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 July 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 September 13, 1999, 5,156,973 shares of common stock were outstanding.
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 31, OCTOBER 31,
1999 1998
----------------- ------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 499 $ 2,340
Receivables, net 2,403 3,057
Inventories, net 731 872
Other current assets 579 534
----------------- ------------------
Total current assets 4,212 6,803
Fixed assets, net 1,106 1,353
Licenses, net 133 181
Other assets 222 223
----------------- ------------------
Total assets $ 5,673 $ 8,560
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 68 $ 68
Borrowings under line-of-credit agreement 3 --
Accounts payable 1,208 1,079
Accrued compensation and related expenses 1,584 2,082
Deferred revenue 395 719
Other accrued expenses 878 902
----------------- ------------------
Total current liabilities 4,136 4,850
Long-term debt --- 74
Deferred officers' compensation 242 249
Other liabilities 52 17
----------------- ------------------
Total liabilities 4,430 5,190
----------------- ------------------
Stockholders' equity:
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,
5,752,593 and 4,889,205 shares issued and 5,150,723
and 4,287,335 outstanding 58 49
Capital in excess of par value 17,856 16,417
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (15,494) (11,919)
---------------- ------------------
Total stockholders' equity 1,243 3,370
---------------- ------------------
Total liabilities and stockholders' equity $ 5,673 $ 8,560
================ ==================
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JULY 31, ENDED JULY 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,954 $ 6,929 $ 14,097 $ 21,135
Costs and expenses:
Cost of sales 3,400 5,605 10,326 15,948
Selling, general, and administrative 1,160 2,123 4,580 6,328
Research and development 600 827 2,299 2,328
Restructuring costs 5 586 -- --
-------- -------- -------- --------
5,165 8,555 17,791 24,604
-------- -------- -------- --------
Operating loss (211) (1,626) (3,694) (3,469)
Net other (expense) income 5 (12) 119 (14)
-------- -------- -------- --------
Loss before income taxes (206) (1,638) (3,575) (3,483)
Benefit (provision) for income taxes 19 (2,218) 0 (2,290)
-------- -------- -------- --------
Net loss (187) (3,856) (3,575) (5,773)
Accumulated deficit:
at beginning of period (15,307) (5,195) (11,919) (3,278)
-------- -------- -------- --------
at end of period $(15,494) $ (9,051) $(15,494) $ (9,051)
======== ======== ======== ========
Basic weighted average shares outstanding 4,438 4,287 4,339 4,282
-------- -------- -------- --------
Diluted weighted average shares outstanding 4,438 4,287 4,339 4,282
-------- -------- -------- --------
Basic loss per share $ (0.04) $ (0.90) $ (0.82) $ (1.35)
Diluted loss per share $ (0.04) $ (0.90) $ (0.82) $ (1.35)
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
ENDED ENDED
JULY 31, 1999 JULY 31, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,575) $(5,773)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 520 662
Amortization of goodwill and licensing agreement 91 188
Gain on disposition of fixed assets (9) --
Provision for inventory reserves 125 457
Consulting expense funded through stock options
granted 155 100
Changes in assets and liabilities:
Receivables 654 (1,395)
Inventories 16 (170)
Other assets and licenses (87) 17
Deferred tax asset 2,150
Accounts payable 129 116
Accrued compensation and related expenses (498) 202
Deferred revenue (324) 57
Other accrued expenses 11 398
Deferred officers' compensation (7) (1)
------- -------
Net cash used in operating activities (2,799) (2,992)
------- -------
Cash flows from investing activities:
Purchases of fixed assets (264) (321)
------- -------
Net cash used in investing activities (264) (321)
------- -------
Cash flows from financing activities:
Reduction in long term debt (74) (61)
Net borrowings under line-of-credit agreements 3 --
Proceeds from issuance of common stock 1,281 --
Exercise of common stock options 12 24
------- -------
Net cash provided by financing activities 1,222 (37)
------- -------
Cash and cash equivalents:
Net decrease during period (1,841) (3,350)
Balance at beginning of period 2,340 3,979
------- -------
Balance at end of period $ 499 $ 629
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
MICROLOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 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 July 31, 1999 and October 31, 1998, and the results of their
operations and their cash flows for the nine month period ended July 31, 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)
JULY 31, OCTOBER 31,
Inventories Consist of the Following: 1999 1998
------------------ ------------------
<S> <C> <C>
Components $ 710 $ 1,357
Work-in-process and finished goods 691 1,159
------------------ ------------------
1,401 2,516
Less: reserve for obsolescence (670) (1,644)
------------------ ------------------
$ 731 $ 872
================== ==================
</TABLE>
During the first nine 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 $1.1 million to the reserve for obsolescence. The Company also
increased its reserve for obsolescence by an additional $125,000 for the nine
months ended July 31, 1999.
