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 April 30, 1999 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 June 14, 1999, 4,294,285 shares of common stock were outstanding.
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
April 30, October 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 190 $ 2,340
Receivables, net 1,838 3,057
Inventories, net 798 872
Other current assets 703 534
----------------- -----------------
Total current assets 3,529 6,803
Fixed assets, net 1,209 1,353
Licenses, net 168 181
Other assets 221 223
----------------- -----------------
Total assets $ 5,127 $ 8,560
================= =================
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 68 $ 68
Borrowings under line-of-credit agreement 25 ---
Accounts payable 1,248 1,079
Accrued compensation and related expenses 1,677 2,082
Deferred revenue 549 719
Other accrued expenses 1,037 902
----------------- -----------------
Total current liabilities 4,604 4,850
Long-term debt 74 74
Deferred officers' compensation 247 249
Other liabilities 58 17
----------------- -----------------
Total liabilities 4,983 5,190
----------------- -----------------
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,
4,896,155 and 4,889,205 shares issued and 4,294,285
and 4,287,335 outstanding 49 49
Capital in excess of par value 16,579 16,417
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (15,307) (11,919)
----------------- -----------------
Total stockholders' equity 144 3,370
----------------- -----------------
Total liabilities and stockholders' equity $ 5,127 $ 8,560
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Microlog Corporation
Consolidated Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended April 30, Ended April 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,251 $ 7,651 $ 9,142 $ 14,206
Costs and expenses:
Cost of sales 3,407 5,564 6,926 10,343
Selling, general, and administrative 1,744 2,102 3,419 4,205
Research and development 736 712 1,699 1,501
Restructuring costs 582 -- 582 --
6,469 8,378 12,626 16,049
------- ------ ------- ------
Operating loss (2,218) (727) (3,484) (1,843)
Net other income (expense) 38 (12) 116 (3)
------- ------ ------- ------
Loss before income taxes (2,180) (739) (3,368) (1,846)
Provision for income taxes (9) (10) (20) (72)
------- ------ ------- ------
Net loss (2,189) (749) (3,388) (1,918)
Accumulated deficit:
at beginning of period (13,118) (4,446) (11,919) (3,277)
------- ------ ------- ------
at end of period $(15,307) $ (5,195) $(15,307) $ (5,195)
======= ====== ======= ======
Basic weighted average shares outstanding 4,291 4,286 4,289 4,280
------- ------ ------- ------
Diluted weighted average shares outstanding 4,291 4,286 4,289 4,280
------- ------ ------- ------
Basic loss per share $ (0.51) $ (0.17) $ (0.79) $ (0.45)
Diluted loss per share $ (0.51) $ (0.17) $ (0.79) $ (0.45)
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the For the
Six Months Six Months
Ended Ended
April 30, 1999 April 30, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,388) $ (1,918)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 381 437
Amortization of goodwill and licensing agreement 57 131
Gain on disposition of fixed assets (9) ---
Provision for inventory reserves 50 403
Changes in assets and liabilities:
Receivables 1,219 (2,811)
Inventories 24 (1,216)
Other assets and licenses (211) (193)
Accounts payable 169 649
Accrued compensation and related expenses (405) 279
Deferred revenue (170) 81
Other accrued expenses 176 627
Deferred officers' compensation (2) (16)
---------------------- ----------------------
Net cash used in operating activities (2,109) (3,547)
---------------------- ----------------------
Cash flows from investing activities:
Purchases of fixed assets (228) (158)
---------------------- ----------------------
Net cash used in investing activities (228) (158)
---------------------- ----------------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 25 ---
Exercise of common stock options 162 124
---------------------- ----------------------
Net cash provided by financing activities 187 124
---------------------- ----------------------
Cash and cash equivalents:
Net decrease during period (2,150) (3,581)
Balance at beginning of period 2,340 3,979
---------------------- ----------------------
Balance at end of period $ 190 $ 398
====================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Microlog Corporation
Notes To Consolidated Financial Statements
April 30, 1999 (Unaudited) and October 31, 1998
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 April 30, 1999 and October 31, 1998, and the results of
their operations and their cash flows for the six month period ended April 30,
1999. The results of operations presented are not necessarily indicative of the
results that may be expected for the fiscal year ending October 31, 1999.
