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, 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 May 15, 1997.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q - QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements.
Balance Sheets -- March 31, 1997 and December 31, 1996
Statements of Operations -- Three months ended March 31,
1997 and March 31, 1996.
Statements of Cash Flows --Three months ended March 31, 1997
and March 31, 1996.
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>
MICRO GENERAL CORPORATION
Balance Sheets
March 31, 1997 and December 31, 1996
March 31,
1997 December 31,
(unaudited) 1996
Assets
Current assets:
Cash $ 451,663 $ 413,533
Accounts and notes receivable,
less allowance for doubtful receivables
and sales returns of $28,896
at 3/31/97 and $35,333 at 12/31/96 92,416 103,474
Inventories (note 2) 893,982 1,039,972
Prepaid expenses and accrued interest 208,648 104,993
---------- -----------
Total current assets 1,646,709 1,661,972
Equipment and improvements, net (note 3) 203,322 207,659
Other assets, net (note 4) 370,294 320,598
---------- -----------
$2,220,325 $ 2,190,229
=========== ==========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 68,113 $ 65,480
Accrued expenses 137,835 173,040
Deferred revenue 79,248 60,857
---------- ----------
Total current liabilities 285,196 299,377
Long-term debt 1,500,000 1,500,000
Shareholders' equity:
Preferred stock, $.05 par value; 1,000,000
shares authorized no shares issued and
outstanding at 3/31/97 and 12/31/96. - -
Common stock, $.05 par value; 10,000,000
shares authorized 1,949,666 shares issued
at 3/31/97 and 1,949,166 shares at 12/31/96 97,483 97,458
Additional paid-in capital 4,176,370 4,175,708
Accumulated deficits (3,838,724) (3,882,314)
---------- -----------
Total shareholders' equity 435,129 390,852
---------- -----------
$ 2,220,325 $ 2,190,229
=========== ============
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Three Months Ended March 31, 1997 and March 31, 1996
(Unaudited)
March 31, March 31,
1997 1996
--------- ---------
Revenues:
Product sales, net of returns of $36,390 in
1997 and $ 152,295 $ 319,341
$40,452 in 1996
Service and rate revenues (note 5) 887,756 1,151,047
---------- ----------
Total revenues 1,040,051 1,470,388
Cost of sales:
Net product sales 248,256 318,869
Service and rate revenues 294,658 243,993
---------- ----------
Total cost of sales 542,914 562,862
---------- ----------
Gross profit 497,137 907,526
Operating expenses:
Selling, general and administrative 313,663 435,715
Engineering and development 101,208 150,579
Provision for doubtful receivables 6,000 6,000
---------- ---------
Total operating expenses 420,871 592,294
---------- ---------
Operating profit 76,266 315,232
Interest income/expense, net 31,876 3,414
---------- ---------
Income before income taxes 44,390 311,818
Income taxes (note 5) 800 800
--------- ---------
Net income $ 43,590 $ 311,018
========= =========
Net income per common and common equivalent share $ 0.02 $ 0.16
========== ==========
Weighted average shares outstanding 1,949,584 1,948,166
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Cash Flows
For the Three Months Ended March 31, 1997 and March 31, 1996
(Unaudited)
March 31, March 31,
1997 1996
---------- ----------
Cash flows from operating activities:
Net income $ 43,590 $ 311,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 23,903 27,112
Provision for losses on accounts receivable
and sales returns, net of write-offs (6,437) 3,516
Change in assets and liabilities:
Decrease in accounts receivable 17,495 64,818
Decrease in inventories 145,990 77,796
(Increase) decrease in prepaid expenses (103,656) 27,196
Increase in accounts payable 3,506 14,604
Increase in deferred revenue 18,390 34,505
Increase (decrease) in accrued expenses (36,077) 30,981
--------- ---------
Total adjustments 63,114 280,528
Net cash provided by operating activities 106,704 591,546
Cash flows used in investing activities--capital
expenditures (69,262) (1,016)
Cash flows from financing activities:
Exercise of stock options 688 -
Proceeds from note payable to bank - 25,000
Repayment of note payable to bank - (150,000)
---------- ----------
Net cash provided (used) by financing activities 688 (125,000)
---------- ----------
Net increase in cash 38,130 465,530
Cash - beginning of period 413,533 35,222
---------- ----------
Cash - end of period $ 451,663 $ 500,752
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 35,625 $ 3,414
========= =========
Income taxes $ 800 $ 800
========= =========
See accompanying notes to financial statements
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED MARCH 31, 1997
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 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 three
months ended March 31, 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 March 31, 1997 and
December 31, 1996:
March 31, 1997 December 31, 1996
Parts & supplies $ 552,869 $ 683,936
Purchased finished goods 318,592 333,376
Consigned inventory 22,521 22,660
----------- ----------
$ 893,982 $1,039,972
=========== ==========
Note 3. Equipment and Improvements
Equipment and improvements are as follows at March 31, 1997
and December 31, 1996:
March 31, 1997 December 31, 1996
Production equipment, tooling
and construction in process $ 446,232 $ 446,232
Office furniture and
equipment 631,506 617,480
Leasehold improvements 39,347 39,347
------------ ----------
1,117,085 1,103,059
Less accumulated depreciation
and amortization 913,763 895,400
------------ -----------
$ 203,322 $ 207,659
============ ===========
<PAGE>
Note 4. Other Assets
Other assets are as follows at March 31, 1997 and December 31, 1996:
Estimated
Useful Life 1997 1996
Capitalized product costs 3 to 5 years $317,794 $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
-------- --------
665,095 609,859
Less accumulated amortization 294,801 289,261
--------- ---------
$ 370,294 $ 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 March 31, 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 three months ended March 31, 1997 and March
31, 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:
March 31, March 31,
1997 1996
Expected tax expense $ 15,092 $ 106,018
Utilization of net operating
