
due in part to an increase of $0.3 million in the reserve for inventory
obsolescence, and $0.7 million of costs incurred for restructuring the Company's
voice processing operations. These losses were offset in part by the $0.5
million net income generated from the Company's performance analysis and
supports services operations.
In fiscal year 1999, the Company incurred restructuring charges of $693,000 for
severance benefits and other costs for the reduction of employees. Temporary
employees and contractors were also reduced. The restructuring charges include
costs of $381,000 for severance and benefits, the write-off of assets of $49,000
for the equipment associated with headcount reductions, costs of $103,000
associated with the closing of the Company's manufacturing facility, and costs
of $160,000 to terminate the 15-year lease commitment for new office space which
the Company had entered into in May 1998. As a result of these restructuring
activities and other cost reduction actions, the Company expects to reduce its
annual voice processing operating expenses by approximately $4.8 million
annually.
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On July 2, 1999 the Company finalized an Investment Agreement with TFX Equities,
Inc., a wholly owned subsidiary of Teleflex, Inc. The investment was consummated
in two transactions. In the first transaction, which occurred on July 2, 1999,
TFX purchased 854,563 shares of Microlog common stock for $1.3 million. In the
second transaction, which occurred on October 2, 1999, TFX purchased 1,812,104
additional shares of common stock for $2.7 million. The Company held a special
meeting of stockholders on September 9, 1999 and received approval of the
issuance of the 1,812,104 additional shares.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA (formerly Intela) software and
related hardware. The Company also agreed to assign certain agreements to which
Microlog is a party relating to the TIVRA products. As part of the sale, two
Microlog employees became employees of Comsys. The sale is anticipated to result
in a gain to Microlog of approximately $100,000. Since some of the proceeds from
the sale are based on future contracts between Comsys and the Company's former
customers, the gain on the sale was estimated and therefore has been deferred
into fiscal year 2000.
In fiscal year 1999, the Company closed and drew on a revolving line-of-credit
facility which allows the Company to borrow up to 75% of its eligible
receivables to a maximum of $2,000,000, subject to the right of the financial
institution to make loans only in its discretion. The line-of-credit bears
interest at the bank's prime rate plus 2.25% (10.75% at October 31, 1999), and
contains a 0.025% fee on the average unused portion of the line as well as a
monthly collateral fee and a 1% up-front commitment fee. The loan subjects the
Company to a restrictive covenant of not exceeding 115% of its consolidated
planned quarterly losses for its second and third quarters of fiscal year 1999,
and a requirement for consolidated profitability beginning in the fourth quarter
of fiscal year 1999. The line also subjects the Company to a number of
restrictive covenants including restrictions on mergers or acquisitions, payment
of dividends, and certain restrictions on additional borrowings. The line is
secured by all of the Company's assets. The Company was not in compliance with
the restrictive covenant in the second quarter of fiscal year 1999, but obtained
a waiver from the bank. The Company was not in compliance with the restrictive
covenant in the fourth quarter of fiscal year 1999 for which a forbearance
agreement has been obtained. The forebearance agreement waives the lenders right
under an event of default to terminate the loan. This line-of-credit expires in
March 2000, and the Company and the bank are in the process of renewal
discussions. There was no outstanding debt against this line-of-credit at
October 31, 1999.
Over the past two years, the Company has been experiencing reduced demand,
increased competition, and reduced margins in the voice processing area, which
the Company attributes to market forces. The Company believes that interactive
voice response systems in general, and certain vertical sub-segments of this
market in particular, are in the maturing phase of market evolution for
stand-alone systems. Accordingly, competition has increased, margins have been
reduced, and it has become more difficult to sell these products. In addition,
governmental customers have been procuring large IVR systems as part of major
procurements from larger vendors, which has required the Company to work through
prime contractors, also resulting in increased margin pressure and greater
difficulty in making sales directly. The Company's response to this has been to
increase its R&D in both the uniQue(TM) and TIVRA (formerly Intela) products to
expand its interactive response offerings to include Internet-based
interactions, and to offer professional turnkey services to the integration of
modern customer contact centers. This addresses not only traditional voice types
of contacts, but also e-mail, fax, Web callback, IP telephony, chat, Web
bulletin board, and hardcopy mail, thereby expanding the Company's addressable
market. This approach yields sales potential due to the trend in corporate
process re-engineering in customer relationship management, and in outsourcing
of related transactions and application development.
In fiscal year 2000, the Company's strategy for addressing the market trends
will be to expand its professional services offerings to provide comprehensive
solutions to its customers, inclusive of the Company's products. The objective
of these solution services is for the Company to help its customers to better
serve their customers. The Company plans to accomplish this through the
implementation of self service and customer interaction applications utilizing:
the TIVRA voice processing platform, enabled by speech recognition; the uniQue
contact processing platform, for media processing, Web interfaces, and contact
prioritization; and services based on the analysis, development, and integration
skills developed over the years by the Microlog and ODSM staff.
The Company is subject to the risk that its new strategy will not be successful.
The new strategy is dependent on market acceptance of the Company's new focus
and new products, ongoing research and development efforts and sales activities
over the near term. In addition, the new strategy is also dependent on the
Company's ability to successfully retain and recruit skilled personnel.
