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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, 1995 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 statement incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 19, 1996 closing price of these shares) was approximately
$20.8 million. The Common Stock is traded over-the-counter and quoted through
the Nasdaq SmallCap Market.
As of January 19, 1996, 3,964,073 shares of the Registrant's Common Stock were
outstanding.
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Documents Incorporated by Reference
Parts I and III incorporate information by reference from portions of the
Company's definitive Proxy Statement dated January 29, 1996 (the "Proxy
Statement"). Parts I, II and IV incorporate information by reference from
portions of the Company's Annual Report to Shareholders for the fiscal year
ended October 31, 1995 (the "Annual Report to Shareholders").
PART I
ITEM 1. BUSINESS
General
Microlog Corporation ("Microlog" or the "Company") designs, assembles, markets,
and services a variety of microprocessor-based voice processing systems which
allow users to store, retrieve, and transmit digitized voice messages and to
access information on computer databases. In addition, the Company provides
performance analysis and technical and administrative support services to the
Applied Physics Laboratory ("APL"), and American Telephone and Telegraph
("AT&T"), prime contractors to the U.S. Navy. Although this segment of its
business historically has provided a stable source of sales and profits, the
Company believes that its principal opportunities for growth are in the voice
processing segment and has been concentrating its efforts on that segment.
The results of the Company's performance during fiscal 1995, 1994, and 1993 are
discussed in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," incorporated by reference into
Item 7 of the report. That section should be read in its entirety in conjunction
with the discussion of the Company's business in this Item 1. Information
concerning the Company's operations by business segment is hereby incorporated
by reference from Note 1 of the Notes to Consolidated Financial Statements
incorporated by reference into Item 8 of this Report.
Microlog, a Virginia corporation, was organized in 1969. The Company's wholly
owned subsidiaries are Microlog Corporation of Maryland, Genesis Electronics
Corporation, and Old Dominion Systems Incorporated of Maryland.
VOICE PROCESSING
Voice Processing Industry
Voice processing systems are designed to serve the needs of organizations which
are searching for an efficient, cost-effective means to deliver and communicate
information and complete business transactions in a timely manner. These systems
use specialized computer hardware and software to store, retrieve, and transmit
digitized voice messages and to access information on computer databases. They
are accessible through touch-tone and rotary telephones. Voice processing
systems range from small systems with basic voice processing features to larger
more complex systems. Many voice processing systems focus on only one
application.
Microlog offers through its Intela, a Graphical User Interface ("GUI")-based
interactive voice information processing system designed to run multiple voice
processing applications simultaneously. Through its DOS-based VCS 3500, Microlog
offers customized systems which can include up to eleven primary applications,
each supported by separate software modules, and also offers, through its
CallStar, products which are standard and can be sold in volume through
distribution channels.
Products
The Company's voice processing systems are comprised of a specially-configured
microprocessor-based hardware platform and versatile proprietary application
software which allows users to store, retrieve, and transmit digitized voice
messages and to access information on computer databases. The Company's voice
processing products include a new addition to its product line, the Intela
("Intela"), which is a UNIX-based voice processing system capable of running
multiple voice processing applications simultaneously. The Company also offers
the DOS-based VCS 3500 voice processing system, which performs up to eleven
voice processing applications, and the CallStar series of voice mail and
automated attendant products.
Interactive Information Response ("IIR") connects the voice processing system to
an external computer which contains data of interest to callers. With touch-tone
or voice commands (using speech recognition software), which often include
passwords, codes or account numbers, callers can query the computer and have
data read back to them in voice form. Depending on the customer's application,
callers may also change data on the computer or input new data with touch-tone
or voice commands. IIR is widely used for functions such as reporting account
balances, checking on inventory in stock and determining the status of
applications or permits in process. A special application of IIR is also used by
taxpayers who are in arrears in paying their Federal income taxes to call the
Intela IIR system from a touch-tone telephone and automatically establish a
repayment plan with the IRS. Microlog IIR software interfaces to the most
popular types of host mini-computers, mainframe computers, and local area
networks ("LANs"). Microlog emphasizes the IIR applications of its new Intela
product, but also provides IIR applications through the VCS 3500. The CallStar
product provides primarily voice mail, automated attendant and fax-on-demand
features.
The following voice processing applications are provided by the Intela and VCS
3500 products:
Local Database provides very similar functions to IIR, but allows the
data of interest, up to 100,000 records, to reside on the voice
processing system rather than a host mini- or mainframe computer. This
provides a cost-effective approach for smaller IIR applications. It
also allows large IIR applications to do local batch processing of data
by downloading to the voice processing system for data manipulation.
Audiotex is used by organizations to construct a "library" of
pre-recorded messages which outside callers can access through
touch-tone or voice commands without live operator assistance.
Customers can record and change menus and messages themselves over the
telephone at any time. Libraries of information may be presented in
different languages, and callers with rotary telephones may also access
menus and information. Up to 5,000 messages may be presented. Audiotex
software finds wide use by organizations which receive large volumes of
highly-repetitive telephone requests for information. Major advantages
of audiotex over live information operators include the availability of
information at every hour of the day and the consistency in the content
of information dispensed.
Voice Mail provides an organization with "voice mailboxes" in which
internal or external callers may leave detailed, confidential messages
at any time. Messages may be left for groups of people as well as
individuals. Callers have many options to review and may record their
messages until satisfied, and mailbox owners have many options to
review, save, forward or discard voice messages.
Voice Mail overcomes many limitations of telephone systems, allowing
people to exchange information and transact business without having to
be on the phone simultaneously. It eliminates paperwork and adds
meaning and content which written messages can't reflect. Primary
benefits are, increased office productivity through fewer
interruptions, timely, accurate message delivery, and increased message
detail, eliminating callbacks and "telephone tag." Although all of the
Company's voice processing products provide voice mail, the CallStar is
a less expensive product designed specifically for voice mail and
automated attendant applications.
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 different greetings and different menus of options to be
presented to different callers. In the event extensions are busy or not
answered, 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 called 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.
Transaction Processing allows the inbound caller to place orders,
request information, respond to surveys or complete other transactions
without personal handling by a live operator, using either touch-tone
or voice commands. The caller can make the transaction any hour of any
day, and the company can process the transaction at its convenience.
Such transactions allow orders and requests to be filled faster and at
lower cost than traditional methods.
Outbound Dialing permits an organization to send messages automatically
to large lists of external phone numbers and to record responses to
those messages, if necessary. This very flexible software can handle
multiple lists with up to 10,000 names per list. It can draw from a
library of 1,000 messages and send different combinations of messages
to individual phone numbers as directed. The software also generates
management reports about the number of successful connections, length
of calls, and content of responses.
Multiple Languages including Telecommunications Device for the Deaf
("TDD") Interface software allows system messages to be played in up to
24 different languages. It also interfaces TDD terminals to VCS 3500
systems over telephone lines. The interface enables TDD users to
interact with most VCS 3500 software modules no differently than if
voice communications were being used. Users simply type messages onto
their TDD terminals and send them to the voice processing system, which
understands the input and responds with menus, prompts and messages
which are printed on the TDD terminal. It has broad application in
areas where the hearing-impaired must have access to information
sources.
Speech Recognition allows the caller to speak responses that are
understood by the VCS 3500 and Intela systems. Continuous and discrete
speech recognition are available on a single product. A standard
vocabulary includes digits "0-9" and "yes" and "no" responses.
Microlog's speech recognition is speaker independent and therefore
requires no special training or development to recognize individual
voice or speech patterns.
Text-to-Speech converts typed ASCII data, resident on host computers or
databases, to computer-generated synthetic speech on demand. It creates
an extensive vocabulary, since it can pronounce any string of letters
which are sent to it. Microlog's text-to-speech module is ideal for
applications requiring information from large text databases. Because
text-to-speech works with external databases, the module works with the
interactive voice response module which provides the link between the
VCS 3500 or Intela voice processing system and the customer's database.
Fax software allows voice processing system users to automatically send
stored fax documents on demand from within the voice processing system.
Customer service and sales support operations are frequent users of fax
software. A service representative can take a request for documents
from the voice processing system and designate faxes to be sent in
response without exiting the voice processing system.
Intela
Intela is an IIR system designed for simultaneous support of multiple
applications and interactive information solutions. Prices for Intela systems
are dependent on the number of ports in the system (from 4 to over 1000), the
amount of voice storage, the need for additional equipment, and in the case of
direct sales, the time needed to develop a customized application. The Company
is currently working on additional releases of the product with expanded
features.
Microlog has employed the Intela in projects for the Internal Revenue Service.
