FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended :March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________.
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 [ ]
The number of shares outstanding of Common Stock, $.05 Par Value - 1,948,166
shares as of May 15, 1996.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q - QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets -- March 31, 1996 and December 31, 1995
Statements of Operations -- Three months ended March 31, 1996
and March 31, 1995.
Statements of Cash Flows --Three months ended March 31, 1996
and March 31, 1995.
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 4. Other Information
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
All other schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or notes thereto.
<PAGE>
<TABLE>
<CAPTION>
MICRO GENERAL CORPORATION
Balance Sheets
March 31, 1996 and December 31, 1995
March 31,
1996 December 31,
(unaudited) 1995
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 500,752 $ 35,222
Accounts and notes receivable, less
allowance for doubtful receivables and
sales returns of $50,109 at 3/31/96 and
$46,594 at 12/31/95 281,657 349,991
Inventories (note 2) 1,246,313 1,324,109
Prepaid expenses and accrued interest 117,037 143,433
----------- ------------
Total current assets 2,145,759 1,852,755
Equipment and improvements, net (note 3) 174,208 193,691
Other assets, net (note 4) 31,210 37,822
----------- ------------
$ 2,351,177 $ 2,084,268
=========== ============
Liabilities and Stockholders' Equity:
Current liabilities:
Note payable to bank (note 6) $ 150,000 $ 275,000
Accounts payable 65,693 51,278
Accrued expenses 196,515 164,545
Deferred revenue 56,182 21,677
----------- ------------
Total current liabilities 468,390 512,500
Stockholders' equity:
Preferred stock, $.05 par value; 1,000,000
shares authorized no shares issued and
outstanding at 3/31/95 and 12/31/95. -- --
Common stock, $.05 par value; 4,000,000 shares
authorized 1,948,166 shares issued at 3/31/96
and 1,888,166 shares at 12/31/95 (note 1) 97,408 97,408
Additional paid-in capital 4,174,508 4,174,508
Accumulated deficits (2,389,129) (2,700,148)
----------- ------------
Total stockholders' equity 1,882,787 1,571,768
----------- ------------
$ 2,351,177 $ 2,084,268
=========== ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO GENERAL CORPORATION
Statements of Operations
For the Three Months Ended March 31, 1996 and March 31, 1995
(Unaudited)
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Product sales, net of returns of $40,452 in
1996 and $106,334 in 1995. $ 319,341 $ 557,279
Service and rate revenues (note 7) 1,151,047 1,616,410
------------ ------------
Total revenues 1,470,388 2,173,689
Cost of sales:
Net product sales 318,869 499,979
Service and rate revenues 243,993 396,326
------------ ------------
Total cost of sales 562,862 896,305
------------ ------------
Gross profit 907,526 1,277,384
Operating expenses:
Selling, general and administrative 435,715 484,488
Engineering and development 150,579 168,008
Provision for doubtful receivables 6,000 9,000
------------ ------------
Total operating expenses 592,294 661,496
------------ ------------
Operating profit 315,232 615,888
Interest income (expense), net (3,414) 4,044
------------ ------------
Income before income taxes 311,818 619,932
Income taxes (note 5) 800 0
------------ ------------
Net income $ 311,018 $ 619,932
============ ============
Net income per common and common equivalent
share (note 1) $ 0.16 $ 0.32
============ ============
Weighted average shares outstanding (note 1) 1,948,166 1,922,166
============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MICRO GENERAL CORPORATION
Statements of Cash Flows
For the Three Months Ended March 31, 1996 and March 31, 1995
(Unaudited)
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 311,018 $ 619,932
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 27,112 25,346
Provision for losses on accounts receivable
and sales returns, net of write-offs 3,516 9,000
Change in assets and liabilities:
Decrease in accounts receivable 64,818 23,497
(Increase) decrease in inventories 77,796 55,851
Decrease in prepaid expenses 27,196 108,533
Decrease in accounts payable 14,604 (227,097)
Increase (decrease) in deferred revenue 34,505 155,064
Decrease in accrued expenses 30,981 47,597
------------ ------------
Total adjustments 280,528 197,791
------------ ------------
Net cash provided by operating activities 591,546 817,723
Cash flows used in investing activities--capital
expenditures (1,016) (10,384)
Cash flows from financing activities:
Common stock proceeds, net 0 65,625
Proceeds from note payable to bank 25,000 0
Repayment of note payable to bank (150,000) 0
------------ ------------
Net cash used by financing activities (125,000) 65,625
------------ ------------
Net increase in cash 465,530 872,964
Cash - beginning of year 35,222 152,848
------------ ------------
Cash - end of period $ 500,752 $ 1,025,812
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,414 $ 0
============ ============
Income taxes $ 800 $ 0
============ ============
<FN>
See accompanying notes to financial statements
</TABLE>
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
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, 1996, are not
necessarily indicative of results that may be expected for any other interim
period or for the full year ending December 31, 1996.
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 life of
the equipment and improvements.
