Quarterly Report 9-30-1997
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from .......to.......
Commission file number 0-23710
Micro-Integration Corp.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1204847
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Science Park
Frostburg, MD 21532
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 301-689-0800
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ......X....... No ...........
The number of shares outstanding of the issuer's classes of common stock as of
September 30, 1997:
Common Stock, $.01 Par Value --- 2,495,355 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 Operations 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed
Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7
Part II Other Information
- -------------------------
Item 2. Changes in Securities and Use of Proceeds 9
Item 4. Submission of Matters to a Vote of
Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 12
- ----------
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
September 30 March 31
1997 1997
----------- ----------
(unaudited)
ASSETS
Current Assets
Cash $ 219,462 $ 370,598
Marketable securities, available-for-sale 100,000 100,000
Receivables
Trade, net of allowance for doubtful
accounts $62,307 and $76,324 1,843,475 1,872,291
Note 14,760 70,000
Tax refund 41,061 46,141
Inventory 607,778 596,556
Prepaid expense 106,334 97,576
---------- ----------
Total Current Assets 2,932,870 3,153,162
---------- ----------
Property, Plant, and Equipment
Land 92,962 92,962
Buildings 1,457,558 1,455,518
Equipment 1,405,862 1,384,231
Automobiles 83,952 83,952
Property held for sale 58,224 58,794
---------- ----------
3,098,558 3,075,457
Less accumulated depreciation (1,188,499) (1,041,637)
---------- ----------
1,910,059 2,033,820
Cash Surrender Value of Life Insurance
and Other Noncurrent Assets, Net 310,415 298,437
Intangible Assets, Net of Amortization 737,236 745,912
---------- ----------
$5,890,580 $6,231,331
========== ==========
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
September 30 March 31
1997 1997
---------- ----------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Demand notes payable $ 381,464 $ 462,500
Current portion of long-term debt and
capital lease obligations 174,425 196,181
Accounts payable 855,827 933,434
Accrued expenses 244,649 471,137
Income tax payable 5,119 1,800
----------- -----------
Total Current Liabilities 1,661,484 2,065,052
----------- -----------
Long-Term Liabilities
Debt, less current portion 1,156,996 1,210,139
Shareholders' Equity
Preferred stock - $.01 par value: authorized
4,000,000 shares; none issued as of
September 30, 1997 and March 31, 1997 - -
Common stock - $.01 par value; authorized
12,000,000 shares; issued 2,644,893 and
2,641,477 as of September 30, 1997 and
March 31, 1997, respectively 26,449 26,415
Additional capital 5,603,263 5,603,263
Retained deficit (2,176,718) (2,292,644)
----------- -----------
3,452,994 3,337,034
Less treasury stock 380,894 380,894
----------- -----------
3,072,100 2,956,140
----------- -----------
$ 5,890,580 $ 6,231,331
============ ============
See Notes to Unaudited Condensed Consolidated Financial Statements.
