U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from ...............to.................
Commission file number 0000-23710
Micro-Integration Corp.
(Name of small business issuer in its charter)
Delaware 06-1204847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Science Park
Frostburg, MD 21532
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 301-689-0800
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common
Stock, $.01 Par Value
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_____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $9,659,861
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 2, 1997 was approximately $3,114,924 (based on the price
at which the stock was sold on that date).
The number of shares outstanding of the issuer's classes of common stock as
of June 2, 1997: Common Stock, $.01 Par Value - 2,491,939 shares
Number of shares outstanding of each of the issuer's classes of common
equity, as of June 16, 1997 - 2,491,939.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive Proxy Statement for 1997 Annual Meeting of Stockholders --
Items 9, 10, 11, and 12.
Transitional Small Business Disclosure Format (check one): Yes_____ No__X__
<PAGE>
Index to Form 10-KSB
Micro-Integration Corp.
Part I
Item 1. Description of Business................................................2
Item 2. Description of Properties..............................................8
Item 3. Legal Proceedings......................................................9
Item 4. Submission of Matters to a Vote of Security Holders....................9
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters. .............................................................11
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................11
Item 7. Financial Statements and Supplementary Data...........................14
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..............................................14
Part III
Item 9. Directors, Executive Officers, and Key Personnel
of the Registrant.....................................................15
Item 10.Executive Compensation................................................15
Item 11.Security Ownership of Certain Beneficial Owners and
Management............................................................15
Item 12.Certain Relationships and Related Transactions........................15
Part IV
Item 13.Exhibits and Reports on Form 8-K......................................16
<PAGE>
Part I
Item 1. Description of Business
Introduction
Micro-Integration Corp. ("MI" or "the Company") designs, develops, markets,
sells, and supports computer and networking products and provides consulting,
network integration and design services, as well as Internet access and web site
design and hosting. The Company sells computers and communications products
purchased from others and designs, manufactures, and sells a line of products
that provide communications and connectivity between personal computers ("PCs")
and IBM mainframe and midrange AS/400 computers.
The Company's strategy is to provide complete solutions to customers' business
problems, instead of providing stand-alone products or services. The Company
provides Internet services, consulting, network integration, network
configuration, training, and help-desk services to complement computer and
network equipment and software sales.
John A. Parsons, the Company's current Chairman and CEO, founded the Company's
predecessor, Micro-Integration Inc. ("MII"), in 1978. The Company was formed in
1986 to hold the stock of Micro-Integration Inc. and i.e. Systems, Inc. The two
subsidiaries were merged into the Company in 1988. Since inception, the Company
and its predecessors have designed, developed, marketed, and supported
client-server and PC-to-IBM host communications and connectivity products. In
late 1995, the Company began offering Internet access in Western Maryland and
began offering other Internet services and network design and integration
services.
The Company had a European subsidiary, Micro-Integration Corp. PLC ("MI PLC"),
headquartered in Birmingham, U.K., with a sales and service office near
Brussels, Belgium, until March 31, 1997, when the majority of the Company's
interest in the subsidiary was sold.
Significant Developments During Fiscal Year 1996-1997
During fiscal year 1996-1997 the Company took significant steps to implement its
previously announced strategy of transitioning itself from a PC-to-AS/400
communications product development company to a broad-based network integrator
and service provider. During this period the Company developed its network
services business into a major new source of revenue, leveraging its
communications and networking expertise to enter into new markets, such as the
Internet Service Provider ("ISP") market. The Company also intends to continue
to develop new software and hardware products and introduce new services that
will complement its Internet business and expertise.
On August 21, 1996, the Company completed the purchase of the assets of Computer
Site, Inc. ("Computer Site"), an Ohio-based network systems integrator. Computer
Site accounted for 24% of the consolidated total revenue of the Company for the
year ended March 31, 1997.
On November 22, 1996, the Company completed the purchase of the assets of
Computer One of Ohio, Inc. ("Computer One"), an Ohio-based network systems
integrator. Computer One accounted for 14% of the consolidated total revenue of
the Company for the year ended March 31, 1997.
On February 6, 1997, the Company announced it had discovered errors in certain
of its previously published unaudited quarterly financial statements that
required the Company to restate its financial results for the quarters ended
June 30, 1996, and September 30, 1996. The Company filed restated financial
statements for these periods on Forms 10-QSB/A. The Company also filed a Form
8-K attaching press releases issued on that day announcing the discovery of the
errors and the filing of the restated financial statements.
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On March 31, 1997, the Company completed the sale of 80% of its interest in MI
PLC, its wholly-owned European subsidiary. MI PLC accounted for 14% of the
consolidated total revenue of the Company for the year ended March 31, 1997. The
Company filed a Form 8-K attaching the agreements regarding the sale.
Business Operations
Strategy
The Company is concentrating on increasing revenues and returning to
profitability in the short term. Revenue growth will be driven by a focus on
large account sales, the addition of new products and services, sales to new
customers, and acquisitions of regional network services and systems integration
companies. The Company's profit strategy focuses on the addition and expansion
of higher-margin products and services and on expense control, including
improvement of the Company's internal processes and procedures.
Management believes the Company's long-term success will depend on its ability
to identify market segments and develop or acquire products or services that
will allow the Company to gain and hold a significant market share and/or
maintain above-average gross margins in the segments identified.
Business Units
The Company implements its business strategy through three principal business
units: the PC Connectivity unit, the Internet Services unit, and the Technology
Services unit. These business units provide the framework for managing the
Company's transition from a product-driven PC Connectivity supplier to a
solution-driven network integrator. Under the framework of these business units,
the Company will continue to expand and foster its customer focus, delivering
business solutions. The Company also provides various support and management
services to the three business units from a headquarters support group.
PC Connectivity Unit
Prior to the 1996-1997 fiscal year, the Company's PC-to-IBM midrange (System/36,
System/38, and AS/400) client-server communications products were the Company's
primary business. In the 1996-1997 year, these products became less important as
the Company shifted its focus from supplying AS/400 Connectivity products to
providing network integration solutions for customers.
Products: The AS/400 Connectivity products provide PC users with easy access to
computer applications and data on IBM midrange computers. They provide PC-to-IBM
host and Local Area Network ("LAN")-to-IBM host connections using a wide variety
of network and communications system configurations, including several types of
direct and modem connections, multiple LAN operating systems, communications
hardware, and a range of communications servers and gateways. In the fiscal year
ended March 31, 1996, these products accounted for approximately 92% of the
Company's total revenue; in the year ended March 31, 1997, they accounted for
51% of total revenue. These products continue to supply generous gross margins,
however, and contributed 72% of the Company's total gross margin during the year
ended March 31, 1997.
Sales and Marketing: The Company sells its AS/400 Connectivity products
worldwide through a combination of direct sales and sales through resellers and
distributors. U.S. sales are primarily handled by experienced in-house telesales
representatives. These sales people handle typical reseller and end-user
accounts. The Company also employs one outside sales person in the U.S. for
major accounts in the AS/400 Connectivity product line. The Company consults
with and supports its resellers with experienced sales, marketing, systems
engineering, and technical support staff.
In Europe, the Middle East, and Africa, approximately 30% of the Company's
AS/400 Connectivity product sales are made through distributors. Approximately
15% of the Company's revenue for the fiscal year ended March 31,
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1997, was attributable to sales made outside the United States. The Company's
former subsidiary, MI PLC, contributed 89% of this revenue in the period, and
the Company expects the sale of the subsidiary to substantially reduce Company
sales revenue outside of the United States.
Manufacturing: The Company manufactures AS/400 Connectivity computer software
kits and hardware boards in the U.S. Other products are purchased from a variety
of suppliers worldwide.
Raw materials for AS/400 Connectivity software kits are obtained on an as-needed
basis, with four to six weeks as the longest lead time from purchase order to
receipt of most materials. All materials used in preparation of these software
kits can be produced by a large number of vendors, helping to assure quick
delivery and competitive pricing. The Company currently contracts with one
outside firm in the United States for the production of the Company's custom
hardware boards. This firm purchases and stocks raw materials and assembles
finished boards on the Company's orders. The Company is currently producing 11
distinct hardware board designs.
The Company maintains an inventory of all items it manufactures which it
believes to be sufficient to meet demand. The Company manufactures or purchases
and maintains inventory of certain high-volume items in larger quantities.
Competitors: The Company currently has eight major competitors in the IBM
midrange client-server connectivity and server segment: IBM, Novell, I.D.E.
Associates, Inc., Andrew Corporation, Wall Data, Inc., Better Online Solutions,
Inc., DCI, Inc., and Eicon Technology Corp.
The principal competitive factors affecting the market for the Company's PC
Connectivity products include: product functionality, ease of use, quality,
performance, reliability, quality of customer service and support, product
availability, vendor credibility, ability to keep pace with technological
change, and price. The PC Connectivity market is subject to rapidly changing
technology and evolving standards incorporated into the Internet, PCs, networks,
and IBM mainframe and midrange computers. This market is characterized by
significant price competition.
Backlog: The Company typically ships AS/400 Connectivity products on the same
day orders are received. Because of this, the Company believes that a PC
Connectivity product backlog at any given point in time is not a reliable
indicator of future sales or earnings. The absence of significant backlog and
variations in the purchasing patterns of the Company's customers could
contribute to variations in the Company's quarterly results of operations.
Internet Services Unit
The Company offers dial-up and direct-connect Internet access, web site
creation, and web site hosting services to customers in Western Maryland. On
March 31, 1997, the Company had nearly 3,000 dial-up subscribers and was the
largest ISP located in Western Maryland. The Company hosts web sites for more
than 50 businesses and organizations and more than 270 individuals.
Sales and Marketing: The Company sells dial-up service through direct mail and
advertising in regional newspapers and guides. It has partnered with the school
systems in Washington, Allegany, and Garrett Counties, Maryland, to bring free
Internet access to all elementary, middle, and high schools. The Company also
has co-marketing arrangements with Allegany College and Frostburg State
University for Internet access for students.
Web design and hosting services are primarily sold by the Company's Technology
Services sales force. See "Sales and Marketing" in the Technology Services Unit
subsection.
Competitors: The Company's main competitors for Internet Services in Western
Maryland are the major on-line service providers: America Online, CompuServe,
and Prodigy. None of these competitors offer high-speed (28.8 kbps or faster) or
Integrated Services Digital Network ("ISDN") local-call access to the Internet
in the two Western Maryland counties where the majority of the Company's
customers are, while the Company offers both high-speed and ISDN service to all
customers. None of the other major ISPs, such as AT&T, MindSpring, or Bell
Atlantic offer local-call access to their networks from these Western Maryland
counties. Management does not believe entry
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of one of these competitors into the Company's market area would have a
significant effect on the Company's results of operations.
