<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 1996 Commission file No. 0-14880
Microlog Corporation
(Exact name of registrant as specified in its charter).
State of Incorporation: Virginia
I.R.S. Employer Identification No.: 52-0901291
20270 Goldenrod Lane
Germantown, Maryland 20876
(Address of principal executive offices).
Registrant's Telephone No., Including Area Code: 301-428-9100
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 [ ]
As of March 12, 1996 3,985,022 shares of common stock were outstanding.
<PAGE>
<TABLE>
<CAPTION>
MICROLOG CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31 October 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 321,708 $ 922,763
Receivables, net 3,317,417 2,948,538
Receivable from related party 117,464 97,622
Inventories 1,775,359 1,436,889
Other current assets 301,139 110,365
---------- -----------
Total current assets 5,833,087 5,516,177
Fixed assets, net 2,959,420 3,006,528
Licenses, net 495,238 523,810
Other assets 192,540 232,491
Goodwill, net 129,105 146,710
---------- -----------
Total assets $ 9,609,390 $ 9,425,716
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 0 $ 45,455
Borrowings under line-of-credit agreement 250,000
Accounts payable 1,300,924 1,388,122
Accrued compensation and related expenses 2,005,200 2,103,316
Other accrued expenses 889,621 1,230,310
---------- ----------
Total current liabilities 4,445,745 4,767,203
Deferred officers' compensation 266,241 269,218
Other liabilities 199,105 227,641
---------- ----------
Total liabilities 4,911,091 5,264,062
---------- ----------
Stockholders' equity:
Serial preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued 0 0
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,566,836 and 4,507,968 shares issued 45,668 45,079
Capital in excess of par value 15,086,250 15,015,344
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (9,257,082) (9,722,232)
---------- ----------
Total stockholders' equity 4,698,299 4,161,654
---------- ----------
Total liabilities and stockholders' equity $ 9,609,390 $ 9,425,716
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MICROLOG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
For The Three Months
Ended January 31,
1996 1995
---- ----
Net sales $ 5,915,273 $ 5,428,806
------------ ------------
Costs and expenses:
Cost of sales 3,493,180 3,335,905
Selling, general and
administrative 1,513,766 1,434,268
Research and development 411,638 377,659
------------ ------------
5,418,584 5,147,832
------------ ------------
Operating income 496,689 280,974
Net other income (expense) (28,609) (17,130)
------------ ------------
Income before income taxes 468,080 263,844
Provision for income taxes 2,930 0
------------ ------------
Net income 465,150 263,844
Accumulated deficit:
at beginning of period (9,722,232) (11,109,363)
------------ ------------
at end of period $ (9,257,082) $(10,845,519)
============ ============
Weighted average shares outstanding 4,397,058 3,880,498
------------ ------------
Income per common share $ 0.11 $ 0.07
============ ============
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MICROLOG CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the For the
Three Months Three Months
Ended Ended
January 31, 1996 January 31, 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 465,150 $ 263,844
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 128,994 219,204
Amortization of goodwill and other 46,177 68,678
Loss from disposition of fixed assets 1,946 0
Changes in assets and liabilities:
Receivables (388,721) (330,470)
Inventories (338,470) (128,475)
Other current assets (190,774) (32,989)
Accounts payable and accrued expenses (526,003) (153,546)
Deferred officers' compensation (2,977)
Other liabilities (28,536) (42,573)
---------- ---------
Net cash used in operating activities (833,214) (136,327)
---------- ---------
Cash flows from investing activities:
Purchases of fixed assets (83,832) (134,865)
Other assets 39,951 10,319
---------- ---------
Net cash used in investing activities (43,881) (124,546)
---------- ---------
Cash flows from financing activities:
Reduction of long-term debt (45,455) (181,455)
Borrowings under line-of-credit agreement 250,000 0
Issuance of common stock 71,495 0
---------- ---------
Net cash provided by (used in) financing activities 276,040 (181,455)
---------- ---------
Cash and cash equivalents:
Net increase (decrease) during period (601,055) (442,328)
Balance at beginning of period 922,763 1,166,194
---------- ---------
Balance at end of period $ 321,708 $ 723,866
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
MICROLOG CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1996 (unaudited) and OCTOBER 31, 1995
General
- -------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of Microlog
Corporation (the Company) as of January 31, 1996 and October 31, 1995, and the
results of their operations and cash flows for the three month period ended
January 31, 1996. The results of operations presented are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 1996.
