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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, 1997 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 22, 1998 closing price of these shares) was approximately
$22.6 million. The Common Stock is traded over-the-counter and quoted through
the Nasdaq National Market.
As of January 22, 1998, 4,282,810 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, 1997 attached as an exhibit
hereto (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 interactive communications
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 interactive communications segment and has
been concentrating its efforts on that segment.
The results of the Company's performance during fiscal 1997, 1996, and 1995, 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, Old Dominion Systems
Incorporated of Maryland, and Microlog Europe.
INTERACTIVE COMMUNICATIONS
INTERACTIVE COMMUNICATIONS INDUSTRY
Interactive communications 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 communications systems, which provide information
not only through voice, but through a wide range of additional input devices and
interfaces, including the Internet, fax, Telecommunications Device for the Deaf
(TDD), Analog Display Services Interface (ADSI), screen phones, and pagers.
Interactive communications 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. Interactive communications is widely used for functions such
as reporting account balances, checking on inventory, or determining the status
of applications or permits in process. Interactive communications 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 interactive communications products include the Intela(TM), a
UNIX-based platform product, which is capable of running many different
applications simultaneously, including pre-packaged applications, such as The
Automated Collector(TM), and numerous productivity enhancement applications. The
Company also offers a Retail Solutions product line that operates under either a
UNIX or DOS operating system, and the VCS 3500 products which are DOS-based
only. Microlog emphasizes the interactive communications applications of its
Intela product, but also provides much of the same application functionality
through the VCS 3500 and Retail Solutions product lines.
The following functionality is provided through 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 50,000 messages may be presented. Audiotex
software finds wide use by organizations that receive large volumes of
highly-repetitive telephone requests for information. Major advantages
of audiotex over live information operators include the availability of
information at every hour of the day and the consistency in information
disseminated..
Automated Attendant uses touch-tone or voice commands to route and
connect inbound calls to extensions faster and more accurately than
live operators. Microlog's software allows different phone lines to be
answered with various greetings and menus of options presented to
different callers. In the event of a busy or unanswered extension, the
software permits callers to hold, transfer, leave a message or
disconnect. The system can be name-based, in which callers input the
first three letters of the party's last name, or extension-based, in
which callers dial an extension number. For extension-based systems,
the software incorporates a directory of names, allowing callers to use
touch-tone commands to find extension numbers they do not know.
Fax software allows system users to automatically receive stored fax
documents on demand from the voice processing system. Customer service
and sales support operations are frequent users of fax software. A
service representative can take a request for documents from the system
and designate faxes to be sent in response without exiting the
interactive communications 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 similar functionality to interactive
communications systems as IVR, but allows the data of interest to
reside on the system rather than a host mini- or mainframe computer.
This provides a cost-effective approach for many interactive
communications applications. It also allows large interactive
communication applications to do local batch processing of data by
downloading to the system for data manipulation.
Multiple Languages Interface software allows system messages to be
played in multiple 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 flexible software can handle
multiple lists with thousands of names per list. It can draw from a
library of 50,000 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, the
length of calls, and the content of responses.
Release Line Trunking (RLT) provides the ability to transfer the same
call several times. After the call to each transfer destination is
completed, the telephone line to that destination is released. A call
may, for example, initially be transferred to a phone number which can
provide information required for the second transfer. In the Microlog
applications, RLT is used for long distance transfers.
Speech Recognition allows the caller to speak responses that are
understood by the VCS 3500 and Intela systems. Continuous and discrete
speech recognition can be combined in a single system. The standard
vocabulary includes digits "0-9", "yes", and "no" responses. Microlog
has incorporated speech recognition technology from several U.S. and
international based companies. All technologies are speaker independent
and therefore require no special training or development to recognize
individual voice or speech patterns.
Text-to-Speech converts typed ASCII data, resident on host computers or
databases, to computer-generated synthetic speech on demand. It has an
extensive vocabulary, since it can pronounce any string of letters
which are sent to it. Microlog's text-to-speech module is ideal for
applications requiring information from large text databases. Because
text-to-speech works with external databases, the module works with the
interactive voice response module that provides the link between the
VCS 3500 or Intela interactive communications system and the customer's
database.
Transaction Processing allows the inbound caller to place orders,
request information, respond to surveys or complete other transactions
without personal handling by a live operator, using either touch-tone
or voice commands. The caller can initiate transactions any hour of any
day, and the company can process the transactions at its convenience,
including processing outside normal business hours. Such transactions
allow orders and requests to be filled faster and at lower cost than
traditional methods.
Voice Mail provides an organization with "voice mailboxes" in which
internal or external callers may leave detailed, confidential messages
at any time. Voice mail overcomes many limitations of telephone
systems, allowing people to exchange information and transact business
without having to be on the phone together. It eliminates paperwork and
adds meaning and content, which written messages can't reflect.
Benefits include, increased office productivity through fewer
interruptions, timely and accurate message delivery, increased message
detail, and reduced callbacks and "telephone tag." Messages may be left
for groups of people as well as individuals. Callers may edit messages,
reviewing and re-recording until satisfied. Mailbox owners may review,
save, forward or discard voice messages.
INTELA
The Intela platform is an interactive communications product 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.
Microlog has employed Intela for many different customers, with one of their
largest Intela customers being the Internal Revenue Service (IRS). Projects for
the IRS included Voice Balance Due (VBD), which enables eligible taxpayers to
check the status of their debt to the U.S. government and set up repayment
plans. The Refund Inquiry Application enables taxpayers to call the IRS and, by
selecting the Refund Inquiry on Intela, automatically obtain their refund
status, including the amount of the refund. Microlog also employed the Intela
for call center solutions in Europe for companies such as, Sykes, KLM Royal
Dutch Airlines, and Xerox.
Intela is based on an Intel Pentium(R) hardware platform utilizing a UNIX
operating system with a Graphical User Interface (GUI) for application
development. The Intela system has a non-proprietary open architecture. User
screens, voice prompts, and documentation are available in many foreign
languages. Intela also supports text-to-speech, speech recognition, remote and
local databases, host connectivity, and fax.
Each Intela system contains multiple microprocessors with hard disk storage and
several voice cards. Intela uses distributed microprocessors, each of which
handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the interactive communications
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 thousands of ports, and they can be configured to run on -48 volt for use
in a Central Office (CO).
The Intela architecture supports a variety of configurations that meet varying
functional, processing, and voice port and storage needs. This platform is
designed for simultaneous support of multiple applications, including both voice
response and voice messaging services. Within the architecture, particular
hardware configurations may be proposed to provide cost-effective solutions to a
wide range of system requirements. All systems can be configured with built-in
redundancy so that at least 50% of total system capacity is maintained across
any single component failure. Growth capability is achieved by the modular
upgrade of application servers, port servers, disk storage, additional
communications links, and additional voice response 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.
The basic Intela architecture consists of three major system components: the
Application Server(s), the Port Server(s), and the Intelaware software platform.
Application Server defines the computing environment in which
Intelaware software resides and provides centralized management and
control, as well as optional secure voice storage. The application
server can be a personal computer, a workstation, or mini-computer. It
interfaces to a voice processing peripheral, or Intela port server, via
a command link on a LAN or a serial communications link.
Port Server consists of tabletop, tower, and rackmount models, each
providing call and speech processing, as well as voice storage.
Interfacing to either a CO- or PBX-based telephone system, these units
answer calls, and process and store speech, all under the direction of
commands coming from Intelaware software on the application server
across a command link.
Intelaware Software Platform is an application development and
deployment environment for interactive communications 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 Calendar Manager.
Through these interfaces, users control the development and operation of their
voice applications, using a graphical user interface. This interface provides
the developer with a set of tools to create voice applications. Following is a
description of each of these interfaces.
Application Editor is used to create and edit applications and is
oriented towards programmer productivity, with several developers able
to access different applications simultaneously. The editor is
GUI-based and allows programmers to develop call flows using a
click-and-place approach similar to many standard drawing packages.
Cells from a palette are placed onto a drawing pane and are connected
using a set of mouse actions. Standard Windows(R)-like pull-down menus
allow file control, editing features (cut, copy, and paste), object
search (by cell number, name, or type), and user preferences for
appearance of the palette. Applications can be developed and tested
on-line without interrupting those currently running.
Prompt Loading and Management Facility provides the capability for
prompt creation, a major function in voice applications. With the
Intelaware prompt loading facility, prompts can be reviewed, recorded,
installed, deleted, backed up to removable media, restored, and
distributed over a local or wide-area data network (LAN/WAN). They can
be loaded on-line over the telephone, a microphone, or from a tape, and
the process can be semi- or fully- automatic, depending on whether
dual-tone multifrequency (DTMF) tones are coded on the tape to identify
the prompts. Users can record individual prompts, a list of prompts, or
record with DTMF prompt numbers, and the prompts will be replaced only
after they've been reviewed and accepted. New or updated prompts will
be phased in automatically while applications remain on-line.
Prompt Manager has a graphical prompt manager that allows users to
retrieve a prompt from storage on a port server and have the graphical
representation shown in a window. The user can modify the prompt simply
by clicking on the window and performing any of the following actions:
cut, copy, paste, delete, trim silence, adjust again, convert sections
of a prompt to silence, and change sampling rate.
System Administration allows for the loading and unloading of
applications, and the management of the port servers connected to the
application processor. If a system has network hardware in the system
configuration, administration can be performed through one central
point. Administrators can bring up a new revision of an application or
move an application to another trunk while the system is on-line. If a
caller happens to be on the line at the time, the changes on that trunk
will take effect after the caller hangs up. Intelaware can support
multiple Intela systems to expand to larger port and storage capacity
by networking systems and clusters of systems together.
Centralized System Management provides a graphical means to address
operation, administration, and maintenance (OA&M) of a distributed
system. It provides a graphical representation of the application
server and its attached Intela systems, 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 about the running
application.
Reports are designed 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 include call
detail, cell usage, trunk usage, subscriber information, and
transaction log. Statistical requirements beyond those addressed by the
standard reports can be met from the raw call data records (CDRs).
Database Access allows interfaces to be built between Intelaware and
Standard Query Language (SQL) relational databases, such as Oracle,
Sybase, Informix and Ingress. The Application Editor contains an SQL
cell type, which allows information to be extracted from databases to
support interactive communication applications. This cell type allows
users to delete, insert, select, and update data. 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 first in, first out (FIFO) or last in, first out
(LIFO), determined on a system basis.
In 1997, the Company delivered Intela System Release 5 (SR5), and completed work
on functional enhancements to the optional features of the product. In addition,
work was completed to support international connectivity and localization.
Intela product options released in conjunction with SR5 included; IntelaDB(TM),
a relational database, which allows Intela to locally access gigabytes of data
without the need of a more costly customer furnished database; IntelaConnect, an
intelligent "gateway" that seamlessly connects Microlog's Intela interactive
communications systems to vital customer information residing on hosts and;
IntelaCTI(TM), which supports comprehensive call control and monitoring through
links to many popular telephone switches.
Four product enhancement applications for Intela were also released in 1997.
These enhancements are: IntelaPowerdial(TM), a dialer application that can
initiate thousands of calls and transfers the called party to an application or
live agent after connection; IntelaPay(TM), an application that provides the
ability to verify credit card numbers for online purchases; IntelaFill(TM), a
high capacity messaging application that gives the caller the ability to fill
out a "voice-form" through their touch-tone phone; and IntelaAttendant(TM), a
multi-line attendant application designed to work with the other Intela
applications to transfer outside calls to the correct internal extension without
operator intervention.
