U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________to___________
Commission file number 0-23710
Micro-Integration Corp.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1204847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Science Park
Frostburg, MD 21532
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 301-689-0800
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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___
The number of shares outstanding of the issuer's classes of common stock as of
September 30, 1996 Common Stock, $.01 Par Value --- 2,403,565 shares
Transitional Small Business Disclosure Format (check one):
Yes ___ No_X_
<PAGE>
10
Micro-Integration Corp. and Subsidiaries
Form 10-QSB
Index
Part I Financial Information Page
- ----------------------------- ----
Item 1. Consolidated Balance Sheets 2
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 7
Part II Other Information
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 12
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
September 30 March 31
1996 1996
---------- ----------
(unaudited)
ASSETS
Current Assets
Cash and equivalents $ 163,095 $ 460,874
Marketable securities
Held-to-maturity 1,000,000 1,000,000
Accounts receivable trade, net 1,173,925 1,300,838
Inventory 910,389 933,522
Tax refund receivable 125,303 103,086
Prepaid expense 179,428 114,967
Deferred income taxes 23,483 23,483
---------- ----------
Total Current Assets 3,575,623 3,936,770
---------- ----------
Property, Plant and Equipment
Land 92,962 92,962
Buildings 1,455,518 1,455,518
Equipment 1,729,018 1,447,128
Automobiles 212,133 238,738
Property held for sale 59,251 59,933
---------- ----------
3,548,882 3,294,279
Less accumulated depreciation 1,304,504 1,149,678
---------- ----------
2,244,378 2,144,601
Cash Surrender Value of Life Insurance
and other noncurrent assets 180,207 177,402
Intangible Assets, Net of Amortization 545,290 356,052
---------- ----------
$6,545,498 $6,614,825
========== ==========
2
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 March 31
1996 1996
------------ --------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt and $ 252,543 $ 299,067
capital lease obligations
Accounts payable 512,669 202,049
Accrued expenses 86,637 198,044
Income tax payable 0 1,000
----------- -----------
Total Current Liabilities 851,849 700,160
----------- -----------
Long-term debt, less current portion 1,111,744 1,133,008
Capital lease obligations, less current portion 33,560 53,202
Deferred Income Taxes 42,985 42,985
Shareholders' equity
Common stock - $.01 par value; authorized 120,000,000 shares;
outstanding -- 2,403,565 shares at September 1996; and 2,385,925
shares at March 1996 25,341 25,155
Additional capital 5,404,795 5,404,795
Retained deficit (256,939) (113,162)
Foreign currency translation (262,415) (176,376)
----------- -----------
4,910,782 5,140,412
Less deferred compensation (49,528) (99,048)
Less treasury stock (355,894) (355,894)
----------- -----------
4,505,360 4,685,470
$ 6,545,498 $ 6,614,825
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended September 30 Six months ended September 30
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue
Product revenue $ 1,547,779 $ 1,880,016 $ 3,059,449 $ 3,938,852
License revenue 17,263 91,563 77,606 240,214
----------- ----------- ----------- -----------
Total revenue 1,565,042 1,971,579 3,137,055 4,179,066
Cost of goods sold 602,654 536,574 1,034,455 1,412,591
----------- ----------- ----------- -----------
Gross profit 962,388 1,435,005 2,102,600 2,766,475
Operating Expenses
Selling, general, and administrative 1,056,923 1,365,871 2,027,682 3,246,995
Depreciation and amortization expense 103,036 116,227 206,573 237,284
----------- ----------- ----------- -----------
1,159,959 1,482,098 2,234,255 3,484,279
Operating Loss (197,571) (47,093) (131,655) (717,804)
Other Income (Expense)
Interest expense (27,785) (27,954) (54,165) (58,343)
Other income (expense) 36,412 (3,081) 51,434 19,908
----------- ----------- ----------- -----------
8,627 (31,035) (2,731) (38,435)
----------- ----------- ----------- -----------
Income before income taxes (188,944) (78,128) (134,386) (756,239)
Income tax (benefit) expense (1,741) 33,097 9,392 66,705
----------- ----------- ----------- -----------
Net Loss $ (187,203) $ (111,225) $ (143,778) $ (822,944)
=========== =========== =========== ===========
Earnings (Loss) per Share $ (0.08) $ (0.05) $ (0.06) $ (0.34)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding and
Common Stock Equivalents 2,396,625 2,423,148 2,396,625 2,423,148
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended September 30
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss) $ (143,778) $ (822,944)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 242,690 401,603
(Gain) Loss on disposal of assets 0 811
Deferred income taxes 0 0
Change in operating assets and liabilities:
Accounts receivable 137,723 281,440
Inventory 28,411 (65,005)
Tax refund receivable 0 616,368
Prepaid expense (81,141) 79,086
Accounts payable 306,808 (151,172)
Accrued expenses (113,603) (109,266)
Income taxes payable (1,000) 28,495
----------- -----------
Net cash provided by operating activities 376,110 259,416
Cash Flows from Investing Activities:
Acquisition of property, plant, and equipment (257,853) (154,211)
Investment in other noncurrent assets and
intangibles (293,838) (26,469)
Purchase of held-to-maturity securities (6,000,000) (6,000,000)
Proceeds from maturity of held-to-maturity securities 6,000,000 6,500,000
Increase in cash surrender value of life insurance (2,805) 0
Proceeds from sale of fixed assets 17,212 0
----------- -----------
Net cash (used in) provided by investing activities (537,284) 319,320
Cash Flows from Financing Activities:
Increase in notes payable and long-term debt 0 0
Repayments of notes payable, long-term debt, and
capital lease obligations (89,306) (122,994)
Issuance of common stock 185 0
----------- -----------
Net cash (used in) financing activities (89,121) (122,994)
Currency Adjustments:
Effect of exchange rate changes on cash (47,484) (32,337)
----------- -----------
Increase in cash (297,779) 423,405
Cash at beginning of period 460,874 427,085
----------- -----------
Cash at end of period $ 163,095 $ 850,490
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation have
been included. The results for the three months and the six months ended
September 30, 1996, and 1995, are not necessarily indicative of financial
information for the full year. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's annual report and Form 10-KSB for
the year ended March 31, 1996.