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30 Six months ended September 30
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
<C> <C> <C> <C>
<S>
REVENUE
License revenue $ 19,950 $ 17,263 $ 29,855 $ 77,606
Product revenue 2,981,946 1,542,503 6,330,922 3,056,853
---------- ---------- ---------- ----------
Total Revenue 3,001,896 1,559,766 6,360,777 3,134,459
Cost of goods sold 1,863,245 647,966 4,106,882 1,128,990
---------- ---------- ---------- ----------
Gross Profit 1,138,651 911,800 2,253,895 2,005,469
Operating Expenses
Selling, general, and
administrative 1,056,450 1,213,785 2,065,900 2,359,848
Depreciation and
amortization expense 78,277 104,727 158,578 208,426
---------- ---------- ---------- ----------
1,134,727 1,318,512 2,224,478 2,568,274
Operating Income (Loss) 3,924 (406,712) 29,417 (562,805)
Other Income (Expense)
Interest expense (34,099) (27,754) (69,884) (54,150)
Gain on sale of residential
internet business 135,837 - 135,837 -
Other income 6,790 36,435 25,944 51,445
---------- ---------- ---------- ----------
108,528 8,681 91,897 (2,705)
---------- ---------- ---------- ----------
Income (Loss) before
Income Taxes 112,452 (398,031) 121,314 (565,510)
Income tax expense 161 (1,741) 5,389 9,392
---------- ---------- ---------- -----------
Net Income (Loss) $ 112,291 $ (396,290) $ 115,925 $ (574,902)
========== ========== ========== ===========
Income (Loss) per Share $ 0.04 $ (0.17) $ 0.05 $ (0.24)
========== ========== ========== ===========
Weighted Average Number of
Common Shares Outstanding 2,493,164 2,396,625 2,492,555 2,396,625
========== ========== ========== ===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended September 30
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 115,925 $ (574,902)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities:
Depreciation and amortization 158,578 286,040
Change in operating assets and liabilities:
Accounts receivable (176,584) 266,435
Note receivable 55,240 -
Tax refund receivable 5,080 -
Inventory (11,222) 82,447
Prepaid expense (8,758) (13,491)
Accounts payable (77,607) 306,808
Accrued expenses (226,488) (63,246)
Income taxes payable 3,319 (1,000)
---------- ----------
Net cash (used in) provided by
operating activities (162,517) 289,091
Cash Flows from Investing Activities
Acquisition of property, plant, and equipment (23,671) (257,853)
Increase in other noncurrent assets (2,469) (229,823)
Purchase of available-for-sale securities - 3,000,000
Proceeds from sales of available-for-sale securities - (3,000,000)
Increase in cash surrender value of life insurance (11,978) (2,805)
Proceeds from sale of residential internet business 205,400 -
Proceeds from sale of fixed assets - 17,212
---------- ----------
Net cash provided by (used in) investing activities 167,282 (473,269)
Cash Flows from Financing Activities
Repayments of notes payable, long-term debt,
and capital lease obligations (74,899) (89,306)
Net repayment of short-term debt (81,036) -
Issuance of common stock 34 185
---------- ----------
Net cash used in financing activities (155,901) (89,121)
Currency Adjustments
Effect of exchange rate changes on cash - (24,480)
---------- ----------
Decrease in cash (151,136) (297,779)
Cash at beginning of period 370,598 460,874
---------- ----------
Cash at end of period $ 219,462 $ 163,095
========== ==========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statments
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 and six
months ended September 30, 1997, and 1996, are not necessarily indicative of
financial information for the full year. The unaudited condensed 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, 1997.
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
Available-for-sale securities are stated at fair value, with the unrealized
gaines 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 is included in investment income. Available-for-sale
securities include obligations of state municipalities and are stated at fair
market value of $100,000 at September 30, 1997, and March 31, 1997. These
securities mature in August 2026. There were no unrealized gains/losses with
respect to these securities during the periods ended September 30, 1997, nor
1996.
3. Inventory
Inventory consisted of the following:
September 30 March 31
1997 1997
---- ----
Raw material $ 123,019 $ 129,766
Finished goods 484,759 466,790
---------- ----------
$ 607,778 $ 596,556
========== ==========
Inventory is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
<PAGE>
Part I Financial Information
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition for the Six Months Ended September 30, 1997,
and 1996
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 results 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.
Recent Events
On October 3, 1997, the Company announced it had signed a Letter of Intent to
acquire, in exchange for shares of Company common stock, Software 'N Such, an
Ohio-based systems and network integrator. On October 22, 1997, the Company
announced it had signed a Letter of Intent to acquire, in exchange for shares
of Company common stock, SuiteOne Computer Services, Inc., a Pennsylvania-
based UNIX services company. Both acquisitions are expected to be accounted
for as tax-free stock swaps. The Company expects that, if consummated, these
transactions will not have a significant effect on results of operations
until the fourth quarter, ending March 31, 1998.
Results of Operations
The Company's total revenue was $3.0 million for the quarter ended September
30, 1997, an increase of 92% or $1.4 million from the quarter ended September
30, 1996. Product revenue increased $1,439,000 or 93% while license revenue
declined $3,000 or 16% compared to the same period last year.
