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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended: September 30, 1997
Commission File Number: 1-9605
Media Logic, Inc.
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(Exact name of registrant as specified in its charter)
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Massachusetts 04-2772354
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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310 South Street, P.O. Box 2258, Plainville, MA 02762
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(Address of principal executive offices) (Zip Code)
(508) 695-2006
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(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.
/ X / Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value per share--8,135,666 shares issued and
outstanding as of October 24, 1997
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INDEX
MEDIA LOGIC, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated condensed financial statements (Unaudited)
Consolidated condensed balance sheets--September 30, 1997 and
March 31, 1997
Consolidated condensed statements of operations--three and six months
ended September 30, 1997 and 1996
Consolidated condensed statements of cash flows--six months
ended September 30, 1997 and 1996
Notes to consolidated condensed financial statements--
September 30, 1997
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
MEDIA LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
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ASSETS SEPTEMBER 30, 1997 MARCH 31, 1997
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CURRENT ASSETS:
Cash and cash equivalents................................................... $ 262,164 $ 2,382,875
Accounts receivable, net.................................................... 453,080 813,993
Inventories................................................................. 3,628,515 3,563,482
Prepaid expenses and other current assets................................... 1,430 1,000
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Total current assets...................................................... 4,345,189 6,761,350
PROPERTY AND EQUIPMENT, net................................................... 353,333 469,080
DEFERRED FINANCING COSTS...................................................... 1,426,524 1,711,829
OTHER ASSETS.................................................................. 18,507 30,696
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$ 6,143,553 $ 8,972,955
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 394,595 $ 1,107,732
Accrued expenses............................................................ 184,023 293,238
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Total current liabilities................................................. 578,618 1,400,970
CONVERTIBLE SUBORDINATED DEBENTURES 1,540,552 3,266,663
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 20,000,000 shares authorized;
7,663,297 and 6,320,909 shares issued and outstanding as of September 30,
1997 and March 31, 1997, respectively....................................... 76,633 63,209
Additional paid-in capital.................................................... 22,382,212 20,577,945
Accumulated deficit........................................................... (18,434,462) (16,335,832)
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Total stockholders' equity................................................ 4,024,383 4,305,322
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$ 6,143,553 $ 8,972,955
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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PART I. FINANCIAL INFORMATION
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MEDIA LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1997 1996 1997 1996
----------- ------------ ------------- -------------
NET SALES................................................ $ 435,057 $ 1,226,884 $ 767,626 $ 2,075,433
COSTS AND EXPENSES:
Cost of products sold.................................. 245,851 830,433 491,292 1,277,525
Selling, general and administrative expenses........... 534,997 905,381 1,281,924 1,937,321
Research and development expenses...................... 249,570 332,353 679,252 852,856
----------- ------------ ------------- -------------
LOSS FROM OPERATIONS..................................... (595,361) (841,283) (1,684,842) (1,992,269)
OTHER INCOME (EXPENSE):
Interest income........................................ 6,184 32,476 18,897 73,035
Interest expense-convertible debentures................ (210,913) -- (437,285) --
Other.................................................. 3,460 (8,511) 4,600 (6,081)
----------- ------------ ------------- -------------
LOSS BEFORE INCOME TAXES................................. (796,630) (817,318) (2,098,630) (1,925,315)
PROVISION FOR INCOME TAXES............................... -- 31,392 -- 46,122
----------- ------------ ------------- -------------
NET LOSS................................................. $ (796,630) $ (848,710) $ (2,098,630) $ (1,971,437)
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
NET LOSS PER SHARE (NOTE 3).............................. $ (.11) $ (.14) $ (.31) $ (.32)
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING..... 7,046,705 6,232,753 6,685,867 6,226,049
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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PART I. FINANCIAL INFORMATION
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MEDIA LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
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CASH (USED) BY OPERATING ACTIVITIES $(2,134,100) $(2,175,945)
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CASH PROVIDED (USED) BY INVESTING ACTIVITIES:
Sale (purchase) of property and equipment, net.......................... -- (115,002)
Decrease in other assets................................................ 12,189 --
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12,189 (115,002)
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CASH PROVIDED BY FINANCING ACTIVITIES:
Exercise of stock options............................................... 1,200 113,927
Issuance of common stock upon conversion of debentures.................. 1,816,491 --
Decrease in debentures upon conversion.................................. (1,816,491) --
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1,200 113,927
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NET INCREASE (DECREASE) IN CASH......................................... (2,120,711) (2,177,020)
CASH BALANCE, BEGINNING OF PERIOD....................................... 2,382,875 3,545,477
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CASH BALANCE, END OF PERIOD............................................. $ 262,164 $ 1,368,457
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SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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PART I. FINANCIAL INFORMATION
MEDIA LOGIC, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1997
(1) Operations and Basis of Presentation
Media Logic, Inc. (the "Company") designs and manufactures tape-based data
storage libraries targeted at the information needs of small to mid-sized
businesses. The Company also supplies evaluation equipment for flexible computer
disks and tape, and manufactures and sells industrial duplication equipment for
high volume and high reliability applications.
