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, 1998
[ ] 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, 1998:
Common Stock, $.01 Par Value --- 2,881,525 shares
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
<PAGE>
Micro-Integration Corp. and Subsidiaries
Form 1O-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 8
Part II Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
September 30 March 31
1998 1998
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash $ 124,708 $ 176,964
Marketable securities, available-for-sale -- 100,000
Receivables
Trade, net of allowance for doubtful
accounts $177,342 and $153,377 2,064,314 1,650,884
Note 15,191 74,880
Inventory 849,682 551,565
Prepaid expense 150,341 101,571
----------- -----------
Total Current Assets 3,204,236 2,655,864
----------- -----------
Property, Plant, and Equipment
Land 92,962 92,962
Buildings 1,474,333 1,461,357
Equipment 1,633,103 1,418,918
Automobiles 74,037 54,955
Property held for sale, net 100,287 76,848
----------- -----------
3,374,722 3,105,040
Less accumulated depreciation (1,553,007) (1,209,082)
----------- -----------
1,821,715 1,895,958
Cash Surrender Value of Life Insurance
and Other Noncurrent Assets, Net 301,304 254,704
Intangible Assets, Net 927,617 468,932
----------- -----------
$ 6,254,872 $ 5,275,458
=========== ===========
2
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 March 31
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,074,364 $ 818,121
Accrued expenses 332,041 176,199
Demand notes payable 556,877 372,542
Current portion of long-term debt and
capital lease obligations 104,993 130,423
----------- -----------
Total Current Liabilities 2,068,275 1,497,285
----------- -----------
Long-Term Debt, Less Current Portion 1,199,498 1,162,987
Commitment and Contingencies -- --
Shareholders' Equity
Preferred stock - $.01 par value: authorized
4,000,000 shares; none issued and outstanding -- --
Common stock - $.01 par value; authorized
12,000,000 shares; issued 3,031,063 and
2,667,349 as of September 30,
1998 and March 31, 1998, respectively,
outstanding 2,881,525 and
2,517,811 as of September 30,
1998 and March 31, 1998, respectively 30,311 26,673
Additional capital 6,315,901 5,683,039
Accumulated deficit (2,978,219) (2,713,632)
----------- -----------
3,367,993 2,996,080
Less 149,538 shares held in treasury 380,894 380,894
----------- -----------
2,987,099 2,615,186
----------- -----------
$ 6,254,872 $ 5,275,458
=========== ===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30 Six months ended September 30
------------------------------- -----------------------------
1998 1997 1998 1997
------------ ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 2,956,096 $ 3,001,896 6,161,631 6,360,777
Cost of goods sold 1,748,500 1,863,245 3,781,644 4,106,882
----------- ----------- ----------- -----------
Gross Profit 1,207,596 1,138,651 2,379,987 2,253,895
Operating Expenses
Selling, general, and
administrative 1,175,177 1,056,450 2,442,462 2,065,900
Depreciation and
amortization expense 82,692 78,277 160,079 158,578
----------- ----------- ----------- -----------
1,257,869 1,134,727 2,602,541 2,224,478
Operating (Loss) Income (50,273) 3,924 (222,554) 29,417
Other (Expense) Income
Interest expense (39,580) (34,099) (77,072) (69,884)
Gain on sale of residential
Internet business -- 135,837 -- 135,837
Other income 15,955 6,790 37,139 25,944
----------- ----------- ----------- -----------
(23,625) 108,528 (39,933) 91,897
----------- ----------- ----------- -----------
(Loss) Income before
Income Taxes (73,898) 112,452 (262,487) 121,314
Income tax expense 224 161 2,100 5,389
----------- ----------- ----------- -----------
Net (Loss) Income $ (74,122) $ 112,291 $ (264,587) $ 115,925
=========== =========== =========== ===========
Basic and Diluted (Loss)
Earnings per Common Share $ (0.03) $ 0.05 $ (0.09) $ 0.05
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended September 30
-----------------------------
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) income $(264,587) $ 115,925
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 160,079 158,578
Gain on sale of fixed assets (1,863) --
Increase in cash surrender value of life insurance -- (11,978)
Other (6,262) 5,114
Change in operating assets and liabilities:
Accounts receivable (3,062) (176,584)
Note receivable 59,689 55,240
Inventory (141,961) (11,222)
Prepaid expense (12,980) (8,758)
Accounts payable 93,995 (77,607)
Accrued expenses (25,679) (226,488)
Income taxes payable (1,450) 3,319
--------- ---------
Net cash used in operating activities (144,081) (174,461)
Cash Flows from Investing Activities
Acquisition of property, plant, and equipment (10,923) (23,671)
Decrease (increase) in other noncurrent assets 3,208 (2,469)
Cash received in acquisition of subsidiaries 4,574 --
Proceeds from sale of available-for-sale securities 100,000 --
Proceeds from sale of fixed assets 27,603 --
Proceeds from sale of residential Internet business -- 205,400
--------- ---------
Net cash provided by investing activities 124,462 179,260
Cash Flows from Financing Activities:
Issuance of notes payable and long-term debt 111,034 --
Repayments of notes payable, long-term debt, and
capital lease obligations (143,671) (155,935)
