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: September 30, 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 -
1,949,166 shares as of September 30, 1996.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Balance Sheets -- September 30, 1996 and
December 31, 1995 2
Statements of Operations -- Three months ended
September 30, 1996 and September 30, 1995. 3
Statements of Operations --Nine months ended
September 30, 1996 and September 30, 1995. 4
Statements of Cash Flows --Nine months ended
September 30, 1996 and September 30, 1995. 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9
PART II. OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K. 11
SIGNATURES 12
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements
or notes thereto.
<PAGE>
MICRO GENERAL CORPORATION
Balance Sheets
September 30, 1996 and December 31, 1995
September 30,
1996 December 31,
Assets (unaudited) 1995
------------ ------------
Current assets:
Cash $ 379,424 $ 35,222
Accounts and notes receivable, less allowance
for doubtful receivables and sales returns
of $40,709 at 9/30/96 and $46,594 at 12/31/95 123,056 349,991
Inventories (note 2) 1,132,891 1,324,109
Prepaid expenses and accrued interest 114,889 143,433
------------ ------------
Total current assets 1,750,260 1,852,755
Equipment and improvements, net (note 3) 184,167 193,691
Other assets, net (note 4) 197,857 37,822
------------ ------------
$ 2,132,284 $ 2,084,268
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Note payable to bank $ -- $ 275,000
Accounts payable 46,475 51,278
Accrued expenses 169,175 164,545
Deferred revenue 55,087 21,677
------------ ------------
Total current liabilities 270,737 512,500
Long term liabilities:
Long term debt 1,000,000 --
------------ ------------
Total liabilites 1,270,737 512,500
Shareholders' equity:
Preferred stock, $.05 par value; 1,000,000 shares
authorized no shares issued and outstanding at
9/30/96 and 12/31/95 -- --
Common stock, $.05 par value; 10,000,000 shares
authorized 1,949,166 shares issued at 9/30/96 and
1,948,166 shares at 12/31/95(note 1) 97,458 97,408
Additional paid-in capital 4,175,708 4,174,508
Accumulated deficit (3,411,619) (2,700,148)
------------ ------------
Total shareholders' equity 861,547 1,571,768
------------ ------------
$ 2,132,284 $ 2,084,268
============ ============
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Three Months Ended September 30, 1996 and September 30, 1995
(unaudited)
September 30, September 30,
1996 1995
------------- -------------
Revenues:
Product sales, net of returns of $67,440
in 1996 and $84,144 in 1995 $ 146,334 $ 424,778
Service and rate revenues 54,824 322,385
------------- -------------
Total revenues 201,158 747,163
Cost of sales:
Net product sales 223,884 361,663
Service and rate revenues 49,192 107,802
------------- -------------
Total cost of sales 273,076 469,465
------------- -------------
Gross profit (loss) (71,918) 277,698
Operating expenses:
Selling, general and administrative 335,768 403,624
Engineering and development 59,589 122,104
Provision for doubtful receivables 4,000 (42,000)
------------- ------------
Total operating expenses 399,357 483,728
------------- ------------
Operating loss (471,275) (206,030)
Interest income (expense), net (15,491) 6,100
------------- ------------
Loss before income taxes (486,766) (199,930)
Income taxes -- --
------------- ------------
Net loss $ (486,766) $ (199,930)
============= ============
Net loss per common and common equivilant
share (note 1) $ (0.25) $ (0.10)
============= ============
Weighted average shares outstanding(note 1) 1,948,704 1,948,166
============= ============
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Nine Months ended September 30, 1996 and September 30, 1995
(unaudited)
September 30, September 30,
1996 1995
------------- ------------
Revenues:
Product sales, net of returns of $150,384
in 1996 and $381,291 in 1995 $ 688,309 $ 1,389,666
Service and rate revenues 1,247,511 2,196,181
------------- -------------
Total revenues 1,935,820 3,585,847
Cost of sales:
Net product sales 796,310 1,156,587
Service and rate revenues 336,519 587,855
------------- -------------
Total cost of sales 1,132,829 1,744,442
------------- -------------
Gross profit 802,991 1,841,405
Operating expenses:
Selling, general and administrative 1,121,927 1,299,486
Engineering and development 354,039 489,276
Provision for doubtful receivables 14,000 (29,000)
------------- ------------
Total operating expenses 1,489,966 1,759,762
------------- ------------
Operating profit (loss) (686,975) 81,643
Interest income (expense), net (23,696) 10,937
------------- ------------
Earnings (loss) before income taxes (710,671) 92,580
Income taxes 800 --
------------- ------------
