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, 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 92780
(Address of principal executive offices) (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 November 15, 1997.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q - QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets -- September 30, 1997 and December 31, 1996. 2
Statements of Operations -- Three months ended September 30, 1997 3
and September 30, 1996.
Statements of Operations -- Nine months ended September 30, 1997 4
and September 30, 1996.
Statements of Cash Flows -- Nine months ended September 30, 1997 5
and September 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 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
September 30, 1997 and December 31, 1996
September 30,
1997 December 31,
(unaudited 1996
Assets
Current assets:
Cash $ 186,444 $ 413,533
Accounts and notes receivable, less allowance for
doubtful receivables and sales returns of $22,000
at 9/30/97 and $35,333 at 12/31/96 76,525 103,474
Inventories, net (note 2) 81,542 1,039,972
Prepaid expenses and accrued interest 184,887 104,993
----------- -----------
Total current assets 1,329,398 1,661,972
Equipment and improvements, net (note 3) 222,709 207,659
Other assets, net (note 4) 855,630 320,598
----------- -----------
$ 2,407,737 $ 2,190,229
=========== ===========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 168,787 $ 65,480
Accrued expenses 159,396 173,040
Deferred revenue 14,908 60,857
----------- -----------
Total current liabilities 343,091 299,377
Long-term debt 2,550,000 1,500,000
Shareholders' equity:
Preferred stock, $.05 par value; 1,000,000 shares
authorized no shares issued and outstanding at
9/30/97 and 12/31/96. -- --
Common stock, $.05 par value; 10,000,000 shares
authorized 1,949,666 shares issued at 9/30/97
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 (4,759,207) (3,882,314)
----------- -----------
Total shareholders' equity (485,354) 390,852
----------- -----------
$ 2,407,737 $ 2,190,229
=========== ===========
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Three Months Ended September 30, 1997 and September 30, 1996
(Unaudited)
September 30, September 30,
1997 1996
Revenues: ------------ ------------
Product sales, net of returns of $20,573 in
1997 and $67,440 in 1996 $ 180,681 $ 147,394
Service and rate revenues (note 6) 68,938 53,764
------------ ------------
Total revenues 249,619 201,158
Cost of sales:
Net product sales 203,307 186,545
Service and rate revenues 99,816 86,531
------------ ------------
Total cost of sales 303,123 273,076
------------ ------------
Gross loss (53,504) (71,918)
Operating expenses:
Selling, general and administrative 308,392 335,768
Engineering and development 62,198 59,589
Provision for doubtful receivables (17,306) 4,000
------------ ------------
Total operating expenses 353,284 399,357
------------ ------------
Operating loss (406,788) (471,275)
Interest expense, net (53,418) (15,491)
------------ ------------
Loss before income taxes (460,206) (486,766)
Income taxes (note 5) -- --
------------ ------------
Net loss $ (460,206) $ (486,766)
============ ============
Net loss per common and common equivalent share $ (0.24) $ (0.25)
============ ============
Weighted average shares outstanding 1,949,666 1,948,704
============ ============
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Operations
For the Nine Months Ended September 30, 1997 and September 30, 1996
(Unaudited)
September 30, September 30,
1997 1996
Revenues: ------------ ------------
Product sales, net of returns of $100,703 in
1997 and $150,564 in 1996 $ 511,495 $ 691,617
Service and rate revenues (note 6) 1,047,646 1,244,203
------------ ------------
Total revenues 1,559,141 1,935,820
Cost of sales:
Net product sales 436,970 540,885
Service and rate revenues 687,098 591,944
------------ ------------
Total cost of sales 1,124,068 1,132,829
------------ ------------
Gross profit 435,073 802,991
Operating expenses:
Selling, general and administrative 964,227 1,121,927
Engineering and development 230,391 354,039
Provision for doubtful receivables (6,306) 14,000
------------ ------------
Total operating expenses 1,188,312 1,489,966
------------ ------------
Operating loss (753,239) (686,975)
Interest expense, net (122,854) (23,696)
------------ ------------
Loss before income taxes (876,093) (710,671)
Income taxes (note 5) 800 800
------------ ------------
Net loss $ (876,893) $ (711,471)
============ ============
Net loss per common and common equivalent share $ (0.45) $ (0.37)
============ ============
Weighted average shares outstanding 1,949,305 1,948,345
============ ============
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and September 30, 1996
(Unaudited)
September 30, September 30,
1997 1996
Cash flows from operating activities: ------------ ------------
Net loss $ (876,893) $ (711,471)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 40,133 64,379
Provision for losses on accounts receivable
and sales returns, net of write-offs (13,333) (5,884)
Change in assets and liabilities:
Decrease in accounts receivable 40,282 232,819
Decrease in inventories 158,430 191,218
(Increase) in prepaid expenses (79,894) 28,544
Increase (decrease) in accounts payable 103,307 (3,815)
Increase (decrease) in deferred revenue (45,949) 33,410
Increase (decrease) in accrued expenses (13,644) 3,641
----------- -----------
Total adjustments 189,332 544,312
Net cash used in operating activities (687,561) (167,159)
Cash flows used in investing activities--capital
expenditures and capitalized product costs (590,215) (214,889)
Cash flows from financing activities:
Exercise of stock options 687 1,250
Proceeds from notes payable 1,050,000 1,000,000
Proceeds from note payable to bank -- (275,000)
----------- -----------
Net cash provided by financing activities 1,050,687 726,250
----------- -----------
Net decrease in cash (227,089) (344,202)
Cash - beginning of period 413,533 35,222
----------- -----------
Cash - end of period $ 186,444 $ 379,424
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 113,024 $ 17,167
=========== ===========
Income taxes $ 800 $ 800
=========== ===========
See accompanying notes to financial statements
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1997
NOTES TO 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.
