FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 OR 15(D) of
the Securities Exchange Act of 1934
For quarter ended: March 31, 1995
Commission file number: 0-8358
Micro General Corporation
(Exact name of registrant as specified in its charter)
Delaware 95-2621545
(State or other jurisdiction of ((I.R.S. Employer
incorporation or organization) Identification Number)
1740 Wilshire Ave. Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
(714) 667-0557
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods 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 [ ]
Common Stock, $.05 Par Value - 1,948,166 as of March 31, 1995.
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
MICRO GENERAL CORPORATION
Balance Sheets
March 31, 1995 and December 31, 1994
March 31, 1995 December 31,
(unaudited) 1994
-------------- ------------
<S> <C> <C>
Assets
Current assets
Cash $ 1,025,812 $ 152,848
Accounts and notes receivable,
less allowance for doubtful receivables
and sales returns of $ 91,749 at 3/31/95
and $81,749 at 12/31/94 585,937 618,434
Income tax refund receivable 7,000 7,000
Inventories (note 2) 1,084,332 1,140,183
Prepaid expenses and accrued interest 168,900 277,432
----------- ------------
Total current assets 2,871,981 2,195,897
Equipment and improvements, net (note 3) 169,606 179,206
Other assets, net (note 4) 39,326 44,688
----------- ------------
$ 3,080,912 $ 2,419,791
============ =============
Liabilities and Shareholders' Equity:
Current liabilities:
Note Payable to bank (note 6) $ 0 $ 0
Accounts payable 68,974 296,071
Accrued expenses 275,668 228,072
Deferred rate change agreement
revenue 314,917 159,853
------------ -------------
Total current liabilities 659,560 683,996
Shareholders' equity:
Preferred stock, $.05 par value;
1,000,000 shares authorized
no shares issued and outstanding
at 3/31/95 and 12/31/94. -- --
Common stock, $.05 par value;
4,000,000 shares authorized
1,948,166 shares issued at 3 /31/95
and 1,888,166 shares at 12/31/94(note 1) 97,408 94,408
Additional paid-in capital 4,174,508 4,111,883
Accumulated deficit (1,850,563) (2,470,496)
------------ -------------
Total shareholders' equity 2,421,352 1,735,795
------------ -------------
$ 3,080,912 $ 2,419,791
============ =============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Three Months Ended March 31, 1995 and March 31, 1994
March 31, March 31,
1995 1994
<S> <C> <C>
Revenues:
Product sales, net of returns of
$106,334 in 1995 and $ 557,279 $ 683,302
$49,928 in 1994)
Service and rate revenues(note 7) 1,616,410 1,161,255
----------- -----------
Total Revenues 2,173,689 1,844,557
Cost of Sales:
Net product sales 499,979 644,806
Service and rate revenues 396,326 314,448
----------- -----------
Total cost of sales 896,305 959,254
Gross profit 1,277,384 885,303
Operating Expenses:
Selling, general and administrative 484,488 498,299
Engineering and development 168,008 110,015
Provision for doubtful receivables 9,000 9,000
---------- ---------
Total operating expenses 661,496 617,314
---------- ---------
Operating profit 615,888 267,989
Interest and other income, net 4,044 1,512
---------- ---------
Income before income tax expense 619,932 269,501
Income tax expense (note 5) 0 0
---------- ---------
Net earnings $ 619,932 $ 269,501
========== ==========
Net income per common share: $ 0.32 $ 0.14
========== ==========
Weighted average number of common shares
outstanding 1,922,166 1,882,240
========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MICRO GENERAL CORPORATION
Statements of Cash Flows
For the Three Months Ended March 31, 1995 and March 31, 1994
March 31, March 31,
1995 1994
---------- ----------
<S> <C> <C>
Net earnings $ 619,932 $ 269,501
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 25,346 25,982
Provision for losses on accounts
receivable 9,000 8,017
Change in assets and liabilities:
Decrease in accounts receivable 23,497 260,025
Decrease in inventories 55,851 58,209
Decrease in prepaid expenses 108,533 101,865
(Decrease) in accounts payable (227,097) (27,072)
Increase in deferred rate revenue 155,064 191,537
Increase (decrease) in accrued expenses 47,597 (22,355)
---------- ---------
Total adjustments: 197,791 596,208
Net cash provided by operating
activities 817,723 865,709
---------- ---------
Cash flows used in investing activities:
Capital expenditures (10,384) (17,830)
---------- ---------
Cash flows from financing activities:
Issuance of common stock 65,625 0
Repayment of note payable to bank 0 (100,000)
---------- ---------
Net cash provided by
(used in) financing activities 65,625 (100,000)
---------- ---------
Net increase in cash 872,964 747,879
Cash at beginning of period 152,848 85,513
---------- ----------
Cash at end of period $1,025,812 $ 833,392
========== ==========
Supplemental disclosures of cash flow
information:
Cash received during the period for:
Interest $ 4,044 $ 1,512
========== ==========
Income Taxes $ -0- $ -0-
========== ==========
<FN>
See accompanying notes to financial statements
</TABLE>
<PAGE>
MICRO GENERAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
Note 1. Summary of Significant Accounting Policies
General
The operations of Micro General Corporation (the "Company" consist of
the design, manufacture and sale of computerized parcel shipping
systems, postal scales and piece-count scales.
