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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, 2000 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) 540-5500
(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 last reported sale price of the Common Stock on January 19, 2001,
as reported by the Nasdaq SmallCap Market) was approximately $4.9 million. The
Common Stock is traded over-the-counter and quoted through the Nasdaq SmallCap
Market.
As of January 19, 2001, 7,066,938 shares of the
Registrant's Common Stock were outstanding.
- --------------------------------------------------------------------------------
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, 2000 attached as an
exhibit hereto (the "Annual Report to Shareholders").
TABLE OF CONTENTS
PAGE
----
Part I. Item 1. Business ....................................................1
Item 2. Properties...................................................9
Item 3. Legal Proceedings............................................9
Item 4. Submission of Matters to a Vote of Security Holders..........9
Part II. Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters..................................9
Item 6. Selected Financial Data......................................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...9
Item 8. Financial Statements and Supplementary Data.................10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................10
Part III. Item 10. Directors and Executive Officers of the Registrant..........10
Item 11. Executive Compensation......................................10
Item 12. Security Ownership of Certain Beneficial
Owners and Management.......................................10
Item 13. Certain Relationships and Related Transactions..............10
Part IV. Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.....................................10
Other Matters ................................................................13
Signatures.
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 the
Company's industry, the Company's 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 its expectations in such forward-looking statements will
turn out to be correct. Some important factors that could cause the Company's
actual results to be materially different from its 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 is an interactive communications software company that
provides advanced Web-based customer interaction management products and
services for businesses seeking to better serve their customers. Microlog offers
an integrated suite of products and services which blend with existing corporate
applications and infrastructure to accomplish both automated response functions,
such as interactive voice response, or "IVR," email, and Web, as well as
intelligent interactions between customers and contact center agents.
Interactions today include telephone, email, Web chat, Web callback, Web
collaboration, Web bulletin board, voice over IP, fax and scanned hardcopy mail.
Microlog caters to businesses and institutions looking to serve their customers
through advanced, yet user-friendly customer contact and relationship management
systems. This approach advocates retaining or acquiring applications and
components which best suit the customer's objectives, while enhancing its
customers' experience. Microlog's products and services are designed to serve as
middleware to integrate those components (e.g. existing legacy applications,
database applications, CRM applications, PBX or ACD switches, Web sites, email
servers, IVRs, fax servers) in a way that affords consistent operation across
diverse systems and contact types, while preserving investments in the existing
components. Microlog's products are Web-centric, which means major functions are
accomplished through a central server suite, and only Java-enabled browsers or
network computers are required for agent desktop operations. This facilitates
lower cost and eases the implementation of distributed operations afforded by
Internet technologies.
Microlog's integrated suite of customer contact and relationship management
products is called the uniQue(R) (pronounced you-knee-que) family of contact
center solutions. This family of solutions includes uniQue RM (Relationship
Management), uniQue Web, uniQue eMail, uniQue Voice, uniQue Fax, uniQue VoIP,
uniQue CTI, and uniQue IVR. uniQue can be implemented as a total solution, or
each family member can be installed as an individual solution for an existing
contact center. In addition, businesses can add media types in a modular fashion
as they expand their customer contact facilities. For example, customers can
start with a telephone solution, add an email solution, then add a web solution,
then add a fax solution. This openness and modularity is complemented by uniform
and easy-to-use management facilities, as well as comprehensive cross-media
statistics and reporting. The name "uniQue" derives from "unified queuing," and
this refers to uniQue's ability to allow easy management of multiple media types
in one virtual queue, allowing "automated contact distribution," prioritized
routing by customer, skills-based routing and multiple campaign management.
To complement its suite of uniQue products, Microlog offers the following
services: technology assessment, requirements analysis and documentation,
project management, application and software development, system integration,
telephony integration, installation, system administration and quality
assurance.
