SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 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 June 14, 2000, 7,064,688 shares of common stock were outstanding.
<PAGE>
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 April 30, 2000
and October 31, 1999 ..................................1
Consolidated Statements of Operations for the Three
Months ended April 30, 2000 and April 30, 1999
and for the Six Months ended April 30, 2000 and
April 30, 1999............................................2
Consolidated Statements of Cash Flows for the Six
Months ended April 30, 2000 and April 30, 1999............3
Notes to Consolidated Financial Statements..................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................5
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders........10
Item 6. Exhibits and Reports on Form 8-K...........................11
Signatures....................................................................12
i
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
April 30, October 31,
2000 1999
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,190 $ 3,425
Receivables, net 2,009 1,155
Inventories, net 299 375
Other current assets 422 301
Total current assets 4,920 5,256
------------------ -----------------
Fixed assets, net 803 917
Licenses, net 31 100
Other assets 241 153
================== =================
Total assets $ 5,995 $ 6,426
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $ 74 $ 74
Accounts payable 466 388
Accrued compensation and related expenses 1,489 1,965
Deferred revenue 437 447
Other accrued expenses 246 564
------------------ -----------------
Total current liabilities 2,712 3,438
Deferred officers' compensation 141 151
Other liabilities 21 33
------------------ -----------------
Total liabilities 2,874 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, 7,666,558 77 76
Capital in excess of par value 20,650 20,517
Treasury stock, at cost, 601,870 shares (1,177) (1,177)
Accumulated deficit (16,429) (16,612)
------------------ -----------------
Total stockholders' equity 3,121 2,804
------------------ -----------------
Total liabilities and stockholders' equity $ 5,995 $ 6,426
================== =================
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Statements of Operations
(Unaudited)
(In thousands)
For The Three Months For The Six Months
Ended April 30, Ended April 30,
2000 1999 2000 1999
---------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales $ 4,387 $ 4,251 $ 8,553 $ 9,142
Costs and expenses:
Cost of sales 2,871 3,407 5,857 6,926
Selling, general and administrative 1,076 1,744 1,899 3,419
Research and development 332 736 663 1,699
Restructuring costs --- 582 --- 582
---------------- ----------------- -------------- -------------
4,279 6,469 8,419 12,626
---------------- ----------------- -------------- -------------
Operating income (loss) 108 (2,218) 134 (3,484)
Net other income (expense) 2 38 (7) 116
---------------- ----------------- -------------- -------------
Income (loss) before income taxes 110 (2,180) 127 (3,368)
Benefit (provision) for income taxes 0 (9) 56 (20)
---------------- ----------------- -------------- -------------
Net income (loss) 110 (2,189) 183 (3,388)
Accumulated deficit:
at beginning of period (16,539) (13,118) (16,612) (11,919)
---------------- ----------------- -------------- -------------
at end of period $ (16,429) $ (15,307) $ (16,429) $ (15,307)
================ ================= ============== =============
Basic weighted average shares outstanding 7,028 4,291 7,003 4,289
---------------- ----------------- -------------- -------------
Diluted weighted average shares outstanding 7,302 4,291 7,218 4,289
---------------- ----------------- -------------- -------------
Basic income (loss) per share $ 0.02 $ (0.51) $ 0.03 $ (0.79)
Diluted income (loss) per share $ 0.02 $ (0.51) $ 0.03 $ (0.79)
See accompanying notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
Microlog Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For The For The
Six Months Six Months
Ended Ended
April 30, 2000 April 30, 1999
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 183 $ (3,388)
Adjustments to reconcile net income (loss) to net cash
Used in operating activities:
Depreciation 190 381
Amortization of goodwill and licensing agreement 69 57
Gain on disposition of fixed assets (9)
Provision for inventory reserves 50 50
Changes in assets and liabilities:
Receivables (854) 1,219
Inventories 26 24
Other assets (209) (211)
Accounts payable 78 169
Accrued compensation and related expenses (476) (405)
Deferred revenue (10) (170)
Other accrued expenses (330) 176
Deferred officers' compensation (10) (2)
---------------------- ----------------------
Net cash used in operating activities (1,293) (2,109)
---------------------- ----------------------
Cash flows from investing activities:
Purchases of fixed assets (76) (228)
---------------------- ----------------------
Net cash used in investing activities (76) (228)
---------------------- ----------------------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements 25
Exercise of common stock options 134 162
---------------------- ----------------------
Net cash provided by financing activities 134 187
---------------------- ----------------------
Cash and cash equivalents:
Net decrease during period (1,235) (2,150)
Balance at beginning of period 3,425 2,340
---------------------- ----------------------
Balance at end of period $ 2,190 $ 190
====================== ======================
See accompanying notes to consolidated financial statements
</TABLE>
3
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Microlog Corporation
Notes To Consolidated Financial Statements
January 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 April 30, 2000 and October 31, 1999, and the results of
their operations and their cash flows for the six month period ended April 30,
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.