2
The results of the Company's performance during fiscal 1999, 1998, and 1997, are
discussed in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which forms a part of the Annual
Report to Shareholders and is incorporated by reference into Item 7 of this
Annual Report on Form 10-K. That discussion and analysis 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 to Note 1 of the "Notes to Consolidated
Financial Statements," which forms a part of the Annual Report to Shareholders
and is also incorporated by reference into Item 8 of this Report.
Microlog, a Virginia corporation, was organized in 1969. Microlog Corporation of
Maryland, and Microlog Europe, both subsidiaries, design, assemble, market, and
service customized voice processing systems and other communications products.
Old Dominion Systems Incorporated of Maryland, engaged in providing performance
analysis of certain major weapons systems and related data processing support to
the Federal Government through prime contractors, was merged with and into
Microlog Corporation of Maryland effective October 31, 1999.
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. In
traditional Interactive Voice Response, callers hear voice prompts and then use
a touch-tone telephone to enter information into, and/or retrieve information
from, a computer database. Voice processing systems have evolved and now provide
information not only through voice, but also through a wide range of additional
input devices and interfaces, including the Internet, fax, Telecommunications
Device for the Deaf (TDD), and pagers.
Voice processing typically includes a system connected to an external computer
that 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. Voice
processing is widely used for functions such as reporting account balances,
checking on inventory, or determining the status of applications or permits in
process. Voice processing systems range from small systems with basic features
utilizing a few phone lines, to larger more complex systems with hundreds of
lines.
The following functionality is provided through the Company's voice processing
products:
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 50,000
messages may be presented. Audiotex software finds wide use by
organizations that 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 of information disseminated.
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
various greetings and menus of options presented to different callers. In
the event of a busy or unanswered extension, 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 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.
3
Service Management System (SMS) allows network and operations managers to
configure and manage their voice processing system through a simple,
consistent graphical "point & click" interface. SMS allows network managers
to monitor a system's status, retrieve usage statistics, configure hardware
and software resources, and install software on any TIVRA-based system
installed on the network.
Fax Software allows system users to automatically receive stored fax
documents on demand from 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 system and
designate faxes to be sent in response without exiting the system.
Interactive Voice Response (IVR) provides a telephone interface to computer
systems. IVR allows a user to call into a computer and access various
information systems using a touch-tone telephone or voice commands.
Interactive Web Response (IWR) allows the voice processing platform to
handle Web-originated input as it would data collected from a standard
phone interaction. IWR performs activities such as database lookups,
outgoing faxes, conferencing, and sending information to agents for
customer callbacks. Acting as the interface between a Web site and the
voice processing system, IWR passes information collected through a Web
contact using Common Gateway Interface (CGI) and sockets. The results are
delivered though a Web page that is sent back to the user.
Local Database provides similar functionality to voice processing systems
as IVR, but allows the data of interest to reside on the system rather than
in a host mini- or mainframe computer. This provides a cost-effective
approach for many voice processing applications. It also allows large
interactive communication applications to do local batch processing of data
by downloading the data to the system for manipulation.
Multiple Languages Interface Software allows system messages to be played
in multiple languages. It also interfaces TDD terminals to IVR systems over
telephone lines.
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 flexible software can handle multiple lists
with thousands of names per list. It can draw from a library of 50,000
messages and can send different combinations of messages to individual
phone numbers as directed. The software also generates management reports
about the number of successful connections, the length of calls, and the
content of responses.
Release Line Trunking (RLT) provides the ability to transfer the same call
several times. After the call to each transfer destination is complete, the
telephone line to that destination is released. A call may, for example,
initially be transferred to a phone number, which can provide information
required for the second transfer. In the Microlog applications, RLT is
often used for long distance transfers.
Speech Recognition allows the caller to speak responses that are understood
by the TIVRA systems. Continuous and discrete speech recognition can be
combined in a single system. The standard vocabulary includes digits "0-9",
"yes", and "no" responses. Microlog has incorporated speech recognition
technology from several U.S.- and international-based companies. All
technologies are speaker independent and therefore require 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 has 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 that provides the link between the TIVRA system and the
customer's database.
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 initiate transactions any hour of any day, and the
Company can process
4
the transactions at its convenience, including processing outside normal
business hours. Such transactions allow orders and requests to be filled
faster and at lower cost than traditional methods.
Voice Mail provides an organization with "voice mailboxes" in which
internal or external callers may leave detailed, confidential messages at
any time. Voice mail overcomes many limitations of telephone systems,
allowing people to exchange information and transact business without
having to be on the phone together. It eliminates paperwork and adds
meaning and content, which written messages can not reflect. Benefits
include increased office productivity through fewer interruptions, timely
and accurate message delivery, increased message detail, and reduced
callbacks and "telephone tag." Messages may be left for groups of people as
well as individuals. Callers may edit messages, reviewing and re-recording
until satisfied. Mailbox owners may review, save, forward or discard voice
messages.
