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, 2000
Commission file No. 0-14880
MICROLOG CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 52-0901291
(State of incorporation) (I.R.S. Employer Identification No.)
20270 Goldenrod Lane
Germantown, Maryland 20876
(Address of principal executive offices) (Zip Code)
301-428-9100
(Registrant's telephone number, including area code)
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 12, 2000, 7,064,938 shares of common stock were outstanding.
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MICROLOG CORPORATION
INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 2000 and October 31, 1999.........................3
Consolidated Statements of Operations for the Three Months ended
July 31, 2000 and July 31, 1999 and for the Nine Months ended
July 31, 2000 and July 31, 1999.....................................................4
Consolidated Statements of Cash Flows for the Nine Months ended
July 31, 2000 and July 31, 1999.....................................................5
Notes to Consolidated Financial Statements..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.............................................................13
Signatures.........................................................................................................13
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MICROLOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 31, OCTOBER 31,
2000 1999
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Assets:
Current assets:
Cash and cash equivalents $ 1,842 $ 3,425
Receivables, net 1,898 1,155
Inventories, net 336 375
Other current assets 231 301
-------- --------
Total current assets 4,307 5,256
Fixed assets, net 778 917
Licenses, net 16 100
Other assets 181 153
-------- --------
Total assets $ 5,282 $ 6,426
======== ========
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 0 $ 74
Accounts payable 354 388
Accrued compensation and related expenses 1,316 1,965
Deferred revenue and other deferred credits 485 447
Other accrued expenses 238 564
-------- --------
Total current liabilities 2,393 3,438
Deferred officers' compensation 136 151
Other liabilities 114 33
-------- --------
Total liabilities 2,643 3,622
-------- --------
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,
7,666,808 and 7,575,597 shares issued and 7,064,938
and 6,973,727 outstanding 77 76
Capital in excess of par value 20,672 20,517
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (16,933) (16,612)
-------- --------
Total stockholders' equity 2,639 2,804
-------- --------
Total liabilities and stockholders' equity $ 5,282 $ 6,426
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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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,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Sales $ 3,071 $ 4,954 $ 11,624 $ 14,097
Costs and expenses:
Cost of sales 2,321 3,400 8,178 10,326
Selling, general and administrative 923 1,160 2,823 4,580
Research and development 342 600 1,004 2,299
Restructuring costs -- 5 -- 586
-------- -------- -------- --------
3,586 5,165 12,005 17,791
-------- -------- -------- --------
Operating loss (515) (211) (381) (3,694)
Net other income 11 5 4 119
-------- -------- -------- --------
Loss before income taxes (504) (206) (377) (3,575)
Benefit for income taxes -- 19 56 --
-------- -------- -------- --------
Net loss (504) (187) (321) (3,575)
Accumulated deficit:
at beginning of period (16,429) (15,307) (16,612) (11,919)
-------- -------- -------- --------
at end of period $(16,933) $(15,494) $(16,933) $(15,494)
======== ======== ======== ========
Basic weighted average shares outstanding 7,065 4,438 7,024 4,339
-------- -------- -------- --------
Diluted weighted average shares outstanding 7,065 4,438 7,024 4,339
-------- -------- -------- --------
Basic loss per share $ (0.07) $ (0.04) $ (0.05) $ (0.82)
Diluted loss per share $ (0.07) $ (0.04) $ (0.05) $ (0.82)
</TABLE>
See accompanying notes to consolidated financial statements.