THE AUTOMATED COLLECTOR(TM)
During 1997, the Company launched a new packaged application called The
Automated Collector. Microlog created The Automated Collector based on a custom
application developed for the Internal Revenue Service. Built on the Intela
platform, the Automated Collector is an interactive communications tool designed
to improve efficiency within the Collections Industry by automating the process
of collecting promises to pay.
The Automated Collector is designed to work alongside collectors/agents. The
system can work low balance, high volume campaigns, as well as early out
campaigns. It can handle both inbound and outbound collections calls, including
verifying "right party contact." The system can collect promises to pay in full,
or set up payment schedules. It can accommodate a variety of debt collection
strategies, and can operate 24 hours a day, 7 days a week, 365 days a year.
RETAIL SOLUTIONS
During 1997, 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 Automated Prescription Refill
System (APRS), Photo Ready(TM), Prescription Ready(TM), and the ProNouncer(R).
AUTOMATED PRESCRIPTION REFILL SYSTEM (APRS(R))
APRS is the primary product available under Microlog's Retail Solutions product
line. The APRS product helps pharmacies improve operating efficiencies and
customer service. Prices for APRS are dependent on the number of ports in the
system (from 4 to 16), the amount of voice storage, the need for additional
equipment, and the need for any customization of the application. Patients
calling into the APRS 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.
APRS is a UNIX-based system available as a stand-alone configuration, or 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 out-dial reports, GUI for system
administration, multi-level passwords, and easy expandability of systems through
the use of a variety of voice cards.
A direct link can be established between the APRS 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 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 can accept Caller ID information from the local
telephone company. This allows pharmacies to automatically transfer
pre-defined 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 can answer all incoming calls, greet customers
with a store-specific recording, and then, based on call routing
transfers to the desired department.
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 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 - 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 public address system (PA) 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 is
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 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 out-dial 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.
KeyStar(TM) - In 1997, Microlog developed and introduced KeyStar(TM), a
telecommunication switch. KeyStar is a separate hardware device that connects
directly to a set of incoming telephone lines, the APRS, and the store/pharmacy
telephone system. KeyStar provides all the necessary interface and switching to
receive and transfer calls to the in-store telephone system. KeyStar provides an
interface to a PA system amplifier for in-store paging, a music on hold
interface for an external music source, and a system administration telephone
interface.
KeyStar offers a number of key benefits designed for the retail pharmacy market.
It allows APRS to interface to any existing telephone system, supports Caller
ID, and minimizes telephone system add on/upgrade expenses. KeyStar provides a
direct modem connection to the APRS for remote system access, alleviating the
need to reallocate or purchase additional telephone lines. Automated/bypass
routing of all incoming telephone lines under failure conditions - KeyStar is
available in two configurations: all-in-one packaging with Microlog's APRS and
software, or as a stand-alone device.
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 12
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 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
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.
Many VCS 3500 systems contain 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. Modems are also provided
so that the Company can perform remote diagnostic procedures for customers who
contract for system maintenance services.
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.
Due to the greater versatility of the UNIX System (Intela), as compared to the
DOS operating system (VCS 3500), there has been a shift in sales from the VCS
3500 to Intela.
CALLSTAR(R)
Due to declining requirements for simple voice mail equipment, as compared to
the more sophisticated products offered by the Company, the CallStar product
line was discontinued in April, 1997. Some customer support, parts, and
materials will continue to be provided through April 1998, but this is not
expected to result in significant revenue for the Company.
SALES AND MARKETING
The Company's Retail Solutions and VCS 3500 systems are sold primarily through
direct sales. The Intela product is sold through a combination of direct sales,
value added resellers (VAR), original equipment manufacturers (OEMs), and
government contract vehicles.
Direct Sales Force. The direct sales force has a general manager in charge of
North America, sales managers, sales personnel, sales engineers, marketing
manager, and sales support personnel. The Company's direct sales force is
presently based in the Washington-Baltimore metropolitan area with satellite
offices in Southampton, Pennsylvania, and Belair, Maryland. 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,
debt collection, wagering, and Federal, state and local government. The
principal potential customers for the Company's interactive communications
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 general
manager in charge of international sales, sales personnel, sales engineers, and
sales support personnel. 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.
During 1997, Phonatic International B.V. took on the name Microlog Europe.
The Company has entered into non-exclusive distribution agreements with
international companies, including Philips Communication Systems B.V. (Philips)
of The Netherlands, and Jebson and Jessen in Singapore, along with five other
companies in Europe, Asia, and the Middle East, to market and support the Intela
product line worldwide. Philips markets the Intela interactive communications
system as the VoiceManager 800 series. In 1997, the Company signed PTT Telecom
of The Netherlands to a five-year distribution agreement to sell Microlog's
Intela product within the Dutch interactive communications market. PTT Telecom
is a full service telecommunications company providing a wide-range of
communication products to businesses and consumers both nationally and
internationally.
Marketing - The marketing organization currently has a vice president who
manages the Company's product, engineering, and marketing-related activities.
Marketing consists of a director, product managers, marketing communications
personnel, channel marketing manager, system release manager, and the technical
training & publications group. This organization interfaces with direct and
international sales in developing, marketing, and selling the Company's
products, applications, and services.
Promotional Activities - The Company's promotional efforts during fiscal 1997
included advertising in industry trade publications, direct mail, product
presentations at trade shows and similar events, and public relations. The
Company conducted seminars for potential customers in certain industries
worldwide. The Company expects to continue these promotional activities during
fiscal 1998.
SERVICES
The Company provides limited warranties for parts and labor on its products
ranging from 90 days to two years, from the date of delivery. The Company also
offers its customers annual maintenance contracts under which the Company
maintains and services the systems. Microlog charges an annual fee of
approximately 10% to 16% of the purchase price of its systems for maintenance
contracts covering normal business hours. The fee is highest for maintenance
contracts providing for 24-hour or weekend assistance.
The Company generally performs maintenance for its interactive communications
systems in the Washington, D.C. metropolitan area from its Germantown, Maryland
headquarters, where an inventory of spare parts is maintained. Microlog also has
an agreement with a subcontractor to perform on-site maintenance on its
interactive communications systems nationwide. The Company operates a hotline
which customers with maintenance contracts may use to request assistance or to
ask questions concerning operation of the Company's interactive communications
systems. Microlog can perform many diagnostic procedures remotely and,
historically, has been able to correct many of the difficulties experienced by
its customers through telephone consultation. International maintenance is
performed by the third party distributor and is supported by Microlog service
personnel in 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 interactive communications systems to a customer's specific needs by
using the application software matrix in the VCS 3500 or the GUI in its Intela,
or by making appropriate changes in the underlying source code in all of
Microlog's products. The Company may charge for this service on a time and
materials basis, or may include the service in the price of the system being
sold. Training on system operations also is offered to customers. In addition,
the Company generally provides certain improvements to its software modules free
of charge to customers who contract for its system maintenance services.
BACKLOG
As of October 31, 1997, the Company had a backlog of existing orders for
interactive communications systems totaling $2.9 million. The backlog, as of
October 31, 1996, was $4.9 million. The Company has experienced fluctuations in
its backlog at various times during the past three fiscal years attributable
primarily to the seasonality of governmental purchases. The Company anticipates
that all of the outstanding orders at October 31, 1997, will be shipped and the
sales recognized during fiscal 1998. Although the Company believes that its
entire backlog of orders consists of firm orders, because of the possibility of
customer changes in delivery schedules and delays inherent in the government
contracting process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.
COMPETITION
The interactive communications industry is highly competitive and the Company
believes that competition will intensify. The Company competes with a large
number of companies which produce interactive communications products offering
one or more of the 12 major voice processing applications performed by the
Company's products. Microlog's competitors include companies such as IBM,
InterVoice, Inc., Lucent, Periphonics, and Syntellect, that have emphasized
sales of systems with interactive voice response applications. Direct
competition with the Company's interactive communications systems also arises
from a substantial number of companies, such as 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 products of these and other
competitors.
New or enhanced products can be expected from the Company's competitors. It is
also likely that there will be new entrants into the interactive communications
industry because of the absence of any major technological barriers to entry.
Competition for the sale of interactive communications systems has been based in
part on the application required by the customer. In marketing its Intela and
VCS 3500 products, the Company places emphasis on the 12 major interactive
communications functions (refer to "Products" section) that can be performed and
the ability of these systems to be expanded to incorporate additional
applications. As a result of this emphasis on openness and expandability, the
Company believes that many of its competitors' products cannot be customized as
easily to the user's specific needs as 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 1998.
Marketing and product recognition also play a substantial role in competition
within the interactive communications industry and within particular vertical
markets. Most of the Company's competitors have considerably greater financial,
marketing, and sales resources than Microlog. Many of these competitors have
concentrated on one or two voice applications or on specific vertical markets
and may enjoy advantages in selling to customers seeking only those applications
or to companies in those markets. The Company believes that it has advantages
over some competitors in sales to government and retail pharmacy 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 interactive communications market are product applications and features,
quality and reliability, customer support and service, and price. The Company
believes that it competes favorably with respect to these factors.
RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING
The Company believes that both the development of new voice applications and
features for its existing products and the development of new products are
necessary to remain competitive in the rapidly-changing interactive
communications market. In order to maintain its competitive position, the
Company continues to improve its interactive communications product lines and is
currently developing new products and enhancements to its existing products.
During 1997, the Company completed a new release for its Intela product line,
System Release 5. This release adds optional features such as enhanced host
connectivity, a CTI server, and local and remote database support to the
product. In 1997, the Company completed a number of productivity enhancement
applications for Intela, including a power dialer, a transaction messaging
application, a credit card verification module, and an integrated
auto-attendant. These applications, in turn, were used as modules for the
Company's Automated Collector release, a packaged application for the
collections industry. For the APRS product, the Company developed a UNIX-based
system which 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.
Additive to either the stand-alone or board-and-software APRS solutions, the
Company also developed the KeyStar product. KeyStar is a front-end integration
hardware module, software controlled by the APRS, that facilitates the
integration of the APRS into existing store systems, including many diverse
telephone systems, PBXs, and key systems, without requiring potentially costly
upgrades by the store. The Company's engineering staff is also 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 interactive communications
net sales represented by these expenditures.
Research and Development Expenditures
(In thousands, except percentage amounts)
Year Ended October 31,
----------------------
1995 1996 1997
---- ---- ----
Research and development expense $1,592 $2,093 $3,579
Percentage of voice
processing net sales 11% 13% 19%
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
MANUFACTURING AND OPERATIONS
The Company assembles its own equipment using standard parts obtained from
outside sources. The proprietary aspects of the Company's systems are primarily
in the software provided with the equipment and in the specific applications
development designed for the customer. Systems are built to order as they vary
in size and sophistication of software modules. Equipment assembly, along with
testing and quality control, are performed at its Gaithersburg, Maryland
facility. The Company leases a manufacturing and training facility located in
Gaithersburg, Maryland which expires in September, 1999. Microlog currently has
11 employees in its manufacturing group. The Company generally uses standard
parts and components obtained from a variety of computer vendors and specially
configures these components to produce the hardware for its systems. Certain
components used in the Company's products are presently available from limited
sources. To date, the Company has been able to obtain supplies of these
components in a timely manner from these sources.
