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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, 2001 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 29, 2002,
as reported by the Over the Counter Bulletin Board) was approximately $1.02
million dollars. The Common Stock is traded over-the-counter. As of January 29,
2002, 7,106,938 shares of the Registrant's Common Stock were outstanding of
which 2,666,667 shares were held by affiliates.
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TABLE OF CONTENTS
PAGE
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Part I. Item 1. Business.......................................................1
Item 2. Properties....................................................12
Item 3. Legal Proceedings.............................................12
Item 4. Submission of Matters to a Vote of Security Holders...........12
Part II. Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters...................................13
Item 6. Selected Financial Data.......................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....20
Item 8. Financial Statements and Supplementary Data...................20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................20
Part III. Item 10. Directors and Executive Officers of the Registrant............20
Item 11. Executive Compensation........................................20
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................ 20
Item 13. Certain Relationships and Related Transactions................20
Part IV. Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.......................................20
Index to Consolidated Financial Statements...............................................F-1
Schedule II - Valuation and Qualifying Accounts and Reserves.............................S-1
Report of Independent Certified Public Accountants on Supplemental Information...........S-2
Signatures
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 Affect
Future Results of Operations."
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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 integrate 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 the
customer's experience. Microlog's products and services are designed to serve as
middleware to integrate existing components such as legacy applications,
database applications, CRM applications, PBX or ACD switches, Web sites, email
servers, IVRs, fax servers, in a manner 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 costs 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
any family member can be installed as an individual solution for an existing
contact center. In addition, businesses can add different uniQue 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, and 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,
which operates the uniQue business generally is described above, represents
Microlog's primary focus and product future. Accordingly, the Company is
concentrating its resources 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 significant source of sales
and profits, the Company believes that its Old Dominion Systems division will
not generate significant future revenue. Revenue generated by the Old Dominion
Systems division represented $2.1 million (29%), $7.1 million (49%), and $10.1
million (56%), of Microlog's consolidated revenue for the fiscal years ended
October 31, 2001, 2000, and 1999, respectively.
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. Revenue generated by uniQue IVR
represented $4.5 million (63%), $6.6 million (46%), and $7.9 million
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(44%), of Microlog's consolidated revenue for the fiscal years ended October 31,
2001, 2000, and 1999, respectively. Revenue generated in the aggregate by uniQue
IVR and the Old Dominion Systems division represented $6.7 million (92%), $13.7
million (95%), and $18.0 million (100%), of Microlog's consolidated revenue for
the fiscal years ended October 31, 2001, 2000, and 1999, 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 2001, the Company continued to sharpen its focus on the
Contact Center Solutions division in general and its uniQue line of products in
particular. In order to bring expenses more in line with historical and
anticipated revenues for the Contact Center Solutions division, the Company
restructured and significantly streamlined its Contact Center Solutions
operations in fiscal 2001. If revenue grows and resources become available to
the Company, the Company plans to in fiscal 2002 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 continue to offer its products directly
through regional sales representatives, and to begin to offer its products
indirectly through OEM and reseller partners, and through hosted or
network-based services.
The results of the Company's performance during fiscal years 2001, 2000, and
1999, are discussed in detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which forms a part of this
report in Item 7. 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 are included in 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.
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 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 consulting and customization services necessary to
complete the solutions customers want. Microlog believes that customers will pay
for complete solutions, including consulting and IT services, because their own
internal resources often 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
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even more packaged to appeal to a higher volume of small customers without need
of a significant amount of customization.
UNIQUE(R) CONTACT CENTER SOLUTIONS
Microlog's uniQue family of software 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 third 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, albeit in a more limited capacity.
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.
uniQue 2.2.0, which adds significant security enhancements, collaboration
options, and integration capabilities, was released in December 2000. Subsequent
point function releases 2.2.1, 2.2.2, 2.2.3, 2.2.4, and 2.2.4.1 were released in
January, February, March, June, and August 2001, respectively. As of the date of
this report, uniQue release 3.0 is in the final stages of development and will
mark the next significant uniQue enhancement.
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 customers, uniQue
becomes the single source repository of all customer interaction provides 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.
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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 5 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.
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 over time. The Company plans that
indirect partners will make a more significant contribution to sales of uniQue
during the latter portions of fiscal 2002.
The Company has a sales and marketing team, which currently consists of seven
employees primarily located in the Washington-Baltimore metropolitan area,
including an experienced director of sales and marketing. Sales personnel are
also located in Georgia. This team focuses 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, health care, 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
generally for 90 days 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.
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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.
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). Stand alone point solution companies competing in this space
include Interactive Intelligence Inc., Cosmocom, Inc., eGain Communications
Corporation, eShare Communications Corporation, 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
acquisition of Webline (Internet based contact management), Geotel
Communications Corporation (Network routing) and Summa Four, Inc. (traditional
telephony switches).
BACKLOG
As of October 31, 2001, the Company had a backlog of existing orders for the
Contact Center Solutions division totaling $753,000. By comparison, the backlog,
as of October 31, 2000, was $1.7 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, 2001 will be
shipped and the sales recognized during fiscal 2002. 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 2001 were focused on the broader
uniQue family, with incremental investments in the uniQue IVR product. uniQue
2.2.0, which adds significant security enhancements, collaboration options, and
integration capabilities, was released in December 2000. Subsequent point
function releases 2.2.1, 2.2.2, 2.2.3, 2.2.4, and 2.2.4.1 were released in
January, February, March, June, and August 2001, respectively, with additional
capabilities in form collaboration, reporting enhancements, usability,
administration, and voice messages as a contact type. uniQue IVR enhancements
were in the areas of specific custom and re-usable application extensions for
individual customers plus additional voice recognition and speech synthesis
capabilities. 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.
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RESEARCH AND DEVELOPMENT EXPENDITURES
(In thousands, except percentage amounts)
YEAR ENDED OCTOBER 31,
----------------------
2001 2000 1999
---- ---- ----
Research and development expense $1,376 $1,350 $2,870
Percentage of Contact Center Solutions sales 27% 18% 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 one employee in its manufacturing group, and outsources
almost all of the system assembly and test work. 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.
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 Capability, an Automated Announcement
System, Methods for Communicating with a Telecommunications Device for the Deaf
(TDD) and Apparatus and Method for Coupling an Automated Attendant to a
Telecommunications System. The Company also has pending patent applications on 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.
Microlog, Truant, CINDI, CallStar FXD, APRS, Connecting People to a World of
Information, The Automated Collector, uniQue, The Best Seat In The House,
Strategic Team of Elite Partners, are all registered trademarks owned by the
Company. 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
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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 30%, 49%, and 56% of the
Company's sales for fiscal years 2001, 2000, and 1999, 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 no longer provides significant services to APL.
SERVICES
The Company's performance analysis and support services personnel perform a
variety of analytical and science-related support services under one contract.
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 systems data. The technical support rendered by the
Company includes real-time data acquisition, digital signal processing,
spacecraft operations, software development and systems applications, data
management, and data analysis.
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, 2001, the Company had no backlog of funding on existing
contracts for Old Dominion Systems. The Company's existing contract is the
indefinite delivery, indefinite quantity (IDIQ) type, which generally does 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 2002.
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.
COMPANY EMPLOYEES
As of January 29, 2002, the Company's two divisions employed a total of 40
persons, including two part-time employees, compared to 89 persons as of January
19, 2001. Of the Company's employees as of January 29, 2002, 34 worked in the
Company's Contact Center Solutions division and 6 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
7
marketing personnel, the Company anticipates that it will need to augment and/or
replace some of the sales and marketing personnel. The Company has not usually
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.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
The Company's business is subject to a number of risks, including the following:
IF WE FAIL TO GENERATE INCREASED REVENUES FROM OUR UNIQUE CONTACT CENTER
PRODUCTS IN THE NEAR TERM, OUR BUSINESS WILL BE MATERIALLY ADVERSELY AFFECTED
AND WE MAY NOT BE ABLE TO PAY ALL OF OUR EXPENSES.
We began to focus most of our resources on our uniQue contact center products
during fiscal 2001, but have not been able to generate the revenues from sales
of these products in the amounts or within the time frame we had expected. We
cannot provide assurance that our uniQue contact center products will generate
additional revenue in the near term. If we fail to generate increased revenues
from our uniQue contact center products in the near term or raise additional
financing, our business will be materially adversely affected and we may not be
able to pay all of our expenses in 2002.
WE WILL REQUIRE ADDITIONAL CAPITAL AND, IF ADEQUATE FUNDS ARE NOT AVAILABLE, WE
MAY NOT BE ABLE TO PAY ALL OF OUR EXPENSES.
We currently estimate that our current sources of funds will enable us to fund
our business as currently planned at least through April 2002. Thereafter, we
may need additional debt or equity financing in order to pay all of our
expenses. If adequate funds are not available to us, we believe, based on our
current expectations, that we may not be able to pay all of our expenses after
April 2002. Since 1999, we have substantially relied on TFX Equities, Inc. for
our financing needs. While we anticipate closing on an additional round of
funding of $500,000 in February 2002 with TFX Equities, we cannot assure you
that TFX Equities will provide us with necessary funds in the future. If we are
not able to acquire funds from TFX Equities or other third parties as needed, we
may be forced to find a buyer for the Company's business or discontinue
operations.
In addition, if we are unable to increase revenue of the products of our Contact
Center Solutions division as currently planned or if we need or choose to expend
more on sales and marketing or product development than currently anticipated we
may need to raise additional funds or to raise funds sooner than anticipated.
Our ability to obtain additional debt financing is limited by provisions of our
credit facility agreement with TFX Equities.
WE HAVE INCURRED SIGNIFICANT LOSSES IN RECENT YEARS AND WE MAY NOT ACHIEVE
PROFITABILITY.
We have not had a profit from operations for several years. We incurred a net
loss of $4.7 million for our 1999 fiscal year, a net loss of $475,000 for our
2000 fiscal year and a net loss of $3.2 million for our 2001 fiscal year. As of
October 31, 2001, the end of our 2001 fiscal year, we also had an accumulated
deficit of $20.2 million. In addition, we believe that our strategy to focus
exclusively on the operations of our Contact Center Solutions division may
continue to adversely affect our ability to reach operating profitability. We
anticipate that our expenses may exceed our total sales in fiscal 2002 and
possibly thereafter. As a result, we may continue to experience losses and
negative cash flow from operations, and we will need to seek debt or equity
financing in order to sustain operations until we reach profitability.
OUR TOTAL SALES MAY CONTINUE TO DECLINE SIGNIFICANTLY BECAUSE WE DO NOT EXPECT
OUR OLD DOMINION SYSTEMS DIVISION TO GENERATE ANY SIGNIFICANT SALES FOR US.
