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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, 1996 Commission File No. 0-14880
MICROLOG CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA 52-0901291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20270 Goldenrod Lane 20876-4070
Germantown, Maryland (Zip Code)
(Address of principal executive offices)
(301) 428-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 16, 1997 closing price of these shares) was approximately
$26.7 million. The Common Stock is traded over-the-counter and quoted through
the Nasdaq National Market.
As of January 16, 1997, 4,193,143 shares of the Registrant's Common
Stock were outstanding.
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Documents Incorporated by Reference
-----------------------------------
Parts I and III incorporate information by reference from portions of the
Company's definitive Proxy Statement to be filed within 120 days after the end
of the fiscal year (the "Proxy Statement"). Parts I, II and IV incorporate
information by reference from portions of the Company's Annual Report to
Shareholders for the fiscal year ended October 31, 1996 (the "Annual Report to
Shareholders").
PART I
ITEM 1. BUSINESS
General
Microlog Corporation ("Microlog" or the "Company") designs, assembles, markets,
and services a variety of microprocessor-based voice processing systems which
allow users to store, retrieve, and transmit digitized voice messages and to
access information on computer databases. In addition, the Company provides
performance analysis and technical and administrative support services to the
Applied Physics Laboratory ("APL"), a prime contractor to the U.S. Navy.
Although this segment of its business historically has provided a stable source
of sales and profits, the Company believes that its principal opportunities for
growth are in the voice processing segment and has been concentrating its
efforts on that segment.
The results of the Company's performance during fiscal 1996, 1995, and 1994 are
discussed in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," incorporated by reference into
Item 7 of the report. That section should be read in its entirety in conjunction
with the discussion of the Company's business in this Item 1. Information
concerning the Company's operations by business segment is hereby incorporated
by reference from Note 1 of the Notes to Consolidated Financial Statements
incorporated by reference into Item 8 of this Report.
Microlog, a Virginia corporation, was organized in 1969. The Company's wholly
owned subsidiaries are Microlog Corporation of Maryland, Genesis Electronics
Corporation, and Old Dominion Systems Incorporated of Maryland.
VOICE PROCESSING
Voice Processing Industry
Voice processing systems are designed to serve the needs of organizations which
are searching for an efficient, cost-effective means to deliver and communicate
information and complete business transactions in a timely manner. These systems
use specialized computer hardware and software to store, retrieve, and transmit
digitized voice messages and to access information on computer databases. In
traditional Interactive Voice Response, callers hear voice prompts and then use
a touch-tone telephone to enter information into, and/or retrieve information
from, a computer database. Voice processing systems have evolved to Interactive
Information Response (IIR) systems, which provide information not only through
voice, but through a wide range of additional input devices and interfaces,
including the Internet, faxes, TDD (Telephony Device for the Deaf), ADSI (Analog
Display Services Interface), screen phones, and pagers.
IIR typically connects the voice processing system to an external computer which
contains data of interest to callers. With touch-tone or voice commands (using
speech recognition software), which often include passwords, codes or account
numbers, callers can query the computer and have data read back to them in voice
form. Depending on the customer's application, callers may also change data on
the computer or input new data with touch-tone or voice commands. IIR is widely
used for functions such as reporting account balances, checking on inventory and
determining the status of applications or permits in process. IIR systems range
from small systems with basic voice processing features utilizing a few phone
lines, to larger more complex distributed systems with up to hundreds of lines.
Products
The Company's voice processing products include the Intela(TM) UNIX-based
platform product, which is capable of running many different voice processing
applications simultaneously. The Company also offers a Retail Solutions product
line that operates under a UNIX and DOS operating system, a DOS-based VCS 3500
platform product, and the CallStar(R) voice messaging system. Microlog
emphasizes the IIR applications of its Intela product, but also
provides IIR applications through the VCS 3500 and Retail Solutions product
line. The CallStar product provides primarily voice mail and automated attendant
functions.
The following voice processing functionality is provided by the Intela and/or
VCS 3500 products:
Audiotex is used by organizations to construct a "library" of
pre-recorded messages which outside callers can access through
touch-tone or voice commands without live operator assistance.
Customers can record and change menus and messages themselves over the
telephone at any time. Libraries of information may be presented in
different languages, and callers with rotary telephones may also access
menus and information. Up to 5,000 messages may be presented. Audiotex
software finds wide use by organizations which receive large volumes of
highly-repetitive telephone requests for information. Major advantages
of audiotex over live information operators include the availability of
information at every hour of the day and the consistency in the content
of information dispensed.
Automated Attendant uses touch-tone or voice commands to route and
connect inbound calls to extensions faster and more accurately than
live operators. Microlog's software allows different phone lines to be
answered with various greetings and menus of options to be presented to
different callers. In the event of a busy or unanswered extension, the
software permits callers to hold, transfer, leave a message or
disconnect. The system can be name-based, in which callers input the
first three letters of the party's last name, or extension-based, in
which callers dial an extension number. For extension-based systems,
the software incorporates a directory of names, allowing callers to use
touch-tone commands to find extension numbers they do not know.
Fax software allows voice processing system users to automatically send
stored fax documents on demand from within the voice processing system.
Customer service and sales support operations are frequent users of fax
software. A service representative can take a request for documents
from the voice processing system and designate faxes to be sent in
response without exiting the voice processing system.
Interactive Voice Response ("IVR") provides a telephone interface to
computer systems. IVR allows a user to call into a computer and access
various information systems using a touch-tone telephone.
Local Database provides very similar functions to IIR, but allows the
data of interest, up to 100,000 records, to reside on the voice
processing system rather than a host mini- or mainframe computer. This
provides a cost-effective approach for smaller IIR applications. It
also allows large IIR applications to do local batch processing of data
by downloading to the voice processing system for data manipulation.
Multiple Languages, including Telecommunications Device for the Deaf
(TDD), Interface software allows system messages to be played in up to
24 different languages. It also interfaces TDD terminals to VCS 3500
systems over telephone lines. The interface enables TDD users to
interact with most VCS 3500 software modules no differently than if
voice communications were being used. Users simply type messages onto
their TDD terminals and send them to the voice processing system, which
understands the input and responds with menus, prompts and messages
which are printed on the TDD terminal. It has broad application in
areas where the hearing-impaired must have access to information
sources.
Outbound Dialing permits an organization to send messages automatically
to large lists of external phone numbers and to record responses to
those messages, if necessary. This very flexible software can handle
multiple lists with up to 10,000 names per list. It can draw from a
library of 1,000 messages and send different combinations of messages
to individual phone numbers as directed. The software also generates
management reports about the number of successful connections, length
of calls, and content of responses.
Release Line Trunking ("RLT") With Microlog's patented Release Line
Trunking capability, patients calling a particular pharmacy after hours
can be forwarded to the nearest extended-hour location or to a
pharmacist on-call. At the request of a caller, the system accesses an
additional available telephone line and places an outgoing call to the
nearest 24-hour location or to an "on-duty" pharmacist. This feature
provides better customer service at critical off-peak hours when urgent
medical needs can arise.
Speech Recognition allows the caller to speak responses that are
understood by the VCS 3500 and Intela systems. Continuous and discrete
speech recognition are available on a single product. A standard
vocabulary includes digits "0-9" and "yes" and "no" responses. Microlog
has incorporated speech recognition technology from several U.S. and
international based companies. All technologies are speaker independent
and therefore require no special training or development to recognize
individual voice or speech patterns.
Text-to-Speech converts typed ASCII data, resident on host computers or
databases, to computer-generated synthetic speech on demand. It creates
an extensive vocabulary, since it can pronounce any string of letters
which are sent to it. Microlog's text-to-speech module is ideal for
applications requiring information from large text databases. Because
text-to-speech works with external databases, the module works with the
interactive voice response module which provides the link between the
VCS 3500 or Intela voice processing system and the customer's database.
Transaction Processing allows the inbound caller to place orders,
request information, respond to surveys or complete other transactions
without personal handling by a live operator, using either touch-tone
or voice commands. The caller can make the transaction any hour of any
day, and the company can process the transaction at its convenience.
Such transactions allow orders and requests to be filled faster and at
lower cost than traditional methods.
Voice Mail provides an organization with "voice mailboxes" in which
internal or external callers may leave detailed, confidential messages
at any time. Messages may be left for groups of people as well as
individuals. Caller's options include reviewing the message and
recording their messages until satisfied. Mailbox owners have options
to review, save, forward or discard voice messages.
Voice Mail overcomes many limitations of telephone systems, allowing
people to exchange information and transact business without having to
be on the phone simultaneously. It eliminates paperwork and adds
meaning and content which written messages can't reflect. Primary
benefits are, increased office productivity through fewer
interruptions, timely, accurate message delivery, and increased message
detail, eliminating callbacks and "telephone tag."
Intela
The Intela platform is an IIR system designed for simultaneous support of
multiple applications and interactive information solutions. Prices for Intela
systems are dependent on the number of ports in the system (from 4 to over
1000), the amount of voice storage, the need for additional equipment, and in
the case of direct sales, the time needed to develop a customized application.
Intela is based on a Pentium hardware platform utilizing a UNIX operating system
with a Graphical User Interface for application development.
The Intela system has a non-proprietary open architecture. It supports foreign
language user screens, voice prompts, and documentation. Intela also supports
text-to-speech, speech recognition, remote and local databases, host
connectivity, and fax.
Microlog has employed the Intela in projects for the Internal Revenue Service.
Some of these projects included Voice Balance Due (VBD), which enables eligible
taxpayers to check the status of their debt to the U.S. government and set up
repayment plans. The Refund Inquiry Application enables taxpayers to call the
IRS and, by selecting the Refund Inquiry on Intela, automatically obtain their
refund status, including the amount of the refund.
Each Intela system contains multiple microprocessors with hard disk storage and
several voice cards. Intela uses distributed microprocessors, each of which
handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the voice processing systems with a
greater number of ports and hours of message storage. Depending upon customer
specifications, systems are provided as tabletop, floor-standing, or rack
mounted units. These units can be networked to create a larger system with more
than 1000 ports.
Product Architecture. The basic Intela architecture consists of four major
system components: the Application Server(s), the Port Server(s), the Voice
Distribution and Control Network, and the Intelaware Software Platform.
Application Server. The application server defines the computing environment in
which Intelaware resides and provides centralized management and control, as
well as optional secure voice storage. The application server can be a personal
computer, a workstation, or minicomputer. It interfaces to a voice processing
peripheral, or Intela Port Server, via a command link on Ethernet or an RS-232-C
link.
Port Server. Microlog's Intela T100 and Intela R100 are voice processing
peripherals, each providing call and speech processing, as well as voice
storage. Interfacing to either a CO- or PBX-based telephone system, these units
answer calls, process and store speech, all under the direction of commands
coming from Intelaware software on the application server across a command link.
Voice Distribution and Control Network. An Ethernet-based, high-speed network is
used to control the port server and transfer voice files between the Intela and
the application server, as well as among the Intela(s) themselves.
Intelaware Software Platform. Microlog's Intelaware is an application
development and deployment environment for both IIR and voice messaging
applications, supporting the on-line creation and administration of multiple
applications. From an X-Windows graphic terminal connected to the application
server, users access major functions of the software through several interfaces:
Application Editor, Prompt Loading and Management, System Administration,
Reports and Database Access, Integration Manager, Agency Manager, and the
Calendar Manager.
Through these interfaces, users control the development and operation of their
voice applications, using an OSF Motif-based graphical user interface. This
interface provides the developer with a set of tools to create voice
applications. Following is a description of each of these interfaces.
Application Editor. The Application Editor is used to create and edit
applications and is oriented towards programmer productivity, with
several developers able to access different applications
simultaneously. The editor is GUI based and allows programmers to
develop call flows using a click-and-place approach similar to many
standard drawing packages. Cells from a palette are placed onto a
Drawing Pane and are connected using a set of mouse actions. Standard
Windows-like pull down menus allow file control, editing features (cut,
copy, and paste), object search (by cell number, name, or type), and
user preferences for appearance of the palette. Applications can be
developed and tested on-line without interrupting those currently
running.
Prompt Loading and Management Facility. A major function in voice
applications is prompt creation. With the Intelaware prompt loading
facility, prompts can be reviewed, recorded, installed, deleted, backed
up to removable media, restored, and distributed over a wide-area data
(WAN) network. They can be loaded on-line over the telephone, a
microphone, or from a tape, and the process can be semi- or fully-
automatic, depending on whether DTMF (dual-tone multifrequency) tones
are coded on the tape to identify the prompts. Users can record
individual prompts, a list of prompts, or record with DTMF prompt
numbers, and they will be replaced only after they've been reviewed and
accepted. New or updated prompts will be phased in automatically while
applications remain on-line.
Prompt Manager. The Intelaware prompt management facility has a
Graphical Prompt Manager. This editor allows users to retrieve a prompt
from storage on a port server or Intela and have the graphical
representation shown in a window. The user can modify the prompt simply
by clicking on the window and performing any of the following actions:
cut, copy, paste, delete, trim silence, adjust again, convert sections
of a prompt to silence, and change sampling rate.
System Administration. The load/unload of applications and the
management of the Port Servers connected to the application processor
are done through the System Administration interface. If a system has
network hardware in the system configuration, administration can be
performed through one central point. Administrators can bring up a new
revision of an application or move an application to another trunk
while the system is on-line. If a caller happens to be on the line at
the time, the changes on that trunk will take effect after the caller
hangs up. Intelaware can support multiple Intelas to expand to larger
port and storage capacity by networking systems and clusters of systems
together. Expansions depend on the application server that the systems
are connected to.
Centralized System Management. The system monitor menu, under system
administration, provides a graphical means to address the central
administration of a distributed system. It provides a graphical
representation of the application server and its attached Intelas,
including the command link mode used, Ethernet or serial links.
Further, by clicking on the Intela icon, an additional window is
displayed. In this window, a graphic of the Intela display panel, with
active trunk status indicators and disk usage indicators, is shown.
Clicking on a trunk status indicator opens an additional window that
depicts information on the application that is running, shows what cell
it is in, and so forth.
Reports. To track significant statistical information for activities
such as billing and to justify services, Intelaware offers a choice of
reports that can be created and viewed without interrupting the
operation of an application. These reports can then be sent to a
printer for a hard copy print-out. Available reports are call detail,
cell usage, trunk usage, subscriber information, and transaction log.
If requirements include other than these standard reports, they can be
customized using the underlying statistics.
Database Access. Interfaces can be built between Intelaware and SQL
relational databases, such as Oracle, Sybase, Informix and Ingress. The
Application Editor contains an SQL cell type, which allows information
to be extracted from databases to support interactive information
applications. This cell type allows users to delete, insert, select,
and update data. Intelaware also supports two internal proprietary
databases: message and information databases. The message database used
in voice mail applications, consists of mailboxes associated with a
number, usually the phone number of the user who will access the box
for the messages deposited in it. More than one message database can be
supported within Intelaware to accommodate multiple applications.
