SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
------------------------------------------
For the fiscal year ended December 31, 1995 Commission File
No.0-8358
MICRO GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2621545
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1740 E. Wilshire Ave.
Santa Ana, California 92705
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (714)
667-0557
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.05 par value
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 period 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 [ ]
As of December 31, 1995, the aggregate market value of the
voting stock held by non-affiliates of the registrant was
$1,820,420.
As of December 31, 1995, the registrant had 1,948,166 shares
of common stock, $.05 par value outstanding.
The information required by Part III (items 10,11,12 and 13)
is
incorporated by reference to portions of the registrant's
definitive
proxy statement for the 1996 annual meeting of shareholders which
will
be filed with the Securities and Exchange Commission within 120
days
after the close of the 1995 fiscal year.
PART I
Item 1. BUSINESS
INTRODUCTION
Micro General Corporation (the "Company") designs, markets
and
sells parcel shipping systems and electronic postal scales for
use in
shipping departments and office mailrooms. The Company earns
revenues
both from the initial sale of shipping systems and scales and
from
subsequent rate updates resulting from rate changes by the U.S.
Postal
Service ("USPS"), United Parcel Service ("UPS") and other parcel
carriers (see the following "Rate Change Modifications"
discussion).
The Company's products reduce labor costs in shipping parcels and
letters and, by consistent use of accurate weight and
corresponding
shipping or postage rates, can significantly reduce shipping and
postage
rate errors.
The Company's products are programmed with the current
shipping
rates of USPS or UPS. The high-end models of the Company's
parcel
shipping systems and each of the Company's postal scale models
also
permit the customer to choose additional carriers' rates from the
Company's rate library. The Company's ability to customize a
shipping
system or postal scale to include additional carriers' rates in
accordance with each customer's shipping or mailing preferences
permits
the customer to choose the optimum carrier and class of service
for a
particular parcel or letter by quickly "rate shopping" between
the
standard shipping or postal rate of different carriers.
DEVELOPMENT OF THE COMPANY'S BUSINESS
In March 1981, the Company acquired all of the outstanding
stock of
Coda Enterprises, Inc., a California corporation ("CODA"). Since
its
1978 inception, CODA had designed and manufactured an electronic
postal
scale and a piece-count scale, and had sold those products under
a
private label contract with a distributor of mailroom equipment.
In
December 1981, CODA merged with the Company and the Company
changed its
name to Micro General Corporation. The Company has since
redirected its
resources to the development of its microprocessor-based parcel
shipping
systems and postal scales. In 1988, the Company reincorporated
in
Delaware.
INDUSTRY OVERVIEW
Prior to 1956, the USPS provided the sole means of letter or
parcel
delivery throughout the United States. Currently many other
companies,
such as UPS, FedEx and others, provide nationwide coverage in the
package delivery business. There are currently more than 30
letter and
parcel delivery companies which compete directly with the USPS.
Additionally, deregulation of the airline and trucking industries
has
lessened certain prior barriers to reducing the cost of
delivering
letters and parcels by these particular modes of transportation.
In order to provide reliable delivery information regarding
the
location of en-route parcels, parcels must be uniquely tagged so
that
package origin, destination, class of service and other data can
be
quickly read and input into the carrier's information system.
The
ability to produce this tag has created a significant potential
opportunity for the Company within the mailing and shipping
industry.
Although carriers are currently investing in plant and equipment
to
automate the handling of parcels and letters, many of their
customers
still use hand ledgers, manual zip-to-zone charts, spring scales
and
other conventional mechanical equipment which lack the accurate
weight/cost precision of the Company's family of
microprocessor-based
products. These products also make data entry less difficult.
The Company believes that the number of UPS and other parcel
carrier users who might have a need for the Company's products
represents a significant market.
PRODUCTS AND MARKETS
The Company's family of microprocessor-based parcel shipping
systems and postal scales are as follows:
PARCEL SHIPPING SYSTEMS The Company believes its parcel
shipping
systems offer cost and productivity advantages over manual
methods of
parcel shipping recording for businesses which consistently use
UPS, the
USPS or other parcel carriers. First, the Company's parcel
shipping
systems automate transaction recording and label identification
on a
package-by-package basis. For example, a system's "manifest"
printout,
by itself, adequately documents parcel shipments for pickup,
delivery
and accurate billing by a carrier. Additionally, these systems
allow
the user to determine the most economically acceptable method of
shipment, to determine and apply the correct shipping charge,
and to
record data relevant to the transaction for use both by the
shipper and
the parcel carrier.
The user places the parcel on the system's electronic scale
platform (which has a maximum rating of 150 pounds), then enters
the
desired carrier and class of service and the parcel's destination
zip
code. Each entry is accomplished by pushing a single, clearly
identified button. The user can instantly display the rates for
alternative carriers and classes of service by depressing a
single key
for each such inquiry. When a carrier and class of service have
been
selected, the user enters a package identification number and,
with a
single keystroke, prints the shipping label. Simultaneously, the
transaction is automatically entered into a computerized memory
which
both the carrier and the shipper's accounting department can
access.
The suggested retail prices for the Company's parcel
shipping
systems range from $795 to $4,295, excluding options.
MAILING SCALES The Company currently offers both digital
electronic scales as well as mechanical spring scales. The
Company's
digital display electronic postal scales are primarily designed
for
office mailroom use. Relying upon Company-designed
microprocessor-based
circuitry, parcel or letter weight is instantly displayed in
digital
format. When a class of service is selected on the membrane
switch
keyboard, the precise postage is computed and displayed.
Sophisticated
features, such as the ability to connect directly to a printer to
provide instantaneous accounting for transactions or to an
electronic
postage meter for automatic setting and dispensing of postage,
are
possible because of the microprocessor-based design. Use of the
Company's scales enables businesses to decrease postage costs by
eliminating the inefficiencies and errors which commonly occur
when
mechanical scales and manual rate tables are used. The Company's
postal
scales are available in maximum weight capacity ratings of 1 to
150
pounds. The suggested retail prices for the Company's postal
scales
range from approximately $10 to $1,295, excluding options.
COMPUTER-BASED SYSTEMS The Company currently offers
computer
software for shipping and warehouse automation. The software
programs
include many of the standard features already found in the
Company's
parcel shipping systems. The software programs have the ability
to take
advantage of all of the carriers now offered in the Company's
other
products. The suggested retail prices for the Company's software
programs, which can be sold with or without equipment, range from
$1,195
to $10,000 excluding options.