<TABLE>
<CAPTION>
Note 2 - Fixed Assets (in thousands)
- ------------------------------------
(UNAUDITED)
Fixed Assets Consist of the Following: JULY 31, OCTOBER 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Office furniture and equipment $ 3,865 $ 3,700
Vehicles 24 24
Leasehold improvements 170 171
----------------- ------------------
4,059 3,895
Less: accumulated depreciation and amortization (2,953) (2,542)
----------------- ------------------
$ 1,106 $ 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:
PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Voice processing 50.0% 57.7% 45.0% 57.3%
Performance analysis and support services 50.0% 42.3% 55.0% 42.7%
------ ------- ------- -------
Total 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales 68.6% 80.9% 73.3% 75.5%
Selling, general, and administrative 23.4% 30.7% 32.5% 29.9%
Research and development 12.1% 11.9% 16.3% 11.0%
Restructuring costs 0.1% 0.0% 4.1% 0.0%
------ -------- ------ --------
Total 104.2% 123.5% 126.2% 116.4%
-------- -------- -------- --------
Operating loss (4.2)% (23.5)% (26.2)% (16.4)%
Net other income (expense) 0.1% (0.1)% 0.5% (0.1)%
------- --------- -------- ----------
Loss before income taxes (4.1)% (23.6)% (25.7)% (16.5)%
Benefit (provision) for income taxes 0.3% (32.0)% (0.3)% (10.8)%
------- --------- ---------- ----------
Net loss (3.8)% (55.6)% (25.4)% (27.3)%
========= ========== ========== =========
</TABLE>
6
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $0.2 million (($.04) per basic and diluted share)
for the quarter ended July 31, 1999 and a net loss of $3.6 million (($.82) per
basic and diluted share) for the nine months ended July 31, 1999. By comparison,
the Company had a net loss of $3.9 million (($.90 per basic and diluted share),
and a net loss of $5.8 million (($1.35 per basic and diluted share) for the
comparable periods in fiscal year 1998. The results for fiscal year 1998
included a write-off of a deferred tax asset for the three and nine month
periods of $2.2 million (($.50) per basic and diluted share.) 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 third quarter of fiscal year 1999 and the nine months ended
July 31, 1999 were attributable to the Company's voice processing operations.
The losses were due to insufficient voice processing revenues as well as
significant costs specific to the uniQue product line with no corresponding
uniQue revenue. These losses in the voice processing operations were offset by
net income of $0.1 million in the third quarter and $0.5 million in the nine
month period generated from the Company's performance analysis and supports
services operations.
Over the past two years, 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 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. As a result of the restructuring and cost reduction plan
the Company expects to reduce total voice processing operating expenses by
approximately $4.8 million annually and approximately $1.2 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. uniQue
became generally available in April, 1999 and has resulted in several new orders
since then. The Company is devoting significant efforts to promote market
acceptance of uniQue.
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
7
<PAGE>
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 increase sales and reduce costs .
On July 2, 1999 the Company finalized an Investment Agreement with TFX Equities,
Inc., a wholly owned subsidiary of Teleflex, Inc. The investment will be
consummated in two transactions. In the first transaction, which occurred on
July 2, 1999, TFX purchased 854,563 shares of Microlog common stock for $1.3
million. In the second transaction, which is scheduled to close on September 27,
1999, TFX would purchase 1,812,104 shares of common stock for $2.7 million. The
Company held a special meeting of stockholders on September 9, 1999. At the
meeting, the proposed approval of the issuance of 1,812,104 additional shares of
Common Stock to TFX Equities, Inc. was obtained.
NET SALES
- ---------
Net sales for the quarter ended July 31, 1999 were $5.0 million, which
represented a decrease of 29% compared to $6.9 million of net sales for the
quarter ended July 31, 1998. Net sales for the nine months ended July 31, 1999
were $14.1 million, which represented a decrease of 33% compared to $21.1
million of net sales for the nine months ended July 31, 1998. The decrease in
sales for the comparable quarters was attributable to a decrease in voice
processing net sales of $1.5 million and a decrease in performance analysis net
sales of $0.4 million. The decrease in sales for the comparable nine month
periods was attributable to a decrease in voice processing net sales of $5.7
million and a decrease in performance analysis net sales of $1.3 million.
