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: June 30, 1997
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)
14711 Bentley Circle, Tustin, California
(Address of principal executive offices)
92780
(Zip Code)
(714) 731-0557
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 -
1,949,666 shares as of August 15, 1997.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q - QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets -- June 30, 1997 and December 31, 1996 2
Statements of Operations -- Three months ended June 30, 1997 3
and June 30, 1996.
Statements of Operations -- Six months ended June 30, 1997 4
and June 30, 1996.
Statements of Cash Flows --Six months ended June 30, 1997 5
and June 30, 1996.
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 4. Other Information 12
Item 6. Exhibits and Reports on Form 8-K. 12
SIGNATURES 13
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
June 30, 1997 and December 31, 1996
<TABLE>
<S> <C> <C>
June 30,1997 December 31,
(unaudited) 1996
Assets
Current assets:
Cash $ 223,743 $ 413,533
Accounts and notes receivable, less
allowance for doubtful receivables and sales
returns of $34,718 at 6/30/97 and $35,333
at 12/31/96 79,959 103,474
Inventories (note 2) 893,369 1,039,972
Prepaid expenses and accrued interest 168,980 104,993
----------- -----------
Total current assets 1,366,051 1,661,972
Equipment and improvements, net (note 3) 206,531 207,659
Other assets, net (note 4) 602,563 320,598
----------- -----------
$ 2,175,145 $ 2,190,229
=========== ===========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 77,284 $ 65,480
Accrued expenses 128,272 173,040
Deferred revenue 44,738 60,857
----------- -----------
Total current liabilities 250,294 299,377
----------- -----------
Long-term debt 1,950,000 1,500,000
----------- -----------
Shareholders' equity:
Preferred stock, $.05 par value; 1,000,000
shares authorized no shares issued and
outstanding at 6/30/97 and 12/31/96. - -
Common stock, $.05 par value; 10,000,000
shares authorized 1,949,666 shares issued
at 6/30/97 and 1,949,166 shares at 12/31/96 97,483 97,458
Additional paid-in capital 4,176,370 4,175,708
Accumulated deficit (4,299,002) (3,882,314)
------------ -----------
Total shareholders' equity (25,149) 390,852
------------ -----------
$ 2,175,145 $ 2,190,229
============ ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Three Months Ended June 30, 1997 and June 30, 1996
(Unaudited)
<TABLE> <C> <C>
June 30, June 30,
1997 1996
Revenues: ----------- -----------
Product sales, net of returns of $43,741
in 1997 and $42,676 in 1996 $ 178,267 $ 223,865
Service and rate revenues (note 6) 91,203 40,409
----------- -----------
Total revenues 269,470 264,274
Cost of sales:
Net product sales 227,343 253,557
Service and rate revenues 50,688 43,334
----------- -----------
Total cost of sales 278,031 296,891
----------- -----------
Gross loss (8,561) (32,617)
Operating expenses:
Selling, general and administrative 342,172 350,442
Engineering and development 66,985 143,873
Provision for doubtful receivables 5,000 4,000
----------- -----------
Total operating expenses 414,157 498,315
----------- -----------
Operating loss (422,718) (530,932)
Interest income (expense), net (37,561) (4,792)
----------- -----------
Loss before income taxes (460,279) (535,724)
Income taxes (note 5) - -
----------- -----------
Net loss $ (460,279) $ (535,724)
=========== ===========
Net loss per common and common
equivalent share $ (0.24) $ (0.27)
=========== ===========
Weighted average shares outstanding 1,949,666 1,948,166
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Six Months Ended June 30, 1997 and June 30, 1996
(Unaudited)
<TABLE>
<S> <C> <C>
June 30, June 30,
1997 1996
Revenues: ------------ -----------
Product sales, net of returns of $43,741
in 1997 and $42,676 in 1996 $ 329,800 $ 541,975
Service and rate revenues (note 6) 979,722 1,192,687
----------- -----------
Total revenues 1,309,522 1,734,662
Cost of sales:
Net product sales 475,599 572,426
Service and rate revenues 345,346 287,326
----------- -----------
Total cost of sales 820,945 859,752
----------- -----------
Gross profit 488,577 874,910
Operating expenses:
Selling, general and administrative 655,836 786,159
Engineering and development 168,192 294,450
Provision for doubtful receivables 11,000 10,000
----------- -----------
Total operating expenses 835,028 1,090,609
----------- -----------
Operating loss (346,451) (215,699)
Interest income (expense), net (69,437) (8,205)
----------- -----------
Loss before income taxes (415,888) (223,904)
Income taxes (note 5) 800 800
----------- -----------
Net loss $ (416,688) $ (224,704)
=========== ===========
Net loss per common and common equivalent share $ (0.21) $ (0.12)
=========== ===========
Weighted average shares outstanding 1,949,584 1,948,166
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MICRO GENERAL CORPORATION
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and June 30, 1996
(Unaudited)
<TABLE>
<S> <C> <C>
June 30, June 30,
1997 1996
Cash flows from operating activities: ------------ ------------
Net loss $ (416,688) $ (224,704)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 17,922 41,473