UNIQUE(TM)
Microlog's uniQue product offers comprehensive open architecture, cross
platform solutions for customer contact centers. uniQue is designed for the
contact center with 5 to 5,000 agents and seamlessly integrates all of the
contact center's telephony, computer and business applications. uniQue is
designed for the contact center manager and offers the agent appropriate
tools necessary to handle customer interactions.
Microlog's uniQue product is now in its second major release phase. uniQue
release 1.5 was first demonstrated in September, 1998, and was generally
available in November, 1998. The function of this release was limited to
telephony call control (for telephone calls into a switch or ACD, or for
calls through an IVR), although the current functions of management,
statistics, and the agent interface were available at that time in a more
limited implementation. uniQue 2.0, which adds the other major media
contact types (see below) and major functional enhancements, went into
limited availability trial testing in September, 1999. uniQue 2.0 is
generally available as of February, 2000. Work on subsequent releases is
continuing, along with specific custom extensions of the product based on
customer requests. One customer has been fully installed and is operational
on the 2.0 release, and two others are in process as of this writing.
Several others are in the pre-contract stage.
The sales model for uniQue is direct at first, with growing indirect sales
over time. The direct sales experience is important to the first phases of
the product roll-out in order to provide responsive service to customers,
to obtain direct feedback on the usability and marketability of the product
as initially conceived, and to allow the Company to develop a certification
program for indirect sales representatives to ensure that the product will
be properly represented and supported. The indirect channel development
will be important to building sales volume beyond the capabilities of the
current direct sales staff to reach certain market segments. Indirect sales
methods could range from simple lead sharing in informal partnership
arrangements to formal value added remarketer (VAR) representation of the
product, to actual packaging of the product under another brand (original
equipment manufacturer - OEM relationship). Management is currently seeking
appropriate indirect relationships along this spectrum of possibilities,
and we believe that management's success in this endeavor is key to the
long-term success of the product. The Company expects in any case to
continue to represent the product through direct sales in addition to any
successful indirect channels that may be developed.
The uniQue product includes the following features:
Multiple Media - uniQue accepts and intelligently routes all customer
contacts, whether from a traditional telephone call, Web contact, email,
facsimile, or even simple postal mail. By accepting any type of contact
from the customers, uniQue becomes the single source repository of all
customer interaction providing the user with a powerful information tool
that summarizes customer behavior and provides better customer
satisfaction.
Contact Prioritization - In addition to handling all types of media, uniQue
prioritizes the contact based upon the rules established by the contact
center manager in order to ensure that all of the user's customers are
handled in the most appropriate manner, such as servicing the most
important customers first.
Intelligent Routing - uniQue leverages the effectiveness of skills-based
routing by matching the customer contact to the agent having the most
appropriate skills required to service the contact. uniQue's simple
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system administration feature allows the supervisor to quickly and easily
add or remove skills to any agent profile on-line. This allows the contact
center's management to schedule and maintain the most appropriate level of
agents at all times.
Easy Configuration & Remote Administration - Being a completely Web-based
Java application, uniQue offers the contact center management zero
administration at the agent 's workstation. The Java applet is hosted on
the uniQue server. It is loaded only once, and each time an agent logs into
the application, the uniQue applet is downloaded to the agent's workstation
eliminating any agent workstation configuration or administration.
Web-Based System - Keeping with the concept of open systems, uniQue
operates on any agent computer with any operating system provided there is
a properly configured Java-enabled Web browser on the agent's desktop. This
concept frees the user from being tied to a single computer environment,
system architecture or operating system. uniQue will operate in an
environment where there may be multiple types of computers. The open system
approach provides tremendous flexibility to a contact center's computing
requirements and simplifies the task of integration.
Reporting - Included with uniQue is a powerful statistical data capturing
and reporting component. Contact center managers can generate any number of
statistical reports from the system. uniQue stores each customer contact
along with the detailed information about the contact. Detailed information
which could be stored includes but is not limited to: contact duration,
agent wrap-up time, total contact length, contact outcome, contact result
and contact reason. With uniQue, contact center managers are able to
develop their own reports which summarize agent productivity, contact
center accomplishments, and even business success statistics.
TIVRA
The TIVRA (formerly Intela) platform is a voice processing product designed
for simultaneous support of multiple applications and interactive
information solutions. Prices for TIVRA 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 the time needed to develop a
customized application.
Microlog has installed TIVRA for many different customers, with one of our
largest TIVRA customers being the Internal Revenue Service (IRS). Projects
for the IRS 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 TIVRA, automatically
obtain their refund status, including the amount of the refund.
TIVRA is based on an Intel Pentium(R) hardware platform utilizing a UNIX(R)
operating system with a Graphical User Interface (GUI) for application
development. The TIVRA system has a non-proprietary open architecture.
TIVRA also supports text-to-speech, speech recognition, remote and local
databases, host connectivity, Web and fax.
Each TIVRA system incorporates multiple servers with hard disk storage and
several voice cards. TIVRA uses distributed servers, 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 servers, 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 floor standing or rack
mounted units. These units can be networked to create a larger system with
thousands of ports, and they can be configured to run on -48 volt DC for
use in a Central Office (CO).
The TIVRA 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
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
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response units. The TIVRA system includes a monitor, keyboard, and printer.