Some of these projects included Voice Balance Due ("VBD"), which enables
eligible taxpayers to check the status of their debt to the U.S. government and
set up repayment plans. The Refund Inquiry Application enables taxpayers to call
the IRS and, by selecting the Refund Inquiry on Intela, automatically obtain
their refund status, including the amount of the refund.
The Company has incorporated all of the interface features of its DOS-based VCS
3500 with Graphical User Interface-based tools for application development in
Intela. Intela is based on a Pentium hardware platform utilizing a UNIX
operating system and is capable of supporting 4 to over 1000 ports. Intela has a
non-proprietary open architecture. It supports foreign language user screens,
voice prompts and documentation. Intela also supports text-to-speech, speech
recognition, remote and local databases, host connectivity, and fax.
Each Intela system contains multiple microprocessors with hard disk storage and
several voice cards. Intela uses distributed microprocessors, each of which
handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the voice processing systems with a
greater number of ports and hours of message storage. Depending upon customer
specifications, systems are provided as tabletop, floor-standing or rack mounted
units. These units can be networked to create a larger system with more than
1000 ports.
Product Architecture. The basic Intela architecture consists of four major
system components: the Application Server(s), the Port Server(s), the Voice
Distributed and Control Network and the Intelaware Software Platform.
Application Server. The application server defines the computing environment in
which Intelaware resides and provides centralized management and control, as
well as optional secure voice storage. The application server can be a personal
computer, a workstation or minicomputer. It interfaces to a voice processing
peripheral, or Intela Port Server, via a command link on Ethernet or an RS-232-C
link.
Port Server. Microlog's Intela T100 and Intela R100 are voice processing
peripherals, each providing call and speech processing, as well as voice
storage. Interfacing to either a CO- or PBX-based, telephone system, these units
answer calls, process and store speech, all under the direction of commands
coming from Intelaware software on the application server across a command link.
Voice Distribution and Control Network. An Ethernet-based, high-speed network is
used to control the port server and transfer voice files between the Intelas and
the application server, as well as among the Intelas themselves.
Intelaware Software Platform. Microlog's Intelaware is an application
development and deployment environment for both Interactive Information Response
("IIR") and voice messaging applications, supporting the on-line creation and
administration of multiple applications. From an X-Windows graphic terminal
connected to the application server, users access major functions of the
software through several interfaces: Application Editor, Prompt Loading and
Management, System Administration, Reports and Database Access, Integration
Manager, Agency Manager and the Calendar Manager.
Through these interfaces, users control the development and operation of their
voice applications, using OSF Motif-based graphical user interface. This
interface provides the developer with a set of tools to create voice
applications. Following is a description of each of these interfaces.
Application Editor. The Application Editor is used to create and edit
applications and is oriented towards programmer productivity, with
several developers able to access different applications
simultaneously. The editor is GUI based and allows programmers to
develop call flows using a click-and-place approach similar to many
standard drawing packages. Cells from a palette are placed onto a
Drawing Pane and connected using a set of mouse actions. Standard
Windows-like pull down menus allow file control, editing features (cut,
copy, and paste), object search (by cell number, name, or type), and
user preferences for appearance of the palette. Applications can be
developed and tested on-line without interrupting those currently
running.
Prompt Loading and Management Facility. A major function in voice
applications is prompt creation. With the Intelaware prompt loading
facility, prompts can be reviewed, recorded, installed, deleted, backed
up to removable media, restored, and distributed over a wide-area data
("WAN") network. They can be loaded on-line over the telephone, a
microphone, or from a tape, and the process can be semi- or fully-
automatic, depending on whether DTMF (dual-tone multifrequency) tones
are coded on the tape to identify the prompts. Users can record
individual prompts, a list of prompts, or record with DTMF prompt
numbers, and they will be replaced only after they've been reviewed and
accepted. New or updated prompts will be phased in automatically while
applications remain on-line.
Prompt Manager. The Intelaware prompt management facility has a
Graphical Prompt Manager. This editor allows users to retrieve a prompt
from storage on a port server or Intela and have the graphical
representation shown in a window. The user can modify the prompt simply
by clicking on the window and performing any of the following actions:
cut, copy, paste, delete, trim silence, adjust again, convert sections
of a prompt to silence, and change sampling rate.
System Administration. The load/unload of applications and the
management of the Port Servers connected to the application processor
are done through the System Administration interface. If a system has
network hardware in the system configuration, administration can be
performed through one central point. Administrators can bring up a new
revision of an application or move an application to another trunk
while the system is on-line. If a caller happens to be on the line at
the time, the changes on that trunk will take effect after the caller
hangs up. Intelaware can support multiple Intelas to expand to larger
port and storage capacity by networking systems and clusters of systems
together. Expansions depend on the application server the systems are
connected to.
Centralized System Management. The system monitor menu under system
administration provides a graphical means to address the central
administration of a distributed system. It provides a graphical
representation of the application server and its attached Intelas,
including the command link mode used, Ethernet or serial links.
Further, by clicking on the Intela icon, an additional window is
displayed. In this window, a graphic of the Intela display panel, with
active trunk status indicators and disk usage indicators, is shown.
Clicking on a trunk status indicator opens an additional window that
depicts information on the application that is running, shows what cell
it is in, and so forth.
Reports. To track significant statistical information for such
activities 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, and these reports can be sent to a
printer for a hard copy print-out. Reports available are call detail,
cell usage, trunk usage, subscriber information, and transaction log.
If requirements include other than these standard reports, they can be
customized using the underlying statistics.
Database Access. Interfaces can be built between Intelaware and SQL
relational databases, such as Oracle, Sybase, Informix and Ingress. The
Application Editor contains an "SQL" cell type, which allows
information to be extracted from databases to support interactive
information applications. This cell type allows users to delete,
insert, select, and update data. Intelaware also supports two internal
proprietary databases: message and information databases. The message
database, used in voice mail applications, consists of mailboxes
associated with a number, usually the phone number of the user who will
access the box for the messages deposited in it. More than one message
database can be supported within Intelaware to accommodate multiple
applications. Messages can be retrieved either FIFO (first in, first
out) or LIFO (last in, first out), determined on a system basis.
The Microlog Intela platform architecture supports a variety of configurations
that meet varying functional, processing, and voice port and storage needs. This
platform is designed for simultaneous support of multiple applications,
including both voice response and voice messaging services. Within the Microlog
platform architecture, particular hardware configurations may be proposed to
provide cost-effective solutions to a wide range of system requirements. All
systems can be configured with built-in redundancy so that at least 50% of total
system capacity is maintained across any single component failure. Growth
capability is achieved by the modular upgrade of application servers, port
servers, disk storage, additional communications links, and additional voice
processing units.
The Intela system includes a monitor, keyboard, and printer, which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity. Customers that contract
for the Company's system maintenance services also purchase modems so that the
Company can perform remote diagnostic procedures.
The Company has entered into non-exclusive distribution agreements with
international companies, including Philips Communication Systems B.V.
("Philips") of The Netherlands and Communication & Network System PTE Ltd. of
Singapore, along with 4 other companies in Europe, Asia, and the Middle East, to
market and support the Intela product line worldwide. Philips markets the Intela
IIR system as the VoiceManager 800 series.
VCS 3500
The Microlog VoiceConnect System 3500 ("VCS 3500") line of systems consists of a
microprocessor-based hardware platform which can accommodate varying numbers of
ports and, due to its proprietary software modules, can support up to eleven
separate voice response or voice messaging applications. Prices for VCS 3500
systems range from $10,000 to over $250,000 and are dependent upon the number of
ports in the system (from 2 ports to 96 or more), the number of voice processing
applications desired, the amount of voice storage, the need for additional
equipment (in the case of large or unique systems), and the extent to which the
product must be adapted to the customer's specific needs.
The VCS 3500 system may be purchased with up to eleven different voice
processing applications: voice mail, automated attendant, automated transaction
processing, audiotex, interactive voice response, local database, outbound
dialing, multiple languages including Telecommunications Device for the Deaf
("TDD), speech recognition, text-to-speech, and fax. The Company also provides
other applications and customization where required. The Company has developed a
separate software module for each voice processing application, making it
possible to provide customers with any combination of these eleven voice
processing applications. Additional software modules may be added after a system
has been installed, thereby allowing customers to expand their systems
gradually, as the need arises, without substantial additional cost.
Microlog's voice processing software modules include a proprietary application
software matrix which allows users to customize the systems without the need for
additional software. The VCS 3500 system's application software provides a
series of menus containing instructions for the entry of data into the matrix
which will result in a customized system. For example, the automated attendant
application of the VCS 3500 can be customized to forward calls based on the
recipient's last name, extension number, or other code of up to 20 letters or
numbers. The features in the application software matrix may be set to specific
dates or times, allowing the system to activate or de-activate different
information menus, greetings, or other features on particular dates or at
particular times. The complexity of the interactive voice response application
presently requires that most customizing of this application be performed by
Microlog.
