-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VytGOTexcFzYhXBZq5oJwTHP02fQIp3Ion/2FgT3cp+hloQtYjXq0ANc/imcyoTd l3/4BbQwmd8zh0sNC2kH2Q== 0000892569-98-002368.txt : 19980817 0000892569-98-002368.hdr.sgml : 19980817 ACCESSION NUMBER: 0000892569-98-002368 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO GENERAL CORP CENTRAL INDEX KEY: 0000067383 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 952621545 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08358 FILM NUMBER: 98690771 BUSINESS ADDRESS: STREET 1: 14711 BENTLEY CIRCLE CITY: TUSTIN STATE: CA ZIP: 92780-7226 BUSINESS PHONE: 7147310557 MAIL ADDRESS: STREET 1: 14711 BENTLEY CIRCLE CITY: TUSTIN STATE: CA ZIP: 927807226 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1998 1 ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended: JUNE 30, 1998 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 [ ] Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of the latest practicable date. $.05 par value Common Stock 6,549,666 shares as of August 14, 1998. Exhibit Index appears on page 11 of 11 sequentially numbered pages. ================================================================================ 2 MICRO GENERAL CORPORATION FORM 10-Q - QUARTER ENDED JUNE 30, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. A. Condensed Consolidated Balance Sheets as of June 30, 1998 2 and December 31, 1997. B. Condensed Consolidated Statements of Operations for the three 3 months ended June 30, 1998 and June 30, 1997. C. Condensed Consolidated Statements of Operations for the six 4 months ended June 30, 1998 and June 30, 1997. D. Condensed Consolidated Statements of Cash Flows for the six 5 months ended June 30, 1998 and June 30, 1997. E. Notes to Condensed Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial 8 Condition and Results of Operations. PART II. OTHER INFORMATION Items 1.-5. of Part II have been omitted because they are not applicable with respect to the current reporting period. Item 6. Exhibits and Reports on Form 8-K. 11
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 ------------------------- (Registrant) By: /s/ Anthony J. Park Date: August 14, 1998 ---------------------------- Anthony J. Park Vice President and Chief Financial Officer 1 3 MICRO GENERAL CORPORATION Condensed Consolidated Balance Sheets June 30, 1998 and December 31, 1997
June 30, December 31, 1998 1997 ------------ ------------ (Unaudited) Assets Current assets: Cash $ 1,234,527 $ 318,845 Accounts and notes receivable, less allowance for doubtful receivables and sales returns of $193,950 at 6/30/98 and $16,141 at 12/31/97 900,538 97,223 Inventories 2,615,114 853,033 Prepaid expenses and other assets 967,156 264,970 ------------ ------------ Total current assets 5,717,335 1,534,071 ------------ ------------ Equipment and improvements, net 2,221,406 209,351 Other assets, net 33,750 41,250 Capitalized software and postage meter development costs 3,475,783 1,054,865 Intangibles, less accumulated amortization of $215,372 at 6/30/98 6,470,316 -- ------------ ------------ $ 17,918,590 $ 2,839,537 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses 2,654,189 367,246 Income taxes payable 17,554 -- Deferred tax liability 524,098 -- Deferred revenue 15,486 6,112 Current portion of long-term debt with affiliates 250,000 250,000 Notes payable with affiliates 1,350,000 600,000 ------------ ------------ Total current liabilities 4,811,327 1,223,358 ------------ ------------ Long-term debt with affiliates 2,750,000 2,750,000 Note payable due to affiliate 4,907,272 -- Shareholders' equity: Preferred stock, $.05 par value; 1,000,000 shares authorized no shares issued and outstanding at 6/30/98 and 12/31/97 -- -- Common stock, $.05 par value; 10,000,000 shares authorized 6,549,666 shares issued at 6/30/98 and 1,949,666 shares issued at 12/31/97 327,483 97,483 Additional paid-in capital 10,920,658 4,176,370 Accumulated deficit (5,798,150) (5,407,674) ------------ ------------ 5,449,991 (1,133,821) ------------ ------------ $ 17,918,590 $ 2,839,537 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 4 MICRO GENERAL CORPORATION Condensed Consolidated Statements of Operations For the Three Months Ended June 30, 1998 and June 30, 1997 (Unaudited)
June 30, June 30, 1998 1997 ----------- ----------- Revenues: Postal product sales $ 179,468 $ 178,267 Postal service and rate change revenues 38,994 91,203 Software sales and maintenance, including $458,531 with affiliates 617,402 -- Hardware sales and maintenance, including $2,197,151 with affiliates 2,633,675 -- Consulting revenue, including $406,702 with affiliates 454,759 -- Servicing revenue, including $186,211 with affiliates 216,737 -- Telecommunication revenue, including $63,755 with affiliates 163,057 -- Other operating revenue, including $8,096 with affiliates 68,580 -- ----------- ----------- Total revenues 4,372,672 269,470 ----------- ----------- Cost of sales: Postal product sales 199,225 227,343 Postal service and rate change revenues 