Messages can be retrieved either FIFO (first in, first out) or LIFO
(last in, first out), determined on a system basis.
The Microlog Intela platform architecture supports a variety of configurations
that meet varying functional, processing, and voice port and storage needs. This
platform is designed for simultaneous support of multiple applications,
including both voice response and voice messaging services. Within the Microlog
platform architecture, particular hardware configurations may be proposed to
provide cost-effective solutions to a wide range of system requirements. All
systems can be configured with built-in redundancy so that at least 50% of total
system capacity is maintained across any single component failure. Growth
capability is achieved by the modular upgrade of application servers, port
servers, disk storage, additional communications links, and additional voice
processing units.
The Intela system includes a monitor, keyboard, and printer. 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.
In 1996, the Company completed Intela release 2.07, and completed work on
functional enhancements to the optional features of the product. In addition,
work was underway to support international connectivity features and
customization, to be included in a new release of the product targeted at
international sales in 1997.
VCS 3500
The Microlog VoiceConnect System 3500, (VCS 3500) line of systems consists of a
microprocessor-based hardware platform which can accommodate varying numbers of
ports and, due to its proprietary software modules, can support up to twelve
separate voice response or voice messaging applications. Prices for VCS 3500
systems range from $10,000 to over $250,000. Prices are dependent upon, (i) the
number of ports in the system (from 2 ports to 96 or more), (ii) the number of
voice processing applications desired, (iii) the amount of voice storage, (iv)
the need for additional equipment (in the case of large or unique systems) and
(v) the extent to which the product must be adapted to the customer's specific
needs.
The VCS 3500 system may be purchased with up to twelve different voice
processing applications: voice mail, automated attendant, automated transaction
processing, audiotex, interactive voice response, local database, outbound
dialing, multiple languages including Telecommunications Device for the Deaf
(TDD), release line trunking (RLT), speech recognition, text-to-speech, and fax.
The Company also provides other applications and customization where required.
The Company has developed a separate software module for each voice processing
application, making it possible to provide customers with any combination of
these twelve voice processing applications. Additional software modules may be
added after a system has been installed, thereby allowing customers to expand
their systems gradually, as the need arises, without substantial additional
cost.
Microlog's voice processing software modules include a proprietary application
software matrix which allows users to customize the systems without the need for
additional software. The VCS 3500 system's application software provides a
series of menus containing instructions for the entry of data into the matrix
which will result in a customized system. For example, the automated attendant
application of the VCS 3500 can be customized to forward calls based on the
recipient's last name, extension number, or other code of up to 20 letters or
numbers. The features in the application software matrix may be set to specific
dates or times, allowing the system to activate or de-activate different
information menus, greetings, or other features on particular dates or at
particular times. The complexity of the interactive voice response application
presently requires that most customizing of this application be performed by
Microlog.
The Company's VCS 3500 has a flexible system architecture. All of the VCS 3500
systems use similar hardware platforms and the Company activates one or more of
the twelve software modules to enable a system to perform the desired voice
processing applications. In the case of complex systems performing extra or
unusual applications as requested by a particular user, the Company can
customize the voice processing systems' architecture. By using similar hardware
platforms for VCS 3500 systems, the Company has been able to achieve greater
system reliability and more efficient assembly, testing, and maintenance.
Each VCS 3500 system contains multiple microprocessors with hard disk storage
and several voice cards. The VCS 3500 uses distributed microprocessors, each of
which handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the voice processing systems with a
greater number of ports and hours of message storage. Depending upon customer
specifications, systems are provided as tabletop, floor-standing or rack-mounted
units. These units can be networked to create a larger system with more than 48
ports.
The VCS 3500 includes a monitor, keyboard, and printer, which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity. Customers that contract
for the Company's system maintenance services also purchase modems so that the
Company can perform remote diagnostic procedures.
The VCS 3500 voice response applications can be used with most customer
telephone systems. When used in connection with a PBX, Centrex or other
telephone system having a switch capable of transferring calls automatically,
the system can provide a direct connection between the caller and the customer's
telephone system. The system can also be designed to allow callers to transfer
their calls to a live operator on the customer's telephone system.
In 1996, the Company completed VCS release 3.5, a major release including
functional enhancements and product improvements requested by existing
customers.
CallStar(R)
CallStar products are based on Microlog's flexible, industry-standard hardware
platform and operating system, and incorporate new user interfaces and software
standardization and improved integration features.
The CallStar 2000 has capacity of up to 24 ports, and is available with voice
mail and automated attendant software. CallStar 1200 was designed for the
small-to-medium organization with capacities of 2 to 12 ports and a standard 18
hours of storage with up to 50 hours of storage optional. These models combine
features of the VCS
3500 with the popular user interface, model standardization and integration
technology from the former CINDI product line of Genesis Electronics
Corporation, a company based in Rancho Cordova, California that was acquired by
the Company in November 1990.
The CallStar system is sold primarily through indirect channels as a stand-alone
voice mail system. Over the past year, sales through these channels have
diminished as the Company continues to emphasize high-function IIR systems and
applications and de-emphasizes stand-alone voice mail.
Retail Solutions
During 1996, the Company continued to dedicate development efforts to refine its
offerings under the Retail Solutions product line. Retail Solutions consists of
several applications designed and manufactured specifically for the retail
pharmacy industry. These applications include the APRS(R) Automated Prescription
Refill System, Photo Ready(TM), Prescription Ready(TM), and the ProNouncer(R).
APRS(R) Automated Prescription Refill System
APRS is the primary product available under Microlog's Retail Solutions product
line. The APRS product helps pharmacies improve operating efficiencies and
customer service. Patients calling into the APRS system can use the touch-tone
keypad on their phone to enter their prescription refill orders, inquire about
store location and hours of operation, and request a transfer to a specific
department. This system processes calls 24 hours a day, 7 days a week, allowing
pharmacy staff to spend more time consulting with in-store patients. As managed
care continues to change the way health care is delivered, APRS technology
becomes a part of the pharmacist's newly evolving role--that of providing a
broad range of pharmacy care services by assisting pharmacists with the
traditional dispensing of medications.
A direct link can be established between the APRS system and the pharmacy
database, enabling the automated refill system to access the extensive medical,
customer, and marketing information stored on the pharmacy database as a part of
every call. For instance, the APRS system can provide drug interaction
information to customers calling in to place refill orders, promote
complementary over-the-counter products available for purchase at the same
store, alert patients when they are about to run out of refills, and so on.
The APRS product includes the following features:
Doctor's Messaging. Doctors can leave refill authorizations, new
prescription instructions, and other important messages on a voice
mailbox. Physicians needing to speak with a pharmacist about an urgent
matter during normal operating hours can immediately transfer out of
the system to a live pharmacist.
Caller ID. The APRS system can accept Caller ID information from the
local telephone company. This allows pharmacies to automatically
transfer specified patients and doctors directly to pharmacy staff.
Pharmacies are also able to capture the caller's telephone number and
verify it against their prescription number for validation purposes.
Call Routing. The APRS system can answer all incoming calls, greet
customers with a store-specific recording, and then, based on Call
Routing, allow callers to transfer to the desired department(s).
Release Line Trunking. With Microlog's patented Release Line Trunking
capability, patients calling a particular pharmacy after hours can be
forwarded to the nearest extended-hour location or to a pharmacist
on-call. At the request of a caller, the APRS system accesses an
additional available telephone line and places an outgoing call to the
nearest 24-hour location or to an "on-duty" pharmacist. This feature
provides better customer service at critical off-peak hours when urgent
medical needs can arise.
Automatic Speech Recognition. Speech Recognition enables pharmacy
customers who have rotary phones to speak their responses into the
telephone, rather than pushing buttons on their telephone keypad.
This is particularly important in regions where there is still a high
percentage of rotary phones--or in areas where a sizable portion of the
population may be more comfortable speaking into the phone.
Multi-Language Capability. Callers of varying nationalities can use the
system at the same time, and yet hear prompts spoken in their own
native tongue. The APRS product supports 24 different languages,
including Mexican and Cuban Spanish, Canadian and Franco-French, Slavic
languages including Ukrainian and Polish, and a number of Asian
languages. This enables pharmacies to better serve ethnically diverse
customer bases.
TDD Access. The APRS product provides TDD access for the hearing
impaired, helping pharmacies to comply with the Americans with
Disabilities Act. Microlog's technical approach allows dynamic use of
TDD on all incoming lines without the need to provide a dedicated line
for the hearing impaired.
In-Store Paging. When calls are transferred, pages can be made over the
store PA system or the dedicated APRS pharmacy paging subsystem. This
allows physicians to quickly reach pharmacists regarding urgent patient
matters and expedites customer and staff calls to the manager among
other functions.
In-store Patient Notification. APRS in-store notification enables
patients waiting for their prescription refills to shop throughout the
rest of the store. When the prescription is ready, the customer can be
paged by their prescription number.
Voice Mail. Each pharmacy employee can be assigned a voice mailbox,
enabling better communication among employees as well as with
management. The system can also be designed to enable outside callers
to leave messages for employees. This level of flexibility is
particularly valuable in supporting communication across multiple
shifts and between part-time and full-time workers.
Prescription Pick-up Time. The APRS system can prompt callers for their
preferred pick-up time, and then confirm for the patient the time by
which their refill will be ready for pick-up. This can help pharmacy
staff in scheduling personnel workloads.
Prescription Status Check. Prescription Status Check enables patients
to call and directly query the pharmacy system to determine whether
their prescription has been filled and what time it will be ready for
pick-up.
Prescription Ready(TM) Out Dial. The Prescription Ready out dial
capability enhances a pharmacy's Compliance Program by placing reminder
calls to those patients who have not used all their refills. This
capability also reduces restocking costs and increases pharmacy
revenue. Pharmacy staff can either create the lists of patients to be
called, or the lists can be automatically generated through a direct
link to the pharmacy database.
Text-to-Speech. Through Text-to-Speech technology, callers can hear a
text file "read to them" over the phone. Names, addresses, drug names,
and any other text-based information stored in a database can be
converted into speech. This can be used, for example, in conjunction
with a compliance outdial program--voicing the name of the prescription
holder as it reminds them to pick up their refill.
System Performance Reports. The product's reporting functionality is
designed to help pharmacies gauge how well the system is operating and
to measure performance activity. Reports can be printed automatically
on a daily basis and can also be generated on demand by the system
administrator.
Other Retail Solutions Products
Photo Ready(TM) Out Dial The Photo Ready Out Dial feature calls
customers to remind them to pick up their film development order(s).
Photo department staff prepare the list of customers to be called, or a
direct link can be established with the photo database for automatic
generation of calling lists.
ProNouncer(R). Pharmacies and grocery stores can complement their own
store-specific or chain-wide advertising efforts with Microlog's
patented automated digital in-store announcement system. The ProNouncer
guides customers to specific promotional items, giving an added boost
to sales of perishable and/or high-margin products, and helping to
promote impulse purchases. The ProNouncer can also automate a store's
closing messages or holiday greetings and can be used to make
repetitive public service messages.
APRS UNIX. During 1996, Microlog developed a UNIX-based APRS system.
The System is available as a stand alone configuration as well as a
"board and software" solution. The "board and software" solution is
designed for customers who already have an in-store processor with
spare capacity.
Customized management software allows selected control functions to be
executed from a remote, central location. Such features include loading
of new software modules, running diagnostics, and implementing system
changes.
Enhanced features of the system include more comprehensive outdial
reports, graphical user interface for system administration,
multi-level passwords, and easy expandability of systems through the
use of a variety of voice cards.
Sales and Marketing
The Company's Applications, Retail Solutions and VCS 3500 systems are sold
primarily through direct sales, while the CallStar products have been sold
principally through a distribution network. Intela is also sold through both
direct sales and a distribution network.
Direct Sales Force. The direct sales force has a director in charge of Federal
systems sales, and four salesmen, two sales engineers, and three sales support
personnel. The Company's direct sales force is presently based in the
Washington-Baltimore metropolitan area with a satellite office in Pennsylvania.
The Company provides training to its direct sales persons and furnishes ongoing
technical support to these persons through its systems engineers and other
personnel. The Company compensates its direct and distribution sales personnel
through a base salary plus commissions, which generally represent a percentage
of the net sales for which they are responsible.
The Company's direct sales personnel will continue to focus on national accounts
assigned to them and on certain vertical markets, including retail, health care,
credit collection, wagering, and Federal, state and local government. The
principal potential customers for the Company's voice processing applications
and products in these vertical markets are organizations which receive or make a
large volume of telephone calls that primarily are repetitive in nature, and the
caller desires information stored on the organizations data system.
International Sales. The international sales force currently has a director in
charge of international sales, two salesmen, and three sales engineers. The
sales force and support group is presently located in the Washington-Baltimore
metropolitan area, and in Neunen, The Netherlands. During fiscal 1996, the
Company acquired Phonatic International B.V. of the Netherlands, to strengthen
its presence in the European voice response market.
The Company has entered into non-exclusive distribution agreements with
international companies, including Philips Communication Systems B.V. (Philips)
of The Netherlands and Communication & Network System PTE Ltd. of Singapore,
along with 5 other companies in Europe, Asia, and the Middle East, to market and
support the Intela product line worldwide. Philips markets the Intela IIR system
as the VoiceManager 800 series.
Marketing. The marketing organization currently has a vice president who manages
the Company's product and marketing related activities, three product managers,
one marketing manager, and one assistant marketing manager. This organization
interfaces with direct and international sales in marketing and selling the
company's products, applications, and services.
Promotional Activities. The Company's promotional efforts during fiscal 1996
included advertising in industry trade publications, direct mail, product
presentations at trade shows and similar events, and public relations. The
Company also conducted seminars for potential customers in certain industries,
such as Federal, state and local governments. The Company expects to continue
these promotional activities during fiscal 1997.
Services
The Company provides limited warranties for parts and labor on its products
ranging from 90 days to two years, from the date of delivery. The Company also
offers its customers annual maintenance contracts under which the Company
maintains and services the systems. Microlog charges an annual fee of
approximately 10% to 16% of the purchase price of its systems for maintenance
contracts covering normal business hours. The fee is highest for maintenance
contracts providing for 24-hour or weekend assistance. Distributors generally
perform the maintenance required on systems sold by them, and most of the
Company's distributors offer annual maintenance contracts, which the Company
believes are similar to those offered by the Company and provided at generally
comparable prices.
The Company performs maintenance for its voice processing systems in the
Washington, D.C. metropolitan area from its Germantown, Maryland headquarters,
where an inventory of spare parts is maintained. Microlog also has an agreement
with a subcontractor to perform on-site maintenance on Microlog's voice
processing systems nationwide. The Company operates a hotline which customers
with maintenance contracts may use to request assistance or to ask questions
concerning operation of the Company's voice processing systems. Microlog can
perform many diagnostic procedures over the telephone and historically has been
able to correct most of the difficulties experienced by its customers through
telephone consultation. International maintenance is performed by the third
party distributor and is supported by Microlog service personnel in Neunen, The
Netherlands, and Microlog's service center in Germantown, Maryland.