--------- ---------
Net cash used in financing activities (32,637) (155,935)
Decrease in cash (52,256) (151,136)
Cash at beginning of period 176,964 370,598
--------- ---------
Cash at end of period $ 124,708 $ 219,462
========= =========
Due to the acquisition of CompSource during the quarter ending June 30, 1998,
the Company had the following noncash investing and financing activities:
Assets acquired, excluding cash $(659,068)
Liabilities assumed 573,272
Goodwill recorded (546,130)
Common stock issued 636,500
---------
Cash acquired in acquisition $ 4,574
=========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Condensed Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Micro-Integration Corp. (the "Company") 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 periods ended September 30, 1998, and 1997,
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, 1998.
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
gains and losses, net of tax, reported as a separated 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 March 31,
1998. THere were no unrealized gains/losses with respect to these securities
during the period ended September 30, 1998 nor 1997.
3. Inventory
Inventory consisted of the following:
September 30 March 31
1998 1998
-------- --------
Parts $128,783 $156,412
Finished goods 720,899 395,153
-------- --------
$849,682 $551,565
======== ========
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
6
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Condensed Financial Statements
4. Earnings per Share
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
----------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator used in basic and
diluted loss per share:
Net (loss) income $ (74,122) $ 112,291 $ (264,587) $ 115,925
========== ========== ========== ==========
Denominator:
Weighted average number of
shares of common stock
outstanding during the period 2,873,475 2,493,170 2,870,674 2,492,558
========== ========== ========== ==========
Basic and diluted (loss)
earnings per share $ (0.03) $ 0.05 $ (0.09) $ 0.05
========== ========== ========== ==========
</TABLE>
7
<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, 1998,
and 1997
This quarterly report on Form 10-QSB contains forward-looking statements as that
term is defined in the Private Securities Litigation Reform Act of 1996. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Statements
regarding the intent, belief or current expectations of the Company are intended
to be forward-looking statements which may involve risk and uncertainty. There
are a number of factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements, including,
but not limited to, those discussed in "Part I -- Item 1 -- Description of
Business -- Risk Factors" and "Part II -- Item 6 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
Company's 1997-1998 Form 10-KSB, as filed with the Securities and Exchange
Commission on June 29, 1998. In addition, set forth below under the headings
"Results of Operations" and "Factors Affecting Operating Results" is a further
discussion of certain of those risks as they relate to the period covered by
this report, the Company's near term outlook with respect thereto, and the
forward-looking statements set forth herein; however, the absence in this
quarterly report of a complete recitation of or update to all risk factors
identified in the Company's 1997-1998 Form l0-KSB should not be interpreted as
modifying or superseding any such risk factors, except to the extent set forth
below. Investors should review this quarterly report in combination with the
Company's 1997-1998 Form l0-KSB in order to have a more complete understanding
of the principal risks associated with an investment in the Company's stock.
Overview
Micro-Integration Corp. ("MI" or the "Company") is primarily an Information
Technology ("IT") Services company which provides both IT services and products.
The Company's IT services include IT consulting, network integration and design
services, accounting and distribution information systems, process control
information systems, and Internet web site design, programming, and hosting. The
Company also sells computers, software and communications products purchased
from others. The Company provides Internet web hosting, training, desktop
management, help-desk, and maintenance services that complement its consulting
and computer and network software and equipment sales. In addition to IT
services and products, the Company designs, manufactures, and sells a line of
products that provides communications and connectivity between personal
computers ("PCs") and IBM mainframe and midrange AS/400 computers.
Results of Operations
The Company's total revenue was $3.0 million for the quarters ended September
30, 1998 and 1997. IT Services revenue increased by $330,000 or 15% for the
quarter ended September 30, 1998 compared to the same quarter last year while PC
Connectivity product and royalty revenue decreased $258,000 or 36% for the same
periods. Internet revenue decreased by $117,000 or 92% from $127,000 for the
quarter ended September 30, 1997 to $10,000 in the quarter ended September 30,
1998 due to the sale of the residential Internet business.