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, 1998.
<TABLE>
<CAPTION>
Note 1 - Inventories (in thousands)
- -----------------------------------
(Unaudited)
April 30, October 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Inventories consist of the following:
Components $ 1,150 $ 1,357
Work-in-process and finished goods 912 1,159
---------------- ----------------
2,062 2,516
Less: reserve for obsolescence (1,264) (1,644)
---------------- ----------------
$ 798 $ 872
================ ================
</TABLE>
During the first six months of fiscal year 1999, the Company disposed of
obsolete inventory relating to certain product lines for which future sales are
doubtful. This inventory was previously reserved for, and therefore resulted in
a reduction of $430,000 to the reserve for obsolescence. The Company also
increased its reserve for obsolescence by an additional $50,000.
Note 2 - Fixed Assets (in thousands)
Fixed assets consist of the following:
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Office furniture and equipment $ 3,830 $ 3,700
Vehicles 24 24
Leasehold improvements 170 171
---------------- ----------------
4,024 3,895
Less: accumulated depreciation
and amortization (2,815) (2,542)
---------------- ----------------
$ 1,209 $ 1,353
================ ================
</TABLE>
5
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Microlog Corporation designs, develops, markets, and supports products,
applications, and professional services for the corporate customer contact
center marketplace. The Company's contact center products include uniQue(TM),
which provides prioritized "media-neutral" intelligent contact routing to
distributed or local agents in corporate contact centers (formerly called call
centers). Media-neutral means that uniQue enables contact center agents to
handle Web contacts, e-mail, hardcopy mail, chat, and fax contacts as easily as
they handle phone calls. The Company's products also include Intela(TM), a
robust interactive voice response platform that facilitates automated handling
of phone calls both within a contact center and within public switched networks.
Intela and other customized Microlog voice processing products allow callers to
access pre-recorded and host-based information, collect customer information for
intelligent contact center routing, complete business transactions, and store
and retrieve digitized voice messages, all by touch-tone, speech-based, or Web
interfaces. The Company's professional services include technology assessment
services, project management, application and software development services,
system integration services, telephony integration services, installation
services, system administration and end-user training, documentation services,
on-going maintenance and upgrade services, and quality assurance.
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 and contact center 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>
PERCENTAGE OF TOTAL REVENUES
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Voice processing 35.3% 59.8% 43.0% 57.1%
Performance analysis and support services 64.7% 40.2% 57.0% 42.9%
------ ------- ------- -------
Total 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales 80.2% 72.7% 75.8% 72.8%
Selling, general, and administrative 41.0% 27.5% 37.4% 29.6%
Research and development 17.3% 9.3% 18.5% 10.6%
Restructuring costs 13.7% 0.0% 6.4% 0.0%
------- -------- ------ --------
Total 152.2% 109.5% 138.1% 113.0%
-------- -------- -------- --------
Operating loss (52.2)% (9.5)% (38.1)% (13.0)%
Net other income (expense) 0.9% (0.2)% 1.3% 0.0%
------- --------- -------- ---------
Loss before income taxes (51.3)% (9.7)% (36.8)% (13.0)%
Provision for income taxes (0.2)% (0.1)% (0.3)% (0.5)%
--------- -------- ---------- ---------
Net loss (51.5)% (9.8)% (37.1)% (13.5)%
========== ========= ========== =========
</TABLE>
6
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $2.2 million (($.51) per basic and diluted share)
for the quarter ended April 30, 1999 and a net loss of $3.4 million (($.79) per
basic and diluted share) for the six months ended April 30, 1999. By comparison,
the Company had a net loss of $0.7 million (($.17 per basic and diluted share),
and a net loss of $1.9 million (($.45 per basic and diluted share) for the
comparable periods in fiscal 1998. 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 fiscal year 1998.