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 nine months ended September 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 September 30, 1997 and
December 31, 1996:
September 30, 1997 December 31, 1996
Parts & supplies $ 578,407 $ 683,936
Purchased finished goods 281,850 333,376
Consigned inventory 21,285 22,660
----------- -----------
$ 881,542 $ 1,039,972
=========== ===========
Note 3. Equipment and Improvements
Equipment and improvements are as follows at September 30, 1997 and
December 31, 1996:
September 30, 1997 December 31, 1996
Production equipment, tooling
and construction in process $ 459,263 $ 446,232
Office furniture and
equipment 664,522 617,480
Leasehold improvements 21,417 39,347
------------ ----------
1,145,202 1,103,059
Less accumulated depreciation 922,493 895,400
------------ ----------
$ 222,709 $ 207,659
============ ==========
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1997
NOTES TO FINANCIAL STATEMENTS
Note 4. Other Assets
Other assets are as follows at September 30, 1997 and December 31, 1996:
Estimated
Useful Life 1997 1996
Capitalized product costs 3 to 5 years $ 810,630 $ 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
---------- ----------
1,157,931 609,859
Less accumulated amortization 302,301 289,261
---------- ----------
$ 855,630 $ 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 September 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.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1997
NOTES TO FINANCIAL STATEMENTS
Note 5. Income Taxes
Income taxes for the nine months ended September 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:
September 30, September 30,
1997 1996
Expected tax expense $ (298,144) $ (241,900)
Utilization of net operating
loss carryforward 291,144 238,900
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 September 30, 1997, the Company had available net operating loss
carryforwards of approximately $3,604,000 and $1,546,000 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>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1997
NOTES TO FINANCIAL STATEMENTS
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 September 30, 1997, the Company is
committed to the following noncancelable operating lease payments:
Year ending December 31,
1997(three months) 51,900
1998 190,100
1999 97,500
2000 68,500
----------
382,500
Less sublease income 170,300
----------
$ 212,200
==========
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 rates 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/USPS rate change during the nine months ended September 30,
1997 and September 30, 1996. Recorded revenues from rate changes
totaled approximately $995,772 and $1,175,875 for the nine months
ended September 30, 1997 and September 30, 1996, respectively.
Gross profit from rate change totaled $763,275 and $1,005,850 for
these same periods.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 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 increased $33,287 or 23% for the three months
ended September 30, 1997 ("Q3 1997") compared to the three months ended
September 30, 1996 ("Q3 1996") while service and rate change revenues
increased $15,174 or 28% for the same period in 1996. The increase in net
product sales is due to both an increase in the dealer channel of $28,117
or 25% and an increase in the retail channel of $5,170 or 15% as compared
to Q3 1996. For Q3 1997 and Q3 1996, service and rate change revenues
represented approximately 28% and 27% of total revenue, respectively. The
increase in rate change revenues for Q3 1997 as compared to Q3 1996, was
due to a minor United States Postal Service ("USPS") rate change in June
1997. In Q3 1997 the increase in the retail channel sales is a direct
result of more orders in the channel as compared to Q3 1996. The Company is
continuing to seek other sources of retail distribution to further increase
sales in this channel. The increase in the dealer channel is a result of
greater sales of the Company's EAGLE BEST RATE SHIPPER manifest software
and an increased demand for multi-carrier systems due to the UPS strike in
August 1997. The Company is continuing its efforts to add products through
outside distribution agreements as well as through its own research and
development efforts.