For the six months ended September 30, 1998, total revenue was $6.2 million,
down 3% or $199,000 from the same period last year. IT Services revenue
increased by $704,000 or 15% while PC Connectivity product and royalty
8
<PAGE>
revenue decreased $689,000 or 44%. The sale of the residential Internet business
in the quarter ended September 30, 1997 resulted in a decline of Internet
revenue of $214,000 or 88% from $243,000 for the six months ended September 30,
1997 to $29,000 for the same period in the current year. The Company's
subsidiaries accounted for 79% of the Company's total revenue for the six months
ended September 30, 1998 compared to 66% in the same period last year. The
Company expects this trend to continue as PC Connectivity product and royalty
revenues continue to decline.
Gross profit increased to 40.9% for the quarter ended September 30, 1998, from
37.9% in the same period in 1997. Gross profit increased to 38.6% for the six
months ended September 30. 1998, from 35.4% in the same period in 1997. The
major contributing factor to the improvement in gross profit is the increase in
the percentage of IT Services revenue derived from high-margin IT services
versus revenue from lower margin IT product sales. For the six month period
ended September 30, 1998, IT Services service revenue accounted for $1.1 million
or 22% of the total IT Services revenue of $5.3 million compared to $467,000 or
10% of total IT Services revenue of $4.6 million for the six months ended
September 30, 1997.
Selling, general, and administrative (SG&A) expenses increased by $119,000 in
the quarter ended September 30, 1998, compared to the same period in 1997. As a
percentage of sales, SG&A expenses were 39.8% of total sales in the quarter
ended September 30, 1998, compared with 35.2% of total sales in the same quarter
last year. For the six months ended September 30, 1998, SG&A expenses increased
$377,000 compared to the same period in 1997. As a percentage of sales, SG&A
expenses represented 39.6% of total sales for the six months ended September 30,
1998, compared with 32.5% for the same period last year. The increase in SG&A
expenses is primarily due to increases in salaries, benefits and occupancy
expenses caused by the acquisition of CompSource, Inc. on April 1, 1998, along
with an increase in consulting expense. This is partially offset by a reduction
in telephone expenses due to the sale of the residential Internet business,
which occurred in the quarter ended September 30, 1997, and in accounting
expenses.
The Company's net other expense was $24,000 for the three months ended September
30, 1998, compared to net other income of $109,000 in the same quarter last
year. For the six months ended September 30, 1998, the Company had net other
expense of $40,000 compared to a net other income of $92,000 in the same period
last year. Without the gain on sale of residential Internet business of
$136,000, the quarter and six month period ending September 30, 1997, had net
other expenses of $27,000 and $44,000, respectively.
For the six months ended September 30, 1998, the Company recognized a corporate
tax expense of $2,000. At September 30, 1998, the Company had a net operating
loss carryforward of approximately $1.5 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, 1998, the
Company had $125,000 in cash. During the six month period ended September 30,
1998, cash provided by investing activities of $124,000 was exceeded by cash
used in operating and financing activities of $176,000, resulting in a $52,000
decrease in cash.
The Company's working capital decreased slightly from $1.2 million at March 31,
1998 to $1.1 million at September 30, 1998.
At September 30, 1998, the Company had four working capital credit lines with
U.S. banks. One credit line, which is payable on demand, has a $100,000 limit
and had an outstanding balance of $100,000 as of September 30, 1998. A second
line, which is also payable on demand, has a $600,000 limit and had an
outstanding balance of $228,000
9
<PAGE>
at September 30, 1998. The third line, also payable on demand, has a $50,000
limit and had an outstanding balance of $4,000 at September 30, 1998. The last
line is for $300,000, is renewable annually, and is limited to the lesser of
$300,000 or 70% of acceptable domestic accounts receivable. This line is secured
by substantially all of the Company's assets and as of September 30, 1998, had
an outstanding balance of $225,000. The Company expects that cash generated from
operations and borrowings will satisfy its operating cash needs for the
foreseeable future.
Factors Affecting Operating Results
Potential Fluctuations in Operating Results
The Company believes that future operating results will be subject to
fluctuations due to a variety of factors, many of which are beyond the Company's
control. Such factors may include, but are not limited to, demand for the
Company's services, availability of skilled sales and technical personnel,
introduction or enhancements of services by the Company or its competitors,
market acceptance of new service offerings, increased competition, litigation
costs, results of litigation, and general economic conditions.
