10-Q 1 form10q.txt FORM 10-Q 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, 2001 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) 301-540-5500 (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 14, 2001, 7,106,938 shares of common stock were outstanding. MICROLOG CORPORATION INDEX ------

PART I. ITEM 1. FINANCIAL STATEMENTS MICROLOG CORPORATION CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATE)

See accompanying notes to consolidated financial statements. 1 MICROLOG CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS)

See accompanying notes to consolidated financial statements. 2 MICROLOG CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to consolidated financial statements. 3 MICROLOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 2001 (UNAUDITED) AND OCTOBER 31, 2000 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, 2001 and October 31, 2000, and the results of their operations and their cash flows for the nine-month period ended July 31, 2001. The results of operations presented are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2001. 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, 2000. 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. Debt In January 2001, the Company renewed its revolving line-of-credit facility with Silicon Valley Bank which allows the Company to borrow up to 75% of its eligible receivables to a maximum of $1,000,000, 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% (8.5% at July 31, 2001), and contains a minimum monthly interest charge as well as a monthly collateral fee and an up-front commitment fee of $35,000. The line subjects the Company to a financial covenant of maintaining a minimum tangible net worth tested on a monthly basis. The line also subjects the Company to a number of restrictive covenants, including restrictions on mergers or acquisitions, payment of dividends, and certain restrictions on additional borrowings. The line is secured by all of the Company's assets. At July 31, 2001, the Company was not in compliance with the financial covenant of maintaining a minimum of $1,500,000 of stockholders' equity. At July 31, 2001, there was no outstanding debt against this line-of-credit. Demand Note Payable In July 2001, the Company borrowed $200,000 from its principal stockholder, TFX Equities Incorporated, in the form of a demand note. The note bears interest at the rate of 12% per annum. In August 2001, the Company borrowed an additional $190,000 from TFX Equities, which was also in the form of a demand note and bears interest at the rate of 12% per annum. 4 Liquidity and Capital Resources The Company believes that its existing sources of funds and possible additional funds from TFX Equities will provide sufficient funds to enable the Company to operate its business as currently planned through the end of the calendar year. In the event that the Contact Center Solutions division does not generate expected sales, or if the Company's plans or assumptions change or prove to be inaccurate, the foregoing sources of funds may prove to be insufficient to fund its currently planned operations, in which case the Company would be required to seek and obtain additional capital through other means, including equity or debt financing, possibly in the very near future. The Company can give no assurance that it will be able to generate sufficient cash flow from operations, through planned or expected sales by the Contact Center Solutions division, or that additional financing arrangements will be available when needed or, if available, that they can be concluded on acceptable terms. Any inability by the Company to generate or obtain sufficient funds would have a material adverse effect on its ability to continue operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan" and "will," as they related to the Company or its management, are intended to identify these forward-looking statements. All statements regarding the Company's expected financial position, operating results and liquidity needs, business strategy, financing plans, forecasted trends relating to its industry, its ability to realize anticipated cost savings and similar matters are forward-looking statements. The Company cannot promise that its expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The following analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000 and the audited financial statements and related notes thereto. Microlog Corporation is an interactive communications software company that provides advanced customer interaction management products and services for businesses seeking to better serve their customers. Microlog offers an integrated suite of products and services which blend with existing corporate applications and infrastructure to accomplish both automated response functions, such as interactive voice response, or "IVR," email, and Web, as well as intelligent interactions between customers and contact center agents. Interactions today include telephone, email, Web chat, Web callback, Web collaboration, Web bulletin board, voice over IP, fax and scanned hardcopy mail. Microlog's integrated suite of customer contact and relationship management products is called the uniQue(R) (pronounced you-knee-que) family of contact