Provision for losses on accounts receivable
and sales returns, net of write-offs (615) (8,094)
Change in assets and liabilities:
Decrease in accounts receivable 24,130 136,243
Decrease in inventories 146,603 125,266
(Increase) in prepaid expenses (63,987) (19,931)
Increase in accounts payable 11,804 16,555
Increase (decrease)in deferred revenue (16,119) 16,828
Increase (decrease) in accrued expenses (44,768) 2,823
----------- ------------
Total adjustments 74,970 311,163
Net cash provided by (used in)
operating activities (341,718) 86,459
Cash flows used in investing activities--capital
expenditures and capitalized
research & development (298,759) (1,465)
Cash flows from financing activities:
Exercise of stock options 687 -
Proceeds from notes payable 450,000 -
Proceeds from note payable to bank - 175,000
Repayment of note payable to bank - (150,000)
---------- ------------
Net cash provided by financing activities 450,687 25,000
----------- ------------
Net increase (decrease) in cash (189,790) 109,994
Cash - beginning of period 413,533 35,222
----------- ------------
Cash - end of period $ 223,743 $ 145,216
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 74,961 $ 8,205
=========== ============
Income taxes $ 800 $ 800
=========== ============
See accompanying notes to financial statements
</TABLE>
<PAGE>
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.
This Quarterly Report on Form 10-Q contains forward looking statements,
which are subject to known and unknown risks, uncertainties and other
factors which may cause the actual results, performance and
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
The financial information included in this report has been prepared in
accordance with generally accepted accounting principles and the
instructions to Form 10-Q and Article 10 of Regulation S-X. All
adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation, have been included. This report
should be read in conjunction with the Company's 1996 Annual Report on
Form 10-K for the year ended December 31, 1996. The results of
operations for the six months ended June 30, 1997, are not necessarily
indicative of results that may be expected for any other interim period
or for the full year ending December 31, 1997.
Note 2. Inventories
Inventories are comprised of the following at June 30, 1997 and
December 31, 1996:
June 30, 1997 December 31, 1996
------------- -----------------
Parts & supplies $ 567,938 $ 683,936
Purchased finished goods 304,484 333,376
Consigned inventory 20,947 22,660
----------- -----------
$ 893,369 $1,039,972
=========== ===========
Note 3. Equipment and Improvements
Equipment and improvements are as follows at June 30, 1997 and
December 31, 1996:
June 30, 1997 December 31, 1996
Production equipment, tooling
and construction in process $ 457,900 $ 446,232
Office furniture and
equipment 631,245 617,480
Leasehold improvements 21,417 39,347
------------ -----------
1,110,562 1,103,059
Less accumulated depreciation
and amortization 904,031 895,400
------------ -----------
$ 206,531 $ 207,659
============ ===========
<PAGE>
Note 4. Other Assets
Other assets are as follows at June 30, 1997 and December 31, 1996:
Estimated
Useful Life 1997 1996
Capitalized product costs 3 to 5 years $553,814 $262,558
Excess cost of assets purchased
over fair market value 15 years 232,531 232,531
Deferred loan fees 5 years 50,000 50,000
License rights 10 years 41,382 41,382
Other intangible assets 15 years 23,388 23,388
-------- ---------
901,115 609,859
Less accumulated amortization 298,552 289,261
--------- ---------
$602,563 $320,598
========= =========
During July 1996, the Company reached the technological feasibility stage
of development of a project (the Meter Project), which, in accordance with
Statement of Financial Accounting Standard No. 86, " Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," is
the point at which qualified product costs may be capitalized. The amount
capitalized at June 30, 1997 and December 31, 1996 is mainly comprised of
salary expense, departmental overhead and an allocation of other indirect
costs. All such capitalized costs were incurred subsequent to the
achievement of technological feasibility.
Note 5. Income Taxes
Income tax for the six months ended June 30, 1997 and June 30, 1996
represents the state minimum tax.
The expected income tax expense computed by multiplying earnings before
income tax expense by the statutory Federal income tax rate of 34% differs
from the actual income tax expense as follows:
June 30, June 30,
1997 1996
Expected tax expense $ (141,742) $ (76,399)
Utilization of net operating
loss carryforward 134,742 73,399
Nondeductible amortization of the
excess cost of assets purchased
over fair market value 7,000 3,000
State income taxes 800 800
------------ -----------
$ 800 $ 800
============ ===========
At June 30, 1997, the Company had available net operating loss
carryforwards of approximately $3,144,000 and $1,086,000 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 2011. The
Company also has investment tax credit and research and
experimentation credit carryforwards aggregating approximately
$80,000 which expire during the period 1997 to 2002.