TAPE DISPENSING SYSTEMS The Company currently offers a
manual
gummed tape dispensing system. This system is used for securing
boxes
for shipment. The suggested retail price for the Company's tape
dispensing system is $279, excluding options.
SMALL PARCEL INSURANCE During 1995, the Company provided
marketing services for an insurance broker and underwriter for
small
parcel insurance which provides alternative insurance coverage
for items
shipped by customers. The Company sponsored this insurance
program
through its network of machine equipment dealers to the end-user
customers. The Company received a fee for the marketing services
provided. In May 1995, the Company transferred the existing
accounts to
an independent company and ceased sponsoring any additional
insurance.
In 1995, the fees received were not material.
RATE CHANGE MODIFICATIONS Currently, the Company maintains
a rate
library containing rate information for most national and
regional
parcel carriers. The Company updates this library whenever a
carrier's
rate change occurs.
Modifying the Company's units in the field to reflect rate
changes
by the USPS, UPS or other carriers in the Company's rate library
is done
by inserting programmable read-only memory chips ("PROMS") into
designated slots in the Company's parcel shipping systems and
postal
scales. The Company generally charges a fee for each new PROM it
provides. Alternatively, the Company will, for a one-time fee,
provide
updated rate PROMS as required for a specified period of time.
As the
Company's installed unit base grows, potential revenues
associated with
rate changes represent a significant source of revenue and profit
for
the Company. PROMS related to rate changes are sold both to the
dealer
and directly by the Company for its installed customer base. For
each
rate PROM sold to an end-user customer, a percentage of the
purchase
price is generally credited to the dealer that originally sold
the
system to the customer, provided that the dealer is still an
authorized
Company dealer. No such allowances are paid where sales of the
underlying equipment were not through dealers.
MARKETING, SALES, WARRANTIES AND CUSTOMERS
MARKETING AND SALES The Company's strategy is to select
market
niches in which its technology provides price and/or performance
advantages over products offered by the market leaders. The
Company's
position is primarily in software, but the unique appearance,
functionality and built in "ease of use" of its products are also
considered to be significant competitive advantages. With the
increase
of UPS owned equipment available to the customers, the Company
seeks new
products to replace the customers lost to UPS equipment.
The Company sells its historical dealer products through a
network
of more than 140 dealers located throughout the United States and
Canada, although approximately 30 dealers account for the
majority of
the Company's sales. The Company believes the loss of any
particular
dealer would not have a material adverse effect on the Company's
operating results. All dealer orders accepted by the Company are
shipped and invoiced to dealers at discounts from the Company's
suggested retail list price. The Company's normal sales terms to
its
qualified dealers are net 30 days from invoice date. Company
sales are
generally final and are supported by a Company-issued order entry
acknowledgment which specifies all terms and conditions of the
contracted sales transaction. However, in addition to any
product
returns resulting from product defects, the Company is obligated
under
some of its dealer agreements to accept the return of unopened
inventory
from terminated dealers (subject to a restocking fee). The
Company, at
its discretion, periodically permits dealers to return products
for
credit or exchange (subject to a restocking fee in most cases)
due to
dealers' lost sales or dealers' errors in ordering or evaluating
end-user
customer needs. Returns as a percentage of product sales for
1995,
1994, and 1993, were 16%, 12%, and 11%, respectively. The
Company
believes that the allowance for sales returns at December 31,
1995 and
December 31, 1994, is adequate in light of historical experience.
The Company typically experiences significantly higher
revenues in
the first quarter of each year, which is attributable to the
sales of
carrier rate changes. When a USPS or UPS rate change occurs many
product users update their machines with new rates which provides
significant rate change revenues to the Company.
A comparison of first quarter sales in the last 3 years in
relation
to annual sales is as follows:
1st Quarter Annual Sales %
1995 $2,173,689 $4,041,921 54%
1994 $1,844,557 $4,768,548 39%
1993 $2,049,155 $5,054,415 41%
Even though history has shown that the carrier rate changes
traditionally have occurred in the first quarter, the Company
believes
this should not be included as a seasonal impact. There can be
no
assurance as to the timing of future rate changes.
In 1990, the Company established a network of manufacturer's
representatives to sell the retail products to stationary stores,
direct
mail houses, wholesalers and office product resellers. This
portion of
the business in 1995 and 1994 represents 29% and 24% of the
Company's
total product sales, respectively.
WARRANTIES Individual dealers have responsibility for
installation
and service of the Company's products. The Company's distributed
products are sold with a 90-day warranty on material and labor.
The
Company bears the costs incurred in providing such in-warranty
repairs.
The Company invoices the dealers on a time and materials basis
for
out-of-warranty repairs performed by the Company. In 1995,
1994, and 1993
the Company's costs to perform both in-warranty and
out-of-warranty
repairs, in the aggregate were 13%, 11%, and 6%, respectively, of
total
product sales.
CUSTOMERS As of December 31, 1995, the Company estimates it
had an
aggregate installed base of approximately 25,000 parcel shipping
systems, postal scales and piece count scales. Moreover, no
individual
dealer accounted for more than 10% of the Company's 1995 total
net
revenues.
BACKLOG The Company typically enters facsimile orders from
its
dealers, considers these orders part of backlog, and schedules
delivery
for a date within 10 days from receipt of the order. Subsequent
confirmation through a written purchase order is normally
obtained. On
a monthly basis, the Company generates a listing of scheduled and
confirmed backlog. Backlog cancellations have historically been
nominal.
The backlog at December 31, 1995, is not material.
COMPETITION
The Company competes in an industry characterized by
intense and
increasing competition. To the Company's knowledge, there are
approximately 20 competitors engaged in either the sale or lease
of
electronic shipping systems or postal scales. Among these,
Pitney
Bowes, Inc. has a dominant position in the postage meter market,
and UPS
has a dominant position in the parcel shipping systems market.
The Company sells principally to shippers having moderate
volumes
of daily shipments. Various firms have recently begun selling
parcel
shipping software that customers use with their existing in-house
computer systems. Also, various air express and other shipping
firms
are now providing free computerized parcel shipping systems and
offering
volume discounts to end-user customers that maintain specified
minimum
shipping volumes.
The Company believes that the price/performance features of
its
products continue to compare favorably with their various
competitors.
Nevertheless, many of the Company's competitors have far greater
financial and personnel resources than those of the Company,
including
direct sales branches and substantial marketing and product
development
programs. Consequently, there can be no assurance that future
competition from such competitors will not have a material
adverse
effect on the Company's business.