Since the Company recognizes services revenue only when personnel are engaged on
client projects, the relative utilization of such personnel directly affects the
Company's operating results. In addition, a majority of the Company's services
operating expenses, particularly personnel and related costs, are substantially
fixed in advance of any particular period. As a result, variations in
utilization of personnel may have material effects on operating results.
Termination or completion of engagements in the Company's services business or
failure to obtain additional engagements in its services business could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainty of Future Acquisitions
The Company evaluates potential acquisitions on an ongoing basis. No assurance
can be given as to the Company's ability to compete successfully for available
acquisition candidates, to complete future acquisitions, or the financial effect
on the Company of any acquired businesses. Acquisitions by the Company may
involve significant cash expenditures and may result in decreased operating
income, either of which could have a material adverse effect on the Company's
business, financial condition, and results of operations. The inability of the
Company to successfully continue its acquisition strategy could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Management of Acquired Businesses
The Company's recent acquisitions have placed, and are expected to continue to
place, a significant strain on its managerial and operational resources. To
manage these acquired businesses and others that may be acquired in the future,
the Company must continue to implement and improve its operational, management
and financial systems and to train and manage its employee base. The Company
expects that its operational, management and financial systems will face
additional strains as a result of possible acquisitions in the future.
Integration of Acquisitions
As part of its business strategy, the Company expects to continue to seek out
business combinations with other IT Services companies. Such business
combinations involve a number of risks, including, without limitation,
difficulty
10
<PAGE>
assimilating the operations and personnel, expenditure of management time,
expenses associated with the transactions, additional expenses associated with
amortization of acquired intangible assets, the implementation and maintenance
of standards, controls, procedures, and policies, the impairment of
relationships with employees and customers as a result of the integration of new
management personnel, and potential unknown liabilities associated with acquired
businesses. There can be no assurance that the Company will be successful in
addressing these risks or any other problems encountered in connection with such
business combinations.
Dependence on Key Personnel
The Company's performance is substantially dependent on the performance of its
senior management and key sales and technical personnel. In particular, the
Company's success depends substantially on the continued efforts of its senior
management team. The Company does not carry key person life insurance on any of
its senior management personnel. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the business, operating results, and financial condition of the Company. The
Company's future success also depends on its continuing ability to attract and
retain highly-qualified sales, technical, and managerial personnel. Competition
for such personnel is intense and there can be no assurance that the Company
will be able to retain its key managerial, sales, and technical employees or
that it will be able to attract and retain additional highly-qualified sales,
technical, and managerial personnel in the future. The inability to attract and
retain the necessary sales, technical, and managerial personnel could have a
material adverse effect upon the Company's business, financial condition, and
results of operation.
Concentration of Stock Ownership
As of September 30, 1998, the present directors, executive officers, greater
than 5% stockholders, and their respective affiliates beneficially owned
approximately 55% of the outstanding Common Stock of the Company. As of
September 30, 1998, John A. Parsons, the Company's Chairman and CEO,
beneficially owned approximately 38% of the outstanding Common Stock of the
Company. As a result of their ownership, the directors, executive officers,
greater than 5% stockholders, and their respective affiliates collectively are
able to control all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control of the Company.
Volatility of Stock Price
The trading price of the Company's Common Stock has been and may continue to be
subject to wide fluctuations in response to a number of events and factors, such
as quarterly variations in operating results, changes in financial estimates and
recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news reports relating to trends in the Company's markets. In
addition, the stock market, in general, and the market prices for IT Services
companies, in particular, have experienced volatility that often has been
unrelated to the operating performance of such companies. These broad market and
industry fluctuations may adversely affect the trading price of the Company's
Common Stock, regardless of the Company's operating performance.
Ability to Obtain Financing
The Company uses commercial financing and bank borrowings to supplement cash
generated from operations in order to meet its operating cash needs. It also
uses 30-to-60 day commercial financing to finance goods sold to
11
<PAGE>
others. There can be no assurance that the Company will continue to be able to
meet its operating cash needs through commercial financing and bank borrowings
or will be able to continue to finance the purchase of goods sold to others
through commercial financing. There can be no assurance the Company could obtain
additional cash through equity financing or any other means. Any inability to
satisfy the Company's operating cash needs or inability to finance the purchase
of goods sold to others could have a material adverse affect on the Company's
business, financial condition and results of operation.