The losses for the second quarter of fiscal year 1999 and the six months ended
April 30, 1999 were attributable to the Company's voice processing operations.
The losses were due primarily to insufficient voice processing revenues offset
by net income of $0.2 million in the second quarter and $0.3 million in the six
month period generated from the Company's performance analysis and supports
services operations.
Over the past 18 months, 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
information response (IIR) systems in general, and in the retail pharmacy
vertical market targeted by the Company's commercial sales efforts in
particular, are becoming commodities which are more readily available from an
increased number of vendors and require less engineering customization.
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 IIR systems as part of major procurements
from larger vendors, which has required the Company to work through prime
contractors, also resulting in greater difficulty in making sales and increased
pressure on margins. One of the Company's short-term responses to these market
trends has included increased marketing efforts focusing on the capabilities of
the Company's Intela product and its ability to customize the product to meet
specific application requirements.
In addition, in February 1999, the Company restructured its voice processing
operations in order to bring expenses in line with forecasted revenues. In
connection with this restructuring, the Company reduced its voice processing
workforce by approximately 25% and wrote off equipment associated with its
headcount reductions. As a result of the restructuring and cost reduction plan
the Company expects to reduce total voice processing operating expenses by
approximately $4.5 million annually and approximately $2.3 million for the
remainder of fiscal year 1999, which started in the second quarter of fiscal
year 1999.
In fiscal year 1999, the Company's strategy for addressing the market trends has
been to move aggressively into the customer contact center market, which became
a new target market for the Company in late fiscal year 1997 and fiscal year
1998. The Company has been focusing sales of its UNIX-based Intela product, the
Company's principal interactive communications system, on contact center
applications. The Company is also promoting its newest product line, uniQue(TM),
a family of open solutions for customer contact center management that leverages
the effectiveness of unified queuing, priority and skills-based routing, and
"zero administration" at the agent's desktop. With "zero administration", the
system administrator makes changes to the configuration or application from a
central location and distributes to the agents' desktops automatically. In
fiscal year 1998, the Company launched its first product from the uniQue(TM)
suite of contact center products, uniQue Agent(TM), an application that allows
the contact center agent to seamlessly manipulate all of the different media
types: email, Web, and voice contacts all at one work station. The Company is
devoting significant efforts to promote market acceptance of uniQue Agent(TM),
and is commencing an advertising campaign directed specifically at contact
centers, collections, and interactive communications industries.
7
<PAGE>
To a lesser extent, the Company is also focusing on another Intela application,
The Automated Collector(TM) (TAC), which has recently been enhanced to add
features the Company believes will meet market requirements. The Company will be
seeking technology partners and resellers for this product in fiscal year 1999.
Also in fiscal year 1999, the Company is continuing to market its Intela product
to its base of VCS 3500 customers. The Company no longer offers the VCS 3500
product; there were no VCS 3500 product revenues in fiscal years 1998 or 1997
and limited revenues ($0.6 million) in fiscal year 1996. The Company continues
to support its base of VCS 3500 customers and receives service revenues from
this support, but expects these revenues to decline since the Company has not
updated the product, including with respect to Year 2000 compliance, since
fiscal year 1996.
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 reduce costs. The Company is subject to the
risk that it will not be able to maintain the necessary debt financing or raise
the equity financing it requires to implement its new strategy. Failure to
maintain or raise required financing would have a material adverse effect on the
Company. The Company's fiscal year 1999 operating budget includes significant
expenditures relating to the development and marketing of its new product line,
uniQue(TM) and requires the Company to utilize debt or equity financing to
maintain its new strategy. The Company's anticipated cash flows from existing
operations will not generate the required cash flows to successfully launch the
Company's new strategy. If the Company is unable to maintain the necessary debt
financing or raise equity financing, the Company will not be able to
successfully implement its new strategy and it will be forced to reduce
expenditures in addition to those associated with the restructuring discussed
above in order to continue as a going concern. The Company is subject to the
risks that it may not make the necessary decisions to reduce expenditures in
enough time to avoid severe adverse consequences.
