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, 1999
|_| 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 September 30, 1999:
Common Stock, $.01 Par Value --- 2,917,081 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
Financial Condition and Results of Operations 7
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
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
September 30 March 31
1999 1999
------------ --------
(unaudited)
ASSETS
Current assets
Cash $ 8,219 $ 74,543
Accounts receivables, less allowance of
$98,077 and $224,955 as of September 30,
1999 and March 31, 1999, respectively 2,267,182 1,538,959
Note receivable -- 18,323
Inventory 507,922 619,735
Prepaid expense 195,219 82,535
----------- -----------
Total current assets 2,978,542 2,334,095
----------- -----------
Property, plant, and equipment
Land 92,962 92,962
Buildings 1,474,333 1,474,333
Equipment 1,868,231 1,885,283
Automobiles 115,778 115,778
----------- -----------
3,551,304 3,568,356
Less accumulated depreciation (1,873,059) (1,748,564)
----------- -----------
1,678,245 1,819,792
Cash surrender value of life insurance 231,821 229,471
Goodwill, net of accumulated amortization
of $119,169 and $88,860 as of September 30,
1999 and March 31, 1999, respectively 790,157 820,466
Other noncurrent assets 4,151 122,812
----------- -----------
$ 5,682,916 $ 5,326,636
=========== ===========
2
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 March 31
1999 1999
------------ --------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 1,295,300 $ 727,002
Accrued expenses 361,658 341,683
Demand notes payable 568,632 648,903
Current portion of long-term debt 167,677 183,549
----------- -----------
Total current liabilities 2,393,267 1,901,137
----------- -----------
Long-term debt, less current portion 1,299,817 1,131,221
Commitment and contingencies -- --
Stockholders' 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 3,066,619 and 3,031,063 as of
September 30, 1999 and March 31, 1999, respectively;
outstanding 2,917,081 and 2,881,525 as of September 30,
1999 and March 31, 1999, respectively 30,666 30,311
Additional capital 6,355,545 6,315,901
Accumulated deficit (4,015,485) (3,671,040)
----------- -----------
2,370,726 2,675,172
Less 149,538 shares held in treasury 380,894 380,894
----------- -----------
1,989,832 2,294,278
----------- -----------
$ 5,682,916 $ 5,326,636
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30 Six months ended September 30
1999 1998 1999 1998
------------ ------------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 2,946,627 $ 2,956,096 $ 5,668,953 $ 6,161,631
Cost of goods sold 1,642,938 1,748,500 3,085,230 3,781,644
----------- ----------- ----------- -----------
Gross Profit 1,303,689 1,207,596 2,583,723 2,379,987
Operating Expenses
Selling, general, and
administrative 1,298,801 1,175,177 2,560,024 2,442,462
Depreciation and
amortization expense 82,122 82,692 168,635 160,079
----------- ----------- ----------- -----------
1,380,923 1,257,869 2,728,659 2,602,541
Operating loss (77,234) (50,273) (144,936) (222,554)
Other expense
Interest expense (33,538) (39,580) (69,623) (77,072)
Loss on foreign investment (139,874) -- (139,874) --
Other income 22,427 15,955 9,988 37,139
----------- ----------- ----------- -----------
(150,985) (23,625) (199,509) (39,933)
----------- ----------- ----------- -----------
Loss before income taxes (228,219) (73,898) (344,445) (262,487)
Income tax expense -- 224 -- 2,100
----------- ----------- ----------- -----------
Net loss $ (228,219) $ (74,122) $ (344,445) $ (264,587)
=========== =========== =========== ===========
Basic and diluted loss
per common share $ (0.08) $ (0.03) $ (0.12) $ (0.09)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended September 30
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(344,445) $(264,587)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 168,635 160,079
Loss on foreign investment 139,874 --
Loss (gain) on sale of fixed assets 1,173 (1,863)
Other 2,922 (7,712)
Change in operating assets and liabilities
Accounts receivable (760,310) (3,062)
Note receivable -- 59,689
