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, 1998 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 13, 1998, 4,284,377 shares of common stock were outstanding.
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
January 31, October 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 909,952 $ 3,979,452
Receivables, net 5,519,011 3,882,564
Inventories, net 2,313,186 1,920,983
Deferred tax asset 1,200,000 1,200,000
Other current assets 644,043 422,836
----------------- -----------------
Total current assets 10,586,192 11,405,835
Fixed assets, net 3,590,190 3,733,994
Licenses, net 266,667 295,238
Deferred tax asset 950,000 950,000
Other assets 57,517 61,395
Goodwill, net 570,100 608,238
----------------- -----------------
Total assets $ 16,020,666 $ 17,054,700
================= =================
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 61,180 $ 61,180
Accounts payable 1,795,371 1,872,200
Accrued compensation and related expenses 1,762,000 1,807,709
Deferred revenue 634,127 695,017
Other accrued expenses 520,090 300,152
----------------- -----------------
Total current liabilities 4,772,768 4,736,258
Long-term debt 141,680 141,680
Deferred officers' compensation 255,688 256,255
Other liabilities 10,471 32,635
----------------- -----------------
Total liabilities 5,180,607 5,166,828
----------------- -----------------
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,
4,886,247 and 4,872,753 shares issued and 4,284,377
and 4,270,883 outstanding 48,862 48,727
Capital in excess of par value 16,414,241 16,293,536
Treasury stock, at cost, 601,870 shares (1,176,537) (1,176,537)
Accumulated deficit (4,446,507) (3,277,854)
----------------- -----------------
Total stockholders' equity 10,840,059 11,887,872
----------------- -----------------
Total liabilities and stockholders' equity $ 16,020,666 $ 17,054,700
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months
Ended January 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Net sales $ 6,554,629 $ 7,093,502
Costs and expenses:
Cost of sales 4,779,020 4,050,128
Selling, general and administrative 2,103,439 1,590,620
Research and development 788,683 846,037
---------------- ----------------
7,671,142 6,486,785
---------------- ----------------
Operating (loss) income (1,116,513) 606,717
Net other income (expense) 9,257 (43,441)
---------------- ----------------
(Loss) income before income taxes (1,107,256) 563,276
(Provision) benefit for income taxes (61,397) 105,545
---------------- ----------------
Net (loss) income (1,168,653) 668,821
Accumulated deficit:
at beginning of period (3,277,854) (7,009,498)
---------------- ----------------
at end of period $ (4,446,507) $ (6,340,677)
================ ================
Basic weighted average shares outstanding 4,273,999 4,190,134
---------------- ----------------
Diluted weighted average shares outstanding 4,273,999 4,544,678
---------------- ----------------
Basic (loss) earnings per share $ (0.27) $ 0.16
Diluted (loss) earnings per share $ (0.27) $ 0.15
</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, 1998 January 31, 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,168,653) $ 668,821
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation 210,574 196,060
Amortization of goodwill and licensing agreement 66,709 78,446
Deferred tax benefit -- (100,000)
Changes in assets and liabilities:
Receivables (1,636,447) (1,795,406)
Inventories (392,203) 7,336
Other assets (217,329) 14,966
Accounts payable (76,829) (123,822)
Accrued compensation and related expenses (45,709) 22,048
Deferred officers' compensation (567) 6,397
Deferred revenue (60,890) --
Other accrued expenses 197,774 (113,368)
---------------- ----------------
Net cash (used in) operating activities (3,123,570) (1,138,522)
---------------- ----------------
Cash flows from investing activities:
Purchases of fixed assets (66,770) (163,253)
---------------- ----------------
Net cash (used in) investing activities (66,770) (163,253)
---------------- ----------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements -- 1,350,000
Exercise of common stock options 120,840 7,498
---------------- ----------------
Net cash provided by financing activities 120,840 1,357,498
---------------- ----------------
Cash and cash equivalents:
Net (decrease) increase during period (3,069,500) 55,723
Balance at beginning of period 3,979,452 1,170,603
---------------- ----------------
Balance at end of period $ 909,952 $ 1,226,326
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MICROLOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 (Unaudited) and OCTOBER 31, 1997
GENERAL
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accurals)
necessary to present fairly the financial position of Microlog Corporation and
its subsidiaries at January 31, 1998 and October 31, 1997, and the results of
their operations and their cash flows for the three month period ended January
31, 1998. The results of operations presented are not necessarily indicative of
the results that may be expected for the fiscal year ending October 31, 1998.
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, 1997.
