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, 1997 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 14, 1997 4,209,745 shares of common stock were outstanding.
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 31 October 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,226,326 $ 1,170,603
Receivables, net 6,055,247 4,259,841
Inventories, net 2,210,970 2,218,306
Deferred tax asset 750,000 650,000
Other current assets 222,573 208,551
--------------- ---------------
Total current assets 10,465,116 8,507,301
Fixed assets, net 3,853,564 3,886,371
Licenses, net 380,953 409,524
Other assets 72,800 101,788
Goodwill, net 757,863 807,738
--------------- ---------------
Total assets $ 15,530,296 $ 13,712,722
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of longterm debt $ 54,740 $ 54,740
Borrowings under lineofcredit agreement 2,750,000 1,400,000
Accounts payable 838,893 962,715
Accrued compensation and related expenses 1,896,739 1,874,691
Other accrued expenses 986,485 1,070,973
--------------- ---------------
Total current liabilities 6,526,857 5,363,119
Longterm debt 202,860 202,860
Deferred officers' compensation 274,318 267,921
Other liabilities 83,304 112,184
--------------- ---------------
Total liabilities 7,087,339 5,946,084
--------------- ---------------
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,
4,798,695 and 4,792,004 shares issued 47,986 47,920
Capital in excess of par value 15,912,185 15,904,753
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (6,340,677) (7,009,498)
--------------- ---------------
Total stockholders' equity 8,442,957 7,766,638
--------------- ---------------
Total liabilities and stockholders' equity $ 15,530,296 $ 13,712,722
=============== ===============
See accompanying notes to consolidated financial statements.
2
</TABLE>
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended January 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Net sales $ 7,093,502 $ 5,915,273
--------------- ---------------
Costs and expenses:
Cost of sales 4,050,128 3,493,180
Selling, general and administrative expenses 1,590,620 1,513,766
Research and development 846,037 411,638
--------------- ---------------
6,486,785 5,418,584
--------------- ---------------
Operating income 606,717 496,689
Net other expense 43,441 28,609
--------------- ---------------
Income before income taxes 563,276 468,080
Benefit (provision) for income taxes 105,545 (2,930)
--------------- ---------------
Net income 668,821 465,150
Accumulated deficit:
at beginning of period (7,009,498) (9,722,232)
--------------- ---------------
at end of period $ (6,340,677) $ (9,257,082)
=============== ===============
Weighted average shares outstanding 4,544,678 4,397,058
--------------- ---------------
Income per common share $ 0.15 $ 0.11
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Three Months
Ended Ended
January 31, 1997 January 31, 1996
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 668,821 $ 465,150
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 196,060 128,994
Deferred officers' compensation 6,397
Amortization of goodwill and licensing agreement 78,446 46,177
Loss on disposition of fixed assets 1,946
Deferred tax benefit (100,000)
Changes in assets and liabilities:
Receivables (1,795,406) (388,721)
Inventories 7,336 (338,470)
Other current assets (14,022) (190,774)
Accounts payable (123,822) (526,003)
Accrued compensation and related expenses 22,048
Other accrued expenses (113,368) (28,536)
--------------- ---------------
Gain (loss) on sale of fixed assets
Net cash used in operating activities (1,167,510) (830,237)
--------------- ---------------
Cash flows from investing activities:
Purchases of fixed assets (163,253) (83,832)
Other assets 28,988 39,951
--------------- ---------------
Net cash used in investing activities (134,265) (43,881)
--------------- ---------------
Cash flows from financing activities:
Reduction in longterm debt (45,455)
Net borrowings under lineofcredit agreement 1,350,000 250,000
Exercise of common stock options 7,498 71,495
--------------- ---------------
Net cash provided by financing activities 1,357,498 276,040
--------------- ---------------
Cash and cash equivalents:
Net increase (decrease) during period 55,723 (598,078)
Balance at beginning of period 1,170,603 922,763
--------------- ---------------
Balance at end of period $ 1,226,326 $ 324,685
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MICROLOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 (unaudited) and OCTOBER 31, 1996
General
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of Microlog
Corporation and its subsidiaries at January 31, 1997 and October 31, 1996, and
the results of their operations and their cash flows for the three month period
ended January 31, 1997. The results of operations presented are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 1997.