center solutions. This family of solutions includes uniQue RM (Relationship Management), uniQue Web, uniQue eMail, uniQue Voice, uniQue Fax, uniQue VoIP, uniQue CTI, and uniQue IVR. uniQue can be implemented as a total solution, or each family member can be installed as an individual solution for an existing contact center. In addition, businesses can add media types in a modular fashion as they expand their customer contact facilities. For example, customers can start with a telephone solution, add an email solution, then add a web solution, then add a fax solution. This openness and modularity is complemented by uniform and easy-to-use management facilities, as well as comprehensive cross-media statistics and reporting. The name "uniQue" derives from "unified queuing," which refers to uniQue's ability to allow easy management of multiple media types in one virtual queue, allowing "automated contact distribution," prioritized routing by customer, skills-based routing and multiple campaign management. Microlog, a Virginia corporation, headquartered in Germantown, Maryland, was organized in 1969. Microlog Corporation of Maryland, Microlog's operating subsidiary, has two major subdivisions: the Contact Center Solutions division and the Old Dominion Systems division. The Contact Center Solutions division, whose business is generally described above, represents Microlog's primary focus and product future. Accordingly, the Company is concentrating its investments and efforts on developing the Contact Center Solutions division. The 5 charter of the division is to help the Company's customers serve their customers better through the use of technology in corporate contact centers performing customer relationship management. The Old Dominion Systems division 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, this division no longer generates significant revenue for the Company. Nasdaq Listing On July 23, 2001, the Company was notified by the Nasdaq SmallCap Market System that its common stock was de-listed effective with the open of business on July 24, 2001. The Company is currently trading on the OTC Bulletin Board. Results of Operations The following table shows the percentage of revenues of certain items from Microlog's consolidated statements of operations:

The Company had a net loss of $845,000 (($.12) per basic and diluted share) for the quarter ended July 31, 2001 and a net loss of $2.4 million (($.34) per basic and diluted share) for the nine months ended July 31, 2001. By comparison, the Company 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. The losses for the third quarter of fiscal 2001 and the nine months ended July 31, 2001 were attributable to insufficient sales generated by the Contact Center Solutions division. The losses for the third quarter of fiscal 2001 and the nine-month period ended July 31, 2001 were offset in part by $36,000 and $0.4 million, respectively, of net income generated by the Old Dominion Systems division. The net losses for the comparable periods in fiscal 2000 were primarily attributable to insufficient sales generated by the Contact Center Solutions division. 6 Sales Sales for the quarter ended July 31, 2001 were $1.6 million, which represented a decrease of 48%, compared to $3.1 million of sales for the quarter ended July 31, 2000. Sales for the nine-month period ended July 31, 2001 were $5.9 million, which represented a decrease of 49%, compared to $11.6 million of sales for the nine month period ended July 31, 2000. The decrease in sales for the current quarter was attributable to a decrease of $0.2 million in sales by the Contact Center Solutions division and a decrease of $1.3 million in sales by the Old Dominion Systems division. The decrease in sales for the 2001 nine month period was attributable to a decrease of $1.5 million in sales by the Contact Center Solutions division and a decrease of $4.3 million in sales by the Old Dominion Systems division. Contact Center Solutions Sales Contact Center Solutions sales for the quarter ended July 31, 2001 were $1.2 million, which represented a decrease of 14%, compared to $1.4 million of sales for the quarter ended July 31, 2000. Sales for the nine-month period ended July 31, 2001 were $4.0 million, which represented a decrease of 27%, compared to $5.5 million of sales for the nine month period ended July 31, 2000. The decrease in sales for the current nine month period was primarily attributable to sales totaling $1.1 million to four new customers in the second quarter of fiscal 2000 that were not replaced in the second quarter of fiscal 2001 as the Company's mostly new sales staff came up to speed and initiated sales discussion with potential new customers. The lower sales resulted from many deferrals in purchasing decisions by potential customers, which the Company believes were caused primarily by a significant softening of the economy, which has significantly impacted capital spending for technology across most vertical industries. As of July 31, 2001, the Contact Center Solutions division had a backlog of existing orders totaling $0.8 million. The backlog as of July 31, 2000 was $2.0 million. The Company has experienced fluctuations in its backlog at various times in the past primarily due to the