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MICROLOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
ENDED ENDED
JULY 31, 2000 JULY 31, 1999
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Cash flows from operating activities:
Net loss $ (321) $(3,575)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 275 520
Amortization of goodwill and licensing agreement 84 91
Gain on disposition of fixed assets -- (9)
Provision for inventory reserves 50 125
Consulting expense funded through stock options
granted -- 155
Changes in assets and liabilities:
Receivables (743) 654
Inventories (11) 16
Other assets 42 (87)
Accounts payable (34) 129
Accrued compensation and related expenses (649) (498)
Deferred revenue and other deferred credits 38 (324)
Other accrued expenses (245) 11
Deferred officers' compensation (15) (7)
------- -------
Net cash used in operating activities (1,529) (2,799)
------- -------
Cash flows from investing activities:
Purchases of fixed assets (136) (264)
------- -------
Net cash used in investing activities (136) (264)
------- -------
Cash flows from financing activities:
Reduction in long term debt (74) (74)
Net borrowings under line-of-credit agreements -- 3
Proceeds from issuance of common stock -- 1,281
Exercise of common stock options 156 12
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Net cash provided by financing activities 82 1,222
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Cash and cash equivalents:
Net decrease during period (1,583) (1,841)
Balance at beginning of period 3,425 2,340
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Balance at end of period $ 1,842 $ 499
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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MICROLOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 (UNAUDITED) AND OCTOBER 31, 1999
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, 2000 and October 31, 1999, and the results of their
operations and their cash flows for the nine month period ended July 31, 2000.
The results of operations presented are not necessarily indicative of the
results that may be expected for the fiscal year ending October 31, 2000.
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, 1999.
Revenue Recognition
Sales of products are recognized at the time deliveries are made. The Company
generates software revenues from licensing the right to use its software
products and also generates service revenues from implementation and
installation services, ongoing maintenance, training services, and professional
services performed.
Revenue from software license agreements is recognized upon shipment of the
software if: persuasive evidence of an arrangement exists; sufficient vendor
specific objective evidence exists to support allocating the total fee to all
elements of the arrangement; the fee is fixed or determinable; and collection is
probable.
Ongoing maintenance contracts, which include software upgrades, are invoiced
separately and revenue is earned ratably over the term of the contract. Revenue
from implementation and installation services is recognized when the services
are completed. Revenue from training services and professional services is
recognized when the services are completed.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Introduction
Microlog Corporation has two major subdivisions: the Contact Center division
(formerly called the Voice Processing division) and the Old Dominion Systems
division. The Contact Center division is a software development and systems
integration services company. This division builds custom self-service and
customer interaction solutions that manage telephony type contacts and
Internet-based contacts, sometimes known in the industry as "channels", which
allow Microlog's customers to serve their customers better through the use of
technology in formal and informal corporate contact centers. In providing these
solutions, Microlog uses its products, primarily core voice and data platforms
and toolkits, combined with its professional services offerings. Microlog's
products and solutions address interactive voice response (IVR), inbound and
outbound phone calls, e-mail, fax, world-wide Web interactions, Web chat, Web
bulletin board, and voice-over-IP types of contacts. Professional services
associated with this business include technology assessment, project management,
application and software development, telephony integration, installation,
system administration, quality assurance testing, and on-going maintenance and
support.
Through its Old Dominion Systems division, Microlog provides performance
analysis and technical and administrative support services to the Applied
Physics Laboratory (APL), a prime contractor to the U.S. Navy. Although this
segment of the business has historically provided a stable source of sales and
profits, Microlog believes that, due to a change in policy by APL regarding
contract labor positions, it will no longer provide significant performance
analysis and technical and administrative support services to APL after the
fourth quarter of fiscal year 2000. Accordingly, Microlog believes its principal
opportunities for growth are in the Contact Center area. Microlog has been
concentrating its investments and efforts on the Contact Center area.