<PAGE>
Note 6. Commitments and Contingencies
Noncancellable operating lease commitments consist principally of
the leases for the Company's manufacturing and administrative
facility in California and the research and development facility in
Connecticut. In December 1996, the Company entered into a four-
year lease agreement for a manufacturing and office facility in
California, and in turn entered into an agreement to sublease the
former California facility for the same lease term and same lease
payments. Sublease income is shown below as a reduction to total
future lease payments. At June 30, 1997, the Company is committed
to the following noncancelable operating lease payments:
Year ending December 31,
1997(six months) $ 101,000
1998 183,000
1999 89,000
2000 60,000
---------
433,000
Less sublease income 196,000
---------
$ 237,000
=========
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
the 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 six months ended June 30, 1997 and June
30, 1996. Recorded revenues from rate changes totaled
approximately $955,789 and $1,143,011 for the six months ended
June 30, 1997 and June 30, 1996, respectively. Gross profit from
rate change totaled $723,622 and $976,386 for these 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 $45,598 or 20% for the three months
ended June 30, 1997 ("Q2 1997") compared to the three months ended June 30,
1996 ("Q2 1996") while service and rate change revenues increased $50,794
or 126% for the same period in 1996. The decrease in net product sales is
due to both a decrease in the retail channel of $23,354 or 10% and a
decrease in the dealer channel of $22,244 or 10% as compared to Q2 1996.
For Q2 1997 and Q2 1996, service and rate change revenues represented
approximately 34% and 15% of total revenue, respectively. The increase in
rate change revenues for Q2 1997 as compared to Q2 1996, was due to a minor
U.S.P.S. rate change in June 1997. In Q2 1997 the decrease in the retail
channel is a direct result of fewer orders in the channel as compared to Q2
1996. The Company is continuing to seek other sources of retail
distribution to increase sales in this channel. The dealer channel sales
also shows a decline in Q2 1997 as compared to the prior year. This
continues to be the result of United Parcel Services("UPS") 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 Company's
introduction of a Windows(TM) version of The EAGLE BEST RATE SHIPPER software
in May 1997, is targeted to compete against the UPS activities.
Total net product sales decreased $212,175 or 39% for the six months
ended June 30, 1997 ("YTD 1997") compared to the six months ended June 30,
1996 ("YTD 1996") while service and rate change revenues decreased $212,965
or 18% for the same period in 1996. The decrease in net product sales is
due to both a decrease in the retail channel of $72,386 or 13% and a
decrease in the dealer channel of $139,789 or 26% as compared to YTD 1996.
For YTD 1997 and YTD 1996, service and rate change revenues represented
approximately 75% and 69% of total revenue, respectively. The decrease in
rate change revenues for YTD 1997 as compared to YTD 1996, was primarily
due to a decline in the company's installed base as more scale based
systems are replaced by service provider free systems and computer based
systems. In YTD 1997 the decrease in the retail channel is a direct result
of fewer orders by a major catalog wholesaler as compared to YTD 1996. The
Company is continuing to seek other sources of retail distribution to
increase sales in this channel. The dealer channel sales also shows a
decline in YTD 1997 as compared to the prior year. This continues to be
the result of United Parcel Services("UPS") 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 Company's DOS based EAGLE BEST
RATE SHIPPED and introduction of a Windows(TM) version of The EAGLE BEST RATE
SHIPPER software in May 1997, are both targeted to compete against the UPS
activities and other software companies.
Q2 1997 cost of sales for product sales decreased $26,214 or 10% as
compared to the same period in 1996. The decrease was due to a change in
product mix and a decrease in overall product sales. The Q2 1997 service
and rate change revenue product costs increased $7,354 or 17% as compared
to the same period in 1996. This increase is due to minor USPS rate change
in June 1997. Gross loss Q2 1997 was (3%) compared to (12%) for the same
period the prior year.
YTD 1997 cost of sales for product sales decreased $96,827 or 17% as
compared to the same period in 1996. The decrease was due to a change in
product mix and a decrease in overall product sales. Though expenses have
been reduced for product labor and overhead, the gross margin on product
sales for both the three and six months ended June 30, 1997, remains
negative due to the under absorption of fixed costs and low product sales.
The YTD 1997 service and rate change revenue product costs increased
$58,020 or 20% as compared to the same period in 1996. This increase is
due to the higher costs of material needed to support the UPS rate change
in Q1 1997 and the minor USPS rate change in June 1997. The overall cost
of goods decrease is due to a decrease in labor and overhead costs
associated with product sales. Gross margin YTD 1997 was 37% compared to
50% for the same period the prior year.