The Company's VCS 3500 has a flexible system architecture. All of the VCS 3500
systems use similar hardware platforms and the Company activates one or more of
the eleven software modules to enable a system to perform the desired voice
processing applications. In the case of complex systems performing extra or
unusual applications as requested by a particular user, the Company can
customize the voice processing systems' architecture. By using similar hardware
platforms for VCS 3500 systems, the Company has been able to achieve greater
system reliability and more efficient assembly, testing, and maintenance.
Each VCS 3500 system contains multiple microprocessors with hard disk storage
and several voice cards. The VCS 3500 uses distributed microprocessors, each of
which handles a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of distributed
microprocessors, the Company can configure the voice processing systems with a
greater number of ports and hours of message storage. Depending upon customer
specifications, systems are provided as tabletop, floor-standing or rack-mounted
units. These units can be networked to create a larger system with more than 48
ports.
The VCS 3500 includes a monitor, keyboard, and printer, which are used to
program the system, organize the storage of information which will be accessible
to users, produce reports, and monitor system activity. Customers that contract
for the Company's system maintenance services also purchase modems so that the
Company can perform remote diagnostic procedures.
The VCS 3500 voice response applications can be used with most customer
telephone systems. When used in connection with a PBX, Centrex or other
telephone system having a switch capable of transferring calls automatically,
the system can provide a direct connection between the caller and the customer's
telephone system. The system can also be designed to allow callers to transfer
their calls to a live operator on the customer's telephone system.
CallStar
CallStar 2000, developed during fiscal 1991 and available for delivery early in
fiscal 1992, and CallStar 1200, introduced at the end of fiscal 1993, are based
on Microlog's flexible, industry-standard hardware platform and operating
system, and incorporate new user interfaces and software standardization and
improved integration features.
The CallStar 2000 has capacity of up to 24 ports, and is available with voice
mail and automated attendant software. CallStar 1200 was designed for the
small-to-medium organization with capacities of 2 to 12 ports and a standard 18
hours of storage with up to 50 hours of storage optional. These models combine
features of the VCS 3500 with the popular user interface, model standardization
and integration technology from the former CINDI product line of Genesis
Electronics Corporation, a company based in Rancho Cordova, California that was
acquired by the Company in November 1990.
Prior Systems. With the introduction of CallStar, the Company discontinued the
manufacturing and sales of the Genesis CINDI systems. The Company is continuing
to provide parts and service to the over 4,500 CINDI's sold.
Application Solutions
During 1995, the Company dedicated development efforts to repackage and market
existing applications previously developed for the government sector for
commercial customers. The first suite of applications targeted for the
commercial market is called the Retail Solution. Retail Solution consists of
several applications designed and manufactured specifically for the retail
pharmacy industry. These applications include the Automated Prescription Refill
System ("APRS"), Photo Ready, Prescription Ready, the ProNouncer(R), and Call
Routing. APRS allows users to place their prescription refill orders 24 hours a
day by entering their prescription information via telephone. Photo Ready and
Prescription Ready automatically dials individuals who have not picked up their
complete prescription orders or processed film, and the ProNouncer is a digital
in-store automated announcement system. Call Routing answers incoming lines and
automatically directs callers to the desired store department without the need
for a human operator.
Sales and Marketing
The Company's Applications and VCS 3500 systems are sold primarily through
direct sales, while the CallStar products have been sold principally through a
distribution network. Intela is also being sold through both direct sales and a
distribution network.
Direct Sales Force The Direct Sales force has a Director in charge of Federal
systems sales, a sales manager for commercial sales, and five salesmen. The
Company's direct sales force is presently based in the Washington-Baltimore
metropolitan area with satellite offices in Illinois, California, and
Pennsylvania. The Company provides training to its direct sales persons and
furnishes ongoing technical support to these persons through its systems
engineers and other personnel. The Company compensates its direct and
distribution sales personnel through a base salary plus commissions, which
generally represent a percentage of the net sales for which they are
responsible.
The Company's Direct Sales personnel will continue to focus on national accounts
assigned to them and on certain vertical markets, including Retail, Health Care,
Federal, state and local government. The principal potential customers for the
Company's voice processing applications and products in these vertical markets
are organizations which receive or make a large volume of telephone calls that
primarily are repetitive in nature.
Distribution Sales The Distribution Sales force currently has a director in
charge of international sales, one salesmen, and one sales engineer. The Company
has established distribution relationships with GTE, Sprint North Supply, and a
variety of smaller independent companies in the domestic market. In the
international market, Microlog has established a distribution agreement with
Philips Communication Systems B.V. ("Philips") of The Netherlands to market and
support the Intela product line initially in Europe, then worldwide, under the
name VoiceManager 800. The Company has established or is negotiating
distribution agreements in other countries in Europe, the Middle East, and the
Far East.
Marketing. The marketing organization currently has a director who manages the
Company's product and marketing related activities, one product manager, one
application business development manager, and two assistant marketing managers.
This organization interfaces with Direct and Distribution Sales in marketing and
selling the company's products, applications, and services. The Company's
Training and Documentation groups are also under the marketing organization.
Promotional Activities The Company's promotional efforts during fiscal 1995
included advertising in industry trade publications, direct mail, product
presentations at trade shows and similar events, and public relations. The
Company also conducted seminars for potential customers in certain industries,
such as Federal, state and local governments. The Company expects to continue
these promotional activities during fiscal 1996.
Services
The Company provides limited warranties for parts and labor on its products
ranging from 90 days to two years, from the date of delivery. The Company also
offers its customers annual maintenance contracts under which the Company
maintains and services the systems. Microlog charges an annual fee of
approximately 10% to 16% of the purchase price of the VCS 3500 and Intela
systems for maintenance contracts covering normal business hours. The fee is
highest for maintenance contracts providing for 24-hour or weekend assistance.
Distributors generally perform the maintenance required on systems sold by them,
and most of the Company's distributors offer annual maintenance contracts, which
the Company believes are similar to those offered by the Company and provided at
comparable prices.
The Company performs maintenance for its VCS 3500 and Intela voice processing
systems in the Washington, D.C. metropolitan area from its Germantown, Maryland
headquarters, where an inventory of spare parts is maintained. Microlog also has
an agreement with a subcontractor to perform on-site maintenance on Microlog's
voice processing systems nationwide. The Company operates a hotline which
customers with maintenance contracts may use to request assistance or to ask
questions concerning operation of the Company's voice processing systems.
Microlog can perform many diagnostic procedures over the telephone and
historically has been able to correct most of the difficulties experienced by
its customers through telephone consultation.
Microlog also offers a variety of other services to its customers. Microlog will
customize voice processing systems to a customer's specific needs by using the
application software matrix in the VCS 3500 or the Graphical User Interface in
its Intela, or by making appropriate changes in the underlying source code. The
Company may charge for this service on a time and materials basis, or may
include the service in the price of the system being sold. Training on system
operations also is offered to customers. In addition, the Company generally
provides certain improvements to its voice processing software modules free of
charge to customers who contract for its system maintenance services.
Customer service and support for voice processing products sold through the
distribution network generally is provided by the distributor. Most of the
distributors offer annual maintenance contracts to customers with varying levels
of support. CallStar products sold through distributors would also receive
service and support from distributors, and CallStar models sold to customers on
a direct basis are covered by the VCS 3500 customer service and support program.
The Company provides a limited warranty for parts and labor on its CallStar
products for one-year, with the exception of CallStar 1200 which has a two-year
warranty on voice boards and up to a four-year extended service warranty.
Backlog
As of October 31, 1995, the Company had a backlog of existing orders for voice
processing systems totaling $3.7 million. The backlog, as of October 31, 1994,
was also $3.7 million. The Company has experienced fluctuations in its backlog
at various times during the past two fiscal years attributable primarily to the
seasonality of governmental purchases. In addition, the Company has observed a
lengthening of the period between the date of booking an order and the date of
shipment, with the shipment depending on any customer delivery schedules and any
customization needed for VCS 3500 or Intela applications. The Company
anticipates that all of the outstanding orders at October 31, 1995 will be
shipped and the sales recognized during fiscal 1996. Although the Company
believes that its entire backlog of orders consists of firm orders, because of
the possibility of customer changes in delivery schedules and delays inherent in
the government contracting process, the Company's backlog as of any particular
date may not be indicative of actual sales for any future period.
Competition
The voice processing industry is highly competitive and the Company believes
that competition will intensify. The Company competes with a large number of
companies which produce voice processing products offering one or more of the
eleven voice processing applications performed by the Company's products.