DISTRIBUTION
In recent years, the Company has increased the purchasing of
completed units manufactured outside the United States. The
foreign
manufacturers take advantage of the tooling put in place by the
Company,
in order to provide the Company with parts for its specialized
needs.
In the fourth quarter of 1995, the Company resumed manufacturing
in
their California facility to improve quality and reduce costs on
its
larger model scales.
Finished product quality inspection and final testing is
performed
prior to shipment by Company personnel at the Company's Santa
Ana,
California facility.
ENGINEERING AND DEVELOPMENT
For the years ended December 31, 1995, 1994, and 1993, the
Company's expenditures for engineering, research and development
approximated $638,000, $415,000, and $338,000, respectively. In
May
1995, the engineering department was moved to the Company's
facility in
Oxford, Connecticut. The Company's 1995 engineering, research
and
development activities included the USPS and UPS rate changes in
the
first quarter of 1995 and the USPS international rate change in
the
third quarter of 1995. The Ship-Easy product was modified to
create the
Ship-Mate product to provide a separate product for the dealer
sales
channel. A new multi-carrier computer-based product, The Eagle
Best Rate
Shipper, was designed in 1995 and was released in March 1996.
The
postage meter development project, started in 1995, is
continuing and
is designed to comply with changing U.S. Postal regulations. It
has
been reported, in various dealer newsletter publications, that
the U.S.
Postal Service is planning to announce the decertification of all
mechanical postage meters in the U.S.. The publications report
that the
phase-out period is to be completed by March 1999. It is
estimated that
774,000 meters are affected by this anticipated ruling. This
ruling
provides the Company with an opportunity to enter a major new
market.
Submission for approval to the U.S. Postal Service of the
Company's
first postage meter is expected by mid-1996.
PATENTS AND LICENSES
The Company has federally registered the trademarks "CODA,"
"MAILMATE ", "PC SHIPMATE ", "SMART METER ", "SMART LABEL , "SHIP
SAVER ", "SHIPMATE ", "SHIP MASTER ", "SHIP-EASY", "SHIP
COMMANDER ",
and "Eagle Best Rate Shipper". In 1984, the Company consolidated
the
marketing of all its products under the corporate name Micro
General
Corporation. During 1995 the Company has applied for several
patents
which pertain to the postage meter project.
EMPLOYEES
As of December 31, 1995, the Company employed 33 people. The
Company's employees are not represented by a labor union and it
has
experienced no work stoppages. The Company believes that its
employee
relations are good. The Company augments its work force with
temporary
staff during periods of rate change shipments.
Item 2. PROPERTIES
The Company's executive office, distribution and service
facility
consists of 18,550 square feet in a building located in Santa
Ana,
California. The Company leases this facility until the year
1999. In
April 1995, the Company entered into a three-year lease for a
5,000 square
feet research and development office in Oxford, Connecticut.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age and offices presently
held
by the Company's executive officers:
Thomas E. Pistilli . . . . 53 President, Chief Executive
Officer, Chief
Financial Officer and Director
John J. Horbal . . . . . . .58 Vice President - Engineering
Linda I. Morton. . . . . . .43 Corporate Secretary and
Controller
Gerald W. Simmons. . . . . .52 Vice President - Sales &
Marketing
THOMAS E. PISTILLI
Mr. Pistilli has served as the President, Chief Executive
Officer,
Chief Financial Officer, and Director since November 1994. Prior
to
joining the Company, Mr. Pistilli served as a management
consultant to
the Company for approximately two years. Mr. Pistilli is the
former
President and Chief Executive Officer of International Mailing
Systems,
Inc.(ASCOM/HASLER), Shelton, Connecticut, where he served in that
capacity for 11 years and overall with that Company for 18 years.
Mr.
Pistilli, a Certified Public Accountant, was previously employed
by KPMG
Peat Marwick LLP, for a period of seven years. Mr. Pistilli is
a
member of the Board of Directors, serving since November 1994.
JOHN J. HORBAL
Mr. Horbal joined the Company as Vice President-Research and
Development in January 1995. Prior to joining the Company, Mr.
Horbal
was with ASCOM/HASLER and Better Packages, Shelton, Connecticut,
for 25
years serving as Director of Engineering, Director of Research
and
Development, and Chief Engineer. He was named Vice President of
Engineering in June 1995.
LINDA I. MORTON
Ms. Morton joined the Company in September 1983 serving in
various
management accounting positions. She was appointed Controller in
August
1988 and Corporate Secretary in June 1991.
GERALD W. SIMMONS
Mr. Simmons was appointed as Vice President - Sales and
Marketing
in July 1995. Prior to joining the Company, Mr. Simmons was with
MOS
Scale, Costa Mesa, California for more than 10 years serving as
Vice
President - Sales and Marketing.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Principal Market and Prices
The Company's common stock is traded on the over-the-counter
market on NASDAQ under the symbol MGEN. The following table sets
forth the range of high and low closing bid quotations per share
of
the Company's common stock for the fiscal quarters indicated as
reported by the NASD on its monthly statistical reports. Such
prices represent interdealer quotations without adjustment for
retail markup, markdown, or commission, and do not necessarily
represent actual transactions.
Fiscal Quarters Bid Price
High Low
Year Ended December 31, 1994
First Quarter . . . . . . $ 2.13 1.75
Second Quarter . . . . . . 2.18 1.88
Third Quarter. . . . . . . 2.25 2.13
Fourth Quarter . . . . . . 2.25 2.00
Year Ended December 31, 1995
First Quarter . . . . . . $ 2.50 2.00
Second Quarter . . . . . . 2.63 2.25
Third Quarter. . . . . . . 2.38 1.75
Fourth Quarter . . . . . . 1.75 1.50
Number of Common Shareholders
The number of record holders of the Company's common stock
at
December 31, 1995 was 615.
Dividends
The Company intends to continue its policy of retaining all
earnings for reinvestment in the business operations of the
Company. Under Delaware law, the Company's Board of Directors
may
declare and pay dividends on its outstanding shares in cash or
property only out of the unreserved and unrestricted earned
surplus. The Company has an accumulated deficit of $2,700,148 as
of December 31, 1995 and accordingly, Delaware law prohibits the
Company from paying cash dividends except to the extent that the
Company has net profits in any fiscal year or the preceding
fiscal
year. There were no accumulated dividends as of December 31,
1995.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data.
This
data is derived from and qualified in its entirety by the more
detailed financial statements included elsewhere herein.
