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 June 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 June 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 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
June 30 March 31
1999 1999
----------- -----------
(unaudited)
ASSETS
Current assets
Cash $ 11,512 $ 74,543
Accounts receivables, less allowance of
$86,332 and $224,955 as of June 30,
1999 and March 31, 1999, respectively 1,893,410 1,538,959
Note receivable 22,477 18,323
Inventory 559,973 619,735
Prepaid expense 83,222 82,535
----------- -----------
Total current assets 2,570,594 2,334,095
----------- -----------
Property, plant, and equipment
Land 92,962 92,962
Buildings 1,474,333 1,474,333
Equipment 1,856,458 1,885,283
Automobiles 115,778 115,778
----------- -----------
3,539,531 3,568,356
Less accumulated depreciation (1,806,452) (1,748,564)
----------- -----------
1,733,079 1,819,792
Cash surrender value of life insurance 229,471 229,471
Goodwill, net of accumulated amortization
of $104,013 and $88,860 as of June 30,
1999 and March 31, 1999, respectively 805,313 820,466
Other noncurrent assets 112,860 122,812
----------- -----------
$ 5,451,317 $ 5,326,636
=========== ===========
2
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Micro-Integration Corp. and Subsidiaries
Consolidated Balance Sheets
June 30 March 31
1999 1999
----------- -----------
(unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable $ 987,819 $ 727,002
Accrued expenses 311,377 341,683
Demand notes payable 661,903 648,903
Current portion of long-term debt 177,297 183,549
----------- -----------
Total current liabilities 2,138,396 1,901,137
----------- -----------
Long-term debt, less current portion 1,134,869 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 June 30, 1999 and
March 31, 1999, respectively;
outstanding 2,917,081 and 2,881,525
as of June 30, 1999 and March 31, 1999,
respectively 30,311 30,311
Additional capital 6,315,901 6,315,901
Accumulated deficit (3,787,266) (3,671,040)
----------- -----------
2,558,946 2,675,172
Less 149,538 shares held in treasury 380,894 380,894
----------- -----------
2,178,052 2,294,278
----------- -----------
$ 5,451,317 $ 5,326,636
=========== ===========
See accompanying notes.
3
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Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Operations
Three months ended June 30
1999 1998
----------- -----------
(unaudited)
Revenues $ 2,722,326 $ 3,205,535
Cost of goods sold 1,442,292 2,033,144
----------- -----------
Gross Profit 1,280,034 1,172,391
Operating Expenses
Selling, general, and
administrative 1,261,223 1,267,285
Depreciation and
amortization expense 86,513 77,387
----------- -----------
1,347,736 1,344,672
Operating loss (67,702) (172,281)
Other income (expense)
Interest expense (36,085) (37,492)
Other income (expense) (12,439) 21,184
----------- -----------
(48,524) (16,308)
----------- -----------
Loss before income taxes (116,226) (188,589)
Income tax expense -- 1,876
----------- -----------
Net loss $ (116,226) $ (190,465)
=========== ===========
Basic and diluted loss
per common share $ (0.04) $ (0.07)
=========== ===========
See accompanying notes.
4
<PAGE>
Micro-Integration Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended June 30
1999 1998
--------- ---------
(unaudited)
Cash flows from operating activities
Net loss $(116,226) $(190,465)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 86,513 77,387
Loss on sale of fixed assets 1,173 2,151
Other 2,921 (6,614)
Change in operating assets and liabilities
Accounts receivable (354,451) 103,329
Note receivable (4,154) 59,989
Inventory 59,762 26,172
Prepaid expense (687) (5,540)
Accounts payable 234,995 (136,944)
Accrued expenses (4,484) (102,822)
--------- ---------
Net cash used in operating activities (94,638) (173,357)
Cash flows from investing activities
Acquisition of property, plant, and equipment (2,267) (7,335)
Decrease (increase) in other noncurrent assets 9,593 (15,940)
Cash received in acquisition of subsidiaries -- 4,574
Proceeds from sale of fixed assets 13,885 18,263
--------- ---------
Net cash provided by (used in) investing
activities 21,211 (438)
Cash flows from financing activities
Issuance of notes payable and long-term debt 49,738 220,858
Repayments of notes payable, long-term debt,
and capital lease obligations (39,342) (74,999)
--------- ---------
Net cash provided by financing activities 10,396 145,859
Decrease in cash (63,031) (27,936)
Cash at beginning of period 74,543 176,964
--------- ---------
Cash at end of period $ 11,512 $ 149,028
========= =========
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
=========
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 three months ended June 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:
June 30 March 31
1999 1999
-------- --------
Parts $ 80,073 $ 66,210
Finished goods 479,900 553,525
-------- --------
$559,973 $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:
6
<PAGE>
Micro-Integration Corp. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended June 30
1999 1998
----------- -----------
(unaudited)
Numerator used in basic and
diluted loss per share:
Net loss $ (116,226) $ (190,465)
=========== ===========
Denominator:
Weighted average number of
shares of common stock
outstanding during the period 2,892,075 2,867,811
=========== ===========
Basic and diluted loss per share $ (0.04) $ (0.07)
=========== ===========
7
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Part I Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Months Ended June 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.
