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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, 1998 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 March 4, 1999 closing price of these shares) was approximately
$5.4 million. The Common Stock is traded over-the-counter and quoted through the
Nasdaq National Market.
As of March 4, 1999, 4,287,585 shares of the Registrant's Common
Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
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,
1998 attached as an exhibit hereto (the "Annual Report to Shareholders").
PART I
ITEM 1. BUSINESS
GENERAL
Microlog Corporation ("Microlog" or the "Company") designs, assembles, and
supports, a variety of interactive communications systems which allow users to
remotely interact with computer systems via voice, touch-tone phone, or
graphical means and to access information on computer databases as well as
provides open solutions for customer contact center management. 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 and contact
center solutions segments and has been concentrating its efforts on those
segments.
The Company had a net loss of $8.6 million (($2.02) per basic and diluted share)
for the fiscal year ended October 31, 1998. These results include a write-off of
$2.15 million (($.50) per basic and diluted share) related to the deferred tax
asset. As a result of the losses in fiscal year 1998 and the uncertainty of
future profitability, management believes that the expected future realization
of the Company's net operating loss carryforwards is not likely to be realized
in the near future. By comparison, the Company had net income of $3.7 million
($.89 per basic share and $.82 per diluted share) for the fiscal year ended
October 31, 1997, which included a $1.5 million ($.36 per basic share and $.33
per diluted share) income tax benefit. The Company had net income of $2.7
million ($.67 per basic share and $.59 per diluted share) for the fiscal year
ended October 31, 1996, which included a $650,000 ($.16 per basic share and $.14
per diluted share) income tax benefit. The Company is now reporting basic and
diluted earnings per share as required under Statement of Financial Accounting
Standards (SFAS No.128), "Earnings per Share", which became effective for the
Company in fiscal year 1998.
The net loss of $8.6 million for fiscal year 1998 was attributable to the
Company's voice processing operations. Approximately $5.3 million of this loss
was due primarily to insufficient voice processing revenues and a change in the
sales mix in the Company's voice processing operations. The loss was also due in
part to a write-off of the deferred tax asset ($2.15 million), a large increase
in the reserve for inventory obsolescence ($1.3 million), the write-off of
goodwill ($0.5 million), and reserves associated with the relocation of its
operations facility in The Netherlands ($0.3 million). These losses were offset
by the $1.0 million net income generated from the Company's performance analysis
and supports services operations.
Over the past fiscal year the Company has been experiencing reduced demand,
increased competition and reduced margins in the voice processing area, which
the Company attributes to market forces. The Company believes that interactive
information response (IIR) systems in general, and in the retail pharmacy
vertical market targeted by the Company's commercial sales efforts in
particular, are becoming commodities which are more readily available from an
increased number of vendors and require less engineering customization. In
addition, governmental customers have been procuring large IIR systems as part
of major procurements from larger vendors, which has required the Company to
work through prime contractors, also resulting in greater difficulty in making
sales and increased pressure on margins. One of the Company's short-term
responses to these market trends has included increased marketing efforts
focusing on the capabilities of the Company's Intela product and its ability to
customize the product to meet specific application requirements.
In February 1999, the Company restructured its voice processing operations in
order to bring expenses in line with forecasted revenues. In connection with
this restructuring, the Company reduced its voice processing workforce by
approximately 25% and wrote off equipment associated with its headcount
reductions. As a result of the restructuring and cost reduction plan the Company
expects to reduce total voice processing operating expenses by approximately
$4.0 million annually and approximately $2.3 million for the remainder of fiscal
year 1999, starting in the second quarter of fiscal year 1999.
In February 1999, the Company and its financial institution put in place a
$750,000 line-of-credit facility, which allows the Company to borrow up to 75%
of the eligible receivables of Old Dominion Systems Inc. of Maryland.
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The line of credit bears interest at the bank's prime rate plus 1.25% (9% at
February 11, 1999) and is payable upon demand. At March 17, 1999, $500,000 was
outstanding against this line-of-credit. This credit facility will be terminated
upon closing of the $2.0 million revolving line-of-credit facility with the new
financial institution discussed below.
The Company has a commitment for a $2.0 million revolving line-of-credit
facility with a new financial institution, which allows the Company to borrow up
to 75% of its eligible receivables to a maximum of $2,000,000, subject to the
right of the financial institution to make loans at its discretion. The Company
expects to close on this loan facility by the end of March, 1999. The
line-of-credit bears interest at the bank's prime rate plus 2.25% (10.00% at
March 17, 1999), and contains a 0.025% fee on the average unused portion of the
line as well as a monthly collateral fee and a 1% upfront commitment fee. The
term of the loan is one year, and subjects the Company to a restrictive covenant
of not exceeding 115% of its consolidated planned quarterly losses for its
second and third quarters of fiscal year 1999, and a requirement for
consolidated profitability beginning in the fourth quarter of fiscal year 1999.
The line also subjects the Company to a number of restrictive covenants
including restrictions on mergers or acquisitions, payment of dividends, and
certain restrictions on additional borrowings. The line will be secured by all
of the Company's assets.
In fiscal year 1999, the Company's strategy for addressing the market trends
will be to move aggressively into the customer contact center market, which was
a new vertical market for the Company in late fiscal year 1997 and fiscal year
1998. The Company will be focusing sales of its UNIX-based Intela product, the
Company's principal interactive communications system, on contact center
applications. The Company also will be promoting its newest product line,
uniQue(TM), a family of open solutions for customer contact center management
that leverages the effectiveness of unified queuing, priority and skills-based
routing, and "zero administration" at the agent's desktop. With "zero
administration" the system administrator makes changes to the configuration or
application from a central location and distributes to the agents' desktops
automatically. In fiscal year 1998, the Company launched its first product from
the uniQue suite of contact center products, uniQue Agent(TM), an application
that allows the contact center agent to seamlessly manipulate all of the
different media types: email, fax, Web, and voice contacts all at one work
station. The Company is devoting significant efforts to promote market
acceptance of uniQue Agent(TM), and is commencing an advertising campaign
directed specifically at contact centers, collections, and interactive
communications industries.