The principal competitive factors affecting the market for the Internet services
include: speed of connection, availability of local-call access, functionality,
quality, reliability, quality of customer service and support, network
availability, vendor credibility, ability to keep pace with technological
change, and price. The Internet is subject to rapidly changing technology and
evolving standards.
Technology Services Unit
The Company believes it distinguishes itself and can obtain significant market
share in the markets it serves because of the Company's focus on providing
complete solutions to customers' business problems, instead of isolated products
or services.
The Company offers computer and network systems design and integration, help
desk, training, maintenance, and consulting services on a regional basis through
its Technology Services offices in Frostburg, MD and its subsidiaries, Computer
One in Lima, OH, and Computer Site in Strongsville, OH.
In conjunction with its service offerings, the Company sells a broad selection
of products with a predominant focus on the products of major software vendors
such as Microsoft, Lotus, and Novell, and on products of communications
equipment, personal computer, and peripheral manufacturers such as Cisco,
Compaq, IBM, and Hewlett-Packard. The Company has sales and/or service
authorizations from Microsoft, Lotus, Novell, Cisco, IBM, Compaq, US Robotics,
Hewlett Packard, NEC, Apple, Dell, and others. No manufacturer's products
represented more than 10% of total sales for the year ended March 31, 1997.
Sales and Marketing: The Company sells its networking and computer solutions
through sales staffs located in Frostburg, MD, Lima, OH, and Strongsville, OH.
These sales people sell network and communications equipment, Internet web
design and hosting, computers, computer peripherals, and the services needed to
design, install, maintain, and support them. Technology Services sales accounted
for 38% of the Company's revenue for the year ended March 31, 1997. The sales
staffs are supported by Marketing Support Representatives ("MSR"s) and technical
support staff in each office, as well as by a headquarters support group located
in Frostburg. The headquarters support group, located in Frostburg, MD, provides
pre- and post-sale support, training, consulting, and installation and help desk
services for all three offices.
Competition: In the niche markets in which the Company's marketing efforts are
focused, there are many competitors who provide one or more products or services
similar to the Company's, but few competitors who provide complete solutions to
customers' business problems with the breadth of products and expertise offered
by the Company. Companies such as Electronic Data Systems ("EDS") and Andersen
Consulting offer such breadth of products and expertise, but tend to focus on
larger companies. Since the Company's focus is on small- to mid-size
organizations, there is not direct competition with those companies focusing on
larger customers.
The Company sells products only in conjunction with its networking and
consulting services. Therefore, the Company does not generally compete with
vendors that sell directly to large purchasers and parties that implement other
sales methods, such as direct mail, computer "superstores," and mass
merchandisers. Mail-order communications companies such as Black Box and Data
Communications Warehouse sell communications products in competition with the
Company, but generally do not provide on-site consulting, design, and
installation services. Mail-order computer and peripheral companies such as
Micro Warehouse and Dell Computers sell computers and peripherals in competition
with the Company, but generally do not provide network design and installation
services. Local computer superstores such as Best Buy and Comp USA sell
computers and peripherals at low prices, but generally do not provide networking
equipment or services. Small local computer stores, consultants, and resellers
are able to provide both products and services, but generally do not have the
breadth of staff or expertise of the Company, especially in such areas as
Internet access and programming.
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The entire computer industry is characterized by intense competition, based
primarily on quality and breadth of products and services, availability of
pre-and post-sale support, product and service availability, price, speed of
delivery, ability to tailor specific solutions to customer needs, and quality of
customer training.
Expansion. The Company will continue to pursue revenue and profit growth through
the acquisition of established network integrators and resellers that can add to
the Company's sales through increasing the customer base and the Company's
geographic coverage.
Backlog: The company stocks a minimal amount of products manufactured by others,
relying on distributors' drop shipping and just-in-time shipping to fill orders.
As a result, the Company sometimes experiences a short, but not significant,
order backlog on products purchased from distributors. Occasionally, demand may
outstrip a particular manufacturer's ability to produce, which could result in a
significant backlog for the Company and a significant impact on the Company's
results of operations. The Company believes that a product backlog at any given
point in time is not a reliable indicator of future sales or earnings, although
the absence of significant backlog and variations in the purchasing patterns of
the Company's customers could contribute to variations in the Company's
quarterly results of operations.
Research and Development
As of March 31, 1997, 3 employees were engaged in new product development and
testing. The Company spent approximately $394,000 and $585,000, respectively,
during the years ended March 31, 1997 and 1996, on product development,
enhancement, and maintenance. Of these amounts, $193,000 and $258,000,
respectively, were capitalized in the years ending March 31, 1997 and 1996. The
capitalized amounts relate to external software development and the licensing of
software products and hardware designs for some of the Company's products.
PC Connectivity Products: In the past, the Company has performed research,
design, product development, and testing of software and hardware, primarily in
the field of PC Connectivity products. During the 1996-1997 fiscal year, the
Company significantly scaled back its research and development ("R & D") efforts
in the PC Connectivity field, and had only one person involved in PC
Connectivity R & D as of March 31, 1997.
Internet Products: The Company is continuing research and development of its
Internet Voice/Fax Server ("VFS"), a software product that allows users to place
telephone calls, send faxes, and leave voice-mail messages over the Internet,
without long-distance telephone charges. The Company has completed development
of a four-channel voice/fax hardware adapter that couples four telephone lines
to a computer, and can be used by VFS. During the quarter ended March 31, 1997,
the Company decided to change the functionality of VFS and the hardware adapter
from a proprietary interface to be compatible with the Telephone Application
Program Interface ("TAPI") standard recently promulgated by Microsoft and Intel.
This change delayed the delivery of the first VFS system by approximately four
months, to July, 1997. The Company believes this delay is worthwhile because
TAPI compatibility will significantly increase the market for the hardware
adapter and VFS software, allowing the hardware adapter to be used with other
software products.
Patents, Trademarks, and Copyrights
The Company regards its software and hardware as proprietary and relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, and contractual provisions, including employee and
third-party nondisclosure agreements, to protect its proprietary rights. The
Company seeks to protect its software, documentation, and other written
materials under trade secret and copyright laws, which afford only limited
protection. The laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. The
Company requires its employees to enter into confidentiality agreements.
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The Company owns several U.S. patents and U.S. and foreign trademarks, including
the mark "Micro-Integration" in the United States. None of the patents or
trademarks, other than the marks "Micro-Integration" and "MI," are significant
to the Company's business.
No material claims have been made against the Company for infringement of
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims against the Company in the
future. As the number of products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs will increasingly become subject to infringement claims. The
Company's strategy to develop Internet-based services may also expose the
Company to infringement claims on software programs, web sites, or web content
in the future. The cost of responding to any such assertion may be material,
whether or not the assertion is valid.
Software License and Warranty Terms
The Company's PC Connectivity products are licensed on a per-user, per-host, or
per-LAN basis. For certain major customers, the Company makes available
enterprise-wide or site licenses. Under the terms of these licenses, the
customer acquires a master copy of the software and documentation and the right
to make and distribute multiple copies of these materials within the enterprise
or site. In addition, certain Company products are priced in volume packs, where
the customer pays a lower unit price for a pack that contains a large number of
units of the product.
The Company provides a one-year limited warranty against defects in hardware and
software products manufactured by the Company. For certain of these hardware
products, the Company provides a limited lifetime warranty when the customer
returns the registration card. It is the Company's experience that the cost of
the extended warranty is immaterial, but there can be no assurance that this
will continue to be the case.
The Company's original equipment manufacturer ("OEM") PC Connectivity customers
generally have non-exclusive licenses to distribute and market certain products
of the Company. The licenses are generally cancelable by the OEM on 90 days
notice and by the Company for cause. The Company receives a license fee or
royalty based on the number of copies of the Company's technology distributed by
the OEM's.
Employees
MI currently has approximately 66 full-time and 11 part-time employees.
Approximately 69% of all employees are employed at MI in Frostburg, Maryland,
17% at Computer Site in Strongsville, Ohio, and 14% at Computer One in Lima,
Ohio. Approximately two-thirds of the Company's employees work in customer sales
and service; approximately 16% work in administration; and approximately 6% work
in research and development. The remaining employees provide marketing or
product management services.
Environmental
The Company owns or leases several parcels of real estate on which its
operations are located. Adjacent to the Company's headquarters building in
Frostburg, Maryland, is a property which was formerly operated as a sanitary
landfill. The Company leases this property from The Cumberland Allegany County
Industrial Foundation ("CACIF"), with an option to purchase. The Company uses
part of this property as a parking lot, the rest of the site being open space.
Although the Company has not performed an environmental assessment on the
property, neither CACIF nor the Company is aware of any environmental problems
which would necessitate a cleanup. CACIF has contractually agreed to indemnify
the Company should any environmental cleanup costs arise from the property's
pre-existing condition (excluding consequential damages). In addition, should
any pre-existing environmental condition interrupt or materially impair the
Company's use of the property, the Company has the right through at least the
year 2023 to require CACIF or Allegany County, Maryland, to promptly alleviate
the condition and compensate the Company for any lost use of the property
(again, excluding consequential damages). If either or
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both fail to satisfy this requirement, the Company has the right to obligate
CACIF and Allegany County to repurchase the property and reimburse the Company
for all improvements made by the Company. There can be no assurance that CACIF
and Allegany County will fulfill their contractual obligations to the Company.
Were environmental problems to arise with respect to the property, failure by
either CACIF or Allegany County to fulfill its obligations, or the occurrence of
consequential damages, could have a material adverse effect on the Company.
Governmental Approval of Hardware Products
All computer hardware products must meet certain radiowave emissions standards
prescribed by the Federal Communications Commission ("FCC") in the United States
and EC Directives in the European Economic Community ("EEC"). The Company's
current PC Connectivity products meet the FCC standards and are certified to
comply with Conformite Europeene ("CE") in the EEC. The Company does not expect
to have problems meeting FCC or CE standards with future products. Although the
Company's products meet current FCC and CE radiowave emissions standards, such
products sold internationally may not meet the standards of, and may not be
approved by, the certification authorities of other countries. If any of the
Company's products were found not to meet the standards of any country, the
Company would be required to incur the expenses of bringing such products in
conformance with those standards or to cease selling the product in that
country.