Microlog also offers a variety of other services to its customers. Microlog will
customize voice processing systems to a customer's specific needs by using the
application software matrix in the VCS 3500 or the Graphical User Interface in
its Intela, or by making appropriate changes in the underlying source code. The
Company may charge for this service on a time and materials basis, or may
include the service in the price of the system being sold. Training on system
operations also is offered to customers. In addition, the Company generally
provides certain improvements to its voice processing software modules free of
charge to customers who contract for its system maintenance services.
Customer service and support for voice processing products sold through the
distribution network generally is provided by the distributor. Most of the
distributors offer annual maintenance contracts to customers with varying levels
of support. CallStar products sold through distributors would also receive
service and support from distributors, and CallStar models sold to customers on
a direct basis are covered by the VCS 3500 customer service and support program.
The Company provides a limited warranty for parts and labor on its CallStar
products for one-year, with the exception of CallStar 1200 which has a two-year
warranty on voice boards and up to a four-year extended service warranty.
Backlog
As of October 31, 1996, the Company had a backlog of existing orders for voice
processing systems totaling $4.9 million. The backlog, as of October 31, 1995,
was $3.7 million. The Company has experienced fluctuations in its backlog at
various times during the past two fiscal years attributable primarily to the
seasonality of governmental purchases. In addition, the Company has observed a
lengthening of the period between the date of booking an order and the date of
shipment, with the shipment depending on customer delivery schedules and the
level of customization required for Intela applications. The Company anticipates
that all of the outstanding orders at October 31, 1996 will be shipped and the
sales recognized during fiscal 1997. Although the Company believes that its
entire backlog of orders consists of firm orders, because of the possibility of
customer changes in delivery schedules and delays inherent in the government
contracting process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.
Competition
The voice processing industry is highly competitive and the Company believes
that competition will intensify. The Company competes with a large number of
companies which produce voice processing products offering one or more of the
twelve voice processing applications performed by the Company's products.
Microlog's competitors include companies such as AT&T, Computer Communication
Specialists ("CCS"), InterVoice, Inc., Perception Technology Corporation, and
Syntellect, that have emphasized sales of systems with audiotex or interactive
voice response applications. Direct competition with the Company's voice
processing systems also arises from a substantial number of companies, such as
AVT, Centigram, and Active Voice, that focus on the market for small or
medium-size voice messaging (voice mail or automated attendant) systems. In
addition, the Company also competes with dealers and distributors that sell
voice processing products of these and other competitors.
New or enhanced products can be expected from the Company's competitors. It is
also likely that there will be new entrants into the voice processing industry
because of the absence of any major technological barriers to entry.
Competition for the sale of voice processing systems has been based in part on
the application required by the customer. In marketing its Intela and VCS 3500
products, the Company places emphasis on the twelve voice processing
applications that can be performed and the ability of these systems to be
expanded to incorporate additional applications. Although many of its primary
competitors continue to develop new voice processing applications, the Company
believes that no competing microprocessor-based system presently offers all
twelve voice processing applications on a single hardware platform. The Company
also believes that many of its competitors' products cannot be customized as
easily to the user's specific needs as the Intela and VCS 3500.
In marketing its Retail Solution, the Company places emphasis on the suite of
applications and solutions that these applications offer. Potential customers
have the ability to add additional solutions as the need arises. The Company is
also able to customize these applications to meet the user's needs. The Company
is actively developing additional features to the Retail Solution and new
solutions for release in fiscal 1997.
In marketing its CallStar products, the Company places emphasis on the extensive
features, and the ease of use and installation of its products in comparison to
competition. The Company believes that the user interface for these products is
presently one of the best accepted interfaces in the market. In addition, the
dealer support programs, including sales support, service support and others,
help differentiate Microlog from the competition.
Marketing and product recognition also play a substantial role in competition
within the voice processing industry and within particular vertical markets.
Most of the Company's competitors have considerably greater financial,
marketing, and sales resources than the Company. Many of these competitors have
concentrated on one or two voice processing applications or on specific vertical
markets and may enjoy advantages in selling to customers seeking only those
applications or to companies in those markets. The Company believes that it has
advantages over some competitors in sales to government customers because of its
experience in marketing products to these customers and in participating in
competitive procurements.
The Company believes that the other principal factors affecting competition in
the voice processing market are product applications and features, quality and
reliability, customer support and service, and price. The Company believes that
it competes favorably with respect to these factors.
Research and Development and Product Engineering
The Company believes that both the development of new voice processing
applications and features for its existing products and the development of new
products are necessary to remain competitive in the rapidly-changing voice
processing market. In order to maintain its competitive position, the Company
continues to improve its voice processing product lines and is currently
developing new products and enhancements to its existing products.
During 1996 the Company completed a new release for its Intela product line,
release 2.07, this release adds functional enhancements to the optional features
of the product. Also during 1996, the Company began to offer release 3.5 for the
VCS product line. The 3.5 release included functional enhancements, such as, DOS
Protected
Mode Interface, Global Tones, Release Line Trunking ("RLT"), Telecommunications
Devices for the Deaf ("TDD"), and Multi-lingual Speech Recognition. For the APRS
systems, the Company developed a UNIX-based system which is available as a stand
along configuration as well as a "board and software" solution. The "board and
software" solution is designed for customers who already have an in-store
processor with spare capacity. The Company's product engineering staff also is
engaged in the development of special product features for current or potential
customers. Unless prohibited by government regulation or customer contract, the
Company retains ownership of all software applications and features that it
develops.
The following table sets forth for the periods indicated the Company's research
and development expenditures and the percentage of voice processing net sales
represented by these expenditures.
Research and Development Expenditures
(In thousands, except percentage amounts)
Year Ended October 31,
1994 1995 1996
---- ---- ----
Research and development expense $1,644 $1,592 $2,093
Percentage of voice
processing net sales 16% 11% 13%
====== ====== ======
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
Manufacturing and Operations
The Company assembles its own equipment using standard parts obtained from
outside sources. The proprietary aspects of the Company's systems are primarily
in the software provided with the equipment and in the specific applications
development designed for the customer. Systems are built to order as they vary
in size and sophistication of software modules. The CallStar is the only product
that comes in a standard equipment format, although the Company is standardizing
some vertical market applications. Equipment assembly, along with testing and
quality control, are performed at its Gaithersburg, Maryland facility. The
Company leases a manufacturing and training facility located in Gaithersburg,
Maryland which expires in September, 1999. Microlog currently has 13 employees
in its manufacturing group. The Company generally uses standard parts and
components obtained from a variety of computer vendors and specially configures
these components to produce the hardware for its systems. Certain components
used in the Company's products are presently available from limited sources. To
date, the Company has been able to obtain supplies of these components in a
timely manner from these sources.
Software Protection, Technology Licenses, and Trademarks
The Company regards its software as proprietary and has implemented protective
measures both of a legal and a practical nature to ensure that the software
retains that status. The Company derives protection for its software by
licensing only the object code to customers and keeping the source code
confidential. Like many other companies in the voice processing industry,
Microlog does not have patent protection for its software (although some of the
inventions for which Microlog has received patents can be implemented in
software). It therefore relies upon the copyright laws to protect against
unauthorized copying of the object code of its software, and upon copyright and
trade secret laws for the protection of the source code of its software. Despite
this protection, competitors could copy certain aspects of the Company's
software or hardware or obtain information which the Company regards as a trade
secret.
The Company has patents on Automated Announcement Systems, Detection of TDD in
an Automated Telephone System, Automated Telephone System with TDD capabilities,
Digital Switching, Voice Messaging, Multiple-Language Automated Telephone
Systems, Telecommunications Device for the Deaf ("TDD") compatibility, and
Release Line Trunking ("RLT"), and pending patent applications on, TDD Message
Storage, and other TDD-related innovations. EVR, Microlog, Call Installer,
Truant, CINDI, ProNouncer, CallStar, CallStar FXD, and APRS, are all registered
trademarks owned by the Company. Intela, Intelaware, Intelaview, Prescription
Ready Connecting People to a World of Information, and The Automated Collector,
are all trademarks or service marks which are the subject of applications for
registration owned by the Company which are pending in the United States Patent
and Trademark Office. INTEL Corporation has filed with the U.S. Trademark Trial
and Appeal Board requests for extension of time in which to file opposition to
registration by the Company of the marks Intela, VCS Intela, Intelaware,
Intelaview. Settlement discussions between the Company and INTEL Corporation on
these matters are currently on going. The Company is currently using, and claims
common law rights in the following additional unregistered marks: Voice Connect,
Genesis, Voice Path, and VCS 3500. In addition, the Company enters into
confidentiality agreements with its employees, distributors, and customers and
limits access to and distribution of its software, documentation, and other
proprietary information. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology. Further, there can be no assurance that any
patent issued or that its registered copyrights can be successfully defended. In
any event, the Company believes that factors such as technological innovation
and expertise and market responsiveness are more important than the legal
protections described above.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES
General
Since the early 1970s, the Company and its subsidiaries have been providing
performance analysis and technical and administrative support services
(principally in the form of technical data processing and analysis, engineering
and scientific analysis, and computer services) to government and commercial
customers. These services, which comprised the Company's original business,
presently are provided through the Company's subsidiary, Old Dominion Systems
Incorporated of Maryland. The Company believes that its performance analysis and
support services business will continue to provide a stable stream of sales,
although its voice processing business offers greater potential for growth.
The principal customer for the Company's performance analysis and technical and
administrative support services is The Johns Hopkins University's Applied
Physics Laboratory ("APL"), a United States Navy contractor, for which the
Company or its subsidiaries have been performing services since 1972. Sales from
contracts with APL accounted for 43%, 37% and 38% of the Company's net sales for
fiscal 1994, 1995, and 1996, respectively.
The Company's performance analysis and support services personnel perform a
variety of analytical and science-related support services under several
contracts. These services usually are performed on the customer's premises or at
test-site locations. The Company's technical staff works jointly with the
customer's scientists and engineers in the acquisition, processing, analysis,
and management of certain major weapon systems data. This work is directed to
quantifying and reducing the impact of current and future threats to the United
States' submarine fleet through the use of ocean sensor systems. The technical
support rendered by the Company includes real-time data acquisition, digital
signal processing, software development and systems applications, data
management, and data analysis.
In addition, the Company supports naval strategic programs through its role as
an independent evaluator of the performance of submarine-based strategic missile
systems. This is accomplished through extensive data processing, technical
evaluation, and data analysis relating to sonar, fire control, missile,
launcher, and navigation subsystems.
The Company's performance analysis and support services employees also engage in
communications testing and evaluation for mobile communications network
exercises. The Company's communications analysts assist in preparing
presentations to the Navy and in designing and implementing communications
analysis software.
The Company's employees perform various technical support services in connection
with several Ballistic Missile Defense Organization ("BMDO") projects. These
include advanced technical support in the design, development, and
implementation of space-qualified equipment, systems analysis, and the operation
of a VAX computer-based mission control center for the MSX mission.
Contracts
The Company's contracts are generally one-year in duration, and many of such
contracts contain two one-year extension options, with a fixed level of work
authorized under the contract. Several of the Company's larger contracts with
APL have been renewed or re-awarded to the Company annually, and the level of
work authorized at the time of contract renewal has provided for, in the
aggregate, the same or a greater level of services.
The Company provides services under three types of contracts. The majority of
contracts are on a time-and-materials basis, pursuant to which the Company
receives a pre-set fee for all services provided under the contract, without
regard to the Company's cost of supplying these services, and is reimbursed only
for the cost of materials. Other contracts are on a purchase order basis which
operates similar to a time and materials contract, and on a cost plus fixed fee
bases. Occasionally, the Company experiences delays in contract awards, contract
funding, and payment, which the Company believes is customary under contracts
which involve performance of services for Federal Government agencies.
The Company monitors performance under existing contracts and requests for
proposal ("RFPs") for performance analysis and support services by contractors
or government agencies. The Company has received a number of blanket contracts
by responding to RFPs. In order to increase the new contracts, the Company must
locate skilled programmers and other technical personnel with the qualifications
specified by the open requisitions. The Company uses agencies and internal
resources to locate these personnel. The Company believes that its reputation in
the industry enables it to attract qualified individuals for inclusion in the
Company's proposals.
Competition
The Company's Government contracts can be opened to competitive bidding upon
their expiration at the discretion of the contractor or agency. Although
contracts presently comprising a substantial percentage of the Company's sales
have been renewed annually, these contracts may and have been open to
competitive bidding. There can be no assurance that these contracts will be
awarded to the Company if competitive bidding occurs.
The Company encounters substantial competition in its procurements. The
Company's competitors include Hadron, Inc., SAIC, Fairchild, Sonalysts, and
Comsys. The Company has instituted policies and procedures designed to maintain
a low overhead to enhance its ability to compete with respect to new contracts
and to existing contracts that are to be renewed or extended. During the last
three years, the contracts that have been lost through competitive bidding or
otherwise have not been material to the Company, either individually or in the
aggregate. During this three-year period, the Company has received several new
contracts as a result of competitive procurements and also increases in the
level of work authorized under contracts which have been renewed or re-awarded
to the Company.
The Company has had no success in obtaining contracts with government agencies
or contractors other than APL or AT&T. Many of these contracts have been renewed
with the incumbent on a sole source basis, rather than being competitively bid.
In the case of contracts that have been opened to competitive bidding, the
contract incumbents generally have had advantages because of their prior
relationships with the agencies and the experience of their personnel in
performing the requested services. In addition, incumbents or other competitors
often have substantially greater financial and other resources than the Company.
Backlog
As of October 31, 1996, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $5.5 million.
By comparison, the backlog as of October 31, 1995 was $7.8 million. The Company
anticipates that these services will be provided during the next three fiscal
years. The Company estimates that of the $5.5 million of backlog at October 31,
1996, $1.9 million will be recognized as sales beyond
fiscal 1997. Because of the delays inherent in the government contracting
process or possible changes in defense priorities or spending, the Company's
backlog as of any particular date may not be indicative of actual sales for any
future period. Although the Company believes that its backlog of funding on
existing contracts is firm, the possibility exists that funding for some
contracts on which the Company is continuing to work, in the expectation of
renewal, may not be authorized (and the Government has the right to cancel
contracts at any time), although to date this has not occurred.