For the six months ended September 30, 1997, total revenue was $6.4 million,
up 103% or $3.2 million from the same period last year. Product and service
revenue increased by $3.3 million or 107%, and license revenue declined, as
expected, by $48,000 or 62% 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 sales 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 slowdown in purchases
of connectivity products in the IBM AS/400 marketplace, and that this decline
will continue. These declines were offset by increased revenues from sales
by the Company's systems integration and consulting businesses primarily
through the Company's Computer One and Computer Site subsidiaries. The
Company's Computer One and Computer Site subsidiaries jointly accounted for
66% of the Company's total revenue for the period ending September 30, 1997.
Gross margin declined to 37.9% for the quarter ended September 30, 1997, from
58.5% in the same period in 1996. Gross margin declined to 35.4% for the six
months ended September 30, 1997, from 64.0% in the same period in 1996. The
major contributing factor to these declines is the change in product mix from
high-margin AS/400 connectivity products, where unit volumes are declining,
to lower-margin products and consulting services. The Company expects gross
margins to continue to decline in the short term, as computer and network
equipment and consulting services continue to become a larger proportion of
the product mix.
Selling, general, and administrative expenses (SG&A) decreased by $157,000 in
the quarter ended September 30, 1997, compared to the same period in 1996.
As a percentage of sales, SG&A was 35.2% of total sales in the current
quarter compared with 77.8% of total sales in the same quarter last year.
For the six months ended September 30, 1997, SG&A expenses decreased by
$294,000 compared to the same period in 1996. As a percentage of sales, SG&A
represented 32.5% of total sales for the six months compared with 75.3% for
the same period last year. Management continues to control costs in an
attempt to keep them below expected gross margins.
The Company's net other income was $109,000 for the three months ended
September 30, 1997, compared to $9,000 in the same quarter last year. For
the six months ended September 30, 1997, the Company had net other income of
$92,000 compared to a net other expense of $3,000 in the same period last
year. The quarterly and year-to-date net other income amounts include a
$136,000 gain on the sale of the Company's residential internet dial-up
business. This gain offsets net other expense of $27,000 and $44,000 for the
quarter and six months ended September 30, 1997, respectively.
For the six months ended September 30, 1997, the Company recognized a
corporate tax expense of $5,000. At September 30, 1997, the Company had a
net operating loss carryforward of approximately $2.3 million available for
offset against future operating profits.
Liquidity and Capital Resources
The Company satisfies its cash requirements primarily through cash flow from
operations, bank borrowings, and lease financing. At September 30, 1997, the
Company had $100,000 invested in available-for-sale securities and an
additional $219,462 in cash. The $151,000 decrease in cash on hand at
September 30, 1997, compared with cash on hand at March 31, 1997, is
primarily due to an increase of $167,000 in cash provided by investing
activities offset by decreases of $162,000 and $156,000 in cash caused by
operating and financing activities, respectively. Investing activities
included capitalization of software development costs associated with the
Company's new Internet voice/fax server product currently in development.
At September 30, 1997, the Company had two working capital credit lines with
U.S. banks. One credit line, which is secured by a deposit from the Company,
had an outstanding balance of $100,000. The second line had a balance of
$281,464 outstanding of $300,000 available. This line of credit will
continue through January 31, 1998, at which time the terms and conditions of
the loan will be re-evaluated. The Company expects that cash generated from
operations will satisfy its operating cash needs for the for the foreseeable
future.
Working capital increased to $1.3 million as of September 30, 1997, from
$1.1 at March 31, 1997. The Company's current ratio showed improvement from
1.5 to 1 at March 31, 1997, to 1.8 to 1 at September 30, 1997. At the end of
the September 1997 period, the Company's book value was $3.07 million or
approximately $1.23 per weighted average share outstanding.
<PAGE>
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds
The Company registered 1,000,000 shares of common stock, par value $.01 per
share (the "Common Stock"), pursuant to a Registration Statement on Form SB-2
(File No. 33-76752), which was declared effective by the Securities and
Exchange Commission on May 11, 1994. The managing underwriter of the
offering was Ryan, Hartley, and Lee, Inc. and the aggregate price of the
offering, including shares registered for selling shareholders, was
$9,000,000. The Company registered for its own account an aggregate of
800,000 shares of Common Stock, of which it sold 621,227 shares resulting in
an aggregate gross proceeds of the offering to the Company of $4,659,203.