24,474 50,688 Cost of hardware and software 2,162,802 -- ----------- ----------- Total cost of sales 2,386,501 278,031 ----------- ----------- Gross profit (loss) 1,986,171 (8,561) Operating expenses: Selling, general and administrative 2,186,958 347,172 Engineering and development 55,523 66,985 Amortization of goodwill and software development costs 92,371 -- ----------- ----------- Total operating expenses 2,334,852 414,157 ----------- ----------- Operating loss (348,681) (422,718) Interest expense (115,603) (37,561) ----------- ----------- Loss before income taxes (464,284) (460,279) Income taxes 17,554 -- ----------- ----------- Net loss $ (481,838) $ (460,279) =========== =========== Basic loss per share $ (0.11) $ (0.24) =========== =========== Weighted average shares outstanding - basic basis 4,325,490 1,949,666 =========== =========== Diluted loss per share $ (0.11) $ (0.24) =========== =========== Weighted average shares outstanding - diluted basis 4,325,490 1,949,666 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 5 MICRO GENERAL CORPORATION Condensed Consolidated Statements of Operations For the Six Months Ended June 30, 1998 and June 30, 1997 (Unaudited)
June 30, June 30, 1998 1997 ----------- ----------- Revenues: Postal product sales $ 458,442 $ 329,800 Postal service and rate change revenues 793,841 979,722 Software sales and maintenance, including $458,531 with affiliates 617,402 -- Hardware sales and maintenance, including $2,197,151 with affiliates 2,633,675 -- Consulting revenue, including $406,702 with affiliates 454,759 -- Servicing revenue, including $186,211 with affiliates 216,737 -- Telecommunication revenue, including $63,955 with affiliates 163,057 -- Other operating revenue, including $8,096 with affiliates 68,580 -- ----------- ----------- Total revenues 5,406,493 1,309,522 ----------- ----------- Cost of sales: Postal product sales 473,899 475,599 Postal service and rate change revenues 202,599 345,346 Cost of hardware and software 2,162,802 -- ----------- ----------- Total cost of sales 2,839,300 820,945 ----------- ----------- Gross profit 2,567,193 488,577 Operating expenses: Selling, general and administrative 2,569,247 666,836 Engineering and development 78,206 168,192 Amortization of goodwill and software development costs 92,371 -- ----------- ----------- Total operating expenses 2,739,824 835,028 ----------- ----------- Operating loss (172,631) (346,451) Interest expense (199,491) (69,437) ----------- ----------- Loss before income taxes (372,122) (415,888) Income taxes 18,354 800 ----------- ----------- Net loss $ (390,476) $ (416,688) =========== =========== Basic loss per share $ (0.12) $ (0.21) =========== =========== Weighted average shares outstanding - basic basis 3,144,141 1,949,584 =========== =========== Diluted loss per share $ (0.12) $ (0.21) =========== =========== Weighted average shares outstanding - diluted basis 3,144,141 1,949,584 =========== ===========
See accompanying notes to condensed consolidated financial statements 4 6 MICRO GENERAL CORPORATION Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1998 and June 30, 1997 (Unaudited)
June 30, June 30, 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $ (390,476) $ (416,688) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 92,370 17,922 Provision for losses on accounts receivable and sales returns, net of write-offs -- (615) Change in assets and liabilities: Decrease in accounts receivable 1,856,349 24,130 (Increase) decrease in inventories (50,407) 146,603 Increase in prepaid expenses (699,516) (63,987) Increase (decrease) in accounts payable and accrued expenses 699,787 (32,964) Capitalized software and postage meter development costs (499,878) (291,256) Increase (decrease) in deferred revenue 9,374 (16,119) Increase in taxes payable 17,554 -- ----------- ----------- Total adjustments 1,425,633 (216,286) ----------- ----------- Net cash provided by (used in) operating activities 1,035,157 (632,974) Cash flows used in investing activities: Additions to property and equipment (767,536) (7,503) ----------- ----------- Net cash used in investing activities (767,536) (7,503) Cash flows from financing activities: Exercise of stock options -- 687 Proceeds from notes payable 750,000 450,000 Repayment of note payable to bank (101,939) -- ----------- ----------- Net cash provided by financing activities 648,061 450,687 ----------- ----------- Net increase (decrease) in cash 915,682 (189,790) Cash - beginning of period 318,845 413,533 ----------- ----------- Cash - end of period $ 1,234,527 $ 223,743 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 155,033 $ 74,961 =========== =========== Income taxes $ 800 $ 800 =========== =========== Non-cash transactions: Stock issued in connection with the acquisition of ACS Systems, Inc. $ 6,974,288 $ -- =========== ===========