Government Regulation
In order to maintain contracts with contractors or Government agencies, the
Company must comply with a variety of regulations and Department of Defense
guidelines, including regulations or guidelines covering security, record
keeping, and employment practices. The majority of the employees assigned to the
Company's contracts with contractors or agencies are required to have security
clearances. The Company historically has not experienced any significant
difficulty in obtaining the necessary security clearances. The Company's sales
under these contracts are subject to audit by the Defense Contract Audit Agency
(the "DCAA"). The DCAA has completed audits through fiscal 1992, and any
adjustments required as a result of these audits have been minor. The
implementation by the Federal Government of spending cutbacks, or a change in
national defense priorities, could reduce the Company's sales.
Employees
At January 16, 1997, the Company and its subsidiaries employed a total of 267
persons, including 4 part-time employees. Of these personnel, 89 are engaged
principally in the Company's voice processing systems operations, 170 are
engaged in performance analysis and support services, and 8 serve as officers or
managers or perform administrative services for the Company and all of its
subsidiaries.
The Company believes that its success will continue to depend, in part, on its
ability to attract and retain skilled sales and marketing, technical, and
management personnel. Because of the high turnover rate typically associated
with sales and marketing personnel, the Company anticipates that it will need to
replace some of the sales and marketing personnel who do not meet the Company's
performance expectations. The Company has not experienced any significant
difficulty in hiring qualified technical personnel. Neither the Company nor any
of its subsidiaries is a party to a collective bargaining agreement, and the
Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company occupies a 24,000 square foot building in Germantown, Maryland,
which it uses for its principal executive offices and its voice processing
operations center. The Company also leases 22,700 square feet of office space in
Rancho Cordova, California which was Genesis' headquarters and 12,000 square
feet in Gaithersburg, Maryland which it uses for production and warehouse of its
voice processing products. In February 1993, the Company entered into a sublease
for its Rancho Cordova facility. The sublease is for a five-year term and began
in June 1993.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation from time to time arising from its
operations and receives occasional letters alleging infringement of patents
owned by third parties. Management believes that such litigation and claims are
without merit and will not have a material effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference from
"Price Range of Common Stock" and "Dividend Policy" on page 22 of the Company's
printed Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference on
page 23 of the Company's printed Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference from
pages 19 through 23 of the Company's printed Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including Consolidated
Statements of Operations for the years ended October 31, 1994, 1995, and 1996,
Consolidated Balance Sheets as of October 31, 1995, and 1996, Consolidated
Statements of Changes in Stockholders' Equity for the years ended October 31,
1994, 1995, and 1996, Consolidated Statements of Cash Flows for the years ended
October 31, 1994, 1995, and 1996, and Notes to Consolidated Financial
Statements, together with the report thereon of Price Waterhouse LLP dated
December 16, 1996, are incorporated by reference from pages 8 through 18 of the
Company's printed Annual Report to Shareholders.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and certain executive officers of the Company
under the caption "Election of Directors" and the caption "Section 16(a)
Disclosure" is incorporated herein by reference from the Company's Proxy
Statement to be filed by the Company within 120 days after the end of its fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information", required by this item is incorporated herein by reference from the
Company's Proxy Statement to be filed by the Company within 120 days after the
end of its fiscal year (excluding specifically the sections captioned
"Comparative Company Performance" and "Management Compensation Committee Report
on Executive Compensation").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Stock Owned by Management and Principal
Stockholders" required by this item is incorporated herein by reference from the
Company's Proxy Statement to be filed by the Company within 120 days after the
end of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Compensation Committee Interlocks and Insider
Participation" required by this item is incorporated herein by reference from
the Company's Proxy Statement to be filed by the Company within 120 days after
the end of its fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included on pages 8 through 18 of the
Company's printed Annual Report to Shareholders and are incorporated herein by
reference.
Consolidated Statements of Operations for the years ended October 31,
1994, 1995, and 1996
Consolidated Balance Sheets as of October 31, 1995, and 1996
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 1994, 1995, and 1996
Consolidated Statements of Cash Flows for the years ended October 31,
1994, 1995, and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedule
Unaudited supplementary data entitled "Selected Quarterly Financial Data
(unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 17).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages F-1 and F-2:
F-1 Schedule II Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent Accountants on Financial Statement Schedule
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of Registrant, as amended 1/
3.2 By-laws of Registrant, as amended 1/
4.1 Specimen Stock Certificate 1/
10.1 Employment Agreement between the Company and Joe J. Lynn.
10.2 Deferred Compensation Agreements between the Company and J. Graham Hartwell and Joe J. Lynn,
respectively 3/
10.4 Employment Agreement between the Company and Richard A. Thompson 5/
10.5 Microlog Corporation Executive Deferred Bonus Plan 2/
10.6 Microlog Corporation Medical Reimbursement Plan 5/
10.8 Microlog Corporation 1989 Non-Employee Director Non-Qualified Stock Option Plan 6/
-
10.9 Agreements with Farmers & Mechanics National Bank
10.10 Sub-contracting Agreement with Aspect Telecommunications Corporation 6/
10.11 Sub-contracting Agreement with Applied Physics Laboratory 6/
10.12 Agreement with Philips Communication Systems B.V.*/ 7/
13 Annual Report to Shareholders for the fiscal year ended October 31, 1996
22 Subsidiaries of the Registrant 5/
24 Consent of Price Waterhouse LLP
- ----------
*/ Confidential treatment has been granted for portions of this document.
1/ Filed as an Exhibit to Registration Statement on Form S-1, File No.
33-31710, and incorporated herein by reference.
2/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1987.
3/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1988.
4/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1990.
5/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1992.
6/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1993.
7/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1994.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal year ended
October 31, 1996.
OTHER MATTERS
- -------------
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8, Nos.
33-30965 (filed September 11, 1989) and 33-34094 (filed March 30, 1990):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Exhibit 13
Annual Report to Shareholders for the fiscal year ended
October 31, 1996
Exhibit 24
Consent of Price Waterhouse LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-30965 and 333-2612) of Microlog Corporation of
our report dated December 16, 1996 appearing on page 18 of the 1996 Printed
Annual Report to Shareholders of Microlog Corporation which is incorporated in
this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which appears on
page F-2 of this Form 10-K.
Price Waterhouse LLP
Washington, DC
January 29, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Germantown, State of Maryland on January 26, 1996.
MICROLOG CORPORATION
By /s/ Richard A. Thompson
-------------------------------------
Richard A. Thompson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
- ------------------------------------------------ February 10, 1997
Steven R. Delmar
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
- ------------------------------------------------ February 10, 1997
David M. Gische
Director
- ------------------------------------------------ February 10, 1997
Robert E. Gray, Jr.
Director
- ------------------------------------------------ February 10, 1997
J. Graham Hartwell
Chairman of the Board and Director
- ------------------------------------------------ February 10, 1997
Joe J. Lynn
Chief Development Officer and Director
- ------------------------------------------------ February 10, 1997
Richard A. Thompson
President and Chief Executive Officer
ADDITIONAL SCHEDULE REQUIRED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE BALANCE
FISCAL YEAR ENDED 10/31/96 11/1 ADDITIONS DELETIONS 10/31
- -------------------------------------------------- --------------------------------------------------------------------
RECEIVABLES
ALLOWANCE FOR DOUBTFUL ACCOUNTS 167,211 80,729 40,852 207,088
INVENTORY
RESERVE FOR OBSOLESCENCE 1,054,615 379,293 1,181,290 252,618
INCOME TAXES
VALUATION ALLOWANCE 4,931,902 0 1,470,352 3,461,550
FISCAL YEAR ENDED 10/31/95
- --------------------------------------------------
RECEIVABLES
ALLOWANCE FOR DOUBTFUL ACCOUNTS 233,081 15,422 81,292 167,211
INVENTORY
RESERVE FOR OBSOLESCENCE 1,144,694 321,117 411,196 1,054,615
INCOME TAXES
VALUATION ALLOWANCE 5,460,142 0 528,240 4,931,902
FISCAL YEAR ENDED 10/31/94
- --------------------------------------------------
RECEIVABLES
ALLOWANCE FOR DOUBTFUL ACCOUNTS 174,454 72,000 13,373 233,081
INVENTORY
RESERVE FOR OBSOLESCENCE 777,575 1,137,039 769,920 1,144,694
INCOME TAXES
VALUATION ALLOWANCE 3,473,212 1,986,930 0 5,460,142
F-1
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To The Board of Directors and Stockholders
Microlog Corporation
Our audits of the consolidated financial statements referred to in our report
dated December 16, 1996 appearing on page 18 of the 1996 Printed Annual Report
to Shareholders of Microlog Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Washington, DC
December 16, 1996
F-2
Microlog
1996
Annual Report
"...developing lasting partnerships."
Connecting people
to a world of informationTM
Microlog Headquarters
20270 Goldenrod Lane
Germantown, Maryland 20876-4070
USA
Tel. 301-428-9100
Fax 301-916-2475
http://www.mlog.com
Microlog Europe
De Pinckart 54
5674 CC Nuenen
Postbus 319
5670 AH Nuenen
The Netherlands
Tel. 31 (0)40 2631255
Fax 31 (0)40 2839922
Microlog Corporation designs, develops, markets, and supports a complete line of
Interactive Information Response (IIR) systems and application solutions for
customers worldwide. Our solutions help clients in government and private
industry operate more efficiently, productively, and profitably.
We define ourselves as suppliers of Interactive Information Response technology
to better reflect the myriad of ways users of these systems can now interact
with information. In traditional Interactive Voice Response, callers hear voice
prompts and then use a touch-tone telephone to enter information into, and/or
retrieve information from, a computer database. Now, IIR users can access
information not only through voice, but also through the Internet, faxes, TDD
(Telephony Device for the Deaf ), ADSI (Analog Display Services Interface)
screen phones, and pagers.
Microlog Corporation is headquartered near Washington, DC, in Germantown,
Maryland. Microlog Europe, an international subsidiary, is based in The
Netherlands.
Old Dominion Systems Incorporated of Maryland, a Microlog subsidiary, provides
technical and administrative support to US prime government contractors. ODSM's
comprehensive technical capabilities include software development life cycle
support, data management support, systems engineering and integration, and
information management services.
[ GRAPHIC OMITTED ]
To Our Shareholders and Friends
We are pleased to announce that 1996 represented Microlog's best year ever,
producing record results in terms of both revenues and profitability. In fiscal
1996, Microlog generated $2.7 million in net income on consolidated net revenues
of $25.7 million. All three of the Company's IIR business units--Government,
Commercial, and International--along with ODSM, produced higher revenues this
year compared to 1995.
The Company also succeeded in adding a $1.0 million loan facility to its
existing $2.0 million line of credit to provide additional working capital for
the future.
Market Focus
Commercial
Our year-over-year revenue from commercial customers increased 144%, from $1.6
million in 1995 to $3.9 million in 1996. This was due in part to the multi-year,
multi-million dollar contract Microlog was awarded to provide Interactive
Information Response systems to Eckerd Corporation, one of the largest drug
store chains in the US.
As we continue to build market share in this niche, we are also developing plans
for the phased penetration of other industry niches with the long-term goal of
establishing broad brand equity for Microlog products.
Government
Our government business continues to provide Microlog with a solid base and an
ongoing revenue opportunity as our resource-pressed government customers
continue to embrace IIR technology as a means to better serve their
constituents. For instance, one of our most significant government customers,
the Internal Revenue Service, ordered a $5 million upgrade during 1996 to
standardize on Microlog's Intela(TM) IIR platform product.
International
During fiscal year 1996, Microlog strengthened its position in Europe through
the acquisition of the Dutch IIR supplier, Phonatic International B.V. This
merger underscores Microlog's commitment to establishing itself as a player in
the worldwide Interactive Information Response marketplace, building first on a
strong base in Europe.
During 1996, Microlog also signed several new distribution partners, including
Devotech in France, as well as Deutsche Telekom in Germany. In addition, our
partner in Singapore, Communications and Network Systems PTE, Ltd., secured
several significant contracts during 1996.
Performance Analysis
Our Old Dominion Systems Incorporated of Maryland (ODSM) subsidiary also
continued to perform well, generating $9.9 million in revenue, up $1.6 million
from the prior year. During the year, we were successful in adding new contracts
and increasing the level of work authorized under existing contracts from the
Johns Hopkins University Applied Physics Laboratory (APL), the Company's
principal customer since 1972. ODSM's scope of work continues to be in the form
of technical data processing and analysis, engineering and scientific analysis,
and computer services. Management anticipates continued growth from this
business segment in 1997.
Looking Ahead
Microlog's objective for fiscal year 1997 is to grow at a rate equal to or
greater than the industry norm. We expect to pursue this growth through further
investment in people, processes, and tools, and a focus on building market
share, particularly in the retail pharmacy market.
We shall continue to pursue promising new markets, explore further strategic
acquisitions, and rapidly insert new technological developments to our products
in order to strengthen our position domestically and abroad.
Our thanks go to the many people who have contributed to the past
year's results. We thank our employees for their loyalty and dedication, our
distributors and business partners for their commitment to our products and
services, and our shareholders and customers for their continued confidence in
Microlog. We also welcome our new partners/customers, value added resellers, and
shareholders to the Microlog family.
/s/ Richard a. Thompson
Richard A. Thompson
President and Chief Executive Officer
Developing Lasting Partnerships
Commercial Business Unit
Eckerd Corporation Leads the Way With Microlog
Eckerd is a company with a vision. With over 1,700 stores in thirteen states,
Eckerd was already one of the largest retail drug chains in the US in 1996,
ranking No. 1 or No. 2 in twenty-three of the nation's top 100 drug store
markets. But that was not enough: Frank Newman, Eckerd's CEO, announced the goal
of growing to 2,000 units by the end of the decade and becoming No. 1 in each of
the company's metropolitan markets within five to seven years. Then, J.C. Penney
announced that it would buy Eckerd, merging it with Penney's current holding,
Thrift Drug, creating a single chain with approximately 2,700 units. Penney also
announced that Newman would become CEO of the combined entity.
In keeping with Eckerd's
reputation as an industry
"Microlog's APRS...enables us innovator, the company had
to both improve in-store embarked on a re-engineering
efficiency and provide a program in 1993 designed to
higher level of service to our make the company "the best
time-pressed customers." provider of pharmacy and
related health care in the
Richard D. (Dale) Adkins, Vice industry." As a part of a
President of Pharmacy major pharmacy system
Operations, Eckerd Corporation overhaul, Eckerd selected a
Government new in-store processor, along
with new telephone equipment.
It also signed a multi-million
dollar, three year contract in
1996 to install Microlog's
APRS(R) Automated Prescription
Refill System in most of its
pharmacies.
Eckerd selected Microlog due to APRS' rich set of features, our extensive UNIX
programming knowledge, and our deep telephony and project management expertise.
APRS, one of the primary modules available under Microlog's Retail Solutions
product line, enables physicians to call in prescriptions, and patients to order
refills automatically, from any touch-tone phone.
This provides convenience, faster turnaround, and better service for Eckerd
customers, and frees up pharmacists for additional patient consultations. As
managed care continues to change the way health care is delivered, APRS
technology becomes a critical enabler of the pharmacist's evolving role at
Eckerd--that of providing pharmacy care services that extend far beyond
dispensing medications.