Item 2. Description of Properties
As of March 31, 1997, the Company owned or leased the following facilities:
<TABLE>
<CAPTION>
Approximate Leased or
Location Type of Facility Condition Square Feet Owned
- ---------------------- ------------------------------ ------------ --------------- ---------------
<S> <S> <S> <C> <C>
Frostburg, MD Corporate Offices, Good 20,000 Owned (1)
R & D, and distribution
Friendsville, MD Vacant Fair 3,752 Owned (2)
Hagerstown, MD Sales/Service/Internet Good 1,020 Leased (3)
Lima, OH Sales/Service Good 2,200 Leased (5)
Strongsville, OH Sales/Service Excellent 4,250 Leased (4)
</TABLE>
(1) This property was financed with two separate notes. One is a 20-year,
$215,000 note from Allegany County, Maryland, bearing interest at 7.5%, payable
through August 2013. The other is a 20-year, $1,005,000 note from the State of
Maryland, bearing interest at 5.93%, payable through September 2013. At March
31, 1997, these notes had balances of $200,000 and $928,000, respectively.
Management believes the property is adequately covered by insurance.
(2) This property is currently vacant and is on the market for sale.
(3) On September 3, 1996, MI entered into a lease agreement with Fedder
Management Corporation for the Hagerstown facility. The rent commencement date
was December 1, 1996. The initial term of the lease shall expire on November 30,
1999.
(4) Computer One is currently renting office space in Lima, OH, from Duff
Warehouses. The rent commencement date was December 1994. The initial term of
the lease expires in November 2000.
(5) Computer Site is currently renting office space in Strongsville, OH, under a
month-to-month agreement and has no lease obligation associated with this
property.
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Item 3. Legal Proceedings
As of March 31, 1997, the Company was involved in a legal dispute with the
contractor who built the Company's Frostburg, MD, building, regarding water
leaks and the quality of construction. The Company has demanded arbitration
under the terms of the contract, and has also filed a suit in Allegany County,
Maryland. The Company believes this dispute will be resolved and the contractor
is taking action to remediate the defects. Management does not believe this
dispute or the resolution thereof will have any significant effect on the
Company's results of operations in the future.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during fiscal year
1996-1997.
Executive Officers and Key Personnel of the Registrant
(a) Executive Officers
The following sets forth information concerning the individuals who
are currently serving as executive officers of the Company:
Name Age Position
---- --- --------
John A. Parsons 53 Chief Executive Officer and CFO
Barry S. Wirtanen 43 Vice President, Sales
John A. Parsons, CDP, the Company's founder, has been President,
Chairman of the Board of Directors, and a director of the Company
since it was founded in 1986. He held the same positions at MII, the
Company's predecessor, from its founding in 1978. In January 1997, Mr.
Parsons also became Chief Financial Officer of the Company. Prior to
inception of the Company, Mr. Parsons was an independent consultant
and held positions with Avon Products, Inc. and AT&T. He holds a CDP
(Certificate in Data Processing), awarded in 1977.
Barry S. Wirtanen joined the Company in 1995 as Vice President, Sales.
In 1996, he also became President of the Company's subsidiary,
Computer Site, Inc. Prior to joining MI, Mr. Wirtanen was vice
president of sales and marketing at MRK Computer Systems, Inc., based
in Cleveland, Ohio. He has extensive management experience in sales
and marketing.
(b) Key Personnel
Thomas M. Eversole is currently President of the Company's Computer
One of Ohio, Inc. subsidiary. He held the same position at the
subsidiary's predecessor. Prior to that, he held positions at Lima
Memorial Hospital, First Federal Savings and Loan Association, and
Westinghouse Corporation. He has extensive experience in project
management with an emphasis on accounting and financial management.
P. Edward Fisher is currently the Company's Vice President, Product
Development. Mr. Fisher joined the Company in 1978. Prior to becoming
Vice President, Product Development in 1993, he was Vice President,
Special Products and OEM sales manager.
John S. Malloch is currently Director of Operations in Frostburg. He
has been with the Company since 1996. Prior to joining the Company he
was a Management and Sales Education Consultant with Oslo Marketing
Group. His background includes thirty years of management and sales
experience, including seventeen years with IBM Corp.
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Mark A. Proudfoot is currently the Company's Vice President, Customer
Service. Mr. Proudfoot joined the Company in 1981. Prior to becoming
Vice President, Marketing, Mr. Proudfoot served as Vice President,
Product Development and Vice President, Marketing.
Ronald J. Scaletta is currently Vice President of the Company's
Computer Site, Inc. subsidiary. Prior to joining MI, he held senior
sales and marketing positions with MRK Technologies, Ltd. and
BasicComputer Corporation, both major network and systems integrators.
William L. Shomo has been with the Company and its predecessor MII
since 1978. He is currently Vice President, Product Research. Prior to
assuming his current position in 1995, Mr. Shomo held a variety of
positions with the Company, including Vice President, Products, Vice
President, Customer Support, and Vice President, Product Development.
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Since the Company's initial public offering in May 1994, the Common Stock has
been traded in the NASDAQ National Market System under the symbol MINT.
Set forth below are the high and low closing sales price for the Common Stock as
reported by NASDAQ for the periods indicated.
Fiscal Year Ended March 1997 High Low
------------------------------------- ----------- -----------
First quarter (June 30, 1996) $ 3.000 $ 1.875
Second quarter (September 30, 1996) $ 2.625 $ 1.844
Third quarter (December 31, 1996) $ 2.875 $ 1.375
Fourth quarter (March 31, 1997) $ 2.125 $ 1.188
The approximate number of record holders of the Common Stock as of March 31,
1997, was 211. The Company estimates that there are in excess of 400 beneficial
holders of its Common Stock.
The Company has no present intention of paying dividends in the foreseeable
future as it intends to retain any future earnings to fund operations and the
continued development of its business. The declaration and payment of dividends
and the amount paid, if any, is subject to the discretion of the Company's Board
of Directors and will necessarily be dependent on the earnings, financial
condition, and capital requirements of the Company and any other factors the
Company's Board of Directors may consider relevant.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 those forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following is Management's discussion and analysis of the consolidated
financial condition and results of operations of the Company. It should be read
in conjunction with the audited consolidated financial statements and related
notes.
Overview
As previously reported, the Company's PC Connectivity business is declining in
unit and dollar volume. Because of this, revenues for the first six months,
ended September 30, 1996, were down 25%, or $1.0 million, from the same period
in the prior year.
Approximately mid-year, the Company began to implement a sharply changed
strategy and direction, acquiring the assets of two Ohio-based network systems
integrators: Computer Site, Inc., and Computer One of Ohio, Inc. This change
caused revenue for the last half of the year to increase 81%, or $2.9 million,
from the last half of the prior year. For the entire year revenue was $9.7
million, up 24% or $1.9 million from the prior year.
11
<PAGE>
During the first nine months of the year, the Company lost $819,000, as expense
reduction efforts failed to keep pace with declining revenues. In the fourth
quarter, the Company incurred a loss of $1.4 million, primarily as a result of
one-time costs associated with sale of its money-losing European operations,
write-off of questionable or obsolete inventory associated with its PC
Connectivity business, write-off of questionable receivables, and costs of
personnel reductions. For the year, the Company lost $2.2 million.
The Company has continued its program to reduce expenses in its PC Connectivity
business to match declining revenues in that business segment, and has sold its
European operations, which accounted for a significant portion of the Company's
operating loss for the year. The Company expects a shift in business from PC
Connectivity to network integration and technology services to continue for the
foreseeable future.
Results of Operations
Comparison of Fiscal Year 1996-1997 to Fiscal Year 1995-1996
The Company's total revenue increased $1,876,000, or 24%, from $7.8 million in
fiscal year 1995-1996 to $9.7 million in fiscal year 1996-1997. This increase
was accomplished through the start up of the new network integration and
technology services strategy, which accounted for an increase of $3.9 million or
40% of total revenue for fiscal year 1996-1997. The increase in this revenue
offset the continued decline of PC Connectivity product and royalty revenues,
which decreased $1.8 million (24%) and $245,000 (53%), respectively, from the
1995-1996 year.
Revenue related to sales of the Company's PC Connectivity products (including
license revenue) outside of the United States represented $1.5 million (15% of
total revenue) in fiscal year 1996-1997, compared to $2.2 million (28% of total
revenue) in fiscal year 1995-1996. The Company expects this revenue to be
significantly lower in the future, since the Company has divested its European
subsidiary, which accounted for $1.3 million or 89% of international sales for
the 1996-1997 year.
Gross profit declined to 47.7% in fiscal year 1996-1997 from 68.2% in fiscal
year 1995-1996. The PC Connectivity product margin declined by 6.4% from 66.2%
last year to 62.0% in fiscal 1996-1997. The remainder of the decline was caused
by the lower margins realized in the Company's network integration and
technology services business. The Company expects gross margins to continue to
decline as these businesses make up a larger proportion of the Company's total
business.
The Company's cost cutting measures reduced selling, general, and administrative
("SG&A") costs by $806,000 during the period. This decrease was offset by new
SG&A costs of $702,000 associated with the acquisitions of Computer Site and
Computer One. This resulted in a net decrease to SG&A expenses of $104,000. This
decrease would be significantly larger if not for the one-time costs associated
with the sale of the MI PLC European subsidiary and staff reductions in the
Company's PC Connectivity business. The operating expenses of MI PLC, $885,000
in fiscal year 1996-1997, have been eliminated by the sale of the subsidiary,
and the Company continues to reduce other expenses to match costs with declining
sales in the PC Connectivity business. The Company expects SG&A expenses in its
network integration and technology services business to increase in the future
as this segment continues to grow, and these increases will partially offset
SG&A reductions in the PC Connectivity segment.
Bad debt expense increased $411,000 from $152,000 in fiscal 1995-1996 to
$563,000 in fiscal 1996-1997. Of the $411,000 increase, $236,000 (57%) was
recorded as a result of allowance for notes receivable relating to the debt
restructure due to the sale of MI PLC and $87,000 (21%) was incurred by MI PLC.
The remaining $88,000 (22%) increase in bad debt expense was incurred by the
Company in the normal course of business. The Company has implemented an
aggressive collections program in an attempt to lower the ratio of bad debt to
sales.
12
<PAGE>
Depreciation and amortization expenses decreased by $20,000 (4.4%) to $435,000
in fiscal year 1996-1997 from $455,000 in fiscal year 1995-1996. Included is
deferred compensation amortization of $99,000 and $113,000 in fiscal year
1996-1997 and fiscal year 1995-1996, respectively. Amortization of deferred
compensation is the annual amortization of the value of stock options that were
granted as inducement for certain key employees to join the Company. As of March
31, 1997, deferred compensation was fully amortized.
