================================================================================
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, 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 March 4, 1999, 4,287,585 shares of common stock were outstanding.
================================================================================
<PAGE>
Microlog Corporation
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
January 31, October 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 1,063 $ 2,340
Receivables, net 3,118 3,057
Inventories, net 787 872
Other current assets 994 534
----------------- ------------------
Total current assets 5,962 6,803
Fixed assets, net 1,414 1,353
Licenses, net 152 181
Other assets 192 223
----------------- ------------------
Total assets $ 7,720 $ 8,560
================= ==================
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 68 $ 68
Accounts payable 1,520 1,079
Accrued compensation and related expenses 2,164 2,082
Deferred revenue 703 719
Other accrued expenses 678 902
----------------- ------------------
Total current liabilities 5,133 4,850
Long-term debt 74 74
Deferred officers' compensation 251 249
Other liabilities 12 17
----------------- ------------------
Total liabilities 5,470 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,
4,889,455 and 4,889,205 shares issued and 4,287,585
and 4,287,335 outstanding 49 49
Capital in excess of par value 16,496 16,417
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (13,118) (11,919)
----------------- ------------------
Total stockholders' equity 2,250 3,370
----------------- ------------------
Total liabilities and stockholders' equity $ 7,720 $ 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
Ended January 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Net sales $ 4,891 $ 6,555
Costs and expenses:
Cost of sales 3,518 4,779
Selling, general and administrative 1,676 2,104
Research and development 963 789
---------------- ----------------
6,157 7,672
---------------- ----------------
Operating loss (1,266) (1,117)
Net other income 78 9
---------------- ----------------
Loss before income taxes (1,188) (1,108)
Provision for income taxes (11) (61)
---------------- ----------------
Net loss (1,199) (1,169)
Accumulated deficit:
at beginning of period (11,919) (3,278)
---------------- ----------------
at end of period $ (13,118) $ (4,447)
================ ================
Basic weighted average shares outstanding 4,288 4,274
---------------- ----------------
Diluted weighted average shares outstanding 4,288 4,274
---------------- ----------------
Basic loss per share $ (0.28) $ (0.27)
Diluted loss per share $ (0.28) $ (0.27)
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Microlog Corporation
Consolidated Statements Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Three Months
Ended Ended
January 31, 1999 January 31, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,199) $ (1,169)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 178 211
Amortization of goodwill and licensing agreement 29 66
Gain on disposition of fixed assets (47)
Provision for inventory reserves 50 100
Changes in assets and liabilities:
Receivables (61) (1,636)
Inventories 35 (492)
Other assets (429) (217)
Accounts payable 441 (77)
Accrued compensation and related expenses 82 (46)
Deferred revenue (16) (61)
Other accrued expenses (229) 198
Deferred officers' compensation 2 (1)
----------- -----------
Net cash used in operating activities (1,164) (3,124)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (192) (67)
----------- -----------
Net cash used in investing activities (192) (67)
----------- -----------
Cash flows from financing activities:
Exercise of common stock options 79 121
----------- -----------
Net cash provided by financing activities 79 121
----------- -----------
Cash and cash equivalents:
Net decrease during period (1,277) (3,070)
Balance at beginning of period 2,340 3,980
----------- -----------
Balance at end of period $ 1,063 $ 910
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Microlog Corporation
Notes to Consolidated Statements
January 31, 1998 (Unaudited) and October 31, 1998
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, 1999 and October 31, 1998, and the results of
their operations and their cash flows for the three month period ended January
31, 1999. The results of operations presented are not necessarily indicative
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 December 31, 1998
<TABLE>
<CAPTION>
Note 1 - Inventories (in thousands) (Unaudited)
January 31, October 31,
Inventories consist of the following: 1999 1998
------------------ ------------------
<S> <C> <C>
Components $ 1,213 $ 1,357
Work-in-process and finished goods 981 1,159
------------------ ------------------
2,194 2,516
Less: reserve for obsolescence (1,407) (1,644)
------------------ ------------------
$ 787 $ 872
================== ==================
Note 2 - Fixed Assets (in thousands)
(Unaudited)
Fixed assets consist of the following: January 31, October 31,
1999 1998
------------------ ------------------
Office furniture and equipment $ 3,859 $ 3,700
Vehicles 24 24
Leasehold improvements 186 171
------------------ ------------------
4,069 3,895
Less: accumulated depreciation and amortization (2,655) (2,542)
------------------ ------------------
$ 1,414 $ 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 a complete line of
UNIX, NT, and DOS-based voice processing systems and applications solutions. The
Company's voice processing products allow users to store, retrieve, and transmit
digitized voice messages and to access information on computer data bases. These
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 enable
the systems to perform multiple voice processing applications. The Company's
contact center solutions include uniQue(R) which provides prioritized,
"media-neutral" intelligent contact routing to corporate contact centers
(formerly called call centers) for service, sales, help desk, collections, and
benefits functions across a number of vertical industries. uniQue handles phone
calls, web contacts, email, fax, regular mail, and other contact types, which
come into common use. uniQue is a software-only product, based on web
technology, with an NT based server and pure Java applet clients.