APRS' robust features include the Prescription Ready(TM) out dial capability,
which promotes "patient compliance" by placing reminder calls to those who have
not used all their refills; this helps ensure patients take the optimum dosage
of medication as prescribed by their doctor. Also, through a direct link between
APRS and the pharmacy database, APRS can leverage the extensive medical,
customer, and marketing information stored on the pharmacy system. APRS can
provide customers drug interaction information and promote complementary
over-the-counter products available for purchase.
The opportunity in the retail pharmacy marketplace grows as industry leaders
begin to reap the competitive benefits of deploying voice processing technology.
As they do so, the rest of the industry is likely to find it necessary to follow
suit--particularly in light of increasing margin pressures and the continuing
trend toward market consolidation. Microlog is well-positioned to serve the
needs of these pharmacy customers.
Business Unit
IRS Call Centers Standardize on Intelax
Like all government agencies, the Internal Revenue Service is increasingly being
asked to do more with less. Constituents and lawmakers alike are demanding the
agency provide better service to taxpayers while driving down operating costs.
As a long time technology partner, Microlog takes great pride in helping the IRS
meet this challenge.
During 1996, the IRS committed to standardizing its nationwide call center
network on our Intela IIR platform, with plans to automate 45 percent of all
calls. By the end of fiscal year 1996, Microlog had received a total of $5
million in orders from the IRS to upgrade existing Microlog equipment to Intela.
The IRS placed the orders through its contract with Aspect Telecommunications, a
market leader in providing product and service solutions for organizations with
mission-critical call centers.
By year end, more than 20 IRS Intela systems were up and running across the
country, with some systems running as many as seven Interactive Information
Response applications. These applications were designed to efficiently process
tax-related calls from citizens, generally without requiring the assistance of a
customer service representative.
The Voice Balance Due application allows taxpayers in arrears to commit to a
federal tax repayment plan, which has led to a significant increase in
incremental collections. In fact, one IRS office collected 200,000 promises to
pay through VBD in just six weeks. Callers can also check the status and amount
of their refunds through the Refund Inquiry application and can get information
about where to file returns and where to send remittances using the Location
application. There is also a CTI (Computer Telephony Interface) application--
developed jointly
with Aspect--ensuring that
when a taxpayer does need to
talk with a customer service
representative, the call is "The decision to upgrade to
handled efficiently: data Intela was based on the IRS'
already collected by Intela need for enhanced voice
from the taxpayer is response capabilities provided
transferred along with the by the Intela software and the
call to the representative. UNIX operating environment."
Microlog was one of the first Robert Grossman, Manager, TRIS
companies to develop a voice Project Office, Internal
response system specifically Revenue Service
for the needs of government
and has served the public
sector for more than 20 years,
installing more than 8,400
voice processing ports at the IRS alone. One cornerstone of our relationship
with the IRS and other government customers has been our commitment to
delivering products and services of the highest quality. In fact, Microlog was
the first voice processing company to receive ISO 9001 certification. In
addition, we will pursue CMM Level II certification during 1997. The
"Capabilities Maturity Model" is recognized by major government entities as well
as Fortune 500 corporations for its effectiveness in ensuring adherence to
rigorous software development standards and procedures.
International Business Unit
Microlog Plays Integral Role in Philips' Call Center Strategy
Philips Business Communications of The Netherlands, a household name in Europe
and Asia, is one of the world's leading suppliers of open business
communications solutions, providing scalable switching platforms, value added
applications and services. A leading telecom switch provider, Philips has 10.3
million total PABX lines installed worldwide.
In 1994, Philips and Microlog
entered into a strategic
alliance to jointly develop
Philips' VoiceManager 800, an
"Working in partnership with advanced voice processing
Microlog, we believe we have platform based on Microlog's
developed the voice processing Intela product line. Since
product necessary to meet the then, we have worked with
demanding requirements of our Philips on several major
call center customers across accounts, as Philips has built
Europe and Asia. market awareness for the
VoiceManager 800 across six
" Ian Murdoch, Marketing European and seven Asian
Director, Philips Business countries.
Communications
As we enter 1997, the Intela
platform forms an integral
part of Philips' newly-formed
TeleBusiness Group's call
center strategy. In fact, the TeleBusiness Group plans to focus on markets in
which Microlog has extensive applications expertise: health and medical
services, banking and insurance, utilities, and government, among others. In
partnering with Microlog, Philips is confident that customers will benefit from
the best of breed for PABX integrated voice response solutions.
In support of these sales efforts, Microlog put the final touches on a major new
Intela release toward the close of fiscal 1996. This international release will
provide robust digital connectivity functionality critical to market success in
Europe and Asia. The release will also provide support for Philips' Automatic
Speech Recognition, Dial Pulse Detection, and various fax enhancements.
Microlog Looks Ahead
when soldiers serving in Desert Storm called stateside, it was a Microlog
solution that helped them connect with family and friends at home. Developed
prior to the Gulf War, Release Line Trunking (RLT) provides a uniform,
switch-independent means to transfer calls. Closer to home, RLT provides such
valuable functions as automatically transferring after-hours calls from a
patient's local pharmacy to the same chain's nearest 24 hour pharmacy.
Release Line Trunking is just one of the seven patents Microlog already holds in
areas including multiple language switch technology and Telephony Device for the
Deaf (TDD) applications. An additional patent is pending and Microlog plans to
pursue others in related areas.
In 1996, Microlog strengthened its commitment to research and to extending its
already rich portfolio of patented inventions. The Microlog research and
development group will be concentrating in 1997 and beyond on extending
Microlog's expertise in distributed network-based computing and management,
Internet-based voice and data applications, low-end hardware capabilities
including general and digital signal processors in a single compact package, and
advanced telephony features for productivity enhancements.
Technical innovations are always important to a technology-based company.
However, they are not the only keys to success. Microlog's success has been
founded on an ability to understand customer needs and then fulfill them more
uniquely and rapidly than others, while providing higher levels of value,
quality, and service. In 1997, we will build further on this tradition, while
developing an increased focus on strategic market planning, aligned closely with
an on-going commitment to technology R&D. This approach was strengthened during
1996 with the formation of a "product development" group, combining software
engineering and product marketing under one cohesive umbrella.
Strategic market planning allows Microlog to identify market niches where its
strengths can be leveraged, through direct or indirect marketing and
distribution channels. As the company grows, these niches will grow in size,
number, and geographic presence. Planning allows the market niches to be
identified at the point of early technology acceptance on the part of customers,
and allows the efficient and sequential allocation of small numbers of highly
skilled Microlog staff to harvest high volume opportunities over short time
frames. This has been the key in the highly successful Government and Commercial
Business Units, and is the model for future successes in International and other
vertical market segments to come.
Consolidated Statements of Operations
Year Ended October 31,
1994 1995 1996
Net sales:
Products $ 7,856,759 $ 9,905,239 $ 11,458,643
Services 10,812,003 12,480,404 14,248,092
- -----------------------------------------------------------------------------------------------------------
Total net sales 18,668,762 22,385,643 25,706,735
- -----------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of products 5,760,284 4,746,581 5,190,018
Cost of services 8,625,581 8,173,060 9,918,101
Selling, general and administrative 7,005,470 6,373,764 6,394,407
Research and development 1,643,850 1,591,895 2,093,496
Restructuring costs 550,258 -- --
- -----------------------------------------------------------------------------------------------------------
Total costs and expenses 23,585,443 20,885,300 23,596,022
- -----------------------------------------------------------------------------------------------------------
Income (loss) from operations (4,916,681) 1,500,343 2,110,713
Investment income 38,244 24,078 10,900
Interest expense (137,416) (112,244) (91,786)
Other income (expense), net 55,046 (5,046) 43,611
- -----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,960,807) 1,407,131 2,073,438
Benefit (provision) for income taxes (23,234) (20,000) 639,296
- -----------------------------------------------------------------------------------------------------------
Net Income (loss) $ (4,984,041) $ 1,387,131 $ 2,712,734
- -----------------------------------------------------------------------------------------------------------
Per common share $ (1.29) $ 0.34 $ 0.59
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Balance Sheets
October 31,
1995 1996
Assets
Current assets:
Cash and cash equivalents $ 922,763 $ 1,170,603
Receivables, net 3,046,160 4,259,841
Inventories, net 1,436,889 2,218,306
Deferred tax asset -- 650,000
Other current assets 110,365 208,551
- ------------------------------------------------------------------------------------------------
Total current assets 5,516,177 8,507,301
- ------------------------------------------------------------------------------------------------
Fixed assets, net 3,006,528 3,886,371
Licenses, net 523,810 409,524
Other assets 232,491 101,788
Goodwill, net 146,710 807,738
- ------------------------------------------------------------------------------------------------
Total assets $ 9,425,716 $ 13,712,722
- ------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 45,455 $ 54,740
Borrowings under line-of-credit agreement -- 1,400,000
Accounts payable 1,388,122 962,715
Accrued compensation and related expenses 2,103,316 1,874,691
Other accrued expenses 1,230,310 1,070,973
- ------------------------------------------------------------------------------------------------
Total current liabilities 4,767,203 5,363,119
- ------------------------------------------------------------------------------------------------
Long-term debt -- 202,860
Deferred officers' compensation 269,218 267,921
Other liabilities 227,641 112,184
- ------------------------------------------------------------------------------------------------
Total liabilities 5,264,062 5,946,084
- ------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
1,000,000 shares authorized, no shares issued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,507,968 and 4,792,004 shares issued 45,079 47,920
Capital in excess of par value 15,015,344 15,904,753
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (9,722,232) (7,009,498)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 4,161,654 7,766,638
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,425,716 $ 13,712,722
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statements of Changes in Stockholders' Equity
Serial Capital In
Preferred Stock Common Stock Excess of
Shares Par Value Shares Par Value Par Value
Balance as of October 31, 1993 -- -- 4,372,661 $ 43,726 $ 14,758,655
Exercise of common stock options -- -- 6,850 69 7,344
Net loss for the year ended
October 31, 1994 -- -- -- -- --
Balance as of October 31, 1994 -- -- 4,379,511 43,795
Exercise of common stock options -- -- 25,600 256 25,373
Release of mandatorily
redeemable common stock -- -- 102,857 1,028
Net income for the year ended
October 31, 1995 -- -- -- -- --
Balance as of October 31, 1995 -- -- 4,507,968 45,079
Exercise of common stock options -- -- 219,114 2,192 305,758
Issuance of common stock in
conjunction with acquisition
of Phonatic International B.V -- -- 64,922 649 583,651
Net income for the year ended
October 31, 1996 -- -- -- -- --
Balance as of October 31, 1996 -- -- 4,792,004 $ 47,920 $ 15,904,753
Treasury Stock Accumulated
Shares Cost Deficit Total
Balance as of October 31, 1993 601,870 $ (1,176,537) $ (6,125,322) $ 7,500,522
Exercise of common stock options -- -- -- 7,413
Net loss for the year ended
October 31, 1994 -- -- (4,984,041) (4,984,041)
Balance as of October 31, 1994 14,765,999 601,870 (11,109,363) 2,523,894
Exercise of common stock options -- -- -- 25,629
Release of mandatorily
redeemable common stock 223,972-- -- -- 225,000
Net income for the year ended
October 31, 1995 -- -- 1,387,131 1,387,131
Balance as of October 31, 1995 15,015,344 601,870 (9,722,232) 4,161,654
Exercise of common stock options -- -- -- 307,950
Issuance of common stock in
conjunction with acquisition
of Phonatic International B.V -- -- -- 584,300
Net income for the year ended
October 31, 1996 -- -- 2,712,734 2,712,734
Balance as of October 31, 1996 601,870 $ (1,176,537) $ (7,009,498) $ 7,766,638
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
Year Ended October 31,
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(4,984,041) $ 1,387,131 $ 2,712,734
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation 879,046 474,537 633,182
Deferred officers' compensation 18,000 -- (1,297)
Amortization of goodwill and licensing agreement 274,713 184,706 227,742
(Gain) loss on disposition of fixed assets 18,544 2,869 (55,455)
Deferred tax benefit -- -- (650,000)
Changes in assets and liabilities:
Receivables 1,433,393 (358,586) (1,198,255)
Inventories 1,042,768 (554,705) (781,417)
Other current assets (78,595) 47,225 (98,186)
Accounts payable 307,894 304,152 (425,407)
Accrued compensation and related expenses 43,751 469,038 (228,625)
Other accrued expenses 729,378 (352,394) (322,770)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (315,149) 1,603,973 (187,754)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (487,103) (543,159) (1,318,969)
Proceeds from sale of fixed assets 65,638 1,150 72,000
Purchase of Phonatic International B.V. -- -- (110,635)
Other assets (212,155) 132,795 130,703
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (633,620) (409,214) (1,226,901)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Reduction in long-term debt (505,244) (1,463,819) (45,455)
Net borrowings under line-of-credit agreement -- -- 1,400,000
Exercise of common stock options 7,413 25,629 307,950
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (497,831) (1,438,190) 1,662,495
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,446,600) (243,431) 247,840
Cash and cash equivalents at beginning of year 2,612,794 1,166,194 922,763
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,166,194 $ 922,763 $ 1,170,603
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
1
- --------------------------------------------------------------------------------
Basis of Presentation and Major Customers
The accompanying consolidated financial statements include the accounts of
Microlog Corporation and its wholly-owned subsidiaries (collectively, the
Company). All intercompany transactions have been eliminated.
Microlog Corporation of Maryland, a subsidiary, designs, assembles, markets, and
services customized voice processing systems and other communications products.
Old Dominion Systems Incorporated of Maryland, a subsidiary, is engaged in
providing performance analysis of certain major weapons systems and related data
processing support to the Federal Government through prime contractors.
A summary of information about the Company's operations by business segment is
as follows:
Year Ended October 31,
1994 1995 1996
---- ---- ----
(Amounts in thousands)
Net sales:
Voice processing systems and
other communications products $10,574 $14,089 $15,836
Performance analysis and
support services 8,095 8,297 9,871
- --------------------------------------------------------------------------------
Net sales $18,669 $22,386 $25,707
- --------------------------------------------------------------------------------
Income (loss) from operations:
Voice processing systems and
other communications products $(5,363) $ 795 $ 1,131
Performance analysis and
support services 446 705 980
- --------------------------------------------------------------------------------
Income (loss) from operations $(4,917) $ 1,500 $ 2,111
- --------------------------------------------------------------------------------
Identifiable assets:
Voice processing systems and
other communications products $ 4,968 $ 6,383 $10,822
Performance analysis and
support services 1,785 683 645
Buildings for common use 2,303 2,360 2,246
- --------------------------------------------------------------------------------
Identifiable assets $ 9,056 $ 9,426 $13,713
- --------------------------------------------------------------------------------
Capital expenditures:
Voice processing systems and
other communications products $ 459 $ 531 $ 1,550
Performance analysis and
support services 13 2 15
Buildings for common use 15 10 25
- --------------------------------------------------------------------------------
Capital expenditures $ 487 $ 543 $ 1,590
- --------------------------------------------------------------------------------
Depreciation expense:
Voice processing systems and
other communications products $ 781 $ 358 $ 501
Performance analysis and
support services 5 6 8
Buildings for common use 93 111 124
- --------------------------------------------------------------------------------
Depreciation expense $ 879 $ 475 $ 633
- --------------------------------------------------------------------------------
Approximately 32%, 38%, and 37% of the Company's consolidated net sales for
fiscal 1994, 1995, and 1996, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.
