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, 1999 Commission File No. 0-14880
MICROLOG CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA 52-0901291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20270 GOLDENROD LANE 20876-4070
GERMANTOWN, MARYLAND (Zip Code)
(Address of principal executive offices)
(301) 428-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the January 14, 2000 closing price of these shares) was approximately
$9.6 million. The Common Stock is traded over-the-counter and quoted through the
Nasdaq Smallcap Market.
As of January 14, 2000 6,989,113 shares of the Registrant's
Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts I and III of this Form 10-K incorporate information by reference to
portions of the Company's definitive Proxy Statement to be filed within 120 days
after the end of the fiscal year (the "Proxy Statement"). Parts I, II, and IV
incorporate information by reference from portions of the Company's Annual
Report to Shareholders for the fiscal year ended October 31, 1999 attached as an
exhibit hereto (the "Annual Report to Shareholders").
TABLE OF CONTENTS
PAGE
Part I. Item 1. Business ..................................................1
Item 2. Properties.................................................15
Item 3. Legal Proceedings..........................................15
Item 4. Sumission of Matters to a Vote of Security Holders.........16
Part II. Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................16
Item 6. Selected Financial Data....................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.16
Item 8. Financial Statements and Supplementary Data................16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................16
Part III. Item 10. Directors and Executive Officers of the Registrant.........17
Item 11. Executive Compensation.....................................17
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................17
Item 13. Certain Relationships and Related Transactions.............17
Part IV. Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K....................................17
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in it contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends the forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements in these sections. All
statements regarding the Company's expected financial position and operating
results, business strategy, financing plans, forecasted trends relating to our
industry, its ability to realize anticipated cost savings and similar matters
are forward-looking statements. These statements can sometimes be identified by
the use of forward-looking words such as "may," "will," "anticipate,"
"estimate," "expect," "believe" or "intend." The Company cannot promise you that
our expectations in such forward-looking statements will turn out to be correct.
Some important factors that could cause our actual results to be materially
different from our expectations include those discussed under the caption
"Business--Factors That May Effect Future Results of Operations."
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references in this report to Microlog or
the Company are to Microlog Corporation and its consolidated subsidiaries.
GENERAL
Microlog Corporation has two major subdivisions: the Voice Processing division,
and the Old Dominion Systems division. The Voice Processing division is a
software development and systems integration services company. The charter of
the division is to help the Company's customers to serve their customers better
through the use of technology in formal and informal corporate contact centers.
Specifically, the Company builds custom self-service and customer interaction
solutions that manage telephony type contacts (a historical focus and strength
of the Company) and Internet-based contacts (sometimes known in the industry as
"new media types"). In providing these solutions, the Company uses core voice
and data platforms and toolkits (the Company's products) combined with
professional services. This means that Microlog's products and solutions address
interactive voice response (IVR), inbound and outbound phone calls, e-mail, fax,
world-wide Web interactions, chat, Web bulletin board, and voice-over-IP types
of contacts. Services associated with this business include technology
assessment, project management, application and software development, telephony
integration, installation, system administration, quality assurance testing, and
on-going maintenance and support. While the scope of this business has expanded
far beyond simply processing telephone calls, the area has traditionally been
identified as Voice Processing, and will be identified as such throughout the
remainder of this document.
Through its Old Dominion Systems division, the Company provides performance
analysis and technical and administrative support services to the Applied
Physics Laboratory (APL), a prime contractor to the U.S. Navy. Although this
segment of the business has historically provided a stable source of sales and
profits, the Company believes that its principal opportunities for growth are in
the Voice Processing area, specifically related to customer contact centers. The
Company has been concentrating its investments and efforts on the Voice
Processing area.
The Company had a net loss of $4.7 million (($1.02) per basic and diluted share)
for the fiscal year ended October 31, 1999. By comparison, the Company had a net
loss of $8.6 million (($2.02) per basic and diluted share) for the fiscal year
ended October 31, 1998, which included a $2.15 million (($.50) per basic and
diluted share) reversal of an income tax benefit associated with the expected
future realization of the Company's net operating loss carryforwards. The
Company had net income of $3.7 million ($.89 per basic share and $.82 per
diluted share) for the fiscal year ended October 31, 1997, which included a $1.5
million ($.36 per basic share and $.33 per diluted share) income tax benefit.
The net loss of $4.7 million for fiscal year 1999 was attributable to the
Company's voice processing operations. Approximately $4.2 million of this loss
was due primarily to insufficient voice processing revenues. The loss was also
due in part to an increase of $0.3 million in the reserve for inventory
obsolescence, and $0.7 million of costs incurred for restructuring the Company's
voice processing operations. These losses were offset in part by the $0.5
million net income generated from the Company's performance analysis and
supports services operations.
In fiscal year 1999, the Company incurred restructuring charges of $693,000 for
severance benefits and other costs for the reduction of employees. Temporary
employees and contractors were also reduced. The restructuring charges include
costs of $381,000 for severance and benefits, the write-off of assets of $49,000
for the equipment associated with headcount reductions, costs of $103,000
associated with the closing of the Company's manufacturing facility, and costs
of $160,000 to terminate the 15-year lease commitment for new office space which
the Company had entered into in May 1998. As a result of these restructuring
activities and other cost reduction actions, the Company expects to reduce its
annual voice processing operating expenses by approximately $4.8 million
annually.
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On July 2, 1999 the Company finalized an Investment Agreement with TFX Equities,
Inc., a wholly owned subsidiary of Teleflex, Inc. The investment was consummated
in two transactions. In the first transaction, which occurred on July 2, 1999,
TFX purchased 854,563 shares of Microlog common stock for $1.3 million. In the
second transaction, which occurred on October 2, 1999, TFX purchased 1,812,104
additional shares of common stock for $2.7 million. The Company held a special
meeting of stockholders on September 9, 1999 and received approval of the
issuance of the 1,812,104 additional shares.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA (formerly Intela) software and
related hardware. The Company also agreed to assign certain agreements to which
Microlog is a party relating to the TIVRA products. As part of the sale, two
Microlog employees became employees of Comsys. The sale is anticipated to result
in a gain to Microlog of approximately $100,000. Since some of the proceeds from
the sale are based on future contracts between Comsys and the Company's former
customers, the gain on the sale was estimated and therefore has been deferred
into fiscal year 2000.
In fiscal year 1999, the Company closed and drew on a revolving line-of-credit
facility which allows the Company to borrow up to 75% of its eligible
receivables to a maximum of $2,000,000, subject to the right of the financial
institution to make loans only in its discretion. The line-of-credit bears
interest at the bank's prime rate plus 2.25% (10.75% at October 31, 1999), and
contains a 0.025% fee on the average unused portion of the line as well as a
monthly collateral fee and a 1% up-front commitment fee. The loan subjects the
Company to a restrictive covenant of not exceeding 115% of its consolidated
planned quarterly losses for its second and third quarters of fiscal year 1999,
and a requirement for consolidated profitability beginning in the fourth quarter
of fiscal year 1999. The line also subjects the Company to a number of
restrictive covenants including restrictions on mergers or acquisitions, payment
of dividends, and certain restrictions on additional borrowings. The line is
secured by all of the Company's assets. The Company was not in compliance with
the restrictive covenant in the second quarter of fiscal year 1999, but obtained
a waiver from the bank. The Company was not in compliance with the restrictive
covenant in the fourth quarter of fiscal year 1999 for which a forbearance
agreement has been obtained. The forebearance agreement waives the lenders right
under an event of default to terminate the loan. This line-of-credit expires in
March 2000, and the Company and the bank are in the process of renewal
discussions. There was no outstanding debt against this line-of-credit at
October 31, 1999.
Over the past two years, the Company has been experiencing reduced demand,
increased competition, and reduced margins in the voice processing area, which
the Company attributes to market forces. The Company believes that interactive
voice response systems in general, and certain vertical sub-segments of this
market in particular, are in the maturing phase of market evolution for
stand-alone systems. Accordingly, competition has increased, margins have been
reduced, and it has become more difficult to sell these products. In addition,
governmental customers have been procuring large IVR systems as part of major
procurements from larger vendors, which has required the Company to work through
prime contractors, also resulting in increased margin pressure and greater
difficulty in making sales directly. The Company's response to this has been to
increase its R&D in both the uniQue(TM) and TIVRA (formerly Intela) products to
expand its interactive response offerings to include Internet-based
interactions, and to offer professional turnkey services to the integration of
modern customer contact centers. This addresses not only traditional voice types
of contacts, but also e-mail, fax, Web callback, IP telephony, chat, Web
bulletin board, and hardcopy mail, thereby expanding the Company's addressable
market. This approach yields sales potential due to the trend in corporate
process re-engineering in customer relationship management, and in outsourcing
of related transactions and application development.
In fiscal year 2000, the Company's strategy for addressing the market trends
will be to expand its professional services offerings to provide comprehensive
solutions to its customers, inclusive of the Company's products. The objective
of these solution services is for the Company to help its customers to better
serve their customers. The Company plans to accomplish this through the
implementation of self service and customer interaction applications utilizing:
the TIVRA voice processing platform, enabled by speech recognition; the uniQue
contact processing platform, for media processing, Web interfaces, and contact
prioritization; and services based on the analysis, development, and integration
skills developed over the years by the Microlog and ODSM staff.
The Company is subject to the risk that its new strategy will not be successful.
The new strategy is dependent on market acceptance of the Company's new focus
and new products, ongoing research and development efforts and sales activities
over the near term. In addition, the new strategy is also dependent on the
Company's ability to successfully retain and recruit skilled personnel.
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The results of the Company's performance during fiscal 1999, 1998, and 1997, are
discussed in greater detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which forms a part of the Annual
Report to Shareholders and is incorporated by reference into Item 7 of this
Annual Report on Form 10-K. That discussion and analysis should be read in its
entirety in conjunction with the discussion of the Company's business in this
Item 1. Information concerning the Company's operations by business segment is
hereby incorporated by reference to Note 1 of the "Notes to Consolidated
Financial Statements," which forms a part of the Annual Report to Shareholders
and is also incorporated by reference into Item 8 of this Report.
Microlog, a Virginia corporation, was organized in 1969. Microlog Corporation of
Maryland, and Microlog Europe, both subsidiaries, design, assemble, market, and
service customized voice processing systems and other communications products.
Old Dominion Systems Incorporated of Maryland, engaged in providing performance
analysis of certain major weapons systems and related data processing support to
the Federal Government through prime contractors, was merged with and into
Microlog Corporation of Maryland effective October 31, 1999.
VOICE PROCESSING
VOICE PROCESSING INDUSTRY
Voice processing systems are designed to serve the needs of organizations which
are searching for an efficient, cost-effective means to deliver and communicate
information and complete business transactions in a timely manner. These systems
use specialized computer hardware and software to store, retrieve, and transmit
digitized voice messages and to access information on computer databases. In
traditional Interactive Voice Response, callers hear voice prompts and then use
a touch-tone telephone to enter information into, and/or retrieve information
from, a computer database. Voice processing systems have evolved and now provide
information not only through voice, but also through a wide range of additional
input devices and interfaces, including the Internet, fax, Telecommunications
Device for the Deaf (TDD), and pagers.
Voice processing typically includes a system connected to an external computer
that contains data of interest to callers. With touch-tone or voice commands
(using speech recognition software), which often include passwords, codes or
account numbers, callers can query the computer and have data read back to them
in voice form. Depending on the customer's application, callers may also change
data on the computer or input new data with touch-tone or voice commands. Voice
processing is widely used for functions such as reporting account balances,
checking on inventory, or determining the status of applications or permits in
process. Voice processing systems range from small systems with basic features
utilizing a few phone lines, to larger more complex systems with hundreds of
lines.
The following functionality is provided through the Company's voice processing
products:
Audiotex is used by organizations to construct a "library" of pre-recorded
messages, which outside callers can access through touch-tone or voice
commands without live operator assistance. Customers can record and change
menus and messages themselves over the telephone at any time. Libraries of
information may be presented in different languages, and callers with
rotary telephones may also access menus and information. Up to 50,000
messages may be presented. Audiotex software finds wide use by
organizations that receive large volumes of highly-repetitive telephone
requests for information. Major advantages of audiotex over live
information operators include the availability of information at every hour
of the day and the consistency of information disseminated.
Automated Attendant uses touch-tone or voice commands to route and connect
inbound calls to extensions faster and more accurately than live operators.
Microlog's software allows different phone lines to be answered with
various greetings and menus of options presented to different callers. In
the event of a busy or unanswered extension, the software permits callers
to hold, transfer, leave a message or disconnect. The system can be
name-based, in which callers input the first three letters of the party's
last name, or extension-based, in which callers dial an extension number.
For extension-based systems, the software incorporates a directory of
names, allowing callers to use touch-tone commands to find extension
numbers they do not know.
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Service Management System (SMS) allows network and operations managers to
configure and manage their voice processing system through a simple,
consistent graphical "point & click" interface. SMS allows network managers
to monitor a system's status, retrieve usage statistics, configure hardware
and software resources, and install software on any TIVRA-based system
installed on the network.
Fax Software allows system users to automatically receive stored fax
documents on demand from the voice processing system. Customer service and
sales support operations are frequent users of fax software. A service
representative can take a request for documents from the system and
designate faxes to be sent in response without exiting the system.
Interactive Voice Response (IVR) provides a telephone interface to computer
systems. IVR allows a user to call into a computer and access various
information systems using a touch-tone telephone or voice commands.
Interactive Web Response (IWR) allows the voice processing platform to
handle Web-originated input as it would data collected from a standard
phone interaction. IWR performs activities such as database lookups,
outgoing faxes, conferencing, and sending information to agents for
customer callbacks. Acting as the interface between a Web site and the
voice processing system, IWR passes information collected through a Web
contact using Common Gateway Interface (CGI) and sockets. The results are
delivered though a Web page that is sent back to the user.
Local Database provides similar functionality to voice processing systems
as IVR, but allows the data of interest to reside on the system rather than
in a host mini- or mainframe computer. This provides a cost-effective
approach for many voice processing applications. It also allows large
interactive communication applications to do local batch processing of data
by downloading the data to the system for manipulation.
Multiple Languages Interface Software allows system messages to be played
in multiple languages. It also interfaces TDD terminals to IVR systems over
telephone lines.
Outbound Dialing permits an organization to send messages automatically to
large lists of external phone numbers and to record responses to those
messages, if necessary. This flexible software can handle multiple lists
with thousands of names per list. It can draw from a library of 50,000
messages and can send different combinations of messages to individual
phone numbers as directed. The software also generates management reports
about the number of successful connections, the length of calls, and the
content of responses.
Release Line Trunking (RLT) provides the ability to transfer the same call
several times. After the call to each transfer destination is complete, the
telephone line to that destination is released. A call may, for example,
initially be transferred to a phone number, which can provide information
required for the second transfer. In the Microlog applications, RLT is
often used for long distance transfers.
Speech Recognition allows the caller to speak responses that are understood
by the TIVRA systems. Continuous and discrete speech recognition can be
combined in a single system. The standard vocabulary includes digits "0-9",
"yes", and "no" responses. Microlog has incorporated speech recognition
technology from several U.S.- and international-based companies. All
technologies are speaker independent and therefore require no special
training or development to recognize individual voice or speech patterns.
Text-to-Speech converts typed ASCII data, resident on host computers or
databases, to computer-generated synthetic speech on demand. It has an
extensive vocabulary, since it can pronounce any string of letters which
are sent to it. Microlog's text-to-speech module is ideal for applications
requiring information from large text databases. Because text-to-speech
works with external databases, the module works with the interactive voice
response module that provides the link between the TIVRA system and the
customer's database.
Transaction Processing allows the inbound caller to place orders, request
information, respond to surveys or complete other transactions without
personal handling by a live operator, using either touch-tone or voice
commands. The caller can initiate transactions any hour of any day, and the
Company can process
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the transactions at its convenience, including processing outside normal
business hours. Such transactions allow orders and requests to be filled
faster and at lower cost than traditional methods.
Voice Mail provides an organization with "voice mailboxes" in which
internal or external callers may leave detailed, confidential messages at
any time. Voice mail overcomes many limitations of telephone systems,
allowing people to exchange information and transact business without
having to be on the phone together. It eliminates paperwork and adds
meaning and content, which written messages can not reflect. Benefits
include increased office productivity through fewer interruptions, timely
and accurate message delivery, increased message detail, and reduced
callbacks and "telephone tag." Messages may be left for groups of people as
well as individuals. Callers may edit messages, reviewing and re-recording
until satisfied. Mailbox owners may review, save, forward or discard voice
messages.
UNIQUE(TM)
Microlog's uniQue product offers comprehensive open architecture, cross
platform solutions for customer contact centers. uniQue is designed for the
contact center with 5 to 5,000 agents and seamlessly integrates all of the
contact center's telephony, computer and business applications. uniQue is
designed for the contact center manager and offers the agent appropriate
tools necessary to handle customer interactions.
Microlog's uniQue product is now in its second major release phase. uniQue
release 1.5 was first demonstrated in September, 1998, and was generally
available in November, 1998. The function of this release was limited to
telephony call control (for telephone calls into a switch or ACD, or for
calls through an IVR), although the current functions of management,
statistics, and the agent interface were available at that time in a more
limited implementation. uniQue 2.0, which adds the other major media
contact types (see below) and major functional enhancements, went into
limited availability trial testing in September, 1999. uniQue 2.0 is
generally available as of February, 2000. Work on subsequent releases is
continuing, along with specific custom extensions of the product based on
customer requests. One customer has been fully installed and is operational
on the 2.0 release, and two others are in process as of this writing.
Several others are in the pre-contract stage.
The sales model for uniQue is direct at first, with growing indirect sales
over time. The direct sales experience is important to the first phases of
the product roll-out in order to provide responsive service to customers,
to obtain direct feedback on the usability and marketability of the product
as initially conceived, and to allow the Company to develop a certification
program for indirect sales representatives to ensure that the product will
be properly represented and supported. The indirect channel development
will be important to building sales volume beyond the capabilities of the
current direct sales staff to reach certain market segments. Indirect sales
methods could range from simple lead sharing in informal partnership
arrangements to formal value added remarketer (VAR) representation of the
product, to actual packaging of the product under another brand (original
equipment manufacturer - OEM relationship). Management is currently seeking
appropriate indirect relationships along this spectrum of possibilities,
and we believe that management's success in this endeavor is key to the
long-term success of the product. The Company expects in any case to
continue to represent the product through direct sales in addition to any
successful indirect channels that may be developed.
The uniQue product includes the following features:
Multiple Media - uniQue accepts and intelligently routes all customer
contacts, whether from a traditional telephone call, Web contact, email,
facsimile, or even simple postal mail. By accepting any type of contact
from the customers, uniQue becomes the single source repository of all
customer interaction providing the user with a powerful information tool
that summarizes customer behavior and provides better customer
satisfaction.
Contact Prioritization - In addition to handling all types of media, uniQue
prioritizes the contact based upon the rules established by the contact
center manager in order to ensure that all of the user's customers are
handled in the most appropriate manner, such as servicing the most
important customers first.
Intelligent Routing - uniQue leverages the effectiveness of skills-based
routing by matching the customer contact to the agent having the most
appropriate skills required to service the contact. uniQue's simple
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system administration feature allows the supervisor to quickly and easily
add or remove skills to any agent profile on-line. This allows the contact
center's management to schedule and maintain the most appropriate level of
agents at all times.
Easy Configuration & Remote Administration - Being a completely Web-based
Java application, uniQue offers the contact center management zero
administration at the agent 's workstation. The Java applet is hosted on
the uniQue server. It is loaded only once, and each time an agent logs into
the application, the uniQue applet is downloaded to the agent's workstation
eliminating any agent workstation configuration or administration.
Web-Based System - Keeping with the concept of open systems, uniQue
operates on any agent computer with any operating system provided there is
a properly configured Java-enabled Web browser on the agent's desktop. This
concept frees the user from being tied to a single computer environment,
system architecture or operating system. uniQue will operate in an
environment where there may be multiple types of computers. The open system
approach provides tremendous flexibility to a contact center's computing
requirements and simplifies the task of integration.