SOFTWARE PROTECTION, TECHNOLOGY LICENSES, AND TRADEMARKS
The Company regards its software as proprietary and has implemented protective
measures both of a legal and a practical nature to ensure that the software
retains that status. The Company derives protection for its software by
licensing only the object code to customers and keeping the source code
confidential. Like many other companies in the interactive communications
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 an Interactive Audio Telecommunications Message
Storage, Forwarding and Retrieval System, Software Switch for Digitized Audio
Signals, Automated Telephone System Using Multiple Languages, Telecommunications
System for Transferring Calls without a Private Branch Exchange, Detection of
TDD Signals in an Automated Telephone System, Automated Telephone System with
TDD Capabilities, Automated Announcement System, and Methods for Communicating
with a Telecommunications Device for the Deaf (TDD). The Company also has a
pending patent application on an Apparatus and Method for Coupling an Automated
Attendant to a Telecommunications System. EVR, Microlog, Call Installer, Truant,
CINDI, ProNouncer, CallStar, CallStar FXD, and APRS are all registered
trademarks owned by the Company. Intela, Intelaware, Intelaview, VCS Intela,
Intelapowerdial, KeyStar, 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
oppositions with the U.S. Trademark Trial and
Appeal Board to registration by the Company of the marks Intela, VCS Intela,
Intelaware, and Intelaview. Discovery is currently ongoing in this consolidated
opposition proceeding. The Company is currently using, and claims common law
rights in the following additional, unregistered marks: Voice Connect, Genesis,
Voice Path, VCS 3500, Retail Solution, RLT, and Release Line Trunking. In
addition, the Company enters into confidentiality agreements with its employees,
distributors, and customers and limits access to and distribution of its
software, documentation, and other proprietary information. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to deter misappropriation of its technology. Further, there can
be no assurance that any patent issued 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 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 interactive communications 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 37%, 38% and 39% of the Company's net sales for
fiscal 1995, 1996, and 1997, 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
basis. Occasionally, the Company experiences delays in contract awards, contract
funding, and payment, which the Company believes is customary under contracts
which involve performance of services for Federal Government agencies.
The Company monitors performance under existing contracts and requests for
proposal (RFPs) for performance analysis and support services by contractors or
government agencies. The Company has received a number of blanket contracts by
responding to RFPs. In order to increase the new contracts, the Company must
locate skilled programmers and other technical personnel with the qualifications
specified by the open requisitions. The Company uses agencies and internal
resources to locate these personnel. The Company believes that its reputation in
the industry enables it to attract qualified individuals for inclusion in the
Company's proposals.
COMPETITION
The Company's Government contracts can be opened to competitive bidding upon
their expiration at the discretion of the contractor or agency. Although
contracts presently comprising a substantial percentage of the Company's sales
have been renewed annually, these contracts may and have been open to
competitive bidding. There can be no assurance that these contracts will be
awarded to the Company if competitive bidding occurs.
The Company encounters substantial competition in its procurements. The
Company's competitors include, Allied Signal, Comsys, EISI, Orbital, SAIC, and
Sachs/Freeman Associates. The Company has instituted policies and procedures
designed to maintain a low overhead to enhance its ability to compete with
respect to new contracts and to existing contracts that are to be renewed or
extended. During the last three years, the contracts that have been lost through
competitive bidding or otherwise have not been material to the Company, either
individually or in the aggregate. During this three-year period, the Company has
received several new contracts as a result of competitive procurements and also
increases in the level of work authorized under contracts 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, 1997, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $2.9 million.
By comparison, the backlog as of October 31, 1996 was $5.5 million. The Company
estimates that the entire $2.9 million of backlog at October 31, 1997 will be
recognized as sales in fiscal 1998. 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, 1998, the Company and its subsidiaries employed a total of 300
persons, including three part-time employees. Of these personnel, 107 are
engaged principally in the Company's interactive communications systems
operations, 186 are engaged in performance analysis and support services, and
seven 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 owns and occupies a 24,000 square foot building in Germantown,
Maryland, which it uses for its principal executive offices and its interactive
communications operations center. The Company also leases 22,700 square feet of
office space in Rancho Cordova, California which was the headquarters of Genesis
Electronics, which was acquired by the Company in 1991, under a 10 year lease,
and 12,000 square feet in Gaithersburg, Maryland, which it uses for production
and warehousing of its interactive communications products. In February 1993,
the Company entered into a sublease for its Rancho Cordova facility. The
sublease is for a five-year term and expires in 1998.
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 31 of the Company's
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference from
"Selected Consolidated Financial Data" on page 32 of the Company's Annual Report
to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference from
pages 28 through 32 of the Company's Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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, 1995, 1996, and 1997,
Consolidated Balance Sheets as of October 31, 1996 and 1997, Consolidated
Statements of Changes in Stockholders' Equity for the years ended October 31,
1995, 1996, and 1997, Consolidated Statements of Cash Flows for the years ended
October 31, 1995, 1996, and 1997 and Notes to Consolidated Financial Statements,
together with the report thereon of Price Waterhouse LLP dated December 18,
1997, are incorporated by reference from pages 16 through 27 of the Company's
Annual Report to Shareholders.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and certain executive officers of the Company
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 16 through 27 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,
1995, 1996, and 1997
Consolidated Balance Sheets as of October 31, 1996 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 1995, 1996, and 1997
Consolidated Statements of Cash Flows for the years ended October 31,
1995, 1996, and 1997
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 14).
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 Agreement between the Company and Joe J. Lynn 2/
10.3 Employment Agreement between the Company and Richard A. Thompson
10.4 Microlog Corporation Medical Reimbursement Plan 3/
10.5 Microlog Corporation 1989 Non-Employee Director Non-Qualified Stock Option Plan 5/
-
10.6 Microlog Corporation 1995 Employee Stock Option Plan 8/
10.7 Agreements with Farmers & Mechanics National Bank 7/
10.8 Amendments to Farmers & Mechanics National Bank Agreements
10.9 Sub-contracting Agreement with Aspect Telecommunications Corporation 4/
10.10 Sub-contracting Agreement with Applied Physics Laboratory 4/
10.11 Agreement with Philips Communication Systems B.V.*/ 6/
13 Annual Report to Shareholders for the fiscal year ended October 31, 1997
22 Subsidiaries of the Registrant
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, 1988.
3/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1991.
4/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1992.
5/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1993.
6/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1994.
7/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1995.
8/ Filed as an Exhibit to Registration Statement on Form S-8, File No.
333-07981, and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal year ended
October 31, 1997.
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.
MICROLOG CORPORATION - CONNECTING PEOPLE TO A WORLD OF INFORMATION(TM)
In today's competitive business environment, customer satisfaction is every
company's bottom line. Microlog's interactive communications solutions give our
clients powerful tools to enhance customer service while maintaining competitive
costs. Since 1969, we have helped clients in government and private industry
operate more efficiently and profitably.
Microlog designs and supports a complete line of interactive communications
systems and applications for customers worldwide. Interactive communications
defines the myriad of ways users interact with information. Microlog's solutions
take advantage of new technologies that provide information not only by
telephone but also through other media, including facsimile and the Internet.
Microlog's Intela(TM) platform is unparalleled in the industry for supporting
robust features, enabling rapid application development, and ensuring reliable
performance. Intela supports call center solutions for customers worldwide as
well as applications for specific industries. Our Automated Prescription Refill
System (APRS(R)) provides interactive communications for retail drug chains and
can be adapted to the needs of other industries. The Automated Collector(TM)
supports the collection operations of corporations, government agencies, and
service bureaus.
Old Dominion Systems Incorporated of Maryland (ODSM), a subsidiary of Microlog,
provides performance analysis as well as technical and administrative support
services to prime U.S. government contractors.
The Company holds ISO 9001 certification, the highest level of certification
from the International Organization for Standardization, which sets
international standards for quality assurance and management.
Microlog Corporation is headquartered in Germantown, Maryland, outside
Washington, D.C. Its European headquarters is in Nuenen, The Netherlands. A
publicly held company since 1986, Microlog's stock trades under the Nasdaq
market, under the symbol MLOG.
MICROLOG CELEBRATES A BREAKOUT YEAR
For Microlog, 1997 was a breakout year in which we redefined our strategy.
Today, Microlog is a different company with a new perspective and a broader
focus than it had just one short year ago. We made breakout moves in market
penetration, product development, strengthening and expanding strategic
partnerships, and infusing new technology into our products and services.
The year's financial performance was the best in the Company's history, with
revenues near $32 million, profits at $3.7 million, which includes a tax benefit
of $1.5 million, and an increase in cash provided by operating activities of
$4.9 million. Our goal for 1997 was to equal or exceed growth rates within our
industry. I am happy to say that we achieved the latter: the industry grew at
approximately 18 percent; Microlog at 24 percent. In doing so, we have achieved
something that few of our principal competitors have achieved: three consecutive
years of double digit growth.
BREAKOUT PERFORMANCE
The year was marked by breakout opportunities that have made us a different kind
of company.
We made gains in the European market, which is poised for significant growth in
interactive communications solutions. PTT Telecom, a distributor of our
Intela(TM) platform in The Netherlands, developed an Intela-based application to
support KLM Royal Dutch Airlines' frequent flyer program. We believe this
application has considerable growth potential. Also in The Netherlands, Microlog
is supporting Xerox CorporationOs product service center with an Intela-based
solution that streamlines the way Xerox responds to service requests. Sykes
Enterprises, one of the largest providers of outsourced call center services,
selected our Intela system to deploy in each of its European call centers. Other
big opportunities are in development or, on the drawing board. The European
market is strong and will get even stronger in 1998.
In North America, use of interactive communications to streamline call center
operations also continues to grow. The U.S. Federal Government has expanded its
use of this technology to meet its mandate to do more with less. In 1997, Sprint
Communications, a company at the forefront in providing integrated
communications services, launched an Intela-based call center system of over
1,000 lines to provide higher value added service levels to its government
customers. This solution is one of the largest Intela-based systems Microlog has
delivered.
Our commercial business within the U.S. continued to grow in fiscal 1997. Eckerd
Corporation, which began using our Automated Prescription Refill System
(APRS(R)) in 1996, signed a contract to expand its use of APRS to another 1,100
stores. This will bring the total installations to 2,800 retail pharmacies.
Old Dominion Systems Incorporated of Maryland (ODSM) enjoyed another strong
year. ODSM won a major contract renewal with The Johns Hopkins University
Applied Physics Laboratory (APL). This award, which was won in competitive bid,
continues services that ODSM provides to APL in support of the U.S. Department
of the Navy. ODSM's continued success in winning contracts with the Applied
Physics Laboratory provides a solid revenue source for the Company.
BREAKOUT DEVELOPMENT EFFORTS
To support our strategic business direction, Microlog continued to add
enhancements to its products and develop new capabilities. We've added new
functionality to our Intela system, notably new call center features to support
this key market thrust. These enhancements underlie our success with the
European call center opportunities and the deployment of the Intela-based
solution for Sprint.
A new product release, The Automated Collector(TM), which supports both inbound
and outbound calls and has wide application within service bureaus, expands our
support of call center operations. To support large retail chains, Microlog has
added enhancements to our retail product line; among them, KeyStar(TM), a
telecommunications front-end that interfaces incoming telephone lines to our
APRS and existing internal phone systems. One of the benefits to the retail
pharmacy is not requiring the purchase of a new telephone system in order to
integrate with the APRS.
Microlog continues to expand its rich portfolio of patented inventions. In 1997,
we received a patent for "Methods for Communicating with a Telecommunications
Device for the Deaf" (TDD). This functionality offers the ability to interface
TDD with interactive communications systems through software only, thereby
eliminating the need for any extra hardware.