Year 2000
The Company has assessed the potential effects of the "Year 2000" millennium
change on the Company's internal computer software applications and systems, the
Company's product and service offerings and the Company's business in general.
The Company believes the PC Communications products it has developed and sells
do not process dates and do not have any Year 2000 compliance issues.
The Company believes, based on statements from its vendors, that all other
products the Company currently sells are Year 2000 compliant and that the
Company's vendors either have Year 2000 compliant internal systems or have
adequate plans to implement remediation by the end of 1999. However, the Company
can give no assurances that the systems or products of other companies on which
the Company relies will be Year 2000 compliant or that the failure of such third
parties to achieve Year 2000 compliance for such systems or products will not
have a material adverse effect on the Company.
The Company believes that some of its internal IT mission critical systems,
including its internal and external telecommunications systems, accounting
systems, and customer tracking systems are not Year 2000 compliant, and has
instituted measures to make them compliant or replace them with compliant
systems. The Company believes that the direct remediation costs needed to make
all of its internal applications and systems Year 2000 compliant are less than
$20,000. The Company does not account separately for indirect costs associated
with Year 2000 issues, such as the cost of internal staff time spent on Year
2000 issues, but the Company believes this cost is not material. The Company
believes all remediation measures will be completely implemented prior to the
end of the first half of 1999.
The Company believes that even in the reasonably likely worst case scenario, in
which all the Company's major IT systems (sales orders, customer tracking,
accounting) unexpectedly fail to function properly after the millennium change,
there would not be a material effect on the Company's business, financial
condition, or results of operation because the critical tasks handled by the
internal IT systems can be accomplished manually.
Delays in implementing remedial measures by the Company or its vendors, failure
of any new or upgraded system to be Year 2000 compliant despite vendors'
assurances, or a failure to fully identify or remediate all Year 2000 problems
in the Company's systems which are not being replaced or upgraded could have an
unexpected material adverse effect on the Company's business, financial
condition or results of operations.
The Company has published a "Year 2000 Readiness Disclosure Statement" on its
Year 2000 web site at http://www.miworld.com/y2kdisc.html.
Risks Relating to Low-Priced Stocks
The Company's continued listing on the Nasdaq Small Cap Market ("SCM") is
contingent upon the Company meeting the maintenance requirements of the SCM.
Substantial changes in Nasdaq initial listing and maintenance
12
<PAGE>
requirements became effective on February 23, 1998. These changes materially
enhance the quantitative threshold criteria necessary to qualify for initial
entry and continued listing on Nasdaq. These changes require that companies
listed on the SCM maintain (i) $2,000,000 in net tangible assets (total assets
less total liabilities and goodwill) or a market capitalization of $35,000,000
or $500,000 in net income for two of the last three years, (ii) a $1,000,000
market value for the public float, (iii) two market-makers, and (iv) a minimum
bid price of $1.00 per share.
On October 14, 1998, the Company was notified by Nasdaq that it was out of
compliance with the minimum bid price requirement, and on October 20 it was
notified by Nasdaq that it was out of compliance with the public float value
requirement. In both cases, the Company was given 90 days to regain compliance.
The Company may regain compliance with both requirements if its securities trade
at or above the minimum bid price requirement of $1.00 per share for at least
ten consecutive trading days prior to January 14, 1999. If, at that time, the
Company has not regained compliance, Nasdaq will delist the Company. The Company
may request a hearing prior to that time, which will generally stay delisting
until the hearing has been completed. No assurances can be made that the
Company's stock will trade above $1.00 per share or that the Company will regain
and maintain compliance with the Nasdaq listing requirements. If the Company's
securities are delisted from Nasdaq, trading, if any, of the Company's
securities would thereafter have to be conducted in the non-Nasdaq
over-the-counter market. In such event, an investor could find it more difficult
to dispose of or to obtain accurate quotations as to the market value of, the
Company's securities. In addition, if the Common Stock were to become delisted
from trading on Nasdaq and the trading price of the Common Stock were to remain
below $5.00 per share, trading in the Company's Common Stock would also be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock. Generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, is considered a penny stock, subject
to certain exceptions. The additional burdens imposed upon broker-dealers by
such requirements could discourage broker-dealers from effecting transactions in
the Common Stock, which could severely limit the market liquidity of the Common
Stock and the ability of investors to trade the Company's Common Stock. See
"Possible Effect of "Penny Stock" Rules on Liquidity for the Company's
Securities" below.