The Company's net other income/expense decreased $298,000 from net other expense
of $43,000 in fiscal year 1995-1996 to net other expense of $341,000 in fiscal
year 1996-1997. This increase is the net effect of a loss on the sale of MI PLC
of $173,000; an impairment loss of $65,000 and other net losses of $76,000
recorded by MI Corp.; and losses of $21,000 and $20,000 for the Computer Site
and Computer One subsidiaries, respectively. These losses were partially offset
by a decrease in MI PLC interest expense of $43,000 and a favorable exchange
rate variance of $14,000.
In fiscal 1996-1997, the Company recorded $51,000 in income tax expenses. At
March 31, 1997, the Company has foreign tax credit carryforwards of
approximately $180,000, a federal net operating loss carryforward of $2,300,000
and a federal capital loss carryforward of $11,000.
Comparison of Fiscal Year 1995-1996 to Fiscal Year 1994-1995
The Company's total revenue decreased $2,339,000, or 23%, from $10.1 million in
fiscal year 1994-1995 to $7.8 million in fiscal year 1995-1996. Product revenue
decreased $2,048,000 million, or 22%. There was a $291,000 (39%) decline in OEM
license revenue.
Revenue related to sales of the Company's products (including license revenue)
outside of the United States represented $2.9 million (37% of total revenue) in
fiscal year 1995-1996, compared to $4.1 million (41% of total revenue) in fiscal
year 1994-1995.
Gross profit declined to 68.2% in fiscal year 1995-1996 from 71.9% in fiscal
year 1994-1995. The entire decline in gross margin is attributed to the first
quarter write-off of Terminal Access Server (TAS) inventory and specialized
software, an expense of $249,000. Excluding this one-time charge, the gross
margin for the year would have been essentially unchanged at 71.4%, compared to
71.9% in fiscal year 1994-1995. Management expects that the gross margin
percentage on the current product line will decline as competitive price
pressures are encountered and as the license revenue percentage of total revenue
declines.
SG&A expenses decreased from $8.0 million in fiscal year 1994-1995 to $5.6
million in fiscal year 1995-1996, a reduction of $2.4 million (30%). The overall
decrease resulted from reduced marketing costs, salaries and benefits, and
general operating costs. These reductions were partially offset by an increase
in bad debt expense of $96,000.
Depreciation and amortization expenses decreased to $455,000 in fiscal year
1995-1996, compared to $523,000 in fiscal year 1994-1995, including deferred
compensation amortization of $113,000 and $126,000 in fiscal year 1995-1996 and
fiscal year 1994-1995, respectively.
The Company's net other income/expense decreased from a net other income of
$132,000 in fiscal year 1994-1995 to a net other loss of $43,000 in fiscal year
1995-1996. The drop in net other income/expense of $175,000 year-to-year is
primarily due to an exchange rate transaction gain of $200,000 included in the
1994-1995 amounts, offset by a reduction in interest expense of $27,000 due to
lower interest rates and debt redemption in fiscal year 1995-1996.
In fiscal 1995-1996, the Company recorded a $34,000 income tax benefit as a
result of using the remainder of the operating loss carryback available as a
result of the operating losses incurred by MI USA and the MI USA write-off of
its $1,051,000 investment in MI Europe in fiscal 1994-1995. At March 31, 1996,
the Company had a net operating loss carryforward of approximately $70,000, and
$500,000 available for offset against future U.S. and U.K. operating profits.
The Company also had foreign tax credit carryforwards of $194,000.
13
<PAGE>
Liquidity and Capital Resources
In the fiscal year ended March 31, 1997, the Company satisfied its cash
requirements primarily through the sales of marketable securities, short-term
borrowings, and the issuance of common stock. At March 31, 1997, the Company had
$100,000 of the 1995 initial public offering invested in available-for-sale
securities and an additional $371,000 held as cash.
During the year cash used in operations exceeded cash provided by operations by
$580,000. The Company invested $300,000 acquiring property plant and equipment,
primarily for its Internet business, and $200,000 in research and development of
its VFS software and associated four-channel voice/fax hardware adapter (see
Research and Development in Item 1. Description of Business). These activities
were funded by the sale of marketable securities, net new financing, and through
the use of existing cash, in the amounts of $900,000, $387,000 and $90,000
respectively.
The Company's working capital decreased by $2.1 million, from $3.2 million at
March 31, 1996, to $1.1 million at March 31, 1997, as working capital was
expended to fund cash needs caused by the loss incurred and in the disposition
of the European operations.
The Company's subsidiaries have floor-plan facilities totaling $1.3 million with
an outstanding balance of $756,000 as of March 31, 1997. In addition, the
Company has two working capital credit lines with U.S. banks. One credit line
has a $150,000 limit, is secured by a deposit from MI, and had an outstanding
balance of $85,000 as of March 31, 1997. The second line is for $400,000, is
renewable annually, and is limited to the lesser of $400,000 or 70% of
acceptable domestic accounts receivable. This line is secured by substantially
all of the Company's assets and as of March 31, 1997, had an outstanding balance
of $377,500. The bank has informed the Company that they do not intend to renew
this credit line and intend to terminate the lending relationship. The Company
is actively seeking alternative financing, and cash generated from operations
will have to satisfy working capital needs until alternative financing is
obtained.
Item 7. Financial Statements and Supplementary Data
The information required by this Item 7 is set forth on pages F-1 through F-22.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
14
<PAGE>
Part III
Item 9. Directors, Executive Officers, and Key Personnel of the Registrant
Directors
The information required by Item 9 relating to directors of the Company is
presented under the caption "Nomination and Election of Directors" of the
Company's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders
("Proxy Statement") to be filed with the Securities and Exchange Commission (the
"Commission") no later than July 3, 1997, and is hereby incorporated by
reference herein.
Executive Officers and Key Personnel
See Part I, Executive Officers and Key Personnel of the Registrant.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this Item is presented under the caption "Other
Matters - Compliance with Section 16(a) of the Exchange Act" of the Company's
definitive Proxy Statement to be filed with the Commission no later than July 3,
1997, and is hereby incorporated by reference herein.
Item 10. Executive Compensation
The information required by Item 10 is presented under the caption "Executive
Compensation" of the Company's definitive Proxy Statement to be filed with the
Commission no later than July 3, 1997, and is hereby incorporated by reference
herein.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 11 is presented under the caption "Security
Ownership of Certain Beneficial Owners and Management" of the Company's
definitive Proxy Statement to be filed with the Commission no later than July 3,
1997, and is hereby incorporated by reference herein.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 is presented under the caption "Certain
Transactions" of the Company's definitive Proxy Statement to be filed with the
Commission no later than July 3, 1997, and is hereby incorporated by reference
herein.
15
<PAGE>
Part IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits listed below are filed or incorporated by reference
herein.
EXHIBIT INDEX
--------------
Exhibit Description of Document
Number -----------------------
------
3(ii).1 Amended and Restated Bylaws of Micro-Integration Corp., filed as
Exhibit 3(ii).1 to the Company's Registration Statement on Form
SB-2, Registration No. 33-72752, is hereby incorporated by
reference.
4.1 Article IV of the Restated Certificate of Incorporation of
Micro-Integration Corp., filed as Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, Registration No. 33-72752, is
hereby incorporated by reference.
4.2 Form of Common Stock Certificate, filed as Exhibit 4.2 to Amendment
No. 1 to the Company's Registration Statement on Form SB-2,
Registration No. 33-72752, is hereby incorporated by reference.
4.3 Form of Underwriter's Warrant, filed as Exhibit 4.3 to Amendment No.
1 to the Company's Registration Statement on Form SB-2, Registration
No. 33-72752, is hereby incorporated by reference.
10.1 Micro-Integration Corp. Employee Savings and Stock Ownership Plan,
filed as Exhibit 10.1 to the Company's Registration Statement on
Form SB-2, Registration No. 33-72752, is hereby incorporated by
reference.
10.2 1994 Stock Plan of Micro-Integration Corp., filed as Exhibit 10.2 to
the Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
10.3 Agreement between Micro-Integration Corp., Micro-Integration Europe
n.v., and Gabor Weiner entered into September 28, 1990, filed as
Exhibit 10.3 to the Company's Registration Statement on Form SB-2,
Registration No. 33-72752, is hereby incorporated by reference.
10.4 Agreement between Micro-Integration Corp. and Gabor Weiner entered
into on September 28, 1990, filed as Exhibit 10.4 to the Company's
Registration Statement on Form SB-2, Registration No. 33-72752, is
hereby incorporated by reference.
10.5 Amendment to Agreements between Micro-Integration Corp.,
Micro-Integration Europe n.v., and Gabor Weiner entered into on
March 21, 1994, filed as Exhibit 10.5 to the Company's Registration
Statement on Form SB-2, Registration No. 33-72752, is hereby
incorporated by reference.
16
<PAGE>
10.6 Contract of Sale made on August 23, 1995, between CCSAC Federal
Credit Union and Micro-Integration Corp., filed as Exhibit 10.6 to
the Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
10.7 Agreement made as of May 20, 1993, between Micro-Integration Corp.
and Lashley Construction, Inc., filed as Exhibit 10.7 to the
Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
10.8 Contract of Sale made on September 16, 1992, between
Micro-Integration Corp., Cumberland Allegany County Industrial
Foundation, and the Board of County Commissioners of Allegany
County, Maryland, filed as Exhibit 10.8 to the Company's
Registration Statement on Form SB-2, Registration No. 33-72752, is
hereby incorporated by reference.
10.9 Promissory Note dated September 24, 1993, payable by
Micro-Integration Corp. to the Board of County Commissioners of
Allegany County, Maryland or order, filed as Exhibit 10.9 to the
Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
10.10 Promissory Note dated September 24, 1993, payable by
Micro-Integration Corp. to the order of the Board of County
Commissioners of Allegany County, Maryland, filed as Exhibit 10.10
to the Company's Registration Statement on Form SB-2, Registration
No. 33-72752, is hereby incorporated by reference.
10.11 Revolving Note Agreement dated May 17, 1993, by and between
Micro-Integration Corp. and The First National Bank of Maryland,
filed as Exhibit 10.11 to the Company's Registration Statement on
Form SB-2, Registration No. 33-72752, is hereby incorporated by
reference.
10.12 Business Promissory Note dated September 22, 1993, payable by
Micro-Integration Corp. to the order of The First National Bank of
Maryland, filed as Exhibit 10.12 to the Company's Registration
Statement on Form SB-2, Registration No. 33-72752, is hereby
incorporated by reference.
10.13 Agreement and Plan of Reorganization made in April 1986 by and among
Micro-Integration Corp., Micro-Integration Inc., John A. Parsons,
i.e. Systems, Inc., and the Stockholders named therein, filed as
Exhibit 10.14 to the Company's Registration Statement on Form SB-2,
Registration No. 33-72752, is hereby incorporated by reference.