We continue to build on our substantial investment in our internal information
system infrastructure, which is modernizing the way we handle customer, product,
and accounting information. The new system is a major step in our commitment to
streamline the way our employees and our business partners access and share
information.
In our continuing commitment to invest in our employees, we've hired people with
specific hard-to-find skills, and increased training levels for existing staff
to strengthen our expertise in critical skill areas. Our expanded sales force,
our greater depth in technical talent, our investigative cutting-edge research &
development team (Skunkworks), and our combined marketing/product development
teams all contributed to our expanded market focus.
LOOKING TOWARD THE FUTURE
All these accomplishments in fiscal 1997 have positioned Microlog well for the
future. We see a primary strategic direction for Microlog in 1998 and beyond.
Our vision is for Microlog to become one of the premier companies in the call
center industry, supporting an emerging market that plays to our current
strengths and offers attractive opportunities for growth. With the increasing
globalization of business, companies will need to redesign their call centers to
better serve geographically dispersed customers with diverse service
requirements. This need calls into play a myriad of technical capabilities which
Microlog either has or is developing both internally and in concert with our
strategic partners and with companies with capabilities that complement our own.
On a personal note, I want to congratulate Joe Lynn, Chief Development Officer
and co-founder of Microlog, on his recent retirement. Joe has been a director of
the Company since its formation in 1969, and has been an inspiration for our
Company. We thank Joe for his many creative solutions and dedication over the
years.
As we look forward, after another year of strong growth, we thank our
shareholders and our customers for their confidence and support, and we thank
our employees, distributors, and business partners, who are the backbone of our
success.
Together, we will make a bold leap to the future in 1998.
Richard A. Thompson
President and Chief Executive Officer
THE NEW CALL CENTER
AN ESSENTIAL BUSINESS TOOL
In today's increasingly global, increasingly competitive environment, companies
are turning to advanced technology to help them gain a competitive edge. The
call center is becoming a key strategic asset in this environment. Traditionally
a people-intensive operation aimed primarily at dealing with customer
complaints, todayOs call center is integral to business operations with focus on
total customer satisfaction.
Advances in technology that support call center operations are changing the way
call centers serve their customers. Automated call distribution, interactive
voice response, and computer telephony integration enable networking smaller
call centers into a single, seamless operation and linking callers to service
representatives wherever they may be located. These technologies support
intelligent call routing, which directs a call to the center and representative
best equipped to respond to the callerOs needs. They enable integration with
internal systems to share customer information with other business units sales,
marketing, product development, finance, right up to top management who use the
information as a strategic planning tool.
Microlog has incorporated these technologies into our Intela product to
penetrate this dynamic market. In Europe, where use of call centers is seeing
significant growth, Microlog has pursued opportunities identified by Microlog
Europe and by European companies who are distributors of our Intela system. In
North America, call center support is becoming a major thrust of our business,
especially in support of U.S., state, and local government clients, who are
turning to interactive communications to enable them to provide higher levels of
support without increasing personnel.
A number of contracts won in fiscal 1997 demonstrate how Microlog is responding
to the call center opportunity to become a much different company.
MICROLOGOS DUTCH PARTNER
RAISES THE STANDARD FOR QUALITY
Long recognized as one of the world's preeminent trading nations, The
Netherlands is emerging as a standard bearer for its international
telecommunications service. PTT Telecom, the national telecommunications carrier
of The Netherlands, has one of the most advanced telecommunications
infrastructures in the world. Its totally digital switching system ensures 99.9
percent network completion to its customers; little wonder that PTT Telecom is
leading the way in integrated voice/data solutions. PTT Telecom offers voice
mail as a standard feature of its telephone service. The telecommunications
carrier has created an intranet in The Netherlands that enables users of its
service to communicate by electronic mail as well. In 1997, PTT Telecom took
another step
in integrated voice/data services by becoming a distributor of Microlog's Intela
to provide interactive communications in The Netherlands.
"People today want access to services and information in the most convenient
way," says Sander Demarteau, Product Manager, Voice Support and Special
Marketing, PTT Telecom. "Interactive communications gives them another
convenient way to access information. Our goal is to become the one stop shop
for all our customersO communications needs."
KLM Royal Dutch Airlines was one of the first companies in The Netherlands to
embrace the technology to enhance its service for members of its frequent flyer
program, The Flying Dutchman. The clubOs 800,000 members worldwide earn free
travel points when flying on KLM and partner airlines to nearly 400 destinations
around the globe. To enhance service to club members, KLM asked OgilvyOne
Worldwide, which supports its call center operations, to provide a quick and
easy way for members to inquire about frequent flyer miles earned and other
program benefits.
OgilvyOne selected PTT Telecom to develop the application because the carrier
could support members from anywhere in the world and because they liked the
robustness and flexibility of the Microlog Intela platform, which easily
integrates with other call center equipment. Using Intela, PTT Telecom developed
an application that enables frequent flyers to call one of six help desks, each
of which gives responses in a different language, to inquire about miles earned
in the program. From any touch-tone telephone, members can call the help desk of
choice to learn how many frequent flyer miles they have earned, review recent
flight histories, and check on the status of requests for free flight awards.
Members can use the system to request forms or brochures. They can get answers
to questions like how to report address changes or lost membership cards by
selecting from a menu of frequently asked questions compiled by the help desks.
While interactive communications have been available in The Netherlands for
several years, many people are still reluctant to use the technology, preferring
to speak to a live agent. The KLM application gives members that option.
KLM is introducing the service incrementally, beginning with a group of users
who are receptive to using the service. The system went live in October 1997
with 10,000 members using the application. As KLM learns the benefits of using
interactive communications, it will promote the service to its general
membership.
"As users in The Netherlands become more comfortable with using the telephone as
a business tool, we believe the technology will have broad application because
of its ability to provide faster response when and where people need it," says
Sander Demarteau. "Intela's openness, programmability, and ability to interface
with other call center equipment gives us an efficient tool to provide those
services."
ICROLOG SUPPORTS SPRINTOS EFFORTS
TO ENHANCE GOVERNMENT SERVICE
Like commercial enterprises, government agencies are recognizing the need to
provide higher levels of support to their customers while maintaining austere
budget management. Increasingly, agencies look to their telecommunications
service provider to help them attain these higher service levels.
Sprint Communications Co., LP, which is one of two Federal Telecommunications
Services (FTS) 2000 long distance providers to the Federal Government, is now
offering its government customers an interactive toll free service that will
allow agencies to provide 24- hour automated information to callers in a faster,
more efficient way. The service is designed to dramatically reduce users' wait
time and improve agency response to its users.
Sprint selected Microlog to provide the interactive communications platform for
its FTS 2000 solution. Based on Sprint's experience working with Microlog in
support of the Internal Revenue Service, Sprint determined that Microlog could
provide the level of quality and service it sought for this application.
Microlog's Intela system permits callers to use touch-tone telephone keypads or
speech commands to request information from an automated menu. The system will
retrieve information from government databases to respond to the caller's
requests. The service is very cost effective for government users because
MicrologOs interactive communications platform interfaces directly with the
Sprint telecommunications network. This means that agencies using the service
donOt have to install switching equipment on-site to route calls and link
databases.
"Interactive communications capabilities are expanding and gaining acceptance in
the marketplace," says Kevin Cullen, Sprint Group Manager of Toll-Free Products.
"Sprint seeks to expand its interactive capabilities in a quick and timely way
and we will work with Microlog to accomplish this."
The enhanced service platform provided by Sprint and Microlog will give
government agencies the flexibility and reliability they require to serve
geographically dispersed customers in an efficient and cost-effective way. The
system enables the processing of large volumes of simultaneous calls without
encountering bottlenecks found in many other systems. Intela's open architecture
enables emerging technologies to be incorporated quickly and easily, keeping the
system robust. Using Intela, Sprint can deliver customized applications that
meet and exceed their government clients' business needs.
One large government agency that provides information to more than 3 million
U.S. citizens is conducting a trial of the interactive response system.
Discussions with other Sprint government customers are underway.
"Sprint's interactive communications solution is a win-win opportunity for the
government and its customers," says Don Teague, Vice President and General
Manager of Sprint's Government Systems Division. "Callers get immediate answers
to their frequently asked questions, while agencies save real dollars. We're
pleased to have developed a unique solution that should have many applications
throughout the government to improve service and increase efficiency."
XEROX(R) CHOOSES MICROLOG
TO ENHANCE PRODUCT SUPPORT
Xerox Corporation, The Document Company(R), offers a wide array of
document-related business solutions, products, and services to customers
worldwide. Xerox is committed to providing its customers with the highest
quality products and backing those products with the highest level of service.
XeroxOs goal is to make sure that its products are on the job helping users run
their businesses.
In The Netherlands, Xerox is meeting that commitment by offering its customers
interactive communications to reduce the time required to initiate a request for
service and shorten the response time.
The National Welcome Center, outside Amsterdam, supports service requests from
Xerox product users in The Netherlands. Using the traditional call center
approach, operators receive customer service requests and direct calls to the
appropriate product engineer for resolution. This approach to service has a
number of limitations. Operators receive calls in the order in which they are
placed. This means that a major client with a high service priority may have to
wait in the queue while an operator responds to a caller with a routine problem
that can be easily remedied. Operators responding to the call must key in
customer information, product serial number, and problem description, prolonging
the time of the call.
The system built on Microlog's Intela platform alleviates these problems by
giving customers the option of by-passing the Welcome Center operator and
recording product problems directly into the system. Callers are prompted to
enter the product serial number and to select the type of problem experienced
from a menu of options. Callers also have the option to use the system's voice
mail capability to record a more detailed description of the problem. The system
confirms the product serial number, stores the recorded message, and lets the
caller know that a product service engineer will respond.
Using skills selection, the system pages the appropriate service engineer, who
calls into the system to hear the customer's explanation of the problem. The
engineer can then call the customer to propose a solution or schedule a service
appointment.
An important feature of the system is its ability to interface with the Xerox
mainframe that stores customer support records, such as service level
agreements. This enables effective call management because the system can
prioritize calls to ensure that service levels are met. The system verifies
availability of engineers
based on the status code entered into the database. If the principal support
engineer isn't available, the system has a priority order to follow to identify
the best person available to respond.
"This is not a one size fits all solution. Not all customers require the same
level of response," says Paul Derksen, Senior Support Specialist, National
Welcome Center. "The system we have built using Intela lets us respond to our
customers according to their needs. Customers that use our high end products,
for example, are very knowledgeable about our products. When they encounter a
problem they can't solve, they want to be connected directly to the service
engineer that supports their products. Because the Intela system is tied to our
customer database, it recognizes a high priority call and handles it
accordingly. This is a key element of quality service."
"Microlog is very flexible and has a high level of knowledge of implementation
with any mainframe," says Center Manager, Jan-Simon Swagemakers. "Interfacing a
system with our mainframes is a complex process, often taking weeks or months to
do properly. Microlog built the interface for us in just three days."
Xerox sees the product support application as just the first step toward
streamlining its call center support operations. Mr. Swagemakers sees other
opportunities such as automating the placing of orders for copier supplies. He
believes that Microlog's Intela system will help them quickly achieve that
objective.
SYKES IS TESTING THE LIMITS
OF CALL CENTER TECHNOLOGY
Sykes Enterprises, Incorporated, a diverse information technology company with
headquarters in Tampa, Florida, provides outsourcing services to Fortune 500
companies globally. The company's mission is to be the best and most innovative
provider of services, helping its customers be more efficient, profitable, and
also providing their own customers with the highest quality products and
services.