The following table sets forth for the periods indicated the percentage of sales
of certain items from Microlog's consolidated statements of income and retained
earnings:
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<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ----- ----
<S> <C> <C> <C> <C>
Sales
Contact Center division ....................................45.2% 50.0% 47.8% 45.0%
Old Dominion Systems division.............................. 54.8% 50.0% 52.2% 55.0%
------ ------- ------- -------
Total....................................................100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales...............................................75.6% 68.6% 70.4% 73.3%
Selling, general, and administrative........................30.1% 23.4% 24.3% 32.5%
Research and development ...................................11.1% 12.1% 8.6% 16.3%
Restructuring costs........................................ 0.0% 0.1% 0.0% 4.1%
------ -------- ------ --------
Total............................................... 116.8% 104.2% 103.3% 126.2%
-------- -------- -------- --------
Operating loss..............................................(16.8)% (4.2)% (3.3)% (26.2)%
Net other income .......................................... 0.4% 0.1% 0.0% 0.5%
------- ------- -------- --------
Loss before income taxes....................................(16.4)% (4.1)% (3.3)% (25.7)%
Benefit (provision) for income taxes....................... 0.0% 0.3% 0.5% (0.3)%
------- ------ -------- ---------
Net loss................................................. (16.4)% (3.8)% (2.8)% (25.4)%
========== ========= ========= =========
</TABLE>
7
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Results of Operations
Microlog had a net loss of $504,000 (($.07) per basic and diluted share) for the
quarter ended July 31, 2000 and a net loss of $321,000 (($.05) per basic and
diluted share) for the nine months ended July 31, 2000. By comparison, Microlog
had a net loss of $187,000(($.04) per basic and diluted share) and a net loss of
$3.6 million (($.82) per basic and diluted share) for the comparable periods in
fiscal year 1999.
The losses for the third quarter of fiscal year 2000 and the nine months ended
July 31, 2000 were attributable to the insufficient revenues generated by the
Company's Contact Center division. Even though the first two quarters of fiscal
year 2000 were profitable, the loss for the third quarter of fiscal year 2000
resulted in a cumulative loss for the fiscal year 2000 nine month period. The
Company signed a significant contract near the end of the quarter which will
generate in excess of $500,000 of income. This income is expected to be realized
over the next two fiscal quarters. The net losses for the comparable periods in
fiscal year 1999 were attributable to insufficient sales generated by the
Contact Center division and one-time costs incurred in the first quarter of
fiscal year 1999 in connection with the restructuring program for the Contact
Center division. The losses for the third quarter of fiscal year 1999 and the
nine month period ended July 31, 1999 were offset in part by net income of $0.1
million in the third quarter of fiscal year 1999, and $0.5 million in the nine
month period ended July 31, 1999, generated by the Old Dominion Systems
division.
Over the past two years, Microlog has been experiencing reduced demand,
increased competition, and reduced margins in its traditional voice processing
operations, which Microlog attributes to market forces. Microlog believes that
interactive voice response systems in general, and certain vertical sub-segments
of this market in particular, are in the maturing phase of market evolution for
stand-alone systems. Accordingly, competition has increased, margins have been
reduced, and it has become more difficult to sell these products. In addition,
some governmental customers have been procuring large IVR systems as part of
major procurements from larger vendors, which has required Microlog to work
through prime contractors, also resulting in increased margin pressure and
greater difficulty in making sales directly.
Microlog's response to this has been to increase its research and development in
both the uniQue(TM) Contact Center products and unique IVR products to expand
its offerings to include Internet-based interactions, and to offer professional
turnkey services to the integration of modern customer contact centers. This
response has been to address not only traditional voice types of contacts, but
also e-mail, fax, Web callback, IP telephony, chat, Web bulletin board, and
hardcopy mail, thereby expanding Microlog's addressable market. As a result of
this initiative, uniQue V 2.0 was announced and substantially completed as a
product offering available for customer trial in the contact center market in
January 2000. uniQue V 2.0 was the second in a series of offerings Microlog has
developed to provide a comprehensive range of solutions within the contact
center market. This open, standards-based product enables companies to route and
prioritize phone calls, e-mails, web contacts, faxes, and hardcopy mail and
other contact types to the appropriate skilled agent for handling. In connection
with its new products, Microlog offers a significant amount of custom
engineering services to provide special features, application development, and
system integration services to its customers. Microlog believes this approach
has resulted in increased sales potential for the Contact Center division due to
the trend in corporate process re-engineering in customer relationship
management, and in outsourcing of related transactions and application
development.