To a lesser extent, the Company also will be focusing on another Intela
application, The Automated Collector (TAC), which has recently been enhanced to
add features the Company believes will meet market requirements. The Company
will be seeking technology partners and resellers for this product in fiscal
year 1999.
Also in fiscal year 1999, the Company will continue to market its Intela product
to its base of VCS 3500 customers. The Company no longer offers the VCS 3500
product; there were no VCS 3500 product revenues in fiscal years 1998 or 1997
and limited revenues ($0.6 million) in fiscal year 1996. The Company continues
to support its base of VCS 3500 customers and receives service revenues from
this support, but expects these revenues to decline since the Company has not
updated the product including with respect to Year 2000 compliance since fiscal
year 1996.
The Company is subject to the risk that its new strategy will not be successful.
The new strategy is dependent on market acceptance of the Company's new focus
and new products, ongoing research and development efforts and sales activities
over the near term. In addition, the new strategy is also dependent on the
Company's ability to successfully reduce costs. The Company is subject to the
risk that it will not be able to obtain and maintain the necessary debt
financing it requires to implement its new strategy. Failure to obtain and
maintain required financing would have a material adverse effect on the Company.
The Company's fiscal year 1999 operating budget includes significant
expenditures relating to the development and marketing of its new product line,
uniQue, and requires the Company to utilize debt financing to maintain its new
strategy. The Company's anticipated cash flows from existing operations will not
generate the required cash flows to successfully launch the Company's new
strategy. If the Company is unable to obtain and maintain the necessary debt
financing, the Company will not be able to successfully implement its new
strategy and it will be forced to reduce expenditures in addition to those
associated with the restructuring discussed above in order to continue as a
going concern. The Company is subject to the risks that it may not make the
necessary decisions to reduce expenditures in enough time to avoid severe
adverse consequences. In March 1999, the Company has a commitment for a new
line-of-credit facility with a new financial institution.
2
The results of the Company's performance during fiscal 1998, 1997, and 1996, 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 includes a voice processing system
connected to an external computer that contains data of interest to callers.
With touch-tone or voice commands (using speech recognition software), which
often include passwords, codes or account numbers, callers can query the
computer and have data read back to them in voice form. Depending on the
customer's application, callers may also change data on the computer or input
new data with touch-tone or voice commands. 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 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 development tools, and its newest product
line, the uniQue(TM) family of open solutions for customer contact center
management. The Company also offers a Retail Solutions product line that
operates under either a UNIX or DOS operating system, and the VCS 3500(TM)
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 Company's interactive
communications 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.
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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.
Service Management System (SMS) allows network and operations managers to
configure and manage their interactive communications system through a
simple, consistent graphical "point & click" interface. SMS allows network
managers to monitor the status, retrieve usage statistics, configure
hardware and software resources, and install software on any Intela-based
system installed in the network.
Fax Software allows system users to automatically receive stored fax
documents on demand from the voice processing system. Customer service and
sales support operations are frequent users of fax software. A service
representative can take a request for documents from the system and
designate faxes to be sent in response without exiting the 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 or voice commands.
Interactive Web Response (IWR) allows the interactive communications
platform to handle web-originated input as it would data collected from a
standard phone interaction. IWR performs activities such as database
lookups, outgoing faxes, conferencing, or sending information to agents for
customer callbacks. Acting as the interface between a web site and the
interactive communications system, IWR passes information collected through
a web contact using CGI and sockets. The results are delivered though a web
page that is sent back to the user.
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 as 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 complete, the
telephone line to that destination is released. A call may, for example,
initially be transferred to a phone number, which can provide information
required for the second transfer. In the Microlog applications, RLT is
often used for long distance transfers.
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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 not reflect. Benefits
include, increased office productivity through fewer interruptions, timely
and accurate message delivery, increased message detail, and reduced
callbacks and "telephone tag." Messages may be left for groups of people as
well as individuals. Callers may edit messages, reviewing and re-recording
until satisfied. Mailbox owners may review, save, forward or discard voice
messages.
uniQue(TM)
Microlog's new uniQue product family will offer comprehensive open
architecture, cross platform solutions for customer contact centers. uniQue
is designed for the contact center with 5 to 5,000 agents and seamlessly
integrates all of the contact center's telephony, computer and business
applications. uniQue is designed for the contact center manager and offers
the agent appropriate tools necessary to handle customer interactions.
The uniQue product includes the following features:
Multiple Media - uniQue accepts and intelligently routes all customer
contacts, whether from a traditional telephone call, Web contact, email,
facsimile, or even simple postal mail. By accepting any type of contact
from the customers, uniQue becomes the single source repository of all
customer interaction providing the user with a powerful information tool
that summarizes customer behavior and provides better customer
satisfaction.
Contact Prioritization - In addition to handling all types of media, uniQue
prioritizes the contact based upon the rules established by the contact
center manager in order to ensure that all of the user's customers are
handled in the most appropriate manner, such as servicing the most
important customers first.
Intelligent Routing - uniQue leverages the effectiveness of skills-based
routing by matching the customer contact to the most appropriate agent
skill required to service the contact. uniQue's simple system
administration feature allows the supervisor to quickly and easily add or
remove skills to any agent on-line. This allows the contact center's
management to schedule and maintain the most appropriate level of agents at
all times.
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Easy Configuration & Remote Administration - Being a completely Web-based
Java application, uniQue offers the contact center management zero
administration at the agent 's workstation. The Java applet is hosted on
the uniQue server. It is loaded only once, and each time an agent logs into
the application, the uniQue applet is downloaded to the agent's workstation
eliminating any agent workstation configuration or administration.