As one of the largest suppliers of outsourced information technology services in
the industry today, Sykes' goal is to balance people and technology for optimum
productivity and efficiency. Because its call centers support companies in many
industries, Sykes' operations have to provide a wide range of calling options to
accommodate varying client requirements. In its call centers in Europe, the
company provides services in a multi- language, multi-switching platform
environment.
To support its European operations, Sykes reached an agreement with Microlog to
deploy our Intela system in call centers throughout Europe. Sykes chose Intela
for its interactive communications platform because it can support diverse call
center technology and enable rapid development of new applications.
"Our goal is to integrate all our call centers using a common resource backbone
that provides advanced technology like knowledge based systems, self-managed
problem tracking, and case based reasoning that takes a caller through a
decision logic tree to resolve problems. The Intela can interface with these
technologies to give us that capability," says Keith Barr, Director of
Information Technology, who is responsible for defining Sykes' call center
strategy for Europe.
Sykes' European call centers manage calls coming from 22 countries speaking 13
languages. The call centers' interactive communications system must be able to
direct callers to the language of choice either through prompts or by using
intelligent call routing based on the origin of the call. The Intela provides
this functionality.
In a multi-country environment, the system has to integrate with the wide range
of switching platforms used in European countries. The Intela UNIX platform can
also provide this functionality. The flexibility of the UNIX environment also
enables integration of voice to e-mail and can support voice recognition, which
lets callers speak their choices rather than using the telephone keyboard, which
also makes the system user friendly.
In the outsourced call center operation, the service provider must be able to
give its customers full reporting of caller activity. Intela can support
management tools like call monitoring and automated reporting to provide that
accountability.
"As a provider of outsourced call center support, we are always stretching the
limits of technology to provide our customers with the best service and the most
options to support varying customer needs. The Intela system will help us do
that," says Keith Barr. "Europe is the ideal testing ground for new
technologies. If you can do it here, you can do it anywhere."
WHAT LIES AHEAD
Our Intela system is key to our strategic advance into call center applications.
In 1997, we added new features and functions to the system to enable us to
penetrate more deeply into this growing market. To enable easy integration of
computer and telephone functions, Intela takes advantage of the latest computer
telephony integration (CTI) technology. Intelligent call routing matches a
caller with the agent best equipped to respond to the caller's needs.
IntelaConnect adds a layer of information by tapping into company databases that
contain customer information and passing that information, along with the call,
to help agents provide a higher level of service. The quality of our products
and our growing reputation within the industry have attracted companies to join
forces with Microlog to support the demand for cutting edge capabilities in call
center service.
As Internet and intranet technologies advance, more companies are using these
technologies to attain the enhanced customer support they can provide. This has
led to an expanded definition of a call center - one that includes interactive
Web
response, e-mail requests, and Web call back requests in addition to intelligent
handling of telephone calls. Diverse technology integration is not only a trend
but an opportunity that plays to Microlog's strengths - integrating voice
response, Web response, and computer telephony integration - in ways that
satisfy customer needs while enhancing corporate efficiency and responsiveness.
As we increase our technical depth in call center technology, we are also
expanding call center support to more operations. To support call centers
engaged in collections, we have commercialized The Automated Collector, an
application originally developed for the U.S. Internal Revenue Service to elicit
promises to pay from delinquent tax payers. This robust collections tool enables
call centers that deal with delinquent customers to increase their ability to
collect late payments without increasing support staff. The application supports
both inbound calls from debtors who want to arrange a payment plan and outbound
calls that remind customers of the delinquent status of their accounts. With The
Automated Collector, businesses can increase productivity, reduce expenses, and
increase incoming and outgoing call volume--all without additional personnel.
Microlog believes that over the next five years, call center operations
worldwide should experience significant growth and will become much more
sophisticated in the way they support customers. Microlog is committed to expand
our services to support this market. In realizing this commitment, we are
becoming a different kind of company.
Microlog Corporation
Consolidated Statements of Operations
Year Ended October 31,
1995 1996 1997
- - - -------------------------------------------- ----------------- ------------------ -------------------
Net sales:
Products $ 9,905,239 $ 11,458,643 $ 13,970,212
Services 12,480,404 14,248,092 17,797,616
- - - -------------------------------------------- ----------------- ------------------ -------------------
Total net sales 22,385,643 25,706,735 31,767,828
- - - -------------------------------------------- ----------------- ------------------ -------------------
Costs and expenses:
Cost of products 4,746,581 5,190,018 7,203,426
Cost of services 8,173,060 9,918,101 12,237,609
Selling, general and administrative 6,373,764 6,394,407 6,374,468
Research and development 1,591,895 2,093,496 3,578,665
- - - -------------------------------------------- ----------------- ------------------ -------------------
Total costs and expenses 20,885,300 23,596,022 29,394,168
- - - -------------------------------------------- ----------------- ------------------ -------------------
Income from operations 1,500,343 2,110,713 2,373,660
Investment income 24,078 10,900 29,883
Interest expense (112,244) (91,786) (119,165)
Other (expense) income, net (5,046) 43,611 (53,279)
- - - -------------------------------------------- ----------------- ------------------ -------------------
Income before income taxes 1,407,131 2,073,438 2,231,099
Benefit (provision) for income taxes (20,000) 639,296 1,500,545
- - - -------------------------------------------- ----------------- ------------------ -------------------
Net income $ 1,387,131 $ 2,712,734 $ 3,731,644
- - - -------------------------------------------- ----------------- ------------------ -------------------
Net income per share $ 0.34 $ 0.59 $ 0.82
- - - -------------------------------------------- ----------------- ------------------ -------------------
See accompanying notes to consolidated financial statements.
Microlog Corporation
Consolidated Balance Sheets
October 31,
1996 1997
- - - -----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,170,603 $ 3,979,452
Receivables, net 4,259,841 3,882,564
Inventories, net 2,218,306 1,920,983
Deferred tax asset 650,000 1,200,000
Other current assets 208,551 422,836
- - - ------------------------------------------------------ ----------------- -------------------
Total current assets 8,507,301 11,405,835
- - - ------------------------------------------------------ ----------------- -------------------
Fixed assets, net 3,886,371 3,733,994
Licenses, net 409,524 295,238
Deferred tax asset -- 950,000
Other assets 101,788 61,395
Goodwill, net 807,738 608,238
- - - ------------------------------------------------------ ----------------- -------------------
Total assets $ 13,712,722 $ 17,054,700
- - - ------------------------------------------------------ ----------------- -------------------
LIABILITIES AND STOCKHOLERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 54,740 $ 61,180
Borrowings under line-of-credit agreement 1,400,000 --
Accounts payable 962,715 1,872,200
Accrued compensation and related expenses 1,874,691 1,807,709
Deferred revenue 585,220 695,017
Other accrued expenses 485,753 300,152
- - - ------------------------------------------------------ ----------------- -------------------
Total current liabilities 5,363,119 4,736,258
- - - ------------------------------------------------------ ----------------- -------------------
Long-term debt 202,860 141,680
Deferred officers' compensation 267,921 256,255
Other liabilities 112,184 32,635
- - - ------------------------------------------------------ ----------------- -------------------
Total liabilities 5,946,084 5,166,828
- - - ------------------------------------------------------ ----------------- -------------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
1,000,000 shares authorized, no shares issued
and outstanding -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,792,004 and 4,872,753 shares
issued and 4,190,134 and 4,270,883 outstanding 47,920 48,727
Capital in excess of par value 15,904,753 16,293,536
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (7,009,498) (3,277,854)
- - - ------------------------------------------------------ ----------------- -------------------
Total stockholders' equity 7,766,638 11,887,872
- - - ------------------------------------------------------ ----------------- ------------------
Total liabilities and stockholders' equity $13,712,722 $ 17,054,700
- - - ------------------------------------------------------ ----------------- -------------------
See accompanying notes to consolidated financial statements.
Microlog Corporation
Consolidated Statements of Changes in Stockholders' Equity
Serial
Preferred Stock Common Stock
Shares Par Value Shares Par Value
- - - ----------------------------------------------------------------------------------------------------
Balance as of October 31, 1994 --- -- 4,379,511 $43,795
Exercise of common stock options -- -- 25,600 256
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
Issuance of common stock in
conjunction with acquisition of
Phonatic International B.V. -- -- 64,922 649
Net income for the year ended
October 31, 1996 -- -- -- --
- - - ---------------------------------------------------------------------------------------------------
Balance as of October 31, 1996 --- -- 4,792,004 47,920
Exercise of common stock options -- -- 80,749 807
Consulting expense funded through
stock options granted -- -- -- --
Net income for the year ended
October 31, 1997 -- -- -- --
- - - ---------------------------------------------------------------------------------------------------
Balance as of October 31, 1997 --- -- 4,872,753 $ 48,727
===================================================================================================
Capital in
Excess of Treasury Stock
Par Value Shares Cost
- - - --------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1994 $14,765,999 601,870 $(1,176,537) $(11,109,363) $2,523,894
Exercise of common stock options 25,373 -- -- -- 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 (1,176,537) (9,722,232) 4,161,654
Exercise of common stock options 305,758 -- -- -- 307,950
Issuance of common stock in
conjunction with acquisition of
Phonatic International B.V. 583,651 -- -- -- 584,300
Net income for the year ended
October 31, 1996 -- -- -- 2,712,734 2,712,734
- - - --------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1996 15,904,753 601,870 (1,176,537) (7,009,498) 7,766,638
Exercise of common stock options 188,783 -- -- -- 189,590
Consulting expense funded through
stock options granted 200,000 -- -- -- 200,000
Net income for the year ended
October 31, 1997 -- -- -- 3,731,644 3,731,644
Balance as of October 31, 1997 $ 16,293,536 601,870 $ (1,176,537) $(3,277,854) $11,887,872
==========================================================================================================================
See accompanying notes to consolidated financial statements.
Microlog Corporation
Consolidated Statements of Cash Flows
Year Ended October 31,
1995 1996 1997
- - - --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,387,131 $ 2,712,734 $ 3,731,644
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 474,537 633,182 839,033
Amortization of goodwill and licensing agreement 184,706 227,742 313,786
Loss (gain) on disposition of fixed assets 2,869 (55,455) 84,457
Deferred tax benefit -- (650,000) (1,500,000)
Consulting expense funded through stock options
granted -- -- 200,000
Changes in assets and liabilities:
Receivables (358,586) (1,198,255) 377,277
Inventories (554,705) (781,417) 297,323
Other assets 180,020 32,517 (173,892)
Accounts payable 304,152 (425,407) 909,485
Accrued compensation and related expenses 469,038 (228,625) (66,982)
Deferred officers' compensation -- (1,297) (11,666)
Deferred revenue 204,619 (110,149) 109,797
Other accrued expenses (557,013) (212,621) (265,150)
- - - ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,736,768 (57,051) 4,845,112
- - - ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (543,159) (1,318,969) (777,613)
Proceeds from sale of fixed assets 1,150 72,000 6,500
Purchase of Phonatic International B.V. -- (110,635) --
- - - ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (542,009) (1,357,604) (771,113)
- - - ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Reduction in long-term debt (1,463,819) (45,455) (54,740)
Net borrowings under line-of-credit agreement -- 1,400,000 (1,400,000)
Exercise of common stock options 25,629 307,950 189,590
- - - ----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,438,190) 1,662,495 (1,265,150)
- - - ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (243,431) 247,840 2,808,849
Cash and cash equivalents at beginning of year 1,166,194 922,763 1,170,603
- - - ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 922,763 $ 1,170,603 $ 3,979,452
================================================================================================================
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1: Basis of Presentation and Major Customers
The accompanying consolidated financial statements include the accounts of
Microlog Corporation and its wholly-owned subsidiaries (collectively, the
Company). All intercompany transactions have been eliminated.