In the first nine months of fiscal year 2000, Microlog has continued to
implement its strategy of combining its new interactive response product
offerings with expanded professional services offerings to provide more
comprehensive solutions to its customers. The objective of this strategy is for
Microlog to help its customers to better serve their customers through the
implementation of self service and customer interaction applications utilizing:
the uniQue IVR voice processing platform enabled by speech recognition; the
uniQue contact processing platform for media processing, Web interfaces, and
contact prioritization; and services based on the analysis, development, and
integration skills developed over the years by Microlog's staff.
Microlog is subject to the risk that its strategy will not be successful. The
strategy is dependent on market acceptance of Microlog's new focus and new
products, ongoing research and development efforts and sales activities over the
near term. In addition, the strategy is also dependent on Microlog's ability to
successfully retain and recruit skilled personnel.
8
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Sales
Sales for the quarter ended July 31, 2000 were $3.1 million, which represented a
decrease of 38% compared to $5.0 million of sales for the quarter ended July 31,
1999. Sales for the nine months ended July 31, 2000 were $11.6 million, which
represented a decrease of 18% compared to $14.1 million of sales for the nine
months ended July 31, 1999. The decrease in sales for the comparable quarters
was attributable to a decrease of $1.1 million in sales by the Contact Center
division and a decrease of $0.8 million in sales by the Old Dominion Systems
division. The decrease in sales for the comparable nine month periods was
attributable to a decrease of $0.9 million in sales by the Contact Center
division and a decrease of $1.6 million in sales by the Old Dominion Systems
division.
Contact Center Division Sales
Contact Center sales for the quarter ended July 31, 2000 were $1.4 million,
which represented a decrease of 44% compared to $2.5 million of sales for the
quarter ended July 31, 1999. Sales for the nine month period ended July 31, 2000
were $5.5 million, which represented a decrease of 14% compared to $6.4 million
of sales for the same period in fiscal year 1999. The decrease in sales for the
comparable quarters, as well as for the comparable nine month periods, was
primarily attributable to sales of $1.1 million in the third quarter of fiscal
year 1999 of Microlog's APRS product to Microlog's principal customer in the
retail pharmacy market, and a sale of $0.4 million in the third quarter of
fiscal year 1999 of Microlog's TIVRA product to a government customer, both of
which were only partially replaced by sales of $0.4 million in the third quarter
of fiscal year 2000 of Microlog's uniQue IVR product to three new customers and
various existing customers.
As of July 31, 2000, Microlog had a backlog of existing orders for Contact
Center systems totaling $2.0 million. The backlog as of July 31, 1999, was $1.9
million. Microlog anticipates that approximately $1.4 million of the outstanding
orders at July 31, 2000 will be shipped and the sales recognized during fiscal
year 2000. Although Microlog believes that its entire backlog of orders consists
of firm orders, Microlog's backlog as of any particular date may not be
indicative of actual sales for any future period because of the possibility of
customer changes in delivery schedules.
Old Dominion Systems Division Sales
Old Dominion Systems sales for the quarter ended July 31, 2000 were $1.7
million, which represented a decrease of 32% compared to $2.5 million of sales
for the quarter ended July 31, 1999. Sales for the nine month period ended July
31, 2000 were $6.1 million, which represented a decrease of 21% compared to $7.7
million of sales for the same period in fiscal year 1999. In March 2000,
Microlog was informed by the John Hopkins University Applied Physics Laboratory
(APL) that APL had adopted a change in policy regarding contract labor positions
and that most of the employees of the Old Dominion Systems division would be
offered positions by APL by September 2000. Each employee hired directly by APL,
and removed from the contract(s), decreases the sales and profit potential of
the Old Dominion Systems division from that source. The impact of this change on
Microlog for the balance of fiscal year 2000 is estimated to result in a loss of
sales generated by the Old Dominion Systems division of approximately $1.6
million and a reduction in profits of approximately $0.2 million. The impact of
this change for fiscal year 2001 is estimated to result in a loss of sales
generated by the Old Dominion Systems division of approximately $7.0 million and
a reduction in profits of approximately $1.0 million. Microlog's strategy for
addressing this issue is to focus on replacing the lost profits, and an
increasing portion of the lost sales, through the growth of the Contact Center
division. Microlog is subject to the risk that its strategy will not be
successful.