4
<PAGE>
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. The charter of the division is to help Microlog's
customers serve their customers better through the use of technology in formal
and informal corporate contact centers. Specifically, Microlog builds custom
self-service and customer interaction solutions that manage telephony type
contacts, a historical focus and strength of Microlog, and Internet-based
contacts, sometimes known in the industry as "new media types". In providing
these solutions, Microlog uses its products, primarily core voice and data
platforms and toolkits, combined with its professional services offerings. This
means that Microlog's products and solutions address interactive voice response
(IVR), inbound and outbound phone calls, e-mail, fax, world-wide Web
interactions, 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ---- ----- ----
<S> <C> <C> <C> <C>
Sales
Contact Center division ....................................49.1% 35.3% 47.8% 43.0%
Old Dominion Systems division.............................. 50.9% 64.7% 52.2% 57.0%
------ ------- ------- -------
Total....................................................100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales...............................................65.4% 80.2% 68.4% 75.8%
Selling, general, and administrative........................24.5% 41.0% 22.2% 37.4%
Research and development ....................................7.6% 17.3% 7.8% 18.5%
Restructuring costs........................................ 0.0% 13.7% 0.0% 6.4%
------ --------- ------ --------
Total................................................ 97.5% 152.2% 98.4% 138.1%
------- -------- ------- --------
Operating income (loss).......................................2.5% (52.2)% 1.6% (38.1)%
Net other income .......................................... 0.0% 0.9% 0.0% 1.3%
------- ------- -------- --------
Income (loss) before income taxes.............................2.5% (51.3)% 1.6% (36.8)%
Benefit (provision) for income taxes....................... 0.0% (0.2)% 0.5% (0.3)%
------- -------- -------- ---------
Net income (loss).......................................... 2.5% (51.5)% 2.1% (37.1)%
======= ========== ======= =========
</TABLE>
5
<PAGE>
Results of Operations
Microlog had net income of $110,000 ($.02 per basic and diluted share) for the
quarter ended April 30, 2000 and net income of $183,000 ($.03 per basic and
diluted share) for the six months ended April 30, 2000. By comparison, Microlog
had a net loss of $2.2 million (($.51) per basic and diluted share) and a net
loss of $3.4 million (($.79) per basic and diluted share) for the comparable
periods in fiscal year 1999. The net income for the second quarter of fiscal
year 2000 and for the six months ended April 30, 2000, was primarily
attributable to increased sales generated by the Contact Center division as well
as reduced expenses in all areas of the Contact Center division due to the
restructuring program implemented in fiscal year 1999. 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.
The losses for the first quarter of fiscal year 1999 and the six month period
ended April 30, 1999 were offset in part by net income of $0.2 million in the
second quarter of fiscal year 1999 and $0.3 million in the six month period
ended April 30, 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) and TIVRA products to expand its interactive response
offerings to include Internet-based interactions, and to offer professional
turnkey services to the integration of modern customer contact centers. This
response has been aimed 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 six 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 TIVRA 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.
6
<PAGE>
Sales
Sales for the quarter ended April 30, 2000 were $4.4 million, which represented
an increase of 3% compared to $4.3 million of sales for the quarter ended April
30, 1999. Sales for the six months ended April 30, 2000 were $8.6 million, which
represented a decrease of 6% compared to $9.1 million of sales for the six
months ended April 30, 1999. The increase in sales for the comparable quarters
was attributable to an increase of $0.7 million in sales by the Contact Center
division offset by a decrease of $0.6 million in sales by the Old Dominion
Systems division. The decrease in sales for the comparable six month periods was
attributable to an increase of $0.2 million in sales by the Contact Center
division offset by a decrease of $0.7 million in sales by the Old Dominion
Systems division.
Contact Center Division Sales
Contact Center sales for the quarter ended April 30, 2000 were $2.2 million,
which represented an increase of 47% compared to $1.5 million of sales for the
quarter ended April 30, 1999. Sales for the six month period ended April 30,
2000 were $4.1 million, which represented an increase of 5% compared to $3.9
million of sales for the same period in fiscal year 1999. The increase in sales
for the comparable quarters was primarily attributable to an increase in sales
to commercial customers from $0.4 million to $1.1 million. The increase in sales
for the comparable six month periods was attributable to an increase in sales to
government customers from $1.9 million to $2.6 million offset in part by a
decrease in sales to international customers from $0.7 million to $0.2 million.
The increase in commercial sales for the comparable quarters was primarily due
to sales totaling $0.7 million to three new commercial customers. The increase
in government sales for the comparable six month periods was primarily due to
sales totaling $0.7 million to three new government customers. The decrease in
international sales for the comparable six month periods was due to the sale of
the voice processing operations of Microlog Europe in September 1999.
As of April 30, 2000, Microlog had a backlog of existing orders for Contact
Center systems totaling $2.0 million. The backlog as of April 30, 1999, was $2.5
million. Microlog has experienced fluctuations in its backlog at various times
in the past primarily due to the seasonality of governmental purchases. Microlog
anticipates that $1.8 million of the outstanding orders at April 30, 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 and delays inherent in the government contracting process.