As permitted by the rules of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, these notes are condensed and
do not contain all disclosures required by generally accepted accounting
principles. Reference should be made to the consolidated financial statements
and related notes included in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997 and the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1997.
In the opinion of the Company's management, the accompanying consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the Company's financial
position at September 30, 1997, and the results of its operations and its cash
flows for the six months ended September 30, 1997 and September 30, 1996.
(2) Inventories
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SEPTEMBER 30, 1997 MARCH 31, 1997
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Raw materials................................................................. $ 1,918,480 $ 1,808,917
Work in process............................................................... 170,183 168,762
Finished goods................................................................ 1,539,852 1,585,803
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$ 3,628,515 $ 3,563,482
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(3) Loss per Share
Net loss per share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during the period.
Common stock equivalents were not considered in the determination of net loss
per share as their inclusion would be anti-dilutive.
(4) Convertible Subordinated Debentures
On March 24, 1997, the Company issued 7% convertible subordinated
debentures (the "Debentures") with gross proceeds of $3,530,000. Each
debenture has a face amount of $10,000 and bears interest at 7% per annum.
Interest is payable upon conversion or redemption of the Debentures and is
payable in either cash or shares of common stock at the average market price
of common stock over the five days preceding the conversion dates, at the
option of the Company.
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The Debentures are convertible at the option of the holder into common
stock of the Company. The conversion price is equal to the lower of (x) 120%
of the average closing bid price of the common stock for the five trading-day
period ending on the trading day prior to the subscription date (March 24,
1997) or (y) 80% of the average closing bid price for five days immediately
preceding the conversion date. As of the subscription date, the conversion
price was $2.805. The Debentures mature on March 24, 2000 and automatically
convert on that date at the then current conversion price.
In connection with the issuance of the Debentures, The Company issued
warrants to purchase 1,550,870 shares of common stock at $3.00 per share and
151,016 shares of common stock at $3.51 per share. The warrants are exercisable
at the option of the warrantholder at any time on or after September 24, 1997
and March 24, 1998 for warrants priced at $3.00 per share and $3.51 per share,
respectively. All warrants expire on March 25, 2002.
The Company recognized the estimated fair value of the warrants based on the
Black-Scholes valuation model and the guaranteed return conversion feature
attributable to the Debentures as deferred financing costs with an increase to
additional paid-in capital. These amounted to $1,228,000 along with actual cash
financing costs of approximately $484,000. Deferred financing costs are being
amortized over three years, the stated term of the Debentures, and are included
in "Interest expense-convertible debentures", which is a non-cash expense, in
the accompanying Consolidated Condensed Statements of Operations. To the extent
that the Debentures are converted, any unamortized deferred financing costs will
be charged against additional paid-in capital.
(5) New Accounting Standard
In March 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS
No. 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. This statement is effective for fiscal years ending after December 15,
1997 and early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. The Company will
adopt this statement for its fiscal year ended March 31, 1998. The Company
believes that adoption of SFAS No. 128 will not have a material effect on its
financial statements.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three and Six Months Ended September 30, 1997 Compared to Three and Six
Months Ended September 30, 1996
Results of Operations
Sales:
Sales for the three and six month periods ended September 30, 1997 were
$435,057 and $767,626 as compared with $1,226,884 and $2,075,433 for the three
and six month periods ended September 30, 1996, representing sales decreases
from the three and six month periods ended September 30, 1996 of 64.5% and
63.0%, respectively. Demand for the Company's traditional products continues to
decline, while increasing sales of the Company's Automated Data Library ("ADL")
line have not been enough to offset this decline.