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 October 31, 1996.
<TABLE>
<CAPTION>
Note 1 Inventories (Unaudited)
January 31, October 31,
Inventories consist of the following: 1997 1996
------------- -------------
<S> <C> <C>
Components and finished goods $ 1,753,467 $ 1,951,370
Work-in-process 760,923 519,554
------------- -------------
2,514,390 2,470,924
Less: reserve for obsolescence (303,420) (252,618)
------------- -------------
$ 2,210,970 $ 2,218,306
============ =============
<CAPTION>
Note 2 Fixed Assets
(Unaudited)
Fixed assets consist of the following: January 31, October 31,
1997 1996
------------- -------------
<S> <C> <C>
Land $ 520,000 $ 520,000
Buildings and improvements 2,511,266 2,511,266
Furniture and equipment 3,282,403 3,119,150
Vehicles 23,642 23,642
Leasehold improvements 176,096 176,096
------------- -------------
6,513,407 6,350,154
Less: accumulated depreciation and amortization (2,659,843) (2,463,783)
------------- -------------
$ 3,853,564 $ 3,886,371
============= =============
</TABLE>
5
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Microlog Corporation designs, develops, markets, and supports a complete line of
UNIX and DOS-based voice processing systems and applications solutions 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, RETAIL SOLUTION (APRS(R)) 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"), a prime contractor 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 consolidated statements of income
and retained earnings:
PERCENTAGE OF TOTAL REVENUES
Three Months Ended
January 31,
1997 1996
---- ----
Revenues
Voice processing 62.3% 66.0%
Performance analysis and support services 37.7% 34.0%
----- -----
Total 100.0% 100.0%
Costs and expenses
Cost of sales 57.1% 59.1%
Selling, general and administrative 22.4% 25.5%
Research and development 11.9% 7.0%
----- ----
Total 91.4% 91.6%
Operating income 8.6% 8.4%
Net other expense 0.7% 0.5%
---- ----
Income before income taxes 7.9% 7.9%
Benefit for income taxes 1.5% 0.0%
---- ----
Net income 9.4% 7.9%
6
<PAGE>
RESULTS OF OPERATIONS
The Company had net income of $669,000 ($.15 per share) for the quarter ended
January 31, 1997. These results included a $100,000 ($.02 per share) income tax
benefit associated with the expected future realization of the Company's net
operating loss carryforwards that management believes is more likely than not to
be realized. By comparison, the Company had net income of $465,000 ($.11 per
share), which did not include an income tax benefit, for the quarter ended
January 31, 1996. The improvement in earnings was primarily attributable to an
increase in voice processing net sales as well as an increase in performance
analysis and support services sales.
NET SALES
Net sales for the quarter ended January 31, 1997 were $7.1 million, which
represented an increase of 20% as compared to $5.9 million of net sales for the
quarter ended January 31, 1996. This increase was attributable to an increase in
voice processing net sales as well as an increase in performance analysis and
support services sales.
VOICE PROCESSING NET SALES
Voice processing net sales increased 13% for the quarter ended January 31, 1997
to $4.4 million, as compared to $3.9 million for the quarter ended January 31,
1996. This increase was primarily attributable to an increase of 141% in sales
to commercial customers and a decrease of 64% in sales to distribution
customers. The increase in commercial sales was primarily due to additional
sales of the Company's APRS product to a large retail pharmacy chain. The
decrease in distribution sales was primarily the result of the Company's
decision to focus its sales and marketing efforts on its interactive information
response products and price decreases in the market for voice mail products.
As of January 31, 1997, the Company had a backlog of existing orders for voice
processing systems totaling $3.2 million. The backlog, as of January 31, 1996,
was $2.3 million. The Company has experienced fluctuations in its backlog at
various times during the past two fiscal years attributable primarily to the
seasonality of government 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 customer delivery schedules and the
level of customization required for Intela applications. The Company anticipates
that all of the outstanding orders at January 31, 1997 will be shipped and the
sales recognized during fiscal 1997. Although the Company believes that its
entire backlog of orders consists of firm orders, because of the possibility of
customer changes in delivery schedules and delays inherent in the government
contracting process, the Company's backlog as of any particular date may not be
indicative of actual sales for any future period.