Reporting - Included with uniQue is a powerful statistical data capturing
and reporting component. Contact center managers can generate any number of
statistical reports from the system. uniQue stores each customer contact
along with the detailed information about the contact. Detailed information
which could be stored includes but is not limited to: contact duration,
agent wrap-up time, total contact length, contact outcome, contact result
and contact reason. With uniQue, contact center managers are able to
develop their own reports which summarize agent productivity, contact
center accomplishments, and even business success statistics.
TIVRA
The TIVRA (formerly Intela) platform is a voice processing product designed
for simultaneous support of multiple applications and interactive
information solutions. Prices for TIVRA 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 the time needed to develop a
customized application.
Microlog has installed TIVRA for many different customers, with one of our
largest TIVRA customers being the Internal Revenue Service (IRS). Projects
for the IRS included Voice Balance Due (VBD), which enables eligible
taxpayers to check the status of their debt to the U.S. Government and set
up repayment plans. The Refund Inquiry application enables taxpayers to
call the IRS and, by selecting the Refund Inquiry on TIVRA, automatically
obtain their refund status, including the amount of the refund.
TIVRA is based on an Intel Pentium(R) hardware platform utilizing a UNIX(R)
operating system with a Graphical User Interface (GUI) for application
development. The TIVRA system has a non-proprietary open architecture.
TIVRA also supports text-to-speech, speech recognition, remote and local
databases, host connectivity, Web and fax.
Each TIVRA system incorporates multiple servers with hard disk storage and
several voice cards. TIVRA uses distributed servers, each of which handles
a part of the total processing task, rather than one large central
processor. By increasing the number of voice cards and the number of
distributed servers, the Company can configure the voice processing systems
with a greater number of ports and hours of message storage. Depending upon
customer specifications, systems are provided as floor standing or rack
mounted units. These units can be networked to create a larger system with
thousands of ports, and they can be configured to run on -48 volt DC for
use in a Central Office (CO).
The TIVRA architecture supports a variety of configurations that meet
varying functional, processing, and voice port and storage needs. This
platform is designed for simultaneous support of multiple applications,
including both voice response and voice messaging services. Within the
architecture, particular hardware configurations may be proposed to provide
cost-effective solutions to a wide range of system requirements. All
systems can be configured with built-in redundancy so that at least 50% of
total system capacity is maintained across any single component failure.
Growth capability is achieved by the modular upgrade of application
servers, port servers, disk storage, additional communications links, and
additional voice
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response units. The TIVRA system includes a monitor, keyboard, and printer.
These are used to program the system, organize the storage of information
(which will be accessible to users), produce reports, and monitor system
activity. Customers that contract for the Company's system maintenance
services also purchase modems so that the Company can perform remote
diagnostic procedures.
The basic TIVRA architecture consists of three major system components: the
Application Server(s), the Port Server(s), and the TIVRA-ware software
platform.
Application Server defines the computing environment in which TIVRA-ware
software resides and provides centralized management and control, as well
as optional secure voice storage. The application server can be a personal
computer, a workstation, or mini-computer. It interfaces to a voice
processing peripheral, or TIVRA port server, via a command link on a LAN or
a serial communications link.
Port Server consists of tower and rackmount models, each providing call and
speech processing, as well as voice storage. Interfacing to either a CO- or
PBX-based telephone system, these units answer calls, and process and store
speech, all under the direction of commands coming from TIVRA-ware software
on the application server across a command link.
TIVRA-ware Software Platform is an application development and deployment
environment for voice processing 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, Prompt Manager, and Centralized System Management.
Through these interfaces, users control the development and operation of
their voice applications, using a graphical user interface. This interface
provides the developer with a set of tools to create voice applications.
Following is a description of each of these interfaces.
Application Editor is used to create and edit applications and is oriented
towards programmer productivity, with several developers able to access
different applications simultaneously. The editor is GUI-based and allows
programmers to develop call flows using a click-and-place approach similar
to many standard drawing packages. Cells from a palette are placed onto a
drawing pane and are connected using a set of mouse actions. Standard
Windows(R)-like pull-down menus allow file control, editing features (cut,
copy, and paste), object search (by cell number, name, or type), and user
preferences for appearance of the palette. Applications can be developed
and tested on-line without interrupting those currently running.
Prompt Loading and Management Facility provides the capability for prompt
creation, a major function in voice applications. With the TIVRA-ware
prompt loading facility, prompts can be reviewed, recorded, installed,
deleted, backed up to removable media, restored, and distributed over a
local or wide-area data network (LAN/WAN). They can be loaded on-line over
the telephone, a microphone, or from a tape, and the process can be semi-
or fully- automatic, depending on whether dual-tone multifrequency (DTMF)
tones are coded on the tape to identify the prompts. Users can record
individual prompts, a list of prompts, or record with DTMF prompt numbers,
and the prompts will be replaced only after they have been reviewed and
accepted. New or updated prompts will be phased in automatically while
applications remain on-line.
Prompt Manager allows users to retrieve a prompt from storage on a port
server and have the graphical representation shown in a window. The user
can modify the prompt simply by clicking on the window and performing any
of the following actions: cut, copy, paste, delete, trim silence, adjust
again, convert sections of a prompt to silence, and change sampling rate.
System Administration allows for the loading and unloading of applications,
and the management of the port servers connected to the application
processor. If a system has network hardware in the system 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
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up. TIVRA-ware can support multiple TIVRA systems to expand to larger port
and storage capacity by networking systems and clusters of systems
together.
Centralized System Management provides a graphical means to address the
operation, administration, and maintenance (OA&M) of a distributed system.
It provides a graphical representation of the application server and its
attached TIVRA systems, including the command link mode used, Ethernet or
serial links. Further, by clicking on the TIVRA icon, an additional window
is displayed. In this window, a graphic of the TIVRA display panel, with
active trunk status indicators and disk usage indicators, is shown.
Clicking on a trunk status indicator opens an additional window that
depicts information about the running application.
Reports are designed to track significant statistical information for
activities such as billing and to justify services. TIVRA-ware offers a
choice of reports that can be created and viewed without interrupting the
operation of an application. These reports can then be sent to a printer
for a hard copy printout. Available reports include call detail, cell
usage, trunk usage, subscriber information, and transaction log.
Statistical requirements beyond those addressed by the standard reports can
be met from the raw call data records (CDRs).
Database Access allows interfaces to be built between TIVRA-ware and
Standard Query Language (SQL) relational databases, such as Oracle, Sybase,
Informix and Ingress. The Application Editor contains an SQL cell type,
which allows information to be extracted from databases to support
interactive communication applications. This cell type allows users to
delete, insert, select, and update data. TIVRA-ware 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 TIVRA-ware to accommodate multiple
applications. Messages can be retrieved either first in, first out (FIFO)
or last in, first out (LIFO), determined on a system basis.
Microlog delivered the Y2K compliant TIVRA System Release 6 (SR6) product
in 1998. Enhancements included significant hardware upgrades, system
management capabilities, enhanced speech recognition options, and
extensions to allow interactive Web response. In 1999, the Company focussed
on extending the customer applications built and delivered on the SR6
platform, adding to its inventory of custom and re-usable components.
SALES AND MARKETING
The Company's products are sold primarily through direct sales. The TIVRA
products are sold through a combination of direct sales, value-added resellers,
and government contract vehicles. It is expected that, during 2000, uniQue will
be primarily sold directly. The Company is looking for original equipment
manufacturers, technology partners, and value-added resellers for its uniQue
product.
The Company has a sales and marketing team consisting of six employees located
in the Washington-Baltimore metropolitan area. This team will focus on direct
sales, technology partners, and value-added resellers of the Company's products
in the Mid-Atlantic region. Sales and marketing activities will continue to
focus on certain vertical markets, including contact centers, utilities,
associations, and Federal, state and local government.
The Company compensates its direct and distribution sales personnel through a
base salary plus commission, which generally represents a percentage of the net
sales for which the sales personnel is responsible. The principal potential
customers for the Company's self service applications and products in these
vertical markets are organizations which receive or make a large volume of
telephone calls or e-mail and Web inquiries, and the customer desires
information stored on the organization's data system or requires assistance.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA software and related hardware.
The Company also agreed to assign certain agreements to which Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys.
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SERVICES
The Company provides limited warranties for parts and labor on its products
ranging from 90 days to two years from the date of delivery. The Company also
offers its customers annual maintenance contracts under which the Company
maintains and services the systems. Microlog charges an annual fee of
approximately 10% to 16% of the purchase price of its systems for maintenance
contracts covering normal business hours. The fee is highest for maintenance
contracts providing for 24-hour or weekend assistance.
The Company generally performs maintenance for its interactive communications
systems in the Washington, D.C. metropolitan area from its Germantown, Maryland
headquarters, where an inventory of spare parts is maintained. Microlog also has
an agreement with a subcontractor to perform on-site maintenance on its
interactive communications systems nationwide. The Company operates a hotline
which customers with maintenance contracts may use to request assistance or to
ask questions concerning operation of the Company's interactive communications
systems. Microlog can perform many diagnostic procedures remotely and,
historically, has been able to correct many of the difficulties experienced by
its customers through telephone consultation. International maintenance is
performed by the third party distributor and is supported by Microlog service
personnel in Germantown, Maryland.
Microlog also offers a variety of other services to its customers. Microlog will
customize interactive communications and contact center systems to a customer's
specific needs by designing application software, or by making appropriate
changes in the underlying source code of any of Microlog's products. The Company
may charge for this service on a time and materials basis, or may include the
service in the price of the system being sold. Training on system operations
also is offered to customers. In addition, the Company generally provides
certain improvements to its software modules free of charge to customers who
contract for its system maintenance services.
BACKLOG
As of October 31, 1999, the Company had a backlog of existing orders for voice
processing systems and services totaling $2.8 million. By comparison, the
backlog, as of October 31, 1998, was $2.0 million. The Company has experienced
fluctuations in its backlog at various times in the past attributable primarily
to the seasonality of governmental purchases. The Company anticipates that all
of the outstanding orders at October 31, 1999 will be shipped and the sales
recognized during fiscal year 2000. Although the Company believes that its
entire backlog of orders consists of firm orders, because of the possibility of
customer changes in delivery schedules and delays inherent in the government
contracting process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.
COMPETITION
The interactive communications industry is highly competitive and the Company
believes that competition will intensify. The Company competes with a large
number of companies, which produce interactive communications products offering
one or more of the 14 major voice processing applications performed by the
Company's products. Microlog's competitors include companies, such as IBM,
InterVoice/Brite, Lucent, Periphonics (Nortel), Aspect, and Syntellect, that
have emphasized sales of systems with interactive voice response applications.
In addition, the Company also competes with dealers and distributors that sell
voice products of these and other competitors. New or enhanced products can be
expected from the Company's competitors. It is also likely that there will be
new entrants into the interactive communications industry because of the absence
of any major technological barriers to entry.
Competition for the sale of interactive communications systems has been based in
part on the application required by the customer. In marketing its TIVRA
product, the Company places emphasis on the 14 major interactive communications
functions (refer to "Products" section) that can be performed and the ability of
these systems to be expanded to incorporate additional applications. As a result
of this emphasis on openness and expandability, the Company believes that many
of its competitors' products cannot be customized as easily to the user's
specific needs as TIVRA.
The contact center marketplace in which the uniQue product is expected to
compete is also very competitive. This is because the market is large and
growing, and sits at the convergence point of a number of trends. All of the
trends are underpinned by the increasing willingness of people to undertake
transactions with businesses at a
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distance, and by the generally favorable business conditions which fuel economic
growth at this time. The overall result is that the world's total network
traffic is increasing, with data traffic overtaking voice traffic as the
predominant share in the latter half of the 1990s.
While data traffic driven by rapid adoption of new communications media types
predominates, voice traffic has not stopped growing in absolute terms. There is
the trend toward increased use by customers of the traditional telephone to
accomplish sales and support functions remotely with companies. This means that
the demand for systems that automate and broker telephony interactions from
customers (telephone calls and faxes are examples) is being sustained by
businesses seeking to contain costs and to improve customer service as a
differentiator.
Second, there is the trend in the market toward more widespread use of the
Internet and the various communications media types that it conveys. This is by
far the more dramatic component of the increase in world network traffic. This
means that businesses are compelled to deal with a growing number of e-mails,
Web hits with information requests, Web chat requests, Web bulletin board
postings, and emerging trends in the use of IP telephony and IP fax.
Third, there is a trend by businesses to adopt customer relationship management
programs as a means of structuring and ensuring the quality of their
interactions with customers. This most often takes the form of software packages
that facilitate sales entries and/or the tracking of problem reports for support
purposes. Sometimes as well, the data from the contacts in such systems are used
to facilitate marketing research (through data mining), personalization of sales
pitches or marketing programs based on individual preferences inferred from the
data ("selling to a market of one"), or to simply enable more effective customer
self service as a means to buffer incoming contacts and workload to the people
in the company.
All of these trends and the general staffing challenges associated with a good
economy mean that companies are often forced to consider computer systems that
integrate voice, data, and customer relationship systems as a means of handling
customer load, increasing efficiency, or providing adequate customer service to
differentiate themselves from competition in their own markets. Microlog offers
solutions to these customers, comprised of the uniQue product, the Tivra
product, and custom integration services. A number of competitors are offering
solutions to some or all of the problems these trends present, but from
different technical or market perspectives, largely dependent on whether they
have an installed base of customers, or they are new entrants.
Some competitors are long established telephony vendors, seeking to add the new
media types to their ability to process telephony. These include Lucent, Nortel,
and Aspect as examples. Traditional CTI vendors are seeking to add this
capability to their offerings, an example of which is Genesys (Alcatel). Oracle,
traditionally a database company, has shown interest in this market through an
acquisition of Versatility, a contact management software company. Network
component companies are also interested in the market, most notably Cisco with
its recent acquisitions of Webline (Internet based contact management) and Summa
Four (traditional telephony switches). Start-up companies competing in this
space include Interactive Intelligence, ATIO, Acuity, Cosmocom, eGain, PadNetX,
eShare (Melita), and Apropos. All of these competitors and trends define a
dynamic, large and growing, but very competitive market space.
Competition for the sale of interactive communications systems has been based in
part on the application required by the customer. In marketing its TIVRA
product, the Company places emphasis on the 14 major interactive communications
functions (refer to "Products" section) that can be performed and the ability of
these systems to be expanded to incorporate additional applications. As a result
of this emphasis on openness and expandability, the Company believes that many
of its competitors' products cannot be customized as easily to the user's
specific needs as TIVRA.
Marketing and product recognition also play a substantial role in competition
within the interactive communications industry and within particular vertical
markets. Most of the Company's competitors have considerably greater financial,
marketing, and sales resources than Microlog. Many of these competitors have
concentrated on one or two voice applications or on specific vertical markets
and may enjoy advantages in selling to customers seeking only those applications
or to companies in those markets. The Company believes that it has advantages
over some competitors in sales to government and retail customers because of its
experience in marketing products to these customers and in participating in
competitive procurements.
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The Company believes that the other principal factors affecting competition in
the interactive communications market are product applications and features,
quality and reliability, customer support and service, and price. The Company
believes that it competes favorably with respect to these factors.
RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING
Research and development expenses for 1999 were focused on uniQue, with
incremental investments in the TIVRA product, and smaller incremental
investments in the APRS (Automated Prescription Refill System) and TAC (The
Automated Collector) products. uniQue 2.0 was released in December of 1999, with
additional capabilities in e-mail handling, Web call-back, Web chat, Web
bulletin board, collaboration, statistics collection, management, and reporting.
TIVRA enhancements were in the areas of specific custom and re-usable
application extensions for individual customers. The Company, in providing
special features, application development, and system integration services to
our customers, undertakes a significant amount of custom engineering. The
Company is subject to the risk that it may not have the financial resources to
maintain a competitive research and development strategy.
The following table sets forth for the periods indicated the Company's research
and development expenditures and the percentage of interactive communications
net sales represented by these expenditures.
RESEARCH AND DEVELOPMENT EXPENDITURES
(In thousands, except percentage amounts)
YEAR ENDED OCTOBER 31,
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Research and development expense $3,579 $3,256 $2,870
Percentage of voice processing net sales 19% 22% 36%
</TABLE>
Costs incurred in basic research and development are expensed as incurred. The
Company has determined that the process of establishing technological
feasibility with its new products is completed approximately upon the release of
the products to its customers. Accordingly, software development costs are
expensed as incurred.
MANUFACTURING AND OPERATIONS
The Company assembles its own equipment using standard parts obtained from
outside sources. The proprietary aspects of the Company's systems are primarily
in the software provided with the equipment and in the specific applications
development designed for the customer. Systems are built to order as they vary
in size and sophistication of software modules. Equipment assembly, along with
testing and quality control, are performed at its Germantown, Maryland facility.
Microlog currently has four employees in its manufacturing group. The Company
generally uses standard parts and components obtained from a variety of computer
vendors and specially configures these components to produce the hardware for
its systems. Certain components used in the Company's products are presently
available from limited sources. To date, the Company has been able to obtain
supplies of these components in a timely manner from these sources.
RESTRUCTURING OF OPERATIONS
In fiscal year 1999, the Company incurred restructuring charges of $693,000 for
severance and benefits and other costs for the reduction of employees. Temporary
employees and contractors were also reduced. These restructuring charges include
costs of $381,000 for severance and benefits, the write-off of assets of $49,000
for the equipment associated with headcount reductions, costs of $103,000
associated with the closing of the Company's manufacturing facility, and costs
of $160,000 to terminate the 15-year lease commitment for new office space which
the Company had entered into in May 1998. As a result of these restructuring
activities and other cost reduction actions, the Company expects to reduce its
annual voice processing operating expenses by approximately $4.8 million
annually.
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In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA software and related hardware.
The Company also agreed to assign certain agreements to which Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys. The sale is anticipated to result in a gain to
Microlog of approximately $100,000. Since some of the proceeds from the sale are
based on future contracts between Comsys and the Company's former customers, the
gain on the sale was estimated and therefore has been deferred into fiscal year
2000.
SOFTWARE PROTECTION, TECHNOLOGY LICENSES, AND TRADEMARKS
The Company regards its software as proprietary and has implemented protective
measures both of a legal and a practical nature to ensure that the software
retains that status. The Company derives protection for its software by
licensing only the object code to customers and keeping the source code
confidential. Like many other companies in the interactive communications
industry, Microlog does not have patent protection for its software, although
some of the inventions for which Microlog has received and applied for patents
can be implemented in software. The Company, therefore, relies upon the
copyright laws to protect against unauthorized copying of the object code of its
software, and upon copyright and trade secret laws for the protection of the
source code of its software. Despite this protection, competitors could copy
certain aspects of the Company's software or hardware or obtain information
which the Company regards as a trade secret.