Old Dominion Systems Division Sales
Old Dominion Systems sales for the quarter ended April 30, 2000 were $2.2
million, which represented a decrease of 21% compared to $2.8 million of sales
for the quarter ended April 30, 1999. Sales for the six month period ended April
30, 2000 were $4.5 million, which represented a decrease of 14% compared to $5.2
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 our Old Dominion Systems division would be
offered positions by APL by September 2000. Each employee hired directly by APL,
and removed from our 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 $2.8
million and a reduction in profits of approximately $0.4 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 April 30, 2000, Microlog had a backlog of funding on existing contracts
for performance analysis and support services totaling $0.2 million. By
comparison, the backlog as of April 30, 1999 was $0.2 million. 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 $0.2 million of backlog
at April 30, 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 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.
7
<PAGE>
Costs and Expenses
Cost of sales was $2.9 million or 65.4% of sales for the quarter ended April 30,
2000, compared to $3.4 million or 80.2% of sales for the quarter ended April 30,
1999. Cost of sales was $5.9 million or 68.4% of sales for the six month period
ended April 30, 2000, compared to $6.9 million or 75.8% of sales for the same
period in fiscal year 1999. The decrease in cost of sales, 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. The decrease in cost of sales, as a percentage of sales, was
primarily due to increased sales generated by the Contact Center division.
Selling, general and administrative expenses were $1.1 million or 24.5% of
sales, for the quarter ended April 30, 2000, compared to $1.7 million, or 41.0%
of sales, for the quarter ended April 30, 1999. Selling, general and
administrative expenses were $1.9 million or 22.2% of sales, for the six month
period ended April 30, 2000, compared to $3.4 million, or 37.4% of sales, for
the same period in fiscal year 1999. The decrease in selling, general, and
administrative 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.
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 $332,000, or 7.6% of sales, for the quarter ended April 30, 2000, compared
to $736,000, or 17.3% of sales, for the quarter ended April 30, 1999. Research
and development expenses were $663,000, or 7.8% of sales, for the six month
period ended April 30, 2000, compared to $1,699,000, or 18.5% 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 $2,300 for the quarter ended April 30, 2000,
compared to net other income of $38,000 for the quarter ended April 30, 1999.
Microlog had net other expense of $7,000 for the six month period ended April
30, 2000, compared to net other income of $116,000, for the same period in
fiscal year 1999. Net other income (expense) for the quarter and six month
periods ended April 30, 2000 consisted primarily of interest expense, interest
income, and miscellaneous bank fees associated with the renewal of Microlog's
credit facility. Net other income for the quarter and six month periods ended
April 30, 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 six month period ended April 30, 2000, the benefit for income taxes of
$56,000 relates to refunds of federal and state income taxes. For the quarter
and six month periods ended April 30, 1999, the provision for income taxes of
$9,000 and $20,000, respectively, relates to state income taxes.
Microlog 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 $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.
8
<PAGE>
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 you that its expectations in such forward-looking
statements will turn out to be correct. Some important factors that could cause
our actual results to be materially different from our 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 our 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 $2.8 million and a reduction in profits of
approximately $0.4 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 2000 operating budget
includes significant expenditures related to its development and marketing of
its new professional services, uniQue product line, and TIVRA 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 net income of $110,000 for the quarter ended April 30, 2000, and
net income of $183,000 for the six months ended April 30, 2000, but has an
accumulated deficit of $16.4 million at April 30, 2000. 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 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 balance of fiscal year 2000. 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.
9
<PAGE>
Working capital as of April 30, 2000 was $2.2 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 $0.8 million and a
decrease in current liabilities of $0.7 million, offset by a decrease in cash
and cash equivalents $1.2 million.
Cash and cash equivalents were $2.2 million as of April 30, 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 $0.8 million
and a decrease in accrued compensation and related expenses of $0.5 million.
Accounts receivable were $2.0 million as of April 30, 2000 compared to accounts
receivable of $1.2 million as of October 31, 1999. The increase was primarily
attributable to increased sales in the Contact Center division for the second
quarter of fiscal year 2000 as well as the timing of shipments during the
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 April 30, 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. Microlog
was in compliance with all covenants at April 30, 2000. There was no outstanding
debt against this line-of-credit at April 30, 2000.
In June 1996, Microlog 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.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Microlog held its 2000 annual meeting of shareholders on March 30, 2000.
(b) The following sets forth information regarding each matter voted upon at the
2000 annual meeting.
There were 7,064,688 shares of common stock outstanding as of the record
date for, and entitled to vote at, the 2000 annual meeting.
Proposal No. 1. The shareholders approved election of each of the three
nominees to the board of directors. The tabulation of votes on this proposal was
as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
<S> <C> <C>
Steven R. Delmar 6,367,401 70,562
Robert E. Gray, Jr. ................... 6,392,201 58,762
John C. Mears ....................... 6,380,601 64,214
</TABLE>
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) The Company files herewith the following exhibits:
10.1 Silicon Valley Bank Amendment to Loan Documents
(b) The following Current Report on Form 8-K was filed by Microlog
during the period covered by this report:
<TABLE>
<CAPTION>
Date of Report Item Reported
-------------- -------------
<S> <C> <C>
February 16, 2000 Item 5 (press release announcing resignation of Mr. Stephen D. Smith)
</TABLE>
11
<PAGE>
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: June 14, 2000
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