Microlog's competitors include companies such as AT&T, Computer Communication
Specialists ("CCS"), InterVoice, Inc., Perception Technology Corporation, and
Syntellect, that have emphasized sales of systems with audiotex or interactive
voice response applications. Direct competition with the Company's voice
processing systems also arises from a substantial number of companies, such as
AVT, Centigram, and Active Voice, that focus on the market for small or
medium-size voice messaging (voice mail or automated attendant) systems. In
addition, the Company also competes with dealers and distributors that sell
voice processing products of these and other competitors.
New or enhanced products can be expected from the Company's competitors. It is
also likely that there will be new entrants into the voice processing industry
because of the absence of any major technological barriers to entry.
Competition for the sale of voice processing systems has been based in part on
the application required by the customer. In marketing its VCS 3500 and Intela
products, the Company places emphasis on the eleven voice processing
applications that can be performed and the ability of these systems to be
expanded to incorporate additional applications. Although many of its primary
competitors continue to develop new voice processing applications, the Company
believes that no competing microprocessor-based system presently offers all
eleven voice processing applications on a single hardware platform. The Company
also believes that many of its competitors' products cannot be customized as
easily to the user's specific needs as the VCS 3500 and Intela.
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 1996.
In marketing its CallStar products, the Company places emphasis on the extensive
features, and the ease of use and installation of its products in comparison to
competition. The Company believes that the user interface for these products is
presently one of the best accepted interfaces in the market. In addition, the
dealer support programs, including sales support, service support and others,
help differentiate Microlog from the competition.
Marketing and product recognition also play a substantial role in competition
within the voice processing industry and within particular vertical markets.
Most of the Company's competitors have considerably greater financial,
marketing, and sales resources than the Company. Many of these competitors have
concentrated on one or two voice processing applications or on specific vertical
markets and may enjoy advantages in selling to customers seeking only those
applications or to companies in those markets. The Company believes that it has
advantages over some competitors in sales to government customers because of its
experience in marketing products to these customers and in participating in
competitive procurements.
The Company believes that the other principal factors affecting competition in
the voice processing market are product applications and features, quality and
reliability, customer support and service, and price. The Company believes that
it competes favorably with respect to these factors.
Research and Development and Product Engineering
The Company believes that both the development of new voice processing
applications and features for its existing products and the development of new
products are necessary to remain competitive in the rapidly-changing voice
processing market. The Company has continued to improve its voice processing
product line and is currently developing new products and enhancements to its
existing products. In March 1994, the Company introduced the first release of
its Intela product and in October, a new software release for CallStar was
introduced. The Company's product engineering staff also is engaged in the
development of special product features for current or potential customers.
Unless prohibited by government regulation or customer contract, the Company
retains ownership of all software applications and features that it develops.
The following table sets forth for the periods indicated the Company's research
and development expenditures and the percentage of voice processing net sales
represented by these expenditures.
Research and Development Expenditures
(In thousands, except percentage amounts)
Year Ended October 31,
1993 1994 1995
---- ---- ----
Research and development expense ........ $1,512 $1,644 $1,592
Percentage of voice
processing net sales ......... 11% 16% 11%
====== ====== ======
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
Manufacturing and Operations
The Company assembles its own equipment using standard parts obtained from
outside sources. The proprietary aspects of the Company's systems are primarily
in the software provided with the equipment and in the specific applications
development designed for the customer. Systems are built to order as they vary
in size and sophistication of software modules. The CallStar is the only product
that comes in a standard equipment format, although the Company is standardizing
some vertical market applications. Equipment assembly, along with testing and
quality control, are performed at its Gaithersburg, Maryland facility. In fiscal
1994, the Company signed a five-year lease for a new manufacturing and training
facility located in Gaithersburg, Maryland which became operational in March
1995. Microlog currently has 11 employees in its manufacturing group. The
Company generally uses standard parts and components obtained from a variety of
computer vendors and specially configures these components to produce the
hardware for its systems. Certain components used in the Company's products are
presently available from limited sources. To date, the Company has been able to
obtain supplies of these components in a timely manner from these sources.
Software Protection, Technology Licenses, and Trademarks
The Company regards its software as proprietary and has implemented protective
measures both of a legal and a practical nature to ensure that the software
retains that status. The Company derives protection for its software by
licensing only the object code to customers and keeping the source code
confidential. Like many other companies in the voice processing industry,
Microlog does not have patent protection for its software (although some of the
inventions for which Microlog has received patents can be implemented in
software). It therefore relies upon the copyright laws to protect against
unauthorized copying of the object code of its software, and upon copyright and
trade secret laws for the protection of the source code of its software. Despite
this protection, competitors could copy certain aspects of the Company's
software or hardware or obtain information which the Company regards as a trade
secret.
The Company has patents on Digital Switching, Voice Messaging, Multiple-Language
Automated Telephone Systems, Telecommunications Device for the Deaf ("TDD")
compatibility, and Release Line Trunking ("RLT"), and pending patent
applications on Automated Announcement Systems, TDD Message Storage, and other
TDD-related innovations. EVR, Microlog, Call Installer, Truant, CINDI,
ProNouncer, CallStar, and APRS, are all registered trademarks owned by the
Company. Intela, Intelaware, Intelaview, AACS, AARS, ACIS, and CALLSTAR FXD are
all trademarks or service marks which are the subject of applications for
registration owned by the Company which are pending in the United States Patent
and Trademark Office. INTEL Corporation has filed with the U.S. Trademark Trial
and Appeal Board requests for extnesion of time in which to file opposition to
registration by the Company of the marks INTELA, VCS INTELA, INTELAWARE,
INTELAVIEW. Settlement discussions between the Company and INTEL Corporation on
these matters are currently on going. The Company is currently using, and claims
common law rights in the following additional unregistered marks: Voice Connect,
Genesis, Voice Path, and VCS 3500. In addition, the Company enters into
confidentiality agreements with its employees, distributors, and customers and
limits access to and distribution of its software, documentation, and other
proprietary information. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology. Further, there can be no assurance that any
patent issued or that its registered copyrights can be successfully defended. In
any event, the Company believes that factors such as technological innovation
and expertise and market responsiveness are more important than the legal
protections described above.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES
General
Since the early 1970s, the Company and its subsidiaries have been providing
performance analysis and technical and administrative support services
(principally in the form of technical data processing and analysis, engineering
and scientific analysis, and computer services) to government and commercial
customers. These services, which comprised the Company's original business,
presently are provided through the Company's subsidiary, Old Dominion Systems
Incorporated of Maryland. The Company believes that its performance analysis and
support services business will continue to provide a stable stream of sales,
although its voice processing business offers greater potential for growth.
The principal customer for the Company's performance analysis and technical and
administrative support services is The Johns Hopkins University's Applied
Physics Laboratory ("APL"), a United States Navy contractor, for which the
Company or its subsidiaries have been performing services since 1972. Another
important customer is American Telephone and Telegraph ("AT&T"), for which the
Company has been performing services since 1988. Sales from contracts with APL
(primarily) and AT&T accounted for 36%, 43% and 37% of the Company's net sales
for fiscal 1993, 1994, and 1995, respectively. The Company's contracts with AT&T
were significantly reduced during fiscal 1993 as a result of decreases in levels
of work associated with these contracts. Net sales from performance analysis and
support services through AT&T for fiscal 1995 was significantly less than the
fiscal 1994 net sales. Net sales through AT&T for fiscal 1996 are expected to be
less than those in fiscal 1995. The Company is seeking to diversify its
operations for performance analysis and support services by seeking contracts in
non-defense related areas.
The Company's performance analysis and support services personnel perform a
variety of analytical and science-related support services under several
contracts. These services usually are performed on the customer's premises or at
test-site locations. The Company's technical staff works jointly with the
customer's scientists and engineers in the acquisition, processing, analysis,
and management of certain major weapon systems data. This work is directed to
quantifying and reducing the impact of current and future threats to the United
States' submarine fleet through the use of ocean sensor systems. The technical
support rendered by the Company includes real-time data acquisition, digital
signal processing, software development and systems applications, data
management, and data analysis.
In addition, the Company supports naval strategic programs through its role as
an independent evaluator of the performance of submarine-based strategic missile
systems. This is accomplished through extensive data processing, technical
evaluation, and data analysis relating to sonar, fire control, missile,
launcher, and navigation subsystems.
The Company's performance analysis and support services employees also engage in
communications testing and evaluation for mobile communications network
exercises. The Company's communications analysts assist in preparing
presentations to the Navy and in designing and implementing communications
analysis software.
The Company's employees perform various technical support services in connection
with several Ballistic Missile Defense Organization ("BMDO") projects. These
include advanced technical support in the design, development, and
implementation of space-qualified equipment, systems analysis, and the operation
of a VAX computer-based mission control center for the MSX mission.