Web-Based System - Keeping with the concept of open systems, uniQue
operates on any agent computer with any operating system provided there is
a properly configured Java-enabled Web browser on the agent's desktop. This
concept frees the user from being tied to a single computer environment,
system architecture or operating system. uniQue will operate in an
environment where there may be multiple types of computers. The open system
approach provides tremendous flexibility to a contact center's computing
requirements and simplifies the task of integration.
Reporting - Included with uniQue is a powerful statistical data capturing
and reporting component. Contact center managers can generate any number of
statistical reports from the system. uniQue stores each customer contact
along with the detailed information about the contact. Detailed information
which could be stored include but are not limited to: contact duration,
agent wrap-up time, total contact length, contact outcome, contact result
and contact reason. With uniQue, contact center managers are able to
develop their own reports which summarize agent productivity, contact
center accomplishments, and even business success statistics.
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 installed Intela for many different customers, with one of our
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, web and fax.
Each Intela system incorporates multiple servers with hard disk storage and
several voice cards. Intela uses distributed servers, each of which handles
a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of
distributed servers, the Company can configure the 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 DC 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
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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 have been reviewed and
accepted. New or updated prompts will be phased in automatically while
applications remain on-line.
Prompt Manager allows users to retrieve a prompt from storage on a port
server and have the graphical representation shown in a window. The user
can modify the prompt simply by clicking on the window and performing any
of the following actions: cut, copy, paste, delete, trim silence, adjust
again, convert sections of a prompt to silence, and change sampling rate.
System Administration allows for the loading and unloading of applications,
and the management of the port servers connected to the application
processor. If a system has network hardware in the system
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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 the
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 1998, the Company delivered Intela System Release 6 (SR6), and completed
work on several functional enhancements to the product. In addition, work
was completed to support Dialogic SCbus capabilities and improvements in
speech technology services. Additional Intela features released in SR6
included IntelaSMS(TM) that provides Simple Network Management Protocol
(SNMP) capabilities and a standard Management Information Base (MIB) to
allow centralized management of distributed Intela systems. IntelaWeb(TM)
combines the best of traditional touch-tone based interactive
communications and the Web experience. IntelaWeb allows traditional call
flows and applications to be Web-enabled, without complex redesign or code
rewrites. IntelaWeb also supports industry standard HTML, CGI and Java
Script.
System enhancements provided in the SR6 release include:
o Year 2000 Compliance;
o SCbus Support - a real time, high-speed communications bus that
provides for transmission of digital information between SCbus
compliant products. SCbus allows systems to efficiently share
resources so that multiple technologies can be connected to each port
as needed which provides more scaleable IVR systems at a cost savings
because of more efficient resource deployment;
o Enhanced Speech Recognition and Text-to-Speech services including
integration of Dialogic's Antares DSP platform, dynamic language
specification for both Automatic Speech Recognition (ASR) and
Text-To-Speech (TTS), improved ASR and TTS cut-through support,
addition of PureSpeech and VCS ASR technologies, and the addition of
Centigram TTS.
8
THE AUTOMATED COLLECTOR
The Automated Collector is a flexible, robust, interactive communications
application that automates the process of collecting outstanding debt from
consumers. It is designed to handle both inbound and outbound calls. The
Automated Collector uses scripted messages to collect promises to pay --
debtors are asked to either commit to pay their debt in full, or are given
the opportunity to negotiate a payment schedule over a period of months.
Microlog created The Automated Collector based on a custom application
developed for the Internal Revenue Service (IRS), one of the largest
collections call centers in the world. The IRS required an automated means
of allowing taxpayers in arrears to commit to a federal tax repayment plan.
This application, called Voice Balance Due (VBD), has lead to a significant
increase in incremental collections by the IRS. Based on the application
developed for the IRS, the Company created The Automated Collector for
commercial customers.
The Automated Collector can operate 24-hours per day, 7 days a week, 365
days a year. The Automated Collector verifies right party contact by asking
debtors to enter an identification number, such as their social security
number or other data known only to them. When necessary, the caller can
choose to transfer to a live collector. The Automated Collector is flexible
enough to accommodate a variety of debt collection strategies including
small balance accounts, and most-likely-to-pay accounts.
The Automated Collector can:
o Handle both inbound and outbound collections calls
o Verify "Right Party Contact"
o Collect Promises to Pay or set up payment schedules
o Accommodate a variety of debt collection strategies
Automating Collections will:
o Increase contact rates
o Increase productivity
o Drive down variable costs
o Increase capacity
o Expand hours of operations
RETAIL SOLUTIONS
Retail Solutions consists of several applications designed and manufactured
specifically for the retail pharmacy industry. These applications include
the Automated Prescription Refill System (APRS(R)), Photo Ready(TM),
Prescription Ready(TM), and the ProNouncer(R).
AUTOMATED PRESCRIPTION REFILL SYSTEM (APRS)
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.
9
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.
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.
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.
10
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.
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 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 - 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) - 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) is a DOS-based system
which accommodates varying numbers of ports, utilizes proprietary software
modules, and can support up to 12 separate voice response or voice
messaging applications.
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. Consequently, VCS 3500 is not actively sold and
will be discontinued in 1999. The Company continues to support its base of
VCS 3500 customers and receives service revenues from this support, but
expects these revenues to decline since the Company has not updated the
product, including with respect to Year 2000 compliance, since fiscal year
1996.
11
SALES AND MARKETING
The Company's Retail Solutions systems are sold primarily through direct sales.
The Intela and The Automated Collector products are sold through a combination
of direct sales, value added resellers, original equipment manufacturers, and
government contract vehicles. It is expected that during the first two quarters
of 1999, uniQue will be sold directly, followed by sales through our channel
partners and resellers.
For 1999, Microlog's strategy will be to focus on the contact center by selling
Intela, The Automated Collector, and uniQue into selected vertical markets.
Channel Sales - A Channel Business team of marketing and sales has been created
to obtain technology partners, as well as resellers of the Microlog's products.