We have lost a significant source of sales with the change in policy regarding
contract labor positions by the Applied Physics Laboratory of John Hopkins
University, the principal customer of our Old Dominion Systems division. Through
fiscal 2001, a substantial portion of our total sales were generated by
performance analysis and technical and administrative support services through
our Old Dominion Systems division for the Applied Physics Laboratory, which now
performs most of these services internally. The Old Dominion Systems division
historically has provided a stable source of sales and this portion of our
business offset in part losses from the other portions of our business,
including the Contact Center Solutions division. We believe that sales generated
by our Old Dominion Systems division will continue to decrease significantly as
a result of the change in policy regarding contract labor positions by the
Applied Physics Laboratory. We expect that this loss of revenue, combined with
unexpectedly longer sales cycles and adverse market conditions experienced by
our Contact Center Solutions division, may cause our net revenue for future
periods to be significantly less than our net revenue from prior periods.
8
MOST OF OUR SALES PERSONNEL ARE NEW TO OUR COMPANY AND WE MAY CONTINUE TO
EXPERIENCE DECREASED SALES AS WE INTEGRATE AND TRAIN OUR NEW HIRES.
We have hired new sales personnel during the last year. It has taken time, and
it may take additional time, for our new sales people to be able to market and
sell our products effectively. This has reduced, and may continue to reduce, our
ability to increase our revenues.
THE DEVELOPMENT OF NEW PRODUCTS REQUIRES SIGNIFICANT EXPENDITURES, WHICH WE MAY
NOT HAVE, AND WE MAY NOT EXPERIENCE ANY BENEFITS FROM SUCH EXPENDITURES IF OUR
NEW PRODUCTS ARE NOT ACCEPTED IN THE MARKETPLACE.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, product life cycles and
customer demands. To keep pace with technological developments, evolving
industry standards and customer needs, we must enhance existing products and
develop new products. As a result of the complexities inherent in our
applications, major new products and product enhancements require long
development and testing periods and significant resources. We may not be
successful in developing, marketing and releasing new products or enhancements
that adequately meet the requirements of the marketplace and achieve any
significant degree of market acceptance. We also may not have sufficient funds
to undertake the research, development or marketing activities that we otherwise
determine are necessary to successfully sell our uniQue products. We have
experienced an unexpectedly long period of time seeking a significant degree of
market acceptance for our uniQue family of software products, which is our
primary product, and we cannot assure you that our uniQue products will gain
such market acceptance. If release dates of any future products or enhancements
are delayed for any reason, or if these products or enhancements fail to achieve
market acceptance when released, we may not generate any benefits from the time
and resources we have expended and may be forced to seek a buyer for our
business or discontinue operations. In addition, new products or enhancements by
our competitors may cause customers to defer or forego purchases of our
products, which could have a material adverse effect on our revenues.
WE FACE COMPETITIVE PRESSURES, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
The market for our interactive communications applications and software products
is highly competitive and we expect competition to increase in the future. We
may not be able to compete effectively against current and future competitors.
Currently, our competition comes from several different market segments,
including telecommunications equipment vendors, telephony platform developers,
stand alone point solutions and application providers. Because our industry is
evolving and is characterized by rapid technological change, it is difficult for
us to predict when new technologies or new competitors may be introduced into
our market. Some of our current and potential competitors have longer operating
histories, greater financial, technical, marketing and customer service
resources, greater name recognition and a larger customer base than we do. As a
result, these competitors may be able to respond to new or emerging technologies
and changes in customer requirements faster and more effectively than we can, or
to devote greater resources to the development, promotion and sale of products
than we can. Increased competition or other competitive pressures may result in
price reductions, reduced margins or loss of revenues, which could have a
material adverse effect on our business, financial condition and operating
results.
FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH DISTRIBUTORS,
RESELLERS, TECHNOLOGY VENDORS AND SYSTEMS INTEGRATORS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We seek to establish strategic relationships with distributors, resellers and
technology vendors that we believe are important to our sales, marketing and
support activities and to the implementation of our products. We believe that
relationships with these organizations will expand the distribution of our
products and provide us with technical assistance for our product development
efforts. Our current and potential customers also may rely on third-party system
integrators to develop, deploy or manage our uniQue applications. If we do not
establish and maintain relationships with these companies or if these companies
do not devote the resources necessary to help sell or develop our products, our
business, operating results and financial condition would be adversely affected.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, WHICH COULD
ALLOW THIRD PARTIES TO COPY OR OTHERWISE OBTAIN AND USE OUR TECHNOLOGY WITHOUT
AUTHORIZATION.
We regard our software products as proprietary. In an effort to protect our
proprietary rights, we rely primarily on a combination of copyright, patent,
trademark and trade secret laws, as well as confidentiality agreements with
employees, distributors and customers. The current copyright, patent, trademark
and trade secret laws provide only limited protection of our proprietary rights.
In addition, we have not signed agreements containing these types of protective
provisions with every employee, distributor and customer, and the contractual
provisions that are in place and the protection they provide vary and may not
provide us with adequate protection in all circumstances. Further, although we
have two patents pending, we do not yet have patent protection for our software.
Because our means of protecting our proprietary rights may not be adequate, it
may be possible for a third party to copy certain aspects of our software or
9
hardware or obtain information which we regard as a trade secret. Unauthorized
copying, use or reverse engineering of our products could materially harm our
business.
OUR LARGEST SHAREHOLDER HAS THE ABILITY TO APPOINT MEMBERS TO OUR BOARD OF
DIRECTORS AND TO CONTROL MAJOR DECISIONS INVOLVING OUR BUSINESS AND ASSETS.
Our largest shareholder, TFX Equities, Inc., owns approximately 37.5% of our
outstanding common stock as of October 31, 2001 and has the ability to acquire
approximately up to an additional 15% of our common stock upon the conversion of
convertible subordinated promissory notes it holds and upon exercise of Series A
convertible preferred stock it is entitled acquire as of that date. In addition,
we are obligated to take all actions within our control to cause two designees
of TFX Equities to be nominated for election to our board of directors and to
cause one additional director that is acceptable to TFX Equities to be appointed
to our board of directors. Messrs. John D. Sickler, Randall P. Gaboriault and W.
Joseph Brookman currently serve on our board of directors pursuant to these
provisions. We also are not permitted to engage in specified business
combinations, amend our organizational documents, issue any securities other
than pursuant to our option plans or in the ordinary course of our business,
guarantee or assume specified liabilities of third parties, pay dividends,
change the size of our board of directors or engage in other specified corporate
activities without the prior consent of TFX Equities. These provisions generally
will terminate when TFX Equities ceases to own at least 15% of our outstanding
common stock or, if later, when the obligations of TFX Equities under our credit
facility agreement have terminated and none of the convertible promissory notes
remain outstanding. As a result of the foregoing, TFX Equities has the right to
control most major decisions involving our company or its assets. These rights
of TFX Equities also may render more difficult or discourage a takeover attempt
even if a change of control of our company would be beneficial to the interests
of our stockholders generally.
We may seek additional debt or equity financing from TFX Equities in the future,
although there is no guarantee of such funding. If we were to obtain additional
debt or equity financing from TFX Equities, its ability to control decisions
involving our company or its assets could increase.
INFRINGEMENT CLAIMS COULD ADVERSELY AFFECT US.
A third party could claim that our technology infringes its proprietary rights.
As the number of software products in our target markets increases and the
functionality of these products overlap, we believe that software developers may
face infringement claims. For example, various patent rights have been asserted
against interfaces between PBX telephone hardware and computer network systems.
Claims of infringement of these patents could have a materially adverse affect
on us if these patents were interpreted broadly. Infringement claims, even if
without merit, can be time consuming and expensive to defend. A third party
asserting infringement claims against us or our customers with respect to our
current or future products may require us to enter into costly royalty
arrangements or litigation, which could cost us extensive time and financial
resources.
OUR PRODUCTS COULD HAVE ERRORS OR DEFECTS, WHICH COULD REDUCE OUR SALES OR
INCREASE COSTS.
Our products, including components supplied by others, may contain errors or
defects, especially when first introduced or when new versions are released.
Errors in new products or releases could be found after commencement of
commercial shipments, which could result in additional development costs,
diversion of technical and other resources, product liability claims against us,
or the loss of credibility with current or future customers. This in turn could
result in a loss of revenue or delay in market acceptance of our products. Our
customers generally use our products together with products from other vendors.
When problems occur, it may be difficult to identify the source of the problem.
As a result, even if these problems are not caused by our products, they may
cause us to incur significant warranty and repair costs, divert the attention of
our engineering personnel and cause significant customer relations problems.
OUR QUARTERLY OPERATING RESULTS HAVE VARIED SIGNIFICANTLY.
Our sales and operating results may fluctuate significantly because of a number
of factors, many of which are outside of our control. These factors include:
o level of product and price competition;
o length of our sales cycle and customer purchasing patterns;
o delay or deferral of customer implementation of our products;
o success or lack of success in expanding our customer support
organization, direct sales force and indirect distribution channels;
o our ability to develop new products and control costs;
10
o timing of new product introductions and product enhancements;
o activities of and acquisitions by competitors; and
o timing of new hires and allocation of our resources.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. Based upon the preceding factors,
we may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations in any particular period. These fluctuations will
make period-to-period comparisons of our financial condition less meaningful and
could have a material adverse effect on our business, results of operations and
financial condition.
WE HAVE A LENGTHY PRODUCT SALES CYCLE, WHICH HAS CONTRIBUTED, AND MAY CONTINUE
TO CONTRIBUTE, TO THE QUARTER TO QUARTER VARIABILITY OF OUR REVENUES AND
OPERATING RESULTS.
We have generally experienced a lengthy product sales cycle, averaging
approximately three months to as much as one year. Due to the unique
characteristics of our products, our prospective customers' decisions to
purchase our products often require significant investment and executive level
decision making. We also believe that many companies currently are not aware of
the benefits of the products we provide. For this reason, we must provide a
significant level of education to prospective customers about the use and
benefits of our products, and potential customers may take many months to make
purchasing decisions. The lengthy sales cycle is one of the factors that has
caused, and may in the future continue to cause, our software revenues and
operating results to vary significantly from quarter to quarter. Also, since the
risk of not closing on a sale increases with the length of the product sale
cycle, the lengthy sales cycle effectively could cause a decline in our revenues
and operating results.