Contracts
The Company's contracts are generally one-year in duration, and many of such
contracts contain two one-year extension options, with a fixed level of work
authorized under the contract. Several of the Company's larger contracts with
APL have been renewed or re-awarded to the Company annually, and the level of
work authorized at the time of contract renewal has provided for, in the
aggregate, the same or a greater level of services.
The Company provides services under three types of contracts. The majority of
contracts are on a time-and-materials basis, pursuant to which the Company
receives a pre-set fee for all services provided under the contract, without
regard to the Company's cost of supplying these services, and is reimbursed only
for the cost of materials. Other contracts are on a purchase order basis which
operates similar to a time and materials contract, and on a cost plus fixed fee
bases. Occasionally, the Company experiences delays in contract awards, contract
funding, and payment, which the Company believes is customary under contracts
which involve performance of services for Federal Government agencies.
The Company monitors performance under existing contracts and requests for
proposal ("RFPs") for performance analysis and support services by contractors
or government agencies. The Company has received a number of blanket contracts
by responding to RFPs. In order to increase the new contracts, the Company must
locate skilled programmers and other technical personnel with the qualifications
specified by the open requisitions. The Company uses agencies and internal
resources to locate these personnel. The Company believes that its reputation in
the industry enables it to attract qualified individuals for inclusion in the
Company's proposals.
Competition
The Company's Government contracts can be opened to competitive bidding upon
their expiration at the discretion of the contractor or agency. Although
contracts presently comprising a substantial percentage of the Company's sales
have been renewed annually, these contracts may and have been open to
competitive bidding. There can be no assurance that these contracts will be
awarded to the Company if competitive bidding occurs.
The Company encounters substantial competition in its procurements. The
Company's competitors include Hadron, Inc., SAIC, Fairchild, Sonalysts, and
Comsys. The Company has instituted policies and procedures designed to maintain
a low overhead to enhance its ability to compete with respect to new contracts
and to existing contracts that are to be renewed or extended. During the last
three years, the contracts that have been lost through competitive bidding or
otherwise have not been material to the Company, either individually or in the
aggregate. During this three-year period, the Company has received several new
contracts as a result of competitive procurements and also increases in the
level of work authorized under contracts which have been renewed or re-awarded
to the Company.
The Company has had no success in obtaining contracts with government agencies
or contractors other than APL or AT&T. Many of these contracts have been renewed
with the incumbent on a sole source basis, rather than being competitively bid.
In the case of contracts that have been opened to competitive bidding, the
contract incumbents generally have had advantages because of their prior
relationships with the agencies and the experience of their personnel in
performing the requested services. In addition, incumbents or other competitors
often have substantially greater financial and other resources than the Company.
Backlog
As of October 31, 1995, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $7.8 million.
By comparison, the backlog as of October 31, 1994 was $4.6 million. The increase
in backlog is attributable primarily to a significant multi-year contract award
and increased funding levels on existing or new contracts. The Company
anticipates that these services will be provided during the next three fiscal
years. The Company estimates that of the $7.8 million of backlog at October 31,
1995, $3.9 million will be recognized as sales beyond fiscal 1996. Because of
the delays inherent in the government contracting process or possible changes in
defense priorities or spending, the Company's backlog as of any particular date
may not be indicative of actual sales for any future period. Although the
Company believes that its backlog of funding on existing contracts is firm, the
possibility exists that funding for some contracts on which the Company is
continuing to work, in the expectation of renewal, may not be authorized (and
the Government has the right to cancel contracts at any time), although to date
this has not occurred.
Government Regulation
In order to maintain contracts with contractors or Government agencies, the
Company must comply with a variety of regulations and Department of Defense
guidelines, including regulations or guidelines covering security, record
keeping, and employment practices. The majority of the employees assigned to the
Company's contracts with contractors or agencies are required to have security
clearances. The Company historically has not experienced any significant
difficulty in obtaining the necessary security clearances. The Company's sales
under these contracts are subject to audit by the Defense Contract Audit Agency
(the "DCAA"). The DCAA has completed audits through fiscal 1992, and any
adjustments required as a result of these audits have been minor and are
included in the Company's fiscal 1995 consolidated financial statements. 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 19, 1996, the Company and its subsidiaries employed a total of 236
persons, including 6 part-time employees. Of these personnel, 86 are engaged
principally in the Company's voice processing systems operations, 142 are
engaged in performance analysis and support services, and 8 serve as officers or
managers or perform administrative services for the Company and all of its
subsidiaries.
The Company believes that its success will continue to depend, in part, on its
ability to attract and retain skilled sales and marketing, technical, and
management personnel. Because of the high turnover rate typically associated
with sales and marketing personnel, the Company anticipates that it will need to
replace some of the sales and marketing personnel who do not meet the Company's
performance expectations. The Company has not experienced any significant
difficulty in hiring qualified technical personnel. Neither the Company nor any
of its subsidiaries is a party to a collective bargaining agreement, and the
Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company occupies a 24,000 square foot building in Germantown, Maryland,
which it uses for its principal executive offices and its voice processing
operations center. The Company also leases 22,700 square feet of office space in
Rancho Cordova, California which was Genesis' headquarters and 12,000 square
feet in Gaithersburg, Maryland which it uses for production and warehouse of its
voice processing products. In February 1993, the Company entered into a sublease
for its Rancho Cordova facility. The sublease is for a five-year term and began
in June 1993.
The Company also owns one 850 square foot office condominium unit located at 4
Professional Drive, Gaithersburg, Maryland (formerly used for the Company's
principal executive offices), which it leases.
ITEM 3. LEGAL PROCEEDINGS
Microlog and its subsidiaries, Microlog Corporation of Maryland, and Genesis
Electronics Corporation, were sued in February 1991 in the United States
District Court for the Northern District of Texas by VMX, Inc., ("VMX") and
Dytel Corporation ("Dytel"). The lawsuit alleged nonpayment of royalties owed
under a license granted by VMX to Genesis with respect to certain voice mail
technology and infringement by all three defendant corporations of certain
patents involving call processing technology held by VMX and/or Dytel. VMX and
Dytel were seeking an accounting of royalties allegedly owed under the Genesis
agreement and were seeking an injunction and an accounting with respect to the
alleged infringement of the call processing technology patents.
On May 24, 1993, Microlog and its subsidiaries reached a settlement with VMX and
Dytel. Under the terms of the settlement, the litigation was dismissed with
prejudice and the products of Microlog's subsidiaries, Microlog Corporation of
Maryland, and Genesis Electronics Corporation, are fully licensed under VMX's
and Dytel's voice mail and automatic call processing patents. Microlog and its
subsidiaries paid VMX $275,000 upon execution of the settlement documents and
issued to VMX $225,000 of Microlog common stock (102,857 shares), which was
subject to redemption as discussed in Note 11. Additionally, Microlog and its
subsidiaries will pay to VMX a total of $500,000 in eleven quarterly
installments starting on July 31, 1993. Of the settlement amount, $444,704 was
attributed to the receipt by Microlog of Maryland and Genesis of a fully paid
voice mail license, and $555,296 was attributed to a license under VMX and Dytel
automatic call processing patents. The Company recorded the new licenses at a
cost of $800,000, and is amortizing the licenses over seven years.
The Company is subject to other 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 29 of the Company's
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference on
pages 29 and 30 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 23 through 30 of the Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including Consolidated
Statements of Operations for the years ended October 31, 1993, 1994, and 1995,
Consolidated Balance Sheets as of October 31, 1994, and 1995, Consolidated
Statements of Changes in Stockholders' Equity for the years ended October 31,
1993, 1994, and 1995, Consolidated Statements of Cash Flows for the years ended
October 31, 1993, 1994, and 1995, and Notes to Consolidated Financial
Statements, together with the report thereon of Price Waterhouse LLP dated
December 22, 1995, are incorporated by reference from pages 6 through 22 of the
Company's Annual Report to Shareholders.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and certain executive officers of the Company
found under the caption "Election of Directors" and the caption "Section 16(a)
Disclosure" on pages 6 through 15 is incorporated herein by reference from the
Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information found under the caption "Executive Compensation and Other
Information", found on pages 8 through 15, of the Company's Proxy Statement is
incorporated herein by reference (excluding specifically the sections captioned
"Comparative Company Performance" and "Management Compensation Committee Report
on Executive Compensation").
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information found under the caption "Stock Owned by Management and Principal
Stockholders" on pages 4 and 5 of the Company's Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information found under the caption "Compensation Committee Interlocks and
Insider Participation" on page 14 of the Company's Proxy Statement is
incorporated herein by reference.
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 6 through 22 of the
Company's Annual Report to Shareholders and are incorporated herein by
reference.