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:
Three Months Ended
January 31,
1999 1998
---- ----
Revenues
Voice processing................................... 50.0% 54.0%
Performance analysis and support services.......... 50.0% 46.0%
------ --------
Total 100.0% 100.0%
Costs and expenses
Cost of sales...................................... 71.9% 72.9%
Selling, general, and administrative............... 34.3% 32.1%
Research and development........................... 19.7% 12.0%
-------- --------
Total............................................ 125.9% 117.0%
Operating loss ..................................... (25.9%) (17.0)%
Net other income ................................... 1.6% 0.1%
--------- ------
Loss before income taxes............................ (24.3%) (16.9)%
Provision for income taxes.......................... (0.2%) (0.9)%
--------- ----------
Net loss ........................................... (24.5%) (17.8)%
6
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $1.2 million (($.28) per basic and diluted share)
for the quarter ended January 31, 1999. By comparison, the Company had a net
loss of $1.2 million (($.27) per basic and diluted share), for the quarter ended
January 31, 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 net loss of $1.2 million for the first quarter of fiscal year 1999 was
attributable to the Company's voice processing operations. This loss was due
primarily to insufficient voice processing revenues of approximately $1.4
million offset by $0.2 million of net income generated from the Company's
performance analysis and supports services operations. The net loss of $1.2
million for the first quarter of fiscal year 1998 was also attributable to the
Company's voice processing operations. This loss was due primarily to
insufficient voice processing revenues of approximately $1.5 million offset by
$0.3 million of net income generated from the Company's performance analysis and
supports services operations.
Over the past fiscal year 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 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
$4.0 million annually and approximately $2.3 million for the remainder of fiscal
year 1999, starting in the second quarter of fiscal year 1999.
In fiscal year 1999, the Company's strategy for addressing the market trends
will be 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 will be focusing sales of its UNIX-based Intela product,
the Company's principal interactive communications system, on contact center
applications. The Company also will be 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 also will be 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 will continue 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 obtain and maintain the necessary debt
financing it requires to implement its new strategy. Failure to obtain and
maintain 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 and requires the Company to utilize debt 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 obtain and maintain the necessary debt
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. In March 1999, the Company has a commitment for a new
line-of-credit facility with a new financial institution.
NET SALES
Net sales for the quarter ended January 31, 1999 were $4.9 million, which
represented a decrease of 26%, compared to $6.6 million of net sales for the
quarter ended January 31, 1998. This decrease was attributable to a decrease in
voice processing net sales of $1.2 million and a decrease of $0.5 million in
performance analysis and support services sales.