Net earnings (loss) $ (711,471) $ 92,580
============= ============
Net earnings (loss) per common and common
equivilant share (note 1) $ (0.37) $ 0.05
============= ============
Weighted average shares outstanding(note 1) 1,948,345 1,939,595
============= ============
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and September 30, 1995
(unaudited)
September 30, September 30,
1996 1995
------------- -------------
Cash flows from operating activities:
Net earnings (loss) $ (711,471) $ 92,580
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)operating
activities:
Depreciation and amortization 64,379 76,611
Provision for losses on accounts receivable
and sales returns, net of write-offs (5,884) (29,814)
Change in assets and liabilities:
Decrease in accounts receivable 232,819 186,566
Decrease in inventories 191,218 70,448
Decrease in prepaid expenses 28,544 125,672
Decrease in accounts payable (3,815) (222,181)
Increase (decrease) in deferred rate
revenue 33,410 (76,571)
Increase (decrease) in accrued expenses 3,641 (35,867)
----------- ------------
Total adjustments 544,312 94,864
----------- ------------
Net cash provided by (used in)
operating activities (167,159) 187,444
Cash flows used in investing activities--
capital expenditures (214,889) (91,746)
Cash flows from financing activities:
Common stock proceeds, net 1,250 65,625
Proceeds from long term debt 1,000,000 --
Repayment of note payable to bank (275,000) --
------------ ------------
Net cash used by financing activities 726,250 65,625
------------ ------------
Net increase in cash 344,202 161,323
Cash - beginning of year 35,222 152,848
------------ ------------
Cash - end of period $ 379,424 $ 314,171
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 23,696 $ --
============ ============
Income Taxes $ 800 $ --
============ ============
See accompanying notes to financial statements.
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
Note 1. Operations and Summary of Significant Accounting Policies
General
The accompanying condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such regulations. The condensed financial statements reflect all
adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation of the information
contained therein. All such adjustments are of a normal
recurring nature. The condensed financial statements should be
read in conjunction with the financial statements and notes
thereto that are contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. The results of
operations for the interim periods are not necessarily indicative
of the results of the full fiscal year.
This Quarterly Report on Form 10-Q contains forward looking
statements, all of which are subject to risks and uncertainties.
The Company's actual results may differ significantly from
results discussed in the forward looking statements. Factors
that might cause such differences include, but are not limited
to, those discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and those described in the
Company's other filings with the Securities Exchange Commission.
Net Income (Per Common Share)
Net income per common share is computed based on weighted average
of common shares outstanding. The potential exercise of stock
options is not included in the computation of net earnings per
common shares since the effect would be less than 3% for the
periods presented.
Note 2. Inventories
Inventories are comprised of the following at September 30, 1996
and December 31, 1995:
September 30, 1996 December 31, 1995
Parts & supplies $ 746,651 $ 919,459
Purchased finished goods 355,732 372,763
Consigned inventory 30,508 31,887
----------- ----------
$1,132,891 $1,324,109
=========== ==========
<PAGE>
Note 3. Equipment and Improvements
Equipment and improvements are as follows at September 30, 1996 and
December 31, 1995:
September 30, 1996 December 31, 1995
Production equipment, tooling
and construction in process $ 448,462 $ 432,902
Office furniture and
equipment 576,269 563,557
Leasehold improvements 36,518 30,606
------------ -----------
1,061,249 1,027,065
Less accumulated depreciation
and amortization 877,082 833,374
------------ -----------
$ 184,167 $ 193,691
============ ===========
Note 4. Other Assets
Other assets are as follows at September 30, 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
Loan costs 5 years 50,000 --
Postage meter costs 3 years 130,705 --
--------- ---------
478,006 297,301
Less accumulated amortizati 280,149 259,479
--------- ---------
$ 197,857 $ 37,822
========= =========
<PAGE>
Note 5. Notes Payable/Long Term Debt
The Company had a line of credit which was 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%. On August 1, 1996,
the Company paid the outstanding amount due on the line of credit
in full.