10.14 Indemnification Agreements between Micro-Integration Corp. and its
directors and officers, filed as Exhibit 10.14 to the Company's Form
10-KSB for the year ended March 31, 1996, is hereby incorporated by
reference.
11.1 Statement of computation of per share earnings.
21.1 Subsidiaries of Micro-Integration Corp.
23.1 Consent of Independent Accountants.
(b) Reports on Form 8-K.
Form 8-K disclosing the sale of 80% of MI PLC by MI was filed March
31, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated June 30, 1997 REGISTRANT:
Micro-Integration Corp.
By:/s/ John A. Parsons
-----------------------------
John A. Parsons
President, Chairman of the Board,
Chief Executive Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ John A. Parsons June 30, 1997
---------------------------------
John A. Parsons
President, Chairman of the Board,
Chief Executive Officer and Chief Financial Officer
(principal executive officer)
By: /s/ Maxwell F. Eveleth, Jr. June 30, 1997
----------------------------------------
Maxwell F. Eveleth, Jr.
Director
By: /s/ Wayne M. Lee June 30, 1997
-----------------------------------------
Wayne M. Lee
Director
By: /s/ W. Braun Jones, Jr. June 30, 1997
-----------------------------------------
W. Braun Jones, Jr.
Director
<PAGE>
Annual Report on Form 10-KSB
Item 14(a)(I) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Year Ended March 31, 1997
Micro-Integration Corp.
Frostburg, MD
<PAGE>
Micro-Integration Corp. and Subsidiaries
Index to Consolidated Financial Statements
Years Ended March 31, 1997, 1996, and 1995
Report of Independent Auditors ..................................... F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets .................................... F-4
Consolidated Statements of Operations .......................... F-6
Consolidated Statements of Shareholders' Equity ................ F-7
Consolidated Statements of Cash Flows .......................... F-8
Notes to Consolidated Financial Statements ......................... F-9
Audited Financial Schedules:
Consolidated Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts ............... F-22
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<PAGE>
[LETTERHEAD] Ernst & Young LLP
Report of Independent Auditors
Board of Directors
Micro-Integration Corp.
We have audited the accompanying consolidated balance sheets of
Micro-Integration Corp. as of March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 7. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Micro-Integration Corp. at March 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
May 30, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-2
<PAGE>
This page intentionally left blank.
F-3
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
March 31
1997 1996
----------- -----------
ASSETS
Current Assets
Cash $ 370,598 $ 460,874
Marketable securities, available-for-sale 100,000 1,000,000
Receivables
Trade, net of allowance for doubtful
accounts $76,324 and $145,616 1,872,291 1,300,838
Note 70,000 --
Tax refund 46,141 103,086
Inventory 596,556 933,522
Prepaid expense 97,576 114,967
Deferred income taxes -- 23,483
----------- -----------
Total Current Assets 3,153,162 3,936,770
----------- -----------
Property, Plant, and Equipment
Land 92,962 92,962
Buildings 1,455,518 1,455,518
Equipment 1,384,231 1,447,128
Automobiles 83,952 238,738
Property held for sale 58,794 59,933
----------- -----------
3,075,457 3,294,279
Less accumulated depreciation (1,041,637) (1,149,678)
----------- -----------
2,033,820 2,144,601
Cash Surrender Value of Life Insurance
and Other Noncurrent Assets, Net 298,437 177,402
Intangible Assets, Net of Amortization 745,912 356,052
----------- -----------
$ 6,231,331 $ 6,614,825
=========== ===========
F-4
<PAGE>
MICRO-INTEGRATION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31
1997 1996
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities
Demand notes payable $ 462,500 $ --
Current portion of long-term debt and
capital lease obligations 196,181 299,067
Accounts payable 933,434 202,049
Accrued expenses 471,137 198,044
Income tax payable 1,800 1,000
----------- -----------
Total Current Liabilities 2,065,052 700,160
----------- -----------
Long-Term Liabilities
Debt, less current portion 1,210,139 1,133,008
Capital lease obligations, less current portion -- 53,202
Deferred income taxes -- 42,985
Shareholders' Equity
Common stock - $.01 par value; authorized
12,000,000 shares; issued 2,641,477 and
2,515,427 in 1997 and 1996, respectively 26,415 25,155
Additional capital 5,603,263 5,404,795
Retained deficit (2,292,644) (113,162)
Foreign currency translation -- (176,376)
----------- -----------
3,337,034 5,140,412
Less deferred compensation -- 99,048
Less treasury stock 380,894 355,894
----------- -----------
2,956,140 4,685,470
----------- -----------
$ 6,231,331 $ 6,614,825
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
License revenue $ 218,710 $ 463,476 $ 754,182
Product revenue 9,441,151 7,320,540 9,368,616
------------ ------------ ------------
Total Revenue 9,659,861 7,784,016 10,122,798
Cost of goods sold 5,056,754 2,471,761 2,847,393
------------ ------------ ------------
Gross Profit 4,603,107 5,312,255 7,275,405
Operating Expenses
Selling, general, and administrative 5,393,222 5,497,642 7,963,519
Bad debt 562,786 152,339 56,385
Restructuring expense -- -- 462,579
Depreciation and amortization expense 434,863 454,955 522,810
------------ ------------ ------------
6,390,871 6,104,936 9,005,293
Operating Loss (1,787,764) (792,681) (1,729,888)
Other Income (Expense)
Interest expense (131,857) (111,533) (138,346)
Other income 29,269 68,796 270,504
Impairment loss (65,203) -- --
Loss on sale of subsidiary (172,768) -- --
------------ ------------ ------------
(340,559) (42,737) 132,158
------------ ------------ ------------
Loss before Income Taxes (2,128,323) (835,418) (1,597,730)
Income tax expense (benefit) 51,159 (34,169) (510,944)
------------ ------------ ------------
Net Loss $ (2,179,482) $ (801,249) $ (1,086,786)
============ ============ ============
Loss per Share $ (0.89) $ (0.33) $ (0.46)
============ ============ ============
Weighted Average Number of
Common Shares Outstanding 2,437,556 2,413,555 2,352,030
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Equity
adjustment
Common from
Common stock Retained foreign
stock $0.01 par Additional earnings currency Deferred Treasury Total
shares value capital (deficit) translation compensation stock equity
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 1,810,900 $ 18,110 $ 1,551,585 $ 1,774,873 $ (21,419) $ (379,349) $ -- $ 2,943,800
-----------------------------------------------------------------------------------------------------
Aggregate translation
adjustment (82,009) (82,009)
Issuance of common stock,
net of offering expenses 621,227 6,212 3,950,915 3,957,127
Stock options exercised 38,400 384 384
Repurchase of common stock (240,591) (240,591)
Amortization of deferred
compensation 126,440 126,440
Net loss for 1995 (1,086,786) (1,086,786)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 1995 2,470,527 24,706 5,502,500 688,087 (103,428) (252,909) (240,591) 5,618,365
-----------------------------------------------------------------------------------------------------
Aggregate translation
adjustment (72,948) (72,948)
Stock options exercised 44,900 449 449
Stock options cancelled-
unamortized deferred
compensation (41,121) 41,121 --
Deferred compensation
cancelled (56,584) (56,584)
Amortization of deferred
compensation 112,740 112,740
Repurchase of common stock (115,303) (115,303)
Net loss for 1996 (801,249) (801,249)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 1996 2,515,427 25,155 5,404,795 (113,162) (176,376) (99,048) (355,894) 4,685,470
-----------------------------------------------------------------------------------------------------
Aggregate translation
adjustment 176,376 176,376
Stock options exercised 32,212 322 322
Stock issuance 93,838 938 198,468 199,406
Amortization of deferred
compensation 99,048 99,048
Repurchase of common stock (25,000) (25,000)
Net loss for 1997 (2,179,482) (2,179,482)
-----------------------------------------------------------------------------------------------------
Balance, March 31, 1997 2,641,477 $ 26,415 $ 5,603,263 $(2,292,644) $ -- $ -- $ (380,894) $ 2,956,140
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flow
Year ended March 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (2,179,482) $ (801,249) $ (1,086,786)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 578,706 599,998 617,450
Loss on sale of subsidiary 172,768
Loss (gain) on disposal of assets 7,558 (2,069) 10,259
Impairment loss 65,203 -- --
Loss on sale of available-for-sale securities -- -- 47,263
Deferred income taxes (19,502) 20,699 54,600
Other (58,133) -- --
Change in operating assets and liabilities:
Accounts receivable (396,075) 415,482 9,952
Inventory 440,339 113,128 (11,044)
Prepaid expense (22,233) 111,719 (103,304)
Income taxes receivable 2,349 667,997 (705,231)
Accounts payable 513,815 (481,747) (6,824)
Accrued expenses 274,747 (127,778) 9,095
Income taxes payable 39,640 1,000 (130,762)
------------ ------------ ------------
Net cash (used in) provided by operating activities (580,300) 517,180 (1,295,332)
Cash Flows from Investing Activities
Acquisition of property, plant, and equipment (299,927) (310,852) (425,103)
(Increase) decrease in other noncurrent assets (199,585) (304,209) 177,559
Purchase of available-for-sale securities (6,800,000) (12,000,000) (5,011,202)
Proceeds from sales of available-for-sale securities 7,700,000 12,500,000 3,463,939
Cash received in acquisition of subsidiaries 37,432 -- --
Increase in cash surrender value of life insurance (1,035) (1,976) (9,956)
Proceeds from sale of fixed assets 14,961 14,224 25,858
------------ ------------ ------------
Net cash provided by (used in) investing activities 451,846 (102,813) (1,778,905)
Cash Flows from Financing Activities:
Issuance of notes payable and long-term debt 387,183 -- 176,706
Repayments of notes payable, long-term debt, and
capital lease obligations (341,390) (227,776) (309,933)
Net repayment of short-term debt -- -- (37,981)
Issuance of common stock -- 449 3,957,127
Repurchase of common stock -- (115,303) (240,591)
------------ ------------ ------------
Net cash provided by (used in) financing activities 45,793 (342,630) 3,545,328
Currency Adjustments:
Effect of exchange rate changes on cash (7,615) (37,948) (184,656)
------------ ------------ ------------
(Decrease) increase in cash (90,276) 33,789 286,435
Cash at beginning of year 460,874 427,085 140,650
------------ ------------ ------------
Cash at end of year $ 370,598 $ 460,874 $ 427,085
============ ============ ============
Schedule of Noncash Investing and Financing Activities:
Due to the acquisitions of Computer Site and Computer One during the year, the
Company had the following noncash investing and financing activities:
Assets acquired, excluding cash $ (666,278)
Liabilities assumed 785,023
Goodwill recorded (281,041)
Common stock issued 199,728
------------
Cash acquired in acquisition $ 37,432
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Nature of Operations
The principal business activity of Micro-Integration Corp. and subsidiaries (the
"Company") is the development, design, marketing, selling, and support of
computer and networking products. Services provided include consulting, network
integration and design services, Internet access, and web site design and
hosting. The Company sells computers and communications products purchased from
others and designs, manufactures, and sells its own products that provide
communications and connectivity between personal computers and IBM mainframe and
midrange AS/400 computers.