Direct Sales Force - The direct sales force has a sales manager in charge of
North America, 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 a satellite office in Salt Lake
City, Utah. 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 Eindhoven, The
Netherlands.
In addition to a significant reduction in its international voice processing
operations which occurred as a result of the restructuring, the Company is
currently evaluating options for the transfer or sale of its existing Microlog
Europe interactive voice response operations, sales, and support activities to
organizations in similar lines of business. The Company is continuing to explore
uniQue opportunities in Europe through these organizations.
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 and marketing-related activities. Marketing
consists of product managers and marketing communications personnel. This
organization interfaces with direct and international sales in marketing, and
selling the Company's products, applications, and services.
Promotional Activities - In support of Microlog's sales and marketing strategy
for the coming year, an increased advertising campaign directed specifically at
contact centers, collections, and interactive communications industries is
underway. In addition, an increased presence at industry-specific trade shows is
planned, as well as a direct mail campaign, and the development of new sales
tools and collateral.
SERVICES
12
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 Eindhoven, 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, 1998, the Company had a backlog of existing orders for voice
processing systems totaling $2.0 million. The backlog, as of October 31, 1997,
was $2.9 million. The Company has experienced fluctuations in its backlog at
various times during the past attributable primarily to the seasonality of
governmental purchases. The Company anticipates that all of the outstanding
orders at October 31, 1998 will be shipped and the sales recognized during
fiscal year 1999. Although the Company believes that its entire backlog of
orders consists of firm orders, because of the possibility of customer changes
in delivery schedules and delays inherent in the government contracting process,
the Company's backlog as of any particular date may not be indicative of actual
sales for any future period.
COMPETITION
The interactive communications industry is highly competitive and the Company
believes that competition will intensify. The Company competes with a large
number of companies, which produce interactive communications products offering
one or more of the 14 major voice processing applications performed by the
Company's products. Microlog's competitors include companies such as IBM,
InterVoice, Inc., Lucent, Periphonics, Brite 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.
The contact center marketplace in which the uniQue product is expected to
compete is also very competitive. New competitors are entering the market
frequently. Some are long established telephony vendors with a large market
share such as Lucent, Nortel, and Aspect, while others are new start-up
companies such as Interactive Intelligence, ATIO, and Apropos. Since the market
is large and expanding rapidly, the Company believes competition will continue
to emerge among existing vendors and expects new competitors to enter this
marketplace.
13
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 1999.
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
Research and development expenses for 1998 were focused on the Intela, TAC,
APRS, and uniQue products. uniQue Agent was announced and substantially
completed in November 1998 as a product offering available for customer trial in
the contact center market. uniQue Agent is the first in a series of offerings
the Company is developing to provide a comprehensive range of solutions within
the contact center market in fiscal year 1999. The uniQue development activities
will also be a major focus in fiscal year 1999 for the Company's research and
development efforts. Intela was enhanced for new features and Year 2000
compliance in the System Release 6 (SR6) version of the product. TAC was
enhanced to meet market requirements to readily integrate with both custom and
widely available collections databases in use in customer sites. APRS was
extended and customized for a number of customer opportunities in 1998 which did
not materialize. A significant amount of custom engineering is undertaken by the
Company in providing special features, application development, and system
integration services to our customers. The Company is subject to the risks that
it may not have the financial resources to support its research and development
strategy.
The following table sets forth for the periods indicated the Company's research
and development expenditures and the percentage of interactive communications
net sales represented by these expenditures.
Research and Development Expenditures
(In thousands, except percentage amounts)
YEAR ENDED OCTOBER 31,
----------------------
1996 1997 1998
---- ---- ----
Research and development expense $2,094 $3,579 $3,256
Percentage of voice
processing net sales 13% 19% 22%
14
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 has a lease on a manufacturing and training facility
located in Gaithersburg, Maryland which expires in September, 1999. Microlog
currently has 6 employees in its manufacturing group. The Company generally uses
standard parts and components obtained from a variety of computer vendors and
specially configures these components to produce the hardware for its systems.
Certain components used in the Company's products are presently available from
limited sources. To date, the Company has been able to obtain supplies of these
components in a timely manner from these sources.
RESTRUCTURING OF OPERATIONS
In February 1999, the Company restructured its voice processing operations in
order to bring expenses in line with forecasted revenues. In connection with
this restructuring, the Company reduced its voice processing workforce by
approximately 25% and wrote off equipment associated with its headcount
reductions.
The Company will incur a restructuring charge of approximately $260,000 in the
second quarter of fiscal 1999, for severance and benefits costs for the
reduction of approximately 25 employees in February 1999. Temporary employees
and contractors will also be reduced. Included in the restructuring charge is a
write-off of assets of approximately $50,000 which includes the write-off of
equipment associated with headcount reductions.
As a result of these restructuring activities, the Company expects to reduce its
annual voice processing operating expenses, in the form of reduced salaries and
wages, by approximately $1.8 million. The Company expects to complete most of
the actions associated with the restructuring by the end of the second quarter
of fiscal year 1999.
The Company expects to also decrease expenses as a result of the reduced
headcount in areas such as travel, training and communications expenses.
Additionally, the Company is initiating a cost reduction plan in areas such as
advertising, recruiting, office and computer supplies, and professional fees to
further reduce voice processing operating expenses. As a result of the
restructuring and cost reduction plan the Company expects to reduce total voice
processing operating expenses by approximately $4.0 million annually and
approximately $2.3 million for the remainder of fiscal year 1999, starting in
the second quarter of fiscal year 1999.
In addition to a significant reduction in its international voice processing
operations which occurred as a result of the restructuring, the Company is
currently evaluating options for the transfer or sale of its existing Microlog
Europe interactive voice response operations, sales, and support activities to
organizations in similar lines of business. The Company is continuing to explore
uniQue opportunities in Europe through these organizations.
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.