Year Ended
(in thousands, except per share data)
12/31/95 12/31/94 12/31/93 12/31/92
12/31/91
Net Product Sales $ 1,743 $ 2,710 $ 3,104 $ 2,525 $
2,851
Service and
Rate Change Revenue 2,299 2,059 1,950 1,944
2,331
------- ------- ------- -------
- -------
Total Revenues 4,042 4,769 5,054 4,469
5,182
Cost of Sales 1,937 2,863 2,864 2,579
2,461
------- ------- ------- -------
- -------
Gross Profit 2,105 1,906 2,190 1,890
2,271
------- ------- ------- -------
- -------
Net Earnings (Loss) $ (230) $ (297) $ 375 $ .5 $
362
======= ======= ======= =======
=======
Net Earnings (Loss)
Per Share $ (0.12) $ (0.16) $ 0.20 $ 0.00 $
0.19
======= ======= ======= =======
=======
Weighted Average Number
of Shares Used in
Computation* 1,940,666 1,883,876 1,882,240 1,882,240
1,882,240
========= ========= ========= =========
=========
*Per share computations are based on the weighted average number
of
shares outstanding. The shares issuable upon exercise of stock
options and other common stock equivalents have not been included
in the computations of net earnings (loss) per share during any
of
the periods because the effect would have been antidilutive. All
share and per share data for 1991 and 1992 has been restated for
the 1 for 5 reverse stock split which became effective December
31,
1992.
Year Ended
(in thousands)
12/31/95 12/31/94 12/31/93 12/31/92
12/31/91
Working Capital $ 1,340 $ 1,512 $ 1,778 $ 1,338 $
1,312
Total Assets 2,084 2,420 2,575 2,052
2,255
Shareholders' Equity 1,572 1,736 2,027 1,652
1,652
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
A. COMPARISON OF FISCAL 1995 AND FISCAL 1994.
Total revenue for the Company in 1995 decreased $726,627 or 15%
compared to the same period in 1994. The overall decrease is a
combination of a decrease in product sales of $825,210 or 40% in
the
dealer channel and $141,236 or 22% in the retail channel, a
decrease in
service revenue of $155,802 or 48%, and an increase in rate
change
revenue of $395,621 or 23%. The increase in the rate change
revenue is
a result of both a UPS rate change in February 1995 and USPS rate
change's in both January and August 1995. A portion of the
January 1995
USPS rate change revenue, totaling $384,262, was recognized in
December
1994. The combination of decreased unit sales and lower average
sale
prices, primarily due to a shift in product mix, resulted in
lower
overall revenue. The Company reduced expenses by reducing
advertising
expense and improved profit margins through price adjustments in
the
retail channel, which resulted in lower volume in this channel.
The
Company is continuing to develop new products for the dealer
channel.
The new manifest computer software and turn-key system, The Eagle
Best Rate
Shipper, was introduced in March 1996. Other new product
introductions
are planned in the third and fourth quarters of 1996.
Cost of sales for product sales deceased $927,027 or 41%. The
decrease is due to a decrease in sales and the improved profit
margins
in the retail channel and a reduction in other product costs.
The
service and rate change revenue costs increased $1,714 or 0.3% as
compared to the same period in 1994.
Gross margin increased 12% for the year ended December 31, 1995
compared to the prior year. The primary reason was attributable
to
product sales with a 7% increase in gross margin compared to
1994. This
is a result of cost reductions in the retail channel and the
increase in
product mix towards lower priced, higher margin products in the
dealer
channel. The increase in service and rate change revenue gross
margin
of 5% is a result of two rate changes in the first quarter of
1995.
Operating expenses for the Company in 1995 increased $134,134
or 6%
as compared to the prior year. This was a result of a
combination of
increased expenses in engineering and research and development
and a
decrease in the sales, marketing, general and administrative
expenses as
compared to the prior year. The decrease in sales, marketing and
general and administrative expense is due to a decrease in
promotion and
advertising expense for the period in an effort to control costs.
The
increase in engineering and development expenses of $222,867 or
54%
over the prior year is due to the final development of the
computer-based
system introduced in March 1996 and the continuing development of
the Company's postage meter products. Engineering and
development
expenses are expected to increase in 1996, as the Company's
postage
meter project nears completion.
The net loss of $229,652 is $67,132 or 23% lower than the prior
year. The loss is attributable to lower product sales and an
increase
in engineering and development expenses.
B. COMPARISON OF FISCAL 1994 AND FISCAL 1993.
Total revenue for the Company in 1994 decreased $285,867 or 6%
compared to the same period in 1993. The overall decrease is a
combination of a decrease in product sales of $395,023 or 13%,
with an
increase in service and rate change revenue of $109,156 or 6%
The
increase in the service and rate change revenue is a result of
the
United States Postal Service rate change in January 1995 that was
shipped and billed in December 1994 of $384,262. While sales in
the
retail channel increased $279,812 or 75% as compared to the same
period
in 1993, the sales in the historical dealer channel decreased
$689,410
or 25%. The decrease in the historical dealer channel resulting
in a
decrease in units sold is due to temporary channel conflict and
the
introduction of lower priced models. New product introductions
in
future periods, which will include product differentiation
properly
priced for the two distribution channels, expect to improve
volume and
eliminate the possibility of any significant channel "conflict."
The
Company anticipates a reduction of expenses and improved profit
margins
in the retail channel in future years.
Cost of sales for product sales decreased $66,309 or 3%. The
decrease was due to a change in product mix and a decrease in
sales. The
service and rate change revenue costs increased $65,105 or 13% as
compared to the same period in 1993. The increase was due to an
increase in service and rate revenues for the same period.
Gross margin decreased 3% at December 31, 1994 compared to the
prior year. The primary component was attributed to product
sales which
reported a 9% decrease in gross margin compared to the same
period in
1993. Higher cost of sales in the retail channel, due to high
introductory costs, resulted in lower product gross margins for
the
Company.
Operating expenses for the Company in 1994 increased $367,788
or
20% compared to the same period in 1993. The increase in expense
levels
was primarily due to higher retail channel selling expense. An
increase
in engineering and development expense is a result of further
development in the computer-based system. Expense levels are
expected
to remain the same in future periods.
The decrease in net earnings of $672,307 or 179% as compared to
the
same period in 1993, is the result of lower sales and higher
costs.
C. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to generate cash depends on the sale of
inventory and collection of accounts receivable. The Company's
1995
cash balance decreased $117,626 or 77% from December 31, 1994.