Inventory 111,813 (141,961)
Prepaid expense (105,184) (12,980)
Accounts payable 568,298 93,995
Accrued expenses 19,975 (25,679)
--------- ---------
Net cash used in operating activities (197,249) (144,081)
Cash flows from investing activities
Acquisition of property, plant, and equipment (14,042) (10,923)
Decrease in other noncurrent assets 18,630 3,208
Cash received in acquisition of subsidiaries -- 4,574
Proceeds from sale of available-for-sale securities -- 100,000
Proceeds from sale of fixed assets 13,885 27,603
--------- ---------
Net cash provided by investing activities 18,473 124,462
Cash flows from financing activities
Issuance of notes payable and long-term debt 499,429 111,034
Repayments of notes payable, long-term debt, and
capital lease obligations (426,976) (143,671)
Issuance of common stock 39,999 --
--------- ---------
Net cash provided by (used in) financing activities 112,452 (32,637)
Decrease in cash (66,324) (52,256)
Cash at beginning of period 74,543 176,964
--------- ---------
Cash at end of period $ 8,219 $ 124,708
========= =========
Due to the acquisition of CompSource during the three months 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 accompanying notes.
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 six months ended September 30, 1999, and 1998, 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, 1999.
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. Inventory
Inventory consisted of the following:
September 30 March 31
1999 1999
------------ --------
Parts $ 73,457 $ 66,210
Finished goods 434,465 553,525
-------- --------
$507,922 $619,735
======== ========
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
3. Earnings per Share
The following table sets forth the computation of basic and diluted loss per
share:
Footnote #3 - Earnings per Share
<TABLE>
<CAPTION>
Three months ended September 30 Six months ended September 30
1999 1998 1999 1998
------------- ------------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator used in basic and
diluted loss per share:
Net loss $ (228,219) $ (74,122) $ (344,445) $ (264,587)
========== ========== ========== ===========
Denominator:
Weighted average number of
shares of common stock
outstanding during the period 2,917,081 2,873,475 2,904,646 2,870,674
========== ========== ========== ===========
Basic and diluted loss per share $ (0.08) $ (0.03) $ (0.12) $ (0.09)
========== ========== ========== ===========
</TABLE>
6
<PAGE>
Part I Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Six Months Ended September 30, 1999, and 1998
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS, BELIEFS AND ASSUMPTIONS. WORDS
SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE 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, 1999, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14,
1999. IN ADDITION, SET FORTH BELOW UNDER THE HEADINGS "RESULTS OF OPERATIONS"
AND "RISK FACTORS" 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.
UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. INVESTORS SHOULD REVIEW THIS QUARTERLY REPORT IN
COMBINATION WITH THE COMPANY'S ANNUAL REPORT ON 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. (the "Company") has been primarily an Information
Technology ("IT") Services company providing IT services and products. IT
products are sold in conjunction with the provision of IT services. The
Company's IT services include consulting, network integration and design
services, accounting and distribution information systems, process control
information systems, and Internet web site design, programming, and hosting.
Recently the Company has begun to develop an Internet e-commerce portal and
associated technologies through its Mint Internet division. The Company also
designs, manufactures, and sells a line of products that provide communications
and connectivity between personal computers ("PCs") and IBM mainframe and
midrange AS/400 computers.
Recent Events
On November 1, 1999, the Company completed a stock for stock acquisition of
Meade Technology Corporation, a Pennsylvania based Platinum Reseller and
provider of custom programming services.