The financial statements presented include, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of the results of
operations for the periods presented.
The results of operations for the three months ended March 31, 1995, are
not necessarily indicative of results that may be expected for any other
interim period or for the full year ending December 31, 1995.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the respective equipment and improvements.
Net Earnings (Per Common Share)
Net Earnings per common share is computed based on the weighted average
of common shares outstanding. The potential exercise of stock options
are included in the computation of net earnings per common share and
common share equivalents. Per share computation is net income divided
by the weighted average number of common shares and common share
equivalents.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement 109, "Accounting for Income Taxes" ("SFAS 109"). The Company
currently accounts for income taxes under Statement of Financial
Accounting Standard No. 96, "Accounting for Income Taxes" ("SFAS 96").
Under this method, the Company provides for deferred income taxes using
an asset and liability approach for transactions which affect pretax
earnings (loss) for financial and income tax reporting purposes in
different periods. The current and deferred tax consequences are
measured by applying the provisions and rates of enacted tax laws. SFAS
109 also uses the asset and liability method. The objective of the
asset and liability method under SFAS 109 is to establish deferred tax
assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled.
SFAS was adopted in the period ending March 31, 1995 and no net material
impact was recognized.
<PAGE>
Warranties
The Company's products are sold with a ninety-day warranty on materials
and workmanship. Estimated warranty costs based on historical
experience are accrued as an expense at the time the products are sold.
Intangible Assets
Intangible assets are classified under other assets and are amortized on
a straight-line basis over periods ranging from 10 to 15 years (see note
4).
Deferred Revenue
The Company collects fees from its customers in anticipation of future
rate changes. Customers prepaying future rate changes receive memory
chips with the new tariffs without paying an additional charge. Rate
change fees are recorded as revenue on a pro rata basis over the prepaid
period.
Revenue Recognition
Product sales are recorded by the Company when products are shipped to
dealers and customers. Rate change revenues are recorded by the Company
at the time memory chips are reprogrammed with new tariffs and shipped
to the customer.
Sales Returns
The majority of the Company's product sales are to its authorized
dealers who resell the Company's products. The Company's policy is that
all sales are final, but dealers may, at the Company's sole discretion
and subject to a restocking fee, return certain out-of-warranty products
in exchange for products of comparable sales value. Additionally,
dealers may, at the Company's sole discretion, be permitted to return
their unopened inventory in the event they or the Company terminate
their dealership agreement, again subject to a restocking fee. Upon
acceptance of returned goods, the Company reconditions the goods, at a
nominal cost, and restocks them in inventory to be sold at a later date.
The Company provides an allowance for such returns equal to the
estimated gross profit on the portion of sales estimated to be returned.
This specific allowance is a component of the Company's allowance for
doubtful receivables and sales returns.
Post Retirement Benefits
The Company does not have any postretirement benefits falling within the
scope of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
<PAGE>
Note 2. Inventories
Inventories are comprised of the following at March 31, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
Parts & Supplies $ 759,742 $ 753,456
Purchased finished goods 205,056 292,099
Consigned inventory 119,534 94,628
---------- ----------
$1,084,332 $1,140,183
</TABLE>
Note 3. Equipment and Improvements
Equipment and improvements are as follows at March 31, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
Production equipment, tooling
and construction in process $424,848 $424,848
Office furniture and
equipment 494,612 484,229
Leasehold improvements 19,381 19,381
-------- --------
938,841 928,458
Less accumulated depreciation
and amortization 769,235 749,252
-------- --------
$169,606 $179,206
======== ========
</TABLE>
Note 4. Other Assets
Other assets are as follows at March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
Estimated
Useful Life 1995 1994
----------- ----- -----
<S> <C> <C> <C>
Excess cost of
assets purchased
over fair market,
value 15 years $232,531 $232,531
License rights 10 years 26,382 26,382
Other intangible assets 15 years 23,388 23,388
-------- --------
$282,301 $282,301
Less accumulated
amortization 242,975 237,613
-------- --------
$ 39,326 $ 44,688
======== ========
</TABLE>
<PAGE>
Note 5. Income Taxes
The expected income tax expense(benefit) computed by multiplying
earnings (loss) before income tax expense by the statutory Federal
income tax rate of 34% differs from the actual income tax expense
as follows:
<TABLE>
<CAPTION>
3/31/95 3/31/94
--------- --------
<S> <C> <C>
Expected tax expense $ 210,777 $ 91,630
Utilization of net operating
loss carryforward (213,777) (94,630)
Nondeductible amortization of the
excess cost of assets purchased
over fair market value 3,000 3,000
State income taxes - -
---------- ---------
$ 0 $ 0
========== =========
</TABLE>
At December 31, 1994, the Company has available net operating loss
carryforwards of approximately $1,649,000 and $228,000 for Federal
and state income tax purposes, respectively. If not used to offset
future taxable income, the net operating loss carryforwards will
expire for income tax purposes at various dates through 2009. The
Company also has investment tax credit and research and
experimentation credit carryforwards aggregating approximately
$85,000 which expire during the period 1994 to 2001.