VOICE PROCESSING NET SALES
- --------------------------
Voice processing net sales for the quarter ended July 31, 1999 were $2.5
million, which represented a decrease of 38% as compared to $4.0 million of net
sales for the quarter ended July 31, 1998. Net sales for the nine months ended
July 31, 1999 were $6.4 million, which represented a decrease of 47% as compared
to $12.1 million of net sales for the nine months ended July 31, 1998. The
decrease in sales for the comparable quarters was primarily attributable to a
decrease of 65% in sales to government customers, a decrease of 60% in sales to
international customers, offset by an increase of 143% in sales to commercial
customers. The decrease in sales for the comparable nine month periods was
primarily attributable to a decrease of 53% in sales to government customers, a
decrease of 70% in sales to international customers and a decrease of 6% in
sales to commercial customers. The Company believes that the overall decrease in
sales is largely attributable to the market trends discussed above. 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, $0.5
million, and $0.2 million respectively in the first, second, and third quarters
of fiscal year 1998) to a subsidiary of KPN of the Netherlands which were not
replaced by the Company in the first nine months of fiscal year 1999.
As of July 31, 1999, the Company had a backlog of existing orders for voice
processing systems totaling $1.9 million. The backlog, as of July 31, 1998, was
$3.1 million. Of the $1.9 million of backlog at July 31, 1999, approximately
$1.0 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. 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.
8
<PAGE>
PERFORMANCE ANALYSIS AND SUPPORT SERVICES NET SALES
- ---------------------------------------------------
Performance analysis and support services net sales for the quarter ended July
31, 1999 were $2.5 million, which represented a decrease of 14% compared to $2.9
million of net sales for the quarter ended July 31, 1998. The net sales for the
nine months ended July 31, 1999 were $7.7 million, which represented a decrease
of 14% compared to $9.0 million of net sales for the nine months ended July 31,
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 sales from
performance analysis and support services nor alter the manner in which it
procures contracts for such services. However, over the past two years, there
has been a downward trend in sales from performance analysis and support
services.
As of July 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 July 31, 1998 was $1.7 million. The decrease in
backlog was primarily due to the types of contracts that the Company had in
backlog at July 31, 1999, as compared to July 31, 1998. At July 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 July 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 July 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 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 69% of net sales for the quarter ended July
31, 1999, as compared to $5.6 million or 81% of net sales for the quarter ended
July 31, 1998. Cost of sales was $10.3 million or 73% of net sales for the nine
months ended July 31, 1999 as compared to $15.9 million or 76% of net sales for
the nine months ended July 31, 1998. The decrease in cost of sales in dollar
amount for the comparable quarters, as well as for the comparable nine month
periods, was primarily attributable to reduced headcount in the Company's
manufacturing facility as well as significantly lower voice processing sales.
The decrease in cost of sales as a percentage of revenue for the comparable
quarters, as well as for the comparable nine month periods, was primarily
attributable to significantly lower voice processing product sales.
Selling, general and administrative expenses were $1.2 million or 23% of net
sales for the quarter ended July 31, 1999 as compared to $2.1 million or 31% of
net sales for the quarter ended July 31, 1998. Selling, general and
administrative expenses were $4.6 million or 33% of net sales for the nine
months ended July 31, 1999 as compared to $6.3 million or 30% of net sales for
the nine months ended July 31, 1998. The decrease in selling, general and
administrative expenses in dollar amount for the comparable quarters, as well as
for the comparable nine 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 nine 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 as well as the new uniQue product line. The
9
<PAGE>
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 $600,000 or 12% of net
sales for the quarter ended July 31, 1999 as compared to $827,000 or 12% of net
sales for the quarter ended July 31, 1998. Research and development expenses
were $2.3 million or 16% of net sales for the nine months ended July 31, 1999 as
compared to $2.3 million or 11% of net sales for the nine months ended July 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 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, costs of $103,000 associated with the closing of the
Company's manufacturing facility, 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 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 $4.8 million annually and approximately $1.2 million
for the remainder of fiscal year 1999, which started in the second quarter of
fiscal year 1999.
On September 3, 1999, the Company entered into a contract with Comsys
International B.V. of The Netherlands to sell the assets of the Company's
European operation based in The Netherlands. The Company has agreed to grant
Comsys certain rights to resell its Intela software and related hardware. The
Company has also agreed to assign certain agreements to which Microlog is party
relating to the Intela product. As part of the sale, two Microlog employees
became employees of Comsys.