Net Income (Per Common Share)
Net income per common share is computed based on the weighted average of
common shares outstanding. The potential exercise of stock options not
included in the computation of net earnings per common share since the
effect would be antidilutive for the periods presented.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
109, "Accounting for Income Taxes"("SFAS 109"). Under the asset and liability
method of Statement 109,deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
<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.
<PAGE>
Financial Instruments
The carrying amount of cash, accounts and notes receivable, prepaid expenses,
other asses, accounts payable, accrued expenses, notes payable to bank and
deferred revenue are measured at cost which approximates their fair value due
to the short maturity of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>
Note 2. Inventories
Inventories are comprised of the following at March 31, 1996 and December 31,
1995:
March 31, 1996 December 31, 1995
Parts & supplies $ 822,788 $ 919,459
Purchased finished goods 394,386 372,763
Consigned inventory 29,139 31,887
----------- -----------
$ 1,246,313 $ 1,324,109
=========== ===========
Note 3. Equipment and Improvements
Equipment and improvements are as follows at March 31, 1996 and December
31, 1995:
March 31, 1996 December 31, 1995
Production equipment, tooling
and construction in process $ 434,848 $ 432,902
Office furniture and
equipment 565,458 563,557
Leasehold improvements 27,776 30,606
------------ -----------
1,028,082 1,027,065
Less accumulated depreciation
and amortization 853,874 833,374
------------ -----------
$ 174,208 $ 193,691
============ ===========
Note 4. Other Assets
Other assets are as follows at March 31, 1996 and December 31, 1995:
Estimated
Useful Life 1996 1995
Excess cost of assets purchased
over fair market value 15 years $232,531 $232,531
License rights 10 years 41,382 41,382
Other intangible assets 15 years 23,388 23,388
-------- --------
297,301 297,301
Less accumulated amortization 266,091 259,479
-------- --------
$ 31,210 $ 37,822
======== ========
<PAGE>
Note 5. Income Taxes
Income tax for the three months ended March 31,1996 represents the state
minimum tax.
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:
March 31, March 31,
1996 1995
Expected tax expense $ 106,018 $ 210,777
Utilization of net operating
loss carryforward (109,018) (213,777)
Nondeductible amortization of the
excess cost of assets purchased
over fair market value 3,000 3,000
State income taxes 800 -
----------- -----------
$ 800 $ 0
=========== ===========
At both March 31, 1996 and December 31, 1995, the Company had available net
operating loss carryforwards of approximately $1,839,000 and $217,000 for
Federal and state income tax purposes, respectively. If not used to offset
future taxable income, the net operating loss carryforwards will expire at
various years through 2010. The Company also has investment tax credit
and research and experimentation credit carryforwards aggregating
approximately $85,000 which expire during the period 1996 to 2002.
Note 6. Notes Payable
The Company has a line of credit which is secured by substantially all of
the Company's assets and could not exceed 70% of qualifying accounts
receivable plus 40% of qualifying inventory up to a maximum credit line of
$600,000. The interest rate on the line of credit was at the bank's prime
rate plus 2.0%. At March 31, 1996 and December 31, 1995 the Company was
either in compliance with all financial covenants or had obtained waivers
of such covenants from the bank. The credit line expires July 31, 1996.
<PAGE>
Note 7. Commitments and Contingencies
Non cancelable operating lease commitments consisted principally of the
leases for the Company's manufacturing and administrative facility in
California and the research and development facility in Connecticut through
1999. At March 31, 1996, the Company is committed to the following
noncancelable operating lease payments:
Year ending December
1996(nine months) $ 102,000
1997 145,000
1998 124,000
1999 29,000
----------
$ 400,000
==========
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") and/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 three months ended March 31, 1996
and March 31, 1995, and a USPS rate change during the three months ended
March 31, 1996. Recorded revenues from rate changes totaled approximately
$1,117,423 and $1,561,463 for the three months ended March 31, 1996 and
March 31, 1995, respectively. Gross profit totaled $943,037 and $1,228,122
also for the same periods.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total net product sales decreased $235,064 or 43% for the three months ended
March 31, 1996 ("Q1 1996") compared to the three months ended March 31, 1995
("Q1 1995") while service and rate change revenues decreased $468,237 or 29%.
The decrease in net product sales is a mainly due to a decrease in the retail
channel of $199,155 or 74% as compared to Q1 1995. Service and rate change
revenue in Q1 1996 decreased $465,363 or 29% as compared to the prior year.
For Q1 1996 and Q1 1995, service and rate change revenues represented
approximately 76% and 71% of total revenue, respectively. The decrease in
rate change revenues for Q1 1996 as compared to Q1 1995, was primarily due
to only a UPS rate change in Q1 1996 as compared to both a UPS and USPS rate
change in Q1 1995. In Q1 1996 the decrease in the retail channel is a direct
result of fewer orders by a major catalog wholesaler as compared to Q1 1995.
The Company is currently seeking other sources of retail distribution to
increase sales in this channel. The dealer channel sales also decreased in
Q1 1996 as compared to the prior year. This is primarily the result of
United Parcel Services activities to provide free equipment to a large portion
of the Company's customer target market for shipping room manifest systems.