Consolidated Statements of Operations for the years ended October 31,
1993, 1994, and 1995
Consolidated Balance Sheets as of October 31, 1994, and 1995
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 1993, 1994, and 1995
Consolidated Statements of Cash Flows for the years ended October 31,
1993, 1994, and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedules
Unaudited supplementary data entitled "Selected Quarterly Financial Data
(unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 17).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages F-1 and F-2:
F-1 Schedule VIII Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent Accountants on Financial Statement Schedule
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of Registrant,
as amended 1/
3.2 By-laws of Registrant, as amended 1/
4.1 Specimen Stock Certificate 1/
10.1 Employment Agreements between the Company and Joe J. Lynn and
Steven R. Delmar, respectively 5/
10.2 Deferred Compensation Agreements between the Company and J.
Graham Hartwell and Joe J. Lynn, respectively 3/
10.3 Consulting and Non-Competition Agreement with J. Graham
Hartwell 5/
10.4 Employment Agreement between the Company and Richard A.
Thompson 5/
10.5 Microlog Corporation Executive Deferred Bonus Plan 2/
10.6 Microlog Corporation Medical Reimbursement Plan 5/
10.7 Microlog Corporation 1986 Stock Option Plan, as amended 6/
-
10.8 Microlog Corporation 1989 Non-Employee Director Non-Qualified
Stock Option Plan 6/ -
10.9 Agreements with Farmers & Mechanics National Bank
10.10 Sub-contracting Agreement with Aspect Telecommunications
Corporation 6/
10.11 Sub-contracting Agreement with Applied Physics Laboratory 6/
10.12 Agreement with Philips Communication Systems B.V.*/ 7/
13 Annual Report to Shareholders for the fiscal year ended
October 31, 1995
22 Subsidiaries of the Registrant 5/
24 Consent of Price Waterhouse LLP
*/ Confidential treatment has been granted for portions of this
document.
1/ Filed as an Exhibit to Registration Statement on Form S-1, File No.
33-31710, and incorporated herein by reference.
2/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1987.
3/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1988.
4/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1990.
5/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1992.
6/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1993.
7/ Filed as an Exhibit to Annual Report on Form 10-K for the fiscal year
ended October 31, 1994.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fiscal year ended
October 31, 1995.
OTHER MATTERS
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8, Nos.
33-30965 (filed September 11, 1989) and 33-34094 (filed March 30, 1990):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
To Our Shareholders and Friends:
Fiscal year 1995 was a very exciting and productive year for your Company. We
successfully accomplished most of our primary plan objectives for the year.
These included paying off our bank mortgage on our corporate headquarters
building from operating funds, meeting target revenue and profitability,
shipping our new UNIX product Intela, both domestically and internationally,
introducing our first new standard voice processing application into the
commercial market, maintaining high product quality through our ISO 9001
accreditation, and increasing our performance analysis services revenue.
Financial Performance: The Company generated $1.5 million in operating income on
consolidated net revenues of $22.4 million. These are record results for the
Company. We aggressively managed operating costs and inventory to reduce costs
of goods sold to 58% of net revenues. Revenue per voice processing employee
averaged approximately $168,000 for the year. With the payoff of our outstanding
mortgage, the Company's balance sheet has been strengthened. The Company has in
place a $2 million line of credit and is expecting to close on an additional $1
million loan agreement to provide working capital for the future.
Market Focus: Government - Our government voice processing business enjoyed an
excellent year as approximately 65% of voice processing revenues were generated
from government customers. Of particular note was the acceptance by one of our
major customers, the Internal Revenue Service, of our new Intela voice
processing system. It is Microlog's successful implementation of the IRS' Voice
Balance Due (VBD) application which has helped to initiate a completely new way
for the IRS to collect money owed to the government without traditional labor
intensive collection efforts. The IRS plans to introduce this application in its
larger call centers in 1996. Additionally, our government group secured the
largest single system order for our Intela system at the end of fiscal 1995.
This system, which is able to handle over 900 simultaneous callers, will allow
taxpayers to check the status of important tax related information associated
with income tax filing over the Internet.
Market Focus: Commercial - Although our planned transition to take full
advantage of commercial voice processing opportunities continues to take longer
than we would like, our year-over-year revenue from commercial customers
increased 64%. Late in fiscal 1995, we introduced our first standard commercial
"off the shelf" application - "Retail Solution". Initially, this product
targeted retail pharmacies for use with prescription renewals. By fiscal year
end, we had installed or had orders for approximately 200 units, and have since
received our first significant order for this product. We are optimistic that
this market segment, with over 60,000 pharmacies in North America, offers growth
potential for fiscal 1996 and beyond. We anticipate new applications being
introduced in fiscal 1996.
Market Focus: International - Global demand for voice processing applications
continues to increase. During fiscal 1995, we entered into distribution
agreements with two new international partners in the Middle East Alpha Data in
the United Arab Emirates and Gulf Resources in Kuwait. By year end, we were in
the final stages of new arrangements with several additional partners. During
the year, our major European OEM partner, Philips Communications Systems B.V. of
The Netherlands, introduced Microlog's new UNIX voice processing product,
Intela, in six European countries. Philips generated some initial orders from
certain accounts that offer significant potential for additional business over
the next few years. In the Asia-Pacific region, we installed a 120 line system
at a prestigious customer's site that offers potential for future expansion.
Market Focus: Performance Analysis - Despite the reduction in defense-related
spending, our Old Dominion Systems Incorporated of Maryland (ODSM) subsidiary
continued to perform well, generating $8.3 million in revenue, up $.2 million
from the prior year. During the year, we were successful in adding new
contracts, as well as increasing the level of work authorized under existing
contracts, from the Johns Hopkins University Applied Physics Laboratory (APL),
the Company's principal customer for performance analysis services. Of special
note is ODSM'S award of a continuation contract from APL for a base period of
one year with two one year option years that is valued at $4.4 million over the
next 3 years.
Quality Focus: Fiscal 1995 was your Company's first full year operating under
the most stringent International Standards Organization (ISO) accreditation, ISO
9001. The ISO processes, with the accompanying procedures that we have in place,
enable us not only to consistently deliver very high quality products, but also
to accelerate our new product development activity. ISO provides the internal
discipline associated with designing, developing,
1
manufacturing, and supporting our voice processing products which, when coupled
with our sound financial controls, enables us to better manage the Company.
These controls and disciplines underscore our commitment to delivering value to
our customers, shareholders, and employees. We are proud to announce that we
received re- certification of ISO 9001 in November 1995.
Future Directions: Microlog turned a corner in fiscal 1995. We now believe we
have the product, procedures, organizational depth, and commitment to expand
your Company in the market segments where we compete. Management is solidly
determined to creating value for our customers, employees, and shareholders
alike.
We would like to expressly thank our dedicated employees for their loyalty and
commitment to excellence and our sincere appreciation to our distributors and
business partners. A special thank you is extended to our customers for their
continued commitment to our Company and products. Lastly, we welcome our new
customers, VAR's, and shareholders to the Microlog family.
Richard A. Thompson Joe J. Lynn
President and Chief Operating Officer Chief Executive Officer
2
Microlog: Building A Strong Foundation for the Future
During 1995 -- a banner year for Microlog -- we generated record revenues of
$22.4 million, representing a 20% increase over 1994. This performance
demonstrates our ability to grow in line with the voice processing market, which
is also currently growing at approximately 20% per year. On the international
front, we continued to expand our global presence by recruiting additional
distribution partners. Here at home, our UNIX-based Intela voice processing
systems helped increase our government business and our new Retail Solution
product aided our entry into major commercial voice response market segments.
Intela: UNIX Voice Processing Platform Becomes Flagship Product
Our Intela product is of critical importance to Microlog's future growth, both
here and abroad. For this reason, we devoted considerable resources to adding
features and functionality to the product in order to further enhance its
marketability.
Intela is our Graphical User Interface ("GUI") based interactive information
response ("IIR") platform designed to run multiple voice processing applications
simultaneously. It is based on a Pentium hardware platform utilizing a UNIX
operating system. Intela is capable of supporting over 1000 voice/data
telecommunication lines or "ports", meeting even the most demanding call volume
requirements. Intela also has a non-proprietary open architecture which enables
us to incorporate emerging technologies quickly and to more easily interface
with customers' various telecommunications and networking equipment. In
addition, Intela supports a wide range of international features including the
localization of user screens and software.
In addition to adding text-to-speech ("TTS") and international digital network
protocol support, we incorporated multilingual continuous speech recognition,
enhanced telephone switch support, support for additional databases, and Analog
Display Services Interface ("ADSI") support - a protocol allowing our IIR system
to display text on an ADSI screen phone. We also added a number of call center
enhancements designed to enable call centers, such as collection agencies and
credit card companies, to effectively manage high call volumes.