As of July 31, 2000, Microlog had a backlog of funding on existing contracts for
performance analysis and support services totaling $100,000. By comparison, the
backlog as of July 31, 1999 was also $100,000. Microlog's contracts consist
primarily of indefinite delivery, indefinite quantity (IDIQ) contracts which
generally do not have a funding amount and, therefore, are not included in
backlog. Microlog estimates that the entire $100,000 of this backlog at July 31,
2000 will be recognized as sales in fiscal year 2000. Because of the delays
inherent in the government contracting process or possible changes in defense
priorities or spending, Microlog's backlog as of any particular date may not be
indicative of actual sales for any future period. Although Microlog believes
that its backlog of funding on existing contracts is firm, the possibility
9
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exists that funding for some contracts on which Microlog 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 $2.3 million or 76% of sales for the quarter ended July 31,
2000, compared to $3.4 million or 69% of sales for the quarter ended July 31,
1999. Cost of sales was $8.2 million or 70% of sales for the nine month period
ended July 31, 2000, compared to $10.3 million or 73% of sales for the same
period in fiscal year 1999. The increase in cost of sales for the current
quarter, as a percentage of sales, was primarily due to decreased sales
generated by both divisions of Microlog. The decrease in cost of sales for the
current quarter and for the comparable nine month periods, in dollar amount, was
primarily due to the restructuring program implemented in fiscal year 1999 in
the Contact Center division as well as reduced sales from the Old Dominion
Systems division.
Selling, general and administrative expenses were $0.9 million or 30% of sales,
for the quarter ended July 31, 2000, compared to $1.2 million, or 23% of sales,
for the quarter ended July 31, 1999. Selling, general and administrative
expenses were $2.8 million or 24% of sales, for the nine month period ended July
31, 2000, compared to $4.6 million, or 33% of sales, for the same period in
fiscal year 1999. The decrease in selling, general, and administrative expenses,
in dollar amount was primarily due to the restructuring program implemented in
fiscal year 1999 in the Contact Center division. The increase in selling,
general, and administrative expenses, as a percentage of revenue, was primarily
due to decreased sales generated by the Contact Center division.
Research and development expenses reflect costs associated with the development
of applicable software and product enhancements for Microlog's Contact Center
products. Microlog believes that the process of establishing technological
feasibility with its new products is completed approximately upon release of the
products to its customers. Accordingly, Microlog does not anticipate
capitalizing research and development costs. Research and development expenses
were $342,000, or 11% of sales, for the quarter ended July 31, 2000, compared to
$600,000 or 12% of sales, for the quarter ended July 31, 1999. Research and
development expenses were $1.0 million, or 9% of sales, for the nine month
period ended July 31, 2000, compared to $2.3 million, or 16% of sales, for the
same period in fiscal year 1999. The decrease in research and development
expenses, in dollar amount and as a percentage of sales, was primarily due to
the restructuring program implemented in fiscal year 1999 in the Contact Center
division. uniQue development activities have been the major focus in fiscal year
2000 for Microlog's research and development efforts. In fiscal year 1999,
research and development was focused on the uniQue and TIVRA products.
Net Other Income (Expense)
Microlog had net other income of $11,000 for the quarter ended July 31, 2000,
compared to net other income of $5,000 for the quarter ended July 31, 1999.
