Quarterly Report 12-31-1997
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 December 31, 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 December 31, 1997:
Common Stock, $.01 Par Value --- 2,517,811 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 8
Part II Other Information
- ----------------------------
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
- ----------
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
December 31 March 31
1997 1997
-------------- -------------
(unaudited)
ASSETS
Current Assets
Cash $ 299,042 $ 370,598
Marketable securities, available-for-sale 100,000 100,000
Receivables
Trade, net of allowance for doubtful
accounts $43,197 and $76,324 1,636,568 1,872,291
Note - 70,000
Tax refund 3,158 46,141
Inventory 589,753 596,556
Prepaid expense 111,411 97,576
-------------- ------------
Total Current Assets 2,739,932 3,153,162
Property, Plant, and Equipment
Land 92,962 92,962
Buildings 1,457,558 1,455,518
Equipment 1,451,034 1,384,231
Automobiles 102,952 83,952
Property held for sale 57,939 58,794
-------------- -------------
3,162,445 3,075,457
Less accumulated depreciation (1,251,855) (1,041,637)
-------------- -------------
1,910,590 2,033,820
Cash Surrender Value of Life Insurance
and Other Noncurrent Assets, Net 307,465 298,437
Intangible Assets, Net of Amortization 869,859 745,912
-------------- -------------
$ 5,827,846 $ 6,231,331
============= =============
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
December 31 March 31
1997 1997
-------------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Demand notes payable $ 388,615 $ 462,500
Current portion of long-term debt and
capital lease obligations 154,998 196,181
Accounts payable 743,470 933,434
Accrued expenses 115,562 471,137
Income tax payable 4,253 1,800
-------------- -------------
Total Current Liabilities 1,406,898 2,065,052
-------------- -------------
Long-Term Liabilities
Debt, less current portion 1,183,106 1,210,139
Shareholders' Equity
Preferred stock - $.01 par value: authorized
4,000,000 shares; none issued as of
December 31, 1997 and March 31, 1997 - -
Common stock - $.01 par value; authorized
12,000,000 shares; issued 2,667,349 and
2,641,477 as of December 31, 1997
and March 31, 1997, respectively 26,674 26,415
Additional capital 5,683,038 5,603,263
Retained deficit (2,090,976) (2,292,644)
-------------- -------------
3,618,736 3,337,034
Less treasury stock 380,894 380,894
-------------- -------------
3,237,842 2,956,140
-------------- -------------
$ 5,827,846 $ 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 December 31 Nine months ended December 31
1997 1996 1997 1996
----------- ----------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE
License revenue $ 93,549 $ 75,857 $ 123,404 $ 153,463
Product revenue 2,865,428 2,441,322 9,196,350 5,498,175
----------- ----------- ----------- -----------
Total Revenue 2,958,977 2,517,179 9,319,754 5,651,638
Cost of goods sold 1,795,958 1,378,031 5,902,840 2,507,021
----------- ----------- ----------- -----------
Gross Profit 1,163,019 1,139,148 3,416,914 3,144,617
Operating Expenses
Selling, general, and
administrative 1,046,302 1,226,140 3,112,202 3,585,988
Depreciation and
amortization expense 70,370 127,072 228,948 335,498
----------- ----------- ----------- -----------
1,116,672 1,353,212 3,341,150 3,921,486
Operating Income (Loss) 46,347 (214,064) 75,764 (776,869)
Other Income (Expense)
Interest expense (35,662) (28,470) (105,546) (82,620)
Gain on sale of residential
internet business 57,720 - 193,557 -
Other income 16,714 21,162 42,658 72,607
----------- ----------- ----------- -----------
38,772 (7,308) 130,669 (10,013)
----------- ----------- ----------- -----------
Income (Loss) before
Income Taxes 85,119 (221,372) 206,433 (786,882)
Income tax expense (623) 22,563 4,766 31,955
----------- ----------- ----------- -----------
Net Income (Loss) $ 85,742 $ (243,935) $ 201,667 $ (818,837)
=========== =========== =========== ===========
Basic and Diluted
Earnings (Loss) per Share $ 0.03 $ (0.10) $ 0.08 $ (0.34)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 2,502,922 2,457,240 2,496,023 2,415,813
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended December 31
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 201,667 $ (818,837)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 228,948 441,989
Change in operating assets and liabilities:
Accounts receivable (27,397) 168,767
Note receivable 70,000 -
Tax refund receivable 42,983 (64,751)
Inventory 6,803 241,826
Prepaid expense (13,835) (63,720)
Accounts payable (189,964) 106,362
Accrued expenses (355,575) (11,690)
Income taxes payable 2,453 20,748
------------- -------------
Net cash (used in) provided by operating activities (33,917) 20,694
Cash Flows from Investing Activities
Acquisition of property, plant, and equipment (90,382) (300,697)
