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, 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)
301-689-0800
(Issuer's telephone number)
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 each of the issuer's classes of common
equity as of December 31, 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 10-QSB
Index
Page
----
Part I Financial Information
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 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
Part I Financial Information
Item 1. Financial Statements
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
December 31 March 31
1998 1998
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash $ 107,386 $ 176,964
Marketable securities, available-for-sale -- 100,000
Receivables
Trade, net of allowance for doubtful
accounts $177,925 and $153,377 2,082,920 1,650,884
Note 15,497 74,880
Inventory 827,155 551,565
Prepaid expense 135,710 101,571
----------- -----------
Total Current Assets 3,168,668 2,655,864
----------- -----------
Property, Plant, and Equipment
Land 92,962 92,962
Buildings 1,474,333 1,461,357
Equipment 1,640,663 1,418,918
Automobiles 115,777 54,955
Property held for sale, net 61,197 76,848
----------- -----------
3,384,932 3,105,040
Less accumulated depreciation (1,614,749) (1,209,082)
----------- -----------
1,770,183 1,895,958
Cash Surrender Value of Life Insurance
and Other Noncurrent Assets, Net 286,951 254,704
Intangible Assets, Net 901,298 468,932
----------- -----------
$ 6,127,100 $ 5,275,458
=========== ===========
2
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
December 31 March 31
1998 1998
----------- -----------
(unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,129,989 $ 818,121
Accrued expenses 296,954 176,199
Demand notes payable 576,500 372,542
Current portion of long-term debt and
capital lease obligations 134,112 130,423
----------- -----------
Total Current Liabilities 2,137,555 1,497,285
----------- -----------
Long-Term Debt, Less Current Portion 1,183,418 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 December 31, 1998
and March 31, 1998, respectively;
outstanding 2,881,525 and 2,517,811
as of December 31, 1998
and March 31, 1998, respectively 30,311 26,673
Additional capital 6,315,901 5,683,039
Accumulated deficit (3,159,191) (2,713,632)
----------- -----------
3,187,021 2,996,080
Less 149,538 shares held in treasury 380,894 380,894
----------- -----------
2,806,127 2,615,186
----------- -----------
$ 6,127,100 $ 5,275,458
=========== ===========
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
1998 1997 1998 1997
------------- --------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 3,434,414 $ 2,958,977 $ 9,596,045 $ 9,319,754
Cost of goods sold 2,260,477 1,795,958 6,042,121 5,902,840
----------- ----------- ----------- -----------
Gross Profit 1,173,937 1,163,019 3,553,924 3,416,914
Operating Expenses
Selling, general, and
administrative 1,257,874 1,046,302 3,700,335 3,112,202
Depreciation and
amortization expense 77,539 70,370 237,619 228,948
----------- ----------- ----------- -----------
1,335,413 1,116,672 3,937,954 3,341,150
Operating (Loss) Income (161,476) 46,347 (384,030) 75,764
Other (Expense) Income
Interest expense (38,772) (35,662) (115,844) (105,546)
Gain on sale of residential
Internet business -- 57,720 -- 193,557
Other income 20,695 16,714 57,834 42,658
----------- ----------- ----------- -----------
(18,077) 38,772 (58,010) 130,669
----------- ----------- ----------- -----------
(Loss) Income before
Income Taxes (179,553) 85,119 (442,040) 206,433
Income tax expense (benefit) 1,419 (623) 3,519 4,766
----------- ----------- ----------- -----------
Net (Loss) Income $ (180,972) $ 85,742 $ (445,559) $ 201,667
=========== =========== =========== ===========
Basic and Diluted (Loss)
Earnings per Common Share $ (0.06) $ 0.03 $ (0.16) $ 0.08
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended December 31
1998 1997
------------- --------------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) income $(445,559) $ 201,667
Adjustments to reconcile net (loss) income to
net cash used in operating activities
Depreciation and amortization 237,619 228,948
Gain on sale of fixed assets (1,541) (1,086)
Increase in cash surrender value of life insurance -- (9,028)
Other (6,264) 42,983
Change in operating assets and liabilities
Accounts receivable (21,668) (18,064)
Note receivable 59,383 70,000
Inventory (119,434) 6,803
Prepaid expense 1,651 (13,835)
Accounts payable 149,620 (191,941)
Accrued expenses (60,766) (357,113)
Income taxes payable (1,450) 2,453
--------- ---------
Net cash used in operating activities (208,409) (38,213)
Cash Flows from Investing Activities
Acquisition of property, plant, and equipment (60,222) (62,732)
Decrease (increase) in other noncurrent assets 28,368 (59,109)
Cash received in acquisition of subsidiaries 4,574 242
Proceeds from sale of available-for-sale securities 100,000 --
Proceeds from sale of fixed assets 66,086 2,968
Proceeds from sale of residential Internet business -- 263,120
--------- ---------
Net cash provided by investing activities 138,806 144,489
Cash Flows from Financing Activities
Issuance of notes payable and long-term debt 147,131 29,159
Repayments of notes payable, long-term debt, and
capital lease obligations (147,106) (207,025)
Issuance of common stock -- 34
--------- ---------
Net cash provided by (used in) financing activities 25 (177,832)
Decrease in cash (69,578) (71,556)
Cash at beginning of period 176,964 370,598
--------- ---------
Cash at end of period $ 107,386 $ 299,042
========= =========
Due to the acquisitions of CompSource during the nine months ending December 31,
1998, and SuiteOne during the nine months ending December 31, 1997, the Company
had the following noncash investing and financing activities:
Assets acquired, excluding cash $ (659,068) $ (36,983)
Liabilities assumed 573,272 39,280
Goodwill recorded (546,130) (82,055)
Common stock issued 636,500 80,000
--------- ---------
Cash acquired in acquisition $ 4,574 $ 242
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated 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 nine months periods ended December 31, 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 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 March 31,
1998. There were no unrealized gains/losses with respect to these securities
during the periods ended December 31, 1998 or 1997.