Principles of Consolidation
The consolidated financial statements of Micro-Integration Corp. ("MI") and
subsidiaries include the accounts of MI and its subsidiaries, Computer Site,
Inc. ("Computer Site") and Computer One of Ohio, Inc. ("Computer One"). The
Company consolidates all subsidiaries in which it has a controlling interest
(greater than 50% owned). The consolidated statements of operations includes the
operations of Micro-Integration PLC ("MI PLC") through March 31, 1997. All
significant intercompany accounts have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line method over the shorter
of the lease term or estimated useful life of the asset.
Accounting for the Impairment of Long-Lived Assets
During fiscal year 1997, the Company evaluated the ongoing value of certain
computer equipment. Based on this evaluation, the Company determined that the
equipment was impaired and adjusted it to its fair value.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of shares of
common stock outstanding and common stock equivalents of dilutive stock options.
Intangible Assets
Goodwill is being amortized on a straight-line basis over its estimated useful
life of fifteen years and organization costs over five years.
F-9
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
License fees are amounts paid for products designed externally and are amortized
based on unit sales not to exceed a period of three years from the date of the
product release or first sale.
The Company capitalizes costs associated with new software development and
enhancements in accordance with the guidelines of Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software
costs begins upon the establishment of technological feasibility and ceases when
the software is available for general release to customers. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software costs require considerable judgment by management with
respect to certain external factors, including but not limited to, changes in
software and hardware technologies, anticipated future gross revenues, and
estimated economic life. The Company capitalized $193,000, $258,000, and $45,000
for 1997, 1996, and 1995, respectively. Amortization of capitalized software
development costs is provided on a product-by-product basis and is based on unit
sales not to exceed a period of three years. The amortization charged to cost of
sales was $129,000, $191,000, and $90,000 for 1997, 1996, and 1995,
respectively.
Other intangible assets represent contract rights and customer lists and are
amortized over their estimated useful life of five years (See Note 13 for
details).
Revenue Recognition
Revenue is recognized from the sale of goods, including software products, upon
delivery net of product returns and exchanges. Revenue is recognized from
licensing arrangements upon the establishment of the licensing agreement and
royalty arrangements upon delivery of products to third parties. The Company's
revenue recognition policies conform to Statement of Position 91-1, "Software
Revenue Recognition," promulgated by the American Institute of Certified Public
Accountants. Warranty costs, which have been insignificant to date, are expensed
as incurred.
Research and Development
Research and development ("R & D") costs approximating $201,000, $327,000, and
$960,000 were charged to expense for 1997, 1996, and 1995, respectively. R & D
costs are included in the selling, general, and administrative section of
operating expenses.
Translation of Foreign Currency
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with generally accepted accounting principles. Revenues,
costs, and expenses are translated at the average rates of exchange prevailing
during the year. Exchange adjustments resulting from foreign currency
transactions are recognized in income.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and, accordingly, recognizes no compensation expense for the stock
option grants.
Fair Value of Financial Instruments
The carrying amounts of cash, marketable securities, accounts receivable, notes
receivable, accounts payable, and accrued expenses approximate their fair
values.
F-10
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
2. Inventory
Inventory consisted of the following:
March 31
1997 1996
--------- ---------
Raw material $ 129,766 $ 274,623
Finished goods 466,790 658,899
--------- ---------
$ 596,556 $ 933,522
========= =========
3. Notes Payable and Long-Term Debt
The Company has a $400,000 line of credit with a U.S. bank, secured by accounts
receivable and inventory. Outstanding borrowings are payable on demand and bear
interest at the bank's prime lending rate plus 3/4% (9.25 % at March 31, 1997).
There was $377,500 and $0 outstanding on this line of credit as of March 31,
1997 and 1996, respectively.
The Company also has a $150,000 line of credit with a U.S. bank, secured by a
deposit from MI. Outstanding borrowings are payable on demand and bear interest
at the bank's prime lending rate plus 1.5% (10.0% at March 31, 1997). There was
$85,000 outstanding on this line of credit as of March 31, 1997.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 31
1997 1996
---------- ----------
<S> <C> <C>
Note payable in monthly installments of $364 including principal and
interest at 10.5% through August 1998, secured by real property $ 5,731 $ 9,295
Note payable in monthly installments of $1,765 including principal and interest
at 7.5% through August 2013, secured by real property
Interest-only payments paid through March 31, 1994 199,621 205,583
Note payable in quarterly installments of $22,132 including principal and
interest at 5.93% commencing December 1994 through September 2013, secured by
real property. Interest-only payments
from date of first proceeds payment through initial 15 months 927,655 959,965
Note payable in monthly principal installments of $6,667 plus interest at 3/4%
above prime through September 1998, secured by assets of
the business 118,233 200,000
Note payable in monthly installments of $1,068 plus interest at 8.5% commencing
January 1995 through January 2001, secured by assets
of the business 62,035 --
Note payable in monthly installments of $623 including principal
and interest at 6.0% commencing January 1995 through December 2000 29,558 --
Note payable in monthly installments of $1,190 plus interest at prime plus 1%
commencing November 1994 through November 1999,
secured by assets of the business 62,791 --
---------- ----------
$1,405,624 $1,374,843
========== ==========
</TABLE>
F-11
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
The fair value of the Company's debt was determined using quoted market prices
and is $1,725,167 at March 31, 1997.
Combined maturities for long-term debt by year and in the aggregate consisted of
the following:
March 31
-----------
1998 $ 195,485
1999 80,534
2000 84,653
2001 83,585
Thereafter 961,367
-----------
$ 1,405,624
===========
During the years ended March 31, 1997, 1996, and 1995, the Company paid interest
related to these borrowings of $92,000, $94,000, and $107,000, respectively.
Among the provisions of the loan agreement with a U.S. bank related to a line of
credit for working capital purposes and a separate note, certain financial
covenants are imposed which require the Company to maintain minimum cash flows
to debt service coverage. As a result of operating losses, the Company was in
violation of the minimum cash flow to debt service coverage covenant at March
31, 1997. The bank has informed the Company that they do not intend to renew
this credit line and intend to terminate the lending relationship. The Company
is actively seeking alternative financing.
4. Shareholders' Equity
Common and preferred stock reported on the Company's balance sheet consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
Authorized Issued Outstanding Issued Outstanding
---------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Common stock 12,000,000 2,641,477 2,491,939 2,515,463 2,385,925
Preferred stock 4,000,000 -- -- -- --
</TABLE>
All stock has a $0.01 par value. The dividend rights of preferred stock have not
been established.
During fiscal year 1995, the Company issued 621,227 shares of common stock in an
initial public offering of stock. Key employees also exercised stock options for
38,292 shares of common stock. During the last quarter of fiscal year 1995, the
Company repurchased 70,000 shares of common stock as follows: February 2, 1995,
25,000 shares at $4.00 per share; March 2, 1995, 25,000 shares at $3.00 per
share; and March 14, 1995, 20,000 shares at $3.00 per share.
During fiscal year 1996, key employees exercised stock options for 42,340 shares
of common stock. In addition, during the last half of fiscal year 1996, the
Company repurchased 50,000 shares of common stock as follows: November 27, 1995,
30,000 shares at $2.00 per share; March 15 1996, 20,000 shares at $1.88 per
share. Also during 1996, the Company acquired as treasury stock 9,538 shares of
common stock from two former employees of the Company.
F-12
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
4. Shareholders' Equity (continued)
During 1997, key employees exercised stock options for 32,212 shares of common
stock. During the third quarter of fiscal year 1997, the Company issued 93,838
shares of common stock in a stock purchase transaction to acquire Computer One
subsidiary. Additionally, the Company acquired as treasury stock 20,000 shares
of common stock that were received as payment in the sale of MI PLC (See Note
11).
5. Lease Commitments
The Company leases office space for its subsidiary Computer One. This lease
expires in November 2000. The annual expense associated with this lease is
$15,000. The Company leases office space in Hagerstown, MD, to house its
internet equipment. This lease expires in December 1998. The annual expense
associated with this lease is $10,000. The Company leases equipment and
automobiles under the terms of various capital lease and operating lease
agreements, all of which expire by the year 2000. During the year ending March
31, 1997 and 1996, the Company did not acquire any assets under capital lease
obligations.
Property, plant, and equipment include the following amount for capitalized
leases at the dates indicated:
March 31
1997 1996
--------- ---------
Equipment $ 21,650 $ 166,899
Automobiles -- 153,120
--------- ---------
21,650 320,019
Less: Accumulated amortization (10,516) (210,995)
--------- ---------
$ 11,134 $ 109,024
========= =========
Future minimum payments for these leases, by year and in the aggregate,
consisted of the following at the dates indicated:
March 31
Capital Operating
Leases Leases
-------- --------
1998 $ 701 $ 99,011
1999 -- 65,103
2000 -- 13,124
Thereafter -- --
-------- --------
Total minimum lease payments 701 $177,238
========
Less amounts representing interest 6
--------
Present value of future minimum
capital lease payment $ 695
========
Rent expense related to the operating leases was $152,000, $179,000 and $225,000
for the years ended March 31, 1997, 1996, and 1995, respectively. Interest
expense recognized and paid on the capital lease obligations was $1,000,
$15,000, and $26,000 during the years ended March 31, 1997, 1996, and 1995,
respectively.