NET SALES
Net sales for the quarter ended April 30, 1999 were $4.3 million, which
represented a decrease of 44% compared to $7.7 million of net sales for the
quarter ended April 30, 1998. Net sales for the six months ended April 30, 1999
were $9.1 million, which represented a decrease of 36% compared to $14.2 million
of net sales for the six months ended April 30, 1998. The decrease in sales for
the comparable quarters was attributable to a decrease in voice processing net
sales of $3.1 million and a decrease in performance analysis net sales of $0.3
million. The decrease in sales for the comparable six month periods was
attributable to a decrease in voice processing net sales of $4.2 million and a
decrease in performance analysis net sales of $0.9 million.
VOICE PROCESSING NET SALES
Voice processing net sales for the quarter ended April 30, 1999 were $1.5
million, which represented a decrease of 67% as compared to $4.6 million of net
sales for the quarter ended April 30, 1998. Net sales for the six months ended
April 30, 1999 were $3.9 million, which represented a decrease of 52% as
compared to $8.1 million of net sales for the six months ended April 30, 1998.
The decrease in sales for the comparable quarters was primarily attributable to
a decrease of 84% in sales to commercial customers, a decrease of 38% in sales
to government customers and a decrease of 78% in sales to international
customers. The decrease in sales for the comparable six month periods was
primarily attributable to a decrease of 40% in sales to commercial customers, a
decrease of 43% in sales to government customers and a decrease of 72% in sales
to international customers. The Company believes that the decrease in sales is
largely attributable to the market trends discussed above. The decrease in
commercial sales was primarily attributable to a decrease in sales of the
Company's Automated Prescription Refill System (APRS). The decrease in
government sales was primarily attributable to the reduction in product upgrades
to existing government customers. The decrease in international sales was
primarily attributable to large international sales ($1.0 million and $0.5
million respectively in the first and second quarters of fiscal year 1998) to a
subsidiary of KPN of the Netherlands which were not replaced by the Company in
the first two quarters of fiscal year 1999.
8
<PAGE>
As of April 30, 1999, the Company had a backlog of existing orders for voice
processing systems totaling $2.5 million. The backlog, as of April 30, 1998, was
$3.1 million. Of the $2.5 million of backlog at April 30, 1999, approximately
$0.5 million is expected to be recognized as sales beyond fiscal year 1999. The
Company has experienced fluctuations in its backlog at various times in the past
primarily due to the seasonality of governmental purchases. The Company
anticipates that all of the outstanding orders at April 30, 1999 will be shipped
and the sales recognized during fiscal year 1999. 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
Performance analysis and support services net sales for the quarter ended April
30, 1999 were $2.8 million, which represented a decrease of 10% compared to $3.1
million of net sales for the quarter ended April 30, 1998. The net sales for the
six months ended April 30, 1999 were $5.2 million, which represented a decrease
of 15% compared to $6.1 million of net sales for the six months ended April 30,
1998. The decreases were attributable to the reduction 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 April 30, 1999, the Company had a backlog of funding on existing contracts
for performance analysis and support services totaling $0.2 million. By
comparison, the backlog as of April 30, 1998 was $2.7 million. The decrease in
backlog was primarily due to the types of contracts that the Company had in
backlog at April 30, 1999, as compared to April 30, 1998. At April 30, 1999, the
Company's contracts consisted primarily of indefinite delivery, indefinite
quantity (IDIQ) contracts which generally do not have a funding amount, and
therefore are not included in backlog. At April 30, 1998, the Company had a
contracts portfolio which included fixed price and time and materials contracts
which have a funding amount, as well as IDIQ contracts which generally do not
have a funding amount. The Company estimates that the entire $0.2 million of
backlog at April 30, 1999 will be recognized as sales in fiscal year 1999.