3. Inventory
Inventory consisted of the following:
December 31 March 31
1998 1998
----------- -----------
Parts $ 102,846 $ 156,412
Finished goods 724,309 395,153
---------- ----------
$ 827,155 $ 551,565
========== ==========
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
6
<PAGE>
4. Earnings per Share
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator used in basic and
diluted (loss) earnings per share:
Net (loss) income $(180,972) $ 85,742 $ (445,559) $ 201,667
========= ========= ========== ==========
Denominator:
Weighted average number of
shares of common stock
outstanding during the period 2,881,525 2,505,288 2,874,318 2,496,814
========= ========= ========== ==========
Basic and diluted (loss)
earnings per share $ (0.06) $ 0.03 $ (0.16) $ 0.08
========= ========= ========== ==========
</TABLE>
7
<PAGE>
Part I Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Nine Months Ended December 31, 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 Form 10-KSB for the fiscal year ended March 31, 1998, 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. The
absence in this quarterly report of a complete recitation of or update to all
risk factors identified in the Company's Form 10-KSB, however, 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 Form 10-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") company that develops Internet technology, and provides IT
services and products. The Company's Internet technology, being developed by its
newly formed Mint Internet division, relates to the Internet commerce web site
that will provide information and entertainment via the Internet. The Company's
IT services include Internet web site design, programming, and hosting, provided
by the Mint Internet division, along with IT consulting, network integration and
design services, accounting and distribution information systems and process
control information systems, provided by the Company's IT services division. The
Company's IT services division 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 its IT business, 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 $3.4 million for the quarter ended December 31,
1998, an increase of $400,000 or 16%, from $3.0 million for the quarter ended
December 31, 1997. Revenue from the IT business increased by $928,000 or 42% for
the quarter ended December 31, 1998, compared to the same quarter last year
while product and royalty revenue from the PC Connectivity business decreased
$431,000 or 58% for the same periods. IT service revenue accounted for $687,000
or 22% of the total IT revenue of $3.1 million for the quarter ended December
31, 1998, compared to $342,000 or 16% of the total IT revenue of $2.2 million
for the same period in 1997. Internet web site development and hosting revenue
decreased by $21,000 or 65% from $33,000 for the quarter ended December 31,
1997, to $12,000 in the quarter ended December 31, 1998. The Mint Internet
division
8
<PAGE>
has not generated significant revenue and is not expected to generate
significant revenue in the current fiscal year, ending March 31, 1999.
For the nine months ended December 31, 1998, total revenue was $9.6 million, an
increase of $276,000, or 3%, from $9.3 million for the nine months ended
December 31, 1997. Revenue from the IT business increased by $1.6 million or 23%
for the nine months ended December 31, 1998, compared to the same period last
year, while product and royalty revenue from the PC Connectivity business
decreased $1.1 million or 48% for the same periods. For the nine months ended
December 31, 1998, IT service revenue accounted for $1.8 million or 22% of the
total IT revenue of $8.4 million compared to $855,000 or 13% of total IT revenue
of $6.8 million for the nine months ended December 31, 1997. Product and royalty
revenue from the PC Connectivity business decreased by $704,000 or 46% from $1.5
million for the nine months ended December 31, 1997, to $834,000 for the same
period in 1998. The sale of the residential Internet business in the quarter
ended September 30, 1997 resulted in a decline in Internet web site development
and hosting revenue of $235,000 or 85% from $276,000 for the nine months ended
December 31, 1997, to $41,000 for the same period in the current year. The
Company expects product and royalty revenues from the PC Connectivity business
to continue to decline.
Gross profit decreased to 34% for the quarter ended December 31, 1998, from 39%
in the same period in 1997. Gross profit from the IT business increased from 27%
for the quarter ended December 31, 1997, to 30% for the quarter ended December
31, 1998. This increase is a result of an increase in the percentage of IT
revenue derived from high-margin IT services versus revenue from lower margin IT
product sales. This increase was offset by the decline in gross profit
contributed by product and royalty revenue from the PC Connectivity business
which decreased by $317,000 or 59% from $540,000 for the quarter ended December
31, 1997, to $223,000 for the quarter ended December 31, 1998. Gross profit of
37% remained the same for the nine months ended December 31, 1998, and 1997.