7
<PAGE>
Results of Operations
The Company's total revenue was $2.9 million for the quarters ended September
30, 1999 compared to $3.0 million for the same quarter last year. Revenue from
the IT business increased by $179,000 or 7% for the quarter ended September 30,
1999, compared to the same quarter last year while product and royalty revenue
from the PC connectivity business decreased $188,000 or 42% for the same
periods. The increase in revenue from the IT business is represented by a
decrease in revenue from IT product sales of $45,000 and an increase in revenue
from IT services sales of $224,000. It is anticipated that IT product revenue
will continue to decrease as greater emphasis is placed on IT services. IT
product revenue accounted for $1.9 million or 71% of the total revenue from the
IT business of $2.7 million for the quarter ended September 30, 1999, compared
to $1.9 million or 78% of the total revenue from the IT business of $2.5 million
for the same period in 1998. IT service revenue accounted for $774,000 or 29% of
the total revenue from the IT business of $2.7 million for the quarter ended
September 30, 1999, compared to $551,000 or 22% of the total revenue from the IT
business of $2.5 million for the same period in 1998. Internet web site
development and hosting revenue remained unchanged at $10,000 for the quarters
ended September 30, 1999 and 1998.
For the six months ended September 30, 1999, total revenue was $5.7 million,
down 8% or $493,000 from the same period last year. Revenue from the IT business
decreased by $227,000 or 4% from $5.3 million for the six months ended September
30, 1998 to $5.0 million for the six months ended September 30, 1999. The
decrease in revenue from the IT business is represented by a decrease in revenue
from IT product sales of $524,000 and an increase in revenue from IT services
sales of $297,000. IT product revenue accounted for $3.6 million or 71% of the
total revenue from the IT business for the six months ended September 30, 1999,
compared to $4.1 or 78% of the total revenue from the IT business for the same
period in 1998. IT service revenue accounted for $1.4 million or 29% of the
total revenue from the IT business for the six months ended September 30, 1999,
compared to $1.1 million or 22% of the total revenue from the IT business for
the same period in 1998. Internet web site development and hosting revenue
decreased by $9,000 or 29% from $29,000 for the six months ended September 30,
1998, to $20,000 for the same period in 1999.
Gross profit increased to 46% for the six months ended September 30, 1999, from
39% in the same period in 1998. Gross profit from the IT business increased from
33% for the six months ended September 30, 1998 to 42% for the six months ended
September 30, 1999. This increase is a result of an increase in the percentage
of IT business revenue derived from high-margin IT services sales versus revenue
from lower margin IT product sales. Also contributing to the improved gross
profit margin was an increase in gross profit contributed by product and royalty
revenue from the PC connectivity business which increased from 70% for the six
months ended September 30, 1998, to 76% for the six months ended September 30,
1999.
Selling, general, and administrative (SG&A) expenses increased by $124,000 or
11% for the quarter ended September 30, 1999, compared to the same period in
1998. As a percentage of sales, SG&A expenses were 44% of total sales in the
quarter ended September 30, 1999, compared with 40% of total sales for the same
period in 1998. For the six months ended September 30, 1999, SG&A expenses
increased $118,000 compared to the same period in 1998. As a percentage of
sales, SG&A expenses represented 45% of total sales for the six months ended
September 30, 1999, compared with 40% for the same period last year. The
increase in SG&A expenses is primarily due to increases in salaries and benefits
and legal and accounting fees offset by decreased consulting expenses.
The Company's net other expense was $151,000 for the three months ended
September 30, 1999, compared to $24,000 in the same quarter last year. For the
six months ended September 30, 1999, the Company had net other expense of
$200,000 compared to $40,000 in the same period last year. During the quarter
ended September 30, 1999, the Company recorded a loss of $140,000 arrtibutable
to the closing of Micro-Integration Europe, PLC, in which the Company had an
investment. This former subsidiary was sold to management in 1997 and became
insolvent in September 1999. Without the loss on foreign investment of $140,000,
the quarter and six month period ending September 30, 1999 had net other
expenses of $11,000 and $60,000, respectively.
8
<PAGE>
For the six months ended September 30, 1999, the Company recognized a corporate
tax expense of $2,000. At September 30, 1999, the Company had a net operating
loss carryforward of approximately $2.8 million available for offset against
future operating profits.