The length of the sales cycle for customer orders depends on a number of other
factors over which we have little or no control, including:
o customers' budgetary constraints;
o the timing of customers' budget cycles;
o concerns by customers about the introduction of new products by us
or our competitors; and
o potential downturns in general economic conditions, including
reduction in demand for our products and services.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT OUR
STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Future sales of substantial amounts of our common stock in the public market, or
the perception that such sales could occur, could adversely affect prevailing
market prices for our common stock and could impair our ability to raise capital
through future offerings of equity securities. TFX Equities has demand and
piggyback registration rights which entitle TFX Equities, with limited
exceptions, to have us register up to the maximum of 3,750,000 shares of common
stock that are issuable upon exercise of outstanding convertible promissory
notes or other rights of TFX Equities to purchase shares of our common stock. If
we borrow additional funds from TFX Equities, we may issue additional securities
subject to registration rights.
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(TM) 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.
11
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. In December 2001, the Company subleased approximately one quarter of the
building as an expense reduction measure. The sublease has an initial term of
two years, renewable thereafter annually.
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. To date, 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.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The common stock is presently traded on the Over The Counter Bulletin Board
Market under the symbol "MLOG." The following table sets forth for the last two
years the high and low sales prices per share of the common stock as reported by
the Nasdaq SmallCap Market or the Over The Counter Bulletin Board Market:
High Low
---- ---
Fiscal Year Ended October 31, 2001
First Quarter $1.25 $ .44
Second Quarter .94 .47
Third Quarter .95 .20
Fourth Quarter .43 .15
Fiscal Year Ended October 31, 2000
First Quarter $1.91 $1.06
Second Quarter 4.13 1.22
Third Quarter 2.13 1.06
Fourth Quarter 1.50 0.75
On January 19, 2002, there were approximately 210 holders of record of the
common stock. This number does not reflect the number of individuals or
institutional investors holding stock in nominee name through banks, brokerage
firms, and others.
On July 23, 2001, the Company was notified by the Nasdaq SmallCap Market System
that it had failed to maintain the standard of a minimum bid price of $1.00 per
share of common stock and that it had failed to meet the $2,000,000 minimum net
tangible assets requirement. Accordingly, Nasdaq delisted the Company's
securities from the Nasdaq Stock Market, effective at the open of business on
July 24, 2001.
DIVIDEND POLICY
The Company has not paid any cash dividends in over ten years and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
Microlog. The selected historical income statement data for each of the fiscal
years ended October 31, 2001, 2000, and 1999 and the selected historical balance
sheet data for the years then ended have been derived from the consolidated
financial statements that have been audited by Grant Thornton LLP, independent
accountants. The selected historical income statement data for each of the
fiscal years ended October 31, 1998 and 1997 and the selected historical balance
sheet data for the years then ended have been derived from the consolidated
financial statements that have been audited by Pricewaterhouse-Coopers LLP,
independent accountants.
13
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Sales $ 7,201 $ 14,527 $ 18,023 $ 26,457 $ 31,768
(Loss) income from operations (3,142) (540) (4,754) (6,430) 2,374
Net (loss) income (3,175) (475) (4,693) (8,641) 3,732
Net (loss) income per share:
Basic $ (0.45) $ (0.07) $ (1.02) $ (2.02) $ 0.89
Diluted $ (0.45) $ (0.07) $ (1.02) $ (2.02) $ 0.82
BALANCE SHEET DATA (IN THOUSANDS):
OCTOBER 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Working capital (deficit) $(1,067) $ 1,696 $ 1,818 $ 1,953 $ 6,671
Total assets 1,599 4,718 6,426 8,560 17,055
Long-term obligations, net
of current maturities 392 229 -- 74 142
Stockholders' equity (deficit) (601) 2,443 2,804 3,370 11,888
- -------------------------------------------------------------------------------------------------------------------
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Unless otherwise indicated, all dollar amounts have been rounded to the nearest
hundred thousand.)
PERIOD-TO-PERIOD
PERCENTAGE
PERCENTAGE OF SALES CHANGES
YEAR ENDED OCTOBER 31, 2000 1999
------------------------------ to to
2001 2000 1999 2001 2000
------------------------------- --------------------
Sales:
Contact Center Solutions 70.4% 50.8% 43.8% (31.4%) (6.5%)
Old Dominion Systems 29.6% 49.2% 56.2% (70.0%) (29.5%)
- ------------------------------------------------------------------------------------ --------------------
Total sales 100.0% 100.0% 100.0% (50.4%) (19.4%)
- ------------------------------------------------------------------------------------ --------------------
Costs and expenses:
Cost of sales 67.0% 69.1% 74.6% (51.9%) (25.4%)
Selling, general and administrative 56.5% 25.3% 32.0% 10.6% (36.2%)
Research and development 19.1% 9.3% 15.9% 1.9% (53.0%)
Restructuring 1.0% 0.0% 3.9% 100.0% (100.0%)
- ------------------------------------------------------------------------------------ --------------------
Total costs and expenses 143.6% 103.7% 126.4% (31.4%) (33.9%)
- ------------------------------------------------------------------------------------ --------------------
Investment and other income
(expense), net (0.5%) 0.0% 0.4% (483.6%) (85.5%)
- ------------------------------------------------------------------------------------ --------------------
Loss before income taxes (44.1%) (3.7%) (26.0%) 497.3% (88.7%)
- ------------------------------------------------------------------------------------ --------------------
Benefit (provision) for income taxes 0.0% 0.4% 0.0% (100.0%) 0.0%
- ------------------------------------------------------------------------------------ --------------------
Net loss (44.1%) (3.3%) (26.0%) 567.6% (89.9%)
- ------------------------------------------------------------------------------------ --------------------
RESULTS OF OPERATIONS
A SUMMARY OF INFORMATION ABOUT THE COMPANY'S OPERATIONS BY BUSINESS SEGMENT IS
AS FOLLOWS (IN THOUSANDS):
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Sales:
Contact Center Solutions $5,068 $7,383 $7,896
Old Dominion Systems 2,133 7,144 10,127
- -----------------------------------------------------------------------------------------------------------
Total sales $7,201 $14,527 $18,023
- -----------------------------------------------------------------------------------------------------------
(Loss) income from operations:
Contact Center Solutions ($3,547) ($947) ($5,245)
Old Dominion Systems 405 407 491
- -----------------------------------------------------------------------------------------------------------
(Loss) income from operations ($3,142) ($540) ($4,754)
- -----------------------------------------------------------------------------------------------------------
The Company had a net loss of $3.2 million (($0.45) per basic and diluted share)
for the fiscal year ended October 31, 2001 compared to a net loss of $475,000
(($0.07) per basic and diluted share) from operations for the fiscal year ended
October 31, 2000 and a net loss of $4.7 million (($1.02) per basic and diluted
share) for the fiscal year ended October 31, 1999.
15
The Company's net loss for the year ended October 31, 2001 was attributable to
continuing decreases in sales in both its Contact Center Solutions division and
its Old Dominion Systems Division. The decrease in Old Dominion Systems sales
was anticipated as this division's primary customer has reduced its requirements
from outside vendors over the last two years. The Company's cost reductions in
fiscal 2001 lagged the reduction in sales giving rise to the net loss for the
period. The net loss of $475,000 for fiscal 2000 was attributable to
insufficient sales of approximately $1.0 million in the Contact Center Solutions
division, of which $400,000 was offset by net income generated from the Old
Dominion Systems division. In fiscal 2000, as a result of the restructuring
activities and other cost reduction actions taken in fiscal year 1999, operating
costs of the Contact Center Solutions division was reduced by approximately $3.6
million.
Continued operating losses have severely impacted the Company's financial
position and liquidity. At October 31, 2001, the Company has a working capital
deficit of $1,067,000 and a stockholders' deficit of $601,000. Funding for
operations in fiscal 2001 was provided by funds raised in prior years from a
private placement, collections of accounts receivable, and amounts drawn from
Convertible Subordinate Notes made available to the Company by a major
shareholder who also has representation on the Board of Directors of the
Company.
Management believes it has taken several steps necessary to improve its
operations and enhance its ability to meet its cash flow needs through October
31, 2002.
To lower its breakeven point for generating cash flow from operations,
management took several measures to reduce costs in fiscal 2001 and the
beginning of fiscal 2002, including a reduction of personnel in its Contact
Center Solutions business and administrative and sales staff from a total of 63
at October 31, 2000 to 36 at October 31, 2001 and 34 as of January 24, 2002.
Management believes that its current complement of personnel is sufficient to
carryout its business plan for the foreseeable future. In addition, the Company
recently reconfigured its headquarters office space and successfully sublet a
portion of that space. This sublease will save the Company approximately $80,000
in fiscal 2002 and $95,000 in fiscal 2003. Altogether, it is estimated that cost
containment initiatives will result in reductions of selling, general and
administrative expense by as much as $1.2 million in fiscal 2002 compared to
fiscal 2001, and research and development expense by approximately $600,000 in
fiscal 2002 compared to fiscal 2001 expenditures. The Company also anticipates
in improvements in gross margins in fiscal 2002 from adjustments to its work
force to better align its capacity with current demand for its products,
however, the financial impact of such reductions is more difficult estimate due
to effect of changes in sales volume.
While the Company's sales cycle has increased in recent years from approximately
six to seven months to as much as ten months to a year, management believes,
based in part on orders received for its products and services since October 31,
2001, demand for its products and services will be sufficient to begin
experiencing increases in Contact Center Solutions sales in fiscal 2002 over
prior year levels. The Company has targeted four principal markets for its
products and services; Federal and State governments, Health Care, Utilities,
and Gaming (e.g. Lottery Boards and Off Track Betting). Management believes
these sectors are relatively well insulated to the negative effects of the
current downturn in the United States economy. In addition, based on past sales
experience and ongoing interest shown in the Company's products, each has a
robust need for integrated contact center solutions such as those offered by the
Company. Lastly, the Company believes it's uniQue product line is well suited to
meet the growing demand for solutions which integrate information from multiple
existing platforms and databases, mitigating the need for potential customers to
abandon legacy systems which have been invested in heavily.
To supplement the operational measures taken, since October 31, 2001, the
Company has drawn down on the remaining $300,000 of funds made available under a
credit facility entered into in September 2001 with a major shareholder which
calls for the issuance of Subordinated Convertible Notes and Detachable Warrants
to be issued when funds are provided to the Company. In addition, in January
2002, the Company signed a term sheet with the same major shareholder for
additional Subordinated Convertible Notes and Detachable Warrants in the
aggregate amount of $500,000 with terms similar to those in the previous credit
facility. While the funding called for in the term sheet is subject to execution
of definitive agreements, management believes based on discussions with the
shareholder that definitive transaction documents will be executed in early
February 2002.
See Section below regarding factors that may effect future results of
operations.