Microlog, a Virginia corporation, headquartered in Germantown, Maryland, was
organized in 1969. Microlog Corporation of Maryland, Microlog's operating
subsidiary, has two major subdivisions: the Contact Center Solutions division
and the Old Dominion Systems division. The Contact Center Solutions division,
whose business generally is described above, represents Microlog's primary focus
and product future. Accordingly, the Company is concentrating its investments
and efforts on developing the Contact Center Solutions division. The charter of
the division is to help the Company's customers serve their customers better
through the use of technology in corporate contact centers performing customer
relationship management.
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 source of sales and profits,
the Company believes that its Old Dominion Systems division will not generate
significant revenue beginning in the first quarter of fiscal 2001. Revenue
generated by the Old Dominion Systems division represented $7.1 million (49%),
$10.1 million (56%) and $11.7 million (44%) of Microlog's consolidated revenue
for the fiscal years ended October 31, 2000, 1999, and 1998, respectively.
1
Included in the products of the Contact Center Solutions division is uniQue IVR,
which was formerly called both Tivra and Intela. uniQue IVR, which is an
interactive voice response software product designed for simultaneous support of
multiple interactive voice applications and information solutions, historically
has generated significant revenue for Microlog. Although Microlog continues to
market, sell and maintain its uniQue IVR product, Microlog believes that uniQue
IVR will represent a decreasing portion of Microlog's consolidated revenue in
fiscal 2001 and thereafter. Revenue generated by uniQue IVR represented $6.6
million (46%), $7.9 million (44%), and $14.7 million (56%), of Microlog's
consolidated revenue for the fiscal years ended October 31, 2000, 1999, and
1998, respectively. Revenue generated in the aggregate by uniQue IVR and the Old
Dominion Systems division represented $13.7 million (95%), $18.0 million (100%),
and $26.5 million (100%) of Microlog's consolidated revenue for the fiscal years
ended October 31, 2000, 1999, and 1998, respectively. Microlog's strategy is to
replace the sharply declining revenues of the Old Dominion Systems division and
uniQue IVR with increased revenue generated by its newer uniQue products.
As a result, in fiscal 2000, the Company continued to sharpen its focus on the
Contact Center Solutions division in general and its uniQue line of products in
particular. As a result of changes in its relationship with APL, the Company
also substantially discontinued the performance analysis and technical and
administrative support services of its Old Dominion System division in fiscal
2000. In fiscal 2001, the Company plans to continue to expand its uniQue sales
and marketing efforts, product offerings, and related professional services
offerings to provide more comprehensive Contact Center solutions to small- and
medium-sized businesses and institutions throughout the United States, primarily
in the eastern U.S. Microlog plans to offer its products directly through
regional sales representatives, indirectly through OEM and reseller partners,
and through hosted or network-based services.
The results of the Company's performance during fiscal years 2000, 1999, and
1998, are discussed in 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.
CONTACT CENTER SOLUTIONS DIVISION
CUSTOMER RELATIONSHIP MANAGEMENT/CUSTOMER INTERACTION MANAGEMENT INDUSTRY
According to the Gartner Group, Customer Relationship Management, or "CRM," is
"a business strategy whose outcomes optimize profitability, revenue and customer
satisfaction by organizing around customer segments, fostering customer
satisfying behaviors, and implementing customer-centric processes. CRM
technologies should enable greater customer insight, increased customer access,
more effective customer interactions, and integration throughout all customer
channels and back-office enterprise functions." While total CRM involves many
processes, applications, and infrastructures, many of which are in the domain of
the company choosing to implement a CRM system, a major portion of CRM is the
management of customer interactions in conjunction with those processes,
applications, and infrastructures. This portion is called Customer Interaction
Management or "CIM." Microlog's uniQue products are within the "CIM" industry
space and Microlog offers the related professional services required to
integrate its CIM products into existing CRM systems to create a total CRM
solution.
Although the level of new CRM projects remains reasonably consistent for large
organizations, Gartner Dataquest expects to see a significant increase in new
projects from the midmarket and small enterprises sector. An analysis of average
annual budgets allocated to CRM projects also indicates significant increase in
investment over the next two years. To target this growing market, Microlog
focuses direct sales on small to medium-sized businesses and institutions.