PERFORMANCE ANALYSIS AND SUPPORT SERVICES NET SALES
Net sales from performance analysis and support services increased 35% for the
quarter ended January 31, 1997 to $2.7 million, as compared to $2.0 million for
the quarter ended January 31, 1996. This increase was attributable to the
addition of new contracts as well as increases in the level of work authorized
under existing contracts from the John Hopkins University Applied Physics
Laboratory (APL), the company's principal customer for these services.
The Company believes that its performance analysis contracts are likely to
continue to provide a stable source of sales for the Company. The Company does
not anticipate that any changes in defense priorities or spending will result in
any material adverse affect over the next fiscal year on its net sales from
performance analysis and support services nor alter the manner in which it
procures contracts for such services. However, there is no assurance that
changes in defense priorities or continuing budget reductions will not cause
such an effect during the fiscal year or thereafter.
As of January 31, 1997, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $4.5 million.
By comparison, the backlog as of January 31, 1996 was $8.5 million. The decrease
in backlog was primarily attributable to various multi-year contracts which are
nearing their expiration dates and will soon be in the renewal phase, following
competitive bidding for such contracts. Of the $4.5 million of backlog at
January 31, 1997, approximately $2.3 million will be recognized as sales beyond
fiscal 1997. 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.
7
<PAGE>
COSTS AND EXPENSES
Cost of sales was $4.1 million or 57.1% of net sales for the quarter ended
January 31, 1997 as compared to $3.5 million or 59.1% of net sales for the
quarter ended January 31, 1996. The decrease in cost of sales as a percentage of
net sales was primarily attributable to the mix of products sold in voice
processing. The reduction in cost of sales as a percentage of net sales was
primarily the result of the sale of software licenses to a large commercial
customer for the quarter ended January 31, 1997.
Selling, general and administrative expenses were $1.6 million or 22.4% of net
sales for the quarter ended January 31, 1997 as compared to $1.5 million or
25.5% of net sales for the quarter ended January 31, 1996. The decrease in
selling, general, and administrative expenses as a percentage of revenue was
primarily attributable to the increase in net sales.
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 $846,000 or 11.9% of
net sales for the quarter ended January 31, 1997 as compared to $411,000 or 7.0%
of net sales for the quarter ended January 31, 1996. The increase was primarily
due to the hiring of additional personnel 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.
NET OTHER EXPENSE
Net other expense was $43,000 for the quarter ended January 31, 1997 as compared
to $29,000 for the quarter ended January 31, 1996. Net other expense consisted
primarily of interest expense on short term borrowings. The increase was
primarily due to a higher level of borrowing in the quarter ended January 31,
1997 as compared to the quarter ended January 31, 1996.
PROVISION FOR INCOME TAXES
For the quarter ended January 31, 1997, the Company increased its deferred tax
asset to $750,000 by recording a tax benefit of $100,000 reflecting the benefit
of approximately $1.9 million in loss carryforwards. Although realization is not
assured, management believes that it is more likely than not that all of the
deferred tax asset will be realized.
The Company has exhausted its ability to carry losses back for income tax
refunds. Net operating loss and tax credit carry forwards for income tax
reporting purposes of approximately $9.7 million and $156,000, respectively,
will be available to offset taxes generated from future taxable income through
2007 and 2008. Management believes that the future tax benefits associated with
$7.8 million of its net operating loss carryforwards is not more likely than not
assured. Accordingly, no such benefit has been reflected in the Financial
Statements.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
Various paragraphs of this Item 2 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) 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.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth below and
elsewhere in this document.
The Company believes that in the future its results of operations could be
affected by factors such as the introduction by the Company of new and enhanced
products and services, market acceptance of new voice processing products and
enhancements of existing products, growth in the voice processing market in
general, competition, commitments to automation by potential large purchasers of
the Company's Retail Solutions products, 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 believes that its ability to meet revenue targets principally will
determine the Company's profitability for each fiscal quarter. The Company's
backlog on a quarterly basis generally will not be large enough to assure that
the
8
<PAGE>
Company will meet its revenue targets for a particular quarter, and delivery of
backlog depends upon a number of factors, as discussed above. Further, a large
percentage of any quarter's shipments have traditionally been booked in the last
month of the quarter. Consequently, quarterly revenues and operating results
will depend on the volume and timing of new orders received during a quarter,
which is difficult to predict.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of January 31, 1997 was $3.9 million as compared to $3.1 as
of October 31, 1996. The increase in working capital was primarily attributable
to the net income in the first quarter. Cash and cash equivalents, as of January
31, 1997 were $1.2 million as compared to $1.2 million as of October 31, 1996.