SALES
Sales for fiscal 2001 decreased $7.3 million (50%), from $14.5 million in fiscal
2000 to $7.2 million in fiscal 2001. The decrease in fiscal 2001 was due to a
decrease in Contact Center Solutions sales of $2.3 million and a decrease in Old
Dominion Systems sales of $5.0 million. Sales of $14.5 million for fiscal 2000
decreased $3.5 million (19%) from sales of $18 million in fiscal 1999. The
decrease in fiscal 2000 was due to a decrease in Contact Center Solutions sales
of $0.5 million and a decrease in Old Dominion Systems sales of $3.0 million.
16
CONTACT CENTER SOLUTIONS SALES
Contact Center Solutions sales decreased $2.3 million (31%) in fiscal 2001, from
$7.4 million in fiscal 2000 to $5.1 million in fiscal 2001. The decrease was
primarily attributable to the restructuring of the Contract Center Solutions
Division, resulting in major delays in the development of the sales pipeline
along with a diminishing backlog.
In fiscal 2001, sales to the Company's ten largest customers accounted for 49%
of Contact Center Solutions sales of which two were in the government sector and
one was in the commercial sector. In fiscal 2000, sales to the Company's 10
largest customers accounted for 66% of Contact Center Solutions sales. Of the
Company's three largest customers in fiscal 2000, two were government and one
was in the commercial sector.
Sales to international customers in fiscal 2001 were $.1 million compared to $.3
Million in fiscal 2000.
OLD DOMINION SYSTEMS SALES
Sales from the Old Dominion Systems division in fiscal 2001 decreased $5.0
million (70%), from $7.1 million in fiscal 2000 to $2.1 million in fiscal 2001.
Sales from the Old Dominion Systems division in fiscal 2000 decreased $3 million
(30%), from $10.1 million in fiscal 1999.
The Old Dominion Systems division 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 Old Dominion Systems
division did not generate significant revenue beginning during fiscal 2001 and
is not expected to in the future.
As of October 31, 2001, the Company had no backlog of funding on existing
contracts for Old Dominion Systems. The Company's existing Old Dominion Systems
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 has two Old Dominion Systems contracts, each of which is
with APL. These agreements, which expire in fiscal 2002, are not expected to
generate significant revenue.
CONTACT CENTER SOLUTIONS COSTS AND EXPENSES
Cost of sales of products for Contact Center Solutions for fiscal 2001was $1.2
million or 92% of sales versus $2.6 million, or 85% of sales for fiscal 2000.
The decreases in cost of sales, in dollar amount, for fiscal years 2001 was
primarily attributable to reduced product sales. The increase in component costs
resulted in lower product margins.
Cost of sales of services for Contact Center Solutions was $3.6 million, or 61%
of sales of services, for fiscal 2001 compared to $1.4 million, or 33% of sales
of services, for fiscal 2000. The decrease in margin is due to higher
CTAC/Training and service operation costs in addition to unutilized labor costs
incurred prior to the restructuring.
Selling, general and administrative and marketing expenses for Contact Center
Solutions were $3.8 million, or 75% of Contact Solutions sales, for fiscal 2001
compared to $2.9 million, or 39% of sales, for fiscal 2000. The increase in
fiscal 2001 dollars was primarily attributable to first half increases in
selling, general and administrative expenses. As sales did not materialize in
the second half, the company invoked cost cutting measures to reduce these
costs, although effect of these cost cutting measures did not materially affect
results for the entire fiscal year.
Research and development expenses for Contact Center Solutions reflect costs
associated with the development of applicable software and product enhancements
for the software products of the Contact Center solutions division. The Company
believes that the process of establishing technological feasibility with its new
products is completed approximately upon release of the products to its
customers. Accordingly, the Company does not anticipate capitalizing research
and development costs. Research and development expenses were $1.4 million, or
27% of Contact Solutions sales, for fiscal 2001 compared to $1.4 million, or 18%
of Contact Center Solutions sales, for fiscal 2000.
Research and development expenses for 2001 were focused on the broader uniQue
family, with incremental investments in the uniQue IVR product. uniQue 2.2.0,
which adds significant security enhancements, collaboration options, and
integration capabilities, was released in December 2000. Subsequent point
function releases 2.2.1, 2.2.2, 2.2.3, 2.2.4, and 2.2.4.1 were released in
January, February, March, June, and August 2001, respectively, with additional
capabilities in form collaboration, reporting enhancements, usability,
administration, and voice messages as a contact type. uniQue IVR enhancements
were in the areas of specific custom and re-usable application extensions for
individual customers plus additional voice recognition and speech synthesis
capabilities. The Company, in providing special features,
17
application development, and system integration services to 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.
OLD DOMINION SYSTEMS COSTS AND EXPENSES
Cost of sales of services for Old Dominion Systems was $1.4 million, or 67% of
sales of services, for fiscal 2001; $6.0 million, or 84% of sales of services,
for fiscal 2000; and $8.7 million, or 86% of sales of services, for fiscal 1999.
These decreases, in dollar amount, were primarily attributable to reduced
services sales.
Selling, general and administrative costs for Old Dominion Systems were $0.3
million, or 14% of sales of services, for fiscal 2001; $0.8 million, or 11% of
sales of services, for fiscal 2000; and $0.9 million or 9% of sales of services,
for fiscal 1999. These increases, as a percentage of sales, were primarily due
to fixed costs that do not vary directly with sales volume. As a result,
declines in sales of services did not result in similar declines in costs.
RESTRUCTURING COSTS
In fiscal 2001, the Company restructured its Contact Center Solutions operations
in order to bring expenses more in line with anticipated revenues. The Company
incurred restructuring charges of $69,000 for severance and benefits and other
costs associated with the reduction of employees, including temporary employees
and contractors. During fiscal 2002, payments have been made on a monthly basis
and the entire balance is expected to be paid by the end of February 2002.
INVESTMENT AND OTHER INCOME, NET
The Company had net other expenses of $29,000 for fiscal 2001, compared to net
investment and other income of $9,000 for fiscal 2000. The decrease in fiscal
2001 was primarily attributable to higher interest expenses.
PROVISION FOR INCOME TAXES
There was no provision for income taxes recorded in fiscal 2001 or in fiscal
2000. There were no income taxes (refundable) or payable in fiscal 2001. Income
taxes (refundable) payable of $(56,000) in fiscal 2000 relate to state income
taxes, and the alternative minimum tax for Federal income tax.
The Company has exhausted its ability to carry losses back for income tax
refunds. Net operating loss and tax credit carryforwards for income tax
reporting purposes of approximately $22 million and $0.5 million, respectively,
will be available to offset taxes generated from future taxable income through
2021. If certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of the carryforwards that can
be utilized.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This section (Management's Discussion and Analysis of Financial Condition and
Results of Operations) contains 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 its expectations in
such forward-looking statements will turn out to be correct. Some important
factors that could cause its actual results to be materially different from our
expectations include those discussed under the caption "Factors That May Affect
Future Results of Operations."
18
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss of $3.2 million for fiscal 2001 and has an
accumulated deficit of $20.2 million at October 31, 2001. Key to the Company's
future liquidity position is its ability to generate sufficient cash flows from
internal and external sources to meet its operating needs. In order to help with
its liquidity requirements, management restructured operations in fiscal 2000 to
reduce operating expenses to levels commensurate with revenues. Although the Old
Dominion Systems division has historically provided a stable source of sales,
profits, and cash flows, the Company believes that this division will not
generate significant future sales. Accordingly, the Company must replace the
lost profits, but not necessarily the sales, of the Old Dominion Systems
division with additional Contact Center Solutions sales.
As previously discussed, cost containment and reduction efforts, business
development initiatives and additional funds from TFX Equities will provide
sufficient funds to enable the Company to operate its business as currently
planned through the end of the next fiscal year. In the event that the Contact
Center Solutions division does not generate expected sales, or if the Company's
plans or assumptions change or prove to be inaccurate, the foregoing sources of
funds may prove to be insufficient to fund its currently planned operations, in
which case the Company would be required to seek and obtain additional capital
through other means, including equity or debt financing. The Company can give no
assurance that it will be able to generate sufficient cash flow from operations,
through planned or expected sales by the Contact Center Solutions division, or
that additional financing arrangements will be available when needed or, if
available, that they can be concluded on acceptable terms.
The company has a working capital deficit of $1.1 million as of October 31,
2001, compared to positive working capital of $1.7 million as of October 31,
2000. The decrease was primarily attributable to the shortfall in sales revenue
which ultimately resulted in reduced receivables and cash flow. Cash and cash
equivalents were reduced by $1.4 million, accounts receivable decreased by $1.3
million and other current liabilities were reduced overall by $0.2 million, of
which accrued compensation decreased by $0.6 million.
Accounts receivable as of October 31, 2001 were $0.3 million, compared to $1.6
million as of October 31, 2000. The decrease was primarily attributable to
reduced sales in the Old Dominion Systems Division and Contact Center Solutions
division in the fourth quarter.
Fixed assets as of October 31, 2001 were $0.7 million, compared to $0.8 million
as of October 31, 2000. The net decrease resulted from depreciation expense of
$0.4 million, offset by $0.3 million in asset purchases. Asset additions in
fiscal 2001 consisted primarily of leasehold improvements to the Company's
facilities.
In January 2001, the Company renewed its revolving line-of-credit facility with
the lender which allowed the Company to borrow up to 75% of its eligible
receivables to a maximum of $1,000,000, subject to the right of the bank to make
loans only at its discretion. Interest charges were equal to the bank's prime
rate plus 2.0%. In addition, the credit facility contained a minimum monthly
interest charge, a monthly collateral fee, and an up-front commitment fee of
$35,000. The line subjected the Company to various financial and non-financial
covenants. The line was secured by all of the Company's assets. The Company
cancelled the agreement with Silicon Valley Bank, effective October 10, 2001. On
September 11, 2001, the company entered into agreements for the issuance of
$750,000 of 12% subordinate convertible promissory notes with warrants to
purchase up to one hundred (100) shares of Series A preferred stock in exchange
for up to $750,000 of financing from TFX Equities Incorporation. In October
2001, the company borrowed a total of $450,000 using the proceeds to payoff an
existing outstanding debt of $200,000. In January of 2002, the company accepted
a term sheet from TFX Equities for an additional $500,000 debenture. Where the
additional funding is subject to execution of the definitive documents, closing
is anticipated to occur in February 2002. The company expects to use said funds
to facilitate cash flow and to help continue operations through FY2002. As of
January 29, 2002 the company has approximately $160,000 in cash.