Approximately 0%, 3%, and 10% of the Company's consolidated net sales for
fiscal 1994, 1995, and 1996, respectively, involved the sale of voice processing
systems and other communications products to one customer in the pharmaceutical
industry.
Approximately 4%, 6%, and 6% of the Company's consolidated net sales for
fiscal 1994, 1995, and 1996, respectively, involved the export of voice
processing systems and other communications products to foreign countries.
Approximately 43%, 37%, and 38% of the Company's consolidated net sales for
fiscal 1994, 1995, and 1996, respectively, involved performance analysis and
support services subcontracts with prime contractors to the US Navy. These
contracts have been extended, or have options to extend, to various dates in
fiscal 1997 and 1998.
The Company extends credit to its customers and billings are made in
accordance with contract terms.
2
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Summary of Accounting Policies
Use of Estimates
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates and assumptions.
Revenue Recognition
Sales of products and services are recognized at the time deliveries are made or
services are performed.
Contract revenues are recognized on the percentage of completion basis for
fixed-price contracts. Revenues are recorded to the extent costs have been
incurred for cost-plus-fixed-fee contracts, including a percentage of the fixed
fee computed in accordance with the contract provisions. Revenues for time and
materials contracts are recognized at negotiated hourly rates as incurred and as
materials are delivered. Provisions for losses on contracts in progress are
provided when, in the opinion of management, such losses are anticipated.
Certain contracts are subject to audit and possible adjustment by the Federal
Government. Contract costs have been examined and settled through fiscal 1992.
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of less
than three months to be cash equivalents. Cash equivalents consist of US
treasury bills, certificates of deposit, and repurchase agreements, which are
collateralized by securities issued or guaranteed by the US Treasury.
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 carrying amounts of debt issued pursuant to the Company's bank credit
agreements approximate fair value because the interest rates on these
instruments change with market interest rates.
Inventories
Inventories are stated at the lower of cost, determined on the first-in
first-out method, or market.
Fixed Assets
Fixed assets are recorded at cost and depreciated on a straight-line basis for
financial reporting purposes and accelerated methods for income tax purposes.
Intangible Assets
Licenses are recorded at cost and amortized on a straight-line basis over seven
years. Accumulated amortization at October 31, 1995 and 1996 was $276,190 and
$390,476, respectively.
Goodwill arising from the acquisitions of companies is being amortized on a
straight-line basis over six to seven years. The Company considers goodwill to
be recoverable and is evaluated quarterly based on current undiscounted cash
flow projections of each specific acquired business. Accumulated amortization at
October 31, 1995 and 1996 was $568,727 and $682,183, respectively.
Costs incurred in basic research and development are expensed as incurred.
The Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
Warranty Reserve
Normal product warranty for service and repairs is generally provided for 90
days to two years, subsequent to delivery. Based on experience, the Company has
accrued expenses related to warranty obligations.
Net Income (Loss) Per Share
Net income (loss) per common share is computed by dividing net income (loss) for
the period by the weighted average number of shares outstanding, adjusted for
the effect of common stock equivalents arising from the assumed exercise of
stock options, if dilutive. The weighted average number of shares outstanding
for the years ended October 31, 1994, 1995, and 1996 were 3,877,029, 4,066,705,
and 4,566,199, respectively.
3
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Acquisition of Phonatic International B.V. On June 28, 1996, the Company
acquired Phonatic International B.V. of The Netherlands. The Company changed the
name of Phonatic to Microlog Europe, a wholly-owned subsidiary of Microlog
Corporation of Maryland. To acquire Phonatic, the Company acquired assets of
$151,513, issued 64,922 shares of its common stock valued at $584,300, paid
$233,720 in cash to the Phonatic shareholders, assumed $107,976 in liabilities,
and incurred acquisition costs totaling approximately $46,000.
The acquisition has been accounted for as a purchase and therefore only
activity subsequent to the acquisition date has been included in consolidated
results. The excess of the purchase price over the fair value of net assets
acquired totaled $774,483 and has been recorded as goodwill.
4
- --------------------------------------------------------------------------------
Receivables
Receivables consist of the following:
October 31,
1995 1996
---- ----
Billed accounts receivable $ 3,094,035 $ 4,339,445
Contract retention 78,742 77,742
Accumulated unbilled costs and fees 40,594 49,742
- --------------------------------------------------------------------------------
3,213,371 4,466,929
Less: Allowance for doubtful accounts (167,211) (207,088)
- --------------------------------------------------------------------------------
$ 3,046,160 $ 4,259,841
- --------------------------------------------------------------------------------
5
- --------------------------------------------------------------------------------
Inventories
Inventories consist of the following:
October 31,
1995 1996
---- ----
Components and finished goods $ 1,999,192 $ 1,951,370
Work-in-process 492,312 519,554
- --------------------------------------------------------------------------------
2,491,504 2,470,924
Less: Reserve for obsolescence (1,054,615) (252,618)
- --------------------------------------------------------------------------------
$ 1,436,889 $ 2,218,306
- --------------------------------------------------------------------------------
During fiscal 1996, the Company adjusted its reserve for obsolescence by
approximately $800,000. The Company disposed of obsolete inventory relating to
the CINDI and VCS 3500 lines of voice processing products for which it had
previously reserved.
6
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Fixed Assets
Fixed assets consist of the following:
October 31,
1995 1996
---- ----
Buildings $ 2,532,567 $ 2,511,266
Land 520,000 520,000
Office furniture, equipment,
and capital leases 3,621,890 3,119,150
Vehicles 23,642 23,642
Leasehold improvements 211,021 176,096
- --------------------------------------------------------------------------------
6,909,120 6,350,154
Less: Accumulated depreciation (3,902,592) (2,463,783)
- --------------------------------------------------------------------------------
$ 3,006,528 $ 3,886,371
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements
Estimated useful lives are as follows:
Buildings: 30-40 years
Office furniture, equipment, and vehicles: 3-7 years
Capital leases and Shorter of estimated
leasehold improvements: useful life or lease term
Depreciation expense during fiscal 1994, 1995, and 1996 includes capital
lease amortization of approximately $52,000, $0, and $0, respectively.
7
Accrued Expenses
Accrued expenses consist of the following:
October 31,
1995 1996
---- ----
Accrued restructuring costs $ 184,615 $ 115,458
Accrued warranty and deferred maintenance 695,369 585,220
Other 350,326 370,295
- --------------------------------------------------------------------------------
$ 1,230,310 $ 1,070,973
- --------------------------------------------------------------------------------
8
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Debt
In December 1995, the Company entered into a new line of credit facility with a
bank under which it can borrow up to 70% of its eligible receivables to a
maximum of $2,000,000. The line of credit bears interest at the bank's prime
rate plus 1.25% (9.50% at October 31, 1996), and contains a 1/2 of 1% commitment
fee on the average unused portion of the line. The line expires on February 28,
1997 and subjects the Company to a number of restrictive covenants, including a
requirement to maintain a minimum consolidated tangible net worth, a maximum
ratio of total liabilities to tangible net worth, and a minimum current ratio.
There are restrictions on mergers or acquisitions, payment of dividends, and
certain restrictions on additional borrowings. The line is secured by all of the
Company's tangible assets. At October 31, 1996, $400,000 was outstanding against
this line of credit.
In April 1996, the Company added a $1,000,000 loan facility to its existing
$2,000,000 line of credit. This additional line of credit bears interest at the
bank's prime rate plus 0.5% (8.75% at October 31, 1996), and contains a 0.5% fee
on the average unused portion of the loan. The line contains the same
restrictive covenants as the $2,000,000 line of credit, and the agreements for
the line of credit and loan facility contain cross default provisions. The loan
agreement allows the Company, at its option, to make monthly interest-only
payments on the outstanding principal balance, but all outstanding amounts are
due in full on February 28, 1998. The line is secured by the Company's principal
headquarters building. At October 31, 1996, $1,000,000 was outstanding against
this line of credit.
On June 30, 1996, the Company entered into a contract to purchase a new
management information system including a five year maintenance plan. The
purchase, including maintenance, is being financed by the vendor over a five
year term at an annual interest rate of 8%. The financing terms require five
annual payments of $140,000 each, including interest, beginning on June 30,
1996. The final payment is due on June 30, 2000.
9
- --------------------------------------------------------------------------------
Restructuring of Operations
During the third quarter of both fiscal 1992 and 1994, the Company restructured
and consolidated its voice processing operations and incurred restructuring
charges of $1,280,000 and $550,258, respectively. Approximately $980,000 of the
restructuring charge in fiscal 1992 related to leased facilities which were in
excess of the Company's needs. The fiscal 1994 restructuring included
approximately $224,000 for the severance costs of 23 employees, $62,000
associated with the closing of a sales office, $165,000 associated with the
remaining expense of a consulting contract with the Company's former chief
executive officer, and a $99,000 write-off of fixed assets.
The following table sets forth the Company's restructuring reserves for the
years ended October 31, 1994, 1995, and 1996.
Employee Asset
Separations Writedowns Facilities Other Total
----------- ---------- ---------- ----- -----
Reserve balance,
October 31, 1993 $ 50,769 $ -- $ 298,162 $ -- $ 348,931
Total 1994 restructuring
of operations loss 223,987 98,908 62,493 164,870 550,258
Cash payments (185,717) -- (110,522) (22,482) (318,721)
Non-cash items -- (67,702) -- -- (67,702)
Reserve balance,
October 31, 1994 89,039 31,206 250,133 142,388 512,766
Cash payments (89,039) -- (75,244) (89,929) (254,212)
Non-cash items -- (20,804) -- -- (20,804)
Reserve balance,
October 31, 1995 -- 10,402 174,889 52,459 237,750
Cash payments -- -- (60,608) (52,459) (113,067)
Non-cash items -- (10,402) -- -- (10,402)
Reserve balance,
October 31, 1996 $ -- $ -- $ 114,281 $ -- $ 114,281
Notes to Consolidated Financial Statements
10
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Commitments and Contingencies
Compensation Arrangements
In February 1988, the Company entered into non-contributory deferred
compensation contracts with three officers, which concluded on January 1, 1993.
The general provisions of the contracts called for the Company to make payments
to the employees over ten years subsequent to their retirement. The amount of
such payments was based on $72,000 aggregate annual deferred compensation
(limited to certain minimum net income levels under the original five year
contracts) plus interest at prime rates through the individual employee's
retirement date. Effective April 30, 1991, one of these individuals retired from
the Company and elected to receive his deferred compensation over the ten year
period. As of May 1, 1991, the Company ceased making contributions and
accumulating interest to his deferred compensation contract. The Company has
expensed $545, $0, and $9,617, in fiscal 1994, 1995, and 1996, respectively.
The Company is a party to employment agreements, expiring in 1998 and 1999,
with several of its executive officers. Under certain conditions, these
individuals will be entitled to receive lump sum or monthly payments which
aggregate approximately $505,000.
Operating Lease Obligations
The Company has obtained the use of certain facilities and other equipment
through noncancellable operating leases, which expire in various years through
1999. Minimum future noncancellable operating lease payments as of October 31,
1996 are as follows:
Operating Leases
Year Ending
October 31, Gross Sublease Net
- --------------------------------------------------------------------------------
1997 $ 577,009 $ (277,848) $ 299,161
1998 564,729 (203,755) 360,974
1999 338,983 -- 338,983
- --------------------------------------------------------------------------------
$ 1,480,721 $ (481,603) $ 999,118
- --------------------------------------------------------------------------------
As of October 31, 1996, the Company has reserves of $228,000 for the
remaining net operating lease obligation of $552,000 associated with its Rancho
Cordova facility. Rent expense under noncancellable operating lease agreements
in fiscal 1994, 1995, and 1996 was approximately $225,000, $267,000, and
$275,000 (net of sublease income of $278,000, $278,000, and $278,000),
respectively.
Legal
As part of the fiscal 1993 settlement of a lawsuit, the Company issued $225,000
(102,857 shares) of mandatorily redeemable common stock to VMX, Inc. (VMX). On
July 26, 1995, VMX sold all of these shares in the open market and the Company
was released from any future redemption requirements.
The Company is subject to litigation from time to time arising from its
operations and receives occasional letters alleging infringement of patents
owned by third parties. Management believes that such litigation and claims are
without merit and will not have a material effect on the Company's financial
position or results of operations.
Royalties
As part of the VMX lawsuit settlement, the Company is committed to pay annual
license maintenance fees of $120,000 to VMX under certain call processing
patents, which expire 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 Rhetorex, a wholly-owned subsidiary of VMX.
11
- --------------------------------------------------------------------------------
Stock Option Plans
The Company has two incentive stock option plans. Under the first plan, the
Company may grant options to Directors and employees to purchase up to 750,000
shares of common stock at not less than fair market value at the time of grant.
Under the second plan, approved by the shareholders on March 26, 1996, the
Company may grant options to employees to purchase up to 1,000,000 shares of
common stock at not less than fair market value at the time of grant. Additional
information with respect to the incentive stock option activity is summarized in
the following table:
Option Amount
Number ------------------------------
of Shares Per Share Total
Shares under option,
October 31, 1993 507,600 $ 1.00-5.00 $ 1,001,850
Options granted 36,750 1.00-2.38 39,938
Options canceled (103,750) 1.00-5.00 (308,494)
Options exercised (6,850) 1.00-2.25 (7,413)
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1994
433,750 1.00-5.00 725,881
Options granted 587,167 1.00-4.38 1,877,943
Options canceled (85,785) 1.00-2.38 (144,648)
Options exercised (25,600) 1.00-1.13 (25,629)
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1995 909,532 1.00-5.00 2,433,547
Options granted 253,875 5.50-9.75 1,581,141
Options canceled (104,279) 1.00-9.75 (338,922)
Options exercised (194,114) 1.00-5.00 (268,601)
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1996 865,014 $ 1.00-9.75 $ 3,407,165
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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, 1996, options available for granting were
521,500, and granted options for purchasing 310,170 shares, at prices ranging
from $1.00 to $5.50 per share, were exercisable.