The Company has patents on an Interactive Audio Telecommunications Message
Storage, Forwarding and Retrieval System, a Software Switch for Digitized Audio
Signals, an Automated Telephone System Using Multiple Languages, a
Telecommunications System for Transferring Calls without a Private Branch
Exchange, Detection of TDD Signals in an Automated Telephone System, an
Automated Telephone System with TDD Capabilities, an Automated Announcement
System, and Methods for Communicating with a Telecommunications Device for the
Deaf (TDD). The Company also has pending patent applications on an Apparatus and
Method for Coupling an Automated Attendant to a Telecommunications System, a
Method and System for Enabling Computer Terminals in a Call Center Environment
to Display and Perform Telephony Related Functions, and a Contact Center System
Capable of Handling Multiple Media Types of Contacts and Method for Using the
Same. EVR, Microlog, Truant, CINDI, ProNouncer, CallStar, CallStar FXD, APRS,
Connecting People to a World of Information, The Automated Collector, and uniQue
are all registered trademarks owned by the Company. uniQue Agent, The Best Seat
In The House, Strategic Team of Elite Partners, and The Global Call Center
Company 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 (PTO). INTEL Corporation filed
oppositions with the PTO Trademark Trial and Appeal Board against the Company's
federal trademark applications for the marks Intela, VCS Intela, Intelaware,
Intelaview, and Intelapowerdial (the "Intela marks"). This consolidated
opposition proceeding has been settled and, under the terms of the settlement
agreement, the Company has abandoned its applications for and ceased use of the
Intela marks. Products formerly branded with the Intela marks are now branded
with the Company's "TIVRA" family of marks. The Company is currently using, and
claims common law rights in, the following additional, unregistered marks:
TIVRA, TIVRA-ware, TIVRA Powerdial, Voice Connect, Genesis, Voice Path, VCS
3500, Retail Solutions, RLT, and Release Line Trunking. In addition, the Company
enters into confidentiality agreements with its employees, distributors, and
customers and limits access to and distribution of its software, documentation,
and other 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 to the Company or any registered copyrights of the Company can be
successfully defended.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES
GENERAL
Since the early 1970s, the Company and its subsidiaries have been providing
performance analysis and technical and administrative support services,
principally in the form of data processing and analysis, engineering and
scientific analysis, and computer services, to government and commercial
customers. These services, which comprise the Company's original business, were
provided through Old Dominion Systems Incorporated of Maryland, a subsidiary
which was merged with and into Microlog Corporation of Maryland effective
October 31, 1999. The Company believes that its performance analysis contracts
are likely to continue to provide a stable but declining source of sales for the
Company. The Company is experiencing (indirectly, through its contracts with
APL) the effects of some reductions in defense spending due to changes in U.S.
defense priorities. The Company
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is not aware of any proposed reductions in spending that will result in any
material adverse affect over the next fiscal year on its expected net sales from
performance analysis and support services nor alter the manner in which it
procures contracts for such services. However, the Company cannot assure you
that changes in defense priorities or continuing budget reductions will not
cause such an effect during the fiscal year or thereafter. Additionally, the
Company has experienced increased competition for retention of its employees
from APL. As a result of the tight labor market and changes in hiring policies
at APL, the Company is experiencing increased employee attrition to APL. The
Company expects this trend to continue through fiscal year 2000. Each employee
hired directly by APL, and removed from our contract(s) decreases our revenue
and profit potential from that source.
The principal customer for the Company's performance analysis and technical and
administrative support services is The Johns Hopkins University's Applied
Physics Laboratory (APL), a United States Navy contractor, for which the Company
or its subsidiaries have been performing services since 1972. Sales from
contracts with APL accounted for 39%, 44%, and 56% of the Company's net sales
for fiscal 1997, 1998, and 1999 respectively.
The Company's performance analysis and support services personnel perform a
variety of analytical and science-related support services under several
contracts. These services usually are performed on the customer's premises or at
test-site locations. The Company's technical staff works jointly with the
customer's scientists and engineers in the acquisition, processing, analysis,
and management of certain major weapon systems data. This work is directed to
quantifying and reducing the impact of current and future threats to the United
States' submarine fleet through the use of ocean sensor systems. The technical
support rendered by the Company includes real-time data acquisition, digital
signal processing, software development and systems applications, data
management, and data analysis.
In addition, the Company supports naval strategic programs through its role as
an independent evaluator of the performance of submarine-based strategic missile
systems. This is accomplished through extensive data processing, technical
evaluation and data analysis relating to sonar, fire control, missile, launcher,
and navigation subsystems.
The Company's performance analysis and support services employees also engage in
communications testing and evaluation for mobile communications network
exercises. The Company's communications analysts assist in preparing
presentations to the Navy and in designing and implementing communications
analysis software.
The Company's employees perform various technical support services in connection
with several Ballistic Missile Defense Organization (BMDO) projects. These
include advanced technical support in the design, development, and
implementation of space-qualified equipment, systems analysis, and the operation
of a VAX computer-based mission control center for the MSX mission.
CONTRACTS
The Company's contracts are generally one-year in duration, and many of such
contracts contain two one-year extension options, with a fixed level of work
authorized under the contract. Several of the Company's larger contracts with
APL have been renewed or re-awarded to the Company annually, and the level of
work authorized under the contract at the time of renewal has provided for, in
the aggregate, the same or a greater level of services.
The Company typically provides services under three types of contracts. The
majority of contracts are on a time-and-materials basis, pursuant to which the
Company receives a pre-set fee for all services provided under the contract,
without regard to the Company's cost of supplying these services, and is
reimbursed only for the cost of materials. Other contracts are on a purchase
order basis, which operates similar to a time and materials contract, and on a
cost plus fixed fee basis. Occasionally, the Company experiences delays in
contract awards, contract funding, and payment, which the Company believes is
customary under contracts which involve performance of services for Federal
Government agencies.
The Company monitors performance under existing contracts and requests for
proposal (RFPs) for performance analysis and support services by contractors or
government agencies. The Company has received a number of blanket contracts by
responding to RFPs. In order to increase the new contracts, the Company must
locate skilled programmers and other technical personnel with the qualifications
specified by the open requisitions. The Company uses agencies and internal
resources to locate these personnel. The Company believes that its reputation in
the industry enables it to attract qualified individuals for inclusion in the
Company's proposals.
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COMPETITION
The Company's Government contracts can be opened to competitive bidding upon
their expiration at the discretion of the contractor or agency. Although
contracts presently comprising a substantial percentage of the Company's sales
have been renewed annually, these contracts may and have been open to
competitive bidding. There can be no assurance that these contracts will be
awarded to the Company if competitive bidding occurs.
The Company encounters substantial competition in its procurements. The
Company's competitors include, Allied Signal, Comsys, EISI, Orbital, SAIC, and
Sachs/Freeman Associates. The Company has instituted policies and procedures
designed to maintain a low overhead to enhance its ability to compete with
respect to new contracts and to existing contracts that are to be renewed or
extended. During the last three years, the contracts that have been lost through
competitive bidding or otherwise have not been material to the Company, either
individually or in the aggregate. During this three-year period, the Company has
received several new contracts as a result of competitive procurements and also
increases in the level of work authorized under contracts that have been renewed
or re-awarded to the Company.
The Company has had limited success in obtaining contracts with government
agencies or contractors other than APL. Many of these contracts have been
renewed with the incumbent on a sole source basis, rather than being
competitively bid. In the case of contracts that have been opened to competitive
bidding, the contract incumbents generally have had advantages because of their
prior relationships with the agencies and the experience of their personnel in
performing the requested services. In addition, incumbents or other competitors
often have substantially greater financial and other resources than the Company.
BACKLOG
As of October 31, 1999, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $0.4 million.
By comparison, the backlog as of October 31, 1998 was $0.2 million. The
Company's contracts consist primarily of indefinite delivery, indefinite
quantity (IDIQ) contracts which generally do not have a funding amount, and
therefore are not included in backlog. The Company estimates that the entire
$0.4 million of backlog at October 31, 1999 will be recognized as sales in
fiscal year 2000. Because of the delays inherent in the government contracting
process or possible changes in defense priorities or spending, the Company's
backlog as of any particular date may not be indicative of actual sales for any
future period. Although the Company believes that its backlog of funding on
existing contracts is firm, the possibility exists that funding for some
contracts on which the Company is continuing to work, in the expectation of
renewal, may not be authorized. In addition, the Government has the right to
cancel contracts, whether funded or not funded, at any time, although to date
this has not occurred.
GOVERNMENT REGULATION
In order to maintain contracts with contractors or Government agencies, the
Company must comply with a variety of regulations and Department of Defense
guidelines, including regulations or guidelines covering security, record
keeping, and employment practices. The majority of the employees assigned to the
Company's contracts with contractors or agencies are required to have security
clearances. The Company historically has not experienced any significant
difficulty in obtaining the necessary security clearances. The Company's sales
under these contracts are subject to audit by the Defense Contract Audit Agency
(the DCAA). The DCAA has completed audits through fiscal 1992, and any
adjustments required as a result of these audits have been minor. The
implementation by the Federal Government of spending cutbacks, or a change in
national defense priorities, could reduce the Company's sales.
EMPLOYEES
At January 15, 2000, the Company and its subsidiaries employed a total of 188
persons, including three part-time employees. Of these personnel, 54 are engaged
principally in the Company's interactive communications systems operations, 134
are engaged in performance analysis and support services, and six serve as
officers or managers or perform administrative services for the Company and all
of its subsidiaries. In fiscal year 1999, the Company restructured its
interactive communications systems operations which included a workforce
reduction of approximately 35%.
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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.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that its results of operations will be affected by factors
such as the timing of introduction by the Company of new and enhanced products
and services, market acceptance of new voice processing products and
enhancements of existing products, continuation of market trends in the voice
processing market, growth in the voice processing market in general,
competition, ability to secure and retain adequate financing, commitments to
automation by potential customers, fluctuations in the buying cycles of
governmental customers, changes in general economic conditions, and changes in
the U.S. defense industry and their impact on the prime contractor for which the
Company provides performance analysis and support services.
The Company is subject to the risk that its business strategy will not be
successful. The new strategy is dependent on market acceptance of the Company's
new focus, services and products, ongoing research and development efforts, and
sales activities over the near term. In addition, the strategy is dependent upon
the Company's ability to match costs proportionately with revenue. The Company's
fiscal 2000 operating budget includes significant expenditures related to its
development and marketing of its new professional services, uniQue product line,
and TIVRA product line. If the Company is unable to sustain and grow the
associated revenue, the Company is subject to the risk that it may not make the
necessary decisions to reduce expenditures in enough time to avoid severe
adverse consequences.
ITEM 2. PROPERTIES
The Company presently leases and occupies the 24,000 square foot building in
Germantown, Maryland, which it uses for its principal executive offices and its
interactive communications operations center. In September 1998, the Company
allowed the lease of the facility in Gaithersburg, Maryland to expire, and moved
the production and warehousing functions to the Germantown, Maryland facility.
The Company's lease of 22,700 square feet of office space in Rancho Cordova,
California expired in 1999.
In May 1998, the Company entered into a 15-year lease commitment, which was to
commence on or about June 1999, for office space intended to consolidate the
Company's headquarters, warehouse, and training facilities. In August 1998, the
Company sold its office building and committed to lease back the building prior
to its occupation of the new leased space. In April 1999, the Company and its
new landlord agreed to terminate the 15-year lease commitment for the new leased
space. The Company incurred $160,000 in termination costs, but was released from
future obligations by the landlord. At that time, the Company also committed to
lease back its building through 2009.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation from time to time arising from its
operations and receives occasional letters alleging infringement of patents
owned by third parties. Management believes that such litigation and claims are
without merit and will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on September 9, 1999. At the
meeting, the proposed approval of the issuance of 1,812,104 additional shares of
Common Stock to TFX Equities, Inc. was obtained by a vote of: For: 2,304,564,
Against: 72,837, and 24,863 shares abstaining.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information responsive to this Item is incorporated herein by reference to the
Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Information responsive to this Item is incorporated herein by reference to the
Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information responsive to this Item is incorporated herein by reference to the
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, including Consolidated
Statements of Operations for the fiscal years ended October 31, 1999, 1998, and
1997, Consolidated Balance Sheets as of October 31, 1999 and 1998, Consolidated
Statements of Changes in Stockholders' Equity for the fiscal years ended October
31, 1999, 1998, and 1997, Consolidated Statements of Cash Flows for the fiscal
years ended October 31, 1999, 1998, and 1997 and Notes to Consolidated Financial
Statements, together with the report thereon of Grant Thornton dated December
13, 1999, and the report thereon of PricewaterhouseCoopers LLP, dated March 17,
1999, are incorporated herein by reference to pages 2 through 20 of the
Company's Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 12, 1999, the Company dismissed PricewaterhouseCoopers LLP ("PWC") as
its independent accountant. PWC's reports on the Company's financial statements
for the fiscal years ended October 31, 1998 and 1997 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principle. However, such reports
contained an explanatory paragraph relating to the Company's ability to continue
as a going concern. The decision to dismiss PWC was approved by the Audit
Committee and the Board of Directors of the Company. In connection with the
audits of the financial statements of the Company for the fiscal years ended
October 31, 1998 and 1997, and for the period from November 1, 1998 through July
12, 1999, the Company had no disagreements with PWC on matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PWC,
would have caused PWC to make reference to such disagreements in their report on
the Company's financial statements for such years.
The Company engaged Grant Thornton LLP as its new independent accountant as of
July 12, 1999. The decision to engage Grant Thornton LLP was approved by the
Audit Committee and Board of Directors of the Company.
These events were previously reported by the Company on its Current Report on
Form 8-K, filed with the SEC on July 16, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
16
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this Item is incorporated herein by reference to the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included on pages 2 through 20 of the
Annual Report to Shareholders and are incorporated herein by reference.
Consolidated Statements of Operations for the fiscal years ended
October 31, 1999, 1998, and 1997
Consolidated Balance Sheets as of October 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended October 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Report of Independent Accountants
(a)(2) Financial Statement Schedule
Unaudited supplementary data entitled "Selected Quarterly Financial Data
(unaudited)" is incorporated herein by reference in Item 8 (included in "Notes
to Consolidated Financial Statements" as Note 16).
The following financial statement schedule and auditor's report in connection
therewith are attached hereto as pages F-1, F-2, and F-3:
F-1 Schedule II Valuation and Qualifying Accounts and Reserves
F-2 Report of Independent Certified Public Accountants on Supplemental
Information
F-3 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.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its 1999 fiscal year.
(c) Exhibits.
17
<PAGE>
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 Microlog Corporation Medical Reimbursement Plan 2/
10.2 Microlog Corporation 1989 Non-Employee Director Non-Qualified
Stock Option Plan 3/ -
10.3 Microlog Corporation 1995 Employee Stock Option Plan 4/
10.4 Sub-contracting Agreement with Aspect Telecommunications
Corporation 5/
10.5 Sub-contracting Agreement with Applied Physics Laboratory 5/
10.6 Agreement with Philips Communication Systems B.V. */ 6/
10.7 Loan and Security Agreement with Silicon Valley Bank 7/
13 Annual Report to Shareholders for the fiscal year ended October
31, 1999 7/ -
22 Subsidiaries of the Company 7/
23.1 Consent of Grant Thornton LLP 7/
23.2 Consent of PricewaterhouseCoopers LLP 7/
*/ Confidential treatment has been granted for portions of this document.
1/ Filed as Exhibits 3.1, 3.2 and 4.1 to Registration Statement on Form S-1,
File No. 33-31710, and incorporated herein by reference.
2/ Filed as Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year
ended October 31, 1991 and incorporated herein by reference.
3/ Filed as Exhibit 10.8 to Annual Report on Form 10-K for the fiscal year
ended October 31, 1993 and incorporated herein by - reference.
4/ Filed as Exhibit 10.6 to Registration Statement on Form S-8, File No.
333-07981 and incorporated herein by reference.
5/ Filed as Exhibits 10.12 and 10.13 to Annual Report on Form 10-K for the
fiscal year ended October 31, 1992 and incorporated herein by reference.
6/ Filed as Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year
ended October 31, 1994 and incorporated herein by - reference.
7/ Filed herewith.
18
<PAGE>
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.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Germantown, State of Maryland, on January 28, 2000.
MICROLOG CORPORATION
By /s/ Stephen D. Smith
-------------------------------------
Stephen D. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
/s/ Stephen D. Smith January 28, 2000
- ----------------------------------------------------
Stephen D. Smith
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Steven R. Delmar January 28, 2000
- ----------------------------------------------------
Steven R. Delmar
Executive Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ David M. Gische January 28, 2000
- ----------------------------------------------------
David M. Gische
Chairman of the Board and Director
/s/ Robert E. Gray, Jr.. January 28, 2000
- ----------------------------------------------------
Robert E. Gray, Jr.
Director
/s/ David B. Levi January 28, 2000
- ----------------------------------------------------
David B. Levi
Director
/s/ Joe J. Lynn January 28, 2000
- ----------------------------------------------------
Joe J. Lynn
Director
/s/ John J. Sickler January 28, 2000
- ----------------------------------------------------
John J. Sickler
Director
/s/ Randall P. Gaboriault January 28, 2000
- ----------------------------------------------------
Randall P. Gaboriault
Director
<PAGE>
================================================================================
F-1, SCHEDULE II - VALUATION AND QUALIFYNG ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance Balance
Fiscal Year Ended 10/31/99 11/01/98 Additions Deletions 10/31/99
- -------------------------- -------- --------- --------- --------
<S> <C> <C> <C> <C>
Receivables
Allowance for Doubtful Accounts 144 100 94 150
Inventory
Reserve for Obsolescence 1,644 309 1,465 488
Income Taxes
Valuation Allowance 6,400 1,915 0 8,315
Balance Balance
Fiscal Year Ended 10/31/98 11/01/97 Additions Deletions 10/31/98
- -------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 152 29 37 144
Inventory
Reserve for Obsolescence 345 1,299 0 1,644
Income Taxes
Valuation Allowance 1,966 4,434 0 6,400
Balance Balance
Fiscal Year Ended 10/31/97 11/01/96 Additions Deletions 10/31/97
- -------------------------- -------- --------- --------- --------
Receivables
Allowance for Doubtful Accounts 207 49 104 152
Inventory
Reserve for Obsolescence 253 92 0 345
Income Taxes
Valuation Allowance 3,462 0 1,496 1,966
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Stockholders
Microlog Corporation
In connection with our audit of the consolidated financial statements of
Microlog Corporation referred to in our report dated December 13, 1999, which is
included in the Annual Report on Form 10-K, we have also audited Schedule II for
the year ended October 31, 1999. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Vienna, Virginia
December 13, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors
Microlog Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 17, 1999 appearing on page 20 of the 1999 Annual Report to
Shareholders of Microlog Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 17, 1999
F-3
EXHIBIT 10.7
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWERS: MICROLOG CORPORATION
MICROLOG CORPORATION OF MARYLAND
ADDRESS: 20270 GOLDENROD LANE
GERMANTOWN, MD 20876
DATE: MARCH 24, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address"). The Schedule to this Agreement (the
"Schedule") shall for all purposes be deemed to be a part of this Agreement, and
the same is an integral part of this Agreement. (Definitions of certain terms
used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount of
Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.
1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its sole
discretion, issue or arrange for the issuance of letters of credit for the
account of Borrower, in each case in form and substance satisfactory to Silicon
in its sole discretion (collectively, "Letters of Credit"). The aggregate face
amount of all outstanding Letters of Credit from time to time shall not exceed
the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be
reserved against Loans which would otherwise be available hereunder. Borrower
shall pay all bank charges (including charges of Silicon) for the issuance of
Letters of Credit, together with such additional fee as Silicon's letter of
credit department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date. Borrower hereby
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<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
agrees to indemnify, save, and hold Silicon harmless from any loss, cost,
expense, or liability, including payments made by Silicon, expenses, and
reasonable attorneys' fees incurred by Silicon arising out of or in connection
with any Letters of Credit. Borrower agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Silicon and
opened for Borrower's account or by Silicon's interpretations of any Letter of
Credit issued by Silicon for Borrower's account, and Borrower understands and
agrees that Silicon shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower's instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto. Borrower understands that Letters of Credit may require
Silicon to indemnify the issuing bank for certain costs or liabilities arising
out of claims by Borrower against such issuing bank. Borrower hereby agrees to
indemnify and hold Silicon harmless with respect to any loss, cost, expense, or
liability incurred by Silicon under any Letter of Credit as a result of
Silicon's indemnification of any such issuing bank. The provisions of this Loan
Agreement, as it pertains to Letters of Credit, and any other present or future
documents or agreements between Borrower and Silicon relating to Letters of
Credit are cumulative.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles*, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral").
*(TO THE EXTENT PERMITTED BY ANY CONTRACTS OR LICENSES WHICH CONSTITUTE
GENERAL INTANGIBLES OR RECEIVABLES)
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Silicon now has, and will
continue to have, a first-priority perfected and enforceable security interest
in all of the Collateral, subject only to the Permitted Liens, and Borrower will
at all times defend Silicon and the Collateral against all claims of others.