These 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 basic TIVRA architecture consists of three major system components: the
Application Server(s), the Port Server(s), and the TIVRA-ware software
platform.
Application Server defines the computing environment in which TIVRA-ware
software 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 mini-computer. It interfaces to a voice
processing peripheral, or TIVRA port server, via a command link on a LAN or
a serial communications link.
Port Server consists of tower and rackmount models, 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, and process and store
speech, all under the direction of commands coming from TIVRA-ware software
on the application server across a command link.
TIVRA-ware Software Platform is an application development and deployment
environment for voice processing 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, Prompt Manager, and Centralized System Management.
Through these interfaces, users control the development and operation of
their voice applications, using a 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 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 are connected using a set of mouse actions. Standard
Windows(R)-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 provides the capability for prompt
creation, a major function in voice applications. With the TIVRA-ware
prompt loading facility, prompts can be reviewed, recorded, installed,
deleted, backed up to removable media, restored, and distributed over a
local or wide-area data network (LAN/WAN). 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 dual-tone multifrequency (DTMF)
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 the prompts will be replaced only after they have been reviewed and
accepted. New or updated prompts will be phased in automatically while
applications remain on-line.
Prompt Manager allows users to retrieve a prompt from storage on a port
server 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 allows for the loading and unloading of applications,
and the management of the port servers connected to the application
processor. 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
7
up. TIVRA-ware can support multiple TIVRA systems to expand to larger port
and storage capacity by networking systems and clusters of systems
together.
Centralized System Management provides a graphical means to address the
operation, administration, and maintenance (OA&M) of a distributed system.
It provides a graphical representation of the application server and its
attached TIVRA systems, including the command link mode used, Ethernet or
serial links. Further, by clicking on the TIVRA icon, an additional window
is displayed. In this window, a graphic of the TIVRA 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 about the running application.
Reports are designed to track significant statistical information for
activities such as billing and to justify services. TIVRA-ware offers a
choice of reports that can be created and viewed without interrupting the
operation of an application. These reports can then be sent to a printer
for a hard copy printout. Available reports include call detail, cell
usage, trunk usage, subscriber information, and transaction log.
Statistical requirements beyond those addressed by the standard reports can
be met from the raw call data records (CDRs).
Database Access allows interfaces to be built between TIVRA-ware and
Standard Query Language (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 communication applications. This cell type allows users to
delete, insert, select, and update data. TIVRA-ware 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 TIVRA-ware to accommodate multiple
applications. Messages can be retrieved either first in, first out (FIFO)
or last in, first out (LIFO), determined on a system basis.
Microlog delivered the Y2K compliant TIVRA System Release 6 (SR6) product
in 1998. Enhancements included significant hardware upgrades, system
management capabilities, enhanced speech recognition options, and
extensions to allow interactive Web response. In 1999, the Company focussed
on extending the customer applications built and delivered on the SR6
platform, adding to its inventory of custom and re-usable components.
SALES AND MARKETING
The Company's products are sold primarily through direct sales. The TIVRA
products are sold through a combination of direct sales, value-added resellers,
and government contract vehicles. It is expected that, during 2000, uniQue will
be primarily sold directly. The Company is looking for original equipment
manufacturers, technology partners, and value-added resellers for its uniQue
product.
The Company has a sales and marketing team consisting of six employees located
in the Washington-Baltimore metropolitan area. This team will focus on direct
sales, technology partners, and value-added resellers of the Company's products
in the Mid-Atlantic region. Sales and marketing activities will continue to
focus on certain vertical markets, including contact centers, utilities,
associations, and Federal, state and local government.
The Company compensates its direct and distribution sales personnel through a
base salary plus commission, which generally represents a percentage of the net
sales for which the sales personnel is responsible. The principal potential
customers for the Company's self service applications and products in these
vertical markets are organizations which receive or make a large volume of
telephone calls or e-mail and Web inquiries, and the customer desires
information stored on the organization's data system or requires assistance.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA software and related hardware.
The Company also agreed to assign certain agreements to which Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys.
8
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 its systems for maintenance
contracts covering normal business hours. The fee is highest for maintenance
contracts providing for 24-hour or weekend assistance.
The Company generally performs maintenance for its interactive communications
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 its
interactive communications 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 interactive communications
systems. Microlog can perform many diagnostic procedures remotely and,
historically, has been able to correct many of the difficulties experienced by
its customers through telephone consultation. International maintenance is
performed by the third party distributor and is supported by Microlog service
personnel in Germantown, Maryland.
Microlog also offers a variety of other services to its customers. Microlog will
customize interactive communications and contact center systems to a customer's
specific needs by designing application software, or by making appropriate
changes in the underlying source code of any of Microlog's products. 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 software modules free of charge to customers who
contract for its system maintenance services.