Additionally, the Company maintains a non-employee Director stock option
plan. Under this plan, which was amended in December 1995 and approved by the
shareholders on March 26, 1996, the Company may grant up to 125,000 shares at
not less than the fair market value at the time of grant. Additional information
is as follows:
Option Amount
--------------------------
Number
of Shares Per Share Total
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1993 57,000 $ 1.37-6.75 $ 155,250
Options Granted 2,000 1.37 2,750
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1994 59,000 1.37-6.75 158,000
Options Granted 2,000 1.37 2,750
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1995 61,000 1.37-6.75 160,750
Options Granted 6,000 5.50 33,000
Options Exercised (23,000) 1.37-2.75 (35,000)
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1996 44,000 $ 1.37-6.75 $ 158,750
- --------------------------------------------------------------------------------
Options granted under the plan vest immediately and expire ten years from
the date of grant. As of October 31, 1996, options available for granting were
58,000.
The Company has 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 the Board of Directors may determine. Additional information is as
follows:
Number Option Amount
of Shares Per Share Total
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1993 2,000 $ 2.13 $ 4,250
Options Granted 1,000 1.00 1,000
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1994 3,000 1.00-2.13 5,250
Options Granted 45,000 1.00-2.94 54,688
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1995 48,000 1.00-2.94 59,938
Options Granted 5,000 8.38 41,875
Options Exercised (2,000) 2.13 (4,250)
- --------------------------------------------------------------------------------
Shares under option,
October 31, 1996 51,000 $ 1.00-8.38 $ 97,563
- --------------------------------------------------------------------------------
Options granted vest immediately to ratably over three years and expire ten
years from the date of grant. As of October 31, 1996, granted options for
purchasing 21,000 shares, at $1.00 per share, were exercisable. Compensation
expense associated with these options was not material.
The Company also has reserved 50,000 shares for issuance outside these
plans as stock options or stock bonuses to key employees. These shares may be
granted at such times and under such terms as the Board of Directors may
determine. No grants or issuances had been made as of October 31, 1996.
12
- --------------------------------------------------------------------------------
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. The
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 1994, 1995, and 1996
consists of:
Year Ended October 31,
1994 1995 1996
---- ---- ----
Income taxes payable $ 23,234 $ 20,000 $ 10,704
Change in valuation allowance -- -- (650,000)
- --------------------------------------------------------------------------------
$ 23,234 $ 20,000 $(639,296)
- --------------------------------------------------------------------------------
Income taxes payable in fiscal 1994 relate to state income taxes. Income
taxes payable in fiscal 1995 and 1996 relate to state income taxes and the
alternative minimum tax for Federal income tax. The Company has recorded a
deferred tax asset of $650,000 in fiscal 1996 reflecting the benefit of
approximately $1.6 million in loss carryforwards, which expire in varying
amounts between 2008 and 2007. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The Company has provided a valuation allowance for the remaining $8.1 million of
net operating losses as management has determined it more likely than not that
this amount will not be realized.
Notes to Consolidated Financial Statements
A reconciliation of the statutory Federal tax rate to the Company's
effective tax rate is as follows:
Year Ended October 31,
1994 1995 1996
---- ---- ----
Statutory Federal tax rate (benefit) (34.0%) 34.0% 34.0%
State income taxes, net of
Federal tax benefit (5.0) 5.0 5.0
Benefit not recorded due to
net carryforward position 36.0 -- --
Utilization of net operating loss -- (42.6) (40.9)
Goodwill amortization 3.2 4.4 3.0
Change in valuation allowance -- -- (31.3)
Other 0.3 0.6 (0.6)
- --------------------------------------------------------------------------------
0.5% 1.4% (30.8)%
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
October 31,
1995 1996
---- ----
Accounts receivable reserve $ 65,212 $ 80,764
Inventory reserves 360,257 98,521
Accrued vacation and benefits 175,148 174,244
Warranty reserves 52,553 --
Restructuring reserves 160,781 88,781
Deferred compensation 104,995 104,489
Deferred revenues 95,444 228,236
Sales returns 21,304 --
Other 145,606 160,892
Loss carryforwards 3,750,602 3,175,623
- --------------------------------------------------------------------------------
Gross deferred tax assets 4,931,902 4,111,550
Valuation allowance (4,931,902) (3,461,550)
- --------------------------------------------------------------------------------
Net deferred tax asset $ -- $ 650,000
- --------------------------------------------------------------------------------
The net change in the valuation allowance for deferred tax assets was a
decrease of $1,470,352 during the year and relates primarily to utilization of
loss carryforwards, the release of a portion of the valuation allowance, and the
reversal of other temporary differences.
Approximately $9.7 million of tax loss carryforwards and $156,000 of
research and development tax credits can be utilized by the Company through 2008
and 2007, respectively. If certain substantial changes in the Company's
ownership should occur, there would be an annual limitation on the amount of the
carryforwards which can be utilized.
13
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Pension and Profit Sharing Plans
The Company has a defined contribution pension plan covering all employees.
After the employee completes one year of service, the plan provides for annual
contributions by the Company equal to 6% of the employee's 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. In accordance with the plan,
unvested amounts relating to terminated employees with a break in service
greater than one year are credited against pension contributions by the Company.
Such forfeitures amounted to $115,000, $111,000, and $111,000 in fiscal 1994,
1995, and 1996, respectively. It is the Company's policy to fund pension cost
accrued. Net expense of the plan was approximately $331,000, $365,000, and
$365,000 in fiscal 1994, 1995, and 1996, respectively.
The Company also maintains a 401(k) profit sharing plan and trust. The plan
allows for employees to contribute up to 10% of gross salary 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 $145,000, $138,000, and $176,000 in fiscal 1994, 1995, and
1996, respectively.
14
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Supplemental Cash Flow Information
The Company paid cash for interest expense and income taxes as follows:
Year Ended October 31,
1994 1995 1996
---- ---- ----
Interest $ 137,400 $ 112,243 $ 81,000
Income taxes $ 31,500 $ 23,234 $ 20,983
Non-cash investing and financing activities:
Note issued for purchase of fixed assets (Note 8) $257,600
Details of acquisition (Note 3):
Fair value of assets acquired $925,996
Liabilities assumed 107,976
Common stock issued 584,300
- --------------------------------------------------------------------------------
Cash paid 233,720
Less: cash acquired 123,085
- --------------------------------------------------------------------------------
Net cash paid for acquisition $110,635
- --------------------------------------------------------------------------------
As discussed in Note 10, in 1995, the Company was released from its
obligation to repurchase common stock from VMX, when all of the 102,857 shares
were sold by VMX in the open market. As a result, the Company's liability to VMX
of $225,000 was credited to stockholders' equity in the consolidated balance
sheet.
Notes to Consolidated Financial Statements
15
- --------------------------------------------------------------------------------
Selected Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results and the price
range of common stock for the Company's last eight fiscal quarters.
Jan. 31, April 30, July 31, Oct. 31,
1995 1995 1995 1995
---- ---- ---- ----
Net sales $5,428,806 $5,306,899 $5,555,881 $6,094,057
Gross margin 2,092,901 2,297,968 2,418,972 2,656,161
Income from operations 280,974 340,337 383,013 496,019
Net income 263,844 302,691 361,667 458,929
Per common share: $ 0.07 $ 0.08 $ 0.09 $ 0.11
- --------------------------------------------------------------------------------
Stock prices
High 1.500 $ 1.813 $ 3.375 $ 5.125
Low $ 0.500 $ 0.875 $ 1.250 $ 2.750
- --------------------------------------------------------------------------------
Jan. 31, April 30, July 31, Oct. 31,
1996 1996 1996 1996
---- ---- ---- ----
Net sales $5,915,273 $6,537,208 $6,565,486 $6,688,768
Gross margin 2,422,093 2,861,600 2,729,190 2,585,733
Income from operations 496,689 594,614 570,546 448,864
Net income 465,150 571,133 546,287 1,130,164
Per common share $ 0.11 $ 0.13 $ 0.12 $ 0.23
- --------------------------------------------------------------------------------
Stock prices
High $ 6.375 $ 10.000 $ 12.625 $ 8.125
Low $ 4.125 $ 4.500 $ 5.000 $ 5.250
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Stockholders
Microlog Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Microlog Corporation and its subsidiaries at October 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Washington, DC December 16, 1996
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table sets forth for the fiscal periods indicated the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of operations and the percentage change in these items
from the prior fiscal period.
Period-to-Period
Percentage Changes
Percentage of Net Sales
Year Ended October 31, 1994 1995
to to
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
Net sales:
Voice processing 56.6% 62.9% 61.5% 33.2% 12.4%
Performance analysis 43.4% 37.1% 38.5% 2.5% 19.0%
- ------------------------------------------------------------------------------------
Total net sales 100.0% 100.0% 100.0% 19.9% 14.8%
- ------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 77.1% 57.7% 58.8% (10.2%) 16.9%
Selling, general and
administrative 37.5% 28.5% 24.9% (9.0%) --
Research and development 8.8% 7.1% 8.1% (3.2%) 31.5%
Restructuring costs 2.9% -- -- (100.0%) --
- ------------------------------------------------------------------------------------
Total costs and expenses 126.3% 93.3% 91.8% (11.4%) 13.0%
Investment and other income
(expense), net (0.3%) (0.4%) (0.1%) 111.2% (60.0%)
- ------------------------------------------------------------------------------------
Income (loss) before income taxes (26.6%) 6.3% 8.1% 128.4% 47.4%
- ------------------------------------------------------------------------------------
Benefit (provision) for income taxes (0.1%) (0.1%) 2.5% (13.9%) --
- -------------------------------------------------------------------------------------
Net income (loss) (26.7%) 6.2% 10.6% 127.8% 95.6%
- -------------------------------------------------------------------------------------
Results of Operations
The Company had net income of $2.7 million ($.59 per share) for the fiscal year
ended October 31, 1996. These results include a $650,000 ($0.14 per share)
income tax benefit associated with the expected future realization of the
Company's net operating loss carryforwards that management believes is more
likely than not to be realized. By comparison, the Company had net income of
$1.4 million ($.34 per share), which did not include an income tax benefit, for
the fiscal year ended October 31, 1995, and had a net loss of $5.0 million
($1.29 per share), for the fiscal year ended October 31, 1994. The improvement
in earnings in fiscal 1996 was primarily attributable to increases in voice
processing net sales as well as increases in performance analysis net sales.
Net Sales
Net sales for fiscal 1996 were $25.7 million, which represented an increase of
15% from net sales in fiscal 1995. Net sales for fiscal 1995 were $22.4 million,
which represented an increase of 20% from net sales in fiscal 1994. The increase
in fiscal 1996 was due to increases in voice processing net sales as well as
increases in performance analysis net sales. The increase in fiscal 1995 was
primarily attributable to increases in voice processing net sales.
Voice Processing Net Sales
The Company's voice processing net sales increased 12% in fiscal 1996 to $15.8
million, compared to $14.1 million in fiscal 1995. The increase in net sales
during fiscal 1996 included an increase of 16% in voice processing product sales
and an increase of 5% in product support and services sales. The increase in
product sales is primarily attributable to an increase in sales to commercial
customers ($2.2 million), of the Company's Retail Solutions product line, and an
increase in sales to international customers ($0.4 million), offsetting a
decrease in sales to distributors ($0.9 million). The Company's voice processing
net sales increased 33% in fiscal 1995 to $14.1 million, compared to $10.6
million in fiscal 1994. The increase in net sales during fiscal 1995 resulted
from an increase of 26% in voice processing product sales, and by an increase of
54% in product support and services sales. The increase in product sales was
primarily attributable to an increase in sales to government customers ($3.6
million), which was due to the attractiveness to government customers of the
Company's Intela and VCS 3500 products, to an increase in sales to commercial
customers ($0.7 million) of the Company's Retail Solutions product line, and to
an increase in sales to international customers ($0.4 million).
In 1996, sales to the Company's 10 largest customers accounted for 82% of voice
processing sales. One of the three largest customers was in each of the
Company's three sectors, commercial, government, and international. The 10
largest customers in 1995 accounted for 73% of voice processing sales. In 1995,
two of the three largest customers were in the government sector. In 1994, the
Company's 10 largest customers accounted for only 50% of voice processing sales.
During fiscal 1996, approximately $9.6 million (61% of voice processing net
sales and 37% of consolidated net sales) were in the government sector. This
compares to $9.6 million (68% of voice processing net sales and 43% of
consolidated net sales) for fiscal 1995 and $5.9 million (56% of voice
processing net sales and 32% of consolidated net sales) for fiscal 1994.
Traditionally, the government market has produced strong results for the
Company.
Sales to commercial customers increased 144% to $3.9 million (24% of voice
processing net sales) in fiscal 1996. By comparison, sales to commercial
customers were $1.6 million (12% of voice processing net sales) in fiscal 1995
and $1.0 million (9% of voice processing net sales) in fiscal 1994. Commercial
sales increased in fiscal 1996 primarily as a result of increased sales of the
Company's Retail Solutions product line. The Retail Solutions product line
offers multiple voice processing applications designed to improve operations at
retail pharmacies.
Sales to the Company's distributors of voice mail products decreased 56% to $0.7
million (4% of voice processing net sales) in fiscal 1996. By comparison, sales
to distributors were $1.6 million (12% of voice processing net sales) in fiscal
1995 and $2.8 million (27% of voice processing net sales ) in fiscal 1994. This
decrease in net sales is primarily the result of the Company's decision to focus
its sales and marketing efforts on its interactive information response
products, and price decreases in the market for voice mail products.
International voice processing sales increased 23% to $1.6 million (10% of voice
processing net sales) in fiscal 1996. This compares to $1.3 million (9% of voice
processing net sales) in fiscal 1995 and $.8 million (8% of voice processing net
sales) in fiscal 1994. The increase in international sales is the result of
sales by third party resellers of the Company's products such as Philips
Communications Systems B.V. of The Netherlands and Communication & Network
Systems PTE, Ltd. of Singapore. The Company is actively pursuing additional
third party resellers of the Company's products. Also, during fiscal 1996, the
Company acquired Phonatic International B.V. of The Netherlands to strengthen
its presence in the European information response market. The new Microlog
subsidiary operates under the name Microlog Europe and is headquartered in
Neunen, The Netherlands.
In fiscal 1996, the Intela product became the Company's principal interactive
information response (IIR) system surpassing the VCS 3500 platform. Intela
product revenues for fiscal 1996 were $5.2 million as compared to $2.0 million
in fiscal 1995, while VCS 3500 product revenues were $2.2 million in fiscal 1996
as compared to $5.0 million in fiscal 1995. The Company also introduced a UNIX
version of its APRS Automated Prescription Refill System in fiscal 1996.