None of the Collateral now is or will be affixed to any real property in such a
manner, or with such intent, as to become a fixture. Borrower is not and
-2-
<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Silicon, use its best efforts to cause
such third party to execute and deliver to Silicon, in form acceptable to
Silicon, such waivers and subordinations as Silicon shall specify, so as to
ensure that Silicon's rights in the Collateral are, and will continue to be,
superior to the rights of any such third party. Borrower will keep in full force
and effect, and will comply with all the terms of, any lease of real property
where any of the Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Silicon in writing of any material
loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now
or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last date
covered by any such statement provided to Silicon and the date hereof, there has
been no material adverse change in the financial condition or business of
Borrower. Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants
to Silicon as follows: Each Receivable with respect to which Loans are requested
by Borrower shall, on the date each Loan is requested and made, (i) represent an
undisputed bona fide existing unconditional obligation of the Account Debtor
created by the sale, delivery, and acceptance of goods or the rendition of
services in the ordinary course
-3-
<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
of Borrower's business, and (ii) meet the Minimum Eligibility Requirements set
forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and
all unpaid balances appearing in all invoices, instruments and other
documents evidencing the Receivables are and shall be true and correct
and all such invoices, instruments and other documents and all of
Borrower's books and records are and shall be genuine and in all respects
what they purport to be, and all signatories and endorsers * have the
capacity to contract. All sales and other transactions underlying or
giving rise to each Receivable shall fully comply with all applicable
laws and governmental rules and regulations. All signatures and
endorsements * on all documents, instruments, and agreements relating to
all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in
accordance with their terms.
* , TO THE BEST OF BORROWER'S KNOWLEDGE,
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Silicon's security interest and other rights in all of
Borrower's Receivables, nor shall Silicon's failure to advance or lend against a
specific Receivable affect or limit Silicon's security interest and other rights
therein. Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day. Together with each such schedule and
assignment, or later if requested by Silicon, Borrower shall furnish Silicon
with copies (or, at Silicon's request, originals) of all contracts, orders,
invoices, and other similar documents, and all original shipping instructions,
delivery receipts, bills of lading, and other evidence of delivery, for any
goods the sale or disposition of which gave rise to such Receivables, and
Borrower warrants the genuineness of all of the foregoing. Borrower shall also
furnish to Silicon an aged accounts receivable trial balance in such form and at
such intervals as Silicon shall request. In addition, Borrower shall deliver to
Silicon the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, immediately upon receipt thereof and in the same form as received,
with all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Silicon with copies of all credit memos within two days after
the date issued.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Silicon may specify,
pursuant to a blocked account agreement in such form as Silicon may specify.
Silicon or its designee may, at any time, notify Account Debtors that the
Receivables have been assigned to Silicon.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any
Collateral shall be delivered, in kind, by Borrower to Silicon in the original
form in which received by Borrower not later than the following Business Day
after receipt by Borrower, to be applied to the Obligations in such order as
Silicon shall determine; provided that, if no Default or Event of Default has
occurred, Borrower shall not be obligated to remit to Silicon the proceeds of
the sale of worn out or obsolete equipment disposed of by Borrower in good faith
in an arm's length transaction for an aggregate purchase price of $25,000 or
less (for all such transactions in any fiscal year). Borrower agrees that it
will not commingle proceeds of Collateral with any of Borrower's other funds or
property, but will hold such proceeds separate and apart from such other funds
and property and in an express trust for Silicon. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of
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Default, Borrower shall (i) hold the returned Inventory in trust for Silicon,
(ii) segregate all returned Inventory from all of Borrower's other property,
(iii) conspicuously label the returned Inventory as Silicon's property, and (iv)
immediately notify Silicon of the return of any Inventory, specifying the reason
for such return, the location and condition of the returned Inventory, and on
Silicon's request deliver such returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission, or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Silicon be deemed to be responsible for any of Borrower's obligations
under any contract or agreement giving rise to a Receivable. Nothing herein
shall, however, relieve Silicon from liability for its own gross negligence or
willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Silicon copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower (including budgets, sales projections, operating plans and other
financial documentation), as Silicon shall from time to time reasonably specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Silicon shall have the right to
disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following: (i)
merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business; (iv) sell or transfer any
Collateral, except for the sale of finished Inventory in the ordinary course of
Borrower's business, and except for the sale of obsolete or unneeded Equipment
in the ordinary course of business; (v) store any Inventory or other Collateral
with any warehouseman or other third party; (vi) sell any Inventory on a
sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii)
make any loans of any money or other assets; (viii) incur any debts, outside the
ordinary course of business, which would have a material, adverse effect on
Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or
otherwise become liable with respect to the obligations of another party or
entity; (x) pay or declare any dividends on Borrower's stock (except for
dividends
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise
acquire, directly or indirectly, any of Borrower's stock; (xii) make any change
in Borrower's capital structure which would have a material adverse effect on
Borrower or on the prospect of repayment of the Obligations; or (xiii) pay total
compensation, including salaries, fees, bonuses, commissions, and all other
payments, whether directly or indirectly, in money or otherwise, to Borrower's
executives, officers and directors (or any relative thereof) in an amount in
excess of the amount set forth on the Schedule; or (xiv) dissolve or elect to
dissolve. Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default would occur as a result of such
transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity
date set forth on the Schedule (the "Maturity Date"); provided that the Maturity
Date shall automatically be extended, and this Agreement shall automatically and
continuously renew, for successive additional terms of one year each, * unless
one party gives written notice to the other, not less than sixty days prior to
the next Maturity Date, that such party elects to terminate this Agreement
effective on the next Maturity Date.
* AND BORROWER SHALL, UPON EACH SUCH RENEWAL, PAY SILICON A RENEWAL FEE IN
THE AMOUNT OF ONE HALF PERCENT (0.5%) OF THE MAXIMUM CREDIT, AS DEFINED IN THE
SCHEDULE, IN EFFECT AS OF THE EFFECTIVE DATE OF SUCH RENEWAL, WHICH SHALL BE IN
ADDITION TO ALL INTEREST AND OTHER SUMS PAYABLE TO SILICON AND IS NOT
REFUNDABLE,
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity
Date as follows: (i) by Borrower, effective three Business Days after written
notice of termination is given to Silicon; or (ii) by Silicon at any time after
the occurrence of an Event of Default, without notice, effective immediately. If
this Agreement is terminated by Borrower or by Silicon under this Section 6.2,
Borrower shall pay to Silicon a termination fee in an amount equal to The
termination fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the highest rate
applicable to any of the Obligations.
* $10,000
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other
non-monetary Obligation which by its nature cannot be
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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cured; or (e) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within 5 Business Days after the date due; or (f) Any
levy, assessment, attachment, seizure, lien or encumbrance (other than a
Permitted Lien) is made on all or any part of the Collateral which is not cured
within 10 days after the occurrence of the same; or (g) any default or event of
default occurs under any obligation secured by a Permitted Lien, which is not
cured within any applicable cure period or waived in writing by the holder of
the Permitted Lien; or (h) Borrower breaches any material contract or
obligation, which has or may reasonably be expected to have a material adverse
effect on Borrower's business or financial condition; or (i) Dissolution,
termination of existence, insolvency or business failure of Borrower; or
appointment of a receiver, trustee or custodian, for all or any part of the
property of, assignment for the benefit of creditors by, or the commencement of
any proceeding by Borrower under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect; or (j) the commencement of any
proceeding against Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect, which is not cured by the dismissal thereof within 30 days
after the date commenced; or (k) revocation or termination of, or limitation or
denial of liability upon, any guaranty of the Obligations or any attempt to do
any of the foregoing, or commencement of proceedings by any guarantor of any of
the Obligations under any bankruptcy or insolvency law; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any
attempt to do any of the foregoing, or commencement of proceedings by or against
any such third party under any bankruptcy or insolvency law; or (m) Borrower
makes any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such indebtedness
or obligations terminates or in any way limits his subordination agreement; or
(n) there shall be a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of Borrower, in
one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of Silicon; or (o) Borrower shall generally not pay its debts as they
become due, or Borrower shall conceal, remove or transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a
material adverse change in Borrower's business or financial condition; or (q)
Silicon, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Silicon had no knowledge on the effective date or because
of the occurrence of an event on or subsequent to the effective date. Silicon
may cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
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announcement at the time scheduled for sale. Silicon shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Silicon may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Silicon to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to any
item of the Collateral or proceeds thereof, and, in Silicon's sole discretion,
to grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; (h) Offset against any sums in any of
Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional four percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Silicon
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
seven days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least seven days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by Silicon, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v)
Payment of the purchase price in cash or by cashier's check or wire transfer is
required; (vi) With respect to any sale of any of the Collateral, Silicon may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. Silicon shall be free
to employ other methods of noticing and selling the Collateral, in its
discretion, if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become
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part of the Obligations, shall be payable on demand, and shall bear interest at
a rate equal to the highest interest rate applicable to any of the Obligations.
In no event shall Silicon's rights under the foregoing power of attorney or any
of Silicon's other rights under this Agreement be deemed to indicate that
Silicon is in control of the business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and * attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to Silicon for any deficiency. If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
* REASONABLE
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any rights
or remedies shall not operate as a waiver thereof, but all rights and remedies
shall continue in full force and effect until all of the Obligations have been
fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both, would
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Inventory" [NOT APPLICABLE].
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
Eligibility Requirements") are the minimum requirements for a Receivable to be
an Eligible Receivable: (i) the Receivable must not be outstanding for more than
90 days from its invoice date, (ii) the Receivable must not represent progress
billings, or be due under a fulfillment or requirements contract with the
Account Debtor, (iii) the Receivable must not be subject to any contingencies
(including Receivables arising from sales on consignment, guaranteed sale or
other terms pursuant to which payment by the Account Debtor may be conditional),
(iv) the Receivable must not be owing from an Account Debtor with whom the
Borrower has any dispute (whether or not relating to the particular Receivable),
(v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the
Receivable must not be owing from an Account Debtor which is subject to any
insolvency or bankruptcy proceeding, or whose financial condition is not
acceptable to Silicon, or which, fails or goes out of a material portion of its
business, (vii) the Receivable must not be owing from the United States or any
department, agency or instrumentality thereof (unless there has been compliance,
to Silicon's satisfaction, with the United States Assignment of Claims Act),
(viii) the Receivable must not be owing from an Account Debtor located outside
the United States or Canada (unless pre-approved by Silicon in its discretion in
writing, or backed by a letter of credit satisfactory to Silicon, or FCIA
insured satisfactory to Silicon), (ix) the Receivable must not be owing from an
Account Debtor to whom Borrower is or may be liable for goods purchased from
such Account Debtor or otherwise. Receivables owing from one Account Debtor will
not be deemed Eligible Receivables to the extent they exceed 25% of the total
Receivables outstanding. * In addition, if more than 25% of the Receivables
owing from an Account Debtor are outstanding more than 90 days from their
invoice date (without regard to unapplied credits) or are otherwise not
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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eligible Receivables, then all Receivables owing from that Account Debtor will
be deemed ineligible for borrowing. Silicon may, from time to time, in its
discretion, revise the Minimum Eligibility Requirements, upon written notice to
the Borrower.
* RECEIVABLES ARISING FROM THE SALE OF MAINTENANCE OR SUPPORT CONTRACTS WILL
NOT BE DEEMED ELIGIBLE RECEIVABLES TO THE EXTENT THEY EXCEED THE LESSER OF: (A)
$500,000, OR (B) 25% OF THE AMOUNT AVAILABLE FOR LOANS TO BORROWER UNDER SECTION
1 OF THE SCHEDULE.
"Equipment" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organiza-
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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tion, association, corporation, government, or any agency or political division
thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, securities accounts, investment
property, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise returned
to or repossessed by Borrower, and all rights of stoppage in transit and all
other rights or remedies of an unpaid vendor, lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as Silicon
may from time to time establish and revise in good faith reducing the amount of
Loans and Letters of Credit which would otherwise be available to Borrower under
the lending formula(s) provided in the Schedule: (a) to reflect events,
conditions, contingencies or risks which, as determined by Silicon in good
faith, do or may affect either (i) the Collateral or any other property which is
security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of Silicon in the Collateral (including the enforceability, perfection
and priority thereof), or (b) to reflect Silicon's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to Silicon is or may have been incomplete, inaccurate or
misleading in any material respect, or (c) in respect of any state of facts
which Silicon determines in good faith constitutes an Event of Default or may,
with notice or passage of time or both, constitute an Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may
be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in writing
and shall be given either personally or by reputable private delivery service or
by regular first-class mail, or certified mail return receipt requested,
addressed to Silicon or Borrower at the addresses shown in the heading to this
Agreement, or at any other address designated in writing by one party to the
other party. Notices to Silicon shall be directed to the Commercial Finance
Division, to the attention of the Division Manager or the Division Credit
Manager. All notices shall be deemed to have been given upon delivery in the
case of notices personally delivered, or at the expiration of one Business Day
following delivery to the private delivery service, or two Business Days
following the deposit thereof in the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any court
of competent jurisdiction to be void or unenforceable, such defect shall not
affect the remainder of this Agreement, which shall continue in full force and
effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.
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<PAGE>
9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
only Silicon and not Borrower in connection with this Agreement. If either
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. All attorneys' fees and
costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void. No consent by Silicon to any assignment shall release Borrower
from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR SORT OR OTHERWISE.
BORROWER:
MICROLOG CORPORATION
BY /S/ STEVEN R. DELMAR
--------------------
PRESIDENT OR VICE PRESIDENT
BY /S/ ARLENE A. FRANCE
--------------------
SECRETARY OR ASS'T SECRETARY
MICROLOG CORPORATION OF MARYLAND
BY /S/ STEVEN R. DELMAR
--------------------
PRESIDENT OR VICE PRESIDENT
BY /S/ ARLENE A. FRANCE
--------------------
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /S/ PETER BENDORIS
------------------
TITLE ASSISTANT VICE PRESIDENT
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<PAGE>
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LEVY, SMALL & LALLAS
815 Moraga Drive
Los Angeles, California 90049
Telephone (310) 471-3000
Telecopier (310) 471-7990
TRANSMITTAL NOTE
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWERS: MICROLOG CORPORATION
MICROLOG CORPORATION OF MARYLAND
ADDRESS: 20270 GOLDENROD LANE
GERMANTOWN, MD 20876
DATE: MARCH 24, 1999
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
================================================================================
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of:
(i) $2,000,000 at any one time
outstanding (the "Maximum Credit Limit");
or (ii) 75% of the amount of Borrower's
Eligible Receivables (as defined in
Section 8 above).
LETTER OF CREDIT SUBLIMIT
(Section 1.5): $500,000
================================================================================
2. INTEREST.
INTEREST RATE (Section 1.2):
A rate equal to the "Prime Rate" in
effect from time to time, plus 2.25% per
annum. Interest shall be calculated on
the basis of a 360-day year for the
actual number of days elapsed. "Prime
Rate" means
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LEVY, SMALL & LALLAS
TRANSMITTAL NOTE
- --------------------------------------------------------------------------------
Page 2
the rate announced from time to time by
Silicon as its "prime rate;" it is a base
rate upon which other rates charged by
Silicon are based, and it is not
necessarily the best rate available at
Silicon. The interest rate applicable to
the Obligations shall change on each date
there is a change in the Prime Rate.
MINIMUM MONTHLY
INTEREST (Section 1.2): N/A.
================================================================================
3. FEES (Section 1.4):
Loan Fee: $20,000, payable concurrently herewith.
Collateral Monitoring
Fee: $1,000 per calendar month, payable in
arrears (prorated for any partial
calendar month at the beginning and at
termination of this Agreement).
Unused Line Fee. In the event, in any calendar month (or
portion thereof at the beginning and end
of the term hereof), the average daily
principal balance of the Loans
outstanding during the month is less than
the amount of the Maximum Credit,
Borrower shall pay Silicon an unused line
fee in an amount equal to 0.25% per annum
on the difference between the amount of
the Maximum Credit and the average daily
principal balance of the Loans
outstanding during the month, which
unused line fee shall be computed and
paid monthly, in arrears, on the first
day of the following month.
================================================================================
4. MATURITY DATE
(Section 6.1): One year from the date of this Agreement,
subject to automatic renewal as provided
in Section 6.1 above, and early
termination as provided in Section 6.2
above.
================================================================================
5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with the following
covenant:
PROFITABILITY With respect to Borrower's fiscal quarter
ending April 30, 1999, Borrower shall not
incur a loss (before taxes) in excess of
$1,320,000.
With respect to Borrower's fiscal quarter
ending July 31, 1999, Borrower shall not
incur a loss (before taxes) in excess of
the lesser of (a) or (b) below:
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LEVY, SMALL & LALLAS
TRANSMITTAL NOTE
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Page 3
(a) $625,000 plus the difference
between $1,320,000 and
Borrower's actual loss (before
taxes) for its fiscal quarter
ending April 30, 1999; or
(b) $1,250,000.
Borrower shall not incur any loss (before
taxes) for any fiscal quarter beginning
with the fiscal quarter ending October
31, 1999.
================================================================================
6. REPORTING.
(Section 5.3): Borrower shall provide Silicon with the
following:
1. Monthly Receivable agings, aged by
invoice date, within fifteen days after
the end of each month.
2. Monthly accounts payable agings, aged by
invoice date, and outstanding or held
check registers, if any, within fifteen
days after the end of each month.
3. Monthly reconciliations of Receivable
agings (aged by invoice date),
transaction reports, and general ledger,
within fifteen days after the end of
each month.
5. Monthly unaudited financial statements,
as soon as available, and in any event
within thirty days after the end of each
month.
6. Monthly Compliance Certificates, within
thirty days after the end of each month,
in such form as Silicon shall reasonably
specify, signed by the Chief Financial
Officer of Borrower, certifying that as
of the end of such month Borrower was in
full compliance with all of the terms
and conditions of this Agreement, and
setting forth calculations showing
compliance with the financial covenants
set forth in this Agreement and such
other information as Silicon shall
reasonably request, including, without
limitation, a statement that at the end
of such month there were no held checks.
7. Quarterly unaudited financial
statements, as soon as available, and in
any event within forty-five days after
the end of each fiscal quarter of
Borrower.
8. Annual operating budgets (including
income statements, balance sheets and
cash flow statements, by month) for the
upcoming fiscal
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Page 4
year of Borrower within thirty days
prior to the end of each fiscal year of
Borrower.
9. Annual financial statements, as soon as
available, and in any event within 120
days following the end of Borrower's
fiscal year, certified by independent
certified public accountants acceptable
to Silicon.
================================================================================
7. COMPENSATION
(Section 5.5): Without Silicon's prior written consent,
Borrower shall not pay total
compensation, including salaries,
withdrawals, fees, bonuses, commissions,
drawing accounts and other payments,
whether directly or indirectly, in money
or otherwise, during any fiscal year to
all of Borrower's executives, officers
and directors (or any relative thereof)
as a group in excess of 115% of the
total amount thereof in the prior fiscal
year.
================================================================================
8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): See Representations and Warranties of
Borrower dated March 5, 1999 (the
"Representations and Warranties").
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): See the Representations and Warranties.
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): See the Representations and Warranties.
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): See the Representations and Warranties.
MATERIAL ADVERSE
LITIGATION (Section 3.10): None
================================================================================
9. OTHER COVENANTS
(Section 5.1): Borrower shall at all times comply with
all of the following additional
covenants:
(1) BANKING RELATIONSHIP. Borrower
shall at all times maintain its
primary banking relationship with
Silicon.
(2) SUBSIDIARIES.
<PAGE>
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TRANSMITTAL NOTE
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Page 5
The following constitute all
subsidiaries of Microlog Corporation:
(i) Microlog Corporation of Maryland,
a Maryland corporation; and
(ii) Old Dominion Systems Incorporated
of Maryland, a Maryland
corporation ("ODSM").
The following constitute all
subsidiaries of Microlog Corporation of
Maryland:
(iii) Systems Financial, a Maryland
corporation;
(iv) Microlog Europe, a Netherlands
corporation; and
(iii) Microlog U.K. Ltd., a United
Kingdom corporation.
(3) GUARANTIES. Concurrently with the
execution of this Agreement, Borrower
shall cause the following companies to
execute and deliver to Silicon, on
Silicon's standard form, a guaranty
containing terms and conditions as
Silicon may require, together with such
other documentation as Silicon may
require in connection therewith:
(i) Microlog Corporation;
(ii) Microlog Corporation of Maryland;
(iii) ODSM; and
(iv) Systems Financial.
Within sixty (60) days following the
execution of this Agreement, Borrower
shall cause Microlog Europe and Microlog
U.K. Ltd. to each execute and deliver to
Silicon, on Silicon's standard form, a
guaranty and debenture containing terms
and conditions as Silicon may require,
together with such other documentation
as Silicon may require in connection
therewith.