BACKLOG
As of October 31, 1999, the Company had a backlog of existing orders for voice
processing systems and services totaling $2.8 million. By comparison, the
backlog, as of October 31, 1998, was $2.0 million. The Company has experienced
fluctuations in its backlog at various times in the past attributable primarily
to the seasonality of governmental purchases. The Company anticipates that all
of the outstanding orders at October 31, 1999 will be shipped and the sales
recognized during fiscal year 2000. 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 interactive communications industry is highly competitive and the Company
believes that competition will intensify. The Company competes with a large
number of companies, which produce interactive communications products offering
one or more of the 14 major voice processing applications performed by the
Company's products. Microlog's competitors include companies, such as IBM,
InterVoice/Brite, Lucent, Periphonics (Nortel), Aspect, and Syntellect, that
have emphasized sales of systems with interactive voice response applications.
In addition, the Company also competes with dealers and distributors that sell
voice 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 interactive communications industry because of the absence
of any major technological barriers to entry.
Competition for the sale of interactive communications systems has been based in
part on the application required by the customer. In marketing its TIVRA
product, the Company places emphasis on the 14 major interactive communications
functions (refer to "Products" section) that can be performed and the ability of
these systems to be expanded to incorporate additional applications. As a result
of this emphasis on openness and expandability, the Company believes that many
of its competitors' products cannot be customized as easily to the user's
specific needs as TIVRA.
The contact center marketplace in which the uniQue product is expected to
compete is also very competitive. This is because the market is large and
growing, and sits at the convergence point of a number of trends. All of the
trends are underpinned by the increasing willingness of people to undertake
transactions with businesses at a
9
distance, and by the generally favorable business conditions which fuel economic
growth at this time. The overall result is that the world's total network
traffic is increasing, with data traffic overtaking voice traffic as the
predominant share in the latter half of the 1990s.
While data traffic driven by rapid adoption of new communications media types
predominates, voice traffic has not stopped growing in absolute terms. There is
the trend toward increased use by customers of the traditional telephone to
accomplish sales and support functions remotely with companies. This means that
the demand for systems that automate and broker telephony interactions from
customers (telephone calls and faxes are examples) is being sustained by
businesses seeking to contain costs and to improve customer service as a
differentiator.
Second, there is the trend in the market toward more widespread use of the
Internet and the various communications media types that it conveys. This is by
far the more dramatic component of the increase in world network traffic. This
means that businesses are compelled to deal with a growing number of e-mails,
Web hits with information requests, Web chat requests, Web bulletin board
postings, and emerging trends in the use of IP telephony and IP fax.
Third, there is a trend by businesses to adopt customer relationship management
programs as a means of structuring and ensuring the quality of their
interactions with customers. This most often takes the form of software packages
that facilitate sales entries and/or the tracking of problem reports for support
purposes. Sometimes as well, the data from the contacts in such systems are used
to facilitate marketing research (through data mining), personalization of sales
pitches or marketing programs based on individual preferences inferred from the
data ("selling to a market of one"), or to simply enable more effective customer
self service as a means to buffer incoming contacts and workload to the people
in the company.
All of these trends and the general staffing challenges associated with a good
economy mean that companies are often forced to consider computer systems that
integrate voice, data, and customer relationship systems as a means of handling
customer load, increasing efficiency, or providing adequate customer service to
differentiate themselves from competition in their own markets. Microlog offers
solutions to these customers, comprised of the uniQue product, the Tivra
product, and custom integration services. A number of competitors are offering
solutions to some or all of the problems these trends present, but from
different technical or market perspectives, largely dependent on whether they
have an installed base of customers, or they are new entrants.
Some competitors are long established telephony vendors, seeking to add the new
media types to their ability to process telephony. These include Lucent, Nortel,
and Aspect as examples. Traditional CTI vendors are seeking to add this
capability to their offerings, an example of which is Genesys (Alcatel). Oracle,
traditionally a database company, has shown interest in this market through an
acquisition of Versatility, a contact management software company. Network
component companies are also interested in the market, most notably Cisco with
its recent acquisitions of Webline (Internet based contact management) and Summa
Four (traditional telephony switches). Start-up companies competing in this
space include Interactive Intelligence, ATIO, Acuity, Cosmocom, eGain, PadNetX,
eShare (Melita), and Apropos. All of these competitors and trends define a
dynamic, large and growing, but very competitive market space.
Competition for the sale of interactive communications systems has been based in
part on the application required by the customer. In marketing its TIVRA
product, the Company places emphasis on the 14 major interactive communications
functions (refer to "Products" section) that can be performed and the ability of
these systems to be expanded to incorporate additional applications. As a result
of this emphasis on openness and expandability, the Company believes that many
of its competitors' products cannot be customized as easily to the user's
specific needs as TIVRA.
Marketing and product recognition also play a substantial role in competition
within the interactive communications industry and within particular vertical
markets. Most of the Company's competitors have considerably greater financial,
marketing, and sales resources than Microlog. Many of these competitors have
concentrated on one or two voice 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 and retail customers because of its
experience in marketing products to these customers and in participating in
competitive procurements.
10
The Company believes that the other principal factors affecting competition in
the interactive communications 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
Research and development expenses for 1999 were focused on uniQue, with
incremental investments in the TIVRA product, and smaller incremental
investments in the APRS (Automated Prescription Refill System) and TAC (The
Automated Collector) products. uniQue 2.0 was released in December of 1999, with
additional capabilities in e-mail handling, Web call-back, Web chat, Web
bulletin board, collaboration, statistics collection, management, and reporting.