loss carryforward (22,092) (109,018)
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 March 31, 1997, the Company had available net operating
loss carryforwards of approximately $3,009,000 and $952,000
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
Noncancelable 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. In December
1996, the Company entered into a four-year lease agreement for
a new manufacturing and administrative facility in California,
and in turn entered into an agreement to sublease the old
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 March 31, 1997, the Company
is committed to the following noncancelable operating lease
payments:
Year ending December
1997(nine months) 152,000
1998 183,000
1999 89,000
2000 60,000
--------
484,000
Less sublease income 223,000
--------
$ 261,000
=========
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 three months ended
March 31, 1997 and March 31, 1996. Recorded revenues from
rate changes totaled approximately $888,378 and $1,117,423 for
the three months ended March 31, 1997 and March 31, 1996,
respectively. Gross profit from rate change totaled $665,372
and $943,037 for these same periods.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED MARCH 31, 1997
MANAGEMENT DISCUSSION AND ANALYSIS
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Total net product sales decreased $167,046 or 52% for the three
months ended March 31, 1997 ("Q1 1997") compared to the three months
ended March 31, 1996 ("Q1 1996") while service and rate change
revenues decreased $263,291 or 23% for the same period in 1996. The
decrease in net product sales is due to both a decrease in the retail
channel of $49,032 or 75% and a decrease in the dealer channel of
$118,014 or 47% as compared to Q1 1996. For Q1 1997 and Q1 1996,
service and rate change revenues represented approximately 85% and 78%
of total revenue, respectively. The decrease in rate change revenues
for Q1 1997 as compared to Q1 1996, was primarily due to the decline
in the Company's installed base as more scale based systems are
replaced by service provider free systems and computer based systems.
In Q1 1997 the decrease in the retail channel is a direct result of
fewer orders by a major catalog wholesaler as compared to Q1 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 Q1 1997 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, the Company introduced a
Windows version of the software in March 1997.
Q1 1997 cost of sales for product sales decreased $70,613 or 22%
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 remains negative due to the underabsorption of
fixed costs and low product sales. The Q1 1997 service and rate
change revenue product costs increased $50,665 or 21% 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. The
overall cost of goods decrease of is due to a decrease in labor and
overhead costs associated with product sales. Gross margin Q1 1997
was 48% compared to 62% for the same period the prior year.
Operating expenses of the Company in Q1 1997 of $420,871 showed a
29% decrease as compared to Q1 1996. This decrease is a result of a
28% decrease in selling, general and administrative. The 33%
decrease in engineering and development expense is due to a deferral
of approximately $49,000 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
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 due for
submission to the United States Postal Service during the second
quarter of 1997.
Interest expense for the Company in Q1 1997 increased $32,212 as
compared to Q1 1996. This increase is due to the interest associated
with the convertible notes signed August 1, 1996(see note 6).
The decrease in Q1 1997 net earnings of $267,428 or 86% 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 three
months of 1997, depended largely on rate change revenue. The
Company's March 31, 1997 cash balance increased $38,130 from December
31, 1996. The increase is primarily attributable to the cash
generated from prepaid rate change revenue derived from the UPS rate
change effective February 1997. The Company did not request or
receive any additional monies from the convertible notes during the
first quarter of 1997. The Company's March 31, 1997 net accounts
receivable balance decreased $11,058 or 11% from December 31, 1996
levels. This decrease is due to a decrease in product sales for the
Q1 1997 period.
Working capital was $1,361,513 at March 31, 1997 as compared to
$1,362,595 at December 31, 1996. The Company's current ratio at March
31, 1997 was 5.8 as compared to 5.6 at December 31, 1996.
The Company's total inventories decreased 145,990 or 14% at March
31, 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 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. At March 31, 1997, the Company
was in compliance with all financial covenants associated with the
convertible notes.
The Company is currently operating without a revolving line of
credit agreement to fund working capital requirements. Current
liquidity is being funded through the aforementioned product sales,
service and rate change revenues and a portion (15% pursuant to the
loan agreements) of periodic drawdowns on its note payable.
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 Q1 1997
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.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED MARCH 31, 1997
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 March 31, 1997.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED MARCH 31, 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: May 15, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 451,663
<SECURITIES> 0
<RECEIVABLES> 121,312
<ALLOWANCES> (28,896)
<INVENTORY> 893,982
<CURRENT-ASSETS> 1,646,709
<PP&E> 1,117,085
<DEPRECIATION> (913,763)
<TOTAL-ASSETS> 2,220,325
<CURRENT-LIABILITIES> 285,196
<BONDS> 0
0
0
<COMMON> 97,483
<OTHER-SE> 4,176,370
<TOTAL-LIABILITY-AND-EQUITY> 435,129
<SALES> 1,040,051
<TOTAL-REVENUES> 1,040,051
<CGS> 542,914
<TOTAL-COSTS> 542,914
<OTHER-EXPENSES> 414,871
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 31,876
<INCOME-PRETAX> 44,390
<INCOME-TAX> 800
<INCOME-CONTINUING> 43,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,590
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