With these enhancements in place, we feel that the Intela product is
well-positioned for strong performance in both domestic and international
markets.
Retail Solution: Major Commercial Market Segment Targeted With New Product Line
During 1995, we also dedicated development efforts to the "Retail Solution"
product line, which was designed and manufactured specifically for the retail
pharmacy industry.
The Retail Solution offers multiple voice processing applications designed to
improve operations and increase profits at retail pharmacies. These applications
include the Automated Prescription Refill System ("APRS(R)"), Prescription
Ready, Photo Ready, the ProNouncer(R), Call Routing, and Voice Messaging. These
Retail Solution applications are designed to improve productivity and reduce
costs, while increasing sales. All applications run on a single voice processing
platform capable of accommodating additional applications as they are
introduced.
In North America, over 60,000 retail pharmacy outlets fill 2 billion
prescriptions annually; approximately two-thirds -- or 1.3 billion -- of these
prescriptions are refills. The APRS improves the efficiency and reduces the cost
of the prescription refill process for pharmacies. Customers can place their
refill orders 24 hours a day by entering their prescription information via
telephone. By using the APRS, pharmacies free their staff to spend more time
consulting with customers, thereby helping to improve customer service and store
loyalty.
Prescription Ready and Photo Ready help improve pharmacy cash flow by placing
reminder phone calls to customers who have not picked up their prescription
orders or their processed film, and the ProNouncer(R) is Microlog's digital
in-store automated announcement system. Call Routing helps improve staff
productivity by answering incoming lines and automatically directing callers to
the desired store department while avoiding the need for a human operator. All
applications in the Retail Solution are available in multiple languages, support
the Telecommunication Device for the Deaf ("TDD") interface for the hearing
impaired, and are available separately
3
or combined into a single system. The Retail Solution is available running under
both DOS and UNIX operating system software.
Our development of the Retail Solution product line is consistent with plans to
transition our voice processing business increasingly to commercial markets,
specifically to those markets that we believe offer profitable growth
opportunities. During 1996, we will continue to develop and launch new
applications that focus on commercial market segments with strong potential.
VCS 3500: Broad Functionality Continues to Help Drive Sales
The VCS 3500 Interactive Voice Response ("IVR") platform continued to perform
well in 1995. Historically a strong IVR product, especially in the government
sector, the VCS 3500 was significantly enhanced with an eye toward expansion
into the commercial sector. In fact, a number of the basic systems underlying
the Retail Solution were based on VCS 3500 functionality.
We won several significant VCS 3500 contracts in 1995, including an $800,000
order to upgrade sixty-five VCS 3500 systems at U.S. Immigration and
Naturalization Service (INS) offices around the country. These systems drive the
INS "Ask Immigration" hotline, enabling callers to gain access to bilingual
immigration information 24 hours a day, seven days a week. Today, Microlog
systems handle over seven million calls annually and 90% of the callers get the
information they need through the "Ask Immigration" system, without the need of
a human operator.
Microlog also patented two new VCS 3500 features in 1995: the Language Switch,
which makes it possible to run up to 24 different languages, including TDD,
concurrently on a system and Release Line Trunking ("RLT"), which, for example,
makes it possible for a single operator to serve several remote sites.
CallStar: New Markets Opened Abroad
CallStar is our full featured voice mail/automated attendant product. CallStar
remains a reliable and affordable voice processing product. As demand for
traditional voice mail products in developing nations increased, we were able to
expand CallStar's presence abroad, particularly in the Far East.
International Business Significantly Increased
In 1995, international revenues grew by more than 45%. We attribute this success
to the quality of our international distribution partners and to the flexibility
of our voice processing solutions. Throughout the year, we focused on adding
international functionality to our voice processing solutions -- from
text-to-speech in multiple languages, to support of international Integrated
Services Digital Network ("ISDN") protocols.
In 1994, we were proud to announce the signing of Philips Communications Systems
B.V. of The Netherlands to a non-exclusive OEM distribution agreement to market
and support the Intela product line, in a number of European and Asian-Pacific
markets.
During 1995, we continued to identify other high-quality international partners
to distribute our voice processing solutions.
1996 and Beyond
One goal for 1996 is to expand our international markets and to offer new
application solutions to commercial and government sectors. To aid this
expansion, we intend to continue to add additional international global features
for the Intela product, as well as adding support for Computer Telephone
Integration ("CTI"), additional database support, Internet, and network
management capabilities.
4
MICROLOG SUBSIDIARY
Old Dominion Systems Incorporated of Maryland
Providing Professional Business Services For Nearly 25 Years
Microlog provides defense-oriented technical support and administrative services
to U.S. Government prime contractors through its subsidiary Old Dominion Systems
Incorporated of Maryland (ODSM). ODSM is instrumental in the development and
evaluation of submarine-based strategic missile systems, undersea sonar systems,
mobile communications networks, and space-qualified systems associated with the
Ballistic Missile Defense Organization.
Old Dominion Systems Incorporated of Maryland increased its revenue to $8.3
million, up from $8.1 million in 1994. ODSM's comprehensive technical
capabilities include software development life cycle support, data management
support, systems engineering and integration, computer operations and user
support, and information management services for both government and commercial
organizations.
5
Microlog Corporation
Consolidated Statements of Operations
Year Ended October 31,
- ---------------------------------------------------------------------------------------------------------------------
1993 1994 1995
- ---------------------------------------------------------------------------------------------------------------------
Net sales:
Products $10,848,391 $ 7,856,759 $ 9,905,239
Services 9,949,932 10,812,003 12,480,404
- ---------------------------------------------------------------------------------------------------------------------
Total net sales 20,798,323 18,668,762 22,385,643
- ---------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of products 4,387,830 5,760,284 4,746,581
Cost of services 7,715,575 8,625,581 8,173,060
Selling, general and administrative 6,132,231 7,005,470 6,373,764
Research and development 1,511,753 1,643,850 1,591,895
Restructuring costs -- 550,258 --
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 19,747,389 23,585,443 20,885,300
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,050,934 (4,916,681) 1,500,343
Investment income 65,135 38,244 24,078
Interest expense (143,943) (137,416) (112,244)
Other (expense) income, net (15,092) 55,046 (5,046)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 957,034 (4,960,807) 1,407,131
Provision for income taxes 470,255 23,234 20,000
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 486,779 (4,984,041) 1,387,131
Extraordinary item - tax benefit from
utilization of net operating
loss carryforward 433,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 919,779 $(4,984,041) $ 1,387,131
- ---------------------------------------------------------------------------------------------------------------------
Per common share:
Primary:
Income (loss) before extraordinary item $ 0.12 $ (1.29) $ 0.34
Extraordinary item 0.11 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.23 $ (1.29) $ 0.34
- ---------------------------------------------------------------------------------------------------------------------
Fully diluted:
Income (loss) before extraordinary item $ 0.12 $ (1.29) $ 0.34
Extraordinary item 0.10 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.22 $ (1.29) $ 0.34
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
Microlog Corporation
Consolidated Balance Sheets
October 31,
- -----------------------------------------------------------------------------------------------------------------
1994 1995
- -----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,166,194 $ 922,763
Receivables 2,617,337 2,948,538
Receivable from related party 70,237 97,622
Inventories 882,184 1,436,889
Other current assets 157,590 110,365
- ------------------------------------------------------------------------------------------------------------------
Total current assets 4,893,542 5,516,177
Fixed assets, net 2,941,925 3,006,528
Licenses, net 638,095 523,810
Other assets 365,286 232,491
Goodwill, net 217,131 146,710
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 9,055,979 $ 9,425,716
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,463,818 $ 45,455
Accounts payable 1,083,970 1,388,122
Accrued compensation and related expenses 1,634,278 2,103,316
Other accrued expenses 1,415,480 1,230,310
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,597,546 4,767,203
Long-term debt 45,456 --
Deferred officers' compensation 269,218 269,218
Other liabilities 394,865 227,641
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 6,307,085 5,264,062
- ------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable common stock,
102,857 shares issued, redeemable at $2.1875 per share 225,000 --
- ------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
1,000,000 shares authorized, no shares issued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,379,511 and 4,507,968 shares issued 43,795 45,079
Capital in excess of par value 14,765,999 15,015,344
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (11,109,363) (9,722,232)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,523,894 4,161,654
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 9,055,979 $ 9,425,716
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
Microlog Corporation