The Company is primarily focused on the sale of its ADL products. The
Company is also continuing to pursue its traditional product lines, which
includes not only the sale of new certification, test and duplication equipment
but also upgrades, spare parts and maintenance for previously sold units.
Gross Profit:
Gross profit for the three and six months ended September 30, 1997 was
$189,206 (43.5%) and $276,334 (36.0%) as compared with $396,451 (32.3%) and
$797,808 (38.4%) for the three and six months ended September 30, 1996. The
generation of a gross profit on low sales reflects the cost reduction measures
which the Company has instituted, while the increase in gross margins reflects
higher ADL sales as a percentage of the Company's total sales.
Expenses:
Selling, general and administrative ("SG&A") expenses for the three and
six months ended September 30, 1997 were $534,997 (123.0% of sales) and
$1,281,924 (167.0% of sales) as compared with $905,381 (73.8% of sales) and
$1,937,321 (93.3% of sales) for the three and six months ended September 30,
1996. The Company's cost reduction measures have significantly reduced total
SG&A expenses, and they were further reduced during the three months ended
September 30, 1997 by the Company's consolidation of all ADL operations in
Plainville, MA.
Research and development ("R&D") expenses for the three and six month
periods ended September 30, 1997 were $249,570 (57.4% of sales) and $679,252
(88.5% of sales) as compared to $332,353 (27.1% of sales) and $852,856 (41.1% of
sales) for the three and six month periods ended September 30, 1996. All of the
Company's R&D expenses for the three and six months ended September 30, 1997
were related to the development of the ADL product line. During the quarter
ended September 30, 1997, all R&D operations were consolidated in Plainville,
resulting in a decline in R&D expenses.
Interest expense-convertible debentures, a non-cash item, represents the
amortization of assigned deferred costs in accordance with generally accepted
accounting principles in conjunction with the issuance of the Company's 7%
Convertible Subordinated Debentures on March 24, 1997. See Note 4 of Notes to
Consolidated Condensed Financial Statements (Unaudited).
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Liquidity and Capital Resources:
At September 30, 1997, the Company had working capital of $3.8 million
compared to $5.4 million at March 31, 1997. The current ratio was 7.5 to 1 as of
June 30, 1997 and 4.8 to 1 as of March 31, 1997. The decrease in working capital
is principally due to significant operating losses and funding of the
development and introduction to the marketplace of the ADL family of products.
On March 24, 1997, the Company issued 7% Convertible Subordinated
Debentures (the "Debentures"), $3,530,000 aggregate principal amount, in a
private placement exempt from registration under Regulation D under the
Securities Act of 1933, as amended. The Debentures mature on March 24, 2000
and are convertible into the Company's common stock prior to that date at the
option of the holder. The Debentures, together with accrued interest thereon,
are convertible into shares of common stock at the lower of (i) $2.805 and
(ii) 80% of the average closing bid price of the common stock over the five
trading days immediately preceding the conversion date. In connection with
the issuance of the Debentures, the Company issued warrants to purchase
1,550,870 shares of common stock at $3.00 per share and warrants to purchase
151,016 shares of common stock at $3.51 per share. During the quarter ended
September 30, 1997, Debentures aggregating $1,770,000, plus accrued interest,
were converted to 1,341,788 shares of the Company's common stock. Subsequent
to September 30, 1997, Debentures aggregating $560,000, plus accrued
interest, were converted to 472,369 shares of the Company's common stock.
On October 29, 1997, the Company issued 7% convertible subordinated
debentures in a private placement exempt from registration under Regulation D
under the Securities Act of 1933, as amended, with gross proceeds of $750,000.
The debentures mature on October 29, 2000 and are convertible into the Company's
common stock prior to that date at the option of the holder at a conversion
price equal to the lower of (i) 80% of the average closing bid price for the
common stock for the five days prior to the conversion date and (ii) $1.95. In
connection with the issuance of these debentures, the Company is required to
issue warrants to purchase 500,000 shares of common stock at an exercise price
of $2.00 per share.
The Company, because of its continuing losses from operations,
anticipates that, unless revenues increase significantly, it will not have
sufficient cash resources for the next twelve months and it will require
additional capital in order to continue its operations. The Company has no
assurance that it will be able to raise such additional capital, if needed,
in a timely manner or on favorable terms, if at all. If the Company is unable
to increase revenues significantly and/or secure additional financing, the
Company could be forced to curtail or discontinue its operations. The Company
does not fully satisfy all of the American Stock Exchange guidelines for
continued listing and there is no assurance listing will be continued.