15
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,
Intela0Powerdial, KeyStar, Connecting People to a World of Information, The
Automated Collector, uniQue, uniQue Agent, and uniQue The Best Seat In The House
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 38%, 39% and 44% of the Company's net sales for
fiscal 1996, 1997, and 1998, 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.
16
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. 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
17
As of October 31, 1998, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $0.2 million.
By comparison, the backlog as of October 31, 1997 was $2.9 million. The decrease
in backlog was primarily due to the types of contracts that the Company had in
backlog at October 31, 1998, as compared to October 31, 1997. At October
31,1998, the Company's contracts consisted primarily of indefinite delivery,
indefinite quantity (IDIQ) contracts which generally do not have a funding
amount and therefore are not included in backlog. At October 31, 1997, the
Company had a contract portfolio which included fixed price and time and
materials contracts which have a funding amount, as well as IDIQ contracts which
generally do not have a funding amount. The Company estimates that the entire
$0.2 million of backlog at October 31, 1998 will be recognized as sales in
fiscal year 1999. Because of the delays inherent in the government contracting
process or possible changes in defense priorities or spending, the Company's
backlog as of any particular date may not be indicative of actual sales for any
future period. Although the Company believes that its backlog of funding on
existing contracts is firm, the possibility exists that funding for some
contracts on which the Company is continuing to work, in the expectation of
renewal, may not be authorized. In addition, the Government has the right to
cancel contracts, whether funded or not funded, at any time, although to date
this has not occurred.
GOVERNMENT REGULATION
In order to maintain contracts with contractors or Government agencies, the
Company must comply with a variety of regulations and Department of Defense
guidelines, including regulations or guidelines covering security, record
keeping, and employment practices. The majority of the employees assigned to the
Company's contracts with contractors or agencies are required to have security
clearances. The Company historically has not experienced any significant
difficulty in obtaining the necessary security clearances. The Company's sales
under these contracts are subject to audit by the Defense Contract Audit Agency
(the DCAA). The DCAA has completed audits through fiscal 1992, and any
adjustments required as a result of these audits have been minor. The
implementation by the Federal Government of spending cutbacks, or a change in
national defense priorities, could reduce the Company's sales.
EMPLOYEES
At January 15, 1999, the Company and its subsidiaries employed a total of 263
persons, including three part-time employees. Of these personnel, 106 are
engaged principally in the Company's interactive communications systems
operations,151 are engaged in performance analysis and support services, and six
serve as officers or managers or perform administrative services for the Company
and all of its subsidiaries.
In February 1999, the Company restructured its interactive communications
systems operations which included a workforce reduction of approximately 25%.
The Company's interactive communications systems operations currently employs
approximately 77 persons and six will continue to 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
In May 1998, the Company entered into a 15 year non-cancelable lease commitment,
commencing on or about June 1999, for office space intended to consolidate the
Company's headquarters, warehouse, and training facilities. The Company and its
new landlord are in the process of discussing potential alternatives concerning
the new facility. At this time management cannot predict the potential outcome
of these discussions. In August 1998, the Company sold its 24,000 square foot
office building and land and committed to lease back the building prior to its
occupation of the new leased space.
18
The Company presently leases 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 acquired by the Company in 1991, under a 10
year lease, which began in 1989 and expires in 1999. Additionally, the Company
leases and occupies 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 a five-year term for its
Rancho Cordova facility. The sublease was extended in 1998 and is now
coterminous with the lease that expires in April 1999.
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 35 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 36 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 30 through 36 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, 1998, 1997, and 1996,
Consolidated Balance Sheets as of October 31, 1998 and 1997, Consolidated
Statements of Changes in Stockholders' Equity for the years ended October 31,
1998, 1997, and 1996, Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997, and 1996 and Notes to Consolidated Financial Statements,
together with the report thereon of PricewaterhouseCoopers LLP dated March 17,
1999, are incorporated by reference from pages 10 through 27 of the Company's
Annual Report to Shareholders.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Shown below are the names of all Directors and executive officers of the
Company, the age of each such person as of January 18, 1999, all positions and
offices held by each such person, the period during which each person has served
as such, and the principal occupations and employment of each such person during
the last five years:
RICHARD A. THOMPSON, age 52, has been President and Chief Executive Officer
of the Company since January 1, 1997. He was President and Chief Operating
Officer of the Company from June 1992 through January 1, 1997. Mr. Thompson was
elected a director of the Company in September 1992. Prior to joining Microlog
Corporation, Mr. Thompson was President and a director of General Kinetics,
Inc., a diversified manufacturing company from October 1989 to December 1991.
Other positions he has held have been as President of Thompson Associates, a
management consulting firm from 1988 to 1989 and as Marketing Manager with
General Electric Company from 1985 to 1988. Mr. Thompson is also a Captain in
the U. S. Naval Reserve.
JOE J. LYNN, age 67, presently serves as a part-time consultant to the
Company, having retired from his position as Chief Development Officer of the
Company, in which he served from January 1, 1997 through January 15, 1998.
Previously, Mr. Lynn was Chief Executive Officer of the Company from May 1, 1991
through January 1, 1997 and President of the Company from October 1989 to June
1992, and prior thereto he served as Executive Vice President of the Company and
as President of the Company's subsidiary, Microlog Corporation of Maryland. He
has been a director of the Company since its formation in 1969. From 1966 until
1970, Mr. Lynn was employed as a manager with DBA Systems, Inc. From 1961 to
1966, he served as a manager at the Kennedy Space Flight Center for RCA, which
is presently a subsidiary of General Electric Company.
ROBERT E. GRAY, JR., age 57, has been a director of the Company since 1977.
He is currently Executive Vice President of Prosperity Bank and Trust, in
Springfield, Virginia. Mr. Gray was appointed to Prosperity Bank and Trust's
Board of Directors in December 1997. He was employed by Hallmark Bank & Trust
Co. from 1985 to 1992 - as Director and Executive Vice President from 1989 to
1992, and prior thereto as Senior Vice President and Chief Lending Officer. From
1992 to 1993, he served as Senior Vice President of Suburban Bank of Virginia,
NA in McLean, Virginia.