Total year-to-date net product sales decreased $180,122 or 26% for the
nine months ended September 30, 1997 ("YTD 1997") compared to the nine
months ended September 30, 1996 ("YTD 1996") while service and rate change
revenues decreased $196,557 or 16% for the same period in 1996. The
decrease in net product sales is due to both a decrease in the retail
channel of $67,216 or 48% and a decrease in the dealer channel of $112,906
or 21% as compared to YTD 1996. For YTD 1997 and YTD 1996, service and
rate change revenues represented approximately 67% and 64% 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 product sales 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 SHIPPER and
introduction of a Windows version of The EAGLE BEST RATE SHIPPER software
in May 1997, are both targeted to compete against the UPS activities and
other software companies. As a result of the UPS strike in August 1997,
the Company experienced an increase in dealer product sales due to the
multi-carrier features of their products enabling customers the ability to
ship goods during the UPS strike with other carriers. A new product
offering in this area, The ShipperLink, will be introduced during late
fourth quarter of 1997 to help "resurrect" this product area.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1997
MANAGEMENT DISCUSSION AND ANALYSIS
Q3 1997 cost of sales for product sales increased $16,762 or 9% as
compared to the same period in 1996. The increase was due to an increase
in overall product sales. The Q3 1997 service and rate change revenue
product costs increased $13,285 or 15% as compared to the same period in
1996. This increase is due to minor USPS rate change in June 1997. Gross
loss Q3 1997 was (21%) compared to (36%) for the same period the prior
year.
YTD 1997 cost of sales for product sales decreased $103,915 or 19% 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 YTD 1997 service
and rate change revenue product costs increased $95,154 or 16% 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 28% compared to 41% for the same period the prior
year.
Operating expenses of the Company in Q3 1997 of $353,284 showed a
decrease of $46,073 or 12% as compared to Q3 1996. Expenses for YTD 1997
of $1,188,312 showed a decrease of $301,654 or 20% as compared to the same
period in 1996. The decreases in expenses for the three and nine month
periods are the result of a decreases in selling, general and
administrative costs. The 35% decrease in YTD 97 engineering and
development expense is due to the deferral during the nine months ended
September 30, 1997 of approximately $548,072 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 submitted for
comment to the United States Postal Service.
Interest expense for the Company in YTD 1997 increased $99,158 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 $165,422 or 23% 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.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 30, 1997
MANAGEMENT DISCUSSION AND ANALYSIS
Financial Condition, Liquidity and Capital Resources
The Company's ability to generate cash, during the first nine months
of 1997, depended largely on rate change revenue and funds generated from
the notes payable signed August 1996. The Company's September 30, 1997
cash balance decreased $227,089 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 nine months ended September 30, 1997 totaling
$1,050,000. The Company's September 30, 1997 net accounts receivable
balance decreased $26,949 or 26% from December 31, 1996 levels. This
decrease is due to a decrease in product sales for the YTD 1997 period.
Working capital was $986,307 at September 30, 1997 as compared to
$1,362,595 at December 31, 1996. The Company's current ratio at September
30, 1997 was 3.9 as compared to 5.6 at December 31, 1996.
The Company's total net inventories decreased $158,430 or 15% at
September 30, 1997 as compared to December 31, 1996. The decrease in
inventory is related to the sale of products for the nine months ended
September 30, 1997 and rate change products 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 September 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 does not engage in any significant 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 SEPTEMBER 30, 1997
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
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, 1997.
<PAGE>
MICRO GENERAL CORPORATION
FORM 10-Q -- QUARTER ENDED SEPTEMBER 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: November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 186,444
<SECURITIES> 0
<RECEIVABLES> 98,525
<ALLOWANCES> (22,000)
<INVENTORY> 881,543
<CURRENT-ASSETS> 1,329,398
<PP&E> 1,145,202
<DEPRECIATION> (922,493)
<TOTAL-ASSETS> 2,407,737
<CURRENT-LIABILITIES> 343,091
<BONDS> 0
0
0
<COMMON> 97,483
<OTHER-SE> 4,176,370
<TOTAL-LIABILITY-AND-EQUITY> 2,407,737
<SALES> 1,559,141
<TOTAL-REVENUES> 1,559,141
<CGS> 1,124,068
<TOTAL-COSTS> 1,124,068
<OTHER-EXPENSES> 1,194,618
<LOSS-PROVISION> (6,306)
<INTEREST-EXPENSE> 122,854
<INCOME-PRETAX> (876,093)
<INCOME-TAX> 800
<INCOME-CONTINUING> (876,893)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (876,893)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