QUARTERLY RESULTS
Note 15 of the Notes to Consolidated Financial Statements of the Company
contained in this Annual Report presents unaudited quarterly operating results
for the Company's last eight fiscal quarters. The Company believes that this
unaudited information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the selected
quarterly information when read in conjunction with the Consolidated Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any subsequent period.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. The Company cancelled its line of credit
with Silicon Valley Bank in 2001 and is therefore no longer subject to interest
rate risks associated with the credit facility. However, the company has entered
into Subordinated Convertible Note Agreements, which carry fixed rates of
interest at 12% annually. To the extent market rates of interest decrease
relative to the stated rates in its notes, the value of this note to the company
decreases. Conversely, if market interest rates rise relative to the stated rate
in the notes, the value of the notes increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements, page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company engages Grant Thornton LLP as its independent accountants. For the
years ended October 31, 2001 and 2000, there were no changes or disagreements
with said accountants regarding accounting matters and/or financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information responsive to this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 2002 annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 2002 annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 2002 annual meeting of
shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item is incorporated herein by reference to the
Company's definitive proxy statement for the 2002 annual meeting of
shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company, including
notes thereto, appear on pages F-2 through F-18 of this report and are
incorporated by reference in Part II, Item 8.
Report of Independent Accountants
Consolidated Balance Sheets as of October 31, 2001, and 2000
Consolidated Statements of Operations for the fiscal years ended October
31, 2001, 2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended October 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the fiscal years ended October
31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
20
(a)(2) Financial Statement Schedule
Unaudited supplementary data entitled "Selected Quarterly Financial Data
(unaudited)" is incorporated by reference in Part II, Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 15).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages S-1 and S-2:
S-1 Schedule II Valuation and Qualifying Accounts and Reserves
S-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.
During the fourth quarter of fiscal 2001, the Company filed a Current Report on
Form 8-K on October 3, 2001 reporting that it had entered into a credit facility
agreement with TFX Equities.
(c) Exhibits.
The following exhibits are either filed with this Form 10-K or are incorporated
by reference. Our Securities Exchange Act file number is 0-14880.
21
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of Registrant, as amended 1/
-
3.2 By-laws of Registrant, as amended 2/
-
4.1 Specimen Stock Certificate 2/
-
10.1 Microlog Corporation Medical Reimbursement Plan 3/
-
10.2 Microlog Corporation 1989 Non-Employee Director Non-Qualified
Stock Option Plan 4/
-
10.3 Microlog Corporation 1995 Employee Stock Option Plan 5/
-
10.4 Sub-contracting Agreement with Aspect Telecommunications
Corporation 6/
-
10.5 Sub-contracting Agreement with Applied Physics Laboratory 6/
-
10.6 Security Agreement, dated July 11, 2001, between Microlog
Corporation and TFX Equities Incorporated.7/
-
10.7 Security Agreement, dated July 11, 2001, between Microlog
Corporation of Maryland and TFX Equities Incorporated.7/
-
10.8 Credit Facility Agreement, dated as of September 25, 2001,
among Microlog Corporation, Microlog Corporation of
Maryland and TFX Equities Incorporated.7/
-
10.9 Form of Subordinated Convertible Note of Microlog Corporation
and Microlog Corporation of Maryland.7/
-
10.10 Form of Warrant to Purchase Series A Convertible Preferred
Stock of Microlog Corporation. 7/
-
22 Subsidiaries of the Company 8/
-
23.1 Consent of Grant Thornton LLP 8/
-
- --------
1/ Filed as Exhibit 99.6, respectively, to Current Report on Form 8-K, dated
- - October 3, 2001, and incorporated herein by reference.
2/ Filed as Exhibits 3.2 and 4.1, respectively, to Registration Statement
- - on Form S-1, File No. 33-31710, and incorporated herein by reference.
3/ 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.
4/ Filed as Exhibit 4.1 to Registration Statement on Form S-8, File No.
- - 333-69025, and incorporated herein by reference.
5/ Filed as Exhibit 4.1 to Registration Statement on Form S-8, File No.
- - 333-84375, and incorporated herein by reference.
6/ 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.
7/ Filed as Exhibits 99.1, 99.2, 99.3, 99.4 and 99.5, respectively, to Current
Report on Form 8-K, dated October 3, 2001, and incorporated herein by
reference.
8/ Filed herewith.
- -
22
INTENTIONALLY LEFT BLANK
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................................................F-2
Consolidated Balance Sheets as of October 31, 2001, and 2000.............................................F-3
Consolidated Statements of Operations for the fiscal years ended October 31, 2001, 2000, and 1999........F-4
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended
October 31, 2001, 2000, and 1999.........................................................................F-5
Consolidated Statements of Cash Flows for the fiscal years ended October 31,
2001, 2000, and 1999.....................................................................................F-6
Notes to Consolidated Financial Statements...............................................................F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MICROLOG CORPORATION
We have audited the accompanying consolidated balance sheets of Microlog
Corporation as of October 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the three
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Microlog Corporation as of October
31, 2001 and 2000, and the results of its operations and its cash flows for the
three years then ended in conformity with accounting principles generally
accepted in the United States of America.
Grant Thornton LLP
Vienna, VA
December 7, 2001 (except for Note 16, as to which the date is January 17, 2002)
F-2
MICROLOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 31,
2001 2000
- ---------------------------------------------------------------------------------- ----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $170 $1,604
Receivables, net 291 1,628
Inventories, net 173 278
Other current assets 107 232
- ---------------------------------------------------------------------------------- ----------------- -----------------
Total current assets 741 3,742
Fixed assets, net 723 780
Other assets 135 196
- ---------------------------------------------------------------------------------- ----------------- -----------------
Total assets $1,599 $4,718
- ---------------------------------------------------------------------------------- ----------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of deferred compensation $125 $--
Accounts payable 582 398
Accrued compensation and related expenses 471 1,054
Deferred revenue and other credits 334 436
Other accrued expenses 296 158
- ---------------------------------------------------------------------------------- ----------------- -----------------
Total current liabilities 1,808 2,046
Notes payable, net of discount of $99 351 --
Deferred officers' compensation -- 132
Other liabilities 41 97
- ---------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities 2,200 2,275
- ---------------------------------------------------------------------------------- ----------------- -----------------
Stockholders' (deficit) equity:
Series A convertible preferred stock, $.01 par value,100 shares authorized, no -- --
shares issued and outstanding
Serial preferred stock, $.01 par value, 1,000,000 shares authorized, no shares --
issued and outstanding
Common stock, $.01 par value, 10,000,000 shares authorized,
7,708,808 and 7,668,808 shares issued and 7,106,938
and 7,066,938 outstanding 77 77
Capital in excess of par value 20,761 20,630
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (20,262) (17,087)
- ---------------------------------------------------------------------------------- ----------------- -----------------
Total stockholders' (deficit) equity (601) 2,443
- ---------------------------------------------------------------------------------- ----------------- -----------------
Total liabilities and stockholders' equity $1,599 $4,718
- ---------------------------------------------------------------------------------- ----------------- -----------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
-------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Sales:
Products $1,279 $3,097 $3,646
Services 5,922 11,430 14,377
- ---------------------------------------------------------------------------------------------------------
Total sales $7,201 $14,527 $18,023
- ---------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of products $1,198 $2,623 $3,064
Cost of services 3,630 7,413 10,382
Selling, general and administrative 4,071 3,681 5,768
Research and development 1,375 1,350 2,870
Restructuring 69 -- 693
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses $ 10,343 $ 15,067 $ 22,777
- ---------------------------------------------------------------------------------------------------------
Loss from operations (3,142) (540) (4,754)
Investment income 34 93 35
Interest expense (38) (26) (71)
Other (expense) income, net (29) (58) 97
- ---------------------------------------------------------------------------------------------------------
Loss before income taxes $ (3,175) $ (531) $ (4,693)
Benefit for income taxes -- 56 -
- ---------------------------------------------------------------------------------------------------------
Net loss ($3,175) ($475) ($4,693)
- ---------------------------------------------------------------------------------------------------------
Net loss per share:
Basic ($0.45) ($0.07) ($1.02)
Diluted ($0.45) ($0.07) ($1.02)
- ---------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CAPITAL IN
COMMON STOCK EXCESS OF TREASURY STOCK ACCUMULATED
SHARES PAR VALUE PAR VALUE SHARES COST DEFICIT TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1998 4,889 49 16,417 602 (1,177) (11,919) 3,370
Exercise of common stock options 20 -- 20 -- -- -- 20
Consulting expense funded
through stock options granted -- -- 155 -- -- -- 155
Issuance of common stock 2,667 27 3,925 -- -- -- 3,952
Net loss for the year ended
October 31, 1999 -- -- -- -- -- (4,693) (4,693)
- ----------------------------------------- --------- --------- -------------- ------- -------------- -------------- -------------
Balance as of October 31, 1999 7,576 76 20,517 602 (1,177) (16,612) 2,804
Exercise of common stock options 93 1 113 -- -- -- 114
Net loss for the year ended
October 31, 2000 -- -- -- -- -- (475) (475)
- ----------------------------------------- --------- --------- -------------- ------- -------------- -------------- -------------
Balance as of October 31, 2000 7,669 $77 $20,630 602 $(1,177) $(17,087) $2,443
Issuance of common stock to 40 -- 16 -- -- -- 16
Consultants
Accretion of Beneficial Conversion
Feature on Convertible Debt -- -- 11 -- -- -- 11
Issuance of Detachable warrants -- -- 104 -- -- -- 104
Net loss for the year ended
October 31, 2001 -- -- -- -- -- (3,175) (3,175)
- ----------------------------------------- --------- --------- -------------- ------- -------------- -------------- -------------
Balance as of October 31, 2001 7,709 $77 $20,761 602 $(1,177) $(20,262) $(601)
- ----------------------------------------- --------- --------- -------------- ------- -------------- -------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
---------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($3,175) ($475) ($4,693)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 391 361 579
Amortization of goodwill and licensing agreement -- 89 125
Loss on disposition of fixed assets -- -- 108
Amortization of debt discount 4 -- --
Provision for bad debt expense 565 10 --
Accretion of beneficial conversion feature 11 -- --
Provision for inventory reserves 49 140 309
Equity securities issued to consultants 16 -- 155
Changes in assets and liabilities:
Receivables 772 (483) 1,902
Inventories 56 (43) 188
Other assets 186 37 259
Accounts payable 184 10 (691)
Accrued compensation and related expenses (583) (911) (117)
Deferred revenue and other credits (101) (11) (195)
Deferred gain on sale of assets of Microlog Europe -- -- 140
Deferred gain on sale of building and land -- -- (217)
Other accrued expenses and accrued liabilities 82 (342) (322)
Deferred officers' compensation (7) (19) (98)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,550) (1,637) (2,568)
Cash flows from investing activities:
Purchases of fixed assets (334) (224) (283)
Proceeds from sale of fixed assets -- -- 32
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (334) (224) (251)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 450 -- --
Reduction in long-term debt -- (74) (68)
Net proceeds from issuance of common stock -- -- 3,952
Exercise of common stock options -- 114 20
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 450 40 3,904
- ------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,434) (1,821) 1,085
Cash and cash equivalents at beginning of year 1,604 3,425 2,340
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $170 $1,604 $3,425
- ------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND MAJOR CUSTOMERS
The accompanying consolidated financial statements include the accounts of
Microlog Corporation and its wholly-owned subsidiaries (collectively, the
"Company"). All intercompany transactions have been eliminated.