NET OTHER INCOME AND EXPENSE
- ----------------------------
Net other income was $5,000 and $119,000 for the quarter and nine months ended
July 31, 1999 as compared to net other expense of $12,000 and $14,000 for the
comparable periods in fiscal year 1998. Net other income for the quarter ended
July 31, 1999 consisted primarily of a prior years' state tax refund offset by
interest expense on short term borrowings. Net other income for the nine months
ended July 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 expense
for the comparable periods in fiscal year 1998 consisted primarily of interest
expense on short term borrowings.
BENEFIT / PROVISION FOR INCOME TAXES
- ------------------------------------
For the quarter ended July 31, 1999, the benefit for income taxes of $19,000
relates to state income taxes. For the quarter and nine months ended July 31,
1998, the provision for income taxes of $2.2 million and $2.3 million,
respectively relates primarily to the write-off of a deferred tax asset of $2.2
million.
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 $10.4 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.
10
<PAGE>
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.
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.
11
<PAGE>
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,
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 increase sales and reduce costs.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital as of July 31, 1999 was $0.1 million as compared to $2.0 million
as of October 31, 1998. The decrease in working capital was primarily
attributable to a decrease of $1.8 million in cash and cash equivalents, a
decrease of $0.6 million in accounts receivable offset by a decrease of $0.4 in
accounts payable and accrued expenses. Cash and cash equivalents were $0.5
million as of July 31, 1999 as compared to $2.3 million as of October 31, 1998.
The decrease was primarily due to the losses for the first nine months of the
year offset by the proceeds from the issuance of common stock to TFX Equities.
Accounts receivable were $2.4 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 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 July 31, 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. There was $3,000 of outstanding debt against this
line-of-credit at July 31, 1999.
12
<PAGE>
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. Four 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.
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. On August 17, 1999, the Company was notified that it had been moved
to the Nasdaq SmallCap Market System. 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 SmallCap Market System until its market value of public
float had risen and the Company was able to re-list on the Nasdaq National
Market System. There can be no assurance that it will be able to re-list such
securities on the Nasdaq National Market System.
ITEM 1 Legal Proceedings
None
ITEM 2 Changes in Securities
None.
ITEM 3 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 21, 1999. At the
meeting, Joe J. Lynn was appointed to serve as a director for a three year term
by a vote of: FOR 3,977,753 and 109,878 shares abstaining. .
The proposed amendment to the Company's 1989 Non-Employee Director Non-Qualified
Stock Option Plan, which adds an additional annual stock option grant to each
Non-Employee Director of 6,000 shares (or pro-rata portion thereof) for as long
as Non-Employee Directors are serving on the Company's Board of Directors
without monetary compensation, was ratified by a vote of: FOR 3,846,244, AGAINST
216,195, and 25,192 shares abstaining. The meeting was adjourned until July 2,
1999 on the proposed amendment to the Company's 1995 Stock Option Plan (the
"Employee Plan").
When the adjourned meeting of stockholders was reconvened on July 2, 1999, the
proposed amendment to the Company's 1995 Stock Option Plan (the "Employee
Plan"), which increased from 1,000,000 to 1,600,000 the number of shares of
Common Stock reserved for issuance upon the exercise of options granted under
the plan was ratified by a vote of: FOR 2,009,410, AGAINST 181,472, and 21,792
shares abstaining.
The Company held a special meeting of stockholders on September 9, 1999. At the
meeting, the proposed approval of the issuance of 1,812,104 additional shares of
Common Stock to TFX Equities, Inc. was obtained by a vote of: FOR 2,304,564,
AGAINST 72,837, and 24,863 shares abstaining.
13
<PAGE>
ITEM 4 Other Information
None.
ITEM 5 Exhibits and Reports on Form 8-K
A current report on Form 8-K was filed on April 13, 1999, reporting the
resignation of the Company's Chief Executive Officer on March 29, 1999.
A current report on Form 8-K was filed on June 11, 1999 reporting that
the Company had entered into a non-binding letter of intent with TFX
Equities, Inc. to invest $4.0 million in Microlog's common stock at
$1.50 per share.
A current report on Form 8-K was filed on July 6, 1999 reporting that
the Company had finalized the Investment Agreement with TFX Equities,
Inc. to invest $4.0 million in Microlog's common stock at $1.50 per
share.
A current report on Form 8-K was filed on July 16, 1999 reporting that
the Company had dismissed PricewaterhouseCoopers LLP as its independent
accountant and that it had engaged Grant Thornton LLP as its new
independent accountant as of July 12, 1999.
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/ Stephen Smith
--------------------
Stephen Smith
President and Chief Executive Officer
BY /s/ Steven R. Delmar
--------------------
Steven R. Delmar
Executive Vice President and Chief Financial Officer
September 13, 1999
------------------
DATE
14
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