Microlog had net other income of $4,000 for the nine month period ended July 31,
2000, compared to net other income of $119,000, for the same period in fiscal
year 1999. Net other income for the quarter and nine month periods ended July
31, 2000 consisted primarily of interest income, interest expense, and
miscellaneous bank fees associated with the renewal of Microlog's credit
facility. Net other income for the quarter and nine month periods ended July 31,
1999, consisted primarily of the recognition of the deferred gain on the sale of
Microlog's office building in August 1998.
Benefit (Provision) For Income Taxes
For the nine month period ended July 31, 2000, the benefit for income taxes of
$56,000 relates to refunds of federal and state income taxes. For the quarter
ended July 31, 1999, the benefit for income taxes of $19,000 relates to a refund
of state income taxes.
Microlog has exhausted its ability to carry losses back to obtain income tax
refunds. Net operating loss and tax credit carry forwards for income tax
reporting purposes of approximately $16.9 million and $0.4 million,
respectively, will be available to offset taxes generated from future taxable
income through 2019. If certain substantial changes in Microlog's ownership
should occur, there would be an annual limitation on the amount of the
carryforwards which can be utilized.
10
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Cautionary Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains 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. Microlog intends the forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements in these sections. All statements regarding Microlog's expected
financial position and operating results, business strategy, financing plans,
forecasted trends relating to its industry, its ability to realize anticipated
cost savings and similar matters are forward-looking statements. These
statements can sometimes be identified by the use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "believe" or "intend."
Microlog cannot promise that its expectations in such forward-looking statements
will turn out to be correct. Some important factors that could cause actual
results to be materially different from expectations include those discussed
under the caption "Factors That May Effect Future Results of Operations."
Factors That May Effect Future Results Of Operations
Microlog believes that its results of operations will be affected by factors
such as the timing of introduction by Microlog of new and enhanced products and
services, market acceptance of new contact center products and enhancements of
existing products, continuation of market trends in the contact center market,
growth in the contract center market in general, competition, ability to secure
and retain adequate financing, commitments to automation by potential customers,
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 Microlog provides performance analysis and
support services.
In March 2000, Microlog was informed by the John Hopkins University Applied
Physics Laboratory (APL) that APL had adopted a change in policy regarding
contract labor positions and that most of the employees of our Old Dominion
Systems division would be offered positions by APL by September 2000. Each
employee hired directly by APL, and removed from the contract(s), decreases the
sales and profit potential of the Old Dominion Systems division from that
source. The impact of this change on Microlog for the balance of fiscal year
2000 is estimated to result in a loss of sales generated by the Old Dominion
Systems division of approximately $1.2 million and a reduction in profits of
approximately $0.2 million. The impact of this change for fiscal year 2001 is
estimated to result in a loss of sales generated by the Old Dominion Systems
division of approximately $7.0 million and a reduction in profits of
approximately $1.0 million. Microlog's strategy for addressing this issue is to
focus on replacing the lost profits, and an increasing portion of the lost
sales, through the growth of the Contact Center division.
Microlog is subject to the risk that its strategy will not be successful. The
strategy is dependent on market acceptance of Microlog's new focus, services and
products, ongoing research and development efforts, and sales activities over
the near term. In addition, the strategy is dependent upon Microlog's ability to
match costs proportionately with sales. Microlog's fiscal year 2000 operating
budget includes significant expenditures related to its development and
marketing of its new professional services, uniQue Contact Center product line,
and uniQue IVR product line. If Microlog is unable to sustain and grow the
associated revenue, Microlog is subject to the risk that it may not make the
necessary decisions to reduce expenditures in enough time to avoid severe
adverse consequences.