DAVID M. GISCHE, age 49, has been a director of the Company since April
1985. Mr. Gische, an attorney, has been associated with the law firm of Ross,
Dixon & Bell in Washington, D.C. since November 1983. From September 1978 until
November 1983, Mr. Gische was associated with the Washington, D.C. law firm of
Hogan & Hartson LLP, counsel to the Company.
DAVID B. LEVI, age 64, has been a director of the Company since December
1997. Since November, 1998, Mr. Levi also has served as a consultant to the
Company. Mr. Levi served as President of Natural MicroSystems Corporation, a
provider of hardware and software for developers of high-value
telecommunications solutions from June 1991 to April 1995. In November 1995, Mr.
Levi became President of Voice Processing Corp. (VPC). and Mr. Levi served as
Chief Operating Officer of VCS until his retirement in October 1997. Prior to
1991, Mr. Levi held Chief Executive Officer and Chief Operating Officer
positions at Raytheon Data Systems (a division of Raytheon Corp.), Centronics
Data Computer Corp., and Raster Technologies, Inc., and consulted to Regional
Bell Operating Companies.
STEVEN R. DELMAR, age 43, the Company's Executive Vice President and Chief
Financial Officer, has been Executive Vice President of the Company since
October 1989 and was President of Microlog Corporation of Maryland, a
wholly-owned subsidiary of the Company, from May 1991 to July 1992. Mr. Delmar
was Microlog's Chief Financial Officer from January 1987 to May 1991. He served
as Chief Operating Officer of Microlog (rather than Chief Financial Officer)
from May 1991 until July 1992, and following the hiring of Mr. Thompson as
President and Chief Operating Officer, Mr. Delmar resumed his position as Chief
Financial Officer. He was Vice President of the Company from January 1987 to
October 1989. Since 1979, Mr. Delmar has held various offices with the Company
and its subsidiaries, including Assistant Comptroller, Comptroller, General
Manager and Vice President.
20
A certified public accountant, Mr. Delmar held accounting positions with Bechtel
Power Corporation, a commercial construction firm, and the Veterans
Administration prior to his employment with Microlog.
DEBORAH M. GROVE, age 46, has been President of Old Dominion Systems
Incorporated of Maryland, a wholly-owned subsidiary of the Company, since May
1991. From 1983 until May 1991, Ms. Grove was Vice President of Old Dominion
Systems Incorporated of Maryland and from 1985 until May 1991, Vice President of
Old Dominion Services, Inc. Ms. Grove holds a Master of Science degree in
Business and Finance and a Bachelor of Science degree in Business
Administration.
JOHN C. MEARS, age 45, has been the Senior Vice President Product
Development for Microlog since August 1996. Mr. Mears was with International
Business Machines (IBM) from 1990 to 1996 in key management positions associated
with their IVR, CTI, and Network product departments. From 1978 to 1990 he held
various technical, business development, and management positions in multiple
divisions of IBM. Mr. Mears holds both a bachelor's and master's degree in
electrical engineering from the University of Florida.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director and officer of the Company, and each person who beneficially
owns more than 10% of the Company's Common Stock, is required by Section 16(a)
of the Securities Exchange Act of 1934 to file reports with the Securities and
Exchange Commission ("SEC") of beneficial ownership of the Company's equity
securities and certain changes to such ownership. Based on its review of the
reports and written representations furnished by the persons required to file
reports under Section 16(a), Richard A. Thompson and Steven R. Delmar each filed
one late report with the SEC of one transaction involving changes in beneficial
ownership. This was due to the fact that the purchase was made through the
Company's 401k plan which could not provide share price and number of shares
purchased in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ending October 31, 1996,
1997, and 1998, the salary, bonus, and certain other forms of compensation paid
or accrued for those years by the Company and its subsidiaries to the Chief
Executive Officer and each of the three other executive officers whose salary
and bonus compensation exceeded $100,000 in fiscal 1998 ("named executive
officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
FISCAL YEAR SALARY BONUS ($) COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION ($)(A) ($)(B) ($) (#) ($) ($)(C)
- --------------------------- ------------ ---------- ----------- ----------------- ------------ ----------- ---------- ------------
Richard A. Thompson 1998 215,000 22,952 11,491
President and Chief 1997 181,664 23,952 12,035
Executive Officer 1996 164,994 31,500 16,341 150,000 (d) 13,000
Steven R. Delmar 1998 165,006 6,855 11,443
Executive Vice President 1997 143,333 9,479 10,618
and Chief Financial Officer 1996 135,000 25,500 8,861 10,555
Deborah M. Grove 1998 135,013 23,674 10,525
President of subsidiary, 1997 123,334 10,000 18,332 9,732
Old Dominion Systems 1996 115,003 23,500 12,609 9,117
Incorporated of Maryland
Joe J. Lynn 1998 160,158 25,288 4,172
Retired Chief Executive 1997 191,671 16,489 11,424
Officer and Chief Development 1996 184,206 24,500 22,410 10,908
Officer
John Mears (e) 1998 135,013 7,000 10,281
Senior Vice President Product
Development
(a) Includes deferred compensation and consulting fees.
For fiscal 1998, 1997, and 1996 Mr. Lynn's deferred compensation included
in his salary was $14,679, $15,188, and $14,200, respectively. Also
included in the 1998 compensation is deferred compensation that was earned
in his account of $20,509. Mr. Lynn retired in January 1998. The amounts
shown in the table include consulting fees from January 1998 through the
end of the fiscal year of $90,576.
(b) Other annual compensation consists primarily of reimbursements under the
Company's Executive Medical Reimbursement Plan, paid personal leave, and
personal use of automobiles.