Possible Effect of "Penny Stock" Rules on Liquidity for the Company's Securities
If the Company's securities were not listed on a national securities exchange
nor listed on a qualified automated quotation system, they may become subject to
Rule 15g-9 under the Exchange Act. This Rule imposes additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or
$300,000 together with their spouse). For transactions covered by Rule 15g-9, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such Rule may affect the ability of broker-dealers to sell
the Company's securities and may affect the ability of purchasers to sell any of
the Company's securities in the secondary market.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks. The foregoing required penny stock
restrictions will not apply to the Company's securities if the Company meets
certain minimum net tangible assets or average revenue criteria. If applicable,
there can be no assurance that the Company's securities will qualify for
exemption from the penny stock restrictions. If the Company's securities were
subject to the rules on penny stocks, the market liquidity for the Company's
securities could be materially adversely affected.
13
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
(c) Micro-Integration Corp. has made the following unregistered sales of the
Company's Common Stock during the quarter ended September 30, 1998:
<TABLE>
<CAPTION>
Transaction Number of Shares Name of Underwriter Consideration Persons or Class of Persons to
Date of Common Stock or Placement Agent Received Whom the Securities Were Sold
- ----------------- ------------------------- ------------------------ ----------------- -----------------------------------
<S> <C> <C> <C> <C>
08/24/98 13,714 None (1) Douglas M. Gruver
</TABLE>
(1) To satisfy obligations of CompSource Inc., a Pennsylvania corporation and
wholly-owned subsidiary of the Company ("CompSource"), pursuant to the
Stock Redemption Agreement dated December 27, 1997 by and between
CompSource and Douglas M. Gruver (the "Stock Redemption Agreement"), the
Company issued 13,714 shares of the Company's Common Stock to Mr. Gruver.
Such shares were additional consideration paid by the Company under the
Purchase Agreement by and among the Company, Russell A. Hinnershitz and A.
Scott Kauffman, individuals, and CompSource dated April 1, 1998, whereby
the Company agreed to assume certain obligations of CompSource, including
obligations contained in the Stock Redemption Agreement.
For the above transaction, the Company claims the exemption from registration
under Section 4(2) of the Securities Act of 1933 (the "Securities Act") based
upon the following facts: (I) no general solicitation or advertising occurred,
(2) there was a limited number of purchasers, (3) purchasers purchased with a
view toward investment, and (4) each purchaser had access to information as
would be provided by a registration statement under the Securities Act.
(d) 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
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, 1998, the Company had expended all of such
net proceeds. Of the net proceeds, the Company spent approximately
$1,000,000 for new product launch and sale force expansion and
approximately $500,000 for restructuring expenses. The Company used
approximately $2,487,000 for working capital. Payment 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. Prior to using the net proceeds, the
Company invested, from time to time, the balance of such net proceeds
primarily in investment grade marketable securities.
Item 3. Defaults Upon Senior Securities
None.
14
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Annual Meeting") on
July 28, 1998. During the Annual 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 2,701,502 -- 8,940
Wayne M. Lee 2,708,902 -- 1,540
Maxwell F. Eveleth, Jr. 2,708,902 -- 1,540
W. Braun Jones, Jr. 2,708,802 -- 1,640
During the Annual Meeting, the stockholders also approved the amendment and
restatement of the 1994 Stock Plan of Micro-Integration Corp., with the result
of the voting as follows:
For: 2,148,118
Against: 25,330
Withheld: 1,350
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, 1999. with the result of the voting as follows:
For: 2,708,802
Against: 1,240
Withheld: 400
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended September 1998.
15
<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 16th day of November, 1998:
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
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 124,708
<SECURITIES> 0
<RECEIVABLES> 2,241,656
<ALLOWANCES> 177,342
<INVENTORY> 849,682
<CURRENT-ASSETS> 3,204,236
<PP&E> 3,374,722
<DEPRECIATION> 1,553,007
<TOTAL-ASSETS> 6,254,872
<CURRENT-LIABILITIES> 2,068,275
<BONDS> 0
0
0
<COMMON> 30,311
<OTHER-SE> 2,956,788
<TOTAL-LIABILITY-AND-EQUITY> 6,254,872
<SALES> 2,956,096
<TOTAL-REVENUES> 2,956,096
<CGS> 1,748,500
<TOTAL-COSTS> 1,748,500
<OTHER-EXPENSES> 1,241,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,580
<INCOME-PRETAX> (73,898)
<INCOME-TAX> 224
<INCOME-CONTINUING> (74,122)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,122)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