Microlog Corporation of Maryland, and Microlog Europe, both subsidiaries,
design, assemble, market, and service 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,
1995 1996 1997
- - - ------------------------------------------------------------------------------------------------
(Amounts in thousands)
Net sales:
Voice processing systems and other
communications products $14,089 $15,836 $19,277
Performance analysis and
support services 8,297 9,871 12,491
- - - ------------------------------------------------------------------------------------------------
Net sales $22,386 $25,707 $31,768
=================================================================================================
Income from operations:
Voice processing systems and other
communications products 795 $ 1,131 $ 829
Performance analysis and
support services 705 980 1,545
- - - ------------------------------------------------------------------------------------------------
Income from operations $ 1,500 $ 2,111 $ 2,374
=================================================================================================
Identifiable assets:
Voice processing systems and other
communications products $ 6,383 $10,822 $14,333
Performance analysis and
support services 683 645 600
Buildings for common use 2,360 2,246 2,122
- - - ------------------------------------------------------------------------------------------------
Identifiable assets $ 9,426 $13,713 $17,055
=================================================================================================
Capital expenditures:
Voice processing systems and other
communications products $ 531 $1,537 $ 772
Performance analysis and
support services 2 15 6
Buildings for common use 10 25 0
- - - ------------------------------------------------------------------------------------------------
Capital expenditures $ 543 $1,577 $ 778
=================================================================================================
Depreciation expense:
Voice processing systems and other
communications products $ 358 $ 501 $ 704
Performance analysis and
support services 6 8 11
Buildings for common use 111 124 124
- - - ------------------------------------------------------------------------------------------------
Depreciation expense $ 475 $ 633 $ 839
=================================================================================================
Approximately 43%, 37% and 31% of the Company's consolidated net sales for
fiscal 1995, 1996, and 1997, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.
Approximately 3%, 10% and 18% of the Company's consolidated net sales for fiscal
1995, 1996, and 1997 respectively, involved the sale of voice processing systems
and other communications products to one customer in the pharmaceutical
industry.
Approximately 6%, 6%, and 9% of the Company's consolidated net sales for fiscal
1995, 1996, and 1997, respectively, involved the sale of voice processing
systems and other communications products to foreign countries.
Approximately 37%, 38%, and 39% of the Company's consolidated net sales for
fiscal 1995, 1996, and 1997, respectively, involved performance analysis and
support services subcontracts with prime contractors to the U.S. Navy. These
contracts have been extended, or have options to extend, to various dates in
fiscal 1998 and 1999.
The Company extends credit to its customers and billings are made in accordance
with contract terms.
Note 2: 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. When customers, under terms of specific orders, request
that the Company manufacture and invoice goods on a bill and hold basis, the
Company recognizes revenue based on the completion of the manufacturing process,
acceptance by the customer, and passage of title to the customer. For fiscal
1995, 1996, and 1997, the Company recognized 0, 0, and $3.5 million,
respectively, in sales under such bill and hold agreements. The system was
operational at the customers premises in November 1997.
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, possible adjustment, or termination for
convenience 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 U.S.
treasury bills, certificates of deposit, repurchase agreements, (which are
collateralized by securities issued or guaranteed by the U.S. 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, 1996 and 1997 was $390,476 and
$504,762, 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, 1996 and 1997 was $682,183 and $881,683, 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.
Stock-based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Option No. 25, "Accounting for
Stock Issued to Employee," (APB No. 25) and related interpretations. Under APB
No. 25, compensation cost is measured as the excess, if any, of the market price
of the Company's stock at the date of the grant over the exercise price of the
option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," (SFAS No.123) (Note 10).
Transactions for which non-employees are issued equity instruments for goods or
services received are recorded by the Company based upon the fair value of the
goods or services received or the fair value of the equity instruments issued,
whichever is more reliably measured.
Net Income Per Share
Net income per common share is computed by dividing net income 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, 1995, 1996, and 1997 were 4,066,705, 4,566,199 and 4,550,627,
respectively.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS No. 128), "Earnings per
Share", which establishes new standards for computing and presenting earnings
per share (EPS). As required by SFAS No. 128, the Company will adopt the new
standards in the quarter ending January 31, 1998, the Company's first quarter of
fiscal 1998, and restate all prior periods. The pro forma basic and diluted EPS
for each of the three years in the period ende October 31, 1997 are set forth
below:
1995 1996 1997
- - - ------------------------------------------------------------------------
Basic earnings per share $0.36 $0.67 $0.89
- - - ------------------------------------------------------------------------
Diluted earnings per share $0.34 $0.59 $0.82
- - - ------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS No. 130
becomes effective for the Company's fiscal year 1999 and requires
reclassification of earlier financial statements for comparative purposes. SFAS
No. 130 requires that changes in the amounts of certain items, including foreign
currency translation adjustments and gains and losses on certain securities be
shown in the financial statements. SFAS No. 130 does not require a specific
format for the financial statement in which comprehensive income is reported,
but does require that an amount representing total comprehensive income be
reported in that statement. The Company believes the adoption of SFAS No. 130
will not have a material effect on the consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement will change the way
public companies report information about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for the Company's fiscal year 1999. The
Company believes the adoption of SFAS No. 131 will not have a material effect on
the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements in order to conform to the 1997 presentation.
Note 3: 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.
Note 4: Receivables
Receivables consist of the following:
October 31,
1996 1997
- - - ------------------------------------------------------------------------------
Billed accounts receivable $ 4,339,445 $ 3,969,400
Contract retention 77,742 42,997
Accumulated unbilled costs and fees 49,742 22,353
- - - ------------------------------------------------------------------------------
4,466,929 4,034,750
Less: Allowance for doubtful accounts (207,088) (152,186)
- - - -------------------------------------------------------------------------------
$ 4,259,841 $ 3,882,564
- - - -------------------------------------------------------------------------------
Note 5: Inventories
Inventories consist of the following:
October 31,
1996 1997
- - - -------------------------------------------------------------------------------
Components $ 1,259,752 $ 1,474,629
Work-in-process and finished goods 1,211,172 791,576
- - - ------------------------------------------------------------------------------
2,470,924 2,266,205
Less: Reserve for obsolescence (252,618) (345,222)
- - - ------------------------------------------------------------------------------
$ 2,218,306 $ 1,920,983
- - - ------------------------------------------------------------------------------
During fiscal 1996, the Company disposed of obsolete inventory relating to the
CINDI and VCS 3500 lines of voice processing products that it had previously
reserved, resulting in an $800,000 reduction to the reserve for obsolescence.
Note 6: Fixed Assets
Fixed assets consist of the following:
October 31,
1996 1997
- - - --------------------------------------------------------------------------------
Building $ 2,511,266 $ 2,511,266
Land 520,000 520,000
Office furniture, equipment and capital leases 3,119,150 3,451,382
Vehicles 23,642 23,642
Leasehold improvements 176,096 176,096
- - - -------------------------------------------------------------------------------
6,350,154 6,682,386
Less: Accumulated depreciation (2,463,783) (2,948,392)
- - - -------------------------------------------------------------------------------
$ 3,886,371 $ 3,733,994
- - - -------------------------------------------------------------------------------
Estimated useful lives are as follows:
Building: 30 years
Office furniture, equipment and vehicles: 3-7 years
Capital leases and leasehold improvements: Shorter of estimated
useful life or lease
term
Note 7: Accrued Compensation and Related Expenses
Accrued compensation and related expenses consist of the following:
October 31,
1996 1997
- - - ------------------------------------------------------------------------------
Accrued wages $ 817,992 $ 629,919
Accrued vacation and personal leave 558,926 686,198
Other related expenses 497,773 491,592
- - - -----------------------------------------------------------------------------
$ 1,874,691 $ 1,807,709
- - - ------------------------------------------------------------------------------
Note 8: Debt
In February 1997, the Company renewed its line-of-credit facility with its bank
which allows the Company to 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% (9.75% at October 31, 1997), and contains a 0.5% commitment fee
on the average unused portion of the line. The line expires on February 28, 1998
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, 1997, there was no outstanding debt
against this line-of-credit.
In February 1997, the Company also renewed its $1,000,000 loan facility. The
loan facility bears interest at the bank's prime rate plus 0.5% (9% at October
31, 1997), and contains a 0.5% fee on the average unused portion of the loan.
The loan agreement expires on February 28, 1999, and contains the same
restrictive covenants as the 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, 1999. The loan facility is secured by the Company's
principal headquarters building. At October 31, 1997, there was no outstanding
debt against this loan facility.
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. Two annual payments have been made to date. The final payment is due on
June 30, 2000.
Note 9: 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 $0, $9,617, and $25,231, in fiscal 1995, 1996, and 1997, 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 $740,000. Subsequent to December 31, 1997, one of these
individuals retired which reduces the Company's obligation under these
agreements (see Note 15).
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
2000. Minimum future noncancellable operating lease payments as of October 31,
1997 are as follows:
Operating Leases
Year Ending October 31, Gross Sublease Net
- - - --------------------------------------------------------------------------------
1998 $ 561,982 $ (185,232) $ 376,750
1999 336,125 __ 336,125
2000 124,748 __ 124,748
- - - -------------------------------------------------------------------------------
$1,022,855 $ (185,232) $ 837,623
================================================================================
As of October 31, 1997, the Company has reserves of $112,000 for the remaining
net operating lease obligation of $440,000 associated with its Rancho Cordova
facility. Rent expense under noncancellable operating lease agreements in fiscal
1995, 1996, and 1997 was approximately $267,000, $275,000, and $299,000 (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.
Note 10: 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, 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:
Number Weighted Average
of Shares Exercise Price
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1994 433,750 $1.67
Options granted 587,167 3.20
Options canceled (85,785) 1.69
Options exercised (25,600) 1.00
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1995 909,532 2.68
Options granted 253,875 5.73
Options canceled (104,279) 3.25
Options exercised (194,114) 1.38
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1996 865,014 3.79
Options granted 300,000 5.75
Options canceled (75,344) 5.09
Options exercised (80,749) 2.35
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1997 1,008,921 $4.39
=========================================================================
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, 1997, options available for granting were
275,450.
Additionally, the Company maintains a non-employee Director stock option plan.
Under this plan, 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:
Number Weighted Average
of Shares Exercise Price
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1994 59,000 $2.68
Options granted 2,000 1.38
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1995 61,000 2.64
Options granted 6,000 5.50
Options exercised (23,000) 1.52
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1996 44,000 3.61
Options granted 6,000 5.63
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1997 50,000 $3.85
=========================================================================
Options granted under the plan vest immediately and expire ten years from the
date of grant. As of October 31, 1997, options available for granting were
52,000.
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 Weighted Average
of Shares Exercise Price
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1994 3,000 $1.75
Options granted 45,000 1.22
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1995 48,000 1.25
Options granted 5,000 8.38
Options exercised (2,000) 2.13
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1996 51,000 1.91
Options granted 205,000 5.00
Options canceled (16,000) 4.10
- - - -------------------------------------------------------------------------
Shares under option, October 31, 1997 240,000 $4.39
=========================================================================
Generally, options vest upon the achievement of certain events and expire from
two to five years from the date of grant.