(c) All other compensation consists of 401k matching contributions and pension
plan contributions. For fiscal 1998 Mr. Thompson's 401k matching and
pension contributions were $1,891, and $9,600 respectively. For fiscal 1998
Mr. Delmar's 401k matching and pension contributions were $1,843, and
$9,600 respectively. For fiscal 1998 Ms. Grove's 401k matching and pension
contributions were $1,801, and $8,724 respectively. For fiscal 1998 Mr.
Lynn's 401k matching and pension contributions were $646, and $3,526
respectively.
(d) Mr. Thompson also received options to purchase 100,000 additional shares
based upon achieving certain targets; such targets were not met and the
options expired.
(e) Mr. Mears became an executive officer following determination of the Board
in January 1999. His salary for 1999 has been set at $165,000, and he
received stock options in fiscal 1999 of 30,000 shares.
STOCK OPTIONS
The following table contains information with respect to grants of stock
options to each of the named executive officers during the fiscal year ended
October 31, 1998. All such grants were made under the Employee Plan.
21
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
------------------------------------------------------------ RATES OF STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS GRANTED OPTION TERM (A)
NUMBER OF TO EMPLOYEES EXERCISE EXPIRATION -----------------------
OPTIONS GRANTED IN FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
--------------- -------------- ------------ ---- ----------- -------
Richard A. Thompson (b) 0 0% $0.000 N/A $0 $0
Steven R. Delmar (b) 0 0% $0.000 N/A $0 $0
Deborah M. Grove (b) 10,000 0.9% $0.9375 2008 $7,925 $18,225
John Mears (b) 30,000 2.9% $0.9375 2008 $23,775 $54,675
- --------------------
(a) Share prices for Mr. Thompson assuming a 5% and 10% annual appreciation at
the end of the term of his option are $0 and $0, respectively; share prices
for Mr. Delmar assuming a 5% and 10% annual appreciation at the end of the
term of his option are $0 and $0 respectively; share prices for Ms. Grove
assuming a 5% and 10% annual appreciation at the end of the term of her
option are $1.73 and $2.76, respectively, and shares prices for Mr. Mears
assuming a 5% and 10% annual appreciation at the end of the term of her
option are $1.73 and $2.76, respectively.
(b) These options vest over a five year period with 20% vesting at the end of
each year.
The following table provides information concerning the exercise of stock
options by the named executive officers during fiscal 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR, AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS AT
UNEXERCISED OPTIONS FISCAL YEAR
AT FISCAL YEAR END ($)
END (#)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (A)
---- --------------- ------------ ------------- -----------------
Richard A. Thompson 0 0 190,000 / 40,000 $0 / $0
Deborah M. Grove 0 0 19,000 / 16,000 $625 / $0
Steven R. Delmar 0 0 59,000 / 6,000 $0 / $0
John Mears 0 0 12,000 / 33,000 $0 / $0
- -----------------------------
(a) Calculations based on closing price of stock of $1.0625 on October 31, 1998.
EMPLOYMENT, DEFERRED COMPENSATION AND CONSULTING AGREEMENTS
The Company is a party to an employment agreement with Mr. Thompson. The
agreement provides for employment of Mr. Thompson through December 31, 1999. Mr.
Thompson's annual salary under his employment agreement is subject to increase
and discretionary bonuses each year as determined by the Board of Directors. The
employment contract entitles Mr. Thompson to certain fringe benefits, including
insurance coverage and various executive perquisites. Upon termination of
employment without cause, the existing base salary, plus all benefits, will be
paid in monthly installments for twelve months. The employment agreement also
entitles Mr. Thompson to continue to serve as a director of the Company for so
long as he continues to be an officer of the Company.
The Company is a party to a consulting agreement with Mr. Lynn, which
provides for Mr. Lynn to serve as a consultant through December 31, 1999. The
consulting agreement provides for Mr. Lynn to perform consulting services
reasonably requested by the Company. Mr. Lynn is to receive annual compensation
of approximately $118,000 per year and certain benefits, generally those
available to the Company's executive officers, but not including participation
in the incentive stock option plan or executive bonus plan.
The Company is a party to a noncontributory deferred compensation agreement
with Mr. Lynn under which the Company is obligated to make payments to Mr. Lynn
(or his beneficiaries) over the ten-year period subsequent to his retirement (on
or after age 65), permanent disability, or death. The aggregate amount owed to
Mr. Lynn under this agreement is payable either in equal monthly installments
over the ten-year period or in an appropriately discounted single sum payment
(at the election of Mr. Lynn). This amount is determined by multiplying $2,500
by the number of months of employment during the period April 1, 1988 to January
1, 1995 and adding an initial
22
contribution of $10,000. During the fiscal year ended October 31, 1998, the
Company accrued $14,679 in interest for Mr. Lynn under this contract.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
COMPENSATION OF DIRECTORS
Compensation of Mr. Gische, Mr. Gray, and Mr. Levi through fiscal 1998,
consisted of $2,500 per quarter with a maximum of $10,000 per year for each such
director (no per meeting fees were paid). Employee directors are not paid for
attending meetings of the Board of Directors.
The Company has a non-employee director stock option plan (the "Director
Plan"), which was approved by the shareholders, pursuant to which 250,000 shares
of Common Stock are presently reserved for issuance to non-employee directors of
the Company upon exercise of options granted under the Plan. The Board has
adopted amendments to the Director Plan, including the ability to make
discretionary grants to directors serving as consultants, which amendments are
subject to shareholder approval. The Company believes that options issued under
the Director Plan create an incentive for non-employee directors to expend
maximum effort for the growth and success of the Company. Options for 4,000
shares of Common Stock were granted during fiscal 1998 to each of Messrs.
Gische, Gray, and Levi under the Director Plan. The option price of all options
granted under the Director Plan equal the fair market value of the shares
underlying the option on the date of grant. Options granted under the Director
Plan expire if not exercised within ten years from the date of the grant of the
option.