<TABLE>
<CAPTION>
Note 1 - Inventories (Unaudited)
January 31, October 31,
Inventories consist of the following: 1998 1997
----------- -----------
<S> <C> <C>
Components $ 2,294,867 $ 1,474,629
Work-in-process and finished goods 622,096 791,576
----------- -----------
2,916,963 2,266,205
Less: reserve for obsolescence (603,777) (345,222)
----------- -----------
$ 2,313,186 $ 1,920,983
=========== ===========
Note 2 - Fixed Assets
(Unaudited)
Fixed assets consist of the following: January 31, October 31,
1998 1997
----------- -----------
Land $ 520,000 $ 520,000
Building 2,511,266 2,511,266
Office furniture and equipment 3,518,152 3,451,382
Vehicles 23,642 23,642
Leasehold improvements 176,096 176,096
----------- -----------
6,749,156 6,682,386
Less: accumulated depreciation and amortization (3,158,966) (2,948,392)
----------- -----------
$ 3,590,190 $ 3,733,994
=========== ===========
</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 and RETAIL SOLUTION (APRS(R)) and VCS 3500
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:
<TABLE>
<CAPTION>
Three Months Ended
January 31,
1998 1997
------ ------
<S> <C> <C>
Revenues
Voice processing......................................... 54.0% 62.3%
Performance analysis and support services ............... 46.0% 37.7%
------ ------
Total ................................................. 100.0% 100.0%
Costs and expenses
Cost of sales............................................ 72.9% 57.1%
Selling, general, and administrative..................... 32.1% 22.4%
Research and development ................................ 12.0% 11.9%
------ ------
Total.................................................. 117.0% 91.4%
Operating (loss) income .................................. (17.0%) 8.6%
Net other income (expense) ............................... 0.1% (0.7%)
------ ------
(Loss) income before income taxes......................... (16.9%) 7.9%
(Provision) benefit for income taxes ..................... (0.9%) 1.5%
------ ------
Net (loss) income ........................................ (17.8%) 9.4%
</TABLE>
6
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $1,169,000 ($.27 per basic share and $.27 per
diluted share) for the quarter ended January 31, 1998. By comparison, the
Company had net income of $669,000 ($.16 per basic share and $.15 per diluted
share), for the quarter ended January 31, 1997, which included a $100,000 ($.02
per share basic and diluted) 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. The Company is now
reporting basic and diluted earnings per share as required under Statement of
Financial Accounting Standards (SFAS No.128), "Earnings per Share", which became
effective for the Company in the first quarter of 1998.
The loss for the first quarter of fiscal 1998 was primarily attributable to
insufficient sales in the Company's voice processing operations. The decrease in
earnings was primarily attributable to decreased margins due to competition as
well as the sales mix in the Company's voice processing operations. Voice
processing sales for the first quarter of 1998 included a higher percentage of
product sales, as compared with the first quarter of 1997, which had a higher
percentage of services sales. Product sales have a significantly higher cost of
sales than services sales.
NET SALES
Net sales for the quarter ended January 31, 1998 were $6.6 million, which
represented a decrease of 8% as compared to $7.1 million of net sales for the
quarter ended January 31, 1997. This decrease was attributable to a decrease in
voice processing net sales of $0.9 million offset by an increase of $0.4 million
in performance analysis and support services sales.
VOICE PROCESSING NET SALES
Voice processing net sales decreased 20% for the quarter ended January 31, 1998
to $3.6 million, as compared to $4.4 million for the quarter ended January 31,
1997. This decrease was attributable to a decrease of 88% in sales to commercial
customers from $1.7 million to $0.2 million, a decrease of 25% in sales to
government customers from $2.4 million to $1.8 million, offset by an increase of
433% in sales to international customers from $0.3 million to $1.6 million. The
decrease in commercial sales was primarily due to delays in three anticipated
orders totaling approximately $2.6 million. Although there is no assurance that
these orders will be received, the Company is expecting $1.1 million in orders
in the second quarter from two of these customers. The increase in international
sales was primarily due to a large sale ($1.0 million) to a subsidiary of PTT
Telecom of The Netherlands.
As of January 31, 1998, the Company had a backlog of existing orders for voice
processing systems totaling $4.1 million. The backlog, as of January 31, 1997,
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. Of the $4.1 million of backlog at January
31, 1998, approximately $0.9 million will be recognized as sales beyond fiscal
1998. 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 13% for the
quarter ended January 31, 1998 to $3.0 million, as compared to $2.7 million for
the quarter ended January 31, 1997. This increase was attributable to the
addition of a large new contract 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.
7
<PAGE>
As of January 31, 1998, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $2.7 million.
By comparison, the backlog as of January 31, 1997 was $4.5 million. It is
estimated that all of the $2.7 million of backlog at January 31, 1998 will be
recognized as sales in fiscal 1998. 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 $4.8 million or 72.9% of net sales for the quarter ended
January 31, 1998 as compared to $4.1 million or 57.1% of net sales for the
quarter ended January 31, 1997. The increase in cost of sales was primarily
attributable to a higher percentage of voice processing product sales for the
first quarter of 1998, as compared with the first quarter of 1997, which had a
higher percentage of services sales. Product sales have a significantly higher
cost of sales than services sales. The first quarter of 1997 also included a
large sale of software licenses ($1.6 million), which have significantly lower
costs than product sales, as compared to the first quarter of 1998 which had no
sales of software licenses.
