U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to___________________
Commission file number 0-23710
Micro-Integration Corp.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1204847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Science Park
Frostburg, MD 21532
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 301-689-0800
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the issuer's classes of common stock as of
December 31, 1996 Common Stock, $.01 Par Value --- 2,502,403 shares
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [x]
<PAGE>
Micro-Integration Corp. and Subsidiaries
Form 10-QSB
Index
Part I Financial Information Page
- ----------------------------- ----
Item 1. Consolidated Balance Sheets 2
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 7
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 11
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
December 31 March 31
1996 1996
---------- ----------
(unaudited)
ASSETS
Current Assets
Cash and equivalents $ 791,287 $ 460,874
Marketable securities
Held-to-maturity 400,000 1,000,000
Accounts receivable trade, net 1,567,978 1,300,838
Inventory 887,633 933,522
Tax refund receivable 80,941 103,086
Prepaid expense 190,135 114,967
Deferred income taxes 67,483 23,483
---------- ----------
Total Current Assets 3,985,457 3,936,770
---------- ----------
Property, Plant and Equipment
Land 92,962 92,962
Buildings 1,455,518 1,455,518
Equipment 1,917,551 1,447,128
Automobiles 211,420 238,738
Property held for sale 58,741 59,933
---------- ----------
3,736,192 3,294,279
Less accumulated depreciation 1,435,943 1,149,678
---------- ----------
2,300,249 2,144,601
Cash Surrender Value of Life Insurance
and other noncurrent assets 183,980 177,402
Intangible Assets, Net of Amortization 682,555 356,052
---------- ----------
$7,152,241 $6,614,825
========== ==========
2
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
December 31 March 31
1996 1996
----------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Demand notes payable $ 377,500 $
Current portion of long-term debt and 347,425 299,067
capital lease obligations
Accounts payable 677,552 202,049
Accrued expenses 199,211 198,044
Income tax payable 2,804 1,000
----------- -----------
Total Current Liabilities 1,604,492 700,160
----------- -----------
Long-term debt, less current portion 1,296,594 1,133,008
Capital lease obligations, less current portion 22,855 53,202
Deferred Income Taxes 42,985 42,985
Shareholders' equity
Common stock-- $.01 par value; authorized
120,000,000 shares; outstanding -- 2,403,565
shares at September 1996; and 2,385,925 shares
at March 1996 26,279 25,155
Additional capital 5,603,263 5,404,795
Retained deficit (113,162) (113,162)
Current earnings (818,837)
Foreign currency translation (131,563) (176,376)
----------- -----------
4,565,980 5,140,412
Less deferred compensation (24,771) (99,048)
Less treasury stock (355,894) (355,894)
----------- -----------
4,185,315 4,685,470
$ 7,152,241 $ 6,614,825
=========== ===========
See Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue
Product revenue $ 2,441,322 $ 1,625,927 $ 5,498,175 $ 5,564,779
License revenue 57,045 136,444 134,651 376,658
Services and service contracts 18,812 18,812
----------- ----------- ----------- -----------
Total revenue 2,517,179 1,762,371 5,651,638 5,941,437
Cost of goods sold 1,378,031 441,969 2,507,021 1,854,560
----------- ----------- ----------- -----------
Gross profit 1,139,148 1,320,402 3,144,617 4,086,877
Operating Expenses
Selling, general, and administrative 1,226,140 1,238,596 3,585,988 4,485,591
Depreciation and amortization expense 127,072 104,544 335,498 341,828
----------- ----------- ----------- -----------
1,353,212 1,343,140 3,921,486 4,827,419
Operating Loss (214,064) (22,738) (776,869) (740,542)
Other Income (Expense)
Interest expense (28,470) (27,619) (82,620) (85,962)
Other income (expense) 21,162 48,750 72,607 68,658
----------- ----------- ----------- -----------
(7,308) 21,131 (10,013) (17,304)
----------- ----------- ----------- -----------
Income before income taxes (221,372) (1,607) (786,882) (757,846)
Income tax (benefit) expense 22,563 (16,532) 31,955 50,173
----------- ----------- ----------- -----------
Net Loss $ (243,935) $ 14,925 $ (818,837) $ (808,019)
=========== =========== =========== ===========
Earnings (Loss) per Share $ (0.10) $ 0.01 $ (0.34) $ (0.33)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding and
Common Stock Equivalents 2,409,500 2,423,068 2,409,500 2,423,068
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended December 31
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss) $ (818,837) $ (808,013)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 441,989 446,705
Loss (Gain) on disposal of assets 5,214 (2,719)
Increase in deferred income taxes payable 44,000 0
Change in operating assets and liabilities:
Decrease in accounts receivable 179,591 303,854
Increase in other receivables (10,824)
Decrease (Increase) in inventory 241,826 (33,410)
(Increase) Decrease in tax refund receivable (64,751) 761,626
(Increase) Decrease in prepaid expense (63,720) 41,453
Increase (Decrease) in accounts payable 106,362 (439,721)
(Decrease) in accrued expenses (11,690) (109,061)
(Decrease) Increase in income taxes payable (23,252) 32,591