TIVRA enhancements were in the areas of specific custom and re-usable
application extensions for individual customers. The Company, in providing
special features, application development, and system integration services to
our customers, undertakes a significant amount of custom engineering. The
Company is subject to the risk that it may not have the financial resources to
maintain a competitive research and development strategy.
The following table sets forth for the periods indicated the Company's research
and development expenditures and the percentage of interactive communications
net sales represented by these expenditures.
RESEARCH AND DEVELOPMENT EXPENDITURES
(In thousands, except percentage amounts)
YEAR ENDED OCTOBER 31,
1997 1998 1999
---- ---- ----
Research and development expense $3,579 $3,256 $2,870
Percentage of voice processing net sales 19% 22% 36%
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. Equipment assembly, along with
testing and quality control, are performed at its Germantown, Maryland facility.
Microlog currently has four 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.
RESTRUCTURING OF OPERATIONS
In fiscal year 1999, the Company incurred restructuring charges of $693,000 for
severance and benefits and other costs for the reduction of employees. Temporary
employees and contractors were also reduced. These restructuring charges include
costs of $381,000 for severance and benefits, the write-off of assets of $49,000
for the equipment associated with headcount reductions, costs of $103,000
associated with the closing of the Company's manufacturing facility, and costs
of $160,000 to terminate the 15-year lease commitment for new office space which
the Company had entered into in May 1998. As a result of these restructuring
activities and other cost reduction actions, the Company expects to reduce its
annual voice processing operating expenses by approximately $4.8 million
annually.
11
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA software and related hardware.
The Company also agreed to assign certain agreements to which Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys. The sale is anticipated to result in a gain to
Microlog of approximately $100,000. Since some of the proceeds from the sale are
based on future contracts between Comsys and the Company's former customers, the
gain on the sale was estimated and therefore has been deferred into fiscal year
2000.
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 interactive communications
industry, Microlog does not have patent protection for its software, although
some of the inventions for which Microlog has received and applied for patents
can be implemented in software. The Company, 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 an Interactive Audio Telecommunications Message
Storage, Forwarding and Retrieval System, a Software Switch for Digitized Audio
Signals, an Automated Telephone System Using Multiple Languages, a
Telecommunications System for Transferring Calls without a Private Branch
Exchange, Detection of TDD Signals in an Automated Telephone System, an
Automated Telephone System with TDD Capabilities, an Automated Announcement
System, and Methods for Communicating with a Telecommunications Device for the
Deaf (TDD). The Company also has pending patent applications on an Apparatus and
Method for Coupling an Automated Attendant to a Telecommunications System, a
Method and System for Enabling Computer Terminals in a Call Center Environment
to Display and Perform Telephony Related Functions, and a Contact Center System
Capable of Handling Multiple Media Types of Contacts and Method for Using the
Same. EVR, Microlog, Truant, CINDI, ProNouncer, CallStar, CallStar FXD, APRS,
Connecting People to a World of Information, The Automated Collector, and uniQue
are all registered trademarks owned by the Company. uniQue Agent, The Best Seat
In The House, Strategic Team of Elite Partners, and The Global Call Center
Company 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 (PTO). INTEL Corporation filed
oppositions with the PTO Trademark Trial and Appeal Board against the Company's
federal trademark applications for the marks Intela, VCS Intela, Intelaware,
Intelaview, and Intelapowerdial (the "Intela marks"). This consolidated
opposition proceeding has been settled and, under the terms of the settlement
agreement, the Company has abandoned its applications for and ceased use of the
Intela marks. Products formerly branded with the Intela marks are now branded
with the Company's "TIVRA" family of marks. The Company is currently using, and
claims common law rights in, the following additional, unregistered marks:
TIVRA, TIVRA-ware, TIVRA Powerdial, Voice Connect, Genesis, Voice Path, VCS
3500, Retail Solutions, RLT, and Release Line Trunking. 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 to the Company or any registered copyrights of the Company can be
successfully defended.
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 data processing and analysis, engineering and
scientific analysis, and computer services, to government and commercial
customers. These services, which comprise the Company's original business, were
provided through Old Dominion Systems Incorporated of Maryland, a subsidiary
which was merged with and into Microlog Corporation of Maryland effective
October 31, 1999. The Company believes that its performance analysis contracts
are likely to continue to provide a stable but declining source of sales for the
Company. The Company is experiencing (indirectly, through its contracts with
APL) the effects of some reductions in defense spending due to changes in U.S.
defense priorities. The Company
12
is not aware of any proposed reductions in spending that will result in any
material adverse affect over the next fiscal year on its expected net sales from
performance analysis and support services nor alter the manner in which it
procures contracts for such services. However, the Company cannot assure you
that changes in defense priorities or continuing budget reductions will not
cause such an effect during the fiscal year or thereafter. Additionally, the
Company has experienced increased competition for retention of its employees
from APL. As a result of the tight labor market and changes in hiring policies
at APL, the Company is experiencing increased employee attrition to APL. The
Company expects this trend to continue through fiscal year 2000. Each employee
hired directly by APL, and removed from our contract(s) decreases our revenue
and profit potential from that source.