The significant accounting principles and practices followed by the Company are
set forth in the Notes to Consolidated Financial Statements in Microlog
Corporation's Annual Report on Form 10-K for the year ended.
Note 1 - Inventories
- --------------------
Inventories consist of the following: (Unaudited)
January 31, October 31,
1996 1995
Components and finished goods $ 2,491,938 $ 1,999,192
Work-in-process 717,327 492,312
----------- -----------
3,209,265 2,491,504
Less: reserve for obsolescence (1,433,906) (1,054,615)
----------- -----------
$ 1,775,359 $ 1,436,889
=========== ===========
Note 2 - Fixed Assets
- ---------------------
The cost of property and equipment consists of the following:
(Unaudited)
January 31, October 31,
1996 1995
Land $ 520,000 $ 520,000
Buildings and improvements 2,532,567 2,532,567
Furniture and equipment 3,264,906 3,621,890
Vehicles 23,642 23,642
Leasehold improvements 176,266 211,021
----------- -----------
6,517,381 6,909,120
Less: accumulated depreciation and amortization (3,557,961) (3,902,592)
----------- -----------
$ 2,959,420 $ 3,006,528
=========== ===========
Note 3 - Restructuring of Operations
- ------------------------------------
The following table sets forth the Company's restructuring reserves for the
three months ended January 31, 1996.
<CAPTION>
Asset
Writedowns Facilities Other Total
---------- ---------- ----- -----
<S> <C> <C> <C> <C>
Reserve balance, October 31, $ 10,402 $ 174,889 $ 52,459 $ 237,750
Cash payments (14,613) (22,482) (37,095)
Non-cash items (10,402) 0 0 (10,402)
---------- --------- --------- ----------
Reserve balance, January 31, $ 0 $ 160,276 $ 29,977 $ 190,253
========== ========= ========= ==========
</TABLE>
5
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Microlog Corporation designs, manufactures, markets and supports a series of
microprocessor-based voice processing systems which allow users to store,
retrieve and transmit digitized voice messages and to access information on
computer data bases. The Company's voice processing products include the VCS
INTELA, VCS 3500 and CallStar models, which are comprised of specially
configured microprocessor-based hardware platforms and versatile proprietary
applications software that enables the systems to perform multiple voice
processing applications.
The Company also provides performance analysis and technical and administrative
support services ("performance analysis") through its wholly-owned subsidiary,
Old Dominion Systems Inc. of Maryland, primarily to the Applied Physics
Laboratory ("APL") and American Telephone and Telegraph (AT&T), both prime
contractors to the U.S. Navy.
The percentage of the Company's sales generated by the Company's two business
segments has varied significantly from period to period, but the Company
anticipates that any significant growth in sales will be derived primarily from
increases in sales from voice processing operations.
The following table sets forth for the periods indicated the percentage of
revenues of certain items from the Company's condensed consolidated statements
of income and retained earnings:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
Three Months Ended
January 31,
1996 1995
---- ----
<S> <C> <C>
Revenues
Voice processing 66.0% 60.8%
Performance analysis and support services 34.0% 39.2%
Total 100.0% 100.0%
Costs and expenses
Cost of sales 59.1% 61.4%
Selling, general and administrative 25.5% 26.4%
Research and development 7.0% 7.0%
Total 91.6% 94.8%
Operating income 8.4% 5.2%
Interest and other expense, net 0.5% 0.3%
Income before income taxes 7.9% 4.9%
Provision for income taxes 0.0% 0.0%
Net income 7.9% 4.9%
</TABLE>
6
<PAGE>
RESULTS OF OPERATIONS
The Company had a net income of $465,000 ($.11 per share) for the quarter ended
January 31, 1996 as compared to a net income of $264,000 ($.07 per share) for
the comparable period in fiscal 1995. The improvement in earnings is primarily
attributable to an increase in voice processing sales as well as a reduction in
cost of sales.
NET SALES
Net sales for the quarter ending January 31, 1996 were $5.9 million, which
represents an increase of 9% as compared to $5.4 million of net sales in the
quarter ending January 31, 1995. This increase is attributable to an increase in
voice processing sales.
VOICE PROCESSING NET SALES
The Company's voice processing net sales increased 18% for the quarter ended
January 31, 1996 to $3.9 million, from $3.3 million in the comparable quarter in
fiscal 1995. This increase is primarily attributable to an increase of 22% in
sales to government customers and an increase of 279% in sales to commercial
customers.