Gartner analysis indicates "that small enterprises are willing to invest
significantly in CRM implementations as a strategic differentiator against their
competitors. As a percentage of revenue, the small enterprises are expected to
invest twice as much in CRM implementations as the large enterprises segment.
Given the large number of new projects slated for the next couple of years in
the midmarket and small enterprises segment, this is likely to be a powerful
market opportunity...."
2
Estimates by Gartner Dataquest state that "the North American CRM services
market is estimated at $9.6 billion for the year 2000 and is slated to grow at a
CAGR of 22.8 percent, reaching $17.8 billion in 2003. Globally, the greatest
portion of CRM Services spending will be on application development and
integration, business/IT consulting, and to some extent IT outsourcing.
Application development and integration will represent 37 percent of spending
worldwide, largely because the packaged software application market does not yet
meet the needs of the end-user community."
CRM's development across the vertical markets is evidenced by Gartner
Dataquest's forecasts showing that the financial services, high-technology
(included in manufacturing), telecommunications and utilities industries are
among the early adopters of CRM. They have quickly understood the CRM concept
and have been willing to make the investments necessary to adopt enterprise-wide
solutions. Often, these early adopters are willing to adopt CRM in one of two
ways -- by working with point solutions for immediate functionality or by
investing in highly-customized and functional solutions from consultants and
systems integrators. Microlog's strategy for addressing this characteristic of
the market is to produce a middleware solution that can be highly customized and
integrated for a total solution, but at the same time is offered via modular
features which present customers with the opportunity to do a phased
implementation of "point solutions," growing with upgrades as their needs
dictate. Microlog's direct and indirect services provide the consultancy and
customization services necessary to the complete solutions customers want.
Bolstered by the existing shortage of IT skills in the marketplace, Microlog
believes that customers will pay for complete solutions, including consulting
and IT services, because their own internal resources are too stretched to
accommodate the need for additional projects such as CRM integration.
Gartner states that "While the convergence to a common customer focus through
the addition of value-added services is happening across all verticals, how the
vertical industries are pursuing this varies. For example, in the
high-technology and retail sectors, the focus has been on utilizing the Web to
sell to customers and allowing them to customize and configure the products to
their needs." In other industries, Microlog has observed that automation of
voice contacts is still a primary concern and is often the first option pursued.
In any industry where email as a contact type is supported, there is great
pressure to manage email load in a more efficient and assured fashion, something
that is still not the norm. Microlog believes that, regardless of the industry,
every business has to deal with their customers in the fashion which best suits
that business. This has led Microlog to a cross-industry product and services
approach, with a highly configurable and modular set of uniQue offerings for the
direct sales channel. To the extent that indirect channels tend to focus more on
specific industries, their offerings can be packaged and less configurable, and
their hosted services are even more packaged to appeal to a higher volume of
small customers without need of a significant amount of customization.
UNIQUE(R)
Microlog's uniQue family of products offers open architecture, cross platform
solutions for customer contact centers. uniQue is designed for the contact
center with 5 to 1,000 agents and integrates all of the contact center's
telephony, computer and business applications. uniQue is designed for the
contact center manager and offers the agent tools necessary to handle customer
interactions.
Microlog's uniQue product is 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 telephone call
control, although the current functions of management, statistics, and the agent
interface were available at that time in a more limited implementation.
uniQue 2.0.0, which adds the other major media contact types (discussed below)
and major functional enhancements, went into limited availability trial testing
in September 1999. uniQue 2.0.0 was generally available as of February 2000.
uniQue 2.1.0 was generally available as of September 2000 and 2.1.1 was
generally available as of October 2000. Work on subsequent releases is
continuing, along with specific custom extensions of the product based on
customer requests. Four customers have been fully installed and are operational
on the uniQue 2.1 release, and two others are currently being installed.