----------- -----------
Net cash provided by operating activities 25,908 193,305
Cash Flows from Investing Activities:
Acquisition of property, plant, and equipment (300,697) (176,667)
Investment on organization of subsidiary (161,874)
Investment in other noncurrent assets and
intangibles (192,483) 0
Purchase of held-to-maturity securities 7,400,000 (9,000,000)
Proceeds from maturity of held-to-maturity securities (6,800,000) 9,500,000
(Increase) Decrease in cash surrender value of life insurance (6,578) 2,669
Proceeds from sale of fixed assets 14,886 13,582
----------- -----------
Net cash (used in) provided by investing activities (46,746) 339,584
Cash Flows from Financing Activities:
Increase in notes payable and long-term debt 302,183 0
Repayments of notes payable, long-term debt, and
capital lease obligations (131,150) (170,727)
Repurchase of common stock (77,562)
Issuance of common stock 199,592 0
----------- -----------
Net cash provided by (used in) financing activities 370,625 (248,289)
Currency Adjustments:
Effect of exchange rate changes on cash (19,374) (25,531)
----------- -----------
Increase in cash 330,413 259,069
Cash at beginning of period 460,874 427,085
----------- -----------
Cash at end of period $ 791,287 $ 686,154
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation have
been included. The results for the three months and the nine months ended
December 31, 1996, and 1995, are not necessarily indicative of financial
information for the full year. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's annual report and Form 10-KSB for
the year ended March 31, 1996.
For purposes of comparability, certain prior year amounts in the consolidated
financial statements have been reclassified to conform to the presentation used
for current period reporting.
2. Marketable Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale debt
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity. Realized gains
and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale are included in investment income.
There were no trading securities at December 31, 1996.
Held-to-maturity securities include obligations of state municipalities and are
stated at cost $400,000. These securities mature in February 1997.
3. Inventory
Inventory consisted of the following:
December 31 March 31
1996 1996
-------- --------
Raw material $157,680 $274,623
Finished goods 729,953 658,899
-------- --------
$887,633 $933,522
======== ========
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
6
<PAGE>
Part I Financial Information
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition for the Nine Months Ended December 31, 1996, and
1995
Recent Events
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.
Results of Operations
On November 22, 1996, the Company completed the purchase of the assets of
Computer One of Ohio, Inc., an Ohio-based systems integrator. Computer One
accounted for 15% of the consolidated total revenue of the Company for the
quarter ended December 31, 1996. In its last fiscal year, ended June 30, 1996,
Computer One generated revenues of $2.1 million. The Company expects Computer
One to make a similarly significant contribution toward the Company's revenues
in the remaining quarter of this fiscal year, ending March 31, 1997.
The Company's total revenue was $2.5 million for the quarter ended December 31,
1996, up 43% or $755,000 from the quarter ended December 31, 1995. Product and
service revenue increased by $834,000 or 51%, and license revenue declined
$79,000 or 58%, compared to the same period last year. As in the previous
quarter, there were unit and revenue declines in the Company's AS/400
connectivity product classifications, but these declines were not as steep as
they have been in the recent past. The Company believes, as stated previously,
that this decline in unit sales is primarily a result of a continued slowdown in
purchases of connectivity products in the IBM AS/400 marketplace. The decline
was offset by revenue from the Company's Internet service provider (ISP)
business; non-AS/400-related product and service sales by the Company's
Frostburg, MD systems integration business; product sales made by the Computer
Site subsidiary acquired in August, 1996; and by sales of the Computer One
subsidiary, acquired six weeks before the end of the December 31, 1996, quarter.
The Computer One and Computer Site subsidiaries jointly accounted for 40% of the
Company's revenue for the December 31, 1996, quarter.
For the nine months ended December 31, 1996, total revenue was $5.7 million,
down 5% or $290,000 from the same period last year. Product and service revenue
decreased $48,000 or 1%, and license revenue decreased $242,000 or 64%. On a
revenue and per unit basis AS/400 connectivity product sales were down for the
nine month period. The Company believes that the general market slowdown in
AS/400 connectivity purchases will continue for the foreseeable future. The
Company's strategy to offset the declines in revenue from this trend is based on
diversifying its product base to provide computer systems and consulting
services to organizations in secondary markets. The acquisition of Computer Site
and Computer One and other potential acquisitions reflect this strategy.