Accounts receivable as of January 31, 1997 were $6.1 million as compared to $4.3
million as of October 31, 1996. The increase was primarily due to an increase in
net sales.
Goodwill as of January 31, 1997 was $758,000 as compared to $808,000 at October
31, 1996. Net fixed assets as of January 31, 1997 were $3.9 million as compared
to $3.9 million as of October 31, 1996.
In February 1997, the Company renewed its line of credit facility with its bank
which allows the Company to borrow up to 70% of its eligible receivables to a
maximum of $2,000,000. The line of credit bears interest at the bank's prime
rate plus 1.25% (9.50% at January 31, 1997), and contains a 1/2 of 1% commitment
fee on the average unused portion of the line. The line expires on February 28,
1998 and subjects the Company to a number of restrictive covenants, including a
requirement to maintain a minimum consolidated tangible net worth, a maximum
ratio of total liabilities to tangible net worth, and a minimum current ratio.
There are restrictions on mergers or acquisitions, payment of dividends, and
certain restrictions on additional borrowings. The line is secured by all of the
Company's tangible assets. At January 31, 1997, $1,750,000 was outstanding
against this line of credit. The balance was paid off entirely in March, 1997.
In February 1997, the Company also renewed its $1,000,000 loan facility. The
line of credit bears interest at the bank's prime rate plus 0.5% (8.75% at
January 31, 1997), and contains a 0.5% fee on the average unused portion of the
loan. The line expires on February 28, 1999, and contains the same restrictive
covenants as the $2,000,000 line of credit, and the agreements for the line of
credit and loan facility contain cross default provisions. The loan agreement
allows the Company, at its option, to make monthly interest-only payments on the
outstanding principal balance, but all outstanding amounts are due in full on
February 28, 1999. The line is secured by the Company's principal headquarters
building. At January 31, 1997, $1,000,000 was outstanding against this line of
credit. The balance was paid off entirely in March, 1997.
The Company believes that, through conservative management of its cash and cash
equivalents, it will not need additional financial resources beyond those
presently expected to be available during fiscal 1997. It is the intent of the
Company to pay back all outstanding amounts on the credit facilities within one
year.
On June 30, 1996, the Company entered into a contract to purchase a new
management information system including a five year maintenance plan. The
purchase, including maintenance, is being financed by the vendor over a five
year term at an annual interest rate of 8%. The financing terms require five
annual payments of $140,000 each, including interest, beginning on June 30,
1996. The final payment is due on June 30, 2000.
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.
9
<PAGE>
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/ Richard A. Thompson
-------------------------------------------
Richard A. Thompson
President and Chief Executive Officer
BY /s/ Steven R. Delmar
-------------------------------------------
Steven R. Delmar
Executive Vice President and Chief Financial
Officer
(Principal Accounting and Financial Officer)
March 14, 1997
----------------
DATE
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,226,326
<SECURITIES> 0
<RECEIVABLES> 6,269,207
<ALLOWANCES> 213,960
<INVENTORY> 2,210,970
<CURRENT-ASSETS> 10,465,116
<PP&E> 6,513,407
<DEPRECIATION> 2,659,843
<TOTAL-ASSETS> 15,530,296
<CURRENT-LIABILITIES> 6,526,857
<BONDS> 0
0
0
<COMMON> 47,986
<OTHER-SE> 8,394,971
<TOTAL-LIABILITY-AND-EQUITY> 15,530,296
<SALES> 7,093,502
<TOTAL-REVENUES> 7,093,502
<CGS> 4,050,128
<TOTAL-COSTS> 6,486,785
<OTHER-EXPENSES> 43,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,272
<INCOME-PRETAX> 563,276
<INCOME-TAX> (105,545)
<INCOME-CONTINUING> 668,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 668,821
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