F-13
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
6. Income Taxes
Income tax expense (benefit) for the years ended March 31, 1997, 1996, and 1995,
consisted of the following:
1997 1996 1995
--------- --------- ---------
Current:
Federal $ 11,133 $ (78,858) $(490,040)
State 2,350 (821) (72,000)
Foreign 12,154 24,811 57,600
--------- --------- ---------
25,637 (54,868) (504,440)
--------- --------- ---------
Deferred:
Federal 25,522 24,994 (8,047)
State -- (4,295) 1,543
Foreign -- -- --
--------- --------- ---------
25,522 20,699 (6,504)
--------- --------- ---------
$ 51,159 $ (34,169) $(510,944)
========= ========= =========
Deferred tax expense (benefit) is determined by the change in the liability or
asset for deferred taxes. The source of these changes and the tax effect are as
follows:
Years Ended March 31
1997 1996 1995
--------- --------- ---------
Depreciation expense $ (22,995) $ (1,631) $ (3,892)
Deferred compensation expense (23,042) 20,309 45,155
Bad Debts (88,875) (16,900) --
Research and development expense 33,875 48,840 (2,456)
Inventory (23,651) -- --
Foreign tax credit 14,203 (62,440) (131,412)
Research and development credit -- (37,476) --
Capital loss carryforward (5,345) -- --
Investment 64,400 -- --
Other 7,998 (7,289) 1,565
Minimum tax carryforward 14,203 -- --
Net operating loss carryforward (667,304) (32,035) --
Change in valuation allowance 722,055 109,321 84,536
--------- --------- ---------
$ 25,522 $ 20,699 $ (6,504)
========= ========= =========
F-14
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
Total deferred tax assets and deferred tax liabilities as of March 31, 1997 and
1996, and the sources of the differences between financial statements and tax
basis of the Company's assets and liabilities which give rise to the deferred
tax assets and deferred tax liabilities are as follows:
March 31
1997 1996
--------- ---------
Current deferred taxes:
Deferred compensation $ -- $ (10,010)
Allowance for doubtful accounts 109,633 20,758
Other 23,871 12,735
--------- ---------
Net current deferred tax asset (liability) 133,504 23,483
Valuation allowance for deferred tax assets (133,504) --
--------- ---------
$ -- $ 23,483
========= =========
Non-current deferred taxes:
Net operating loss carryforward $ 829,339 $ 162,035
Capital loss carryforward 5,345 --
Foreign tax carryforward 179,654 193,857
Minimum tax carryforward 13,225 --
Charitable contribution carryforward 10,738 --
Research and development credit carryforward 37,476 37,476
Research and development expense (139,457) (105,582)
Intangible 24,359 --
Investment (64,400) --
Tax over book depreciation 16,129 (6,914)
--------- ---------
Net non-current deferred tax asset 912,408 280,872
Valuation allowance for deferred tax asset (912,408) (323,857)
--------- ---------
$ -- $ (42,985)
========= =========
At March 31, 1997, the Company had foreign tax credit carryforwards of
approximately $180,000 which expire in the years 1998 to 2002.
At March 31, 1997, the Company had federal net operating loss carryforwards of
approximately $2,300,000 which expire in the years 2011 and 2012. The state net
operating loss carryforwards vary by states.
At March 31, 1997, the Company had federal capital loss carryforwards of
approximately $11,000 which expire in the year 2000. The state capital loss
carryforwards vary by states.
During the years ended March 31, 1997, 1996, and 1995, the Company paid income
taxes of $24,000, $1,000, and $4,000, respectively.
F-15
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
The reasons for the difference between total tax expense and tax computed by
applying the U.S. Federal income tax rates to earnings before income taxes for
the years ended March 31 were as follows:
1997 1996 1995
---- ---- ----
U.S. Federal statutory rate -34.0% -34.0% -34.0%
State income tax
(net of Federal income tax benefit) 0.1% -1.1% -3.2%
Non-deductible expenses 2.1% 8.4% 1.9%
Non-taxable income -0.1% -5.6% -2.3%
Foreign taxes withheld 0.6% 8.0% --
Higher effective tax rate on earnings
of foreign subsidiaries -- -- 1.4%
Utilization of R & D tax credit -- -- -2.3%
Different tax rate on carryback of
net operating loss -- 1.5% --
Change in valuation allowance 33.9% 12.9% 5.3%
Other -0.2% -1.1% 1.3%
------ ------ ---
2.4% -11.0% -31.9%
====== ====== =====
7. Employee Benefit Plans
In 1988, the Company initiated an Employee Stock Ownership Plan ("ESOP"), which
covers all eligible employees. Contributions are made at the Company's
discretion. They are accrued as of year end and then approved by the Board of
Directors subsequent to year-end after consideration of the profits of the
Company and other factors. The Company made no contributions in the years ended
March 31, 1997, 1996, and 1995, respectively.
In conjunction with the ESOP, the Company also has an Employee Savings 401(k)
Plan, which covers all eligible employees. Under this plan, employees may
contribute up to 10% of their compensation, subject to the rules of Section
401(k) of the Internal Revenue Code, to their accounts. The Company, at its
discretion, matches up to 50% of the employee's contribution. The Company
contribution was $0, $0, and $51,000 (50%) in the years ended March 31, 1997,
1996, and 1995, respectively.
F-16
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options and Warrants
Changes in outstanding stock options were as follows:
Common Weighted-Average
Stock Exercise Price
----------- --------------
Balance at April 1, 1994 123,880 $0.02
1995 Activity
- -------------
Granted 34,764 7.37
Exercised (38,400) 0.01
Forfeited (8,480) 7.50
-------
Balance at March 31, 1995 111,764 $1.73
1996 Activity
- -------------
Granted 74,000 3.64
Exercised (44,900) 0.02
Forfeited (30,016) 3.43
-------
Balance at March 31, 1996 110,848 $3.14
1997 Activity
- -------------
Granted 3,000 1.94
Exercised (32,212) 0.01
Forfeited (38,048) 3.87
-------
Balance at March 31, 1997 43,588 $5.00
=======
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123 ("FASB 123"), "Accounting for Stock-Based
Compensation", requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Disclosure of pro forma net income is required by FASB 123, which also requires
that the information be determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1994, under the fair
value method of that Statement. The fair value for those options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions for 1996, and 1997, respectively: risk-free interest rates
of 6.80% and 7.38%; volatility factors of the expected market price of the
Company's common stock of .55, and a weighted-average expected life of the
options of 10 years.
F-17
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options and Warrants (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1997 1996
------------- -------------
Pro forma net loss $ (2,184,059) $ (827,934)
Pro forma loss per share $ (0.90) $ (0.34)
Of the outstanding options at March 31, 1997, 1996, and 1995, 23,226, 40,373 and
85,588, respectively, were exercisable.
As of March 31, 1997, the range of exercise prices of the stock options is $1.94
to $7.50 and the weighted-average remaining contractual life of the stock
options is 8 years. The weighted-average fair value of options granted during
the years ended March 31, 1997, 1996, and 1995, is $7.37, $3.64, and $1.94,
respectively.
The Company issued warrants to the underwriters of the initial public offering
to purchase 38,822 shares of the Company's common stock. These shares constitute
5% of the total shares sold in the offering. The warrants represent the right to
purchase the Company's common stock for $9.00 per share. The warrants are
exercisable for a period of three and one-half years beginning one year after
the offering date.
9. Marketable Securities
Available-for-sale 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. Available-for-sale securities include obligations of state
municipalities and are stated at fair market value of $100,000 and $1,000,000,
at March 31, 1997, and March 31, 1996, respectively. These securities
mature/matured in August 2026 and April 1996, respectively. There were no
unrealized gains/losses with respect to these securities during fiscal year 1997
nor 1996.
F-18
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
10. Industry Segments
Through March 31, 1997, the Company operated in the United States, through its
headquarters in Maryland and two wholly-owned subsidiaries in Ohio, in Europe
through its wholly-owned subsidiary in the United Kingdom, and in Brussels,
Belgium, through its sales branch. Sales, operating loss, and identifiable
assets by geographic area are presented below.
<TABLE>
<CAPTION>
Year Ended March 31
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales and Other Income
PC Connectivity and Other Revenue $ 4,518,589 $ 5,629,238 $ 7,105,170
Technology Revenue 3,673,842 -- --
------------ ------------ ------------
United States 8,192,431 5,629,238 7,105,170
Eliminations - transfers 160,861 243,364 696,318
------------ ------------ ------------
8,353,292 5,872,602 7,801,488
Europe
Unaffiliated customers 1,467,430 2,154,778 3,017,628
Eliminations - transfers (160,861) (243,364) (696,318)
------------ ------------ ------------
$ 9,659,861 $ 7,784,016 $ 10,122,798
============ ============ ============
Operating (Loss) Income
PC Connectivity and Other Revenue $ (1,466,931) $ (326,896) $ (474,892)
Technology Revenue 60,836 -- --
------------ ------------ ------------
United States (1,406,095) (326,896) (474,892)
Europe (381,639) (465,785) (1,254,996)
------------ ------------ ------------
$ (1,787,734) $ (792,681) $ (1,729,888)
============ ============ ============
Identifiable Assets
PC Connectivity and Other Revenue $ 4,287,873 $ 5,458,587 $ 6,773,282
Technology Revenue 1,943,458 -- --
------------ ------------ ------------
United States 6,231,331 5,458,587 6,773,282
Europe -- 1,156,238 1,612,010
------------ ------------ ------------
$ 6,231,331 $ 6,614,825 $ 8,385,292
============ ============ ============
</TABLE>
The Company does not currently have domestic sales nor sales to an individual
customer in excess of 10% of its consolidated revenues. Intersegment sales are
accounted for at cost. Operating profit is total revenue less cost of goods
sold, operating expenses (including depreciation and amortization), excluding
interest and corporate expenses. Identifiable assets by geographic location
include assets directly identified with those operations.
11. Disposal of Foreign Operations
On March 31, 1997, the Company disposed of 80% of the net assets of its foreign
subsidiary MI PLC and incurred a disposition loss of $173,000, which was
recognized in fiscal year 1997. MI's remaining investment in MI PLC is $44,000.
MI will use the cost method to account for its investment in MI PLC.
F-19
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
12. Business Acquisitions
On August 21, 1996, and November 22, 1996, the Company purchased Computer Site,
Inc. and Computer One of Ohio, Inc., respectively. Both companies acquired are
Ohio-based systems integrators. MI acquired the companies for a common stock
issuance of 93,838 shares (with a market value of $199,000 at acquisition) and
the assumption of liabilities (principally current liabilities) of $785,000.
Each of these acquisitions was accounted for using the purchase method of
accounting. The purchase price of each acquisition was allocated to the net
assets acquired based on their estimated fair value. The excess of the purchase
price over the estimated fair value of the net assets amounted to $281,000 and
is being amortized over fifteen years. The operations of each of these acquired
businesses are included in the accompanying consolidated statement of operations
from the date of the respective acquisition.