(5) SECURITY AGREEMENT BY ODSM. Concurrently
with the execution of this Agreement,
Borrower shall cause ODSM to execute and
deliver to Silicon, on Silicon's
standard form, a security agreement
containing terms and conditions as
Silicon may require, together with such
other documentation as Silicon may
require in connection therewith
(4) PATENTS, TRADEMARKS AND COPYRIGHTS.
Concurrently with the execution of this
Agreement, Borrower shall execute and
deliver to Silicon, on Silicon's
standard form(s), any security
<PAGE>
LEVY, SMALL & LALLAS
TRANSMITTAL NOTE
- --------------------------------------------------------------------------------
Page 6
agreement(s) and other documentation
which Silicon deems necessary for filing
in the United States Patent and
Trademark Office, the United States
Copyright Office, and any other
governmental office, with respect to
Borrower's copyrights, patents,
trademarks and related collateral.
Within ninety (90) days after the date
hereof, Borrower shall (i) cause all of
its computer software, the licensing of
which results in Receivables, to be
registered with the United States
Copyright Office, and (ii) execute such
additional security agreement(s) and
other documentation which Silicon deems
necessary for filing with respect to
such additional registered copyright(s)
Borrower: Silicon:
MICROLOG CORPORATION SILICON VALLEY BANK
By /s/ Richard A. Thompson By /s/ Peter Bendoris
----------------------- ------------------
President or Vice President Title Assistant Vice President
By /s/ Arlene A. France
--------------------
Secretary or Ass't Secretary
MICROLOG CORPORATION OF
MARYLAND
By /s/ Richard A. Thompson
-----------------------
President or Vice President
By /s/ Arlene A. France
--------------------
Secretary or Ass't Secretary
EXHIBIT 13
Annual Report to Shareholders for the fiscal year ended
October 31, 1999
MARKETING
Microlog's award-winning products and services have increased customer
satisfaction by raising the level of service offered by the new "contact center"
of the twenty-first century. Business has discovered that their contact centers
can no longer cater solely to telephony driven events. The advent of the
Internet and e-Commerce has changed the rules for customer sales and service in
today's business environment. Servicing customers at the contact center of the
future must now include the Web, as well as traditional media, telephone,
e-mail, fax, and postal mail. Integration of all the various media into the
contact center, as well as Web enabling the contact center, was a challenge met
head-on by Microlog in 1999.
Microlog's approach to improving the productivity of the contact center revolves
around three core components. They include:
o TIVRA (formerly Intela) - Microlog's Interactive Voice Response (IVR) system
o uniQue(TM) - Microlog's award winning contact center software
o Professional Services & Consultation
TIVRA is Microlog's top-of-the line interactive voice response (IVR) product.
For over seven years Microlog's TIVRA systems have met any and all challenges
placed on it from customers who demand the best. Whether it's the Internal
Revenue Service, who receives thousands of calls daily from concerned tax payers
requesting information, or the Virginia Lottery, whose customers want to know if
they have the winning number, TIVRA can handle any task requiring phone
interactions. TIVRA is the perfect front-end solution to any contact center.
"Product of the Year" 1998-1999
uniQue(TM), winner of four "Product of the Year Awards" in 1998, continues to
receive accolades from the press in 1999. Call Center Solutions awarded "Product
of the Year" to uniQue, Microlog's contact center solution. uniQue is a
comprehensive open architecture, cross platform solution for customer contact
centers that integrates all of the contact center's telephony, computer and
business applications into a smooth operation.
uniQue and the Web
Today's companies realize that their Web sites are an important source of
revenue and service. However, research has shown that customers abandon their
electronic shopping carts as much as two thirds of the time, due to a lack of
support options at the point of decision. Microlog's uniQue software addresses
this issue by giving the customer multiple options from the Web site with which
to contact the company. uniQue's Web-enabling features include call me buttons,
Web-chat, push-pages, and voice-over IP. In addition, uniQue seamlessly blends
and prioritizes these Web contact types with the other traditional contact types
including phones, email, and fax.
Reports...Reports...Reports
As any contact center manager knows, managing the operations and productivity of
the center can only be done with accurate and timely reports. uniQue provides
the contact center manager with definable tables that allow the easy creation of
customized contact outcome descriptions for every campaign. uniQue also contains
a set of six standard performance reports, such as agent productivity and
performance, along with a user-controlled report writer. The report writer
allows the user to design and develop a complete set of reports to meet the most
detailed or unusual reporting requirements.
<PAGE>
Professional Services & Consultation
The mission of Microlog's professional services is to deliver high quality
computer-based technology services, capabilities and solutions to our business
customers. Simply stated, our objective is to help those business customers to
help their customers. The end result will be to retain and satisfy
end-customers, improve operations and lower costs, provide robust and manageable
technology implementations, and establish long-term business relationships.
Whether its project management, Web site development, telephony integration, or
back-office systems integration, Microlog has the experience and the people to
solve any problem.
Microlog Corporation is solving today's communication problems with tomorrow's
technology---today.
WWW.MLOG.COM
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Products $13,970 $ 9,367 $ 3,646
Services 17,798 17,090 14,377
- ----------------------------------------------------------------------------------------------------------------
Total net sales 31,768 26,457 18,023
Costs and expenses:
Cost of products 7,203 8,688 3,064
Cost of services 12,238 11,855 10,382
Selling, general and administrative 6,374 9,088 5,768
Research and development 3,579 3,256 2,870
Restructuring -- -- 693
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 29,394 32,887 22,777
- ----------------------------------------------------------------------------------------------------------------
(Loss) income from operations 2,374 (6,430) (4,754)
Investment income 29 58 35
Interest expense (119) (56) (71)
Other income (expense), net (53) 86 97
- ----------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes 2,231 (6,342) (4,693)
(Provision) benefit for income taxes 1,501 (2,299) --
- ----------------------------------------------------------------------------------------------------------------
Net (loss) income $ 3,732 $ (8,641) $ (4,693)
- ----------------------------------------------------------------------------------------------------------------
Net (loss) income per share:
Basic $0.89 $(2.02) $(1.02)
Diluted $0.82 $(2.02) $(1.02)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,340 $ 3,425
Receivables, net 3,057 1,155
Inventories, net 872 375
Other current assets 534 301
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 6,803 5,256
Fixed assets, net 1,353 917
Licenses, net 181 100
Other assets 223 153
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 8,560 $ 6,426
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 68 $ 74
Accounts payable 1,079 388
Accrued compensation and related expenses 2,082 1,965
Deferred revenue 719 447
Other accrued expenses 902 564
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,850 3,438
Long-term debt 74 --
Deferred officers' compensation 249 151
Other liabilities 17 33
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 5,190 3,622
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.01 par value,
1,000,000 shares authorized, no shares issued and outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
4,889,205 and 7,575,597 shares issued and 4,287,335
And 6,973,727 outstanding 49 76
Capital in excess of par value 16,417 20,517
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (11,919) (16,612)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,370 2,804
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,560 $ 6,426
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF TREASURY STOCK ACCUMULATED
SHARES PAR VALUE PAR VALUE SHARES COST DEFICIT TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of October 31, 1996 4,792 $ 48 $15,905 602 $(1,177) $(7,010) $7,766
Exercise of common stock options 81 1 189 -- -- -- 190
Consulting expense funded
Through stock options granted -- -- 200 -- -- -- 200
Net income for the year ended
October 31, 1997 -- -- -- -- -- 3,732 3,732
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1997 4,873 49 16,294 602 (1,177) (3,278) 11,888
Exercise of common stock options 16 -- 23 -- -- -- 23
Consulting expense funded
Through stock options granted -- -- 100 -- -- -- 100
Net loss for the year ended
October 31, 1998 -- -- -- -- -- (8,641) (8,641)
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1998 4,889 49 16,417 602 (1,177) (11,919) 3,370
Exercise of common stock options 20 -- 20 -- -- -- 20
Consulting expense funded
Through stock options granted -- -- 155 -- -- -- 155
Issuance of common stock 2,667 27 3,925 -- -- -- 3,952
Net loss for the year ended
October 31, 1999 -- -- -- -- -- (4,693) (4,693)
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of October 31, 1999 7,576 $ 76 $20,517 602 $(1,177) $(16,612) $2,804
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ 3,732 $ (8,641) $ (4,693)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation 839 847 579
Amortization of goodwill and licensing agreement 314 722 125
Loss on disposition of fixed assets 84 65 108
Gain on sale of building and land -- (290) --
Provision for sales returns and doubtful accounts 49 29 --
Provision for inventory reserves 93 1,299 309
Consulting expense funded through stock options
granted 200 100 155
Changes in assets and liabilities:
Receivables 328 797 1,902
Inventories 205 (250) 188
Deferred tax asset (1,500) 2,150 --
Other assets (174) (273) 259
Accounts payable 909 (793) (691)
Accrued compensation and related expenses (67) 274 (117)
Deferred revenue 110 (193) (195)
Deferred gain on sale of assets of Microlog Europe -- -- 140
Deferred gain on sale of building and land -- 217 (217)
Other accrued expenses and accrued liabilities (265) 586 (322)
Deferred officers' compensation (12) (7) (98)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 4,845 (3,361) (2,568)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (778) (517) (283)
Proceeds from sale of fixed assets 7 -- 32
Proceeds from sale of building and land -- 2,276 --
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (771) 1,759 (251)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Reduction in long-term debt (55) (61) (68)
Net borrowings under line-of-credit agreement (1,400) -- --
Net proceeds from issuance of common stock -- -- 3,952
Exercise of common stock options 190 23 20
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,265) (38) 3,904
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,809 (1,640) 1,085
Cash and cash equivalents at beginning of year 1,171 3,980 2,340
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,980 $ 2,340 $ 3,425
- --------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
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, formerly a subsidiary, which was
merged into Microlog Corporation of Maryland effective October 31, 1999, 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 (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Voice processing systems and other
communications products and services $ 19,277 $ 14,743 $ 7,896
Performance analysis and
support services 12,491 11,714 10,127
- ----------------------------------------------------------------------------------------------------------
Net sales $ 31,768 $ 26,457 $ 18,023
- ----------------------------------------------------------------------------------------------------------
(Loss) income from operations:
Voice processing systems and other
communications products and services $ 829 $ (7,515) $ (5,245)
Performance analysis and
support services 1,545 1,085 491
- ----------------------------------------------------------------------------------------------------------
(Loss) income from operations $ 2,374 $ (6,430) $ (4,754)
- ----------------------------------------------------------------------------------------------------------
Identifiable assets:
Voice processing systems and other
communications products and services $ 14,333 $ 8,163 $ 6,174
Performance analysis and
support services 600 397 252
Buildings for common use 2,122 -- --
- ----------------------------------------------------------------------------------------------------------
Identifiable assets $ 17,055 $ 8,560 $ 6,426
- ----------------------------------------------------------------------------------------------------------
Capital expenditures:
Voice processing systems and other
communications products and services $ 772 $ 509 $ 282
Performance analysis and
support services 6 8 1
- ----------------------------------------------------------------------------------------------------------
Capital expenditures $ 778 $ 517 $ 283
- ----------------------------------------------------------------------------------------------------------
Depreciation expense:
Voice processing systems and other
communications products and services $ 704 $ 734 $ 572
Performance analysis and
support services 11 12 7
Buildings for common use 124 101 --
- ----------------------------------------------------------------------------------------------------------
Depreciation expense $ 839 $ 847 $ 579
- ----------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Approximately 31%, 30% and 23% of the Company's consolidated net sales for
fiscal years 1997, 1998, and 1999, respectively, involved the sale of voice
processing systems and other communications products and services to the Federal
Government.
Approximately 18%, 10% and 11% of the Company's consolidated net sales for
fiscal years 1997, 1998, and 1999 respectively, involved the sale of voice
processing systems and other communications products and services to one
customer in the pharmaceutical industry.
Approximately 9%, 13%, and 6% of the Company's consolidated net sales for fiscal
years 1997, 1998, and 1999, respectively, involved the sale of voice processing
systems and other communications products and services to foreign countries.
Approximately 39%, 44%, and 56% of the Company's consolidated net sales for
fiscal years 1997, 1998, and 1999, respectively, involved performance analysis
and support services subcontracts with prime contractors to the U.S. Navy. These
contracts have been extended, or have options to extend, to various dates in
fiscal years 2000 through 2003.
NOTE 2: SUMMARY OF ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities on
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates and assumptions.
REVENUE RECOGNITION
Sales of products and services are recognized at the time deliveries are made or
services are performed. When customers, under terms of specific orders, request
that the Company manufacture and invoice goods on a bill and hold basis, the
Company recognizes revenue based on the completion of the manufacturing process,
acceptance by the customer, and passage of title to the customer. For fiscal
years 1997, 1998, and 1999, the Company recognized $3.5 million, $0, and $0,
respectively, in sales under such bill and hold agreements.
Contract revenues are recognized on the percentage of completion basis for
fixed-price contracts. Revenues are recorded to the extent costs have been
incurred for cost-plus-fixed-fee contracts, including a percentage of the fixed
fee computed in accordance with the contract provisions. Revenues for time and
materials contracts are recognized at negotiated hourly rates as incurred and as
materials are delivered. Provisions for losses on contracts in progress are
provided when, in the opinion of management, such losses are anticipated.
Certain contracts are subject to audit, possible adjustment, or termination for
convenience by the Federal Government. Contract costs have been examined and
settled through fiscal year 1992.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with an original maturity of less
than three months to be cash equivalents. Cash equivalents consist of U.S.
treasury bills, certificates of deposit, and repurchase agreements (which are
collateralized by securities issued or guaranteed by the U.S. Treasury).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of these items.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in
first-out method, or market.
7
<PAGE>
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 two to
seven years. Accumulated amortization at October 31, 1998 and 1999 was $619,000
and $744,000, respectively.
Goodwill, which arose from the acquisition of companies, was amortized on a
straight-line basis over six to seven years. As a result of the Company's
periodic analysis of its goodwill recoverability, the goodwill balance was fully
written off during fiscal year 1998 (Note 4).
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.
Management periodically reviews intangible assets for recoverability by
analyzing future cash flows for associated businesses and product lines and
makes adjustments for impairment when necessary.
WARRANTY RESERVE
Normal product warranty for service and repairs is generally provided for 90
days to two years, subsequent to delivery. The Company has incurred only minimal
expenses for warranties over the past few fiscal years and therefore has not
accrued a liability for warranty obligations at October 31, 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No. 25, compensation cost is measured as the excess, if any, of the market
price of the Company's stock at the date of the grant over the exercise price of
the option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company provides additional pro forma
disclosures as required under Statement of Financial Accounting Standards No.
123 (SFAS No. 123), "Accounting for Stock-Based Compensation" (Note 11).
Transactions for which non-employees are issued equity instruments for goods or
services received are recorded by the Company based upon the fair value of the
goods or services received or the fair value of the equity instruments issued,
whichever is more reliably measured.
NET (LOSS) INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 simplifies the earnings per share
(EPS) computation and replaces the presentation of primary EPS with a
presentation of basic EPS. This statement also requires dual presentation of
basic and diluted EPS on the face of the income statement for entities with a
complex capital structure and requires a reconciliation of the numerator and
denominator used for the basic and diluted EPS computations. The Company
implemented SFAS No. 128 in fiscal year 1998, as required. Accordingly, all
prior period EPS data has been restated (Note 13).
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The statement changes the way public
companies report information about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. SFAS No. 131 also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 was effective for the Company's fiscal year 1999. The
adoption of SFAS No. 131 did not have a material effect on the consolidated
financial statements.
8
<PAGE>
In October 1997, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position 97-2 (SoP 97-2), "Software Revenue Recognition," which
supersedes SoP 91-1. This statement provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. SoP 97-2 was effective for the Company's fiscal
year 1999. The adoption of SoP 97-2 did not have a material effect on the
current operations. However, the effect of this statement is uncertain as it
relates to future products.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits." This statement standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate analysis.
Additionally, SFAS No. 132 eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, "Employers' Accounting for Pensions", SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and SFAS No. 106,
"Employers Accounting for Postretirement Benefits Other than Pensions" were
issued. SFAS No. 132 was effective for the Company's fiscal year 1999. The
adoption of SFAS No. 132 did not have a material effect on the consolidated
financial statements.
NOTE 3: OPERATIONS
The Company incurred a net loss of $4.7 million for fiscal year 1999 and has an
accumulated deficit of $16.6 million at October 31, 1999. The Company's
continued existence is dependent upon its ability to generate sufficient cash
flows from internal and external sources to meet its operating needs. Management
has recently taken several steps to meet its liquidity requirements for the
foreseeable future, including restructuring operations to reduce operating
expenses to levels commensurate with revenues and attracting capital through a
private placement transaction. The Company anticipates that existing cash and
cash equivalents generated from fiscal year 2000 operations will be sufficient
to meet its working capital needs. The Company has, in the past, been able to
secure additional financing to meet its operating requirements, although there
can be no assurance that it will be able to continue to do so.
NOTE 4: MICROLOG EUROPE
In June 1996, the Company acquired Phonatic International B.V. of The
Netherlands. The Company changed the name of Phonatic to Microlog Europe, a
wholly-owned subsidiary of Microlog Corporation of Maryland. To acquire
Phonatic, the Company acquired assets of $152,000, issued 65,000 shares of its
common stock valued at $584,000, paid $234,000 in cash to the Phonatic
shareholders, assumed $108,000 in liabilities, and incurred acquisition costs
totaling approximately $46,000. The acquisition has been accounted for as a
purchase and, therefore, only activity subsequent to the acquisition date has
been included in consolidated results. The excess of the purchase price over the
fair value of net assets acquired totaled $775,000 and was recorded as goodwill.
During fiscal year 1998, the Company reevaluated its international marketing
strategy and, as a result, decided to terminate three employees. As of October
31, 1998, the Company established reserves of $281,000 representing costs
associated with the termination of employees, the remaining net operating lease
obligation associated with its Netherlands facility, and the relocation of its
office. Additionally, the Company, based on current undiscounted cash flow
projections, evaluated the recoverability of its goodwill balance and determined
that the goodwill balance was impaired. Accordingly, the Company wrote-off the
remaining goodwill balance of $473,000 in October 1998.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA (formerly Intela) software and
related hardware. The Company also agreed to assign certain agreements to which
Microlog is party relating to the TIVRA product. As part of the sale, two
Microlog employees became employees of Comsys. The sale is anticipated to result
in a gain to Microlog of approximately $100,000. Since some of the proceeds from
the sale are based on future contracts between Comsys and the Company's former
customers, the gain on the sale was estimated and therefore has been deferred
into fiscal year 2000.
9
<PAGE>
NOTE 5: RECEIVABLES
RECEIVABLES CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Billed accounts receivable $ 2,932 $ 1,071
Contract retention 23 --
Accumulated unbilled costs and fees 246 234
- -------------------------------------------------------------------------------------------------
3,201 1,305
Less: Allowance for doubtful accounts (144) (150)
- -------------------------------------------------------------------------------------------------
$ 3,057 $ 1,155
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6: INVENTORIES
INVENTORIES CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Components $ 1,357 $ 730
Work-in-process and finished goods 1,159 133
- -------------------------------------------------------------------------------------------------
2,516 863
Less: Reserve for obsolescence (1,644) (488)
- -------------------------------------------------------------------------------------------------
$ 872 $ 375
- -------------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1999, the Company disposed of obsolete inventory relating to
certain product lines for which future sales are doubtful. The inventory was
previously reserved for and, therefore, resulted in a net reduction of $1.2
million to the reserve for obsolescence.
NOTE 7: FIXED ASSETS
FIXED ASSETS CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Office furniture and equipment $ 3,700 $ 2,977
Vehicles 24 10
Leasehold improvements 171 22
- -------------------------------------------------------------------------------------------------
3,895 3,009
Less: Accumulated depreciation (2,542) (2,092)
- -------------------------------------------------------------------------------------------------
$ 1,353 $ 917
- -------------------------------------------------------------------------------------------------
Estimated useful lives are as follows:
Office furniture, equipment and vehicles: 3-7 years
Leasehold improvements: Shorter of estimated
useful life or lease term
</TABLE>
In August 1998, under a sale-leaseback agreement, the Company sold its office
building and land with a net book value of $1,986,000 for $2,420,000, less
selling costs of $144,000. The gain of $290,000 was amortized over the term of
the lease, which was through April 1999. In April 1999, the Company entered into
a new lease for its building through 2009 (Note 10).