Selling, general and administrative expenses were $2.1 million or 32.1% of net
sales for the quarter ended January 31, 1998 as compared to $1.6 million or
22.4% of net sales for the quarter ended January 31, 1997. The increase in
selling, general, and administrative expenses was primarily attributable to
increased staffing in the sales and marketing departments.
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. Hence, the Company does not anticipate
capitalizing research and development costs. Research and development expenses
were $789,000 or 12.0% of net sales for the quarter ended January 31, 1998 as
compared to $846,000 or 11.9% of net sales for the quarter ended January 31,
1997. Research and development expenses for fiscal 1998 are focused on Intela
and APRS.
The Company has assessed the impact of the Year 2000 on its internal and
external software, and has determined that any modification to the software will
not have a material impact on the Company or its results of operations or
financial condition.
INVESTMENT AND OTHER INCOME, NET
The Company had net investment and other income of $9,000 for the quarter ended
January 31, 1998 as compared to net investment and other expenses of $43,000 for
the quarter ended January 31, 1997. Net other income consisted primarily of
interest income on short term investments. Net other expense consisted primarily
of interest expense on short term borrowings.
PROVISION FOR INCOME TAXES
For the quarter ended January 31, 1998, the provision for income taxes of
$61,000 relates to state income taxes, and the alternative minimum tax for
federal income taxes. For the quarter ended January 31, 1997, the Company
recorded a tax benefit of $100,000. At January 31, 1998, the Company has a
deferred tax asset of $2.2 million reflecting the benefit of approximately $5.5
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 $7.1 million and $293,000, respectively,
will be available to offset taxes generated from future taxable income through
2011 and 2012. Management believes that the future tax benefits associated with
$1.6 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.
8
<PAGE>
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, delays in expected customer orders,
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 and the Company's
products / services mix 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 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, 1998 was $5.8 million as compared to $6.7
million as of October 31, 1997. The decrease in working capital was primarily
attributable to a decrease in cash and cash equivalents of $3.1 million offset
by an increase in accounts receivable of $1.6 million and an increase in
inventories of $0.4 million. Cash and cash equivalents were $0.9 million as of
January 31, 1998 as compared to $4.0 million as of October 31, 1997. The
decrease was primarily due to the net loss in the first quarter. Accounts
receivable were $5.5 million as of January 31, 1998 as compared to $3.9 million
as of October 31, 1997. The increase was primarily due to the timing of
shipments during the quarter as well as extended payment terms given to a large
customer. Inventories were $2.3 million as of January 31, 1998 as compared to
$1.9 million as of October 31, 1997. The increase was primarily due to the build
up of inventory in anticipation of receipt of a large order in the commercial
sector.
Goodwill as of January 31, 1998 was $570,000 as compared to $608,000 at October
31, 1997. Net fixed assets as of January 31, 1998 were $3.6 million as compared
to $3.7 million as of October 31, 1997.
In February, 1998, 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% (9.75% at January 31, 1998), and contains a 0.5% commitment fee
on the average unused portion of the line. The line expires on February 28, 1999
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, 1998, there was no outstanding debt
against this line-of-credit.
In February, 1998, the Company also renewed its $1,000,000 loan facility. The
loan facility bears interest at the bank's prime rate plus 0.5% (9.00% at
January 31, 1998), and contains a 0.5% commitment fee on the average unused
portion. The loan agreement expires on February 28, 2000, and contains the same
restrictive covenants as the 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, 2000. The loan facility is secured by the Company's
principal headquarters building. At January 31, 1998, there was no outstanding
debt against this loan facility.
9
<PAGE>
The Company believes that, through management of its cash and cash equivalents,
it will not need additional financial resources beyond those presently expected
to be available during fiscal 1998.
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, beginning on June 30, 1996. Two annual
payments have been made to date. 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.
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
March 13, 1998
- --------------
DATE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000792094
<NAME> MICROLOG
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 909,952
<SECURITIES> 0
<RECEIVABLES> 5,850,057
<ALLOWANCES> 331,046
<INVENTORY> 2,313,186
<CURRENT-ASSETS> 10,586,192
<PP&E> 6,749,156
<DEPRECIATION> 3,158,966
<TOTAL-ASSETS> 16,020,666
<CURRENT-LIABILITIES> 4,772,768
<BONDS> 0
48,862
0
<COMMON> 0
<OTHER-SE> 10,791,197
<TOTAL-LIABILITY-AND-EQUITY> 16,020,666
<SALES> 6,554,629
<TOTAL-REVENUES> 6,554,629
<CGS> 4,779,020
<TOTAL-COSTS> 7,671,142
<OTHER-EXPENSES> 9,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,257
<INCOME-PRETAX> (1,107,256)
<INCOME-TAX> 61,397
<INCOME-CONTINUING> (1,168,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,168,653)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