13. Intangible Assets
Intangible assets consisted of the following:
March 31
1997 1996 1995
---------- ---------- ----------
Gross:
Goodwill $ 735,736 $ 495,947 $ 495,947
Capitalized software and design costs 787,888 594,803 336,948
Other 199,284 27,809 27,809
---------- ---------- ----------
$1,722,908 $1,118,559 $ 860,704
========== ========== ==========
Net:
Goodwill $ 273,469 $ 26,596 $ 75,254
Capitalized software and design costs 336,336 291,004 221,113
Other 106,107 38,452 3,230
---------- ---------- ----------
$ 715,912 $ 356,052 $ 299,597
========== ========== ==========
F-20
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Consolidated Financial Statements
14. Quarterly Data (unaudited)
The following is a summary of the quarterly results of operations for the years
ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended
June 30 Sept 30 Dec 31 Mar 31
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 1997:
Net sales $ 1,575 $ 1,560 $ 2,517 $ 4,008
Cost of sales $ 481 $ 648 $ 1,378 $ 2,550
Net loss before loss on sale of
subsidiary $ (179) $ (396) $ (244) $(1,187)
Loss on sale of subsidiary -- -- -- (173)
------- ------- ------- -------
Net loss, as originally reported (179) (396) (244) (1,360)
Adjustment for improperly
capitalized expense (1) (80) -- -- 80
------- ------- ------- -------
Net loss, as restated $ (259) $ (396) $ (244) $(1,280)
======= ======= ======= =======
Net loss per share before loss
on sale of subsidiary $ (0.07) $ (0.17) $ (0.10) $ (0.48)
Net loss per share on sale of
subsidiary -- -- -- (0.07)
------- ------- ------- -------
Net loss per share, as originally
reported (0.07) (0.17) (0.10) (0.55)
Adjustment, per share, for improperly
capitalized expense (1) (0.03) -- -- 0.03
------- ------- ------- -------
Net loss per share, as restated $ (0.10) $ (0.17) $ (0.10) $ (0.52)
======= ======= ======= =======
Fiscal year ended March 31, 1996:
Net sales $ 2,207 $ 1,972 $ 1,762 $ 1,843
Cost of sales $ 876 $ 537 $ 442 $ 617
Net (loss) income $ (712) $ (111) $ 15 $ 7
======= ======= ======= =======
Net (loss) income per share $ (0.30) $ (0.04) $ 0.01 $ --
======= ======= ======= =======
</TABLE>
(1) The Company in the fourth quarter of 1997 determined that certain selling,
general, and administrative expenses totaling $80,000 had been improperly
capitalized. The Company corrected the error in its fourth quarter financial
statements. The accompanying 1997 quarterly data represents the quarterly data
as reported in the Quarterly Reports on Form 10-Q filed by the Company, adjusted
for the aforementioned error.
F-21
<PAGE>
Micro-Integration Corp. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Charged to Charged to
Beginning Costs and Other Deductions Ending
Classification Balance Expenses Accounts (1) Balance
- ----------------------------------------- ----------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts $145,616 122,391 -- 191,683 $ 76,324
-------- -------- ------- -------- --------
Total $145,616 122,391 -- 191,683 $ 76,324
======== ======== ======= ======== ========
Year Ended March 31, 1996:
Deducted from asset
accounts:
Allowance for doubtful
accounts $ 34,669 152,339 -- 41,392 $145,616
-------- -------- ------- -------- --------
Total $ 34,669 152,339 -- 41,392 $145,616
======== ======== ======= ======== ========
Year Ended March 31, 1995:
Deducted from asset
accounts:
Allowance for doubtful
accounts $ 33,230 56,385 -- 54,946 $ 34,669
-------- -------- ------- -------- --------
Total $ 33,230 56,385 -- 54,946 $ 34,669
======== ======== ======= ======== ========
</TABLE>
(1) Uncollectible accounts written-off, net of recoveries.
F-22
<PAGE>
Exhibit Index
-------------
Exhibit Description of Document
Number -----------------------
- ------
3(ii).1 Amended and Restated Bylaws of Micro-Integration Corp., filed as
Exhibit 3(ii).1 to the Company's Registration Statement on Form
SB-2, Registration No. 33-72752, is hereby incorporated by
reference.
4.1 Article IV of the Restated Certificate of Incorporation of
Micro-Integration Corp., filed as Exhibit 4.1 to the Company's
Registration Statement on Form SB-2, Registration No. 33-72752, is
hereby incorporated by reference.
4.2 Form of Common Stock Certificate, filed as Exhibit 4.2 to Amendment
No. 1 to the Company's Registration Statement on Form SB-2,
Registration No. 33-72752, is hereby incorporated by reference.
4.3 Form of Underwriter's Warrant, filed as Exhibit 4.3 to Amendment No.
1 to the Company's Registration Statement on Form SB-2, Registration
No. 33-72752, is hereby incorporated by reference.
10.1 Micro-Integration Corp. Employee Savings and Stock Ownership Plan,
filed as Exhibit 10.1 to the Company's Registration Statement on
Form SB-2, Registration No. 33-72752, is hereby incorporated by
reference.
10.2 1994 Stock Plan of Micro-Integration Corp., filed as Exhibit 10.2 to
the Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
10.3 Agreement between Micro-Integration Corp., Micro-Integration Europe
n.v. and Gabor Weiner entered into September 28, 1990, filed as
Exhibit 10.3 to the Company's Registration Statement on Form SB-2,
Registration No. 33-72752, is hereby incorporated by reference.
10.4 Agreement between Micro-Integration Corp. and Gabor Weiner entered
into on September 28, 1990, filed as Exhibit 10.4 to the Company's
Registration Statement on Form SB-2, Registration No. 33-72752, is
hereby incorporated by reference.
10.5 Amendment to Agreements between Micro-Integration Corp.,
Micro-Integration Europe n.v., and Gabor Weiner, entered into on
March 21, 1994, filed as Exhibit 10.5 to the Company's Registration
Statement on Form SB-2, Registration No. 33-72752, is hereby
incorporated by reference.
10.6 Contract of Sale made on August 23, 1995 between CCSAC Federal
Credit Union and Micro-Integration Corp., filed as Exhibit 10.6 to
the Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
10.7 Agreement made as of May 20, 1993 between Micro-Integration Corp.
and Lashley Construction, Inc., filed as Exhibit 10.7 to the
Company's Registration Statement on Form SB-2, Registration No.
33-72752, is hereby incorporated by reference.
<PAGE>
Exhibit Index
-------------
10.8 Contract of sale made on September 16, 1992 between
Micro-Integration Corp., Cumberland Allegany County Industrial
Foundation and the Board of County Commissioners of Allegany County,
Maryland, filed as Exhibit 10.8 to the Company's Registration
Statement on Form SB-2, Registration No. 33-72752, is hereby
incorporated by reference.
10.9 Promissory Note dated September 24, 1993 payable to
Micro-Integration Corp. to the Board of Commissioners of Allegany
County, Maryland or order, filed as Exhibit 10.9 to the Company's
Registration Statement on Form SB-2, Registration No. 33-72752, is
hereby incorporated by reference.
10.10 Promissory Note dated September 24, 1993 payable by
Micro-Integration Corp. to the order of the Board of County
Commissioners of Allegany County, Maryland, filed as Exhibit 10.10
to the Company's Registration Statement on Form SB-2, Registration
No. 33-72752, is hereby incorporated by reference.
10.11 Revolving Note Agreement dated May 17, 1993 by and between
Micro-Integration Corp. and The First National Bank of Maryland,
filed as Exhibit 10.11 to the Company's Registration Statement on
Form SB-2, Registration No. 33-72752, is hereby incorporated by
reference.
10.12 Business Promissory Note dated September 22, 1993 payable by
Micro-Integration Corp. to the order of The First National Bank of
Maryland, filed as Exhibit 10.12 to the Company's Registration
Statement on Form SB-2, Registration No. 33-72752, is hereby
incorporated by reference.
10.13 Agreement and Plan of Reorganization made in April 1986 by and among
Micro-Integration Corp., Micro-Integration Inc., John A. Parsons,
i.e. Systems, Inc. and the Stockholders named therein, filed as
Exhibit 10.14 to the Company's Registration Statement on Form SB-2,
Registration No. 33-72752, is hereby incorporated by reference.
10.14 Indemnification Agreements between Micro-Integration Corp. and its
directors and officers, filed as Exhibit 10.14 to the Company's Form
10-KSB for the year ended March 31, 1996, is hereby incorporated by
reference.
11.1 Statement of computation of per share earnings.
21.1 Subsidiaries of Micro-Integration Corp.
23.1 Consent of Independent Accountants.
F-24
Exhibit 11.1 - Statement of Computation of Per Share Earnings
(In thousands except per-share data)
Year Ended March 31
1997 1996 1995
------- ------- -------
Primary
Average shares outstanding 2,438 2,414 2,352
Net effect of dilutive stock options
based on the treasury stock method
using average market price -- -- --
------- ------- -------
Total 2,438 2,414 2,352
======= ======= =======
Net loss $(2,179) $ (801) $(1,087)
======= ======= =======
Per share amount $ (0.89) $ (0.33) $ (0.46)
======= ======= =======
Note: Fully diluted earnings per share equals primary earnings per share.
Exhibit 21.1 - Subsidiaries of Micro-Integration Corp.
Name Jurisdiction
---- ------------
Computer Site, Inc. Ohio
Computer One of Ohio, Inc. Ohio
Exhibit 23.1 - Consent of Independent Auditors
We Consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-91724) pertaining to the Micro-Integration Corp. Stock Option Plan
of our report dated May 30, 1997, with respect to the consolidated financial
statements and schedule of Micro-Integration Corp. included in the Annual report
(Form 10-KSB) for the yesr ended March 31, 1997.
/s/Ernst & Young LLP
Baltimore, Maryland
June 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 370,598
<SECURITIES> 100,000
<RECEIVABLES> 1,948,615
<ALLOWANCES> 76,324
<INVENTORY> 596,556
<CURRENT-ASSETS> 3,153,162
<PP&E> 3,075,457
<DEPRECIATION> 1,041,637
<TOTAL-ASSETS> 6,231,331
<CURRENT-LIABILITIES> 2,065,052
<BONDS> 0
0
0
<COMMON> 26,415
<OTHER-SE> 2,929,725
<TOTAL-LIABILITY-AND-EQUITY> 6,231,331
<SALES> 9,659,861
<TOTAL-REVENUES> 9,659,861
<CGS> 5,056,754
<TOTAL-COSTS> 5,056,754
<OTHER-EXPENSES> 5,828,085
<LOSS-PROVISION> 562,786
<INTEREST-EXPENSE> 131,857
<INCOME-PRETAX> (2,128,323)
<INCOME-TAX> 51,159
<INCOME-CONTINUING> (2,179,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,179,482)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