In the third quarter of fiscal 1997, the Company entered into a consulting
agreement with The Parthenon Group, Inc. ("Parthenon"), a strategic marketing
and consulting organization. The Company has agreed to grant to Parthenon
non-statutory options to purchase up to 195,000 shares of the common stock of
Microlog at an exercise price of $5 per share. Options to purchase 40,000 shares
became exercisable in the third quarter of fiscal 1997 upon Parthenon's
commencement of work. Future options will become exercisable based upon the
achievement of certain average closing prices of Microlog's common stock on the
Nasdaq National Market. The expense associated with these options of $300,000
will be recorded over the term of the engagement, and the Company recorded
$200,000 as consulting expense in fiscal 1997.
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, 1997.
The following table summarizes information about all stock options outstanding
at October 31, 1997:
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exerciseable Exercise Price
----------------------------------------------------------------------------------------------
Incentive Stock
Option Plans $1.00 - $1.13 80,612 7.0 years $ 1.03 43,947 $ 1.04
$1.56 - $1.75 130,834 4.1 years 1.67 130,000 1.67
$2.94 - $4.38 300,300 7.9 years 4.33 114,485 4.30
$4.69 - $5.75 268,425 8.7 years 5.37 102,125 5.50
$6.00 - $6.88 228,750 9.1 years 6.07 12,663 6.05
$1.00 - $6.88 1,008,921 7.8 years $ 4.39 403,220 $ 3.46
---------------------------------------------------------------------------------------------
Non-Employee
Director Plan
$1.38 14,000 5.7 years $ 1.38 14,000 $ 1.38
$2.00 - $2.75 6,000 4.7 years 2.50 6,000 2.50
$4.75 - $6.75 30,000 4.5 years 5.28 30,000 5.28
$1.38 - $6.75 50,000 4.9 years $ 3.85 50,000 $ 3.85
---------------------------------------------------------------------------------------------
Non-Employee Plan
$1.00 40,000 7.1 years $ 1.00 20,000 $ 1.00
$5.00 195,000 4.6 years 5.00 40,000 5.00
$8.38 5,000 3.4 years 8.38
$1.00 - $8.38 240,000 5.0 years $ 4.39 60,000 $ 3.67
--------------------------------------------------------------------------------------------
The weighted-average fair value of options granted during fiscal 1996 and 1997
was $2.89 and $3.43, respectively. The fair value of each significant option
grant is estimated on the date of grant using the Black-Scholes model. The
following weighted average assumptions are included in the Company's fair value
calculations:
1996 1997
------------------
Expected life (years) 3.3 3.9
Risk-free interest rate 5.5% 6.2%
Volatility 80.0% 78.0%
Dividend yield ---- ----
The Company continues to apply APB No. 25 in accounting for stock-based
compensation for the incentive and non-employee Director plans. To date, all
stock options have been issued at market value; accordingly, no compensation
cost has been recognized. Had the Company determined costs for these plans in
accordance with SFAS No. 123, the Company's pro forma net income and earnings
per share would have been $2,583,620 and $0.57, respectively in fiscal 1996 and
$3,447,498 and $0.76, respectively in fiscal 1997. The SFAS No. 123 method of
accounting does not apply to options granted prior to November 1, 1995, and
accordingly, the resulting pro forma compensation cost may not be representative
of amounts expected in the future.
Note 11: Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of fixed and intangible
assets and revenue recognition for financial and income tax reporting. 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 1995, 1996, and 1997 consists
of:
Year Ended October 31,
1995 1996 1997
------------------------------------------
Income taxes payable (refundable) $ 20,000 $ 10,704 $ (545)
Change in valuation allowance -- (650,000) (1,500,000)
- - - --------------------------------------------------------------------------------
$ 20,000 $(639,296) $(1,500,545)
================================================================================
Income taxes payable (refundable) in fiscal 1995, 1996, and 1997 relate to state
income taxes and the alternative minimum tax for Federal income tax. The Company
recorded a deferred tax asset of $650,000 in fiscal 1996 and $1,500,000 in
fiscal 1997 reflecting the benefit of approximately $5.5 million in loss
carryforwards, which expire in varying amounts between 2006 and 2011.
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 $1.6 million of net operating
losses as management has determined it more likely than not that this amount
will not be realized.
A reconciliation of the statutory Federal tax rate to the Company's effective
tax rate is as follows:
Year Ended October 31,
1995 1996 1997
----------------------------------------
Statutory Federal tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal tax benefit 5.0 5.0 5.0
Utilization of net operating loss (42.6) (40.9) (43.6)
Goodwill amortization 4.4 3.0 3.0
Change in valuation allowance --- (31.3) (67.2)
Other 0.6 (0.6) 1.5
- - - --------------------------------------------------------------------------------
1.4% (30.8)% (67.3)%
================================================================================
Deferred tax assets are comprised of the following:
October 31,
1996 1997
-----------------------------------------
Accounts receivable reserve $ 80,764 $ 59,353
Inventory reserves 98,521 134,636
Accrued vacation and benefits 174,244 182,243
Deferred compensation 104,489 109,299
Deferred revenues 228,236 271,057
Other 71,673 222,464
Research and development credits 178,000 293,000
Foreign net operating losses 89,168
Loss carryforwards 3,175,623 2,755,612
- - - -------------------------------------------------------------------------------
Gross deferred tax assets 4,111,550 4,116,832
Valuation allowance (3,461,550) (1,966,832)
- - - --------------------------------------------------------------------------------
Net deferred tax asset $ 650,000 $ 2,150,000
================================================================================
The net change in the valuation allowance for deferred tax assets was a decrease
of $1,494,718 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 $7.1 million of tax loss carryforwards and $293,000 of research
and development tax credits can be utilized by the Company through 2011 and
2012, respectively. If certain substantial changes in the Company's ownership
should occur, there would be an annual limitation on the amount of the
carryforwards which can be utilized.
Note 12: 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 $111,000, $111,000, and $81,000 in fiscal 1995,
1996, and 1997, respectively. It is the Company's policy to fund pension costs
accrued. Net expense of the plan was approximately $365,000, $365,000, and
$441,000 in fiscal 1995, 1996, and 1997, 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 $138,000, $176,000, and $224,000 in fiscal 1995, 1996, and
1997, respectively.
Note 13: Supplemental Cash Flow Information
The Company paid cash for interest expense and income taxes as follows:
Year Ended October 31,
1995 1996 1997
--------------------------------
Interest $112,243 $81,000 $119,165
Income taxes $ 23,234 $20,983 $ 25,000
Non-cash investing and financing activities:
Note issued for purchase of fixed assets $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 9, 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.
Note 14: 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,
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 share $ 0.11 $ 0.13 $ 0.12 $ 0.23
- - - ------------------------------------------------------------------------------------------------
Stock prices
High $ 6.375 $ 10.00 $ 12.625 $ 8.125
Low $ 4.125 $ 4.50 $ 5.000 $ 5.250
==============================================================================================
Jan. 31, April 30, July 31, Oct. 31,
1997 1997 1997 1997
- - - ----------------------------------------------------------------------------------------------
Net sales $7,093,502 $7,239,214 $ 8,842,228 $8,592,884
Gross margin 3,043,374 2,716,464 3,374,491 3,192,464
Income from operations 606,717 554,299 511,364 701,280
Net income 668,821 615,517 614,541 1,832,765
Per share $ 0.15 $ 0.14 $ 0.14 $ 0. 39
- - - ----------------------------------------------------------------------------------------------
Stock prices
High $ 7.375 $ 6.50 $ 5.984 $ 8.750
Low $ 5.125 $ 5.25 $ 4.188 $ 4.500
===============================================================================================
Note 15: Subsequent Events
Subsequent to year end, one of the Company's executive officers retired. As a
result of this retirement, the total lump-sum for monthly payments which
individuals are entitled to receive under various compensation agreements with
the Company has been reduced to $573,000 (see Note 9).
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Falls Church, Virginia
December 18, 1997
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, 1995 1996
to to
1995 1996 1997 1996 1997
------------------------------ --------------
Net sales:
Voice processing 62.9% 61.5% 60.7% 12.4% 21.7%
Performance analysis 37.1% 38.5% 39.3% 19.0% 26.5%
- - - -----------------------------------------------------------------------------
Total net sales 100.0% 100.0% 100.0% 14.8% 23.6%
- - - -----------------------------------------------------------------------------
Costs and expenses:
Cost of sales 57.7% 58.8% 61.2% 16.9% 28.7%
Selling, general and administrative 28.5% 24.9% 20.1% 0.3% (0.3%)
Research and development 7.1% 8.1% 11.3% 31.5% 70.9%
- - - -----------------------------------------------------------------------------
Total costs and expenses 93.3% 91.8% 92.6% 13.0% 24.6%
Investment and other income
(expense), net (0.4%) (0.1%) (0.4%) (60.0%)
- - - -----------------------------------------------------------------------------
Income before income taxes 6.3% 8.1% 7.0% 47.4% 7.6%
- - - -----------------------------------------------------------------------------
Benefit (provision) for income taxes (0.1%) 2.5% 4.7%
- - - -----------------------------------------------------------------------------
Net income 6.2% 10.6% 11.7% 95.6% 37.6%
- - - -----------------------------------------------------------------------------
Results of Operations
The Company had net income of $3.7 million ($.82 per share) for the fiscal year
ended October 31, 1997. These results include a $1.5 million ($.33 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
$2.7 million ($.59 per share) for the fiscal year ended October 31, 1996, which
included a $0.7 million ($.14 per share) income tax benefit associated with the
expected future realization of the Company's net operating loss carryforwards
and 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. The improvement
in income before taxes of $0.2 million in fiscal 1997 was attributable to an
increase of $0.6 million in performance analysis income offset by a decrease of
$0.3 million in voice processing income.
Net Sales
Net sales for fiscal 1997 were $31.8 million, which represented an increase of
24% from net sales in fiscal 1996. Net sales for fiscal 1996 were $25.7 million,
which represented an increase of 15% from net sales in fiscal 1995. The increase
in fiscal 1997, as well as in fiscal 1996, was due to increases in voice
processing net sales as well as increases in performance analysis net sales.
Voice Processing Net Sales
The Company's voice processing net sales increased 22% in fiscal 1997 to $19.2
million, compared to $15.8 million in fiscal 1996. The increase in net sales
during fiscal 1997 included an increase of 22% in voice processing product sales
and an increase of 21% in product support and services sales. The increase in
sales was primarily attributable to an increase in sales to commercial customers
($2.5 million), of the Company's Retail Solution product, and an increase in
sales to international customers ($1.3 million), offsetting a decrease in sales
to distributors ($0.5 million).
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
sales was primarily attributable
to an increase in sales to commercial customers ($2.2 million), of the Company's
Retail Solution product, and an increase in sales to international customers
($0.4 million), offsetting a decrease in sales to distributors ($0.9 million).
In 1997, sales to the Company's 10 largest customers accounted for 90% of voice
processing sales. Two of the four largest customers were in the government
sector while one customer was in the commercial sector and one customer was in
the international sector. 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, government, commercial, 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.
During fiscal 1997, approximately $9.8 million (51% of voice processing net
sales and 31% of consolidated net sales) were in the government sector, which
included a sale of $3.5 million on a bill and hold basis requested by the
customer. The system was accepted and title passed to the customer in fiscal
1997, and in November 1997, the system was operational at the customer's
premises. This compares to $9.6 million (61% of voice processing net sales and
37% of consolidated net sales) for fiscal 1996 and $9.6 million (68% of voice
processing net sales and 43% of consolidated net sales) for fiscal 1995.
Traditionally the government market has produced strong results for the Company.