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. Sales from
contracts with APL accounted for 39%, 44%, and 56% of the Company's net sales
for fiscal 1997, 1998, and 1999 respectively.
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 under the contract at the time of renewal has provided for, in
the aggregate, the same or a greater level of services.
The Company typically 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 basis. 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.
13
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, Allied Signal, Comsys, EISI, Orbital, SAIC, and
Sachs/Freeman Associates. 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 that have been renewed
or re-awarded to the Company.
The Company has had limited success in obtaining contracts with government
agencies or contractors other than APL. 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, 1999, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $0.4 million.
By comparison, the backlog as of October 31, 1998 was $0.2 million. The
Company's contracts consist primarily of indefinite delivery, indefinite
quantity (IDIQ) contracts which generally do not have a funding amount, and
therefore are not included in backlog. The Company estimates that the entire
$0.4 million of backlog at October 31, 1999 will be recognized as sales in
fiscal year 2000. 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. In addition, the Government has the right to
cancel contracts, whether funded or not funded, 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. 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 15, 2000, the Company and its subsidiaries employed a total of 188
persons, including three part-time employees. Of these personnel, 54 are engaged
principally in the Company's interactive communications systems operations, 134
are engaged in performance analysis and support services, and six serve as
officers or managers or perform administrative services for the Company and all
of its subsidiaries. In fiscal year 1999, the Company restructured its
interactive communications systems operations which included a workforce
reduction of approximately 35%.
14
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.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that its results of operations will be affected by factors
such as the timing of introduction by the Company of new and enhanced products
and services, market acceptance of new voice processing products and
enhancements of existing products, continuation of market trends in the voice
processing market, growth in the voice processing market in general,
competition, ability to secure and retain adequate financing, commitments to
automation by potential customers, fluctuations in the buying cycles of
governmental customers, changes in general economic conditions, and changes in
the U.S. defense industry and their impact on the prime contractor for which the
Company provides performance analysis and support services.
The Company is subject to the risk that its business strategy will not be
successful. The new strategy is dependent on market acceptance of the Company's
new focus, services and products, ongoing research and development efforts, and
sales activities over the near term. In addition, the strategy is dependent upon
the Company's ability to match costs proportionately with revenue. The Company's
fiscal 2000 operating budget includes significant expenditures related to its
development and marketing of its new professional services, uniQue product line,
and TIVRA product line. If the Company is unable to sustain and grow the
associated revenue, the Company is subject to the risk that it may not make the
necessary decisions to reduce expenditures in enough time to avoid severe
adverse consequences.
ITEM 2. PROPERTIES
The Company presently leases and occupies the 24,000 square foot building in
Germantown, Maryland, which it uses for its principal executive offices and its
interactive communications operations center. In September 1998, the Company
allowed the lease of the facility in Gaithersburg, Maryland to expire, and moved
the production and warehousing functions to the Germantown, Maryland facility.
The Company's lease of 22,700 square feet of office space in Rancho Cordova,
California expired in 1999.
In May 1998, the Company entered into a 15-year lease commitment, which was to
commence on or about June 1999, for office space intended to consolidate the
Company's headquarters, warehouse, and training facilities. In August 1998, the
Company sold its office building and committed to lease back the building prior
to its occupation of the new leased space. In April 1999, the Company and its
new landlord agreed to terminate the 15-year lease commitment for the new leased
space. The Company incurred $160,000 in termination costs, but was released from
future obligations by the landlord. At that time, the Company also committed to
lease back its building through 2009.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to 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 adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on September 9, 1999. At the
meeting, the proposed approval of the issuance of 1,812,104 additional shares of
Common Stock to TFX Equities, Inc. was obtained by a vote of: For: 2,304,564,
Against: 72,837, and 24,863 shares abstaining.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information responsive to this Item is incorporated herein by reference to the
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Information responsive to this Item is incorporated herein by reference to the
Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information responsive to this Item is incorporated herein by reference to the
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including Consolidated
Statements of Operations for the fiscal years ended October 31, 1999, 1998, and
1997, Consolidated Balance Sheets as of October 31, 1999 and 1998, Consolidated
Statements of Changes in Stockholders' Equity for the fiscal years ended October
31, 1999, 1998, and 1997, Consolidated Statements of Cash Flows for the fiscal
years ended October 31, 1999, 1998, and 1997 and Notes to Consolidated Financial
Statements, together with the report thereon of Grant Thornton dated December
13, 1999, and the report thereon of PricewaterhouseCoopers LLP, dated March 17,
1999, are incorporated herein by reference to pages 2 through 20 of the
Company's Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 12, 1999, the Company dismissed PricewaterhouseCoopers LLP ("PWC") as
its independent accountant. PWC's reports on the Company's financial statements
for the fiscal years ended October 31, 1998 and 1997 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principle. However, such reports
contained an explanatory paragraph relating to the Company's ability to continue
as a going concern. The decision to dismiss PWC was approved by the Audit
Committee and the Board of Directors of the Company. In connection with the
audits of the financial statements of the Company for the fiscal years ended
October 31, 1998 and 1997, and for the period from November 1, 1998 through July
12, 1999, the Company had no disagreements with PWC on matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PWC,
would have caused PWC to make reference to such disagreements in their report on
the Company's financial statements for such years.