10
<PAGE>
NOTE 8: ACCRUED EXPENSES
ACCRUED COMPENSATION AND RELATED EXPENSES CONSIST OF THE FOLLOWING (IN
THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued wages $ 1,016 $ 1,103
Accrued vacation and personal leave 693 471
Other related expenses 373 391
- -------------------------------------------------------------------------------------------------
$ 2,082 $ 1,965
- -------------------------------------------------------------------------------------------------
</TABLE>
OTHER ACCRUED EXPENSES CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued maintenance, marketing, travel and other expenses $ 689 $ 448
Accrued legal and consulting expenses 213 116
- -------------------------------------------------------------------------------------------------
$ 902 $ 564
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9: DEBT
In fiscal year 1999, the Company closed and drew on a revolving line-of-credit
facility which allows the Company to borrow up to 75% of its eligible
receivables to a maximum of $2,000,000, subject to the right of the financial
institution to make loans only in its discretion. The line-of-credit bears
interest at the bank's prime rate plus 2.25% (10.75% at October 31, 1999), and
contains a 0.025% fee on the average unused portion of the line as well as a
monthly collateral fee and a 1% upfront commitment fee. The loan subjects the
Company to a restrictive covenant of not exceeding 115% of its consolidated
planned quarterly losses for its second and third quarters of fiscal year 1999,
and a requirement for consolidated profitability beginning in the fourth quarter
of fiscal year 1999. The line also subjects the Company to a number of
restrictive covenants, including restrictions on mergers or acquisitions,
payment of dividends, and certain restrictions on additional borrowings. The
line is secured by all of the Company's assets. The Company was not in
compliance with the restrictive covenant in the second quarter of fiscal year
1999, but obtained a waiver from the bank. The Company was not in compliance
with the restrictive covenant in the fourth quarter of fiscal year 1999 for
which a forbearance agreement has been obtained. The forebearance agreement
waives the lenders right under an event of default to terminate the loan. This
line of credit expires in March 2000 and the Company and the bank are in the
process of renewal discussions. There was no outstanding debt against this
line-of-credit at October 31, 1999.
In June 1996, the Company entered into a contract to purchase a new management
information system including a five-year maintenance plan. The purchase,
including maintenance, is being financed by the vendor over a five-year term at
an annual interest rate of 8%. The financing terms require five annual payments
of $140,000 each, including interest, which began on June 30, 1996. Three annual
payments have been made to date. The final payment is due on June 30, 2000.
NOTE 10: COMMITMENTS AND CONTINGENCIES
COMPENSATION ARRANGEMENTS
In February 1988, the Company entered into non-contributory deferred
compensation contracts (the Contracts) with three officers. Under the terms of
the Contracts, (i) the Company's total annual contributions for the three
officers was limited to $72,000, (ii) contributions ceased at the earlier of
January 31, 1993 or the officer's retirement and (iii) accumulated contributions
accrue interest at the prime rate through the officer's retirement. Subsequent
to retirement and at the officer's option, the officer is eligible to receive
his deferred compensation balance in either monthly payments over a 10-
11
<PAGE>
year period or one lump-sum payment. Two of the officers retired in May 1991 and
January 1998, respectively, and elected to receive their deferred compensation
balances over a 10-year period. One officer retired in August 1999 and elected
to receive her deferred compensation balance in a lump-sum payment. The payment
was made in January 2000. The Company has incurred interest expense of $25,000,
$27,000 and $23,000 in fiscal years 1997, 1998, and 1999, respectively.
The Company is a party to employment agreements, expiring in 2000, with two of
its executive officers. In the event that these individuals are terminated, they
would be entitled to receive lump sum or monthly payments, which aggregate
approximately $306,000.
OPERATING LEASE OBLIGATIONS
In May 1998, the Company entered into a 15 year lease commitment, which was to
commence on or about June 1999, for office space intended to consolidate the
Company's headquarters, warehouse, and training facilities. In August 1998, the
Company sold its office building and committed to lease back the building prior
to its occupation of the new leased space. In April 1999, the Company and its
new landlord agreed to terminate the 15 year lease commitment for the new leased
space. The Company incurred $160,000 in termination costs, but was released from
future obligations by the landlord. At that time, the Company also committed to
lease back its building through 2009. In September 1999, the Company's lease
obligation at its Gaithersburg, Maryland facility expired and at that time
relocated its warehouse and training functions to its headquarters facility.
Additionally, the Company leases other equipment through noncancellable
operating leases, which expire in various years through 2004. Minimum future
noncancellable operating lease payments as of October 31, 1999 are as follows(in
thousands):
YEAR ENDING OCTOBER 31,
2000 $ 344
2001 353
2002 363
2003 365
2004 365
Thereafter 1,773
--------------------------------------------
Total $ 3,563
In fiscal year 1999, the Company's operating lease obligation at its Rancho
Cordova, California facility expired. Rent expense under noncancellable
operating lease agreements in fiscal years 1997, 1998, and 1999 was
approximately $299,000, $379,000, and $565,000 (net of sublease income of
$278,000, $281,000, and $159,000), respectively.
LEGAL
The Company is subject to litigation from time to time arising from its
operations and receives occasional letters alleging infringement of patents
owned by third parties. Management believes that such litigation and claims are
without merit and will not have a material effect on the Company's financial
position or results of operations.
ROYALTIES
The Company is committed to pay annual license maintenance fees of $120,000 to a
certain party under certain call processing patents, which expire in 2007. The
Company will receive a credit against future license maintenance fees equal to
12% of the purchase price paid for products purchased from the certain party.
12
<PAGE>
NOTE 11: STOCK OPTION PLANS
The Company has two incentive stock option plans. Under the first plan, the
Company may grant options to Directors and employees to purchase up to 750,000
shares of common stock at not less than fair market value at the time of grant.
Under the second plan, which was increased by 600,000 shares in fiscal year
1999, the Company may grant options to employees to purchase up to 1,600,000
shares of common stock at not less than fair market value at the time of grant.
Additional information with respect to both of the incentive stock option plans
is summarized in the following table:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Shares under option, October 31, 1996 865,014 $ 3.79
Options granted 300,000 5.75
Options canceled (75,344) 5.09
Options exercised (80,749) 2.35
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1997 1,008,921 4.39
Options granted 1,122,400 1.83
Options canceled (1,159,875) 4.26
Options exercised (16,452) 1.45
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1998 954,994 1.59
Options granted 721,500 1.34
Options canceled (406,248) 1.49
Options exercised (19,725) 1.12
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1999 1,250,521 $ 1.49
- ------------------------------------------------------------------------------------
</TABLE>
Options granted under the plans vest at various dates from immediately to
ratably over five years and expire ten years from the date of grant. Certain
options contain possible accelerated vesting clauses should specific financial
measures be met. As of October 31, 1999, options available for granting were
535,300. Subsequent to October 31, 1999, 123,700 options have been issued to
employees.
Due to the decline in the market value of the Company's common stock, the Board
of Directors authorized the Company to reprice stock options granted to
employees and officers with exercise prices in excess of the fair market value
on August 14, 1998. Stock options held by optionees other than directors and
non-employees, which were granted under the incentive stock plans and which had
an exercise price greater than $1.75 per share, were amended to reduce their
exercise price to $1.63 per share, which was the closing price of the Company's
common stock on August 14, 1998. The stock options that were repriced have the
same terms as the original options to which they relate. A total of 907,150
options with a weighted average exercise price of $5.01 were repriced and are
included in options canceled and granted for fiscal year 1998.
Additionally, the Company maintains a non-employee Director stock option plan.
Under this plan, the Company may grant up to 250,000 shares at not less than the
fair market value at the time of grant. Additional information is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C>
Shares under option, October 31, 1996 44,000 $ 3.61
Options granted 6,000 5.63
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1997 50,000 3.85
Options granted 22,000 6.13
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1998 72,000 4.55
Options Canceled (15,000) 4.75
Options granted 24,000 1.31
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1999 81,000 $ 3.55
- ------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Options granted under the plan vest immediately and expire ten years from the
date of grant. As of October 31, 1999, options available for granting were
146,000.
The Company also issued stock options to non-employee consultants outside of the
above plans. These shares may be granted at such times and under such terms as
the Board of Directors determines. Additional information is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C>
Shares under option, October 31, 1996 51,000 $ 1.91
Options granted 205,000 5.00
Options canceled (16,000) 4.10
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1997 240,000 4.40
Options granted 21,000 1.84
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1998 261,000 4.20
Options Canceled (62,000) 0.96
Options granted 137,000 1.80
- ------------------------------------------------------------------------------------
Shares under option, October 31, 1999 336,000 $ 1.46
- ------------------------------------------------------------------------------------
</TABLE>
Generally, options vest upon the achievement of certain events and expire from
two to five years from the date of grant.
In fiscal year 1997, the Company entered into a consulting agreement with The
Parthenon Group, Inc. ("Parthenon"), a strategic marketing and consulting
organization. The Company granted Parthenon non-statutory options to purchase up
to 195,000 shares of the common stock of the Company at an exercise price of $5
per share.
In fiscal year 1999, the Company issued options to non-employee consultants to
purchase 47,000 shares at an exercise price of $0.94. In addition, the Company
entered into a second consulting agreement with Parthenon. Under the terms of
this second consulting agreement, the Company agreed to reprice options granted
in fiscal year 1997 to purchase 195,000 shares of the common stock of the
Company at an exercise price of $0.94 per share. Additionally, the vesting terms
were revised and options to purchase 145,000 shares of the common stock of the
Company became exercisable on the date they were repriced. The remaining options
to purchase 50,000 shares of the common stock of the Company become exercisable
in fiscal year 1999. The Company also issued Parthenon additional options to
purchase 90,000 shares of common stock at an exercise price of $2.25 per share.
These options became exercisable on the date of grant. The expense associated
with all of the options of $450,000 has been recorded over the term of the
engagement. The Company recorded $200,000, $100,000, and $150,000 as consulting
expense in fiscal years 1997, 1998, 1999, respectively.
The Company also reserved 50,000 shares for issuance outside these plans as
stock options or stock bonuses to key employees. These shares may be granted at
such times and under such terms as the Board of Directors determines.
No grants or issuances have been made as of October 31, 1999.
14
<PAGE>
THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT ALL STOCK OPTIONS OUTSTANDING
AT OCTOBER 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------
WEIGHTED-
AVERAGE
RANGE YEARS OF WEIGHTED WEIGHTED
OF REMAINING -AVERAGE -AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Incentive $0.88-$1.25 302,845 8.8 $0.97 193,665 $0.97
Stock Option $1.63-$1.91 920,725 7.2 1.65 576,655 1.65
Plans $2.31 27,000 9.5 2.31 12,000 2.31
----------------------------------------------------------------------------------------
$0.88-$2.31 1,250,570 7.7 1.50 782,320 1.50
----------------------------------------------------------------------------------------
Non-Employee $0.94-$1.69 38,000 7.1 $1.34 38,000 $1.34
Director $2.00-$2.75 6,000 2.4 2.50 6,000 2.50
Plan $4.75-$6.75 37,000 7.0 6.00 37,000 6.00
----------------------------------------------------------------------------------------
$0.94-$6.75 81,000 6.7 3.55 81,000 3.55
----------------------------------------------------------------------------------------
Non-Employee $0.94-$1.06 211,000 4.0 $0.94 211,000 $0.94
Plan $2.25-$2.94 120,000 4.3 2.40 120,000 2.40
$8.38 5,000 1.4 8.38 5,000 8.38
----------------------------------------------------------------------------------------
$0.94-$8.38 336,000 4.0 1.57 336,000 1.57
----------------------------------------------------------------------------------------
</TABLE>
The weighted-average fair value of options granted during fiscal years 1997,
1998, and 1999 was $3.43, $0.97, and $1.21, respectively. The fair value of each
significant option grant is estimated on the date of grant using the
Black-Scholes model. The following weighted average assumptions are included in
the Company's fair value calculations:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 3.9 2.5 5.0
Risk-free interest rate 6.2% 5.5% 5.2%
Volatility 78.0% 62.5% 165.9%
Dividend yield -- -- --
</TABLE>
The Company continues to apply APB No. 25 in accounting for stock-based
compensation for the incentive and non-employee Director plans. To date, all
stock options have been issued at market value; accordingly, no compensation
cost has been recognized. Had the Company determined costs for these plans in
accordance with SFAS No. 123, the Company's pro forma net (loss) income and pro
forma (loss) income per share would have been as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net (loss) income applicable to common
stockholders $3,447 $(8,699) $(5,664)
- -----------------------------------------------------------------------------------------------------------
Pro forma net (loss) income per share:
Basic $ 0.82 $ (2.03) $(1.22)
Diluted $ 0.76 $ (2.03) $(1.22)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
The SFAS No. 123 method of accounting does not apply to options granted prior to
November 1, 1995, and accordingly, the resulting pro forma compensation cost may
not be representative of amounts expected in the future.
Note 12: INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of fixed and intangible
assets and revenue recognition for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax consequences of
those differences, which will either be taxable or deductible when the assets or
liabilities are recovered or settled.
THE (BENEFIT) PROVISION FOR INCOME TAXES IN FISCAL YEARS 1997, 1998, AND 1999
CONSISTS OF (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in income taxes payable $ (1) $ 149 $ --
Decrease (increase) in deferred tax asset (1,500) 2,150 $ --
- ----------------------------------------------------------------------------------------------------------
$ (1,501) $ 2,299 $ --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Income taxes payable (refundable) in fiscal years 1997 and 1998 relate to state
income taxes and the alternative minimum tax for Federal income tax. As a result
of the Company's profitability in fiscal years 1995 through 1997, the Company
recorded a deferred tax asset of $650,000 and $1,500,000 in fiscal years 1996
and 1997, respectively, reflecting the benefit of approximately $5.5 million in
loss carryforwards. Due to the unprofitable operations in fiscal year 1998 and
the uncertain future profitability, the Company reassessed the probability of
realizing these net operating loss carryforwards and determined that their
expected future realization was not likely to be realized in the near future.
Accordingly, the Company wrote-off the deferred tax asset of $2,150,000 in
fiscal year 1998. The Company has provided a full valuation allowance for the
Company's $16.9 million net operating losses as management determined it more
likely than not that this amount will not be realized.
A RECONCILIATION OF THE STATUTORY FEDERAL TAX RATE TO THE COMPANY'S EFFECTIVE
TAX RATE IS AS FOLLOWS:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory Federal tax rate 34.0% (34.0)% (34.0)%
State income taxes, net of
Federal tax benefit 5.0 (5.0) (5.0)
Benefit not recorded due to carryforward position -- 38.6 39.0
Utilization of net operating loss (43.6) -- --
Goodwill amortization 3.0 3.3 --
Change in deferred tax asset (67.2) 33.9 --
Other 1.5 (0.5) --
- -------------------------------------------------------------------------------------------------------
(67.3)% 36.3% 00.0%
- -------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
DEFERRED TAX ASSETS ARE COMPRISED OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31,
1998 1999
---- ----
<S> <C> <C>
Accounts receivable reserve $ 84 $ 49
Inventory reserves 641 190
Accrued vacation and benefits 181 135
Deferred compensation 105 101
Deferred revenues 261 126
Other 451 536
Research and development credits 406 414
Foreign net operating losses 265 162
Loss carryforwards 4,006 6,602
- --------------------------------------------------------------------------------------
Gross deferred tax assets 6,400 8,315
Valuation allowance (6,400) (8,315)
- --------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
- --------------------------------------------------------------------------------------
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase of $1.9 million during the year. The Company has provided a full
valuation allowance against the Company's gross deferred tax assets since
management believes that the realization of such deferred tax assets is not
likely in the near future.
Approximately $16.9 million of tax loss carryforwards and $414,000 of research
and development tax credits can be utilized by the Company through 2019. If
certain substantial changes in the Company's ownership should occur, there would
be an annual limitation on the amount of the carryforwards which can be
utilized.
NOTE 13: NET (LOSS) INCOME PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of the
basic net (loss) income per common share ("basic EPS") and diluted net (loss)
income per common and dilutive potential common share ("diluted EPS"). Basic EPS
is computed using the weighted average number of common shares outstanding and
diluted EPS is computed using the weighted average number of common and common
stock equivalent shares outstanding.
<TABLE>
<CAPTION>
OCTOBER 31,
(IN THOUSANDS) 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income $3,732 $ (8,641) $ (4,693)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common stock outstanding 4,216 4,282 4,619
Stock options, if converted 335 -- --
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common and common stock equivalent shares outstanding 4,551 4,282 4,619
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Options outstanding in fiscal years 1998 and 1999 are not reflected in the
computation of diluted EPS because the effect is anti-dilutive and would
increase diluted EPS.
NOTE 14: PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution pension plan covering all employees.
After an employee completes one-year of service, the plan provides for annual
contributions by the Company equal to 6% of the employee's gross salary,
excluding bonuses and commissions. The Company's contributions to the plan vest
after a five-year period. Employees may also make voluntary contributions to the
plan up to a maximum of 10% of their gross salary on an after-tax basis. On June
1, 1999, the Company ceased contributions to the pension plan for employees of
its voice processing operations. At that time, all of these employees became
100% vested in the plan.
17
<PAGE>
In accordance with the plan, unvested amounts relating to terminated employees
are credited against pension contributions by the Company. Such forfeitures
amounted to $81,000, $128,000, and $239,000 in fiscal years 1997, 1998, and
1999, respectively. It is the Company's policy to fund pension costs accrued.
Net expense of the plan was approximately $441,000, $518,000, and $282,000 in
fiscal years 1997, 1998, and 1999, respectively.
The Company also maintains a 401(k) profit sharing plan and trust. The plan
allows for employees to contribute up to 10% of gross salary on a pre-tax basis
and 5% of gross salary on an after-tax basis. The Company matches 50% of
employee contributions up to 4% of eligible salary. Total expense of the plan
was approximately $224,000, $196,000, and $186,000 in fiscal years 1997, 1998,
and 1999, respectively.
NOTE 15: RESTRUCTURING EXPENSES
At October 31, 1999, the Company recorded $693,000 in costs related to a
comprehensive restructuring program that was implemented during the last
three-quarters of 1999. The costs include employee severance and related costs,
office closing and downsizing expenses, as well as legal and consulting fees
related to the restructuring program. The Company's workforce was reduced by
approximately 35% as a result. The foundation of the restructuring effort
focused on bringing expenses in-line with forecasted revenue for the voice
processing operations. The Company has accrued restructuring costs of $123,000
at October 31, 1999, which are included in accrued expenses.
NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION
THE COMPANY PAID CASH FOR INTEREST EXPENSE AND INCOME TAXES AS FOLLOWS (IN
THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest $ 94 $ 29 $ 48
Income taxes $ 25 $ 125 $ --
</TABLE>
NOTE 17: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THE FOLLOWING TABLE PRESENTS UNAUDITED QUARTERLY OPERATING RESULTS AND THE PRICE
RANGE OF COMMON STOCK FOR THE COMPANY'S LAST EIGHT FISCAL QUARTERS.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Jan. 31, 1998 April 30, 1998 July 31, 1998 Oct. 31, 1998
<S> <C> <C> <C> <C>
Net sales $ 6,555 $ 7,651 $ 6,929 $ 5,322
Gross margin 1,775 2,087 1,324 728
Loss from operations (1,117) (727) (1,626) (2,960)
Net loss per share: (1,169) (749) (3,855) (2,868)
Basic and diluted $ (0.27) $ (0.17) $ (0.90) $ (0.68)
- ----------------------------------------------------------------------------------------------------------
Stock prices
High $ 7.375 $ 5.875 $ 4.250 $ 2.063
Low $ 5.156 $ 4.000 $ 2.063 $ 0.938
- ----------------------------------------------------------------------------------------------------------
Jan. 31, 1999 April 30, 1999 July 31, 1999 Oct. 31, 1999
Net sales $ 4,891 $ 4,251 $ 4,954 $ 3,927
Gross margin 1,373 844 1,554 806
Loss from operations (1,266) (2,218) (211) (1,059)
Net loss per share: (1,199) (2,189) (187) (1,118)
Basic and diluted $ (0.28) $ (0.51) $ (.04) $ (0.20)
- ----------------------------------------------------------------------------------------------------------
Stock prices
High $ 2.000 $ 2.938 $ 2.313 $ 2.000
Low $ 0.813 $ 0.750 $ 1.438 $ 1.438
- ----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Microlog Corporation
We have audited the accompanying consolidated balance sheet of Microlog
Corporation and subsidiaries as of October 31, 1999, and the related statements
of income and stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the October 31, 1999 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Microlog Corporation and subsidiaries as of October 31, 1999, and
the consolidated results of operations and cash flows for the year then ended,
in conformity with generally accepted accounting principles.