Since November, 1998 Mr. Levi has been a non-employee member of the new
Microlog Office of the President. The company has been compensating Mr. Levi in
the amount of $1,000 for each Meeting of the Office of the President he attends,
commencing with the first meeting on November 5, 1998, and proposes to grant Mr.
Levi an option to purchase 20,000 shares of the Company's common stock pursuant
to the Company's Director Plan, if the proposed amendment to the Director Plan
is approved by the shareholders. This arrangement is expected to continue into
the third quarter of fiscal 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 10, 1999 with
respect to the ownership of shares of Common Stock by (i) owners of more than 5%
of the Company's outstanding Common Stock, (ii) each director and nominee for
director of the Company, (iii) each of the named executive officers of the
Company, and (iv) all directors and officers of the Company as a group. The
information is based on the most recent filings with the SEC by such persons or
upon information provided by such persons to the Company. Unless otherwise
indicated, the persons shown in the table are believed to have sole voting and
investment power with respect to the entire number of shares reported.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER (1) BENEFICIALLY OWNED OWNERSHIP (2)
- -------------------- ------------------ -------------
Hathaway & Associates, Ltd 373,000 8.7%
119 Rowayton Avenue
Rowayton, Connecticut 06853
Joe J. Lynn 310,000 7.2%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Richard A. Thompson 222,000 (3) 5.0%
20270 Goldenrod Lane
Germantown, MD 20876-4070
23
Steven R. Delmar 112,300 (4) 2.6%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Deborah M. Grove 53,711 (5) 1.2%
20270 Goldenrod Lane
Germantown, MD 20876-4070
David M. Gische 48,000 (6) 1.1%
20270 Goldenrod Lane
Germantown, MD 20876-4070
John C. Mears 44,000 (7) 1.0%
20270 Goldenrod Lane
Germantown, MD 20876-4070
Robert E. Gray, Jr. 35,520 (8) *
20270 Goldenrod Lane
Germantown, MD 20876-4070
David B. Levi 12,000 (9) *
20270 Goldenrod Lane
Germantown, MD 20876-4070
All officers and directors as
a group (10 persons) 821,081 (10) 17.6%
- ----------------------------
* Less than 1% of the shares outstanding.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner of a security for purposes of
the Rule if he or she has or shares voting power or investment power with
respect to such security or has the right to acquire such ownership within
60 days. As used herein, "voting power" is the power to vote or direct the
voting of shares, and "investment power" is the power to dispose or direct
the disposition of shares.
(2) For the purpose of computing the percentage of ownership of each
beneficial owner, any securities which were not outstanding but which were
subject to options, warrants, rights, or conversion privileges held by
such beneficial owner exercisable within 60 days were deemed to be
outstanding in determining the percentage owned by such person but are not
deemed outstanding in determining the percentage owned by any other
person.
(3) Includes 190,000 shares that may be acquired by Mr. Thompson within 60
days of the record date upon the exercise of stock options and
approximately 25,000 shares in a 401k Plan. Does not include 40,000 shares
that may be acquired by Mr. Thompson more than 60 days after the record
date upon the exercise of stock options. The percentage of ownership as
been rounded up to 5.0%, but Mr. Thompson is not, as of the date hereof,
the beneficial owner of 5% or more of the Common Stock.
(4) Includes 59,000 shares that may be acquired by Mr. Delmar within 60 days
of the record date upon the exercise of stock options and approximately
24,300 shares in a 401k Plan. Does not include 6,000 shares that may be
acquired by Mr. Delmar more than 60 days after the record date upon the
exercise of stock options.
24
(5) Includes 21,000 shares that may be acquired by Ms. Grove within 60 days of
the record date upon the exercise of stock options. Does not include
24,000 shares that may be acquired by Ms. Grove more than 60 days after
the record date upon the exercise of stock options.
(6) Includes 35,000 shares that may be acquired within 60 days of the record
date upon the exercise of stock options. Includes 3,000 shares held by Mr.
Gische's spouse. Mr. Gische disclaims beneficial ownership of such shares.
(7) Includes 16,000 shares that may be acquired by Mr. Mears within 60 days of
the record date upon the exercise of stock options and approximately
28,000 shares in a 401k Plan. Does not include 59,000 shares that may be
acquired by Mr. Mears more than 60 days after the record date upon the
exercise of stock options.
(8) Includes 25,000 shares that may be acquired within 60 days of the record
date upon the exercise of stock options that have been granted. Includes
6,500 shares held by Mr. Gray's spouse. Mr. Gray disclaims beneficial
ownership of such shares.
(9) Includes 12,000 shares that may be acquired by Mr. Levi within 60 days
after the record date upon the exercise of stock options. Does not include
6,000 shares that may be acquired by Mr. Levi more than 60 days after the
record date upon the exercise of stock options.
(10) Includes 368,550 shares that may be acquired within 60 days of the record
date upon the exercise of stock options. Does not include 173,100 shares
that may be acquired more than 60 days after the record date upon the
exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included on pages 10 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, 1998,
1997, and 1996
Consolidated Balance Sheets as of October 31, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the years
ended October 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended October 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedule
25
Unaudited supplementary data entitled "Selected Quarterly Financial Data
(unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 16).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages F-1 and F-2:
F-1 Schedule II Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent 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
26
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 9/
10.2 Deferred Compensation Agreement between the Company and Joe J. Lynn 2/
10.3 Employment Agreement between the Company and Richard A. Thompson 9/
10.4 Microlog Corporation Medical Reimbursement Plan 3/
10.5 Microlog Corporation 1989 Non-Employee Director Non-Qualified Stock Option Plan 10/
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 9/
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, 1998
22 Subsidiaries of the Registrant 11/
24 Consent of PricewaterhouseCoopers LLP
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*/ 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.
9/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1997.
10/ Filed as an Exhibit to Registration Statement on Form S-8, File No.
333-69025, and incorporated herein by reference.
11/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 1998.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal year ended
October 31, 1998.
27
OTHER MATTERS
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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.
28