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 federal 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 was $3.4 million or 80.2% of net sales for the quarter ended April
30, 1999, as compared to $5.6 million or 72.7% of net sales for the quarter
ended April 30, 1998. Cost of sales was $6.9 million or 75.8% of net sales for
the six months ended April 30, 1999 as compared to $10.3 million or 72.8% of net
sales for the six months ended April 30, 1998. The decrease in cost of sales in
dollar amount and the increase as a percentage of sales for the comparable
quarters, as well as for the comparable six month periods, was primarily
attributable to significantly lower voice processing product sales.
Additionally, the increase as a percentage of sales was attributable to certain
fixed costs that do not vary directly with sales volume, so the decline in net
sales did not result in a similar decline in costs.
9
<PAGE>
Selling, general and administrative expenses were $1.7 million or 41.0% of net
sales for the quarter ended April 30, 1999 as compared to $2.1 million or 27.5%
of net sales for the quarter ended April 30, 1998. Selling, general and
administrative expenses were $3.4 million or 37.4% of net sales for the six
months ended April 30, 1999 as compared to $4.2 million or 29.6% of net sales
for the six months ended April 30, 1998. The decrease in selling, general and
administrative expenses in dollar amount for the comparable quarters, as well as
for the comparable six month periods, was primarily attributable to reduced
headcount in the general and administrative areas of the Company, reduced sales
expenses, and reduced marketing programs. The increase in selling, general, and
administrative expenses as a percentage of revenue for the comparable quarters,
as well as the comparable six month periods, was primarily attributable to
reduced net sales by the Company without a corresponding reduction in fixed
costs.
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 $736,000 or 17.3% of net sales for the quarter ended April 30, 1999 as
compared to $712,000 or 9.3% of net sales for the quarter ended April 30, 1998.
Research and development expenses were $1.7 million or 18.5% of net sales for
the six months ended April 30, 1999 as compared to $1.5 million or 10.6% of net
sales for the six months ended April 30, 1998. The increase in expenses for the
comparable quarters, as well as for the comparable six month periods, was
primarily attributable to the expenses associated with the Company's new uniQue
product line. Research and development expenses for fiscal year 1999 are focused
on the Intela products and the Company's new uniQue product line.
RESTRUCTURING OF OPERATIONS
In February 1999, the Company restructured its voice processing operations in
order to bring expenses more in line with forecasted revenues. In connection
with this restructuring, the Company reduced its voice processing workforce by
approximately 25% and wrote off equipment associated with its headcount
reductions.
The Company incurred restructuring charges of $582,000 in the second quarter of
fiscal 1999, for severance and benefits costs for the reduction of approximately
25 employees in February 1999. Temporary employees and contractors were also
reduced. The restructuring charges include costs of $110,000 for severance and
benefits, the write-off of assets of $49,000 for the equipment associated with
headcount reductions, the costs of $103,000 associated with the closing of the
Company's manufacturing facility, the costs of $160,000 to terminate the 15 year
lease commitment for new office space which the Company had entered into in May
1998, and the costs of $160,000 for the settlement with the former Chief
Executive Officer. 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 $4.5 million annually and approximately $2.3
million for the remainder of fiscal year 1999, which started in the second
quarter of fiscal year 1999.
In addition to a significant reduction in its international voice processing
operations which occurred as a result of the restructuring, the Company is
currently evaluating options for the transfer or sale of its existing Microlog
Europe interactive voice response operations, sales, and support activities to
organizations in similar lines of business. The Company is continuing to explore
uniQue opportunities in Europe through these organizations.