Liquidity and Capital Resources
The Company has satisfied its past cash requirements primarily through cash flow
from operations, bank borrowings, and lease financing. At September 30, 1999,
the Company had $8,000 in cash. During the six months ended September 30, 1999,
cash provided by investing and financing activities of $131,000 was exceeded by
cash used in operating activities of $197,000, resulting in a $66,000 decrease
in cash.
The Company's working capital increased from $433,000 as of March 31, 1999 to
$585,000 as of September 30, 1999.
At September 30, 1999, the Company had three working capital credit lines with
U.S. banks. One credit line, which is payable on demand, has a $74,000 limit and
had an outstanding balance of $73,000 as of September 30, 1999. A second line,
which is also payable on demand, has a $550,000 limit and had an outstanding
balance of $416,000 at September 30, 1999. The last line is for $300,000 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, 1999, had an outstanding balance of $79,000.
The Company believes that it will require additional cash infusions to meet the
Company's projected working capital and other cash requirements in its current
fiscal year ending March 31, 2000. See "- Risk Factors."
Risk Factors
IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-QSB, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS
BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A
SIGNIFICANT IMPACT ON THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-QSB AS A RESULT OF THE RISK
FACTORS DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-QSB.
Need for Additional Funds
The Company's recent operations during the six months ended September 30, 1999
and the years ended March 31, 1999, 1998 and 1997 have consumed substantial
amounts of cash and have generated net losses of $344,445, $957,408, $420,988
and $2,179,482, respectively, and accumulated a deficit of $4,015,485 at
September 30, 1999. The Company believes that it will require additional cash
infusions to meet the Company's projected working capital and other cash
requirements in its current fiscal year ending March 31, 2000.
The sale or issuance of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that additional financing will be available when needed or, if
available, will be available on terms acceptable to the Company. Any inability
to satisfy the Company's operating cash needs or the inability to finance the
purchase of goods sold to others would have a material adverse effect on the
Company's business, financial condition and results of operation.
Continuing Losses and Doubtful Ability to Continue as a Going Concern
As a result of the Company's net losses, and the Company's dependence on
additional financing, the Company's independent accountants' report on the March
31, 1999 financial statements of the Company and its subsidiaries
9
<PAGE>
includes an explanatory paragraph indicating that these matters raise a
substantial doubt about the Company's ability to continue as a going concern.
Uncertainty of Future Profitability; Potential Fluctuations in Operating Results
The Company has been facing substantial competition and lowered margins in
several segments of the IT business. In addition, the Company's PC connectivity
business, which enjoys gross margins over 60%, continues to decline rapidly
because of technological change. These factors continue to put pressure on the
Company's ability to return to profitability, and failure to improve the
performance of the IT business would have a material adverse effect on the
Company's business, financial condition and results of operations.
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 will continue to generate losses for the Company. The failure
of these technologies and services to be commercially viable in the marketplace
for any reason would have a material adverse effect on the Company's business,
financial condition and results of operations, as could any significant delay in
the commercial 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.
Integration of Acquisitions
As part of its business strategy, the Company may seek out business combinations
with other Internet or IT Services 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 that the Company acquires
fail, the Company could be required to write-off the amount of the investment.
There can be no assurance that the
10
<PAGE>
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 September 30, 1999, the present directors, executive officers, greater
than 5% stockholders, and their respective affiliates beneficially owned
approximately 53% of the outstanding common stock of the Company ("Common
Stock"). As of September 30, 1999, John A. Parsons, the Company's Chairman and
CEO, beneficially owned approximately 37% 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.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Absent corrective
actions, programs with date sensitive logic may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has commenced a process to assure Year 2000 compliance of all
hardware, software, and ancillary equipment that are date dependent. The process
involves four phases:
Phase I - Inventory and Data Collection. This phase involves an identification
of all items that are date dependent. The Company commenced this phase prior to
June 1998 and it is now substantially complete.
11
<PAGE>
Phase II - Compliance Requests. This phase involves requests to system vendors
for verification that the systems identified in Phase I are Year 2000 compliant.