Operating expenses of the Company in Q2 1997 of $414,157 showed a 17%
decrease as compared to Q2 1996. Expenses for YTD 1997 of $835,028 showed
a 23% decrease as compared to the same period in 1996. The decreases in
expenses for the three and six month periods are the result of a decreases
in selling, general and administrative costs. The 43% decrease in
engineering and development expense is due to a deferral during the six
months ended June 30, 1997 of approximately $291,256 in expense related to
the Meter Project. While expenses are expected to remain relatively
constant in the selling, general and administrative departments, expenses
will be increased in the research and development areas as the Company
increases activity to support new products for the dealer channel and
further development of the Company's postage meter project currently
scheduled to be submitted for comment to the United States Postal Service
during the third quarter of 1997.
Interest expense for the Company in YTD 1997 increased $66,756 as
compared to YTD 1996. This increase is due to the interest associated with
the convertible notes signed August 1, 1996.
The increase in YTD 1997 net loss of $191,984 or 85% as compared to
the same period in 1996, is the result of the decrease in product sales and
in rate change revenue as described above.
Financial Condition, Liquidity and Capital Resources
The Company's ability to generate cash, during the first six months of
1997, depended largely on rate change revenue and funds generated from the
notes payable signed August 1996. The Company's June 30, 1997 cash balance
decreased $189,790 from December 31, 1996. The decrease is primarily
attributable to the cash used for the postage meter development project.
The Company did request and receive additional monies from the convertible
notes during the six months ended June 30, 1997 totaling $450,000. The
Company's June 30, 1997 net accounts receivable balance decreased $24,130
or 17% from December 31, 1996 levels. This decrease is due to a decrease
in product sales for the YTD 1997 period.
Working capital was $1,115,757 at June 30, 1997 as compared to
$1,362,595 at December 31, 1996. The Company's current ratio at June 30,
1997 was 5.5 as compared to 5.6 at December 31, 1996.
The Company's total inventories decreased 146,603 or 14% at June 30,
1997 as compared to December 31, 1996. The decrease in inventory is
related to the sale of products and rate change during the first quarter of
1997.
The Company has available liquidity through two financing agreements
entered into on August 1, 1996, to provide additional funding primarily for
operations and 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. At June 30, 1997, the Company was not
in compliance with certain of the financial covenants associated with the
convertible notes, and received a waiver.
The Company is currently operating without a revolving line of credit
agreement to fund working capital requirements since this is prohibited by
the terms of the note agreements. Current liquidity is being funded
through the aforementioned product sales, service and rate change revenues
and a portion of periodic drawdowns on its financing agreements.
Management is pursuing modifications of the terms of its loan
agreements. With these modifications, the Company believes it will have
adequate liquidity available thought the remainder of 1997.
The Company's investment in capital expenditures during YTD 1997 was
material.
The Company does not engage in any significant off balance sheet
financing.
Inflation
The effect of inflation on operating results has, historically, been
insignificant.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of Shareholders was held on May 20,1997.
b. Voting for the election of Directors at said meeting was duly and
properly conducted by ballot. The following six persons were
duly nominated, and each received the number of votes shown
opposite his name and was elected a Director.
For Withheld
John J. Cahill 1,516,522 758
William P. Foley, II 1,516,576 704
George E. Olenik 1,516,576 704
Richard F. Pickup 1,516,536 744
Thomas E. Pistilli 1,516,576 704
Carl A. Strunk 1,516,576 704
ITEM 5. OTHER INFORMATION
On July 17, 1997, the Company submitted for comment to the United
States Postal Service, various components of the Company's postage
meter which it believes conforms to the new proposed regulations.
The Company intends to submit to U.S.P.S. for comment additional
components during the third quarter of 1997.
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 June 30, 1997.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED JUNE 30, 1997
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: August 14, 1997 /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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 233,743
<SECURITIES> 0
<RECEIVABLES> 114,677
<ALLOWANCES> (34,718)
<INVENTORY> 893,369
<CURRENT-ASSETS> 1,366,051
<PP&E> 1,110,562
<DEPRECIATION> (904,031)
<TOTAL-ASSETS> 2,175,145
<CURRENT-LIABILITIES> 250,294
<BONDS> 0
0
0
<COMMON> 97,483
<OTHER-SE> 4,176,370
<TOTAL-LIABILITY-AND-EQUITY> 2,175,145
<SALES> 1,309,522
<TOTAL-REVENUES> 1,309,522
<CGS> 820,945
<TOTAL-COSTS> 820,945
<OTHER-EXPENSES> 824,028
<LOSS-PROVISION> 11,000
<INTEREST-EXPENSE> 69,437
<INCOME-PRETAX> (415,888)
<INCOME-TAX> 800
<INCOME-CONTINUING> (416,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (416,688)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