The Company engaged Grant Thornton LLP as its new independent accountant as of
July 12, 1999. The decision to engage Grant Thornton LLP was approved by the
Audit Committee and Board of Directors of the Company.
These events were previously reported by the Company on its Current Report on
Form 8-K, filed with the SEC on July 16, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
16
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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 2 through 20 of the
Annual Report to Shareholders and are incorporated herein by reference.
Consolidated Statements of Operations for the fiscal years ended
October 31, 1999, 1998, and 1997
Consolidated Balance Sheets as of October 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended October 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Report of Independent Accountants
(a)(2) Financial Statement Schedule
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 16).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages F-1, F-2, and F-3:
F-1 Schedule II Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent Certified Public Accountants on Supplemental
Information
F-3 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.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its 1999 fiscal year.
(c) Exhibits.
17
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 Microlog Corporation Medical Reimbursement Plan 2/
10.2 Microlog Corporation 1989 Non-Employee Director Non-Qualified
Stock Option Plan 3/ -
10.3 Microlog Corporation 1995 Employee Stock Option Plan 4/
10.4 Sub-contracting Agreement with Aspect Telecommunications
Corporation 5/
10.5 Sub-contracting Agreement with Applied Physics Laboratory 5/
10.6 Agreement with Philips Communication Systems B.V. */ 6/
10.7 Loan and Security Agreement with Silicon Valley Bank 7/
13 Annual Report to Shareholders for the fiscal year ended October
31, 1999 7/ -
22 Subsidiaries of the Company 7/
23.1 Consent of Grant Thornton LLP 7/
23.2 Consent of PricewaterhouseCoopers LLP 7/
*/ Confidential treatment has been granted for portions of this document.
1/ Filed as Exhibits 3.1, 3.2 and 4.1 to Registration Statement on Form S-1,
File No. 33-31710, and incorporated herein by reference.
2/ Filed as Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year
ended October 31, 1991 and incorporated herein by reference.
3/ Filed as Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year
ended October 31, 1993 and incorporated herein by - reference.
4/ Filed as Exhibit 10.6 to Registration Statement on Form S-8, File No.
333-07981 and incorporated herein by reference.
5/ Filed as Exhibits 10.12 and 10.13 to Annual Report on Form 10-K for the
fiscal year ended October 31, 1992 and incorporated herein by reference.
6/ Filed as Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year
ended October 31, 1994 and incorporated herein by - reference.
7/ Filed herewith.
18
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.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company 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 28, 2000.
MICROLOG CORPORATION
By /s/ Stephen D. Smith
-------------------------------------
Stephen D. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/ Stephen D. Smith January 28, 2000
- ----------------------------------------------------
Stephen D. Smith
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Steven R. Delmar January 28, 2000
- ----------------------------------------------------
Steven R. Delmar
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ David M. Gische January 28, 2000
- ----------------------------------------------------
David M. Gische
Chairman of the Board and Director
/s/ Robert E. Gray, Jr.. January 28, 2000
- ----------------------------------------------------
Robert E. Gray, Jr.
Director
/s/ David B. Levi January 28, 2000
- ----------------------------------------------------
David B. Levi
Director
/s/ Joe J. Lynn January 28, 2000
- ----------------------------------------------------
Joe J. Lynn
Director
/s/ John J. Sickler January 28, 2000
- ----------------------------------------------------
John J. Sickler
Director
/s/ Randall P. Gaboriault January 28, 2000
- ----------------------------------------------------
Randall P. Gaboriault
Director
================================================================================
F-1, SCHEDULE II - VALUATION AND QUALIFYNG ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance Balance
Fiscal Year Ended 10/31/99 11/01/98 Additions Deletions 10/31/99
- -------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 144 100 94 150
Inventory
Reserve for Obsolescence 1,644 309 1,465 488
Income Taxes
Valuation Allowance 6,400 1,915 0 8,315
Balance Balance
Fiscal Year Ended 10/31/98 11/01/97 Additions Deletions 10/31/98
- -------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 152 29 37 144
Inventory
Reserve for Obsolescence 345 1,299 0 1,644
Income Taxes
Valuation Allowance 1,966 4,434 0 6,400
Balance Balance
Fiscal Year Ended 10/31/97 11/01/96 Additions Deletions 10/31/97
- -------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 207 49 104 152
Inventory
Reserve for Obsolescence 253 92 0 345
Income Taxes
Valuation Allowance 3,462 0 1,496 1,966
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Stockholders
Microlog Corporation
In connection with our audit of the consolidated financial statements of
Microlog Corporation referred to in our report dated December 13, 1999, which is
included in the Annual Report on Form 10-K, we have also audited Schedule II for
the year ended October 31, 1999. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Vienna, Virginia
December 13, 1999
F-2
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors
Microlog Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 17, 1999 appearing on page 20 of the 1999 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.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 17, 1999
F-3