The
decrease is primarily attributable to less cash generated in
December
1995 as compared to December 1994 when cash was generated from
prepaid
rate change revenue for the United States Postal Service ("USPS")
rate
change which occurred January 1, 1995. The Company's 1995 net
accounts
receivable balance decreased $268,443 or 43% from December 31,
1994
levels. This decrease is due to improved accounts receivable
collections and decreased sales.
Working capital has ranged from $1,778,236 in 1993 to
$1,340,255 in
1995. The Company's current ratio at December 31, 1995 was 3.6
compared
to 3.2 at December 31, 1994.
The Company's total inventories increased 183,926 or 16% at
December 31, 1995 as compared to the prior year end. The
increase in
inventory is related to procurement of goods for the retail
channel from
overseas vendors to supply 1996 sales initiatives.
The Company has available liquidity through a line of credit
agreement with a bank (See note 6, of Notes to the Financial
Statements). The availability is based upon certain qualified
accounts
receivable and inventory balances with maximum availability of
$600,000.
At December 31, 1995, of the $600,000 available, $275,000 was
outstanding on the line of credit while at December 31, 1994, the
Company had no balance outstanding. In February 1996, the Company
reduced the outstanding balance on the line of credit to
$150,000. The
line of credit expires on April 30, 1996. The Company is
currently
negotiating to extend its existing line of credit or negotiate a
new
credit agreement. The Company expects to complete this
refinancing in
the second quarter of 1996. It is the Company's belief that
through
cash flow from operations, the replacement of its current credit
facility, or other sources of available financing, adequate
liquidity
will be available through the remainder of 1996. The Company is
considering its options with respect to equity and/or debt
financing to
fund the Company's ongoing postage meter research and development
efforts. At December 31, 1995, the Company was in compliance
with all
financial covenants associated with the line of credit agreement
or has
obtained waivers from the bank.
The Company's 1995 current liabilities have decreased 25% over
1994. This is associated with the decrease in deferred revenue,
due to
the prepayment by customers for product and service contracts
related to
the USPS rate change effective January 1, 1995. Accounts payable
decreased 83% from 1994 due to the decrease in year-end
purchases.
The Company's investment in capital expenditures for 1995 has
increased slightly over 1994. There were no material commitments
for
capital expenditures as of December 31, 1995. The Company does
not
anticipate any significant domestic capital expenditures in the
near
future.
The Company does not engage in any off balance sheet
financing.
INFLATION
The effect of inflation on operating results has,
historically,
been insignificant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
a
new statement titled "Accounting for Impairment of Long-Lived
Assets."
In October 1995, the Financial Accounting Standards Board issued
a new
statement titled "Accounting for Stock-Based Compensation" (FASB
123).
The new statements are effective for fiscal years beginning after
December 15, 1995. The Company does not believe that adoption of
the
new standards will have a material effect on the financial
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the financial statements and supplementary data
listed in
Item 14 of Part IV of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
Documents filed with Report
Financial Statements
The financial statements listed on the accompanying Index
to
Financial Statements and Schedule are filed as part of this
report.
Financial Statement Schedule
The financial statement schedule listed on the
accompanying
Index to Financial Statements and Schedule are filed as part of
this
report.
Exhibits
The exhibits listed on the accompanying Index to Exhibits
are
filed as part of this report.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last
quarter of the fiscal year ended December 31, 1995.
MICRO GENERAL CORPORATION
SEC FORM 10-K
ITEMS 8, 14(a)(1) and 14(a)(2)
Index to Financial Statements and Schedule
Financial Statements
Independent Auditor's Report
Balance Sheets - December 31, 1995 and 1994
Statements of Operations - Years ended December 31, 1995, 1994
and 1993
Statements of Shareholders Equity -
Years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows -
Years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Schedule
Valuation and Qualifying Accounts - Schedule II
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or notes thereto.
Independent Auditors' Report
The Board of Directors and Shareholders
Micro General Corporation:
We have audited the financial statements of Micro General
Corporation as listed in the accompanying index. In connection
with our audits of the financial statements, we also have
audited the financial statement schedule as listed in the
accompanying index. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Micro General Corporation as of December 31, 1995
and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
Orange County, California
February 23, 1996
Balance Sheets
December 31, 1995 and 1994
Assets (Note 6) 1995 1994
----------
- ----------
Current assets:
Cash $ 35,222
152,848
Accounts and notes receivable, less
allowance for doubtful receivables and
sales returns of $46,594 in 1995 and 349,991
618,434
$81,749 in 1994
Income tax refund receivable -
7,000
Inventories (note 2) 1,324,109
1,140,183
Prepaid expenses 143,433
277,432
-----------
- ----------
Total current assets 1,852,755
2,195,897
Equipment and improvements, net (note 3) 193,691
179,206
-----------
- ----------
Other assets, net (note 4) 37,822
44,688
-----------
- ----------
$ 2,084,268
2,419,791
===========
==========
Liabilities and Shareholders' Equity
Current liabilities:
Note payable to bank (note 6) $ 275,000
- -
Accounts payable 51,278
296,071
Accrued expenses 164,545
228,072
Deferred revenue 21,677
159,853
-----------
- ----------
Total current liabilities 512,500
683,996
-----------
- ----------
Shareholders equity (note 7):
Preferred stock, $.05 par value.
Authorized 1,000,000 shares; none -
- -
issued and outstanding
Common stock, $.05 par value.
Authorized 4,000,000 shares; issued and
outstanding 1,948,166 and 1,888,166 97,408
94,408
shares in 1995 and 1994, respectively
Additional paid-in capital 4,174,508
4,111,883
Accumulated deficit (2,700,148)
(2,470,496)
-----------
- ----------
Total shareholders' equity 1,571,768
1,735,795
Commitments and contingencies (note 9)
-----------
- ----------
$ 2,084,268
2,419,791
===========
==========
[FN]
See accompanying notes to financial statements.