VOICE PROCESSING NET SALES
Voice processing net sales decreased 33% for the quarter ended January 31, 1999
to $2.4 million, compared to $3.6 million for the quarter ended January 31,
1998. This decrease was attributable to an increase in sales to commercial
customers from $0.2 million to $1.0 million, a decrease in sales to government
customers from $1.8 million to $0.9 million, and a decrease in sales to
international customers from $1.6 million to $0.5 million. The increase in
commercial sales was primarily due to additional sales of the Company's APRS
product in the retail pharmacy market to the Company's principal customer in the
retail pharmacy market. The Company believes that the decrease in government
sales and international sales are largely attributable to the market trends
discussed above. Additionally, in the first quarter of fiscal 1999 the Company
experienced a reduction in product upgrades to existing government customers as
compared to the first quarter last year. A large international sale of ($1.0
million) to a subsidiary of KPN of the Netherlands for the quarter ended January
31, 1998, was not replaced by the Company for the quarter ended January 31,
1999.
As of January 31, 1999, the Company had a backlog of existing orders for voice
processing systems totaling $1.5 million. The backlog, as of January 31, 1998,
was $4.1 million. The Company has experienced fluctuations in its backlog at
various times in the past primarily to the seasonality of governmental
purchases. The Company anticipates that all of the outstanding orders at January
31, 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
8
<PAGE>
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 decreased 17% for the
quarter ended January 31, 1999 to $2.5 million, compared to $3.0 million for the
quarter ended January 31, 1998. This decrease was attributable to a 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 January 31, 1999, the Company had a backlog of funding on existing
contracts for performance analysis and support services totaling $0.1 million.
By comparison, the backlog as of January 31, 1998 was $2.7 million. The decrease
in backlog was primarily due to the types of contracts that the Company had in
backlog at January 31, 1999, as compared to January 31, 1998. At January
31,1999, 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 January 31, 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
$0.1 million of backlog at January 31, 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 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 $3.5 million or 71.9% of net sales for the quarter ended
January 31, 1999, compared to $4.8 million or 72.9% of net sales for the quarter
ended January 31, 1998. The decrease in cost of sales, in dollar amount, was
primarily due to reduced voice processing product sales for the first quarter of
1999, compared to the first quarter of 1998, and reduced sales from performance
analysis and support services for the quarter ended January 31, 1999, compared
to the quarter ended January 31, 1998.
Selling, general and administrative expenses were $1.7 million or 34.3% of net
sales for the quarter ended January 31, 1999 as compared to $2.1 million or
32.1% of net sales for the quarter ended January 31, 1998. The decrease in
selling, general, and administrative expenses, in dollar amount, was primarily
due to reduced headcount in the general and administrative areas of the Company
as well as reduced sales expenses. The increase in selling, general, and
administrative expenses, as a percentage of revenue, was primarily attributable
to reduced net sales by the Company.
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 $963,000 or 19.7% of net sales for the quarter ended January 31, 1999
9
<PAGE>
as compared to $789,000 or 12.0% of net sales for the quarter ended January 31,
1998. 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 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 will incur a restructuring charge of approximately $260,000 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 will also be reduced. Included in the restructuring charge is a
write-off of assets of approximately $50,000, which includes the write-off of
equipment associated with headcount reductions. As a result of these
restructuring activities, the Company expects to reduce its annual voice
processing operating expenses, in the form of reduced salaries and wages, by
approximately $1.8 million. The Company expects to complete most of the actions
associated with the restructuring by the end of the second quarter of fiscal
year 1999.
The Company expects to also decrease expenses as a result of the reduced
headcount in areas such as travel, training and communications expenses.
Additionally, the Company is initiating a cost reduction plan in areas such as
advertising, recruiting, office and computer supplies, and professional fees to
further reduce voice processing operating expenses. As a result of the
restructuring and cost reduction plan the Company expects to reduce total voice
processing operating expenses by approximately $4.0 million annually and
approximately $2.3 million for the remainder of fiscal year 1999, starting in
the second quarter of fiscal year 1999.
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.
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
10
<PAGE>
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.
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.
INVESTMENT AND OTHER INCOME, NET
The Company had net investment and other income of $78,000 for the quarter ended
January 31, 1999 as compared to $9,000 for the quarter ended January 31, 1998.