See accompanying notes to condensed consolidated financial statements 5 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENTS The financial information included in this report includes the accounts of Micro General Corporation and its subsidiaries (collectively, the "Company") and 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 Annual Report on Form 10-K for the year ended December 31, 1997 and the Company's Current Report on Form 8-K dated July 27, 1998. Certain reclassifications have been made in the 1997 Condensed Consolidated Financial Statements to conform to the classifications used in 1998. DESCRIPTION OF BUSINESS Historically, the operations of the Company consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations are currently performed through the Company's postage meter and scale division. On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI") completed the merger of a wholly-owned subsidiary of Micro General Corporation with ACS Systems, Inc. ("ACS"), a subsidiary of FNFI. As a result of the merger all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General Corporation common stock. The transaction was valued at $6.9 million. FNFI now owns 81.4% of the common stock of the Company on an undiluted basis. NOTE 2. ACQUISITIONS ACS, a wholly-owned subsidiary of the Company, was founded in 1985 as an escrow software development company. ACS was acquired by FNFI in April 1994 and subsequently acquired by the Company on May 14, 1998 for 4.6 million shares of the Company's common stock. Approximately 80% of the revenue generated by ACS is derived from multiple servicing arrangements with FNFI and its subsidiaries whereby ACS provides comprehensive electronic data processing systems support, including selling computer hardware and software products and developing integrated title and escrow computer applications for FNFI's direct title operations and agency network. In addition to these services, ACS provides products and services to FNFI and unaffiliated customers, including telecommunications hardware and long distance reselling, technical services, consulting services, Internet access and services and computer hardware and systems software. The acquisition of ACS has been accounted for using the purchase method of accounting. The intangibles resulting from this acquisition are being amortized over 20 years. A preliminary allocation of the purchase price has been made, but the entire purchase accounting process has not yet been completed. The results of operations of the Company include the operations of ACS since the date of acquisition. 6 8 Pro forma results assuming the acquisition of ACS had occurred on January 1, 1998, and January 1, 1997, are as follows:
SIX MONTHS ENDED ------------------------------------ JUNE 30, 1998 JUNE 30, 1997 ---------------- ------------- Revenue $ 11,902,000 $ 7,197,000 ================ =========== Net loss $ (398,000) $ (568,000) ================ =========== Net loss per share - basic $ (0.06) $ (0.09) ================ =========== Weighted average shares outstanding - basic 6,549,666 6,549,584 ================ =========== Net loss per share - diluted (2) $ (0.06) $ (0.09) ================ =========== Weighted average shares outstanding - diluted (2) 6,549,666 6,549,584 ================ ===========
(1) Included in the 1998 pro forma earnings is $675,000 of income related to charges incurred by ACS in managing the FNFI information services department that were not properly charged back to FNFI until the current period. (2) Earnings per share on a diluted basis is anti-dilutive given that the Company had a net loss for the period presented; therefore basic and diluted shares and earnings per share are equal. NOTE 3. RELATED PARTY TRANSACTIONS On May 14, 1998, in connection with the Company's acquisition of ACS, a $5.0 million line of credit facility was established between the Company and Fidelity National Title Company, a subsidiary of FNFI. Under the terms of the agreement, accrued interest shall be payable quarterly with any unpaid balance, including principle and accrued interest, due and payable on May 14, 2000. Interest accrues at a rate of 9% per annum. As described in Note 1, the primary source of revenue for both ACS and the Company is fees resulting from sales and services to FNFI and subsidiaries, an affiliate. Revenues generated from the sales and services to affiliates during the three and six-month periods ended June 30, 1998 were $3,321,000, representing 75.9% and 61.4% of total revenue, respectively. Trade accounts receivable with affiliates of $3,718,000 has been offset against accounts payable and accrued expenses with the same affiliates of $3,716,000, with the minor difference applied to note payable due to affiliate. Included in notes payable and long-term debt at June 30, 1998 is $450,000 and $1,000,000, respectively, due to Cal West Service Corporation, a subsidiary of FNFI. Also included in notes payable and long-term debt at June 30, 1998 is $900,000 and $2,000,000, respectively, due to Dito Caree L.P. Holding, an affiliate. NOTE 4. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supercedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's financial reporting. 