GRANT THORNTON
Vienna, Virginia
December 13, 1999
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Microlog Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Microlog Corporation and its subsidiaries at October 31, 1998, and the results
of their operations and their cash flows for each of the two years in the period
ended October 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has been unable to obtain sufficient debt financing for working capital
purposes. These conditions raise substantial doubt about its ability to continue
as a going concern. Management's plans in regards to these matters are also
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
March 17, 1999
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS HAVE BEEN ROUNDED TO THE NEAREST
HUNDRED THOUSAND.)
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE CHANGES
PERCENTAGE OF NET SALES
YEAR ENDED OCTOBER 31, 1997 1998
to to
1997 1998 1999 1998 1999
------------------------------ ------------------
<S> <C> <C> <C> <C> <C>
Net sales:
Voice processing 60.7% 55.7% 43.8% (23.5)% (46.5)%
Performance analysis 39.3% 44.3% 56.2% (6.2)% (13.6)%
- -----------------------------------------------------------------------------------
Total net sales 100.0% 100.0% 100.0% (16.7)% (31.9)%
- -----------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 61.2% 77.6% 74.6% 5.7% (34.6)%
Selling, general and administrative 20.1% 34.4% 32.0% 42.6% (36.5)%
Research and development 11.3% 12.3% 15.9% (9.0)% (11.9)%
Restructuring -- -- 3.9% -- 100.0%
- -----------------------------------------------------------------------------------
Total costs and expenses 92.6% 124.3% 126.4% 11.9% (30.7)%
- -----------------------------------------------------------------------------------
Investment and other income
(expense), net (0.4%) 0.3% 0.4% 161.5% (30.7)%
- -----------------------------------------------------------------------------------
(Loss) income before income taxes 7.0% (24.0)% (26.0)% (384.3)% (260.4)%
- ------------------------------------------------------------------------------------
(Provision) benefit for income taxes 4.7% (8.7)% 0.0% (253.2)% (100.0)%
- ------------------------------------------------------------------------------------
Net (loss) income 11.7% (32.7)% (26.0)% (331.5)% (45.7)%
- ------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
The Company had a net loss of $4.7 million (($1.02) per basic and diluted share)
for the fiscal year ended October 31, 1999. By comparison, the Company had a net
loss of $8.6 million (($2.02) per basic and diluted share) for the fiscal year
ended October 31, 1998, which included a $2.15 million (($.50) per basic and
diluted share) reversal of an income tax benefit associated with the expected
future realization of the Company's net operating loss carryforwards. The
Company had net income of $3.7 million ($.89 per basic share and $.82 per
diluted share) for the fiscal year ended October 31, 1997, which included a $1.5
million ($.36 per basic share and $.33 per diluted share) income tax benefit.
The net loss of $4.7 million for fiscal year 1999 was attributable to the
Company's voice processing operations. Approximately $4.2 million of this loss
was due primarily to insufficient voice processing revenues. The loss was also
due in part to an increase of $0.3 million in the reserve for inventory
obsolescence, and $0.7 million of costs incurred for restructuring the Company's
voice processing operations. These losses were offset in part by the $0.5
million net income generated from the Company's performance analysis and
supports services operations.
In fiscal year 1999, the Company incurred restructuring charges of $693,000 for
severance and benefits and other costs for the reduction of employees. Temporary
employees and contractors were also reduced. These restructuring charges include
costs of $381,000 for severance and benefits, the write-off of assets of $49,000
for the equipment associated with headcount reductions, costs of $103,000
associated with the closing of the Company's manufacturing facility, and costs
of $160,000 to terminate the 15-year lease commitment for new office space which
the Company had entered into in May 1998. As a result of these restructuring
activities and other cost
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reduction actions, the Company expects to reduce its annual voice processing
operating expenses by approximately $4.8 million annually.
In July 1999, the Company finalized an Investment Agreement with TFX Equities,
Inc., a wholly owned subsidiary of Teleflex, Inc. TFX purchased 2.6 million
shares of Microlog common stock for $4.0 million.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA software and related hardware.
The Company also agreed to assign certain agreements to which Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys. The sale is anticipated to result in a gain to
Microlog of approximately $100,000. Since some of the proceeds from the sale are
based on future contracts between Comsys and the Company's former customers, the
gain on the sale was estimated and therefore has been deferred into fiscal year
2000.
Over the past two years, the Company has been experiencing reduced demand,
increased competition, and reduced margins in the voice processing area, which
the Company attributes to market forces. The Company believes that interactive
voice response systems in general, and certain vertical sub-segments of this
market in particular, are in the maturing phase of market evolution for
stand-alone systems. Accordingly, competition has increased, margins have been
reduced, and it has become more difficult to sell these products. In addition,
government customers have been procuring large IVR systems as part of major
procurements from larger vendors, which has required the Company to work through
prime contractors, also resulting in increased margin pressure and greater
difficulty in making sales directly. The Company's response to this has been to
increase its research and development in both the uniQue and TIVRA products to
expand its interactive response offerings to include Internet-based
interactions, and to offer professional turnkey services to the integrated
modern customer contact center market. This addresses not only traditional voice
types of contacts, but also e-mail, fax, Web callback, IP telephony, chat, Web
bulletin board, and hardcopy mail, thereby expanding the Company's addressable
market. This approach also leverages the trend in corporate process
re-engineering in customer relationship management, and in outsourcing of
related transactions and application development.
In fiscal year 2000, the Company's strategy for addressing the market trends
will be to expand its professional services offerings to provide comprehensive
solutions to its customers, inclusive of the Company's products. The objective
of these solution services is for the Company to help its customers to better
serve their customers. The Company plans to accomplish this through: the TIVRA
voice processing platform, enabled by speech recognition; the uniQue contact
processing platform, for media processing, Web interfaces, and contact
prioritization; and professional services based on the analysis, development,
and integration skills developed over the years by the Microlog and ODSM staff.
NET SALES
Net sales for fiscal year 1999 were $18.0 million, which represented a decrease
of 32% from net sales in fiscal year 1998. Net sales for fiscal year 1998 were
$26.5 million, which represented a decrease of 17% from net sales in fiscal year
1997. Net sales for fiscal year 1997 were $31.8 million. The decrease in fiscal
year 1999 was due to a decrease in voice processing net sales of $6.9 million
and a decrease in performance analysis net sales of $1.6 million. The decrease
in fiscal year 1998 was due to a decrease in voice processing net sales of $4.5
million and a decrease in performance analysis net sales of $0.8 million.
VOICE PROCESSING NET SALES
The Company's voice processing net sales decreased 47% in fiscal year 1999 to
$7.9 million, compared to $14.8 million in fiscal year 1998. The decrease in
voice processing net sales during fiscal year 1999 was due to a 61% decrease in
voice processing product sales and a 21% decrease in voice processing services
sales. The decrease in voice processing product sales was primarily attributable
to a decrease of $0.7 million in sales of the Company's Automated Prescription
Refill System (APRS) product to commercial customers, a decrease of $2.4 million
in sales to government customers, and a decrease of $2.6 million in sales to
international customers. The decrease in voice processing services sales was
primarily due to a decrease of $0.4 million in maintenance services and a
decrease of $0.6 million in application development services. The Company
believes that the decrease in sales is largely attributable to the market trends
discussed above.
The Company's voice processing net sales decreased 24% in fiscal year 1998 to
$14.7 million, compared to $19.3 million in fiscal year 1997. The decrease in
voice processing net sales during fiscal year 1998 was primarily due to a 32%
decrease in voice processing product sales. The decrease in voice processing
product sales was primarily
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attributable to a decrease of $3.1 million in sales of the Company's Automated
Prescription Refill System (APRS) product to commercial customers, a decrease of
$1.7 million in sales to government customers, and a decrease of $0.2 million in
sales to distributors, offset in part by an increase of $0.5 million in sales to
international customers.
In fiscal year 1999, sales to the Company's 10 largest customers accounted for
75% of voice processing sales and one of the three largest customers was in each
of the Company's three sectors: government, commercial, and international. In
fiscal year 1998, sales to the Company's 10 largest customers accounted for 85%
of voice processing sales and one of the three largest customers was in each of
the Company's three sectors: government, commercial, and international. In
fiscal year 1997, sales to the Company's 10 largest customers accounted for 90%
of voice processing sales. In fiscal year 1997, two of the four largest
customers were in the government sector, while one customer was in the
commercial sector and one customer was in the international sector.
Sales to government customers for fiscal year 1999 were $4.1 million, or 52% of
voice processing net sales and 23% of consolidated net sales, which represented
a 48% decrease from sales to government customers in fiscal year 1998. Sales to
government customers for fiscal year 1998 were $8.0 million, or 54% of voice
processing net sales and 30% of consolidated net sales, which represented an 18%
decrease from sales to government customers in fiscal year 1997. Sales to
government customers for fiscal year 1997 were $9.7 million, or 51% of voice
processing net sales and 31% of consolidated net sales. Fiscal year 1997
included a $3.5 million sale on a bill and hold basis requested by the customer.
The system was accepted and title passed to the customer in fiscal year 1997
and, just after fiscal year-end, in November 1997, the system was operational at
the customer's premises. In fiscal year 1999, the Company was unable to replace
sales and upgrades of $4.1 million to a large customer that occurred in 1998. In
addition, government customers have been procuring large IVR systems as part of
major procurements from larger vendors, which has required the Company to work
through prime contractors, also resulting in increased margin pressure and
greater difficulty in making direct sales. Although the Company increased sales
by $1.8 million to existing government customers in fiscal year 1998, the
Company was unable to replace a $3.5 million sale to a large customer that
occurred in fiscal year 1997. In addition, the Company was unable to secure any
new government customers in fiscal year 1998. The Company believes sales to
government customers also are being affected by the market trends discussed
above.
Sales to commercial customers for fiscal year 1999 were $2.7 million, or 34% of
voice processing net sales and 15% of consolidated net sales, which represented
an 18% decrease from sales to commercial customers in fiscal year 1998. Sales to
commercial customers for fiscal year 1998 were $3.3 million, or 23% of voice
processing net sales and 12% of consolidated net sales, which represented a 48%
decrease from sales to commercial customers in fiscal year 1997. Sales to
commercial customers for fiscal year 1997 were $6.4 million, or 33% of voice
processing net sales and 20% of consolidated net sales. The decreases in
commercial sales in fiscal years 1999 and 1998, as well as the increase in
commercial sales in fiscal year 1997, was attributable to declining sales of the
APRS product over that three year period, primarily to the Company's principal
customer in the retail pharmacy market. This customer has substantially
completed its purchases of products from the Company and there remains no major
customers for the APRS product who have not implemented technology similar to
APRS.
Sales to international customers for fiscal year 1999 were $1.1 million, or 14%
of voice processing net sales and 6% of consolidated net sales, which
represented a 68% decrease from sales to international customers in fiscal year
1998. Sales to international customers for fiscal year 1998 were $3.4 million,
or 23% of voice processing net sales and 13% of consolidated net sales, which
represented a 17% increase from sales to international customers in fiscal year
1997. Sales to international customers in fiscal year 1997 were $2.9 million, or
15% of voice processing net sales and 9% of consolidated net sales. The decrease
in international sales in fiscal year 1999 was primarily due to decreased sales
of $2.3 million to the Company's European third-party resellers. In fiscal year
1999, the Company sold the voice processing operations of Microlog Europe to
Comsys International, B.V. of The Netherlands. The Company agreed to grant
Comsys certain rights to resell its TIVRA software and related hardware. The
Company also agreed to assign certain agreements to which Microlog is a party
relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys. The sale is anticipated to result in a Microlog gain
of approximately $100,000. Since some of the proceeds from the sale are based on
future contracts between Comsys and the Company's former customers, the gain on
the sale was estimated and therefore has been deferred into fiscal year 2000.
The increase in international sales in fiscal year 1998 was primarily due to a
$1.6 million sale to a subsidiary of KPN Telecom of The Netherlands, offset by
decreased sales of $1.1 million to the Company's European third-party resellers.
As of October 31, 1999, the Company had a backlog of existing orders for voice
processing systems and services totaling $2.8 million. By comparison, the
backlog, as of October 31, 1998, was $2.0 million. The Company has
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experienced fluctuations in its backlog at various times in the past
attributable primarily to the seasonality of governmental purchases. The Company
anticipates that all of the outstanding orders at October 31, 1999 will be
shipped and the sales recognized during fiscal year 2000. Although the Company
believes that its entire backlog of orders consists of firm orders, because of
the possibility of customer changes in delivery schedules and delays inherent in
the government contracting process, the Company's backlog as of any particular
date may not be indicative of actual sales for any future period.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES NET SALES
Net sales from performance analysis and support services for fiscal year 1999
were $10.1 million, which represented a 14% decrease from net sales from
performance analysis and support services in fiscal year 1998. Net sales from
performance analysis and support services for fiscal year 1998 were $11.7
million, which represented a 6% decrease from net sales from performance
analysis and support services in fiscal year 1997. Net sales of performance
analysis and support services in fiscal year 1997 were $12.5 million. The
decreases in net sales from performance analysis and support services in fiscal
years 1999 and 1998 resulted from a reduction in the level of work authorized
under existing contracts from the Johns Hopkins University Applied Physics
Laboratory (APL), the Company's principal customer for these services.
The Company believes that its performance analysis contracts are likely to
continue to provide a stable but declining source of sales for the Company. The
Company is experiencing (indirectly, through its contracts with APL) the effects
of some reductions in defense spending due to changes in U.S. defense
priorities. The Company is not aware of any proposed reductions in spending that
will result in any material adverse affect over the next fiscal year on its
expected net sales from performance analysis and support services nor alter the
manner in which it procures contracts for such services. However, the Company
cannot assure you that changes in defense priorities or continuing budget
reductions will not cause such an effect during the fiscal year or thereafter.
Additionally, the Company has experienced increased competition for retention of
its employees from APL. As a result of the tight labor market and changes in
hiring policies at APL, the Company is experiencing increased employee attrition
to APL. The Company expects this trend to continue through fiscal year 2000.
Each employee hired directly by APL, and removed from our contract(s) decreases
our revenue and profit potential from that source.
As of October 31, 1999, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $0.4 million.
By comparison, the backlog as of October 31, 1998 was $0.2 million. The
Company's contracts consist primarily of indefinite delivery, indefinite
quantity (IDIQ) contracts which generally do not have a funding amount, and
therefore are not included in backlog. The Company estimates that the entire
$0.4 million of backlog at October 31, 1999 will be recognized as sales in
fiscal year 2000. Because of the delays inherent in the government contracting
process or possible changes in defense priorities or spending, the Company's
backlog as of any particular date may not be indicative of actual sales for any
future period. Although the Company believes that its backlog of funding on
existing contracts is firm, the possibility exists that funding for some
contracts on which the Company is continuing to work, in the expectation of
renewal, may not be authorized. In addition, the Government has the right to
cancel contracts, whether funded or not funded, at any time, although to date
this has not occurred.
COSTS AND EXPENSES
Cost of sales of products were $3.1 million, or 84% of net sales of products,
for fiscal year 1999; $8.7 million, or 93% of net sales of products, for fiscal
year 1998; and $7.2 million, or 52% of net sales of products, for fiscal year
1997. The decrease in cost of sales, in dollar amount, for fiscal year 1999 was
primarily attributable to reduced product sales. The decrease in cost of sales,
as a percentage of sales, for fiscal year 1999 was primarily attributable to
higher margins on sales to commercial customers. The Company's principal
customer for its APRS product purchased additional software licenses, which have
significantly lower costs of sales than product sales. The increase in cost of
sales of products, both in dollar amount and as a percentage of sales, for
fiscal year 1998 was primarily attributable to an increase of $1.3 million in
the reserve for inventory obsolescence related to inventory for certain product
lines for which there has been a significant decline in gross margins and
demand, and therefore future sales are doubtful. The increase was also
attributable to lower margins on products sales to commercial and government
customers. The Company believes both of these factors are due to the market
trends discussed above. The fiscal year 1998 lower margins were attributable to
the lack of sales of software licenses in fiscal year 1998 compared to $3.1
million of sales of software licenses in fiscal year 1997. Sales of software
licenses have significantly lower costs of sales than product sales.
Additionally, the increase in cost of sales of products, as a
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percentage of sales, for fiscal year 1998 was attributable to certain fixed
costs that do not vary directly with sales volume, therefore, the decline in net
sales of products did not result in a similar decline in costs.
Cost of sales of services were $10.4 million, or 72% of net sales of services,
for fiscal year 1999; $11.9 million, or 69% of net sales of services, for fiscal
year 1998; and $12.2 million, or 69% of net sales of services, for fiscal year
1997. The increase in cost of sales, as a percentage of sales, for fiscal year
1999 was primarily attributable to the decrease in net sales of performance
analysis services. The decrease in cost of sales, in dollar amount, for fiscal
year 1998 was primarily attributable to the decrease in net sales of performance
analysis services.
Selling, general and administrative costs were $5.8 million, or 32% of net
sales, for fiscal year 1999; $9.1 million or 34% of net sales, for fiscal year
1998; $6.4 million, or 20% of net sales, for fiscal year 1997. The decrease in
fiscal year 1999 was primarily attributable to cost cutting measures taken by
the Company, which are described in more detail under "Restructuring Costs." The
increase in fiscal year 1998, both in dollar amount and as a percentage of
sales, was primarily attributable to increased staffing in the sales and
marketing departments, expanded marketing programs, the write-off of the
remaining goodwill balance resulting from the determination that the goodwill
balance was impaired, and the relocation of operations associated with the
Company's voice processing operations in The Netherlands.
Research and development expenses reflect costs associated with the development
of applicable software and product enhancements for the Company's voice
processing systems. The Company believes that the process of establishing
technological feasibility with its new products is completed approximately upon
release of the products to its customers. Accordingly, the Company does not
anticipate capitalizing research and development costs. Research and development
expenses were $2.9 million, or 16% of net sales, for fiscal year 1999; $3.3
million, or 12% of net sales, for fiscal year 1998; and $3.6 million, or 11% of
net sales, for fiscal year 1997.
Research and development expenses for 1999 were focused on the uniQue and TIVRA
products. uniQue V 2.0 was announced and substantially completed as a product
offering available for customer trial in the contact center market. uniQue V 2.0
is the second in a series of offerings the Company developed to provide a
comprehensive range of solutions within the contact center market in fiscal year
1999. This open, standards-based product enables companies to route and
prioritize phone calls, e-mails, web contacts, faxes, and hardcopy mail and
other contact types to the appropriate skilled agent for handling. The uniQue
development activities will also be a major focus in fiscal year 2000 for the
Company's research and development efforts. TIVRA was enhanced for new features
and Year 2000 compliance in the System Release 6 (SR6) version of the product.
APRS was customized for a number of customer opportunities in fiscal year 1999.
A significant amount of custom engineering is undertaken by the Company in
providing special features, application development, and system integration
services to our customers.
RESTRUCTURING COSTS
In fiscal year 1999, the Company restructured its voice processing operations in
order to bring expenses more in line with anticipated revenues. The Company
incurred restructuring charges of $693,000, for severance and benefits and other
costs for the reduction of employees. Temporary employees and contractors were
also reduced. The restructuring charges include costs of $381,000 for severance
and benefits, the write-off of assets of $49,000 for the equipment associated
with headcount reductions, costs of $103,000 associated with the closing of the
Company's manufacturing facility, and costs of $160,000 to terminate the 15 year
lease commitment for new office space which the Company had entered into in May
1998. As a result of these restructuring activities and other cost reduction
actions, the Company expects to reduce its annual voice processing operating
expenses by approximately $4.8 million annually.