Gross margin declined to 45.3% for the quarter ended December 31, 1996, from
74.9% in the same period in 1995. The major factor causing this decline is the
effect of the Company's increased concentration on the higher-volume,
lower-margin systems integration business, as opposed to the Company's historic
high-margin AS/400 connectivity business, where the margins remain strong. In
subsequent periods the Company expects the trend of lower gross margins to
continue, as sales from the systems integration business become a larger
proportion of the Company's total revenue. On a year-to-date basis, gross margin
declined from 68.8% in the first nine months of 1995 to 55.6% this year.
7
<PAGE>
Selling, general, and administrative expenses (SG&A) decreased by $12,000 in the
quarter ended December 31, 1996 compared to the same period in 1995. As a
percentage of sales, SG&A was 48.7% of total sales in the current quarter
compared with 70.3% of total sales in the same quarter last year. For the nine
months ended December 31, 1996, SG&A expenses decreased by $900,000 compared to
the same period last year. As a percentage of sales, SG&A was 63.4% of total
sales for the nine months compared with 75.5% for the same period last year.
Management continues to make selective reductions in costs to help bring costs
in line with expected revenues.
The Company's net other expense of $7,000 and $10,000 for the three months and
nine months ended December 31, 1996, respectively, is essentially unchanged from
net other income of $21,000 and net other expense of $17,000 for the same
periods last year.
For the three months and nine months ended December 31, 1996, the Company
recognized a corporate tax expense of $22,563 and $31,955, respectively. At
December 31, 1996, the Company has a net operating loss carryforward of
approximately $623,000, and $734,000 available for offset against future U.S.
and U.K. operating profits. The Company also has foreign tax credit
carryforwards of approximately $210,000 that can be applied to offset the tax on
future U.S. earnings.
Liquidity and Capital Resources
The Company satisfies its cash requirements primarily through cash flow from
operations, bank borrowings, and lease financing. At December 31, 1996, the
Company had $400,000 invested in held-to-maturity securities and an additional
$791,000 in cash. The $330,000 increase in cash on hand at December 31, 1996,
compared with cash on hand at March 31, 1996, is primarily due to $302,000 of
short-term borrowings and a $200,000 issuance of common stock, partially offset
by repayments of long-term debt. Investing activities included continued capital
investment in the Company's Internet Division, capitalization of software
development costs associated with the Company's new Internet voice/fax server
product currently in development, capitalization of site licenses for software
under license to the Company, and the acquisitions of Computer One and Computer
Site. The Company expects that cash generated from operations and cash invested
in held-to-maturity securities will satisfy its operating cash needs for the
immediate future.
Working capital decreased from $3.2 million at March 31, 1996, to $2.4 million
at December 31, 1996, as working capital was expended to fund cash needs. In
spite of this reduction, the Company's current ratio remains healthy at 2.5 to 1
at December 31, 1996, as compared to 5.6 to 1 at March 31, 1996. At the end of
the December quarter, the Company's book value was $4.2 million or approximately
$1.74 per weighted average share outstanding.
8
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(11.1) Statement re: Computation of Earnings Per Share
(b) The Company did not file reports on Form 8-K during the three
months ended December 31, 1996.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Frostburg, state of
Maryland, on the 14th day of February, 1997:
Micro-Integration Corp.
By:/s/John A. Parsons
---------------------------------
John A. Parsons
President, Chairman of the Board,
Chief Executive Officer
By:/s/John A. Parsons
---------------------------------
John A. Parsons
Chief Financial Officer
Micro-Integration Corp. and Subsidiaries
Exhibit 11.1 - Statement re: Computation of Earnings Per Share
Three months ended Nine months ended
December 31 December 31
1996 1995 1996 1995
------- ------- ------- -------
(unaudited) (unaudited)
Average shares outstanding 2,410 2,423 2,410 2,423
Net effect of dilutive stock options
based on the treasury stock method
using average market price 0 0 0 0
------- ------- ------- -------
Total 2,410 2,423 2,410 2,423
======= ======= ======= =======
Net Loss $ (244) $ 15 $ (819) $ (808)
======= ======= ======= =======
Per share amount $ (0.10) $ 0.01 $ (0.34) $ (0.33)
======= ======= ======= =======
Note: Fully diluted earnings per share equals primary earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 791,287
<SECURITIES> 400,000
<RECEIVABLES> 1,567,978
<ALLOWANCES> 0
<INVENTORY> 887,633
<CURRENT-ASSETS> 3,985,457
<PP&E> 3,736,192
<DEPRECIATION> 1,435,943
<TOTAL-ASSETS> 7,152,241
<CURRENT-LIABILITIES> 1,604,492
<BONDS> 0
0
0
<COMMON> 26,279
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,152,241
<SALES> 5,651,638
<TOTAL-REVENUES> 5,651,638
<CGS> 2,507,021
<TOTAL-COSTS> 6,275,044
<OTHER-EXPENSES> 10,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,620
<INCOME-PRETAX> (786,882)
<INCOME-TAX> 31,955
<INCOME-CONTINUING> (818,837)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (818,837)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> 0
</TABLE>