The Company has identified and has begun to replace critical systems that cannot
be updated or certified compliant. The Company commenced this phase in the first
quarter of fiscal year 1998 and it is now substantially complete. The Company's
principal compliance issue focused on existing business and accounting systems.
New business and accounting systems are currently being implemented which are
vendor-certified Year 2000 compliant. In addition, the Company has determined
that substantially all of its personal computers and PC applications are
compliant.
Phase III - Test, Fix and Verify. This phase involves testing all items that are
date dependent and upgrading the critical, non-compliant system as well as
completing the implementation of the new business and accounting systems. The
Company expects to complete this phase during November 1999.
Phase IV - Final Testing and New Item Compliance. This phase involves review of
all systems for compliance and re-testing as necessary. During this phase, all
new systems and equipment will be tested for compliance. The Company expects to
complete this phase by the end of November 1999.
The Company presently believes that, with the implementation of the new business
and accounting systems, including hardware and software, the Year 2000 issue
will not pose any significant operational problems. This substantial compliance
has been achieved without the need to acquire new hardware, software or systems
other than in the ordinary course of business, with the exception of the new
business and accounting systems which are being capitalized and will be
amortized over a three year period. The Company is not aware of any other
non-compliance that would require repair or replacement that would have a
material effect on its financial position. As part of the Year 2000 process,
formal communication with the Company's suppliers, customers and other support
services has been initiated and efforts will continue until positive statements
of readiness have been achieved from all third parties. To date, the Company is
not aware of any non-compliance by its customers or suppliers that would have a
material impact on the Company's business. Nevertheless, there can be no
assurance that unanticipated non-compliance will not occur, and such
non-compliance could require material costs to repair or could cause material
disruptions if not repaired. The Company is in the process of developing a
strategy to address these potential consequences that may result from unresolved
Year 2000 issues, which includes the development of various contingency plans in
1999.
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, among other things, (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 fiscal years,
(ii) a $1,000,000 market value for the public float, and (iii) a minimum bid
price of $1.00 per share.
As of September 30, 1999, the Company was in compliance with all of the
continued listing requirements except the net tangible asset requirement. On
July 20, 1999, the Nasdaq Listing Qualifications group notified the Company that
Nasdaq is reviewing the Company's eligibility for listing on the SCM, and asked
the Company to provide a specific plan for regaining compliance with all listing
requirements. The Company provided Nasdaq with this plan on August 2, 1999. On
August 9, 1999, Nasdaq requested additional information from the Company with
respect to this plan which was provided. On November 11, 1999, the Company
informed Nasdaq that certain material aspects of its plan are not likely to
materialize. The Company expects to receive a de-lising notice from Nasdaq in
the near future. Such a notice triggers a process which may result in the
Company's Common Stock being de-listed from Nasdaq.
No assurances can be given 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
12
<PAGE>
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".
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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders the ("Annual Meeting")
on August 13, 1999. 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 2,703,471 -- 6,514
Wayne M. Lee 2,703,485 -- 6,500
Maxwell F. Eveleth, Jr. 2,703,485 -- 6,500
Russell A. Hinnershitz 2,703,171 -- 6,814
During the Annual Meeting, the stockholders also approved the amendment
and restatement of the Amended and Restated 1994 Stock Plan of
Micro-Integration Corp., with the result of the voting as follows:
For: 1,617,177
Against: 3,534
Withheld: 1,400
Stockholders also ratified the designation by the Board of Directors of
Maillie, Falconiero & Company, LLP as the independent accountants for the
Company for the fiscal year ending March 31, 2000, with the result of the
voting as follows:
For: 2,708,802
Against: 1,240
Withheld: 400
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) The Company filed a report on Form 8-K on August 18, 1999,
announcing its intent to merge with GeoPortals.com, Inc.
14
<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 15th day of November, 1999:
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
15
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<PERIOD-END> SEP-30-1999
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