Selling, general, and administrative (SG&A) expenses increased by $212,000 in
the quarter ended December 31, 1998, compared to the same period in 1997. As a
percentage of sales, SG&A expenses were 37% of total sales in the quarter ended
December 31, 1998, compared with 35% of total sales in the same quarter last
year. For the nine months ended December 31, 1998, SG&A expenses increased
$588,000 compared to the same period in 1997. As a percentage of sales, SG&A
expenses represented 39% of total sales for the nine months ended December 31,
1998, compared with 33% 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 and travel expenses. 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 $18,000 for the three months ended December
31, 1998, compared to net other income of $39,000 in the same quarter last year.
For the nine months ended December 31, 1998, the Company had net other expense
of $58,000 compared to a net other income of $131,000 in the same period last
year. Without the gain on sale of residential Internet business of $58,000 and
$194,000, the quarter and nine month periods ending December 31, 1997 had net
other expenses of $19,000 and $63,000, respectively.
For the nine months ended December 31, 1998, the Company recognized a corporate
tax expense of $4,000. At December 31, 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 December 31, 1998, the
Company had $107,000 in cash. During the nine month period ended December 31,
1998, cash provided by investing and financing activities of $139,000 was
exceeded by cash used in operating activities of $208,000, resulting in a
$69,000 decrease in cash.
9
<PAGE>
The Company's working capital decreased slightly from $1.2 million at March 31,
1998 to $1.0 million at December 31, 1998.
At December 31, 1998, the Company had three 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 $84,000 as of December 31, 1998. A second
line, which is also payable on demand, has a $600,000 limit and had an
outstanding balance of $208,000 at December 31, 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 December 31, 1998, had an
outstanding balance of $285,000. 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 expects to incur significant expenses in order to develop,
commercialize and implement the technology and services being developed by the
Company's Mint Internet division. Until such time, if any, as these technologies
and services begin to generate significant revenue, the operations and expenses
of this division may have a material adverse effect on the Company's business,
financial condition and results of operations. The failure of these technologies
and services to be commercially viable in the marketplace for any reason could
have a material adverse effect on the Company's business, financial condition
and results of operations, as could any significant delay in the availability of
the technologies or services.
Since the Company recognizes IT 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 IT
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 materially affect the Company's operating results.
Termination or completion of engagements in the Company's IT services business
or failure to obtain additional engagements in its IT services business could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that future operating results will also 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 technology or services, availability of skilled sales and technical
personnel, introduction or enhancement of technologies or services by the
Company or its competitors, market acceptance of new technology or service
offerings, technological changes, increased competition, litigation costs,
results of litigation, and general economic conditions.
Management of Acquired Businesses
The Company's 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.
10
<PAGE>
Integration of Acquisitions
As part of its business strategy, the Company may seek out business combinations
with other IT or Internet companies. Such business combinations involve a number
of risks, including, without limitation, difficulty 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. To the extent
that any of the companies which we acquire fail, the Company could be required
to write-off the amount of the investment. 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, financial condition and results of operations 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 December 31, 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 ("Common
Stock"). As of December 31, 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 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.
11
<PAGE>
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 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 reasonably likely worst case scenario would occur if all the Company's major
IT systems (sales orders, customer tracking, accounting) unexpectedly fail to
function properly after the millennium change. The Company believes that in this
event 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.
12
<PAGE>
Risks Relating to Small Company 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 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.
As of December 31, 1998, the Company was in compliance with all of the continued
listing requirements except the net tangible asset requirement. No assurances
can be made that the Company will regain and maintain compliance with this or
any other of the Nasdaq listing requirements. If the Company's securities were
to be 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 could 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 asset 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 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 December 31, 1998.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
Micro-Integration Corp.
Date /s/ John A. Parsons
---------- -------------------------
John A. Parsons
President, Chairman of the Board,
and Chief Executive Officer
Date /s/ Terry D. Frost
---------- -------------------------
Terry D. Frost
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 107,386
<SECURITIES> 0
<RECEIVABLES> 2,260,845
<ALLOWANCES> 177,925
<INVENTORY> 827,155
<CURRENT-ASSETS> 3,168,668
<PP&E> 3,384,932
<DEPRECIATION> 1,614,749
<TOTAL-ASSETS> 6,127,100
<CURRENT-LIABILITIES> 2,137,555
<BONDS> 0
0
0
<COMMON> 30,311
<OTHER-SE> 2,775,816
<TOTAL-LIABILITY-AND-EQUITY> 6,127,100
<SALES> 3,434,414
<TOTAL-REVENUES> 3,434,414
<CGS> 2,260,477
<TOTAL-COSTS> 2,260,477
<OTHER-EXPENSES> 1,314,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,772
<INCOME-PRETAX> 0
<INCOME-TAX> 1,419
<INCOME-CONTINUING> (180,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,972)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