Note 6. Notes Payable
The Company has a line of credit which is secured by substantially
all of the Company's assets and can not exceed 70% of qualifying
accounts receivable up to a maximum credit line of $500,000. The
interest rate on the line of credit is at the bank's prime rate (9%
at March 31, 1995) plus 2.0%. At December 31, 1994 the Company
received a waiver on an existing default and March 31, 1995, the
Company was in compliance with all financial covenants associated
with the line of credit agreement. As of March 31, 1995 and
December 31, 1994, the Company has no outstanding loans on the line
of credit with the bank. The line of credit is scheduled for
renewal in May 1995.
<PAGE>
Note 7. Commitments and Contingencies
Non cancelable operating lease commitments consist principally of
the lease for the Company's manufacturing and administrative
facility. In February, 1994 the Company extended its facility lease
through 1999. At December 31, 1994, the Company is committed to
the following noncancelable operating lease payments:
<TABLE>
<S> <C>
Year ending December
1995 100,000
1996 101,000
1997 107,000
1998 114,000
Thereafter 29,000
---------
$ 501,100
</TABLE>
At March 31, 1995 and December 31, 1994, the Company was liable for
$324,215 and $185,475, respectively for outstanding letters of
credit to procure inventory from overseas vendors. These
transactions relate solely to transactions denominated in U.S.
dollars.
The Company has a license agreement with Pitney Bowes which enables
the Company to manufacture and sell certain products. The License
agreement expires in 2004. Annual expenses for the license
agreement are minor.
From time to time, the United State Postal Service ("USPS") or
United Parcel Service ("UPS") change their rates. For a fee, the
Company provides its customers with programmable memory chips with
the new tariffs which can be inserted into the Company's products.
In some instances, customers prepay a fee to the Company which
assures they will receive new programmable memory chips for all
rate changes which occur within a predetermined period. In other
instances, customers incur a fee for each time they decide to
procure a new programmable memory chip. The Company experienced a
UPS rate change during the periods ended March 31, 1995 and March
31, 1994, and a USPS rate change during the period ending March 31,
1995. Recorded revenues from rate changes totaled approximately
$1,561,463 and $1,097,000 respectively. Gross profit totaled
$1,228,122 and $1,007,000 also for the same periods.
<PAGE>
MICRO GENERAL CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
March 31, 1995
Results of Operations
Total net product sales decreased $126,023 or 18% in Q1 1995 over
Q1 1994 while service and rate change revenues increased $ 455,155 or 39%.
This contributed to a $329,132 or 18% increase in total revenue during Q1
1995 over Q1 1994. In Q1 1995 and Q1 1994, service and rate change
revenues represented approximately 74% and 60% of total revenue,
respectively. The increase in rate change revenues in Q1 1995 as compared
to Q1 1995, was the result of the USPS rate change in Q1 1995. While sales
in the retail channel increased $148,239 or 124% as compared to the same
period in 1994, the sales in the historical dealer channel decreased $278,368
or 49%. The decrease in the historical dealer channel resulting in a decrease in
units sold is due to temporary channel "conflict" and the introduction of lower
priced models. New product introductions in future periods, which will
include product differentiation properly priced for the two distribution
channels, are expected to improve volume and eliminate the possibility of
any significant channel "conflict". The Company anticipates a further
reduction in expenses and improved profit margins in the retail channel in
future years.