seasonality of governmental purchases. The Company anticipates that substantially all of the outstanding orders at July 31, 2001 will be shipped and the sales recognized during fiscal 2001. Although the Company believes that its entire backlog of orders consists of firm orders, because of the possibility of customer changes in delivery schedules and delays inherent in the government contracting process, the backlog as of any particular date may not be indicative of actual sales for any future period. Old Dominion Systems Sales Old Dominion Systems sales for the quarter ended July 31, 2001 were $0.4 million, which represented a decrease of 76%, compared to $1.7 million of sales for the quarter ended July 31, 2000. Sales for the nine-month period ended July 31, 2001 were $1.9 million, which represented a decrease of 69%, compared to $6.1 million of sales for the nine month period ended July 31, 2000. The Old Dominion Systems division 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 historically provided a source of sales and profits, this division no longer generates significant revenue for the Company. As of July 31, 2001, the Company had no backlog of funding on existing contracts for Old Dominion Systems. The Company has one remaining Old Dominion Systems contract with APL, which is an indefinite delivery, indefinite quantity (IDIQ) contract and does not have a funding amount, and therefore is not included in backlog. In August 2001, this contract was renewed for one additional year expiring in September 2002. Costs and Expenses Cost of sales was $1.1 million, or 70.8% of sales, for the quarter ended July 31, 2001, compared to $2.3 million, or 75.6% of sales, for the quarter ended July 31, 2000. Cost of sales was $3.9 million, or 66.0% of sales, for the nine-month period ended July 31, 2001, compared to $8.2 million, or 70.4% of sales, for the nine-month period ended July 31, 2000. The decrease in cost of sales for the current quarter was primarily due to decreased sales generated 7 by the Old Dominion Systems division. The decrease in cost of sales for the current nine-month period was primarily due to decreased sales generated by the Contact Center Solutions and Old Dominion Systems divisions. Contact Center Solutions Costs and Expenses Cost of sales was $0.8 million, or 70% of Contact Center Solutions sales, for the quarter ended July 31, 2001, compared to $0.9 million, or 67% of Contact Center Solutions sales, for the quarter ended July 31, 2000. Cost of sales was $2.6 million, or 66% of Contact Center Solutions sales, for the nine month period ended July 31, 2001, compared to $3.0 million, or 54% of Contact Center Solutions sales, for the nine month period ended July 31, 2000. The increases for the current quarter and nine-month period, as a percentage of sales, were primarily due to a reduction in sales for the Contact Center Solutions division during the current period. Selling, general and administrative expenses were $0.9 million, or 71% of Contact Center Solutions sales, for the quarter ended July 31, 2001, compared to $0.7 million, or 51% of Contact Center Solutions sales, for the quarter ended July 31, 2000. Selling, general and administrative expenses were $3.1 million, or 76% of Contact Center Solutions sales, for the nine month period ended July 31, 2001, compared to $2.2 million, or 39% of Contact Center Solutions sales, for the nine month period ended July 31, 2000. The increase for the current nine-month period, as a percentage of sales, was primarily due to decreased sales generated by the Contact Center Solutions division. The increase for the current nine month period, in dollar amount, was primarily due to a one-time charge of $410,000 for the write-off of a bad debt in the second quarter of fiscal 2001 and for increased expenses for sales and marketing as the Company continued to build its sales force and expand its marketing programs. The Company continues to undertake significant expense reduction activity including a 30% reduction in staff since July 2001. Research and development expenses for Contact Center Solutions reflect costs associated with the development of applicable software and product enhancements for the products of the Contact Center Solutions division. The Company believes that the process of establishing technological feasibility with its new products is completed approximately upon release of the products to its customers. Accordingly, the Company does not anticipate capitalizing research and development costs. Research and development expenses were $370,000, or 31% of Contact Center Solutions sales, for the quarter ended July 31, 2001, compared to $342,000, or 25% of Contact Center Solutions sales, for the quarter ended July 31, 2000. Research and development expenses were $1.0 million, or 28% of Contact Center Solutions sales, for the nine month period ended July 31, 2001, compared to $1.0 million, or 18% of Contact Center Solutions sales, for the nine month period ended July 31, 2000. The increases for the current quarter and nine-month period, as a percentage of sales, were primarily due to decreased sales generated by the Contact Center Solutions division. Research and development expenses for the remainder of fiscal 2001 generally are expected to