The Company is continuing its efforts to add products through outside
distribution agreements as well as through its own research and development
efforts. The EAGLE BEST RATE SHIPPER was introduced in March 1996 to expand
the product offering in the computer manifest market.
Q1 1996 cost of sales for product sales decreased $181,110 or 36% as
compared to the same period in 1995. The decrease was due to a change in
product mix and a decrease in overall product sales. The Q1 1996 service and
rate change revenue costs decreased $152,333 or 38% as compared to the same
period in 1995. The cost of goods decrease is due to a decrease in service
and rate change revenues for the same period.
Gross margin Q1 1996 was 62% compared to 59% for the same period the prior
year. This increase in the gross margin due to lower cost of goods for
rate change products.
Operating expenses of the Company in Q1 1996 of $592,294 showed a 10%
decrease as compared to Q1 1995. This decrease is a result of a 10%
decrease in both selling, general and administrative and engineering and
development expense due to cost controls and restructuring of the Company.
While expenses are expected to remain relatively constant in the selling,
general and administrative departments, expenses will be increase in the
research and development areas as the Company increases activity to support
new products for the dealer channel and further development the Company's
postage meter project.
The decrease in Q1 1996 net earnings of $308,914 or 50% as compared to the
same period in 1995, is primarily a result of the decrease in rate change
revenue described above.
<PAGE>
Financial Condition, Liquidity and Capital Resources
The Company's ability to generate cash depends on rate change revenue, the
sale of inventory and collection of accounts receivable. The Company's March 31,
1996 cash balance increased $465,530 from December 31, 1995. The increase is
primarily attributable to the cash generated from prepaid rate change revenue
derived from the UPS rate change effective February 1995. The Company's
March 31, 1996 net accounts receivable balance decreased $68,334 or 20% from
December 31, 1995 levels. This decrease is due to a decrease in product sales
for the Q1 1996 period.
Working capital was $1,677,369 at March 31, 1996 as compared to $1,340,255 at
December 31, 1995. The Company's current ratio at March 31, 1996 was 4.6 as
compared to 3.6 at December 31, 1995. This change is a result of higher cash
balances at March 31, 1996 due to the Q1 1996 rate changes and lower liabilities
at March 31, 1996 which is due to a decrease in notes payable to bank. The
Company expects to completely retire the debt to the bank by June 30, 1996.
The Company's total inventories decreased 77,796 or 6% at March 31, 1996 as
compared to December 31, 1995 was due mainly to shipments of rate change
chips which had been accumulated in inventory at December 31, 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 and inventory balances with
maximum availability of $600,000. At March 31, 1996, of the $600,000 available,
$150,000 was outstanding on the line of credit while at December 31, 1995,
$275,000 was outstanding. The line of credit expires July 31, 1996. It is the
Company's belief that through cash flow from operations, replacement of its
current credit facility, or other sources of available financing, adequate
liquidity will be available through the remainder of 1996. The Company is
considering its options with respect to equity and/or debt financing to fund
the Company's ongoing postage meter research and development efforts. At
March 31, 1996 and December 31, 1995, the Company was in compliance with all
financial covenants associated with the line of credit agreement or has
obtained waivers.
The Company's Q1 1996, current liabilities have decreased 9% compared to
the December 31, 1995 balances. This is associated with a decrease in the
Company's note payable to bank as compared to the December 31, 1995 balance.
The Company's investment in capital expenditures during Q1 1996 were not
material.
The Company does not engage in any off balance sheet financing.
Inflation
The effect of inflation on operating results has, historically, been
insignificant.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Impairment of Long-Lived Assets." In October
1995, the Financial Accounting Standards Board issued a new statement titled
"Accounting for Stock-Based Compensation" (FASB 123). The new statements are
effective for fiscal years beginning after December 15, 1995. The Company does
not believe that adoption of the new standards will have a material effect on
the financial statements.
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits (listed by numbers corresponding to the 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, 1996.
<PAGE>
PART II - SIGNATURES
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
Date: May 13, 1996 /s/ Thomas E. Pistilli
-------------------------
Thomas E. Pistilli
President
Chief Executive Officer
Chief Financial Officer
/s/ Linda I. Morton
-------------------------
Linda I. Morton
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> MAR-31-1995
<CASH> 500,572
<SECURITIES> 0
<RECEIVABLES> 331,766
<ALLOWANCES> 50,109
<INVENTORY> 1,246,313
<CURRENT-ASSETS> 2,145,759
<PP&E> 1,028,082
<DEPRECIATION> 853,874
<TOTAL-ASSETS> 2,351,177
<CURRENT-LIABILITIES> 468,390
<BONDS> 0
<COMMON> 97,408
0
0
<OTHER-SE> 4,174,508
<TOTAL-LIABILITY-AND-EQUITY> 2,351,177
<SALES> 1,470,388
<TOTAL-REVENUES> 1,470,388
<CGS> 562,862
<TOTAL-COSTS> 435,715
<OTHER-EXPENSES> 150,579
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 3,414
<INCOME-PRETAX> 311,818
<INCOME-TAX> 800
<INCOME-CONTINUING> 311,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,018
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