NET OTHER INCOME AND EXPENSE
Net other income was $38,000 and $116,000 for the quarter and six months ended
April 30, 1999 as compared to net other expense of $12,000 and $3,000 for the
comparable periods in fiscal year 1998. Net other income for the quarter and six
months ended April 30, 1999 consisted primarily of the recognition of the
deferred gain on the sale of the Company's office building in August 1998. Net
other expense for the comparable periods in fiscal year 1998 consisted primarily
of interest expense on short term borrowings.
PROVISION FOR INCOME TAXES
For the quarters ended April 30, 1999 and April 30, 1998, the provision for
income taxes of $9,000 and $10,000, and respectively relates to state income
taxes. For the six month period ended April 30, 1999, the provision for income
taxes of $20,000 relates to state income taxes. For the six month period ended
April 30, 1998, the provision for income taxes of $72,000 relates to state
income taxes and the alternative minimum tax for federal income taxes.
10
<PAGE>
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 $10.3 million and $0.4 million,
respectively, will be available to offset taxes generated from future taxable
income through 2013. 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 has concluded that if no action is taken to avoid these consequences,
its Year 2000 issues will have a material effect on the Company's results of
operations and financial condition.
Areas which require remediation are: 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 has reviewed its in-house systems for compliance and determined that
all systems will be 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
has certified that the new system is 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, have been identified, including operating systems
and applications software, and studies are currently being conducted to
determine which programs are compliant and which are not. The Company believes
that the majority of its mission critical systems is currently compliant or can
be made compliant at minimal cost. Non-compliant systems must be replaced or
abandoned prior to the beginning of the Year 2000.
The Company has made a thorough review and testing of its products and believes
that its current products, Intela 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, which are not Year 2000 compliant. The Company has 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 presently receives service and maintenance
revenues with respect to certain of these products, and such revenues are likely
to cease upon migration to the Company's current products or at 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 has not been involved in any
proceeding involving its products or services in connection with Year 2000
compliance. However, there is no assurance that the Company will not, in the
future, be required to defend its products or services in such proceedings
against claims of Year 2000 compliance issues. Any resulting liability of the
Company for damages could have a material adverse effect on the Company's
business, operating results and financial condition.
11
<PAGE>
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.
Despite the Company's intent to complete the modifications necessary to be Year
2000 compliant, there exists the risk that the Company will be unable to
complete all tasks required in a timely manner, or that certain issues or
systems could be over-looked. If the required modifications are not made, or
should they not be completed in a timely manner, this issue could materially and
adversely affect the Company's operating results and financial condition. The
Company estimates that the total costs for Year 2000 compliance will not exceed
$0.6 million.
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 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, 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 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 reduce costs. The Company is subject to the
risk that it will not be able to maintain the necessary debt financing or raise
the equity financing it requires to implement its new strategy. Failure to
maintain or raise required financing would have a material adverse effect on the
Company. The Company's fiscal year 1999 operating budget includes significant
expenditures relating to the development and marketing of its new product line,
uniQue(TM) and requires the Company to utilize debt or equity financing to
maintain its new strategy. The Company's anticipated cash flows from existing
operations will not generate the required cash flows to successfully launch the
Company's new strategy. If the Company is unable to maintain the necessary debt
financing or raise equity financing, the Company will not be able to
successfully implement its new strategy and it will be forced to reduce
expenditures in addition to those associated with the restructuring discussed
above in order to continue as a going concern. The Company is subject to the
risks that it may not make the necessary decisions to reduce expenditures in
enough time to avoid severe adverse consequences.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of April 30, 1999 was a negative $1.1 million as compared to
$2.0 million as of October 31, 1998. The decrease in working capital was
primarily attributable to a decrease in cash and cash equivalents of $2.1
million and a decrease of $1.2 million in accounts receivable. Cash and cash
equivalents were $0.2 million as of April 30, 1999 as compared to $2.3 million
as of October 31, 1998. The decrease was primarily due to the losses in the
first two quarters of the year and a decrease in accounts receivable. Accounts
receivable were $1.8 million as of April 30, 1999 as compared to $3.1 million as
of October 31, 1998. The decrease was primarily due to decreased net sales by
the Company.