The Company also registered 200,000 shares of Common Stock for selling
shareholders, 155,230 shares of which were sold by selling shareholders for
an aggregate gross proceeds to the selling shareholders of $1,164,225. The
offering terminated prior to the sale of all securities registered.
The Company's reasonable estimate of the total expenses in connection with
the offering was $672,000 of which approximately $280,000 were for
underwriting discounts and commissions and approximately $392,000 were for
other expenses paid to persons other than directors or officers of the
Company, persons owning more than 10 percent of any class of equity
securities of the Company, or affiliates of the Company.
The Company's reasonable estimate of the net proceeds from the offering was
$3,987,000. As of September 30, 1997, the Company had expended an aggregate
of approximately $3,887,000 of such net proceeds. Of the aggregate proceeds,
the Company spent approximately $1,000,000 for new product launch and sales
force expansion and approximately $500,000 for restructuring expenses. The
Company used approximately $2,387,000 for working capital. Payments of net
proceeds were made to persons other than directors or officers of the Company,
persons owning more than 10 percent of any class of equity securities of the
Company, or affiliates of the Company. The Company invested, from time to
time, the balance of such net proceeds primarily in investment grade
marketable securities. As of September 30, 1997, approximately $100,000 was
invested in such securities.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on July 29, 1997. During the meeting,
stockholders elected the following individuals to serve as members of the
Board of Directors with the following vote totals:
For Against Withheld
---------- ---------- ----------
John A. Parsons 2,208,193 - 6,650
Wayne M. Lee 2,212,393 - 2,450
Maxwell F. Eveleth, Jr. 2,212,393 - 2,450
W. Braun Jones, Jr. 2,195,393 - 19,450
During the meeting, the stockholders also ratified the designation by the
Board of Directors of Ernst & Young LLP as the independent accountants for
the Company for the fiscal year ending March 31, 1998, with the result of the
voting as follows:
For: 2,115,628
Against: 98,838
Withheld: 377
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(11.1) Statement re: Computation of Earnings per Share 11
(b) The Company did not file reports on Form 8-K
during the three months ended September 30, 1997.
<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 November, 1997:
Micro-Integration Corp.
By: /s/ John A. Parsons
---------------------
John A. Parsons
President, Chairman of the Board,
Chief Executive Officer
By: /s/ Terry D. Frost
--------------------
Terry D. Frost
Chief Financial Officer
Exhibit 11.1-Statment of Computation of Earnings per Share
(In thousands except per-share date)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Average shares outstanding 2,493 2,397 2,493 2,397
Net effect of dilutive stock options
based on the treasury stock method
using average market price - - - -
------ ------ ------ ------
Total 2,493 2,397 2,493 2,397
====== ====== ====== ======
Net income (loss) $ 112 $(396) $ 116 $(575)
====== ====== ====== ======
Per share amount $ 0.04 $(0.17) $ 0.05 $(0.24)
====== ====== ====== ======
</TABLE>
Note: Fully diluted earnings per share equals primary earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 219,462
<SECURITIES> 100,000
<RECEIVABLES> 1,905,782
<ALLOWANCES> 62,307
<INVENTORY> 607,778
<CURRENT-ASSETS> 2,932,870
<PP&E> 3,098,558
<DEPRECIATION> 1,188,499
<TOTAL-ASSETS> 5,890,580
<CURRENT-LIABILITIES> 1,661,484
<BONDS> 0
0
0
<COMMON> 26,449
<OTHER-SE> 3,045,651
<TOTAL-LIABILITY-AND-EQUITY> 5,890,580
<SALES> 3,001,896
<TOTAL-REVENUES> 3,001,896
<CGS> 1,863,245
<TOTAL-COSTS> 1,863,245
<OTHER-EXPENSES> 1,134,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,099
<INCOME-PRETAX> 112,452
<INCOME-TAX> 161
<INCOME-CONTINUING> 112,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,291
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