Results of Operations
The Company's total revenue was $2.7 million for the quarter ended June 30,
1999, a decrease of $483,000 or 15%, from $3.2 million for the quarter ended
June 30, 1998. Revenue from the IT business decreased by $405,000 or 15% for the
quarter ended June 30, 1999, compared to the same quarter last year while
product and royalty revenue from the PC connectivity business decreased $69,000
or 17% for the same periods. The decrease in revenue from the IT business is
represented by a decrease in revenue from IT product sales of $479,000 and an
increase in revenue from IT services sales of $73,000. It is anticipated that IT
product revenue wil continue to decrease as greater emphasis is placed on IT
services. IT product revenue accounted for $1.7 million or 72% of the
7
<PAGE>
total revenue from the IT business of $2.4 million for the quarter ended June
30, 1999, compared to $2.2 million or 79% of the total revenue from the IT
business of $2.8 million for the same period in 1998. IT service revenue
accounted for $665,000 or 28% of the total revenue from the IT business of $2.4
million for the quarter ended June 30, 1999, compared to $592,000 or 21% of the
total revenue from the IT business of $2.8 million for the same period in 1998.
Internet web site development and hosting revenue decreased by $9,000 or 44%
from $20,000 for the quarter ended June 30, 1998, to $11,000 in the quarter
ended June 30, 1999.
Gross profit increased to 47% for the quarter ended June 30, 1999, from 37% in
the same period in 1998. Gross profit from the IT business increased from 31%
for the quarter ended June 30, 1998 to 42% for the quarter ended June 30, 1999.
This increase is a result of an increase in the percentage of IT business
revenue derived from high-margin IT services 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 68% for the quarter ended June 30,
1998, to 77% for the quarter ended June 30, 1999.
Selling, general, and administrative (SG&A) expenses remained stable at $1.3
million in the quarters ended June 30, 1999 and 1998. As a percentage of sales,
SG&A expenses were 46% of total sales in the current quarter compared with 40%
of total sales in the same quarter last year.
The Company's net other expense was $49,000 for the three months ended June 30,
1999, an increase of $32,000 compared to $16,000 of net other expense the same
quarter last year. Included in net other expense for the quarter ended June 30,
1999, is a one-time expense of $32,500 relating to the settlement of a lawsuit
brought against the Company by a former employee.
For the three months ended June 30, 1998, the Company recognized a corporate tax
expense of $2,000. At June 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 June 30, 1999, the
Company had $12,000 in cash. During the quarter ended June 30, 1999, cash
provided by investing and financing activities of $32,000 was exceeded by cash
used in operating activities of $95,000, resulting in a $63,000 decrease in
cash.
The Company's working capital decreased slightly from $433,000 as of March 31,
1999 to $432,000 as of June 30, 1999.
At June 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 $74,000 as of June 30, 1999. A second line, which is
also payable on demand, has a $450,000 limit and had an outstanding balance of
$288,000 at June 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 June 30, 1999,
had an outstanding balance of $300,000. The Company is in the process of
obtaining funds by borrowing against the cash surrender value of life insurance
policies to payoff approximately 80% of this line with the remaining balance
expected to be converted to a term loan.
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."
8
<PAGE>
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 quarter ended June 30, 1999 and the
years ended March 31, 1999, 1998 and 1997 have consumed substantial amounts of
cash and have generated net losses of $116,226, $957,408, $420,988 and
$2,179,482, respectively, and accumulated a deficit of $3,787,266 at June 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 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.
9
<PAGE>
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 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.
10
<PAGE>
Concentration of Stock Ownership
As of June 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 June
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.
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 August 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 September 1999.
11
<PAGE>
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 June 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.
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 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".
12
<PAGE>
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 June 30, 1999.
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 16th day of August, 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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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 11,512
<SECURITIES> 0
<RECEIVABLES> 1,979,742
<ALLOWANCES> 86,332
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0
0
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