Microlytics discloses
lawsuit, loan debt

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The first official news in months spilled from Microlytics Inc.–and it was glum.
The Pittsford-based company late Friday announced it filed with the Securities and Exchange Commission to terminate its registration.
Microlytics also revealed it is $3.2 million in default and faces a lawsuit accusing the company and its former directors of fraud and misrepresentation.
Rumors that the firm would file for bankruptcy have swirled for several months, analysts said.
Michael McCourt, vice president and acting general manager, confirmed that Microlytics continues to weigh such an action.
“It is still an option,” he said. “We have an accumulation of debt from (the) past. It is one of the strategies we are looking at.”
While its trade accounts are basically current, Microlytics is developing a restructuring plan to handle its multimillion-dollar debt. All the debt is in substantial default, the company said.
McCourt said Microlytics still faces major obstacles in its turnaround bid.
“The burden of being a public company and $3.2 million in debt are two obstacles,” he said.
If granted, the SEC registration termination would end the company’s obligation to file quarterly and annual reports, though to maintain trading of its stock the firm would be required to publicly disseminate the same type of information required for the reports.
Future trading would be limited to the “pink sheets,” an inter-dealer quotation publication. Registration termination also results in the loss of certain rights to the holders of restricted stock to resell those shares.
Microlytics noted that its shares already had been removed from the NASDAQ National Market for failure to meet price requirements. Company stock now is quoted in the pink sheets.
The firm also noted that it has not yet filed the Form 10-K for the year ended March 31, 1996, and subsequent quarterly 10-Q forms.
Microlytics officials said the move to deregister was motivated by the need to eliminate the substantial legal and accounting expense associated with filing the SEC reports.
During the first nine months of 1996 ended Dec. 31, Microlytics reported a loss of $1.1 million on revenues of $1.7 million.
McCourt would not release any additional earnings or other financial information.
Reaction from analysts ranged from shock to dismay.
“It is a little shocking. My reaction is one of plain disgust,” said David DeWind, an analyst with Brighton Securities Corp.
DeWind said investors and analysts have been waiting for months for some news from the company. If the stock is relegated to the pink sheets, it creates questions about how stock owners can trade their shares.
“There is a question about marketability,”” he said.
Michael Zbrozek, of Broz Financial Ltd., an investor-relations firm in Englewood, Colo., said no one has received any information from Microlytics.
“This news is not good,” he said.
Both analysts said the most disappointing aspect of the company’s problems is that its technology held such promise.
Microlytics also announced the resignations of Donald Riley and Robert Harris as directors. Elroy Roelke is the sole remaining director. He is a vice president of Renaissance Capital, which owns 15 percent of the company’s capital stock.
The company’s MicroPages proprietary full-text retrieval product recently was licensed to a regional Bell operating company for use in that firm’s proprietary Internet Yellow Pages site. McCourt said Microlytics also expects to announce in the next month several other agreements with telecommunications firms.
The Baby Bell asked Microlytics not to identify it until the Internet site becomes active.
McCourt said the company is developing a restructuring plan to handle its obligations that total $3.2 million. The firm also is attempting to raise additional capital for its MicroPages business.
Microlytics has further delayed its annual meeting–usually held in August–pending the identification of new directors and development of a restructuring plan. McCourt said he could forecast when the next annual meeting might occur.
The company also announced Friday it was named as a defendant in an action brought in U.S. District Court by Unterberg Harris Private Equity Partners LP, a venture capital firm in New York City. The suit alleges securities fraud and breach of contract in connection with Unterberg’s purchase of $2.5 million of Microlytics securities in June 1995.
Xerox Corp.’s Venture Capital division, and former officers and directors Riley and Roy Haythorn, also have been sued for alleged violations of federal securities laws, breach of fiduciary duty, common-law fraud and misrepresentation.
Haythorn resigned in February. The company said it has not had the opportunity to review either the complaint or the underlying details. It expects that if the allegations are true, it will “claim over” against Xerox, Haythorn and Riley for any liability it might have to Unterberg.
In addition, Microlytics may seek independent recovery from those other defendants for damage to the company arising out of their alleged activities.
Microlytics licenses technology related to computational linguistics and data compression, which is used in electronic dictionaries, translators, thesauri and spell-checkers. The company also developed and markets the MicroPages directory-publishing software.
Analysts and McCourt agree the company still has excellent and promising technology.
“The company has very good technology. We need to keep it focused in one direction,” McCourt said.
But he responded cautiously when asked about the company’s future.
“The company is driven by the board,” he said. “I would hate to use the word optimistic (regarding the company’s future).”