Statements of Operations
Years ended December 31, 1995, 1994 and 1993
1995 1994
1993
---------- ----------
- ----------
Revenues:
Product sales, net of returns of
$278,839 in 1995, $329,235 in 1994 $ 1,742,943 2,709,389
3,104,412
and $335,832 in 1993
Service and rate change
revenues (note 9) 2,298,978 2,059,159
1,950,003
---------- ----------
- ----------
Total revenues 4,041,921 4,768,548
5,054,415
---------- ----------
- ----------
Cost of sales:
Products 1,350,017 2,277,044
2,343,353
Service and rate changes 587,367 585,653
520,548
---------- ----------
- ----------
Total cost of sales 1,937,384 2,862,697
2,863,901
---------- ----------
- ----------
Gross profit 2,104,537 1,905,851
2,190,514
Operating expenses:
Selling, general and administrative 1,674,322 1,713,511
1,443,213
Engineering and development 637,896 415,029
387,457
Provision for doubtful receivables 31,849 81,393
11,475
---------- ----------
- ----------
Operating profit (loss) (239,530) (304,082)
348,369
Interest and other income, net 10,678 8,098
17,954
---------- ----------
- ----------
Income (loss) before income tax
expense and cumulative effect of
accounting change (228,852) (295,984)
366,323
Income tax expense (note 5) 800 800
800
---------- ----------
- ----------
Income (loss) before cumulative
effect of accounting change (229,652) (296,784)
365,523
Cumulative effect of accounting
change (note 1) - -
10,000
---------- ----------
- ----------
Net income (loss) $ (229,652) (296,784)
375,523
========== ==========
==========
Net income (loss) per common share:
Income (loss) before cumulative effect
of accounting change $ (.12) (.16)
.19
Cumulative effect of accounting change - -
.01
---------- ----------
- ----------
Net income (loss) $ (.12) (.16)
.20
========== ==========
==========
Weighted average number of common
shares outstanding 1,940,666 1,883,876
1,882,240
========== ==========
==========
[FN]
See accompanying notes to financial statements.
MICRO GENERAL CORPORATION
Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
Additional
Preferred stock Common
stock paid-in Accumulated
Shares Amounts Shares
Amount capital deficit
------ ------- ---------
- ------ --------- ------------
Balance at December 31, 1992 - $ - 1,882,240 $
94,112 $ 4,107,492 $(2,549,235)
Net Income - - -
- - 375,523
------ ------- ---------
- ------ --------- -----------
Balance at December 31, 1993 - - 1,882,240
94,112 4,107,492 (2,173,712)
Repurchase of common stock - - (4,075)
(204) (8,965) -
Stock options exercised - - 10,001
500 13,356 -
Net loss - - -
- - (296,784)
------ ------- ---------
- ------ ---------- -----------
Balance at December 31, 1994 - - 1,888,166
94,408 4,111,883 (2,470,496)
Stock options exercised - - 60,000
3,000 62,625 -
Net loss - - -
- - (229,652)
------ ------- ---------
- ------ ---------- -----------
Balance at December 31, 1995 - $ - 1,948,166 $
97,408 $ 4,174,508 $ (2,700,148)
====== ======= =========
====== ========== ===========
[FN]
See accompanying notes to financial statements.
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994
1993
---------- ---------
- ----------
Cash flows from operating activities:
Net income (loss) $ (229,652) 375,523
(296,784)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 108,281 103,825
102,654
Provision for losses on accounts and 31,849 81,393
11,475
notes receivable
Provision for sales returns 62,739 53,336
46,395
Cumulative effect of accounting change - -
(10,000)
Change in assets and liabilities:
Decrease (increase) in accounts and
notes receivable 173,855 85,496
(329,320)
Decrease (increase) in income tax
receivable 7,000 (2,000)
61,675
Increase in inventories (183,926) (48,633)
(214,618)
Decrease (increase) in prepaid expenses 133,999 27,434
(225,849)
Increase in other assets (15,000) -
-
(Decrease) increase in accounts payable (244,793) 120,846
88,897
(Decrease) increase in accrued expenses (63,527) 8,311
39,715
(Decrease) increase in deferred revenue (138,176) 107,488
(71,199)
---------- --------
- ---------
Net cash provided by (used in)
operating activities (357,351) 240,712
(124,652)
---------- --------
- ---------
Cash flows used in investing activities:
Capital expenditures (100,900) (78,063)
(37,759)
---------- --------
- ---------
Cash flows from financing activities:
Proceeds from note payable to bank 275,000 -
100,000
Repayment of note payable to bank - (100,000)
-
Repurchase of common stock - (9,169)
-
Issuance of common stock 65,625 13,856
-
---------- --------
- ---------
Net cash provided by (used in)
financing activities 340,625 (95,313)
100,000
---------- --------
- ---------
Net increase (decrease) in cash (117,626) 67,336
(62,411)
---------- --------
- ---------
Cash at beginning of year 152,848 85,512
147,923
---------- --------
- ---------
Cash at end of year $ 35,222 152,848
85,512
========== ========
=========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 2,000 1,230
-
Income taxes 800 2,800
(56,420)
========== ========
=========
[FN]
See accompanying notes to financial statements.
MICRO GENERAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) Summary of Significant Accounting Policies
General
The operations of Micro General Corporation (the Company)
consist of the design, purchase, distribution and manufacturing
of
computerized parcel shipping systems, postal scales and
piece-count
scales. Product sales are achieved through the use of
authorized
company dealers and through dealers in the office products and
superstore channels throughout the United_States.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand
deposits
and investments with original maturities of three months or
less.
Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value).
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation
and
amortization are provided using the straight-line method over
the
estimated useful lives of the respective equipment and
improvements.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the
weighted average number of common shares outstanding. The
potential
exercise of stock options or warrants are not included in the
computation of net income (loss) per common share since the
effect
would be antidilutive for all years presented.
Income Taxes
In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109
(Statement 109), "Accounting for Income Taxes." Under the asset
and
liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying
amounts of existing assets and liabilities and their respective
tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years
in which those temporary differences are expected to be
recovered or
settled. Under Statement 109, the effect on deferred tax assets
and
liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Effective January 1, 1993, the Company adopted Statement 109.
The
cumulative effect of this change in the method of accounting for
income taxes in the accompanying 1993 statement of operations
was an
increase to income of $10,000.
Warranties
The Company's products are sold with a 90-day warranty on
materials and workmanship. Estimated warranty costs based on
historical experience are accrued as an expense at the time
products
are sold.
Intangible Assets
Intangible assets are classified under other assets and are
amortized on a straight-line basis over periods ranging from 10
to
15 years.
Revenue Recognition
Product sales are recorded by the Company when products are
shipped to dealers and customers. Rate change revenues are
recorded
by the Company at the time memory chips are reprogrammed with
new
tariffs and shipped to the customer.
The Company collects fees from some customers in anticipation of
future rate changes. Customers prepaying future rate changes
receive memory chips with the new tariffs, upon notice of a rate
change, without paying an additional charge. These prepaid rate
change fees are recorded as revenue on a pro rata basis over the
prepaid period.