3
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 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 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 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 AND REMOTE ADMINISTRATION - Being a Web-based Java
application hosted on the uniQue server, uniQue offers the contact center
management zero administration at the agent's workstation. uniQue 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 - Consistent 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 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 flexibility to a
contact center's computing requirements and simplifies the task of integration.
REPORTING - uniQue includes 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 uniQue can
store includes, among other information: contact type, 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.
UNIQUE IVR(TM)
The uniQue IVR (formerly Tivra) platform is a Contact Center Solutions product
designed for simultaneous support of multiple interactive voice applications and
information solutions. Prices for uniQue IVR systems are dependent on the number
of ports in the system (from 4 to over 1,000), the amount of voice storage, the
need for additional equipment, and the time needed to develop a customized
application.
uniQue IVR is based on an Intel Pentium(R) hardware platform utilizing a
Microsoft NT(R) operating system with a Graphical User Interface (GUI) for
application development. The uniQue IVR system has a non-proprietary open
architecture. uniQue IVR also supports text-to-speech, speech recognition,
remote and local databases, host connectivity, Web and fax.
Each uniQue IVR system incorporates servers with hard disk storage and several
voice cards. By increasing the number of voice cards and the number of servers,
the Company can configure the IVR systems with a greater number of ports and
hours of message storage. Depending upon customer specifications, systems are
provided as desktop 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 power supply for use in a Central Office (CO).
The uniQue IVR 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. The uniQue IVR 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.
4
SALES AND MARKETING
The sales model for uniQue is direct at first, with 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 some market segments. Indirect sales methods could range from simple
lead sharing in informal partnership arrangements to formal value added
remarketer representation of the product, to actual packaging of the product
under another brand, which is referred to as an original equipment manufacturer,
or "OEM," relationship. Microlog is currently seeking appropriate indirect
relationships within this spectrum of possibilities, and we believe that
indirect sales will represent a key to the long-term success of uniQue. The
Company initiated its first OEM relationship late in fiscal 2000 and plans to
add an expanding group of indirect partners beginning in fiscal 2001. The
Company plans that indirect partners will begin to make sales of uniQue during
fiscal 2001.
During fiscal 2000, the Company increased it sales and marketing team from six
employees as of November 1, 1999 to seven employees and one indirect partner as
of October 31, 2000. The Company has further expanded its sales and marketing
team in the first quarter of fiscal 2001, which currently consists of eight
employees primarily located in the Washington-Baltimore metropolitan area,
including an experienced Vice President of Sales & Marketing. Sales personnel
are also located in New Jersey and Georgia. This team will focus on direct
sales, technology partners, and value-added resellers of the Company's products
in the eastern United States. Sales and marketing activities will continue to
focus on certain markets, including contact centers, utilities, and Federal,
state and local governments.
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.
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. Annual maintenance fees generally are
established as a percentage of the purchase price of the system and can vary
depending on the scope of coverage, which ranges from normal business hours to
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 has
partnered with a national subcontractor to perform on-site maintenance over 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 a 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 to customers who contract for its
system maintenance services.
COMPETITION
The market for our products is highly competitive and the Company believes that
competition will intensify. Our competition currently comes from several
different market segments, including telecommunications equipment vendors,
computer telephony platform developers, stand alone point solutions and
application providers.
Some competitors are established telephony vendors and have added the new media
types to their ability to process telephony. These include Avaya, Inc. (formerly
Lucent), Nortel Networks, and Aspect Communications as examples. Traditional CTI
vendors have added this capability to their offerings, an example of which is
Genesys (Alcatel).
5
Stand alone point solution companies competing in this space include Interactive
Intelligence Inc., Acuity Corporation (which was acquired by Quintus
Corporation), Cosmocom, Inc., eGain Communications Corporation, eShare
Communications Corporation, Sideware, and Apropos Technology. Application
provider competitors include Siebel Systems, Nortel Networks (Clarify), and
Peoplesoft (Vantive) as examples. Additionally, network component companies are
also interested in the market, most notably Cisco Systems with its acquisitions
of Webline (Internet based contact management), Geotel Communications
Corporation (Network routing) and Summa Four, Inc. (traditional telephony
switches).