Microlog Corporation of Maryland, Microlog's operating subsidiary, has two
operating divisions: the Contact Center Solutions division and the Old Dominion
Systems division. The company's principal offices are located in Maryland. The
Contact Center Solutions division is a software development and systems
integration services company. This division builds custom self-service and
customer interaction software-based solutions that manage telephony and
Internet-based contacts, which allow the Company's customers to serve their
customers better through the use of technology in formal and informal corporate
contact centers and help desks. Professional 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.
The Old Dominion Systems division 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 significant source of sales and profits, the Company
believes that its Old Dominion Systems division will not generate significant
future revenue. Accordingly, the Company expects that its principal
opportunities for growth are in the Contact Center Solutions division and is
concentrating its resources in developing the Contact Center Solutions division.
The Company manages its business segments on the basis of the products and
services offered. The Company's two reportable segments are the Contact Center
Solutions division and the Old Dominion Systems division. The Company's
management evaluates segment performance on the basis of segment earnings which
includes an allocation of corporate general and administrative expenses.
F-7
A SUMMARY OF INFORMATION ABOUT THE COMPANY'S OPERATIONS BY BUSINESS SEGMENT IS
AS FOLLOWS (IN THOUSANDS):
YEAR ENDED OCTOBER 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Net sales:
Contact Center Solutions $ 5,068 $ 7,383 $ 7,896
Old Dominion Systems
2,133 7,144 10,127
- -----------------------------------------------------------------------------------------------
Net sales $ 7,201 $ 14,527 $ 18,023
- -----------------------------------------------------------------------------------------------
(Loss) income from operations:
Contact Center Solutions $ (3,547) $ (947) $ (5,245)
Old Dominion Systems
405 407 491
- -----------------------------------------------------------------------------------------------
Loss from operations $ (3,142) $ (540) $ (4,754)
- -----------------------------------------------------------------------------------------------
Identifiable assets:
Contact Center Solutions $ 1,598 $ 4,611 $ 6,174
Old Dominion Systems
4 107 252
- -----------------------------------------------------------------------------------------------
Identifiable assets $ 1,602 $ 4,718 $ 6,426
- -----------------------------------------------------------------------------------------------
Capital expenditures:
Contact Center Solutions $ 334 $ 224 $ 282
Old Dominion Systems -- --
1
- -----------------------------------------------------------------------------------------------
Capital expenditures $ 334 $ 224 $ 283
- -----------------------------------------------------------------------------------------------
Depreciation expense:
Contact Center Solutions $ 392 $ 358 $ 572
Old Dominion Systems --
3 7
Buildings for common use -- -- --
- -----------------------------------------------------------------------------------------------
Depreciation expense $ 392 $ 361 $ 579
- -----------------------------------------------------------------------------------------------
Approximately 28%, 32%, and 23% of the Company's consolidated sales for fiscal
years 2001, 2000, and 1999, respectively, involved the sale of Contact Center
Solutions to agencies of the United States Government.
Approximately 7%, 3%, and 11% of the Company's consolidated sales for fiscal
years 2001, 2000, and 1999, respectively, involved the sale of Contact Center
Solutions to one customer in the pharmaceutical industry.
Approximately 0%, 0%, and 6% of the Company's consolidated sales for fiscal
years 2001, 2000, and 1999, respectively, involved the sale of Contact Center
Solutions to foreign countries.
Approximately 30%, 49%, and 56% of the Company's consolidated sales for fiscal
years 2001, 2000, and 1999, respectively, involved Old Dominion Systems
subcontracts with prime contractors to the U.S. Navy. There are two contracts
remaining, which have been extended to two different dates in fiscal year 2002.
NOTE 2: SUMMARY OF ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities on the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates and assumptions.
F-8
REVENUE RECOGNITION
Sales of products are recognized at the time deliveries are made. The Company
generates software revenues from licensing the right to use its software
products and also generates service revenues from performing implementation and
installation services, ongoing maintenance, training services, and other
professional services.
Revenue from software license agreements is recognized in a manner consistent
with Statement of Position 97-2 "Software Revenue Recognition" where for
criteria must be met (upon delivery of the software if persuasive evidence of an
arrangement exists, sufficient vendor specific objective evidence exists to
support allocating the total fee to all elements of the arrangement, the fee is
fixed or determinable, and collection is probable). In addition, revenue is
recognized only when the software is considered functional to the user.
Ongoing maintenance contracts, which include software upgrades, are invoiced
separately and revenue is earned ratably over the term of the contract. Revenue
from implementation and installation services is recognized when the services
are completed. Revenue from training services and professional services is also
recognized when the services are completed.
Contract revenues are recognized on the percentage of completion basis for
fixed-price contracts. Revenues are recorded to the extent costs have been
incurred for cost-plus-fixed-fee contracts, including a percentage of the fixed
fee computed in accordance with the contract provisions. Revenues for time and
materials contracts are recognized at negotiated hourly rates as incurred and as
materials are delivered. Provisions for losses on contracts in progress are
provided when, in the opinion of management, such losses are anticipated.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with an original maturity of less
than three months to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of these items.
The fair value of the Company's Subordinated Convertible Notes Payable cannot be
estimated as this note is due to a related party and therefore comparable
markets or term are not available.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in
first-out method, or market.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated on a straight-line basis for
financial reporting purposes and accelerated methods for income tax purposes.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
WARRANTY RESERVE
Normal product warranty for service and repairs is generally provided for 90
days to two years, subsequent to delivery. Expenses incurred for warranties over
the past few fiscal years have been and are expected to be immaterial and
therefore a liability for warranty obligations has not been provided for.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation for employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees" and related
interpretations. Under APB No. 25, compensation cost is measured as the excess,
if any, of the market price of the Company's stock at the date of the grant over
the exercise price of the option granted. Compensation cost for stock
F-9
options, if any, is recognized ratably over the vesting period. The Company
provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation."
Transactions for which non-employees are issued equity instruments for goods or
services received are recorded by the Company based upon the fair value of the
goods or services received or the fair value of the equity instruments issued,
whichever is more reliably measured.
NET (LOSS) INCOME PER SHARE
The Company presents earnings per share information using SFAS No.128, "Earnings
per Share." This statement requires dual presentation of basic and diluted EPS.
Basic EPS is computed using the weighted average number of common shares
outstanding and diluted EPS is computed using the weighted average number of
common and dilutive common shares outstanding during the periods. The assumed
exercise, or conversion of the Company's outstanding stock options and
convertible debt are not included in calculation, as the effect would be
anti-dilutive.
NOTE 3: OPERATIONS
The Company's net loss for the year ended October 31, 2001 was attributable to
continuing decreases in sales in both its Contact Center Solutions division and
its Old Dominion Systems Division. The decrease in Old Dominion Systems sales
was anticipated as this division's primary customer has reduced its requirements
from outside vendors over the last two years. The Company's cost reductions in
fiscal 2001 lagged the reduction in sales giving rise to the net loss for the
period.
Continued operating losses have severely impacted the Company's financial
position and liquidity. At October 31, 2001, the Company has a working capital
deficit of $1,067,000 and a stockholders' deficit of $601,000. Funding for
operations in fiscal 2001 was provided by funds raised in prior years from a
private placement, collections of accounts receivable, and amounts drawn from
Convertible Subordinate Notes made available to the Company by a major
shareholder who also has representation on the Board of Directors of the
Company.
Management believes it has taken several steps necessary to improve its
operations and enhance its ability to meet its cash flow needs through October
31, 2002.
To lower its breakeven point for generating cash flow from operations,
management took several measures to reduce costs in fiscal 2001 and the
beginning of fiscal 2002, including a reduction of personnel in its Contact
Center Solutions business and administrative and sales staff from a total of 63
at October 31, 2000 to 36 at October 31, 2001 and 34 as of January 24, 2002.
Management believes that its current complement of personnel is sufficient to
carryout its business plan for the foreseeable future. In addition, the Company
recently reconfigured its headquarters office space and successfully sublet a
portion of that space. This sublease will save the Company approximately $80,000
in fiscal 2002 and $95,000 in fiscal 2003. Altogether, it is estimated that cost
containment initiatives will result in reductions of selling, general and
administrative expense by as much as $1.2 million in fiscal 2002 compared to
fiscal 2001, and research and development expense by approximately $600,000 in
fiscal 2002 compared to fiscal 2001 expenditures. The Company also anticipates
in improvements in gross margins in fiscal 2002 from adjustments to its work
force to better align its capacity with current demand for its products,
however, the financial impact of such reductions is more difficult estimate due
to effect of changes in sales volume.
While the Company's sales cycle has increased in recent years from approximately
six to seven months to as much as ten months to a year, management believes,
based in part on orders received for its products and services since October 31,
2001, demand for its products and services will be sufficient to begin
experiencing increases in Contact Center Solutions sales in fiscal 2002 over
prior year levels. The Company has targeted four principal markets for its
products and services; Federal and State governments, Health Care, Utilities,
and Gaming (e.g., Lottery Boards and Off Track Betting). Management believes
these sectors are relatively well insulated to the negative effects of the
current downturn in the United States economy. In addition, based on past sales
experience and ongoing interest shown in the Company's products, each has a
robust need for integrated contact center solutions such as those offered by the
Company. Lastly, the Company believes it's uniQue product line is well suited to
meet the growing demand for solutions which integrate information from multiple
existing platforms and databases, mitigating the need for potential customers to
abandon legacy systems which have been invested in heavily.
F-10
To supplement the operational measures taken, since October 31, 2001, the
Company has drawn down on the remaining $300,000 of funds made available under a
credit facility entered into in September 2001 with a major shareholder which
calls for the issuance of Subordinated Convertible Notes and Detachable Warrants
to be issued when funds are provided to the Company. In addition, in January
2002, the Company signed a term sheet with the same major shareholder for
additional Subordinated Convertible Notes and Detachable Warrants in the
aggregate amount of $500,000 with terms similar to those in the previous credit
facility. While the funding called for in the term sheet is subject to execution
of definitive agreements, management believes based on discussions with the
shareholder that definitive transaction documents will be executed in early
February 2002.