The Company continually monitors the changing business conditions and takes
whatever actions it deems necessary to protect and promote the Company's
interests.
Uncertainties
The discussion in this report which express "belief", "anticipation",
"plans", "expectation", "future" or "intention" as well as other statements
which are not historical fact are forward- looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on management's current expectations and involve a number of risks and
uncertainties. The Company's actual results could differ significantly from the
results discussed in these forward-looking statements. Factors that could cause
future results to differ
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materially from such expectations include, but are not limited to: the
uncertainty surrounding the Company's change in product base from floppy
disk/magnetic tape certifiers and evaluators to automated data libraries: the
Company's limited experience in manufacturing, marketing and selling
automated data libraries and the risk that the Company's new products may not
be able to be marketed at acceptable prices or receive commercial acceptance
in the markets that the Company expects to target; the loss of the services
of one or more of the Company's key individuals, which could have a material
adverse impact on the Company; the development of competing or superior
technologies and products from competitors, many of whom have substantially
greater financial, technical and other resources than the Company; the
cyclical nature of the computer industry; the availability of additional
capital to fund continued operations on acceptable terms, if at all; and,
general economic conditions in both the United States and overseas markets.
As a result, the Company's future operations involve a high degree of risk.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
During the quarter ended September 30, 1997, 1,341,788 shares of the
Company's common stock were issued upon the conversion of 7%
Convertible Subordinated Debentures aggregating $1,770,000, plus
interest.
Subsequent to September 30, 1997, 472,369 shares of the Company's
common stock were issued upon the conversion of 7% Convertible
Subordinated Debentures aggregating $560,000, plus interest.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The following information relates to matters submitted at the Annual
Meeting of Stockholders of the Company held on September 11, 1997.
(b) Proxies for the meeting were solicited and there was no solicitation
in opposition to management's nominees for directors as listed in the proxy
statement and all such nominees were elected. Michael Salter and Dr. Harold B.
Shukovsky were elected directors. Francis Wyman and Raymond Leclerc, with terms
expiring at the 1998 Annual Meeting of Stockholders, and Joseph L. Mitchell and
William Davis, with terms expiring at the 1999 Annual Meeting of Stockholders,
continue to serve as directors.
(c) The total number of shares entitled to vote at the Annual Meeting
of Shareholders was 6,320,909. The total shares voted were 5,853,758 or 93%
of those eligible to vote.
The votes for directors were (1) Michael Salter, 5,755,663 votes for and
98,095 votes against, and (2) Dr. Harold B. Shukovsky, 5,755,663 votes for and
98,095 votes against.
Approval was not granted to amend and restate the Company's Restated
Articles of Organization to authorize 5,000,000 shares of Preferred Stock, $.01
par value per share. The vote was 2,187,027 votes for, 884,835 votes against,
38,950 abstentions, and 2,097,446 shares not voted.
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Approval was granted to the proposal that Arthur Andersen LLP be appointed
as the Company's independent accountant for fiscal year 1998. The vote was
5,138,203 for approval, 668,680 against approval, and 24,375 abstentions.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial data schedule
(b) Reports on Form 8-K
None
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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.
MEDIA LOGIC, INC.
Date: November 13, 1997 \S\ Paul M. O'Brien
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Paul M. O'Brien
Vice President and
Chief Financial Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND IN THE
COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 262,164
<SECURITIES> 0
<RECEIVABLES> 480,934
<ALLOWANCES> 27,854
<INVENTORY> 3,628,515
<CURRENT-ASSETS> 4,345,189
<PP&E> 1,723,901
<DEPRECIATION> 1,370,568
<TOTAL-ASSETS> 6,143,553
<CURRENT-LIABILITIES> 587,618
<BONDS> 1,540,552
0
0
<COMMON> 76,633
<OTHER-SE> 22,382,212
<TOTAL-LIABILITY-AND-EQUITY> 6,143,553
<SALES> 767,626
<TOTAL-REVENUES> 767,626
<CGS> 491,292
<TOTAL-COSTS> 2,452,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 437,285
<INCOME-PRETAX> (2,098,630)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,098,630)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,098,630)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