Net other income for the quarter ended January 31, 1999 consisted primarily of
the recognition of the deferred gain on the sale of the Company's office
building in August 1998. Net other income for the quarter ended January 31, 1998
consisted primarily of interest income on short term borrowings.
PROVISION FOR INCOME TAXES
For the quarter ended January 31, 1999, the provision for income taxes of
$11,000 relates to state 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.
11
<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.
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 obtain and maintain the necessary debt
financing it requires to implement its new strategy. Failure to obtain and
maintain 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 and requires the Company to utilize debt 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 obtain and maintain the necessary debt
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. In March 1999, the Company has a commitment for a new
line-of-credit facility with a new financial institution.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of January 31, 1999 was $0.8 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 $1.2 million. Cash
and cash equivalents were $1.1 million as of January 31, 1999 as compared to
$2.3 million as of October 31, 1998. The decrease was primarily due to the net
loss in the first quarter. Accounts receivable were $3.1 million as of January
31, 1999 as compared to $3.1 million as of October 31, 1998. Inventories were
$0.8 million as of January 31, 1999 as compared to $0.9 million as of October
31, 1998.
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% at March 19,
1999) and is payable upon demand. At March 19, 1999, $550,000 was outstanding
against this line-of-credit. This credit facility will be
12
<PAGE>
terminated upon closing of the $2.0 million revolving line-of-credit facility
with the new financial institution discussed below.
The Company has a commitment for 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 at its discretion. The Company
expects to close on this loan facility by the end of March, 1999. The
line-of-credit bears interest at the bank's prime rate plus 2.25% (10.00% at
March 17, 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 will be secured by all
of the Company's assets.
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 obtain and maintain the necessary debt
financing it requires to implement its new strategy. Failure to obtain and
maintain 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 and requires the Company to utilize debt 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 obtain and maintain the necessary debt
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. In March 1999, the Company has a commitment for a new
line-of-credit facility with a new financial institution.
Upon closing of the $2.0 million revolving line-of-credit facility with a new
financial institution as discussed above, the Company has estimated that it will
have adequate resources to sustain operations through at least March 2000, based
upon management's planned expenditures for fiscal year 1999. The Company is
subject to the risks as to the ultimate success of its research and development
efforts and sales activities. In particular, the Company is subject to the risk
that its new strategy (described above) 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.
The Company is subject to the risk that it will not be able to obtain and
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
$13,118,000 at January 31, 1999. Failure to obtain and maintain required
financing would have a material adverse effect on the Company.
13
<PAGE>
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 requested a hearing with Nasdaq to discuss its plans
for compliance with the minimum standards. The Company's common stock has been
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 informed the Company that it was halting trading of the
Company's stock pending receipt and review of additional information. The
Company has provided this information to Nasdaq, but has not been advised by
Nasdaq regarding the status of Nasdaq's review.
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
Chief Executive Officer
BY /s/ Steven R. Delmar
----------------------------
Steven R. Delmar
Executive Vice President and Chief
Financial Officer
DATE
March 22, 1999
- ----------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<EXCHANGE-RATE> 1,000
<CASH> 1,063,000
<SECURITIES> 0
<RECEIVABLES> 3,370,000
<ALLOWANCES> 252,000
<INVENTORY> 787,000
<CURRENT-ASSETS> 5,962,000
<PP&E> 4,069,000
<DEPRECIATION> 2,655,000
<TOTAL-ASSETS> 7,720,000
<CURRENT-LIABILITIES> 5,133,000
<BONDS> 0
0
0
<COMMON> 49,000
<OTHER-SE> 2,201,000
<TOTAL-LIABILITY-AND-EQUITY> 7,720,000
<SALES> 4,891,000
<TOTAL-REVENUES> 4,891,000
<CGS> 3,518,000
<TOTAL-COSTS> 6,157,000
<OTHER-EXPENSES> 78,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> (1,188,000)
<INCOME-TAX> 11,000
<INCOME-CONTINUING> (1,199,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,199,000)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