Consolidated Statements of Changes in Stockholders' Equity
Serial Common Stock Capital In Treasury Stock
Preferred Stock Excess of Accumulated
Shares Par Value Shares Par Value Par Value Shares Cost Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1992 -- -- 4,338,699 $43,387 $14,715,192 301,870 $(520,287) $(7,045,101) $7,193,191
Settlement of Genesis Electronics
Corporation acquisition escrow -- -- -- -- -- 300,000 (656,250) -- (656,250)
Issuance of common stock -- -- 33,962 339 43,463 -- -- -- 43,802
Net income for the year ended
October 31, 1993 -- -- -- -- -- -- -- 919,779 919,779
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1993 -- -- 4,372,661 43,726 14,758,655 601,870 (1,176,537) (6,125,322) 7,500,522
Issuance of common stock -- -- 6,850 69 7,344 -- -- -- 7,413
Net loss for the year ended
October 31, 1994 -- -- -- -- -- -- -- (4,984,041) (4,984,041)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1994 -- -- 4,379,511 43,795 14,765,999 601,870 (1,176,537) (11,109,363) 2,523,894
Issuance of common stock -- -- 25,600 256 25,373 -- -- -- 25,629
Release of mandatorily
redeemable common stock -- -- 102,857 1,028 223,972 -- -- -- 225,000
Net income for the year ended
October 31, 1995 -- -- -- -- -- -- -- 1,387,131 1,387,131
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1995 -- -- 4,507,968 $45,079 $15,015,344 601,870 $(1,176,537) $(9,722,232) $4,161,654
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8
Microlog Corporation
Consolidated Statements of Cash Flows
Year Ended October 31,
1993 1994 1995
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 919,779 $(4,984,041) $1,387,131
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 1,128,656 879,046 474,537
Deferred officers' compensation 33,000 18,000 --
Amortization of goodwill and licensing agreement 271,364 274,713 184,706
Loss on disposition of fixed assets 19,653 18,544 2,869
Changes in assets and liabilities:
Receivables (637,520) 1,433,393 (358,586)
Inventories 304,595 1,042,768 (554,705)
Other current assets 19,927 (78,595) 47,225
Accounts payable 6,842 307,894 304,152
Accrued compensation and related expenses 287,338 43,751 469,038
Other accrued expenses (1,254,806) 729,378 (352,394)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,098,828 (315,149) 1,603,973
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (630,954) (487,103) (543,159)
Proceeds from sale of fixed assets 3,000 65,638 1,150
Sale or maturity of investments 604,550 -- --
Purchase of licenses (275,000) -- --
Other assets (7,592) (212,155) 132,795
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (305,996) (633,620) (409,214)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock 29,490 7,413 25,629
Reduction of long-term debt (411,530) (505,244) (1,463,819)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (382,040) (497,831) (1,438,190)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 410,792 (1,446,600) (243,431)
Cash and cash equivalents at beginning of year 2,202,002 2,612,794 1,166,194
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,612,794 $ 1,166,194 $ 922,763
================================================================================================================
See accompanying notes to consolidated financial statements.
9
Microlog Corporation
Notes to Consolidated Financial Statements
Note 1: Basis of Presentation and Major Customers
The accompanying consolidated financial statements include the accounts of
Microlog Corporation and its wholly-owned subsidiaries (collectively, the
Company). All intercompany transactions have been eliminated.
Microlog Corporation of Maryland, a subsidiary, designs, assembles, markets, and
services customized voice processing systems and other communications products.
Old Dominion Systems Incorporated of Maryland, a subsidiary, is engaged in
providing performance analysis of certain major weapons systems and related data
processing support to the Federal Government through prime contractors.
A summary of information about the Company's operations by business segment is
as follows:
Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Net sales:
Voice processing systems and other
communications products $13,337 $10,574 $14,089
Performance analysis and
support services 7,461 8,095 8,297
- ----------------------------------------------------------------------------------------------------------
Net sales $20,798 $18,669 $22,386
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Voice processing systems and other
communications products $ 536 $(5,363) $ 795
Performance analysis and
support services 515 446 705
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations $ 1,051 $(4,917) $ 1,500
- ----------------------------------------------------------------------------------------------------------
Identifiable assets:
Voice processing systems and other
communications products $ 8,838 $ 4,968 $ 6,383
Performance analysis and
support services 2,203 1,785 683
Buildings for common use 2,398 2,303 2,360
- ----------------------------------------------------------------------------------------------------------
Identifiable assets $13,439 $ 9,056 $ 9,426
- ----------------------------------------------------------------------------------------------------------
10
Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------
(Amounts in thousands)
Capital expenditures:
Voice processing systems and other
communications products $ 621 $459 $531
Performance analysis and
support services 1 13 2
Buildings for common use 9 15 10
- ----------------------------------------------------------------------------------------------------------
Capital expenditures $ 631 $487 $543
- ----------------------------------------------------------------------------------------------------------
Depreciation expense:
Voice processing systems and other
communications products $ 917 $781 $358
Performance analysis and
support services 4 5 6
Buildings for common use 208 93 111
- ----------------------------------------------------------------------------------------------------------
Depreciation expense $1,129 $879 $475
- ----------------------------------------------------------------------------------------------------------
Approximately 36%, 32%, and 38% of the Company's consolidated net sales for
fiscal 1993, 1994, and 1995, respectively, involved the sale of voice processing
systems and other communications products to the Federal Government.
Approximately 6%, 4%, and 6% of the Company's consolidated net sales for fiscal
1993, 1994, and 1995, respectively, involved the export of voice processing
systems and other communications products to foreign countries.
Approximately 36%, 43%, and 37% of the Company's consolidated net sales for
fiscal 1993, 1994, and 1995, respectively, involved performance analysis and
support services subcontracts with prime contractors to the U.S. Navy. These
contracts have been extended to various dates in fiscal 1996, 1997, and 1998.
The Company extends credit to its customers and billings are made in accordance
with contract terms.
Note 2: Summary of Accounting Policies
Revenue Recognition
Sales of products and services are recognized at the time deliveries are made or
services are performed.
Contract revenues are recognized on the percentage of completion basis for
fixed-price contracts. Revenues are recorded to the extent costs have been
incurred for cost-plus-fixed-fee contracts, including a percentage of the fixed
fee computed in accordance with the contract provisions. Revenues for time and
materials contracts are recognized at negotiated hourly rates as incurred and as
materials are delivered. Provisions for losses on contracts in progress are
provided when, in the opinion of management, such losses are anticipated.
Certain contracts are subject to audit and possible adjustment by the Federal
Government. Contract costs have been examined and settled through fiscal 1992.
Cash Equivalents and Investments
The Company considers all liquid investments with an original maturity of less
than three months to be cash equivalents. Cash equivalents and investments
consist of U.S. treasury bills, certificates of deposit, repurchase agreements,
(which are collateralized by securities issued or guaranteed by the U.S.
Treasury), and municipal bonds, at cost, which approximates market. The Company
has not experienced any losses on its investments.
11
Inventories
Inventories are stated at the lower of cost, determined on the first-in
first-out method, or market.
Fixed Assets
Fixed assets are recorded at cost and depreciated on a straight-line basis for
financial reporting purposes and accelerated methods for income tax purposes.
Intangible Assets
Licenses are recorded at cost and amortized on a straight-line basis over the
expected benefit periods. Accumulated amortization at October 31, 1994 and 1995
was $161,905 and $276,190, respectively.
Goodwill arising from the purchase described in Note 3 is amortized on a
straight-line basis over seven years.
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
Warranty Reserve
Normal product warranty for service and repairs is generally provided for 90
days to two years, subsequent to delivery. Based on experience, the Company has
accrued expenses related to warranty obligations.
Net Income (Loss) Per Share
Net income (loss) per common share is computed by dividing net income (loss) for
the period by the weighted average number of shares outstanding, adjusted for
the effect of common stock equivalents arising from the assumed exercise of
stock options, if dilutive. Primary weighted average number of shares
outstanding for the years ended October 31, 1993, 1994, and 1995 were 4,065,000,
3,877,029 and 4,066,705, respectively. Fully diluted weighted average number of
shares outstanding for the years ended October 31, 1993, 1994, and 1995 were
4,116,000, 3,877,029, and 4,066,705, respectively.
Note 3: Acquisition of Genesis Electronics Corporation
On November 29, 1990, the Company acquired Genesis Electronics Corporation
(Genesis), a voice mail provider for small to medium sized businesses, located
in Rancho Cordova, California. Pursuant to the merger agreement, the Company
issued 675,000 shares of its common stock valued at approximately $1,477,000,
paid $500,000 in cash to the Genesis shareholders, and incurred transaction
costs totaling $450,000. Of the merger consideration, $250,000 and 300,000
shares of common stock were deposited into an escrow account to satisfy possible
purchase price reductions and contract indemnities. The shares held in escrow
were considered to be outstanding shares for financial reporting purposes
through March 15, 1993. On March 16, 1993, the Company reached an agreement with
shareholders of Gen