Cost of sales for product sales decreased $144,827 or 23%. The
decrease is due to a change in product mix and a decrease in the historical
dealer channel sales. The service and rate change revenue costs increased
$81,878 or 26% as compared to the same period in 1994. This increase is
due to an increase in service and rate change revenues for the same period.
Gross margin increased 44% at March 31, 1995, as compared to the
prior year. The increase is comprised of a 4% increase in product gross
margin and a 2% increase in service and rate change revenue gross margin.
The increase in the service and rate change revenue margin is due to higher
rate change revenue, while the slight decrease in the product gross margin is
a result of higher sales in the retail distribution channel.
Operating expenses of the Company in Q1 1995 increased $44,182 or
7% as compared to Q1 1994. An increase in engineering and development
expense is a result of further development of the computer based shipping
system. Expenses are expected to remain the same in future periods.
The increase in net earnings of $350,431 or 130% as compared to the
same period in 1994, is a result to the increase in rate change revenue.
Financial Condition, Liquidity and Capital Resources
The Company's ability to generate cash depends on, rate change
revnue, the sale of inventory and collection of accounts receivable.
The Company's Q1 1995 cash balance increased $872,964 or 571%
from December 31, 1994. The increase is primarily attributable to
the cash generated from prepaid rate change revenue derived from
the United States Postal Service ("USPS") rate change effective
January 1995 and the United Parcel Service ("UPS") rate
change effective February 1995. The Company's Q1 1995 net accounts
receivable balance decreased $32,497 or 5% from December 31, 1994 levels.
This decrease is due to a decrease in product sales for the Q1 1995 period.
<PAGE>
Working capital was $2,212,421 at March 31, 1995 as compared to the
December 31 1994 amount of $1,511,901. The Company's current ratio at
March 31, 1995 was 4.4 as compared to 3.2 at December 31, 1994. This
change is a result of higher cash balances at March 31, 1995 due to the Q1
1995 rate changes.
The Company's total inventories decreased $55,581 or 5% at March
31, 1995 as compared to December 31, 1994. The decrease in inventory is
related to sales in the retail channel during Q1 1995.
The Company has available liquidity through a line of credit
agreement with a bank (See note 6, of Notes to the Financial Statements).
The availability is based upon certain qualified accounts receivable
balances with maximum availability of $500,000. At March 31, 1995, the
Company had no balance outstanding on this line of credit. The line of
credit expires in May, 1995. The Company plans to renew or seek another
similar financing agreement upon expiration. At March 31, 1995, the
Company was in compliance with all financial covenants associated with the
line of credit agreement.
The Company's Q1 1995, current liabilities have decreased 4% over
the December 31, 1994 balances. This is associated with a decrease in the
Company's accounts payable balance as compared to the December 31, 1994
balance.
The Company believes future liquidity requirements will be covered
from operations. The Company's investment in capital expenditures for Q1
1995 increased slightly over December 31, 1994 balances. There were no
material commitments for capital expenditures as of March 31, 1995. The
Company does not anticipate any significant domestic capital expenditures
in the future.
The Company does not have any material off balance sheet risks at
March 31, 1995. The Company does not engage in any off balance sheet
financing.
Inflation
The effect of inflation on operating results has, historically,
been insignificant.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits (listed by numbers corresponding to Exhibit Table of
Item 601 of Regulation S-K):
11. Computation of earnings (loss) per share is not provided as
the calculation can be clearly determined from the material
contained in Item 1 of Part I.
b. The Company did not file any reports on Form 8-K during the
three months ended March 31, 1995 .
<PAGE>
MICRO GENERAL CORPORATION
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.
MICRO GENERAL CORPORATION
Registrant
Date: May 15, 1995 /s/ Thomas E. Pistilli
Thomas E. Pistilli
President
Chief Executive Officer
Chief Financial Officer
Date: May 15, 1995 /s/ Linda I. Morton
Linda Morton
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,025,812
<SECURITIES> 0
<RECEIVABLES> 677,686
<ALLOWANCES> 91,749
<INVENTORY> 1,084,332
<CURRENT-ASSETS> 2,871,981
<PP&E> 938,841
<DEPRECIATION> 769,235
<TOTAL-ASSETS> 3,080,912
<CURRENT-LIABILITIES> 659,560
<BONDS> 0
<COMMON> 97,408
0
0
<OTHER-SE> 4,174,508
<TOTAL-LIABILITY-AND-EQUITY> 3,808,912
<SALES> 2,173,689
<TOTAL-REVENUES> 2,173,689
<CGS> 896,305
<TOTAL-COSTS> 896,305
<OTHER-EXPENSES> 661,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 619,932
<INCOME-TAX> 0
<INCOME-CONTINUING> 619,932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 619,932
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