BACKLOG
As of October 31, 2000, the Company had a backlog of existing orders for the
Contact Center Solutions division totaling $1.7 million. By comparison, the
backlog, as of October 31, 1999, was $2.8 million. The Company has at various
times in the past experienced, and in the future may experience, fluctuations in
its backlog attributable to the seasonality of governmental purchases. The
Company anticipates that all of the outstanding orders at October 31, 2000 will
be shipped and the sales recognized during fiscal 2001. 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.
RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING
Research and development expenses for fiscal 2000 were focused on the broader
uniQue family, with incremental investments in the uniQue IVR product. uniQue
2.0, 2.1.0 & 2.1.1 were released in fiscal 2000, with additional capabilities in
e-mail handling, Web call-back, Web chat, Web bulletin board, collaboration,
security enhancements, statistics collection, management, and reporting. uniQue
IVR 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 its 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,
----------------------
2000 1999 1998
---- ---- ----
Research and development expense $1,350 $2,870 $3,256
Percentage of Contact Center Solutions sales 18% 36% 22%
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 at reasonable prices and in a timely manner from
these sources.
6
SOFTWARE PROTECTION, TECHNOLOGY LICENSES, AND TRADEMARKS FOR THE CONTACT CENTER
SOLUTIONS DIVISION
The Company regards its software as proprietary and has implemented legal and
practical protective measures in an effort 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 "uniQue IVR" family of marks.
The Company is currently using, and claims unregistered trademark rights in, the
following additional, unregistered marks: uniQue IVR, uniQue IVR-ware, uniQue
IVR 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
of the Company's patents, trademarks or copyrights can be successfully enforced
or defended.
OLD DOMINION SYSTEMS DIVISION
GENERAL
Since the early 1970s, the Company has 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 compose
the Company's original business, are provided through Old Dominion Systems, a
division of Microlog Corporation of Maryland. 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 has been performing services since
1972. Sales from contracts with APL accounted for 49%, 56%, and 44% of the
Company's sales for fiscal years 2000, 1999, and 1998, respectively. Although
this segment of the Company has historically provided a stable source of sales
and profits, due to a change in policy regarding contract labor positions by
APL, the Company will no longer provide significant services to APL beginning in
the first quarter of fiscal 2001.
7
SERVICES
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.
BACKLOG
As of October 31, 2000, the Company had no backlog of funding on existing
contracts for Old Dominion Systems. By comparison, the backlog as of October 31,
1999 was $0.4 million. The Company's existing contracts are indefinite delivery,
indefinite quantity (IDIQ) contracts which generally do not have a funding
amount, and therefore are not included in backlog. The Company expects to
continue to provide a minimal amount of services to APL in fiscal year 2001.
GOVERNMENT REGULATION FOR THE OLD DOMINION SYSTEMS DIVISION
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.
COMPANY EMPLOYEES
At January 19, 2001, the Company's two divisions employed a total of 89 persons,
including two part-time employees. Of these personnel, 63 worked in the
Company's Contact Center Solutions division and 26 worked in the Old Dominion
Systems division. Three individuals in the Contact Center Solutions division
serve as officers or managers or perform administrative services for both
divisions of the Company.
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 of the Company's
divisions is a party to a collective bargaining agreement, and the Company
considers its employee relations to be satisfactory.
8
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company has been experiencing reduced demand, increased competition, and
reduced margins in the interactive voice response area, which was a major thrust
of the Company prior to the development of the uniQue product family. The
Company attributes the decline in IVR sales 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, industry consolidation is on-going, 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 the uniQue product family to address the larger opportunity in
customer relationship management associated with corporate contact centers, and
to offer professional turnkey services associated with the integration of those
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. The Company believes that 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 2001, the Company's Contact Center Solutions strategy for addressing
the market trends will be to expand its sales and marketing efforts, uniQue
product offerings, and its professional services offerings to provide more
comprehensive solutions to its customers and in different ways. Microlog will
offer its products directly through regional sales representatives, indirectly
through OEM and reseller partners, and through hosted or network-based services.