In February 1999, the Company and its financial institution put in place a
$750,000 line-of-credit facility, which allows the Company to borrow up to 75%
of the eligible receivables of Old Dominion Systems Inc. of Maryland. The line
of credit bears interest at the bank's prime rate plus 1.25% (9.00% at April 30,
1999) and is payable upon demand. At April 30, 1999, $25,000 was outstanding
against this line-of-credit. In May, 1999, the outstanding amount was paid off
and the credit facility was terminated.
In May 1999, the Company closed and drew on a $2.0 million revolving
line-of-credit facility with a new financial institution, 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% (10.00% at April 30, 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 term of the loan is one year, and 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. At April 30, 1999, the Company was not in compliance with the
restrictive covenant of not exceeding 115% of its consolidated planned quarterly
loss for the second quarter of fiscal year 1999. The bank waived the covenant at
April 30, 1999 and established a revised covenant for the third quarter of
fiscal year 1999. There was no outstanding debt against this line-of-credit at
April 30, 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, beginning on June 30, 1996. Three annual
payments have been made to date. The final payment is due on June 30, 2000.
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 reduce costs. The Company is subject to the
risk that it will not be able to maintain the necessary debt financing or raise
the equity financing it requires to implement its new strategy. Failure to
maintain or raise required financing would have a material adverse effect on the
Company. The Company's fiscal year 1999 operating budget includes significant
expenditures relating to the development and marketing of its new product line,
uniQue(TM) and requires the Company to utilize debt or equity financing to
maintain its new strategy. The Company's anticipated cash flows from existing
operations will not generate the required cash flows to successfully launch the
Company's new strategy. If the Company is unable to maintain the necessary debt
financing or raise equity financing, the Company will not be able to
successfully implement its new strategy and it will be forced to reduce
expenditures in addition to those associated with the restructuring discussed
above in order to continue as a going concern. The Company is subject to the
risks that it may not make the necessary decisions to reduce expenditures in
enough time to avoid severe adverse consequences.
13
<PAGE>
The Company is subject to the risk that it will not be able to maintain adequate
financing to implement its new strategy. Financing activities to date have
primarily consisted of cash generated from operating activities, the sale of the
building and land, and the availability of debt financing. The Company has
generated operating losses resulting in an accumulated deficit of $15.3 million
at April 30, 1999. Failure to raise and maintain required financing would have a
material adverse effect on the Company.
This report contains "forward-looking statements" within the meaning of the
Federal Securities laws. The Company's business is subject to significant risks
that could cause the Company's results to differ materially from those expressed
in any forward-looking statements made in this report.
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. The Company has presented its plans for meeting the minimum
standards to Nasdaq at a hearing in April 1999, and is awaiting Nasdaq's
decision. The Company's common stock was delisted from the Nasdaq National
Market System on one prior occasion. In February 1996, the Company returned to
the Nasdaq National Market System. The common stock was traded on the Nasdaq
Small Caps Market until its market value of public float had risen and the
Company was able to re-list on the Nasdaq National Market System. If the common
stock is delisted from the Nasdaq National Market System, there can be no
assurance that it will be able to re-list such securities on that system.
On March 5, 1999, Nasdaq halted trading of the Company's stock pending receipt
and review of additional information. The Company provided this information to
Nasdaq and trading resumed on March 23, 1999.
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
Form 8K was filed on April 14, 1999, reporting the resignation of the
Chief Executive Officer on March 29, 1999.
14
<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/ David B. Levi
-------------------------
David B. Levi
Chief Executive Officer
BY /s/ Steven R. Delmar
--------------------------
Steven R. Delmar
Executive Vice President
and Chief Financial
Officer
June 14, 1999
- --------------------------
DATE
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