For purposes of comparability, certain prior year amounts in the consolidated
financial statements have been reclassified to conform to the presentation used
for current period reporting.
2. Marketable Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale debt
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity. Realized gains
and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale are included in investment income.
There were no trading securities at September 30, 1996.
Held-to-maturity securities include obligations of state municipalities and are
stated at cost $1,000,000. These securities mature in November 1996.
3. Inventory
Inventory consisted of the following:
September 30 March 31
1996 1996
---- ----
Raw material $210,494 $274,623
Finished goods 699,895 658,899
-------- --------
$910,389 $933,522
======== ========
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
6
<PAGE>
Part I Financial Information
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition for the Six Months Ended September 30, 1996, and
1995
When used in this discussion, the words "estimate," "project," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Recent Events
On October 30, 1996, the Company announced it has signed a Letter of Intent to
acquire the assets of Computer One of Ohio, Inc., an Ohio-based systems
integrator, in exchange for Micro-Integration Corp. common stock. During its
most recent fiscal year, Computer One had sales of $2.1 million, and the revenue
trend has been up. As of the date of this report, the Company was performing its
due diligence. The Company expects that, if consummated, this transaction will
not have a significant effect on results of operations until the fourth quarter,
ending March 31, 1997.
Results of Operations
On August 21, 1996, the Company completed the purchase of the assets of Computer
Site, Inc., an Ohio-based systems integrator. In its last fiscal year ended
February 29, 1996, Computer Site generated revenues of $4.4 million, and the
revenue trend has been down. The Company is endeavoring to reverse this trend
quickly and build Computer Site's revenue and bottom line. Steps to achieve this
goal have already been put in place. While the Company expects Computer Site to
make a contribution toward building the Company's revenues in the remaining two
quarters of this fiscal year, the Company does not expect this acquisition to
have any significant impact on earnings until the fourth quarter. Computer Site
accounted for 8% of the consolidated total revenue of the Company for the
quarter ended September 30, 1996.
The Company's total revenue was $1.6 million for the quarter ended September 30,
1996, down 21% or $406,000 from the quarter ended September 30, 1995. Product
revenue decreased by $332,000 or 18%, and license revenue declined $74,000 or
81% compared to the same period last year. As in the previous quarter, there
were unit and revenue declines in the Company's core business AS/400
connectivity product classifications. This was partially offset by product sales
made by the Computer Site subsidiary, acquired six weeks before the end of the
quarter. The decline in core product unit sales was steeper in Europe than in
the United States, with European unit sales down 43% and U.S. unit sales down
26%. The overall decline in unit sales was 32% compared with 28% in the previous
quarter. The Company believes, as stated previously, that this decline in unit
sales is primarily a result of continued slowdown in purchases of connectivity
products in the IBM AS/400 marketplace.
For the six months ended September 30, 1996, total revenue was $3.1 million,
down 25% or $1,042,000 from the same period last year. Product revenue decreased
$880,000 or 22%, and license revenue decreased $162,000 or 67%. On a per unit
basis, core AS/400 connectivity product sales were down 30% for the six month
period. The Company believes that the general market
7
<PAGE>
slowdown in AS/400 connectivity purchases will continue for the forseeable
future. The Company's strategy to offset the declines in revenue from this trend
is based on diversifying its product base to provide computer systems to
organizations in secondary markets. The acquisition of Computer Site and other
potential acquisitions reflect this strategy.
Gross margin declined to 61.5% for the quarter ended September 30, 1996, from
72.8% in the same period in 1995. The major factor causing this decline is the
effect of the Computer Site subsidiary's gross margin for the period. Computer
Site is a higher-volume, lower-margin system integration business, as opposed to
the Company's historic high-margin AS/400 connectivity business. In subsequent
periods the Company expects the trend of lower gross margins to continue, as
sales from Computer Site and other acquired businesses in the systems
integration area become a larger proportion of the Company's total business. On
a year-to-date basis, gross margin improved slightly from 66.2% in the first six
months of last year to 67.0% this year. During the three-month period ended June
30, 1995, the Company wrote off capitalized TAS software development costs and
TAS inventory totaling $249,000. Excluding this write off, the gross margin for
the same period last year would have been 72.2% compared with 67.0% this year.