be focused on further development of the uniQue products. The Company anticipates that enhancements will be made in the system administration interface of the products. These enhancements are expected to include a revised administration interface and enhancements in graphical displays of statistics. The Company also plans to make enhancements to system monitoring, system security, and multiple contact center support. The Company also expects to undertake efforts for the integration of uniQue with additional third party contact center components, such as CRM/eCRM, Work Force Management, Wall Board solutions, and licensed software necessary to the planned enhancements and features. It is likely that the Company will undertake custom modifications and integrations for potential OEM resale partners within the Company's research and development efforts during fiscal 2001. Old Dominion Systems Costs and Expenses Cost of sales was $0.3 million, or 73% of Old Dominion Systems sales, for the quarter ended July 31, 2001, compared to $1.4 million, or 83% of Old Dominion Systems sales, for the quarter ended July 31, 2000. Cost of sales was $1.2 million, or 66% of Old Dominion Systems sales, for the nine months ended April 30, 2001, compared to $5.2 million, or 85% of Old Dominion Systems sales, for the nine months ended July 31, 2000. The decreases were primarily due to reduced operations, reduced overhead expenses, and fewer employees of the Old Dominion Systems division. 8 Selling, general and administrative expenses were $77,000, or 18% of Old Dominion Systems sales, for the quarter ended July 31, 2001, compared to $213,000, or 13% of Old Dominion Systems sales, for the quarter ended July 31, 2000. Selling, general and administrative expenses were $230,000, or 13% of Old Dominion Systems sales, for the nine months ended July 31, 2001, compared to $664,000, or 11% of Old Dominion Systems sales, for the nine months ended July 31, 2000. The decreases, in dollar amounts, were primarily due to reduced operations and fewer employees of the Old Dominion Systems division. The increases, as a percentage of sales, were primarily due to decreased sales generated by the Old Dominion Systems division. Net Other Income (Expense) The Company had net other expense of $16,000 for the quarter ended July 31, 2001, compared to net other income of $11,000 for the quarter ended July 31, 2000. The company had net other income of $14,000 for the nine months ended July 31, 2001, compared to net other income of $4,000 for the nine months ended July 31, 2000. Net other expense for the quarter ended July 31, 2001 consisted primarily of interest expense and bank fees associated with the Company's credit facility. Net other income for the nine months ended July 31, 2001 also included the recognition of the deferred gain on the sale of the Company's European subsidiary in the first quarter of fiscal 2001. Net other income for the quarter and nine month periods ended July 31, 2000 consisted primarily of interest expense, interest income, and miscellaneous bank fees associated with the renewal of the Company's credit facility. Benefit (Provision) For Income Taxes For the quarter and nine months ended July 31, 2001 there was no benefit or provision recorded for income taxes. For the nine months ended July 31, 2000, the benefit for income taxes of $56,000 consisted of refunds of federal and state income taxes. The Company has exhausted its ability to carry losses back for income tax refunds. Net operating loss and tax credit carryforwards for income tax reporting purposes of approximately $18.7 million and $0.5 million, respectively, will be available to offset taxes generated from future taxable income through 2020. If specific substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of the carryforwards that can be utilized. Liquidity and Capital Resources Working capital was ($734,000) as of July 31, 2001 and was $1.7 million as of October 31, 2000. This decrease was primarily attributable to a decrease in cash and cash equivalents of $1.5 million and a decrease in receivables of $1.2 million, offset by a decrease in current liabilities of $0.3 million. Cash and cash equivalents were $0.1 million as of July 31, 2001 compared to cash and cash equivalents of $1.6 million as of October 31, 2000. This decrease, was primarily due to the net loss of $2.4 million for the nine months ended July 31, 2001, a decrease in accrued compensation of $0.4 million and purchases of fixed assets of $0.3 million during the nine months ended July 31, 2001. Accounts receivable were $0.4 million as of July 31, 2001 compared to $1.6 million as of October 31, 2000. The decrease was primarily due to decreased sales in the Contact Center Solutions division. In January 2001, the Company renewed its revolving line-of-credit facility with Silicon Valley Bank which allows the Company to borrow up to 75% of its eligible receivables to a maximum of $1,000,000, subject to the right of the bank to make loans only in its discretion. The line-of-credit, which expires in January 2002, bears interest at the bank's prime rate plus 2.0% (8.5% at July 31, 2001), and contains a minimum monthly interest charge as well as a monthly collateral fee and an up-front commitment fee of $35,000. The line subjects the Company to a financial covenant of maintaining a minimum tangible net worth tested on a monthly basis. The line also subjects the Company to a number of restrictive covenants, including restrictions on encumbrance of assets, mergers or acquisitions, payment of dividends, and certain restrictions on additional borrowings. The line is secured by all of the Company's assets. At September 14, 2001, the Company was not in compliance with the financial covenant of maintaining a minimum of $1,500,000 of stockholders' equity or with the negative covenant restricting specified encumbrances of the Company's assets. At September 14, 2001, there was no outstanding debt against this line of credit. The Company may not borrow funds under this line-of-credit facility until it regains compliance with all 9 covenants under the facility or obtains a waiver of the application of the covenants from Silicon Valley Bank. In the event the Company regains compliance with the facility's covenants, the ability of the Company to borrow under the facility will remain subject to the right of the bank to make loans only in its discretion. In July 2001, the Company borrowed $200,000 from its principal stockholder, TFX Equities Incorporated, in the form of a secured demand note. The note bears interest at the rate of 12% per annum. In August 2001, the Company borrowed an additional $190,000 from TFX Equities, which was also in the form of a demand note and bears interest at the rate of 12% per annum. The proceeds are being used for corporate operations. The Company is currently in discussions with TFX Equities regarding borrowing additional funds from TFX Equities and issuing convertible notes to TFX Equities. The Company is likely to proceed with the transaction with TFX Equities unless the Company receives additional cash flow from operations sufficient to make such borrowing unnecessary. The Company believes that its existing sources of funds and possible additional funds from TFX Equities will provide sufficient funds to enable the Company to operate its business as currently planned through the end of the calendar year. In the event that the Contact Center Solutions division does not generate expected sales, or if the Company's plans or assumptions change or prove to be inaccurate, the foregoing sources of funds may prove to be insufficient to fund its currently planned operations, in which case the Company would be required to seek and obtain additional capital through other means, including equity or debt financing, possibly in the very near future. The Company can give no assurance that it will be able to generate sufficient cash flows from operations, including planned or expected sales by the Contact Center Solutions division, or that additional financing arrangements will be available when needed or, if available, that they can be concluded on acceptable terms. Any inability by the Company to generate or obtain sufficient funds would have a material adverse effect on its ability to continue operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company currently has loans in the form of demand notes from TFX Equities, Inc., in the amounts of $200,000 and $190,000, which bear fixed interest in the amount of 12% per annum, payable quarterly. The Company is subject to the risk that fluctuations in the market for such loan instruments will make these loans more or less valuable than they currently are. To the extent market interest rates increase or decrease by 1%, the underlying value of these notes, in the aggregate, increase or decrease. For example, assuming the loan will not be repaid for one year, if the interest rate increases 1%, the value of the loans will decrease by $3,603.00 and if the interest rate decreases by 1%, the value of the loan will increase by $3,646.00. 10 Part II. OTHER INFORMATION Item 1 Legal Proceedings None Item 2 Changes in Securities and Use of Proceeds In May 2001, the Company issued 40,000 shares of common stock to Murdock Capital Partners Corporation as consideration for financial advisory services. In connection with this issuance, the Company relied on the exemption from registration under the Securities Act of 1933 provided in Section 4(2) of the Securities Act and/or Regulation D thereunder. The Company did not engage in general advertising or general solicitation in connection with the offer and sale of the securities. In addition, the Company provided or made available information concerning the Company and the common stock and obtained investment representations from Murdock Capital Partners. Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: 10.1 $200,000 Demand Note, dated July 11, 2001, among Microlog Corporation, Microlog Corporation of Maryland and TFX Equities, Inc. (b) The following Current Report on Form 8-K was filed by Microlog during the period covered by this report: Date of Report Item Reported -------------- ------------- July 25, 2001 Nasdaq delisting effective July 24, 2001 11 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 President and Chief Executive Officer (Duly Authorized Officer) /s/ Lynne A. Brisbane -------------------------------------- Lynne Brisbane Principal Accounting Officer Date: September 14, 2001

MICROLOG CORP 10-Q