Sales to commercial customers increased 66% to $6.4 million (33% of voice
processing net sales) in fiscal 1997. By comparison, sales to commercial
customers were $3.9 million (24% of voice processing net sales) in fiscal 1996
and $1.6 million (12% of voice processing net sales) in fiscal 1995. Commercial
sales increased in fiscal 1997 primarily due to the continuation of ongoing
business with a large retail pharmacy chain as part of a large procurement of
the Company's Retail Solution product. The Retail Solution product offers
multiple voice processing applications designed to improve operations at retail
pharmacies.
Sales to the Company's distributors of voice mail products decreased 70% to $0.2
million (1% of voice processing net sales) in fiscal 1997. By comparison, sales
to distributors were $0.7 million (4% of voice processing net sales) in fiscal
1996 and $1.6 million (12% of voice processing net sales) in fiscal 1995. This
decrease in net sales is primarily the result of the Company's decision to focus
its sales and marketing efforts on its interactive voice response products, and
price decreases in the market for voice mail products. In 1996 the Company made
the decision to continue supporting voice messaging functions only within an
integrated approach to interactive communications products. In 1997, the
stand-alone CallStar product was withdrawn from marketing, but is still being
maintained for existing customers.
International voice processing sales increased 80% to $2.9 million (15% of voice
processing net sales) in fiscal 1997. This compares to $1.6 million (10% of
voice processing net sales) in fiscal 1996 and $1.3 million (9% of voice
processing net sales) in fiscal 1995. The increase in international sales was
primarily due to sales from new third party resellers of the Company's products
such as Devotech of France and PTT Telecom of The Netherlands. The Company is
continuing to actively pursue additional third party resellers of the Company's
products. During fiscal 1996, the Company acquired Phonatic International B.V.
of The Netherlands to strengthen its presence in the European voice response
market. This Microlog subsidiary operates under the name Microlog Europe and is
headquartered in Neunen, The Netherlands.
The UNIX-based Intela product has become the Company's principal interactive
communications system, surpassing the DOS-based VCS 3500. Intela revenues for
fiscal 1997 were $8.0 million as compared to $7.0 million in fiscal 1996 and
$2.0 million in fiscal 1995. There were no VCS 3500 revenues in fiscal 1997 as
compared to $0.6 million in fiscal 1996 and $5.0 million in fiscal 1995. The VCS
product continues to be marketed and supported, primarily for APRS trial and
production applications, and for upgrades to support the Year 2000 effort for
existing VCS customers.
As of October 31, 1997, the Company had a backlog of existing orders for voice
processing systems totaling $2.9 million. The backlog, as of October 31, 1996,
was $4.9 million. The Company has experienced fluctuations in its backlog at
various times during the past three fiscal years attributable primarily to the
seasonality of governmental purchases. The Company anticipates that all of the
outstanding orders at October 31, 1997 will be shipped and the sales recognized
during fiscal 1998. 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 increased 27% in fiscal
1997 to $12.5 million, compared to $9.9 million in fiscal 1996. Net sales of
$9.9 million in fiscal 1996 represented a 19% increase over net sales of $8.3
million in fiscal 1995. 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, 1997, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $2.9 million.
By comparison, the backlog as of October 31, 1996 was $5.5 million. The Company
estimates that the entire $2.9 million of backlog at October 31, 1997 will be
recognized as sales in fiscal 1998. 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 $7.2 million, or 52% of net sales of products,
for fiscal 1997; $5.2 million, or 45% of net sales of products, for fiscal 1996;
and $4.7 million, or 48% of net sales of products, for fiscal 1995. The increase
in cost of sales of products, as a percentage of sales, for fiscal 1997 was
primarily attributable to increased pricing pressures in the international
sector resulting in higher costs as a percentage of sales, as well as a large
government contract which yielded smaller margins than the Company's average
margins. The decrease in cost of sales of products, as a percentage of sales,
for fiscal 1996 was primarily attributable to increased sales of the Intela and
Retail Solution products and decreased sales of the CallStar and VCS products,
which had a higher cost of sales.
Cost of sales of services were $12.2 million, or 69% of net sales of services,
for fiscal 1997; $9.9 million, or 70% of net sales of services, for fiscal 1996;
and $8.2 million, or 65% of net sales of services, for fiscal 1995. The increase
in cost of sales in fiscal 1997 was primarily attributable to the increase in
net sales of performance analysis services. The increase in cost of sales in
fiscal 1996, both in dollar amount and as a percentage of sales, was primarily
attributable to the increase in net sales of performance analysis services,
which has a higher cost of sales than voice processing services.
Selling, general and administrative costs were $6.4 million or 20% of net sales,
for fiscal 1997; $6.4 million, or 25% of net sales, for fiscal 1996; and $6.4
million, or 28% of net sales, for fiscal 1995. The decrease in fiscal 1997 and
in fiscal 1996, as a percentage of sales, is primarily attributable to increased
sales. The Company anticipates that selling, general, and administrative costs
will increase in the next fiscal year as it increases its sales, marketing, and
administrative staffs to prepare for future growth.
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 $3.6 million, or 11% of net sales for fiscal 1997; $2.1 million, or 8% of
net sales for fiscal year 1996; and $1.6 million, or 7% of net sales for fiscal
1995. Research and development expenses for fiscal 1997 were focused on Intela,
VCS 3500 and APRS. The Intela product was enhanced for International release,
and the platform had four new productivity enhancement applications designed.
The VCS product was enhanced to include terminal emulation and support for Year
2000 update. The Company developed the KeyStar product during 1997. KeyStar is a
front-end integration hardware module, software controlled by the APRS, that
facilitates the integration of the APRS into existing store systems, including
many diverse telephone systems, PBXs, and key systems, without requiring
potentially costly upgrades by the store. The Company's engineering staff is
also engaged in the development of special product features for current or
potential customers.
The Company has assessed the impact of the Year 2000 on its internal and
external software, and has determined that any modification to the software will
not have a material impact on the Company or its results of operations or
financial condition.
Investment and Other Income, Net
The Company had net investment and other expenses of $143,000 for fiscal 1997,
as compared to $37,000 for fiscal 1996 and $93,000 for fiscal 1995. The higher
expense level in fiscal 1997 resulted from an $84,000 write off of obsolete
fixed assets. 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 (refundable) of $20,000 in fiscal 1995, $11,000 in fiscal
1996, and $(545) in fiscal 1997 relate to state income taxes, and the
alternative minimum tax for Federal income tax. The Company recorded a deferred
tax asset of $1,500,000 in fiscal 1997 and $650,000 in fiscal 1996 reflecting
the benefit of approximately $5.5 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 $7.1 million and $293,000, respectively,
will be available to offset taxes generated from future taxable income through
2011 and 2012. Management believes that the future tax benefits associated with
$1.6 million of net operating loss carryforwards is less 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, 1997 was $6.7 million, as compared to $3.1
million as of October 31, 1996. The increase was primarily attributable to
increases in cash and cash equivalents of $2.8 million, an increase in a
deferred tax asset of $550,000 and a decrease in short term borrowings of $1.4
million, offset by an increase in accounts payable of $909,000.
Accounts receivable as of October 31, 1997 were $3.9 million as compared to $4.3
million as of October 31, 1996. The decrease in accounts receivable was
primarily attributable to the Company's continued aggressive collection efforts
in fiscal 1997.
Fixed assets as of October 31, 1997 were $3.7 million as compared to $3.9
million as of October 31, 1996. The net decrease in fixed assets resulted
primarily from the addition of $778,000 of assets, and depreciation expense of
$839,000 for fiscal 1997. Major assets purchased were primarily hardware and
software upgrades to the Company's internal computer network and workstations.
In February 1997, the Company renewed its line-of-credit facility with its bank
which allows the Company to 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% (9.75% at October 31, 1997), and contains a 0.5% commitment fee
on the average unused portion of the line. The line expires on February 28, 1998
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, 1997, there was no outstanding debt
against this line-of-credit.
In February 1997, the Company also renewed its $1,000,000 loan facility. The
loan facility bears interest at the bank's prime rate plus 0.5% (9.00% at
October 31, 1997), and contains a 0.5% commitment fee on the average unused
portion. The loan agreement expires on February 28, 1999, and contains the same
restrictive covenants as the 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, 1999. The loan facility is secured by the Company's
principal headquarters building. At October 31, 1997, there was no outstanding
debt against this loan facility.
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 1998. 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. Two annual payments have
been made to date. The final payment is due on June 30, 2000.
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 14 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 1997 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
first three quarters of fiscal 1997 were not significant. In each of the three
quarters, the Company's net income was increased by a $100,000 ($0.02 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, and in the fourth quarter, the Company's net
income was increased by a $1,200,000 ($0.26 per share) income tax benefit. The
quarterly fluctuations for 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 as discussed above.
Price Range of Common Stock
The Common Stock is presently traded on the over-the-counter market under the
symbol MLOG. As of January 22, 1998, there were approximately 263 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 22, 1998 was
$5.875 per share.
Dividend Policy
The Company has not paid any dividends in over 10 years. 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.
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS No. 128), "Earnings per
Share", which establishes new standards for computing and presenting earnings
per share (EPS). As required by SFAS No. 128, the Company will adopt the new
standards in the quarter ending January 31, 1998, the Company's first quarter of
fiscal 1998, and restate all prior periods. The pro forma basic and diluted EPS
for each of the three years in the period ended October 31, 1997 are set forth
below:
1995 1996 1997
----------------------------
Basic earnings per share $0.36 $0.67 $0.89
Diluted earnings per share $0.34 $0.59 $0.82
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income." SFAS No. 130
becomes effective for the Company's fiscal year 1999 and requires
reclassification of earlier financial statements for comparative purposes. SFAS
No. 130 requires that changes in the amounts of certain items, including foreign
currency translation adjustments and gains and losses on certain securities be
shown in the financial statements. SFAS No. 130 does not require a specific
format for the financial statement in which comprehensive income is reported,
but does require that an amount representing total comprehensive income be
reported in that statement. The Company believes the adoption of SFAS No. 130
will not have a material effect on the consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement will change the way
public companies report information about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for the Company's fiscal year 1999. The
Company believes the adoption of SFAS No. 131 will not have a material effect on
the consolidated financial statements.
Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
INCOME STATEMENT DATA:
Year Ended October 31,
1993 1994 1995 1996 1997
- - - --------------------------------------------------------------------------------------------------------
Net sales $20,798,323 $ 18,668,762 $22,385,643 $25,706,735 $31,767,828
Income (loss) from
operations 1,050,934 (4,916,681) 1,500,343 2,110,713 2,373,660
Net income (loss) 919,779 (4,984,041) 1,387,132 2,712,734 3,731,644
Net income (loss)per common share:$ .23$ (1.29) $ .34 $ .59 $ .82
- - - --------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
October 31,
1993 1994 1995 1996 1997
--------------------------------------------------------------------------------------------
Working capital $ 4,945,780 $ (704,004) $ 748,974 $ 3,144,182 $ 6,669,577
Total assets 13,438,828 9,055,979 9,425,716 13,712,722 17,054,700
Long-term debt, net
of current maturities 1,659,273 45,456 -- 202,860 141,680
Stockholders' equity 7,500,522 2,523,894 4,161,654 7,766,638 11,887,872
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1) Net income for fiscal 1993 includes the tax benefit related to utilization
of net operating loss carryforwards.
2) Net income for fiscal 1996 includes 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. See Note 11 of the Notes to Consolidated Financial
Statements.
3) Net income for fiscal 1997 includes a $1,500,000 ($0.33 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. See Note 11 of the Notes to Consolidated
Financial Statements.