On August 1, 1996, the Company entered into a $3 million financing
agreement to provide additional funding primarily for the
retirement of bank debt, operations, and to fund the Company's
ongoing development of a series of high-level security postage
meters designed to comply with the new United States Postal Service
proposed regulations. Two 9-1/2%, five-year convertible notes were
issued, one in the amount of $1 million and one in the amount of
$2 million, and are held by Fidelity National Financial, Inc., a
Delaware corporation and thirty-eight (38%) percent holder of Micro
General common stock and Dito Caree L.P. Holding, a Nevada
corporation which owns five (5%) of the common stock of Micro
General, respectively. Repayment of the notes is on an interest
only basis for the first two years, with principal and interest
payments for the remaining 3 years of the term. The Company can
draw against the Notes in aggregate amounts up to $750,000 per
quarter over the twelve months commencing August 1, 1996, if in
compliance with certain restrictive covenants. The debt, secured by
the assets of the Company, can be converted into 1,344,438 shares
of the Company's common stock at a range of $2.00 to $2.50 per
share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total net product sales decreased $278,444 or 66% for the three months
ended September 30, 1996 ("Q3 1996") compared to the three months ended
September 30, 1995 ("Q3 1995") while service and rate change revenues
decreased $267,561 or 83% for the same period. The decrease in net product
sales is due to both a decrease in the retail channel of $44,803 or 57%
and a decrease in the dealer channel of $233,642 or 68% as compared to Q3
1995. For Q3 1996 and Q3 1995, service and rate change revenues
represented approximately 27% and 43% of total revenue, respectively. The
decrease in service and rate revenues is due to the occurrence in Q3 1995
of a United States Postal Service ("USPS") rate change while in Q3 1996 no
such rate change occurred.
Total net product sales decreased $701,357 or 51% for the nine months
ended September 30, 1996 ("YTD 1996") compared to the nine months ended
September 30, 1995 ("YTD 1995") while service and rate change revenues
decreased $948,670 or 43%. The decrease in net product sales is due to
both a decrease in the retail channel of $297,599 or 68% and a decrease in
the dealer channel of $403,757 or 43% as compared to YTD 1995. For YTD
1996 and YTD 1995, service and rate change revenues represented
approximately 64% and 61% of total revenue, respectively. The decrease in
rate change revenues YTD 1996 as compared to the same period in 1995, was
primarily due to only a United Parcel Service ("UPS") rate change in 1996
as compared to both a UPS and two USPS rate changes in 1995. The decrease
in the retail channel is a direct result of fewer orders by a major catalog
wholesaler as compared to the prior period. The Company is continuing to
seek other sources of retail distribution to increase sales in this
channel. The dealer channel sales decrease continues to be 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. A new scale which interfaces with a personal
computer is scheduled for release in early 1997.
Q3 1996 cost of sales for product sales decreased $137,779 or 38% as
compared to the same period in 1995. YTD 1996 cost of sales for product
sales decreased $360,277 or 31% as compared to the same period in 1995.
The decrease in both periods was due to a change in product mix and a
decrease in overall product sales. The Q3 1996 service and rate change
revenue costs decreased $58,610 or 54% as compared to the same period in
1995, while YTD 1996 service and rate change revenue costs decreased
$251,336 or 43%. The cost of goods decrease is due to a decrease in service
and rate change revenues for the same period.
Gross margin YTD 1996 was 42% compared to 52% for the same period the
prior year. This decrease in the gross margin is due to lower total
product sales.
Operating expenses of the Company in Q3 1996 of $399,357 showed a 17%
decrease as compared to Q3 1995, while YTD 1996 operating expenses of
$1,489,966 showed a 15% decrease as compared to the same period in 1995.