NOTE 4: RECEIVABLES
RECEIVABLES CONSIST OF THE FOLLOWING (IN THOUSANDS):
OCTOBER 31,
2001 2000
- -----------------------------------------------------------------------------------------------
Billed accounts receivable $337 $1,653
Accumulated unbilled costs and fees 4 100
- -----------------------------------------------------------------------------------------------
341 1,753
Less: Allowance for doubtful accounts (50) (125)
- -----------------------------------------------------------------------------------------------
$291 $1,628
- -----------------------------------------------------------------------------------------------
NOTE 5: INVENTORIES
INVENTORIES CONSIST OF THE FOLLOWING (IN THOUSANDS):
OCTOBER 31,
2001 2000
- -----------------------------------------------------------------------------------------------
Components and spare parts $477 $494
Work-in-process and finished goods 82 121
- -----------------------------------------------------------------------------------------------
559 615
Less: Reserve for obsolescence (386) (337)
- -----------------------------------------------------------------------------------------------
$173 $278
- -----------------------------------------------------------------------------------------------
NOTE 6: FIXED ASSETS
FIXED ASSETS CONSIST OF THE FOLLOWING (IN THOUSANDS):
OCTOBER 31,
2001 2000
- -----------------------------------------------------------------------------------------------
Office furniture and equipment $2,601 $2,373
Leasehold improvements 164 58
- -----------------------------------------------------------------------------------------------
2,765 2,431
Less: Accumulated depreciation (2,042) (1,651)
- -----------------------------------------------------------------------------------------------
$723 $780
- -----------------------------------------------------------------------------------------------
Estimated useful lives are as follows:
Office furniture and equipment 3-7 years
Leasehold improvements Shorter of estimated useful life or lease term
F-11
NOTE 7: ACCRUED EXPENSES
ACCRUED COMPENSATION AND RELATED EXPENSES CONSIST OF THE FOLLOWING (IN
THOUSANDS):
OCTOBER 31,
2001 2000
- --------------------------------------------------------------------------------------------------
Accrued wages $ 211 $ 541
Accrued vacation and personal leave 129 232
Other related expenses 131 281
- --------------------------------------------------------------------------------------------------
$ 471 $ 1,054
- --------------------------------------------------------------------------------------------------
NOTE 8: DEBT
LINE OF CREDIT
In January 2001, the Company renewed its revolving line-of-credit facility with
Silicon Valley Bank, which allowed the Company to borrow up to 75% of its
eligible receivables to a maximum of $1,000,000, subject to the right of the
bank to make loans only at its discretion. Interest charged on any outstanding
balance equaled the bank's prime rate plus 2.0%. In addition, the line-of-credit
contained a minimum monthly interest charge as well as a monthly collateral fee
and an up-front commitment fee of $35,000. The line provided that the Company
maintain a minimum tangible net worth to be tested on a monthly basis. The line
also subjected 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 was secured by substantially all
of the Company's assets. During fiscal year 2001, the Company was not in
compliance with the line's financial covenant. For this reason and other cost
cutting measures, the line was canceled effective October 10, 2001.
CONVERTIBLE SUBORDINATED NOTES
In September 2001, the Company entered into a credit facility agreement with a
major shareholder, TFX Equities, Inc. Under the facility, the Company was
eligible to borrow up to $750,000, in exchange for up to ten $75,000 convertible
subordinated notes, bearing interest of 12 percent per annum and possessing a
maturity date of September 11, 2003. Each dollar of outstanding debt is
convertible into four shares of the Company's common stock, convertible for no
additional consideration at any time after issuance. In addition, each note
contains one warrant to purchase 10 shares of the Company's Series A Convertible
Preferred Stock at a purchase price of $2,625 per share. The warrants vest
immediately and expire on September 11, 2004. If issued, each share of Series A
Convertible Preferred Stock would be convertible into 7,500 share of common
stock for no additional consideration. The facility subjects the Company to
various financial and non-financial covenants and is secured by all tangible and
intangible assets of the Company.
As of October 31, 2001, the Company issued six of the $75,000 subordinated
convertible notes totaling $450,000. $103,500 of such proceeds was allocated to
the warrants and $346,500 to the notes based on their respective relative fair
values. The value allocated to the warrants has been included in additional
paid-in capital and the related discount is being amortized to interest expense
over the term of the note. At October 31, 2001, the unamortized discount on the
note payable is $99, 200. The debt also included a non-detachable conversion
feature that was "in the money" at the date of issuance (a beneficial conversion
feature). The value associated with the beneficial conversion feature of
$270,000 will be accreted over the term of the debt. At October 31, 2001,
accretion of $11,300 associated with the beneficial conversion feature has been
charged to interest expense and included in paid in capital.
NOTE 9: COMMITMENTS AND CONTINGENCIES
COMPENSATION ARRANGEMENTS
In February 1988, the Company entered into non-contributory deferred
compensation contracts (the "Contracts") with three officers. Under the terms of
the Contracts, (i) the Company's total annual contributions for the three
officers was limited to $72,000, (ii) contributions ceased at the earlier of
January 31, 1993 or the officer's retirement and (iii) accumulated contributions
accrue interest at the prime rate through the officer's retirement. Subsequent
to retirement and at the officer's option, the officer is eligible to receive
his or her deferred compensation balance in either monthly payments over a
10-year period or one lump-sum payment. Two of the officers retired in May 1991
and January 1998,
F-12
respectively, and elected to receive their deferred compensation balances over a
10-year period. The third officer retired in August 1999 and elected to receive
her deferred compensation balance in a lump-sum payment which was made in
January 2000. As of October 31, 2001, the Company owed one officer under such
contracts. In connection with the Contracts, the Company has incurred interest
expense of $12,000, $18,000 and $23,000 in fiscal years 2001, 2000, and 1999,
respectively.
The Company is a party to an employment agreement with an executive officer. In
the event that the executive is terminated, he would be entitled to receive
twelve months base pay, plus specified fringe benefits.
OPERATING LEASE OBLIGATIONS
In September 1999, the Company entered into a 10-year lease commitment on its
headquarters facility which extends through 2009. Additionally, the Company
leases other equipment through noncancellable operating leases, which expire in
various years through 2004. On December 15, 2001, the Company (sublessor)
entered into a sublease agreement for approximately one quarter of its
facilities. The initial term of the sublease is for 2 years, renewable
thereafter in one-year increments. Minimum future noncancellable operating lease
payments as of October 31, 2001 (net of estimated sublease income of $79,000,
$97,000 and $16,000 in 2002, 2003, and 2004 respectively) are as follows (in
thousands):
YEAR ENDING OCTOBER 31,
-----------------------
2002 $ 287
2003 271
2004 351
2005 376
2006 386
Thereafter 1,014
---------------------------------------------
Total $2,685
LEGAL
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 to
date are without merit and will not have a material adverse effect on the
Company's financial position or results of operations.
ROYALTIES
The Company is committed to pay annual license maintenance fees of $120,000 to a
licensor under certain call processing patents, expiring in 2007. The Company
will receive a credit against future license maintenance fees equal to 12% of
the purchase price paid for products purchased from the licensor.
NOTE 10: STOCK OPTION PLANS
The Company has two incentive stock option plans. Under the first plan, which
has been frozen, the Company granted options to directors and employees to
purchase up to 750,000 shares of common stock at not less than fair market value
at the time of grant. Under the second plan, the Company may grant options to
employees to purchase up to 1,600,000 shares of common stock at not less than
fair market value at the time of grant. Additional information with respect to
both of the incentive stock option plans is summarized in the following table:
F-13
Number Weighted Average
of Shares Exercise Price
- --------------------------------------------------------------------------------------
Shares under option, October 31, 1998 954,994 $1.59
Options granted 721,500 1.34
Options canceled (406,248) 1.49
Options exercised (19,725) 1.12
- --------------------------------------------------------------------------------------
Shares under option, October 31, 1999 1,250,521 1.49
Options granted 727,000 1.51
Options canceled (561,074) 1.57
Options exercised (93,155) 1.25
- --------------------------------------------------------------------------------------
Shares under option, October 31, 2000 1,323,292 1.49
Options granted 460,850 0.45
Options canceled (570,175) 1.29
Options exercised -- --
- --------------------------------------------------------------------------------------
Shares under option, October 31, 2001 1,213,967 $1.17
- --------------------------------------------------------------------------------------
Options granted under the plans vest at various dates from immediately to
ratably over five years and expire ten years from the date of grant. Certain
options contain possible accelerated vesting clauses should specific financial
measures be met. As of October 31, 2001, options to purchase 385,900 shares of
common stock were available for granting.
Additionally, the Company maintains a non-employee Director stock option plan.
Under this plan, the Company may grant up to 250,000 shares of common stock at
not less than the fair market value at the time of grant. Additional information
with respect to this plan is as follows:
F-14
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------
Shares under option, October 31, 1998 72,000 $4.55
Options canceled (15,000) 4.75
Options granted 24,000 1.31
- -------------------------------------------------------------------------------------
Shares under option, October 31, 1999 81,000 3.55
Options granted 58,000 1.64
- -------------------------------------------------------------------------------------
Shares under option, October 31, 2000 39,000 2.56
Options granted 50,000 0.59
Options canceled (13,000) 3.14
- -------------------------------------------------------------------------------------
Shares under option, October 31, 2001 176,000 $2.12
- -------------------------------------------------------------------------------------
Options granted under the plan vest immediately and expire ten years from the
date of grant. As of October 31, 2001, options to purchase 46,000 shares of
common stock were available for granting.
The Company also issued stock options to non-employee consultants outside of the
above plans. These shares may be granted at such times and under such terms as
determined by the Board of Directors. Additional information is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
Shares under option, October 31, 1998 261,000 $4.20
Options canceled (62,000) 0.96
Options granted 137,000 1.80
- -----------------------------------------------------------------------------------------------
Shares under option, October 31, 1999 336,000 1.46
Options canceled (11,000) 2.53
- -----------------------------------------------------------------------------------------------
Shares under option, October 31, 2000 325,000 1.46
Options canceled (20,000) 2.75
- -----------------------------------------------------------------------------------------------
Shares under option, October 31, 2001 305,000 $1.46
- -----------------------------------------------------------------------------------------------
Generally, options vest upon the achievement of certain events and expire from
two to five years from the date of grant.