Investment on organization of subsidiary - (161,874)
Increase in other noncurrent assets (141,164) (192,483)
Purchase of available-for-sale securities - 7,400,000
Proceeds from maturity of available-for-sale securities - (6,800,000)
Increase in cash surrender value of life insurance (9,028) (6,578)
Proceeds from sale of residential internet business 263,120 -
Proceeds from sale of fixed assets 2,968 14,886
Loss (gain) on sale of fixed assets (1,086) 5,214
------------- -------------
Net cash provided by (used in) investing activities 24,428 (41,532)
Cash Flows from Financing Activities:
Repayments of notes payable, long-term debt, and
capital lease obligations (68,216) 171,033
Net repayment of short-term debt (73,885) -
Issuance of common stock 80,034 199,592
------------- -------------
Net cash (used in) provided by financing activities (62,067) 370,625
Currency Adjustments:
Effect of exchange rate changes on cash - (19,374)
------------- -------------
Decrease in cash (71,556) 330,413
Cash at beginning of period 370,598 460,874
Cash at end of period $ 299,042 $ 791,287
============= =============
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Condensed 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 and nine
months ended December 31, 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
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 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 December 31, 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 December 31, 1997, nor 1996.
3. Inventory
Inventory consisted of the following:
December 31 March 31
1997 1997
---------- ----------
Raw material $ 156,759 $ 129,766
Finished goods 432,994 466,790
---------- ----------
$ 589,753 $ 596,556
========== ==========
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
4. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
1997 1996 1997 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 85,742 $ (243,935) $ 201,667 $ (818,837)
Numerator for basic earnings (loss)
per share - income available
to common stockholders 85,742 (243,935) 201,667 (818,837)
Numerator for diluted earnings (loss)
per share - income available to
common stockholders after
assumed conversions $ 85,742 $ (243,935) $ 201,667 $ (818,837)
Denominator:
Denominator for basic earnings per
share - weighted-average shares 2,502,922 2,457,240 2,496,023 2,415,813
Effect of dilutive securities:
Employee stock options 2,366 9,194 791 17,746
----------- ------------ ------------ ------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 2,505,288 2,466,434 2,496,814 2,433,599
=========== ============ ============ ============
Basic earnings (loss) per share $ 0.03 $ (0.10) $ 0.08 $ (0.34)
=========== ============ ============ ============
Diluted earnings (loss) per share $ 0.03 $ (0.10) $ 0.08 $ (0.34)
=========== ============ ============ ============
</TABLE>
<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, 1997, and
1996
The statements under Management's Discussion and Analysis of Results of
Operations and Financial Condition and other statements in this Form 10-QSB
which are not historical facts are forward-looking statements as that term is
defined by the Private Securities Litigation Reform Act of 1996. When used in
this discussion and elsewhere in this Form 10-QSB, the words "estimate,"
"expect," "intend," and "project," as well as other words or expressions of
similar meaning are intended to identify such forward-looking statements.
Such statements are based on current expectations, are inherently uncertain,
are subject to risks and should be viewed with caution. Actual results and
experience may differ materially from forward-looking statements as a result
of many factors, including, but not limited to: changes in economic
conditions in the various markets served by the Company's operations;
increased competitive activity; availability, costs and obsolescense of
inventory; employee turnover and labor costs; the rate of technology change;
failure to provide new and innovative products; the effect of regulatory and
legal developments and other unanticipated events and conditions. Readers
are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date of this quarterly report. The Company makes
no commitment to update any forward-looking statement, or to disclose any
facts, events or circumstances after the date hereof that may affect the
accuracy of any forward-looking statement.
Results of Operations
On December 1, 1997, the Company completed the purchase of SuiteOne Computer
Services, Inc., a Pennsylvania-based UNIX services company. In its last
fiscal year, ended December 31, 1996, SuiteOne generated revenues of $454,000.
Because its results are included for only one month, SuiteOne's contribution
to Company revenues in the quarter ended December 31, 1997, was immaterial.