Liquidity and Capital Resources
Microlog had a net loss of $504,000 for the quarter ended July 31, 2000, and a
net loss of $321,000 for the nine months ended July 31, 2000, and has an
accumulated deficit of $16.9 million at July 31, 2000. The Company signed a
significant contract near the end of the quarter which will generate in excess
of $500,000 of income, of which $300,000 was collected in August 2000. This
income is expected to be realized over the next two fiscal quarters. Microlog's
continued existence is dependent upon its ability to generate sufficient cash
flows from internal and external sources to meet its operating needs. Management
has taken several steps to meet its liquidity requirements for the foreseeable
11
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future, including renewing its existing credit facility, restructuring
operations to reduce operating expenses to levels commensurate with sales and
attracting capital through a private placement transaction. The impact of the
estimated loss of sales of $2.8 million generated by the Old Dominion Systems
division for fiscal year 2000 is estimated to result in a reduction in cash of
approximately $0.7 million. Microlog anticipates that existing cash and cash
generated from the Contact Center division will be sufficient to meet its
working capital needs for the next 12 months. If the existing cash and cash
generated from the Contact Center division is insufficient, Microlog may be
required to utilize its line-of-credit facility from Silicon Valley Bank, if
available, or to seek other sources of financing. To utilize the line-of-credit
facility, Microlog is required to meet certain financial and restrictive
covenants, which are discussed below. Microlog has, in the past, been able to
secure additional financing to meet its operating requirements, although there
can be no assurance that it will be able to continue to do so.
Working capital as of July 31, 2000 was $1.9 million compared to working capital
of $1.8 million as of October 31, 1999. The increase was primarily attributable
to an increase in accounts receivable of $0.7 million and a decrease in current
liabilities of $1.0 million, offset by a decrease in cash and cash equivalents
$1.6 million.
Cash and cash equivalents were $1.8 million as of July 31, 2000 compared to cash
and cash equivalents of $3.4 million as of October 31, 1999. The decrease was
primarily attributable to an increase in accounts receivable of $0.7 million, a
decrease in accrued compensation and related expenses of $0.6 million, and a
decrease in other accrued expenses of $0.3 million.
Accounts receivable were $1.9 million as of July 31, 2000 compared to accounts
receivable of $1.2 million as of October 31, 1999. The increase was primarily
attributable to the timing of shipments during the third quarter.
In April 2000, Microlog renewed its revolving line-of-credit facility with
Silicon Valley Bank which allows Microlog to borrow up to 75% of its eligible
receivables to a maximum of $2,000,000, subject to the right of the bank to make
loans only in its discretion. The line-of-credit bears interest at the bank's
prime rate plus 2.0% (11.50% at July 31, 2000), and contains a minimum monthly
interest charge as well as a monthly collateral fee and an upfront commitment
fee of $10,000. If and when Microlog borrows under the line-of-credit, Microlog
will be required to grant Silicon Valley Bank warrants to purchase common stock
equal to 2% of the commitment amount at an exercise price equal to the market
value of Microlog's common stock on the date of the initial borrowing. The line
subjects Microlog to a financial covenant of not exceeding consolidated
quarterly losses of ($70,000) and ($50,000), respectively, for the second and
third quarters of fiscal year 2000, and a requirement for consolidated
profitability beginning in the fourth quarter of fiscal year 2000. The line also
subjects Microlog 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 Microlog's assets. At July
31, 2000, Microlog was not in compliance with the financial covenant of not
exceeding a consolidated quarterly loss of ($50,000) for the third quarter. The
bank waived the covenant at July 31, 2000. There was no outstanding debt against
this line-of-credit at July 31, 2000.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Employment Agreement dated as of April 1, 2000,
between the Company and John C. Mears.
10.2 Employment Agreement dated as of April 1, 2000,
between the Company and Steven R. Delmar.
27.1 Financial Data Schedule.
-------------------------
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the period
covered by this report.
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SIGNATURES
Pursuant to the requirements of the Securities 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/ John C. Mears
-------------------------------------------
John C. Mears
Co-President, Chief Operating Officer
By: /s/ Kirk E. Isenbart
-------------------------------------------
Kirk E. Isenbart
Principal Accounting Officer and Controller
Date: September 13, 2000
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