The Company also reserved 50,000 shares of common stock for issuance outside
these plans as stock options or stock bonuses to key employees. These shares may
be granted at such times and under such terms as determined by the Board of
Directors. No such grants or issuances have been made as of October 31, 2001.
F-15
THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT ALL STOCK OPTIONS OUTSTANDING
AT OCTOBER 31, 2001:
--------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------
RANGE OF EXERCISE NUMBER WEIGHTED AVG. NUMBER
OUTSTANDING AT REMAINING WEIGHTED AVG. EXERCISABLE AT WEIGHTED AVG.
PRICES PERIOD END CONTRACTUAL LIFE EXERCISE PRICE PERIOD END EXERCISE PRICE
--------------------------------------------------------------------------------------------------------------
INCENTIVE $0.24 to 0.63 330,850 9.61 $0.38 160,550 $0.37
STOCK OPTION $0.88 to 1.32 239,317 7.65 1.04 217,213 1.05
PLANS $1.59 to 2.39 640,050 6.01 1.61 634,550 1.63
$2.57 to 3.86 3,750 8.57 2.57 1,500 2.57
--------------------------------------------------------------------------------------------------------------
$0.24 to 3.86 1,213,967 7.33 $0.97 1,013,813 $1.30
--------------------------------------------------------------------------------------------------------------
DIRECTOR PLAN $0.55 to 0.64 50,000 8.76 $0.59 42,500 $0.59
$0.94 to 1.41 26,000 4.18 1.17 26,000 1.17
$1.42 to 1.99 62,000 7.96 1.65 48,000 1.65
$2.00 to 2.75 4,000 0.88 2.38 4,000 2.38
$4.75 to 6.75 34,000 5.59 5.93 34,000 5.93
--------------------------------------------------------------------------------------------------------------
$0.55 to 6.75 176,000 7.01 $1.97 154,500 $2.24
--------------------------------------------------------------------------------------------------------------
NON EMPLOYEE $0.94 to 1.06 195,000 2.13 $0.94 195,000 $0.94
PLAN $2.00 to 2.94 110,000 2.65 2.38 110,000 2.38
$8.38 to 8.38 -- -- -- -- --
--------------------------------------------------------------------------------------------------------------
$0.94 to 1.06 305,000 2.32 $1.46 305,000 $1.46
--------------------------------------------------------------------------------------------------------------
The weighted-average fair value of options granted during fiscal years 2001,
2000, and 1999 was $0.47, $1.52, and $1.21 respectively. The fair value of each
significant option grant is estimated on the date of grant using the
Black-Scholes model. The following weighted average assumptions are included in
the Company's fair value calculations:
2001 2000 1999
---- ---- ----
Expected life (years) 5.0 5.0 5.0
Risk-free interest rate 4.8% 6.3% 5.2%
Volatility 162.0% 85.9% 165.9%
Dividend yield -- -- --
The Company continues to apply APB No. 25 in accounting for stock-based
compensation for the incentive and non-employee director plans. To date, all
stock options have been issued at market value; accordingly, no compensation
cost has been recognized. Had the Company determined costs for these plans in
accordance with SFAS No. 123, the Company's pro forma net (loss) income and pro
forma (loss) income per share would have been as follows (in thousands):
YEAR ENDED OCTOBER 31,
----------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------
Pro forma net loss applicable to common
Stockholders ($3,882) ($1,788) ($5,664)
- ----------------------------------------------------------------------------------------------
Pro forma net loss per share:
Basic ($0.55) ($0.25) ($1.22)
Diluted ($0.55) ($0.25) ($1.22)
- ----------------------------------------------------------------------------------------------
The SFAS No. 123 method of accounting does not apply to options granted prior to
November 1, 1995, and accordingly, the resulting pro forma compensation cost may
not be representative of amounts expected in the future.
F-16
NOTE 11: INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of fixed and intangible
assets and revenue recognition for financial and income tax reporting. Deferred
tax assets and liabilities represent the future tax consequences of those
differences, which will either be taxable or deductible when the assets or
liabilities are recovered or settled.
The (benefit) provision for income taxes in fiscal years 2001, 2000, and 1999
consists of (in thousands):
YEAR ENDED OCTOBER 31,
---------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Increase (decrease) in income taxes payable $-- (28) $--
Refunds of state income taxes -- (28) --
Decrease (increase) in deferred tax asset -- -- --
- --------------------------------------------------------------------------------
$-- (56) $--
- --------------------------------------------------------------------------------
A reconciliation of the statutory Federal tax rate to the Company's effective
tax rate is as follows:
YEAR ENDED OCTOBER 31,
-----------------------------------
2001 2000 1999
-----------------------------------
Statutory Federal tax rate (34.0%) (34.0%) (34.0%)
State income taxes, net of federal tax benefit (5.0) (15.5) (5.0)
Benefit not recorded due to carryforward position 39.0 39.0 39.0
- --------------------------------------------------------------------------------------
0.0% 10.5% 0.0%
- --------------------------------------------------------------------------------------
Deferred tax assets are comprised of the following (in thousands):
OCTOBER 31,
---------------
2001 2000
- --------------------------------------------------------------------------
Accounts receivable and inventory reserves $171 $171
Accrued Compensation 110 120
Deferred revenues 130 138
Other 389 429
Research and development credits 460 535
Foreign net operating losses 16 16
Loss carryforwards 8,524 7,291
- --------------------------------------------------------------------------
Gross deferred tax assets 9,800 8,700
Valuation allowance (9,800) (8,700)
- --------------------------------------------------------------------------
Net deferred tax asset $-- $--
- --------------------------------------------------------------------------
The net change in the valuation allowance for deferred tax assets was an
increase of $1,100,000 during the year. The Company has provided a full
valuation allowance against the Company's gross deferred tax assets since
management believes that the realization of such deferred tax assets is not
likely in the near future.
Approximately $22.0 million of tax loss carryforwards and $460,000 of research
and development tax credits can be utilized by the Company through 2021. If
certain substantial changes in the Company's ownership should occur, there would
be an annual limitation on the amount of the carryforwards that can be utilized.
F-17
NOTE 12: PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution Pension Plan covering all employees.
After an employee completes one-year of service, the Plan provides for annual
contributions by the Company equal to 6% of the employee's gross salary,
excluding bonuses and commissions. The Company's contributions to the Plan vest
after a five-year period. Employees may also make voluntary contributions to the
Plan up to a maximum of 10% of their gross salary on an after-tax basis. On June
1, 1999, the Company ceased contributions to the Pension Plan for employees of
its contact center solutions division. At that time, all of these employees
became 100% vested in the Plan.
In accordance with the Plan, unvested amounts relating to terminated employees
are credited against pension contributions by the Company. Such forfeitures
amounted to approximately $200,000, $118,000, and $239,000 in fiscal years 2001,
2000, and 1999 respectively. It is the Company's policy to fund pension costs
accrued. Net expense of the Plan was approximately $0, $120,000, and $282,000 in
fiscal years 2001, 2000, and 1999 respectively.
Effective November 1, 2001, the Company elected to terminate its pension plan.
All eligible participants of the plan are to receive their vested balances in
the form of a lump-sum payment.
The Company also maintains a 401(k) profit sharing plan and trust. The plan
allows for employees to contribute up to 10% of gross salary on a pre-tax basis
and 5% of gross salary on an after-tax basis. The Company matches 50% of
employee contributions up to 4% of eligible salary. Total expense of the plan
was approximately $52,000, $112,000, and $186,000 in fiscal years 2001, 2000,
and 1999 respectively.
NOTE 13: RESTRUCTURING EXPENSES
In fiscal year 2001, the Company recorded $69,000 in restructuring costs
primarily in the way of headcount reduction. During fiscal 2002, payments have
been made on a monthly basis and the entire balance is expected to be paid by
the end of February 2002.
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid (received) cash for interest expense and income taxes as
follows (in thousands):
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Interest $18 $9 $48
Income taxes paid (received) $-- ($28) $--
F-18
NOTE 15: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for the
Company's last eight fiscal quarters.
(In thousands, except per share data)
Jan. 31, 2000 April 30, 2000 July 31, 2000 Oct. 31, 2000
- ------------------------------------------------------------------------------------------------------------
Sales $4,167 $4,387 $3,071 $2,902
Gross margin 1,181 1,516 471 1,044
Income (loss) from operations 27 108 (829) (160)
Net income (loss) 73 110 (845) (154)
Net income (loss) per share:
Basic and diluted $0.01 $0.02 ($0.07) ($0.02)
- ------------------------------------------------------------------------------------------------------------
Jan. 31, 2001 April 30, 2001 July 31, 2001 Oct. 31, 2001
- ------------------------------------------------------------------------------------------------------------
Sales $2,609 $1,630 $1,611 $1,351
Gross margin 1,126 394 471 382
Income (loss) from operations (294) (1,311) (829) (708)
Net income (loss) (246) (1,329) (845) (755)
Net income (loss) per share:
Basic and diluted ($0.03) ($0.19) ($0.12) ($0.11)
- ------------------------------------------------------------------------------------------------------------
NOTE 16: SUBSEQUENT EVENTS
On January 17, 2002, the company signed a term sheet with TFX Equities, Inc, a
major shareholder, calling for the drafting of definitive agreements for the
issuance of $500,000 of subordinate capital notes and detachable warrants with
terms similar to the previous credit facility. Management expects closing to
occur in February 2002.
F-19
S-1, SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance Balance
Fiscal Year Ended 10/31/01 11/01/00 Additions Deletions 10/31/01
- ---------------------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 125 565 640 50
Inventory
Reserve for Obsolescence 337 49 0 386
Income Taxes
Valuation Allowance 8,700 1,100 0 9,800
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
S-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 7, 2001, which is
included in the Annual Report on Form 10-K, we have also audited Schedule II for
the year ended October 31, 2001. 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 7, 2001
S-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, 2002.
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, 2002
- --------------------------------------------
John C. Mears
President and Chief Executive Officer
(Principal Executive Officer, Principal Accounting Officer)
/s/ David M. Gische January 29, 2002
- --------------------------------------------
David M. Gische
Chairman of the Board and Director
/s/ Joe Brookman January 29, 2002
- --------------------------------------------
Joe Brookman
Director
/s/ David B. Levi January 29, 2002
- --------------------------------------------
David B. Levi
Director
/s/ Joe J. Lynn January 29, 2002
- --------------------------------------------
Joe J. Lynn
Director
/s/ John J. Sickler January 29, 2002
- ---------------------------------------------
John J. Sickler
Director
/s/ Randall P. Gaboriault January 29, 2002
- --------------------------------------------
Randall P. Gaboriault
Director