This decrease is a result of a decrease in both selling, general and
administrative expenses. While expenses are expected to be reduced in the
selling, general and administrative departments, as a result of, layoffs
and cost reductions, expenses will be increased in the research and
development areas as the Company continues to increase activity to support
new products for the dealer channel and further development of the
Company's high-security postage meter project. The advanced stage of
development on the Company's postage meter project allows for certain
expenses to be capitalized in future periods. The product under
development is expected to submitted for approval to the United States
Postal Service near the end of the first quarter in 1997.
<PAGE>
The decrease in YTD 1996 net earnings of $804,051 or 869% as compared
to the same period in 1995, is primarily a result of the decreases in both
product sales and in rate change revenue described above and a significant
increase in research and development costs. The loss experienced in the
third quarter is due to a decrease in product sales and reduced rate change
revenue. Additionally, there was a significant increase in research and
development expenses related to the Company's ongoing development of a
series of postage meters designed to comply with the new USPS proposed
regulations. Submission of the meter to the United States Postal Service is
expected to occur in the first quarter of 1997.
Financial Condition, Liquidity and Capital Resources
The Company's ability to generate cash depends on rate change revenue,
long term debt, the sale of inventory and collection of accounts
receivable. The Company's September 30, 1996 cash balance increased
$344,202 from December 31, 1995. The increase is primarily attributable to
the cash generated from amounts borrowed from the convertible notes signed
August 1, 1996. At September 30, 1996, the Company had borrowed $1,000,000
from the convertible notes (see note 5). The Company's September 30, 1996
net accounts receivable balance decreased $226,935 or 65% from December 31,
1995 levels. This decrease is due to a decrease in product sales for the
YTD 1996 period.
Working capital was $1,479,523 at September 30, 1996 as compared to
$1,340,255 at December 31, 1995. The Company's current ratio at September
30, 1996 was 6.5 as compared to 3.6 at December 31, 1995. This change is a
result of a reduction in current liabilities at September 30, 1996 which is
due to the retirement of the notes payable to bank.
The Company's total inventories decreased 191,218 or 14% at September
30, 1996 as compared to December 31, 1995. This decrease is due to product
sales during the nine months ended September 30, 1996.
The Company has available liquidity through the two financing
agreements entered into on August 1, 1996, to provide additional funding
primarily for the retirement of bank debt, operations, and to fund the
Company's ongoing development of a series of high-level security postage
meters designed to comply with the new United States Postal Service
proposed regulations (see note 5).
It is the Company's belief that through cash flow from the
aforementioned convertible notes, adequate liquidity will be available
through the remainder of 1996. At September 30, 1996 and December 31,
1995, the Company was in compliance with all financial covenants associated
with the convertible notes.
The Company's YTD 1996, current liabilities have decreased 47%
compared to the December 31, 1995 balances. This is primarily with the
retirement of the Company's note payable to bank on July 31, 1996.
The Company's investment in capital expenditures during six months
ended September 30, 1996 were not material. The Company's increase in
other assets is a result of deferred research and development costs
associated with the postage meter project. The postage meter which is in
the final development stage, is projected to be submitted to the United
States Postal Service in early 1997.
The Company does not engage in any significant off balance sheet
financing.
<PAGE>
PART II - OTHER INFORMATION
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 September 30, 1996.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1996
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.
Date: November 14, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 379,424
<SECURITIES> 0
<RECEIVABLES> 163,765
<ALLOWANCES> 40,709
<INVENTORY> 1,132,891
<CURRENT-ASSETS> 1,750,260
<PP&E> 1,061,249
<DEPRECIATION> 877,082
<TOTAL-ASSETS> 2,132,284
<CURRENT-LIABILITIES> 270,737
<BONDS> 0
<COMMON> 97,458
0
0
<OTHER-SE> 4,175,708
<TOTAL-LIABILITY-AND-EQUITY> 861,547
<SALES> 1,935,820
<TOTAL-REVENUES> 1,935,820
<CGS> 1,132,829
<TOTAL-COSTS> 1,132,829
<OTHER-EXPENSES> 1,489,966
<LOSS-PROVISION> 14,000
<INTEREST-EXPENSE> 23,696
<INCOME-PRETAX> (710,671)
<INCOME-TAX> 800
<INCOME-CONTINUING> (711,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (711,471)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