Both product features and services offerings will be augmented as appropriate to
facilitate marketing and sales through the various means.
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 and
marketing 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.
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 1999, the Company
entered into a 10-year lease commitment on the building which extends 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
None.
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.
9
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
We are exposed to minimal market risks. We are exposed to interest rate risk
related to any borrowings under our line of credit. There were no borrowings
outstanding under our line of credit as of October 31, 2000. Our market risk
sensitive instruments do not expose us to material market risk exposures.
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, 2000, 1999, and
1998, Consolidated Balance Sheets as of October 31, 2000, 1999 and 1998,
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years
ended October 31, 2000, 1999, and 1998, Consolidated Statements of Cash Flows
for the fiscal years ended October 31, 2000, 1999, and 1998, and Notes to
Consolidated Financial Statements, together with the report thereon of Grant
Thornton dated December 8, 2000, and the report thereon of
PricewaterhouseCoopers LLP, dated March 17, 1999, are incorporated herein by
reference to pages 6 through 18 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.
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
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
10
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 5 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, 2000, 1999, and 1998
Consolidated Balance Sheets as of October 31, 2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended October 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the fiscal years ended October
31, 2000, 1999, and 1998
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 and F-2:
F-1 Schedule II Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent Certified Public Accountants on Supplemental
Information
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 2000 fiscal year.
(c) 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 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/
11
10.4 Sub-contracting Agreement with Aspect Telecommunications
Corporation 5/
10.5 Sub-contracting Agreement with Applied Physics Laboratory 5/
10.6 Loan and Security Agreement with Silicon Valley Bank 6/
10.7 Amendment to the Loan and Security Agreement with Silicon
Valley Bank 7/
13 Annual Report to Shareholders for the fiscal year ended
October 31, 2000 7/
22 Subsidiaries of the Company 7/
23.1 Consent of Grant Thornton LLP 7/
23.2 Consent of PricewaterhouseCoopers LLP 7/
27.1 Financial Data Schedule 7/
- ---------
1/ Filed as Exhibits 3.1, 3.2 and 4.1, respectively 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, respectively to Annual Report on Form 10-K
for the fiscal year ended October 31, 1992 and incorporated herein by
reference.
6/ Filed as Exhibit 10.7 to Annual Report on Form 10-K for the fiscal year ended
October 31, 1992 and incorporated herein by reference.
7/ Filed herewith.
12
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.
F-1, SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance Balance
Fiscal Year Ended 10/31/00 11/01/99 Additions Deletions 10/31/00
- ----------------------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 150 10 35 125
Inventory
Reserve for Obsolescence 488 140 291 337
Income Taxes
Valuation Allowance 8,315 385 0 8,700
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
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 8, 2000, which is
included in the Annual Report on Form 10-K, we have also audited Schedule II for
the year ended October 31, 2000. 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 8, 2000
F-2
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 29, 2001.
MICROLOG CORPORATION
By /s/ John C. Mears
-------------------------------------
John C. Mears
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/ John C. Mears January 29, 2001
- ------------------------------------
John C. Mears
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kirk E. Isenbart January 29, 2001
- ------------------------------------
Kirk E. Isenbart
Controller
(Principal Accounting and Financial Officer)
/s/ David M. Gische January 29, 2001
- --------------------------------------------
David M. Gische
Chairman of the Board and Director
/s/ Robert E. Gray, Jr.. January 29, 2001
- --------------------------------------------
Robert E. Gray, Jr.
Director
/s/ David B. Levi January 29, 2001
- --------------------------------------------
David B. Levi
Director
/s/ Joe J. Lynn January 29, 2001
- --------------------------------------------
Joe J. Lynn
Director
/s/ John J. Sickler January 29, 2001
- --------------------------------------------
John J. Sickler
Director
/s/ Randall P. Gaboriault January 29, 2001
- --------------------------------------------
Randall P. Gaboriault
Director