In September 1999, the Company sold the voice processing operations of Microlog
Europe to Comsys International, B.V. of The Netherlands. The Company agreed to
grant Comsys certain rights to resell its TIVRA software and related hardware.
The Company also agreed to assign certain agreements to which Microlog is a
party relating to the TIVRA product. As part of the sale, two Microlog employees
became employees of Comsys. The sale is anticipated to result in a gain to
Microlog of approximately $100,000. Since some of the proceeds from the sale are
based on future contracts between Comsys and the Company's former customers, the
gain on the sale was estimated and therefore has been deferred into fiscal year
2000.
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INVESTMENT AND OTHER INCOME, NET
The Company had net investment and other income of $61,000 for fiscal year 1999,
as compared to net investment and other income of $88,000 for fiscal year 1998,
and other expense of $143,000 for fiscal year 1997. The lower income level in
fiscal year 1999 was primarily attributable to lower interest income on
short-term investments and higher interest expense on short-term borrowings. The
higher income level in fiscal year 1998 was primarily due to the recognized gain
of $73,000 on the sale of the Company's office building and land, higher
interest income on short-term investments, and lower interest expense on
short-term borrowings. The higher expense level in fiscal year 1997 resulted
from an $84,000 write-off of obsolete fixed assets.
PROVISION FOR INCOME TAXES
There was no provision for income taxes recorded in fiscal year 1999. Income
taxes payable (refundable) of $149,000 in fiscal year 1998, and $(545) in fiscal
year 1997, relate to state income taxes, and the alternative minimum tax for
Federal income tax. Based on the Company's profitability in fiscal years 1995
through 1997, the Company recorded a deferred tax asset of $650,000 and
$1,500,000 in fiscal years 1996 and 1997, respectively, reflecting the benefit
of approximately $5.5 million in loss carryforwards. Due to the unprofitable
operations in fiscal year 1998 and uncertain future profitability, the Company
reassessed the probability of realizing these net operating loss carryforwards
and determined that their expected future realization was not likely to be
realized in the near future. The Company wrote-off the deferred tax asset of
$2.15 million in fiscal year 1998. The Company has provided a valuation
allowance for $16.9 million of net operating losses as management has determined
it was not likely that this amount will be realized.
The Company has exhausted its ability to carry losses back for income tax
refunds. Net operating loss and tax credit carryforwards for income tax
reporting purposes of approximately $16.9 million and $0.4 million,
respectively, will be available to offset taxes generated from future taxable
income through 2019. If certain substantial changes in the Company's ownership
should occur, there would be an annual limitation on the amount of the
carryforwards which can be utilized.
YEAR 2000 COMPLIANCE
In fiscal year 1998, the Company began the process of identifying and
determining the appropriate resolution to all of the Company's issues relating
to the "Millennium Bug". These issues arise because of the date sensitive
software programs which use two digits to define the applicable year, resulting
in interpretation of a date using "00" as the Year 1900 rather than the Year
2000. This could result in miscalculations or a major system failure. The
Company concluded that if no action were taken to avoid these consequences, its
Year 2000 issues would have a material effect on the Company's results of
operations and financial condition.
Areas which required remediation were: 1) in-house systems and software programs
used to run the business; 2) products sold to the Company's customers; and 3)
systems and services provided by vendors.
The Company reviewed its in-house systems for compliance and determined that all
systems would have been affected. During fiscal year 1998, the Company completed
the conversion of its accounting, inventory, manufacturing control and
information systems to a new system in order to provide more efficient
management information throughout the Company. In October 1998, as part of
system maintenance, a Year 2000 compliant software release was installed. The
vendor certified that the new system was Year 2000 compliant. As part of the
Company's computer upgrade plan, approximately $0.5 million of hardware and
software upgrades were purchased for the internal computer network in fiscal
year 1998. These systems were all Year 2000 compliant and were also part of the
Company's Year 2000 compliance program. All remaining in-house computer systems
which are mission critical were identified, including operating systems and
applications software, and studies were conducted to determine which programs
were compliant and which were not. The Company believes that the majority of its
mission critical systems are currently compliant or can be made compliant at
minimal cost. Non-compliant systems were replaced or abandoned prior to the
beginning of the Year 2000. In fiscal year 1999, the Company continued its
efforts on ensuring compliance and passed a certification test on Year 2000
compliance which was required by TFX Equities, Inc. prior to finalizing the
Investment Agreement.
The Company made a thorough review and testing of its products and believes that
its current products, TIVRA and uniQue, are Year 2000 compliant. The Company's
assessment of its current products is partially dependent upon the accuracy of
representations concerning Year 2000 compliance made by its suppliers, such as
Aspect, Dialogic, Microsoft and SCO (Santa Cruz Operation), among others. Many
of the Company's customers are, however, using earlier versions of the Company's
current products, previous products or discontinued products,
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which are not Year 2000 compliant. The Company initiated programs to proactively
notify such customers of the risks associated with using these products and to
actively encourage such customers to migrate to the Company's current products.
The Company had received service and maintenance revenues with respect to
certain of these products, and such revenues substantially ceased by the end of
the Year 1999.
In addition, the Company's products are generally integrated within a customer's
enterprise system, which may involve products and systems developed by other
vendors. A customer may mistakenly believe that Year 2000 compliance problems
with its enterprise system are attributable to products provided by the Company.
The Company may, in the future, be subject to claims based on Year 2000
compliance issues related to a customer's enterprise system or other products
provided by third parties, custom modifications to the Company's products made
by third parties, or issues arising from the integration of the Company's
products with other products.
The Company purchases components and services, which have been evaluated for
Year 2000 compliance. The Company has divided its vendors into those who supply
critical services, manufacturing suppliers and manufacturing contractors. The
Company has obtained certification from each of its material vendors as to its
Year 2000 compliance. The costs to evaluate and obtain certification from its
key vendors were not material.
RESULTS SINCE JANUARY 1, 2000
The Company believes that it was able to complete all modifications necessary to
be Year 2000 compliant and is not aware of any substantial issues or problems
with in-house systems, products sold to the Company's customers, or systems and
services provided by vendors. To date, Year 2000 problems have had a minimal
effect on the Company's business. However, the Company may not have identified
and remediated all significant Year 2000 problems.
Further remediation efforts may involve significant time and expense, and
unremediated problems may have a material adverse effect on the Company's
business. Also, the Company sells its products to companies in a variety of
industries, each of which is experiencing different year 2000 issues. Customer
difficulties with year 2000 issues might require the Company to devote
additional resources to resolve underlying problems. Finally, although the
Company has not been made a party to any litigation or arbitration proceeding to
date involving our products or services and related to year 2000 compliance
issues, the Company may in the future be required to defend its products or
services in such proceedings, or to negotiate resolutions of claims based on
year 2000 issues. The costs of defending and resolving year 2000-related
disputes, regardless of the merits of such disputes, and any liability for year
2000 related damages, including consequential damages, would negatively affect
the Company's business, results of operations, financial condition and
liquidity, perhaps materially.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This section (Management's Discussion and Analysis of Financial Condition and
Results of Operations) contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding the
Company's expected financial position and operating results, business strategy,
financing plans, forecasted trends relating to our industry, its ability to
realize anticipated cost savings and similar matters are forward-looking
statements. These statements can sometimes be identified by the use of
forward-looking words such as "may," "will," "anticipate," "estimate," "expect,"
"believe" or "intend." The Company cannot promise you that our expectations in
such forward-looking statements will turn out to be correct. Some important
factors that could cause our actual results to be materially different from our
expectations include those discussed under the caption "Factors That May Effect
Future Results of Operations."
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that its results of operations will be affected by factors
such as the timing of introduction by the Company of new and enhanced products
and services, market acceptance of new voice processing products and
enhancements of existing products, continuation of market trends in the voice
processing market, growth in the voice processing market in general,
competition, ability to secure and retain adequate financing, commitments to
automation by potential customers, fluctuations in the buying cycles of
governmental customers, changes in
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general economic conditions, and changes in the U.S. defense industry and their
impact on the prime contractor for which the Company provides performance
analysis and support services.
The Company is subject to the risk that its business strategy will not be
successful. The new strategy is dependent on market acceptance of the Company's
new focus, services and products, ongoing research and development efforts, and
sales activities over the near term. In addition, the strategy is dependent upon
the Company's ability to match costs proportionately with revenue. The Company's
fiscal 2000 operating budget includes significant expenditures related to its
development and marketing of its new professional services, uniQue product line,
and TIVRA product line. If the company is unable to sustain and grow the
associated revenue, the company is subject to the risk that it may not make the
necessary decisions to reduce expenditures in enough time to avoid severe
adverse consequences.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss of $4.7 million for fiscal year 1999 and has an
accumulated deficit of $16.6 million at October 31, 1999. The Company's
continued existence is dependent upon its ability to generate sufficient cash
flows from internal and external sources to meet its operating needs. Management
has recently taken several steps to meet its liquidity requirements for the
foreseeable future, including restructuring operations to reduce operating
expenses to levels commensurate with revenues and attracting capital through a
private placement transaction. The Company anticipates that existing cash and
cash equivalents generated from fiscal year 2000 operations will be sufficient
to meet its working capital needs. The Company has, in the past, been able to
secure additional financing to meet its operating requirements, although there
can be no assurance that it will be able to continue to do so.
Working capital as of October 31, 1999 was $1.8 million, compared to $2.0
million as of October 31, 1998. The decrease was primarily attributable to a
$1.9 million decrease in accounts receivable, and a $0.5 million decrease in
inventories, offset in part by an increase in cash and cash equivalents of $1.1
million and a decrease in accounts payable and other current liabilities of $1.4
million.
Cash and cash equivalents as of October 31, 1999 were $3.4 million, compared to
$2.3 million as of October 31, 1998. The increase in cash and cash equivalents
was primarily attributable to the proceeds from the issuance of common stock to
TFX Equities of $4.0 million, the decrease in accounts receivable of $1.9
million, offset in part by the net loss of $4.7 million in fiscal year 1999.
Accounts receivable as of October 31, 1999 were $1.2 million, compared to $3.1
million as of October 31, 1998. The decrease in accounts receivable was
primarily attributable to decreased sales in voice processing and, to a lesser
extent, decreased sales in performance analysis and support services.
Fixed assets as of October 31, 1998 were $0.9 million, compared to $1.4 million
as of October 31, 1998. The net decrease in fixed assets resulted from
depreciation expense of $0.6 million, the $0.1 million write-off of assets
associated with restructuring costs, offset in part by $0.3 million in asset
purchases. Major assets purchased were primarily hardware and software upgrades
to the Company's internal computer network and workstations.
In fiscal year 1999, the Company closed and drew on a revolving line-of-credit
facility which allows the Company to borrow up to 75% of its eligible
receivables to a maximum of $2,000,000, subject to the right of the financial
institution to make loans only in its discretion. The line-of-credit bears
interest at the bank's prime rate plus 2.25% (10.75% at October 31, 1999), and
contains a 0.025% fee on the average unused portion of the line as well as a
monthly collateral fee and a 1% upfront commitment fee. The loan subjects the
Company to a restrictive covenant of not exceeding 115% of its consolidated
planned quarterly losses for its second and third quarters of fiscal year 1999,
and a requirement for consolidated profitability beginning in the fourth quarter
of fiscal year 1999. The line also subjects the Company to a number of
restrictive covenants, including restrictions on mergers or acquisitions,
payment of dividends, and certain restrictions on additional borrowings. The
line is secured by all of the Company's assets. The Company was not in
compliance with the restrictive covenant in the second quarter of fiscal year
1999, but obtained a waiver from the bank. The Company was not in compliance
with the restrictive covenant in the fourth quarter of fiscal year 1999 for
which a forbearance agreement has been obtained. The forebearance agreement
waives the lenders right under an event of default to terminate the loan. This
line of credit expires in March 2000 and the Company and the bank are in the
process of renewal discussions. There was no outstanding debt against this
line-of-credit at October 31, 1999.
28
<PAGE>
In June 1996, the Company entered into a contract to purchase a new management
information system including a five-year maintenance plan. The purchase,
including maintenance, is being financed by the vendor over a five-year term at
an annual interest rate of 8%. The financing terms require five annual payments
of $140,000 each, including interest, which began on June 30, 1996. Three annual
payments have been made to date. The final payment is due on June 30, 2000.
QUARTERLY RESULTS
Note 16 of the Notes to Consolidated Financial Statements of the Company
contained in this Annual Report presents unaudited quarterly operating results
for the Company's last eight fiscal quarters. The Company believes that this
unaudited information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the selected
quarterly information when read in conjunction with the Consolidated Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any subsequent period.
The net loss of $4.7 million for fiscal year 1999 was attributable to the
Company's voice processing operations. Approximately $4.2 million of this loss
was due primarily to insufficient voice processing revenues. The loss was also
due in part to a $0.3 million increase in the reserve for inventory
obsolescence, and $0.7 million in costs incurred for restructuring the Company's
voice processing operations. These losses were offset in part by the $0.5
million net income generated from the Company's performance analysis and
supports services operations.
The Company experienced losses in all four quarters of fiscal year 1999. The
losses in each quarter were primarily attributable to insufficient sales in the
Company's voice processing operations, restructuring costs of $0.6 million and
$0.1 million in the second and fourth quarters, respectively, and increases in
the reserve for inventory obsolescence of $0.1 million and $0.2 million in the
third and fourth quarters, respectively.
The Company experienced losses in all four quarters of fiscal year 1998. The
losses in each quarter were primarily attributable to insufficient sales in the
Company's voice processing operations, a change in the sales mix in the
Company's voice processing operations, and increases in the reserve for
inventory obsolescence. In the third quarter, the Company wrote-off the deferred
tax asset of $2.15 million (($0.50) per basic and diluted share). In the fourth
quarter, the Company established reserves for the relocation of its operations
facility in The Netherlands, and wrote-off the remaining goodwill balance which
aggregated $0.8 million (($0.19) per basic and diluted share).
PRICE RANGE OF COMMON STOCK
The Common Stock is presently traded on the Nasdaq SmallCap Market under the
symbol MLOG. As of January 14, 2000, there were approximately 226 holders of
record of the common stock. This number does not reflect the number of
individuals or institutional investors holding stock in nominee name through
banks, brokerage firms, and others.
Note 15 of the Notes to Consolidated Financial Statements of the Company
contained in this Annual Report sets forth, for the period indicated, the range
of high and low transaction prices for the common stock as reported on the
NASDAQ Smallcap Market. The closing price of the common stock on January 14,
1999 was $1.375 per share.
In February 1999, the Company was notified by the Nasdaq National Market System
that it had failed to maintain certain maintenance standards for continued
listing on the Nasdaq National Market System. The Company did not meet the
requirements for minimum net tangible assets and was delinquent in filing its
10K report for fiscal 1998.
29
<PAGE>
On August 17, 1999, the Company was notified that it had been moved to the
Nasdaq SmallCap Market System. The Company's common stock was delisted from the
Nasdaq National Market System on one prior occasion. Subsequent to that
occasion, in February 1996, the Company returned to the Nasdaq National Market
System. During the dedicated period, the common stock was traded on the Nasdaq
SmallCap Market System until its market value of public float had risen and the
Company was able to re-list on the Nasdaq National Market System. There can be
no assurance that it will be able to re-list such securities on the Nasdaq
National Market System, subsequent to the August 1999 delisting.
DIVIDEND POLICY
The Company has not paid any dividends in over 10 years. Certain of the
Company's debt agreements restrict the Company's ability to pay dividends. See
Note 9 of the Notes to Consolidated Financial Statements. The Company does not
anticipate paying any cash dividends in the foreseeable future.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement changes the way public
companies report information about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. SFAS No. 131 also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 will be effective for the Company's fiscal year 1999.
The adoption of SFAS No. 131 did not have a material effect on the consolidated
financial statements.
In October 1997, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position 97-2 (SoP 97-2), "Software Revenue Recognition," which
supersedes SoP 91-1. This statement provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. SoP 97-2 was effective for the Company's fiscal
year 1999. The adoption of SoP 97-2 did not have a material effect on the
current operations. However, the effect of this statement is uncertain as it
relates to future products.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits." This statement standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate analysis.
Additionally, SFAS No. 132 eliminates certain disclosures that are no longer as
useful as they were when SFAS No. 87, "Employers' Accounting for Pensions", SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and SFAS No. 106,
"Employers Accounting for Postretirement Benefits Other than Pensions" were
issued. SFAS No. 132 was effective for the Company's fiscal year 1999. The
adoption of SFAS No. 132 did not have a material effect on the consolidated
financial statements.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 22,386 $ 25,707 $ 31,768 $ 26,457 $ 18,023
(Loss) income from
operations 1,500 2,111 2,374 (6,430) (4,754)
Net (loss) income 1,387 2,713 (1) 3,732 (1) (8,641) (2) (4,693)
Net (loss) income per share:
Basic $ .36 $ .67 $ .89 $ (2.02) $ (1.02)
Diluted $ .34 $ .59 $ .82 $ (2.02) $ (1.02)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (IN THOUSANDS):
OCTOBER 31,
1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 749 $ 3,144 $ 6,671 $1,953 $1,818
Total assets 9,426 13,713 17,055 8,560 6,426
Long-term debt, net
of current maturities -- 203 142 74 --
Stockholders' equity 4,160 7,766 11,888 3,370 2,804
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1) Net income includes a $0.65 million ($0.16 per share basic and $0.14 per
share diluted) and a $1.5 million ($0.36 per share basic and $0.33 per
share diluted) income tax benefit for fiscal years 1996 and 1997,
respectively. See Note 12 of the Notes to Consolidated Financial
Statements.
2) Net loss for fiscal year 1998 includes a $2.15 million (($0.50) per basic
and diluted share) write-off of the deferred tax asset. Due to the
unprofitable operations in fiscal year 1998 and the uncertain future
profitability, the Company reassessed the probability of realizing these
net operating loss carryforwards and determined that their expected future
realization was not likely to be realized in the near future. See Note 12
of the Notes to Consolidated Financial Statements.
31
SUBSIDIARIES
MICROLOG CORPORATION OF MARYLAND
Exhibit 23.1
Consent of Grant Thornton LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated December 13, 1999, accompanying the consolidated
financial statements and have incorporated herein by reference or included in
the Annual Report of Microlog Corporation, on Form 10-K, for the year ended
October 31, 1999. We hereby consent to the incorporation by reference of said
reports in the Registration Statement of Microlog Corporation on Form S-8 (No.
333-84375 dated August 3, 1999, 333-69025 dated December 16, 1998, 333-07981
dated July 11, 1996, 333-34094 dated March 30, 1990, and 333-30956 dated
September 11, 1989).
GRANT THORNTON LLP
Vienna, Virginia
January 31, 2000
Exhibit 23.2
Consent of PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No's 333-84375, 333-69025, 333-07981, 333-34094 and
333-30965) of our report dated March 17, 1999 which appears in Microlog
Corporation's Annual Report on Form 10-K for the year ended October 31, 1999. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page F-3 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
January 31, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MICROLOG CORPORATION
FORM 10K AT 10/31/99
</LEGEND>
<CIK> 000792094
<NAME> MICROLOG CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,425,000
<SECURITIES> 0
<RECEIVABLES> 1,305,000
<ALLOWANCES> 150,000
<INVENTORY> 375,000
<CURRENT-ASSETS> 8,560,000
<PP&E> 3,009,000
<DEPRECIATION> 2,092,000
<TOTAL-ASSETS> 6,426,000
<CURRENT-LIABILITIES> 3,438,000
<BONDS> 0
76,000
0
<COMMON> 0
<OTHER-SE> 2,728,000
<TOTAL-LIABILITY-AND-EQUITY> 2,804,000
<SALES> 18,023,000
<TOTAL-REVENUES> 18,023,000
<CGS> 13,446,000
<TOTAL-COSTS> 22,777,000
<OTHER-EXPENSES> 132,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,000
<INCOME-PRETAX> (4,693,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,693,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,693,000)
<EPS-BASIC> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