Sales Returns
The majority of the Company's product sales are to its
authorized dealers who resell the Company's products. The
Company's
policy is that all sales are final, but dealers may, at the
Company's sole discretion and subject to a restocking fee,
return
certain out-of-warranty products in exchange for products of
comparable sales value. Additionally, dealers may, at the
Company's
sole discretion, be permitted to return their unopened inventory
in
the event they or the Company terminate their dealership
agreement,
again subject to a restocking fee. Upon acceptance of returned
goods, the Company reconditions the goods, at a nominal cost,
and
restocks them in inventory to be sold at a later date. The
Company
provides an allowance for such returns equal to the estimated
gross
profit on the portion of sales estimated to be returned. This
specific allowance is a component of the Company's allowance for
doubtful receivables and sales returns.
Financial Instruments
The carrying amount of cash, accounts and notes receivable,
prepaid expenses, other assets, accounts payable, accrued
expenses,
notes payable to bank and deferred revenue are measured at cost
which approximates their fair value due to the short maturity of
these instruments.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make
estimates and assumptions that affect the reported amounts of
assets
and liabilities and disclosure of contingent assets and
liabilities
at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual
results
could differ from those estimates.
(2) Inventories
Inventories are comprised of the following at December 31,
1995
and 1994:
1995 1994
------------ ------------
Parts and supplies $ 919,459 753,456
Purchased finished goods 372,763 292,099
Consigned inventory 31,887 94,628
----------- ------------
$1,324,109 1,140,183
(3) Equipment and Improvements
Equipment and improvements consist of the following at
December
31, 1995 and 1994:
Useful life 1995 1994
------------ ----------- ----------
Production equipment,
including tooling 5 years $ 432,902 424,848
Office furniture and
equipment 5 years 563,557 484,229
Leasehold improvements 5 years 30,606 19,381
----------- ----------
1,027,065 928,458
Less accumulated depreciation
and amortization 833,374 749,252
----------- ----------
$ 193,691 179,206
=========== ==========
(4)Other Assets
Other assets consist of the following at December 31, 1995 and
1994:
Estimated
useful life 1995 1994
----------- ----------
- ----------
Excess cost of assets
purchased over fair
market value 15 years $ 232,531
232,531
License rights 10 years 41,382
26,382
Other intangible assets 15 years 23,388
23,388
----------
- ----------
297,301
282,301
Less accumulated amortization 259,479
237,613
----------
- ----------
$ 37,822
44,688
==========
==========
(5)Income Taxes
Income tax expense for the three years ended December 31, 1995
represents the state minimum tax.
The expected income tax expense (benefit) computed by
multiplying
income (loss) before income tax expense (benefit) and cumulative
effect of accounting change by the statutory Federal income tax
rate
of 34% differs from the actual income tax expense (benefit) as
follows:
1995 1994 1993
---------- ----------
- ----------
Expected tax
expense (benefit) $ (78,000) (101,000) 125,000
Effect of net operating
loss carryforward not
recognized for financial
statement purposes until
utilization is more
likely than not 71,000 94,000 -
Utilization of net operating
loss carryforward - -
(132,000)
Nondeductible amortization of
the excess cost of assets
purchased over fair
market value 7,000 7,000 7,000
State income tax expense 800 800 800
---------- ----------
- ----------
$ 800 800 800
========== ==========
==========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities
for financial reporting purposes and the amounts used for income
tax
purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1995 and 1994 are as
follows:
1995 1994
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $ 652,000 581,000
Reserves and accruals not recognized
for income tax purposes 89,000 105,000
Tax credit carryforwards 85,000 85,000
---------- ----------
Total deferred tax assets 826,000 771,000
Less valuation allowance (822,000) (751,000)
---------- ----------
Net deferred tax assets 4,000 20,000
Deferred tax liabilities:
Accelerated depreciation for income
tax purposes in excess of financial
statement depreciation (4,000) (20,000)
---------- ----------
Deferred taxes recognized on the
accompanying balance sheets $ - -
========== ==========
Deferred income tax assets include the tax impact of net
operating
loss carryforwards. Realization of these assets is contingent
on
future taxable income. The Company believes that it is more
likely
than not that net deferred tax assets of $4,000 at December 31,
1995
(after considering the valuation allowance of $822,000) will be
realized because it expects that the underlying deductions and
net
operating loss carryforwards can be utilized to offset the
effects
of the temporary difference for accelerated depreciation which
may
give rise to taxable income in future periods. The net change
in
the total valuation allowance during 1995 was an increase of
$71,000.
At December 31, 1995, the Company had net operating loss
carryforwards of approximately $1,839,000 and $217,000 for
Federal
and state income tax purposes, respectively. If not used to
offset
future taxable income, the net operating loss carryforwards will
expire at various years through 2010. The Company also has
investment tax credit and research and experimentation credit
carryforwards aggregating approximately $85,000 which expire
during
the period 1996 to 2002.
(6) Note Payable to Bank
The Company has a line of credit which is secured by
substantially
all of the Company's assets and cannot 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 is
at the bank's prime rate (8.25% at December_31, 1995) plus 2.0%
and
the Company paid a $2,000 commitment fee. At December_31, 1995,
the
Company was either in compliance with all financial covenants or
had
obtained waivers of such covenants from the bank. At December
31,
1995, there was $275,000 outstanding on this line of credit.
The
line of credit expires on April 30, 1996.
The Company is currently negotiating to extend its existing line
of
credit or negotiate a new credit agreement. The Company expects
to
complete this refinancing in the second quarter of 1996. It is
the
Company's belief that through cash flow from operations, the
replacement of its current credit facility, or other sources of
available financing adequate liquidity will be available through
the
remainder of 1996.
(7) Stock Option Plans
Under terms of the Company's Incentive Stock Option Plan (the
Plan),
the exercise price of options granted is to be equal to the
stock's
fair market value at the date of grant. Common stock initially
available for option under the Plan was 220,000 shares. Options
are
execrable no later than 5 years from the date of grant. Options
which are not exercised or canceled revert back to the Plan and
are
subject to subsequent reissuance. This Plan expired on October
7,
1991 and was renewed at the 1993 annual shareholders' meeting.
There are 10,499 remaining shares available for grant under this
Plan as of December_31, 1995. In 1995, the Company's Board of
Directors approved a new stock option plan. Company stock
available
for option under this plan is 200,000 shares and all shares were
available for grant as of December_31, 1995.