The Company expects SuiteOne to make a contribution proportionate to its 1996
revenues toward the Company's revenues in the remaining quarter of this fiscal
year, ending March 31, 1998.
The Company's total revenue was $3.0 million for the quarter ended December
31, 1997, an increase of 18% or $442,000 from the quarter ended December 31,
1996. Product and service revenue increased $424,000 or 17% while license
revenue increased $18,000 or 23% compared to the same period last year.
For the nine months ended December 31, 1997, total revenue was $9.3 million,
up 65% or $3.7 million from the same period last year. Product and service
revenue increased by $3.7 million or 67%, and license revenue declined, as
expected, by $30,000 or 20% 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
65% of the Company's total revenue for the nine month period ending December
31, 1997.
<PAGE>
Gross margin declined to 39.3% for the quarter ended December 31, 1997, from
45.3% in the same period in 1996. Gross margin declined to 36.7% for the
nine months ended December 31, 1997, from 55.6% 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 (SG&A) expenses decreased by $180,000
in the quarter ended December 31, 1997, compared to the same period in 1996.
As a percentage of sales, SG&A expenses were 35.4% of total sales in the
current quarter compared with 48.7% of total sales in the same quarter last
year. For the nine months ended December 31, 1997, SG&A expenses decreased
by $474,000 compared to the same period in 1996. As a percentage of sales,
SG&A expenses represented 33.4% of total sales for the nine months compared
with 63.5% for the same period last year. The decrease in SG&A expenses is
primarily attributable to a reduction of 26% in the number of employees from
88 in December 1996 to 65 in December 1997. Management continues to control
costs in an attempt to keep them below expected gross margins.
The Company's net other income was $39,000 for the three months ended
December 31, 1997, compared to $7,000 net other expense in the same quarter
last year. For the nine months ended December 31, 1997, the Company had net
other income of $131,000 compared to a net other expense of $10,000 in the
same period last year. The quarterly and year-to-date net other income
amounts include a $58,000 and $136,000 one-time gain on the sale of the
Company's residential internet dial-up business, respectively. Had the
Company not had the one-time gain from the sale of its residential internet
dial-up business, net other loss would have been $19,000 and $63,000 for the
three and nine month periods ended December 31, 1997.
For the nine months ended December 31, 1997, the Company recognized a
corporate tax expense of $5,000. At December 31, 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 December 31, 1997, the
Company had $100,000 invested in available-for-sale securities and an
additional $299,000 in cash. The $72,000 decrease in cash on hand at
December 31, 1997, compared with cash on hand at March 31, 1997, is primarily
due to an increase of $24,000 in cash provided by investing activities offset
by decreases of $34,000 and $62,000 in cash resulting from 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 December 31, 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
$272,000 outstanding of $300,000 available. The terms of this line of credit
are currently under negotiation. The Company expects that cash generated
from operations will satisfy its operating cash needs for the foreseeable
future.
Working capital increased to $1.3 million as of December 31, 1997, from $1.1
at March 31, 1997. The Company's current ratio showed improvement from 1.53
to 1 at March 31, 1997, to 1.95 to 1 at December 31, 1997. At the end of the
December 1997 period, the Company's book value was $3.2 million or
approximately $1.30 per weighted average share outstanding.
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) During the three months ended December 31, 1997, the
Company filed a Form 8-K dated December 4, 1997, reporting
that trading of the Company's shares moved from the Nasdaq
National Market to The Nasdaq SmallCap Market under Item 5,
"Other Events."
<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 17th day of February, 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 299,042
<SECURITIES> 100,000
<RECEIVABLES> 1,679,765
<ALLOWANCES> 43,197
<INVENTORY> 589,753
<CURRENT-ASSETS> 2,739,932
<PP&E> 3,162,445
<DEPRECIATION> 1,251,855
<TOTAL-ASSETS> 5,827,846
<CURRENT-LIABILITIES> 1,406,898
<BONDS> 0
0
0
<COMMON> 26,674
<OTHER-SE> 3,211,393
<TOTAL-LIABILITY-AND-EQUITY> 5,827,846
<SALES> 2,958,977
<TOTAL-REVENUES> 2,958,977
<CGS> 1,795,958
<TOTAL-COSTS> 1,795,958
<OTHER-EXPENSES> 1,116,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,662
<INCOME-PRETAX> 85,119
<INCOME-TAX> (623)
<INCOME-CONTINUING> 85,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,742
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