As of October 31, 1996, the Company had a backlog of existing orders for voice
processing systems totaling $4.9 million. The backlog, as of October 31, 1995,
was $3.7 million. The Company has experienced fluctuations in its backlog at
various times during the past two fiscal years attributable primarily to the
seasonality of governmental purchases. In addition, the Company has observed a
lengthening of the period between the date of booking an order and the date of
shipment, with the shipment depending on customer delivery schedules and the
level of customization required for Intela applications. The Company anticipates
that all of the outstanding orders at October 31, 1996 will be shipped and the
sales recognized during fiscal 1997. Although the Company believes that its
entire backlog of orders consists of firm orders, because of the possibility of
customer changes in delivery schedules and delays inherent in the government
contracting process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.
Performance Analysis and Support Services Net Sales
Net sales from performance analysis and support services for fiscal 1996 were
$9.9 million, which represented a 19% increase from the net sales from this line
of business during the prior year. Net sales for fiscal 1995 were $8.3 million,
representing an increase of 3% from $8.1 million in fiscal 1994. These increases
resulted from the addition of new contracts, as well as increases in the level
of work authorized under existing contracts from the Johns Hopkins University
Applied Physics Laboratory (APL), the Company's principal customer for these
services.
The Company believes that its performance analysis contracts are likely to
continue to provide a stable source of sales for the Company. The Company does
not anticipate that any changes in defense priorities or spending will result in
any material adverse affect over the next fiscal year on its net sales from
performance analysis and support services nor alter the manner in which it
procures contracts for such services. However, there is no assurance that
changes in defense priorities or continuing budget reductions will not cause
such an effect during the fiscal year or thereafter.
As of October 31, 1996, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $5.5 million.
By comparison, the backlog as of October 31, 1995 was $7.8 million. The Company
anticipates that these services will be provided during the next three fiscal
years. The Company estimates that of the $5.5 million of backlog at October 31,
1996, $1.9 million will be recognized as sales beyond fiscal 1997. Because of
the delays inherent in the government contracting process or possible changes in
defense priorities or spending, the Company's backlog as of any particular date
may not be indicative of actual sales for any future period. Although the
Company believes that its backlog of funding on existing contracts is firm, the
possibility exists that funding for some contracts on which the Company is
continuing to work, in the expectation of renewal, may not be authorized (and
the Government has the right to cancel contracts at any time), although to date
this has not occurred.
Costs and Expenses
Cost of sales of products were $5.2 million, or 45% of net sales of products,
for fiscal 1996; $4.7 million, or 48% of net sales of products, for fiscal 1995;
and $5.8 million, or 73% of net sales of products, for fiscal 1994. The decrease
in cost of sales of products for fiscal 1996 is primarily attributable to
increased sales of the Intela and Retail Solution products and decreased sales
of the CallStar and VCS products, which have a higher cost of sales. The high
cost of sales of products for fiscal 1994 is largely attributable to a reserve
of $1,137,039 for obsolete inventory; without this reserve, costs of sales of
products for the year ended October 31, 1994 would have equaled $4.7 million, or
59% of net sales. During the third quarter of fiscal 1994, the Company adjusted
its reserve for obsolete inventory by $1,137,039. The Company discontinued
manufacture of the CINDI line of voice processing products in January 1992, but
the demand for replacement parts had declined more rapidly than expected. As a
result, the Company reserved $375,000 for the CINDI product line. In addition,
the introduction of the Company's VCS Intela product in March 1994 and the
switch from 386 CPUs to 486/Pentium CPUs in the Company's voice processing
products made it necessary to reserve $762,000 for components relating to its
VCS 3500 product line. During fiscal 1996, obsolete inventory of approximately
$800,000 relating to the CINDI and VCS 3500 product lines was disposed of.
Cost of sales of services were $9.9 million, or 70% of net sales of services,
for fiscal 1996; $8.2 million, or 65% of net sales of services, for fiscal 1995;
and $8.6 million, or 80% of net sales of services, for fiscal 1994. The increase
in cost of sales in fiscal 1996 is primarily attributable to the increase in net
sales of performance analysis services, which has a higher cost of sales than
voice processing services. The decrease in cost of sales in fiscal 1995 is
attributable in part to the increase in net sales of voice processing services,
which have a lower cost of sales than performance analysis. The decrease is also
attributable to a general reduction in raw materials costs and a restructuring
of the Company's voice processing operations in fiscal 1994.
Selling, general and administrative costs were $6.4 million or 25% of net sales,
for fiscal 1996; $6.4 million, or 28% of net sales, for fiscal 1995; and $7.0
million, or 38% of net sales, for fiscal 1994. The decrease in fiscal 1996 as a
percentage of revenue is primarily attributable to tighter management controls
and cost cutting measures taken by the Company. The decrease in fiscal 1995 was
primarily attributable to cost cutting measures taken by the Company and a
restructuring of the Company's operations (see Restructuring Costs).
Research and development expenses reflect costs associated with the development
of applicable software and product enhancements for the Company's voice
processing systems. The Company believes that the process of establishing
technological feasibility with its new products is completed approximately upon
release of the products to its customers. Hence, the Company does not anticipate
capitalizing research and development costs. Research and development expenses
were $2.1 million, or 8% of net sales for fiscal 1995; $1.6 million, or 7% of
net sales for fiscal year 1995; and $1.6 million, or 9% of net sales for fiscal
1994. The Company presently plans to maintain its research and development
program
at approximately the same level, although research and development expenses in
the next fiscal year are expected to be somewhat higher than fiscal 1996,
because of the Company's strategy to continue the development of new products
and the enhancement of existing products.
Restructuring Costs
In the quarter ended July 31, 1994, the Company's voice processing operations
were restructured extensively at a cost of approximately $550,000. The
restructuring included a 25% reduction in voice processing personnel at a cost
of $224,000, a $62,000 charge associated with the closing of a sales office in
California, $165,000 of expenses associated with the consulting contract between
the Company and its former Chief Executive Officer, and a $99,000 write-off of
fixed assets associated with the office closing and terminated employees. The
Company believes that the restructuring has had a positive impact on the results
of fiscal years 1996 and 1995 by reducing employment, overhead, and ongoing
costs of approximately $1.4 million annually. The Company does not believe that
any further restructuring will be required in the near future.
Investment and Other Income, Net
The Company had net investment and other expenses of $37,000 for fiscal 1996, as
compared to $93,000 for fiscal 1995 and $44,000 for fiscal 1994. The lower
expense level in fiscal 1996 resulted from a $43,000 gain on the sale of an
office condominium unit. Without this gain, the Company would have had a net
other expense of $80,000 in fiscal 1996.
Provision for Income Taxes
Income taxes payable of $23,000 in fiscal 1994 relate to state income taxes.
Income taxes payable of $20,000 in fiscal 1995 and $11,000 in fiscal 1996 relate
to state income taxes and the alternative minimum tax for Federal income tax. In
fiscal 1996, the Company has recorded a deferred tax asset of $650,000
reflecting the benefit of approximately $1.6 million in loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. 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 $9.7 million and $156,000, respectively, will be available to
offset taxes generated from future taxable income through 2008 and 2007.
Management believes that the future tax benefits associated with $8.1 million of
its net operating loss carryforwards is not more likely than not assured.
Accordingly, no such benefit has been reflected in the Financial Statements.
Liquidity and Capital Resources
Working capital as of October 31, 1996 was $3,144,000, as compared to $749,000
as of October 31, 1995. The increase is primarily attributable to increases in
cash and cash equivalents of $248,000, accounts receivable of $1,214,000,
inventories of $781,000, a deferred tax asset of $650,000, offset by an increase
in short-term borrowings of $1,400,000.
Accounts receivable as of October 31, 1996 were $4,300,000 as compared to
$3,000,000 as of October 31, 1995. The increase in accounts receivable is
primarily attributable to increased voice processing net sales.
Fixed assets as of October 31, 1996 were $3,900,000 as compared to $3,000,000 as
of October 31, 1995. The net increase in fixed assets resulted from the addition
of $1,590,000 of assets, and depreciation expense of $633,000 for fiscal 1996.
Major assets purchased included a new management information system and hardware
for $625,000 and hardware and software upgrades to the Company's internal
computer network and workstations for approximately $500,000.
In December 1995, the Company entered into a new line of credit facility with a
bank under which it can borrow up to 70% of its eligible receivables to a
maximum of $2,000,000. The line of credit bears interest at the bank's prime
rate plus 1.25% (9.50% at October 31, 1996), and contains a 1/2 of 1% commitment
fee on the average unused portion of the line. The line expires on February 28,
1997 and subjects the Company to a number of restrictive covenants, including a
requirement to maintain a minimum consolidated tangible net worth, a maximum
ratio of total liabilities to tangible net worth, and a minimum current ratio.
There are restrictions on mergers or acquisitions, payment of dividends, and
certain restrictions on additional borrowings. The line is secured by all of the
Company's tangible assets. At October 31, 1996, $400,000 was outstanding against
this line of credit.
In April 1996, the Company added a $1,000,000 loan facility to its existing
$2,000,000 line of credit. This additional line of credit bears interest at the
bank's prime rate plus 0.5% (8.75% at October 31, 1996), and contains a 0.5% fee
on the average unused portion of the loan. The line contains the same
restrictive covenants as the $2,000,000 line of credit, and the agreements for
the line of credit and loan facility contain cross default provisions. The loan
agreement allows the Company, at its option, to make monthly interest-only
payments on the outstanding principal balance, but all outstanding amounts are
due in full on February 28, 1998. The line is secured by the Company's principal
headquarters building. At October 31, 1996, $1,000,000 was outstanding against
this line of credit.
The Company believes that, through conservative management of its cash and cash
equivalents, it will not need additional financial resources beyond these
presently expected to be available during fiscal 1997. It is the intent of the
Company to pay back all outstanding amounts on the credit facilities within one
year.
On June 30, 1996, the Company entered into a contract to purchase a new
management information system including a five year maintenance plan. The
purchase, including maintenance, is being financed by the vendor over a five
year term at an annual interest rate of 8%. The financing terms require five
annual payments of $140,000 each, including interest, beginning on June 30,
1996. The final payment is due on June 30, 2000.
In October 1995, the Financial Accounting Standards Board (the "Board") issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," which the
Company expects to adopt in fiscal 1997. Adoption of this new statement is not
expected to have a material impact on the Company's financial position or
results of operations.
This report contains "forward-looking statements" within the meaning of the
Federal Securities laws. The Company's business is subject to significant risks
that could cause the Company's results to differ materially from those expressed
in any forward-looking statements made in this report.
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.
The Company was profitable in all four quarters of fiscal 1995 and fiscal 1996.
The Company's quarterly results showed continued growth in net sales, net
income, and net income per common share. The quarterly fluctuations for the four
quarters of fiscal 1995 and the first three quarters of fiscal 1996 were not
significant. In the fourth quarter of fiscal 1996, the Company's net income was
increased by a $650,000 ($0.14 per share) income tax benefit associated with the
expected future realization of the Company's net operating loss carryforwards
that management believes is more likely than not to be realized.
Price Range of Common Stock
The Common Stock is presently traded on the over-the-counter market under the
symbol MLOG. As of January 17, 1997, there were approximately 279 holders of
record of the Common Stock. This number does not reflect the number of
individuals or institutional investors holding stock in nominee name through
banks, brokerage firms, and others.
Note 15 of the Notes to Consolidated Financial Statements of the Company
contained in this Annual Report sets forth, for the period indicated, the range
of high and low transaction prices for the Common Stock as reported on the
Nasdaq Market. In February 1996, the Company returned to the Nasdaq National
Market System. The closing price of the Common Stock on January 17, 1997 was
$6.75 per share.
Dividend Policy
The Company has not paid a dividend since a $.10 cash dividend ($.033 as
adjusted for a three-for-one stock split in April 1986) was paid in November
1985. Certain of the Company's debt agreements restrict the payment of
dividends. See Note 8 of the Notes to Consolidated Financial Statements. The
Company does not anticipate paying any cash dividends in the foreseeable future.
The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
Income Statement Data:
Year Ended October 31,
1992 1993 1994 1995 1996
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Net sales $ 19,526,503 $ 20,798,323 $ 18,668,762 $ 22,385,643 $ 25,706,735
Income (loss) from
operations (3,465,726) 1,050,934 (4,916,681) 1,500,343 2,110,713
Net income (loss) (3,454,284) 919,779 (4,984,041) 1,387,132 2,712,734
Per common share:
Primary $ (.86) $ .23 $ (1.29) $ .34 $ .59
Fully diluted $ (.86) $ .22 $ (1.29) $ .34 $ .59
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Balance Sheet Data:
October 31,
1992 1993 1994 1995 1996
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Working capital $ 3,396,862 $ 4,945,780 $ (704,004) $ 748,974 $ 3,144,182
Total assets 14,084,965 13,438,828 9,055,979 9,425,716 13,712,722
Long-term debt, net
of current maturities 1,669,204 1,659,273 45,456 -- 202,860
Stockholders' equity 7,193,191 7,500,522 2,523,894 4,161,654 7,766,638
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(1) Net income for fiscal 1993 includes an extraordinary credit for the tax
benefit related to utilization of net operating loss carryforwards.
Microlog Corporate Information
Directors
David M. Gische
Attorney
Ross, Dixon & Masback
Robert E. Gray, Jr.
Senior Vice President
Prosperity Bank and Trust
J. Graham Hartwell
Chairman of the Board
Joe J. Lynn
Chief Development Officer
Richard A. Thompson
President and Chief Executive Officer
Officers
Microlog Corporation
Parent Company
Steven R. Delmar
Executive Vice President and Chief Financial Officer
Margaret C. Hartwell
Secretary and Treasurer
Joe J. Lynn
Chief Development Officer
Richard A. Thompson
President and Chief Executive Officer
Old Dominion Systems Incorporated of Maryland
Steven R. Delmar
Executive Vice President and Chief Financial Officer
Deborah M. Grove
President
Margaret C. Hartwell
Secretary and Treasurer
Richard A. Thompson
Chief Executive Officer
Microlog Corporation of Maryland
Steven R. Delmar
Executive Vice President and Chief Financial Officer
Margaret C. Hartwell
Secretary and Treasurer
Joe J. Lynn
Chief Development Officer
John C. Mears
Vice President
Product Development
Richard A. Thompson
President and Chief Executive Officer
Independent Accountants Price Waterhouse LLP 1301 K Street NW, Suite 800 W
Washington, DC 20005-3333
Legal Counsel
Hogan and Hartson
555 13th Street, NW
Washington, DC 20004-1109
Corporate Offices
20270 Goldenrod Lane
Germantown, MD 20876-4070
(301) 428-9100
Training and Operations Facility
9161 Industrial Court
Gaithersburg, MD 20877-1427
(301) 990-2580
Annual Meeting
Tuesday, March 25, 1997, 10 a.m.
Gaithersburg Hilton
620 Perry Parkway
Gaithersburg, MD 20877-2530
Transfer Agent
Continental Stock Transfer and Trust Company
2 Broadway
New York, NY 10004-2277
Ticker Symbol
NASDAQ Over-the-Counter-MLOG