In 1984, the Company adopted a nonqualified stock option plan
whereby the Board of Directors could grant stock options to
employees, officers or directors at no less than 85% of the fair
market value of the Company's stock at the date of grant. The
number of shares initially available for option under this plan
was
20,000 shares. In 1990, the Board of Directors approved making
an
additional 20,000 shares available for option. The options were
exercisable no later than ten years from the date of grant.
There
were no shares granted under this plan and the plan expired on
February_16,_1994.
A summary of all stock option transactions for the three-year
period
ended December_31, 1995 follows:
Shares Exercise
price
--------
- --------------
Options granted and outstanding:
At December_31, 1992 111,000 $ 1.093 to
2.50
Granted 103,000 1.375
Exercised - -
Canceled (2,000) 1.875
---------
- ---------------
At December_31, 1993 212,000 1.093 to
2.50
Granted 42,000
2.125
Exercised (10,001) 1.375 to
1.406
Canceled (54,499) 1.375 to
2.187
---------
- ---------------
At December_31, 1994 189,500 1.093 to
2.50
Granted 110,000 2.125 to
2.50
Exercised (60,000)
1.093
Canceled (100,000) 1.375 to
2.50
---------
- ---------------
At December_31, 1995 139,500 $ 1.25 to
2.50
=========
===============
At December_31, 1995, options for 12,999 shares of common stock
were
vested and exercisable at prices ranging from $1.25 to $2.50 per
share.
(8) 401(k) Plan
Effective January 1, 1989 and as subsequently amended, the
Company
adopted a 401(k) plan whereby all employees who have completed
three
months of service may elect to make pretax contributions of 1%
to
20% of their annual pay not to exceed contributions of $9,240
per
year. The Company has a 25% employer matching program
contingent
upon Company earnings of at least $100,000. As the Company did
not
meet the minimum earnings requirement for employer matching in
1995
and 1994, no Company contributions were made to the plan for
those
years. The Company paid approximately $15,000 to the plan based
on
employee contributions of approximately $62,000 in 1993.
(9)Commitments and Contingencies
Noncancelable operating lease commitments consist principally of
the
lease for the Company's distribution and administrative
facility.
In February 1994, the Company extended its facility lease
through
1999. At December_31, 1995, the Company was committed to the
following noncancelable operating lease payments which includes
the
lease extension:
Year ending December:
1996 $ 139,000
1997 145,000
1998 124,000
1999 29,000
----------
$ 437,000
==========
Rental expense was approximately $130,400 in 1995, $118,000 in
1994
and $155,300 in 1993.
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 States Postal Service (USPS) or
United
Parcel Service (UPS) change their rates. For a fee, the Company
provides its customers with programmable memory chips with the
new
tariffs which can be inserted into the Company's products. In
some
instances, customers prepay a fee to the Company which assures
they
will receive new programmable memory chips for all rate changes
which occur within a predetermined period. In other instances,
customers incur a fee for each time they decide to procure a new
programmable memory chip. The Company has experienced UPS rate
changes in 1993, 1994 and 1995 and a USPS rate change in 1995.
During 1995, 1994 and 1993, the Company recorded revenues from
rate
changes totaling approximately $2,132,000, $1,736,000 and
$1,668,000, respectively. Gross profits related to rate changes
in
1995, 1994 and 1993 totaled approximately $1,805,000, $1,396,000
and
$1,442,000, respectively. A UPS rate change also occurred in
January 1996. However, there can be no assurance that future
rate
changes by UPS or USPS will occur.
Schedule II
MICRO GENERAL CORPORATION
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
Additions
Balance at charged to
beginning of costs and
Balance at
Description period expenses
Deductions end of period
- -------------------------------------- ---------- ----------
- ---------- -------------
Allowance for doubtful receivables:
Year ended December 31, 1995 $ 74,749 31,849
67,004 39,594
========== =======
======= =======
Year ended December 31, 1994 $ 66,085 81,393
72,729 74,749
========== =======
======= =======
Year ended December 31, 1993 $ 78,535 11,475
23,925 66,085
========== =======
======= =======
Allowance for sales returns:
Year ended December 31, 1995 $ 7,000 62,739
62,734* 7,000
========== =======
======= =======
Year ended December 31, 1994 $ 7,000 53,336
53,336* 7,000
========== =======
======= =======
Year ended December 31, 1993 $ 44,017 46,395
83,412* 7,000
========== =======
======= =======
[FN]
* Represents gross profit on sales returns of $278,839, $329,235
and $335,832
for the years ended December 31, 1995, 1994 and 1993,
respectively.
INDEX TO EXHIBITS
Exhibit
Sequentially
Number Description of Exhibit Numbered
Page
3.1 Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit
3.1 to the Company's Annual Report on Form 10-K
for the year ended December 25, 1988 (the "1988
Form 10-K Amendment 1"))
3.2 Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the "1988 Form 10-K
Amendment 1")
10.1 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement in use prior
to 1987 (incorporated by reference to Exhibit
10.1 to the 1984 Form 10-K) Option Plan and
form of Incentive Stock Option Agreement in use
commencing in 1987 (incorporated by reference
to Exhibit 10. to the Company's Annual Report
for the year ended December 28, 1986 (the "1986
Form 10-K"))
10.2 Nonqualified Stock Option Plan and form of
Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to
the 1984 Form 10-K)
10.3 Lease of 1740 E. Wilshire Ave., Santa Ana,
California, 92705, facilities between Shaw
Investment and the Company (incorporated by
reference to the Company's Annual Report on
Form 10-K for the year ended December 25, 1988
(the "1988 Form 10-K Amendment 1"))
10.11 Form of Dealer Agreement (incorporated by
reference to Exhibit 10.14(1) to Amendment No.
3 to the Company's Registration Statement on
Form S-2 (registration No. 33-8240), filed on
June 4, 1987 (the "1986 Form S-2 Amendment
Number 3"))
10.16.1 Loan Agreement between the Company and Silicon
Valley Bank dated September 12, 1991.
(Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1991)
10.16.2 Amendment to Loan Agreement between the Company
and Silicon Valley Bank dated December 2, 1992.
(Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1992)
10.16.3 Amendment to Loan Agreement between the Company
and Silicon Valley Bank dated December 10,
1993. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1993)
10.16.4 Amendment to Loan Agreement between the Company
and Silicon Valley Bank dated January 27, 1994.
(Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994)
10.17 Loan Agreement between the Company and First Bank
and Trust dated November 15, 1995.(filed herewith)
33
24 Consent of KPMG Peat Marwick LLP (filed herewith)
32