The Company is pursuing various strategies that it believes will increase sales
in its voice processing division. These strategies include the introduction of
additional features that will enhance the global marketability of Intela,
pursuit of large government procurements, marketing of its Retail Solution
product, development of new applications solutions for commercial markets, and
expansion of third party distributors in the US, Europe, Asia, and the Far East.
Microlog believes that technological improvements to its products and
development of new applications are essential if the Company is to increase its
voice processing revenues. The Company believes that its Intela Interactive
Information Response ("IIR") system is gaining acceptance in government,
commercial and international markets and the Company expects Intela to pass the
VCS 3500 as its principal product in percent of sales.
As of January 31, 1996, the Company had a backlog of existing orders for voice
processing systems totaling $2.3 million. By comparison, the backlog as of
January 31, 1995 was $3.2 million. The Company has experienced fluctuations in
its backlog at various times during the past two fiscal years attributable
primarily to the seasonality of governmental purchases. In addition, the Company
has observed a lengthening of the period between the date of booking an order
and the date of shipment, with the shipment depending on any customer delivery
schedules and any customization needed for VCS 3500 or VCS Intela applications.
The Company anticipates that most of the outstanding orders at January 31, 1996
will be shipped and the sales recognized during fiscal 1996. Although the
Company believes that its entire backlog of orders consists of firm orders,
because of the possibility of customer changes in delivery schedules and delays
inherent in the government contracting process, the Company's backlog as of any
particular date may not be indicative of actual sales for any future period.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES NET SALES
Net sales from performance analysis and support services were $2.0 million for
the quarter ended January 31, 1996 as compared to $2.1 million for the same
period in fiscal 1995. This decrease was attributable to inclement weather in
January 1996, which resulted in no performance analysis and support services
being performed for three business days during the quarter.
The Company is seeking to diversify its operations for performance analysis and
support services by seeking contracts in non-defense related areas. Because of
the lower profit margins allowed on contracts for performance analysis and
support services and the Company's limited success to date in obtaining new
contracts with contractors and agencies other than APL or AT&T, the Company
believes that this segment of its business is not likely to generate a
substantial increase in profitability. Nevertheless, the Company believes that
its performance analysis contracts are likely to continue to provide a stable
source of sales for the Company. The Company does not anticipate that any
changes in defense priorities or spending will result in any material adverse
affect over the next fiscal year on its net sales from performance analysis and
support services nor alter the manner in which it procures contracts for such
services. However, there is no assurance that changes in defense priorities or
continuing budget reductions will not cause such an effect during the fiscal
year or thereafter.
7
<PAGE>
As of January 31, 1996, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $8.5 million.
By comparison, the backlog as of January 31, 1995 was $4.1 million. The increase
in backlog is primarily attributable to a significant multi-year award and
increased funding levels on existing or new contracts. The Company anticipates
that these services will be provided during the next three fiscal years. Of the
$8.5 million of backlog at January 31, 1996, $2.2 million will be recognized as
sales beyond fiscal 1996. Because of the delays inherent in the government
contracting process or possible changes in defense priorities or spending, the
Company's backlog as of any particular date may not be indicative of actual
sales for any future period. Although the Company believes that its backlog of
funding on existing contracts is firm, the possibility exists that funding for
some contracts on which the Company is continuing to work, in the expectation of
renewal, may not be authorized (and the Government has the right to cancel
contracts at any time), although to date this has not occurred.
COSTS AND EXPENSES
Cost of sales was $3.5 million or 59.1% of net sales for the quarter ended
January 31, 1996 as compared to $3.3 million or 61.4% of net sales for the
comparable period in fiscal 1995. The decrease in cost of sales as a percentage
of net sales is primarily attributable to the higher percentage of voice
processing net sales for the quarter as compared to performance analysis and
support services net sales. Performance analysis and support services has a
significantly higher cost of sales compared to voice processing.
Selling, general and administrative expenses were $1.6 million or 25.5% of net
sales as compared to $1.4 million or 26.4% of net sales for the comparable
period in fiscal 1995. The Company expects that selling, general and
administrative expenses during fiscal 1996 will be slightly more than those
incurred in fiscal 1995 as the Company seeks to attract additional customers for
its products and services.
Research and development expenses reflect costs associated with the development
of applicable software and product enhancements for the Company's voice
processing systems. Research and development expenses were $412,000 or 7.0% of
net sales for the quarter ended January 31, 1996 as compared to $378,000 or 7.0%
of net sales for the comparable period in fiscal 1995. The Company expects that
research and development expenses during fiscal 1996 will be slightly more than
those incurred in fiscal 1995 as the Company continues to develop new products
and enhance its existing products. The Company believes that the process of
establishing technological feasibility with its new products is completed
approximately upon release of the products to its customers. Hence, the Company
does not anticipate capitalizing engineering development costs.