Selling, general, and administrative expenses (SG&A) decreased by $309,000 in
the quarter ended September 30, 1996, compared to the same period in 1995. As a
percentage of sales, SG&A was 67% of total sales in the current quarter compared
with 69% of total sales in the same quarter last year. For the six months ended
September 30, 1996, SG&A expenses decreased by $1,219,000 compared to the same
period last year. As a percentage of sales, SG&A was 65% of total sales for the
six months compared with 78% for the same period last year. Management continues
to make selective reductions in costs in its AS/400 connectivity business to
keep those costs in line with expected revenues.
The Company's net other income of $9,000 and net other expense of $3,000 for the
three months and six months ended September 30, 1996, respectively, compares to
a net other expense of $31,000 and $38,000 for the same periods last year. The
swing to net income from net expense in the year-to-date figures is due
primarily to higher investment income in the second quarter of this year.
For the three months and six months ended September 30, 1996, the Company
recognized a corporate tax benefit of $2,000 and a corporate tax expense of
$9,000, respectively. At September 30, 1996, the Company has a net operating
loss carryforward of approximately $210,000, and $480,000 available for offset
against future U.S. and U.K. operating profits, respectively. The Company also
has foreign tax credit carryforwards of approximately $205,000 that can be
applied to offset the tax on future U.S. earnings.
Liquidity and Capital Resources
The Company satisfies its cash requirements primarily through cash flow from
operations, bank borrowings, and lease financing. At September 30, 1996, the
Company has $1.0 million invested in held-to-maturity securities and an
additional $163,000 in cash. The $298,000 decrease in cash on hand at September
30, 1996, compared with cash on hand at March 31, 1996, is primarily due to an
increase of $328,000 in cash provided by operations, offset by decreases of
$89,000 and $537,000 in cash caused by financing activities and investing
activities, respectively. Investing activities included continued capital
investment in the Company's Internet Division, capitalization of software
development costs associated with the Company's new Internet voice/fax server
product currently in development, capitalization of site licenses for software
under license to the Company, and the acquisition of Computer Site. The Company
expects that cash generated from operations and cash invested in
held-to-maturity securities will satisfy its operating cash needs for the
foreseeable future.
8
<PAGE>
Working capital decreased from $3.3 million at March 31, 1996, to $2.7 million
at September 30, 1996, as working capital was expended to fund cash needs. In
spite of this reduction, the Com-pany's current ratio remains healthy at 4.2 to
1 at September 30, 1996, as compared to 5.6 to 1 at March 31, 1996.
At the end of the September quarter, the Company's book value was $4.5 million
or approximately $1.87 per share.
9
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(11.1) Statement re: Computation of Earnings Per Share 11
(b) The Company did not file any reports on Form 8-K during the
three months ended September 30, 1996.
10
<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 in the city of Frostburg, state of
Maryland, on the 12th day of November, 1996:
Micro-Integration Corp.
By: /s/ John A. Parsons
----------------------
John A. Parsons
President, Chairman of the Board,
and Chief Executive Officer
By: /s/ Christopher J. Burgess
------------------------------
Christopher J. Burgess
Vice President, Finance and Administration
and Chief Financial Officer
Micro-Integration Corp. and Subsidiaries
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
(thousands except per share) (thousands except per share)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Average shares outstanding 2,397 2,423 2,397 2,423
Net effect of dilutive stock options
based on the treasury stock method
using average market price 0 0 0 0
------- ------- ------- -------
Total 2,397 2,423 2,397 2,423
======= ======= ======= =======
Net Loss $ (187) $ (111) $ (144) $ (823)
======= ======= ======= =======
Per share amount $ (0.08) $ (0.05) $ (0.06) $ (0.34)
======= ======= ======= =======
</TABLE>
Note: Fully diluted earnings per share equals primary earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 163,095
<SECURITIES> 1,000,000
<RECEIVABLES> 1,173,925
<ALLOWANCES> 0
<INVENTORY> 910,389
<CURRENT-ASSETS> 3,575,623
<PP&E> 3,548,882
<DEPRECIATION> 1,304,504
<TOTAL-ASSETS> 6,545,498
<CURRENT-LIABILITIES> 851,849
<BONDS> 0
0
0
<COMMON> 25,341
<OTHER-SE> 5,404,795
<TOTAL-LIABILITY-AND-EQUITY> 6,545,498
<SALES> 1,565,042
<TOTAL-REVENUES> 1,565,042
<CGS> 602,654
<TOTAL-COSTS> 602,654
<OTHER-EXPENSES> 1,159,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,785
<INCOME-PRETAX> (188,944)
<INCOME-TAX> (1,741)
<INCOME-CONTINUING> (187,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (187,203)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