INTEREST AND OTHER EXPENSE, NET
Net other expense was $28,000 for the quarter ended January 31, 1996 as compared
to $17,000 for the same period in fiscal 1995. Net other expense consisted
primarily of closing costs on the line of credit facility and interest expense
on short term borrowings.
PROVISION FOR INCOME TAXES
The Company has exhausted its ability to carry losses back for income tax
refunds. However, net operating loss and tax credit carry forwards for income
tax reporting purposes of approximately $9.0 million and $156,000, respectively,
will be available to offset taxes generated from future taxable income. These
potential future tax benefits have not been reflected in the financial
statements since realization is not assured. Tax expense for the three months
ended January 31, 1996 relates to state income taxes and alternative minimum tax
for federal income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of January 31, 1996 was $1,387,000 as compared to $749,000 as
of October 31, 1995. The increase in working capital is primarily attributable
to the net income in the first quarter. Cash, and cash equivalents, as of
January 31, 1996 were $322,000 as compared to $923,000 as of October 31, 1995.
The decline in cash is primarily attributable to payments of accounts payable
and accrued expenses of $526,000 and purchases of inventory of $338,000.
The Company utilized its line of credit during the quarter to meet its
requirements for working capital. The outstanding borrowings at January 31, 1996
were $250,000.
8
<PAGE>
Accounts receivable as of January 31, 1996 were $3.4 million, as compared to
$3.0 million as of October 31, 1995. Included in the January 31, 1996 balance is
a related party receivable of $117,000 relating to the sale of voice processing
products and services to American Computer, of which a former member of the
Board of Directors is an executive officer and of which a member of the Board of
Directors is a director. Payment of $81,000 was received from American Computer
in February, 1996.
Net fixed assets as of January 31, 1996 were $3.0 million, as compared to $3.0
million as of October 31, 1995. Goodwill as of January 31, 1996 was $129,000 as
compared to $147,000 at October 31, 1995.
In December 1995, the Company entered into a new line of credit facility with a
bank. The Company can borrow up to 70% of its eligible receivables to a maximum
of $2,000,000. The line of credit bears interest at the bank's prime rate plus
1.25% and contains a 1/2 of 1% commitment fee on the average unused portion of
the line. The Company paid a one-time origination fee of $10,000 in December
1995. The line of credit subjects the Company to a number of restrictive
covenants, including a requirement to maintain a minimum consolidated tangible
net worth, a ratio of total liabilities to tangible net worth, and a current
ratio. There are restrictions on merger or acquisitions, payment of dividends,
and certain restrictions on additional borrowings.
The Company is currently negotiating a loan agreement with the same bank for an
additional $1,000,000 for working capital. The agreement is to be secured by the
Company's building, to bear interest at the bank's prime rate plus 0.5%, and to
contain a 0.5% fee on the average unused portion of the loan. This loan
agreement is to contain the same restrictive covenants as the $2 million line of
credit.
ITEM 1 Legal Proceedings
None.
ITEM 2 Changes in Securities
None.
ITEM 3 Submission of Matters to a Vote of Security Holders
None.
ITEM 4 Other Information
None.
ITEM 5 Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROLOG CORPORATION
BY /s/ Joe J. Lynn
---------------------
Joe J. Lynn
Chief Executive Officer
BY /s/ Steven R. Delmar
---------------------
Steven R. Delmar
Executive Vice President and
Chief Financial Officer
March 12, 1996
- -----------------------
DATE
9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 321,708
<SECURITIES> 0
<RECEIVABLES> 3,612,075
<ALLOWANCES> (177,194)
<INVENTORY> 1,775,359
<CURRENT-ASSETS> 5,833,087
<PP&E> 6,517,381
<DEPRECIATION> 3,557,961
<TOTAL-ASSETS> 9,609,390
<CURRENT-LIABILITIES> 4,445,745
<BONDS> 0
<COMMON> 45,668
0
0
<OTHER-SE> 4,652,631
<TOTAL-LIABILITY-AND-EQUITY> 9,609,390
<SALES> 5,915,273
<TOTAL-REVENUES> 5,915,273
<CGS> 3,493,180
<TOTAL-COSTS> 5,418,584
<OTHER-EXPENSES> 23,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,463
<INCOME-PRETAX> 468,080
<INCOME-TAX> 2,930
<INCOME-CONTINUING> 465,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465,150
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