7 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors That May Affect Operating Results The statements contained in this report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. The reader should consult the risk factors listed from time to time and other information disclosed in the Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of 1933, as amended. Results of Operations The following discussion and analysis reflects the results of operations for the Company for the three and six-month periods ended June 30, 1998 and 1997. Included in the second quarter and six-month period ended June 30, 1998 is 47 days of operations of ACS, which was acquired on May 14, 1998. See Note 2. Due to the acquisition of ACS, results of operations may differ substantially when comparing 1998 periods with 1997 periods. The following table presents information regarding the components of revenues and expenses for the Company on a historical basis by division:
THREE MONTHS ENDED ------------------------------------------------------------------------ JUNE 30, 1998 JUNE 30, 1997 --------------------------------------------------- ----------- Postal Postal Division ACS Total Division ----------- ----------- ----------- ----------- Revenues $ 219,000 $ 4,154,000 $ 4,373,000 $ 269,000 Cost of sales 224,000 2,163,000 2,387,000 278,000 ----------- ----------- ----------- ----------- Gross profit (loss) (5,000) 1,991,000 1,986,000 (9,000) Operating expenses 383,000 1,952,000 2,335,000 414,000 Interest expense 85,000 31,000 116,000 38,000 Income tax expense -- 18,000 18,000 -- ----------- ----------- ----------- ----------- Net loss $ (472,000) $ (10,000) $ (482,000) $ (460,000) =========== =========== =========== ===========
SIX MONTHS ENDED ----------------------------------------------------------------------- JUNE 30, 1998 JUNE 30, 1997 --------------------------------------------------- ----------- Postal Postal Division ACS Total Division ----------- ----------- ----------- ----------- Revenues $ 1,252,000 $ 4,154,000 $ 5,406,000 $ 1,310,000 Cost of sales 676,000 2,163,000 2,839,000 821,000 ----------- ----------- ----------- ----------- Gross profit 576,000 1,991,000 2,567,000 489,000 Operating expenses 788,000 1,952,000 2,740,000 835,000 Interest expense 168,000 31,000 199,000 69,000 Income tax expense -- 18,000 18,000 1,000 ----------- ----------- ----------- ----------- Net loss $ (380,000) $ (10,000) $ (390,000) $ (416,000) =========== =========== =========== ===========
(1) The ACS division is included in the Company's historical financial statements for 47 days during the second quarter of 1998 and excluded entirely from 1997 results. 8 10 Total revenue for the quarter ended June 30, 1998 increased 1,525.7% to $4,373,000 from $269,000 for the second quarter of 1997. Total revenue for the six months ended June 30, 1998 increased 312.7% to $5,406,000 from $1,310,000 for the comparable 1997 period. The ACS contribution for the three and six-month periods ended June 30, 1998 was $4,154,000, or 95.0% and 76.8% of total revenue, respectively. Excluding the ACS contribution, total revenue for the second quarter decreased by $50,000, or 18.6%, which reflects the decrease in postal service and rate change business. Postal product sales were consistent in the quarter over quarter comparison. Total revenue for the six months ended June 30, 1998 excluding the ACS contribution decreased by $58,000, or 4.4%, which reflects the increase in postal product sales during the first quarter of 1998 offset by a decrease in service and rate change revenues. Product sales increased by $128,000, or 38.8%, while service and rate change revenues decreased by $186,000, or 19.0%, comparing the six-month periods of 1998 and 1997. The primary reason for the increase in product sales is the dealer-based sales of the Shipper Link product and the Company's Eagle Best Rate Shipper software for Windows and DOS. The decrease in service and rate change revenues relates to the decline in the Company's installed product base as more scale-based systems are being replaced by free service provider systems and computer-based systems. Cost of sales for the second quarter of 1998 increased 758.6% to $2,387,000 from $278,000 in the 1997 second quarter. For the six months ended June 30, 1998 cost of sales increased to $2,839,000, a 245.8% increase from $821,000 for the comparable 1997 period. Included in cost of sales for the three and six-month periods ended June 30, 1998 is $2,163,000, or 90.6% and 76.2% of total cost of sales, respectively, relating to the operations of ACS. See Note 2. Excluding the cost of sales related to ACS, cost of sales decreased $54,000 and $145,000 for the three and six months ended June 1998, respectively, which is consistent with the decrease in revenues discussed above. In addition, cost of sales related to postal product sales have decreased as a percentage of sales due to expense reductions in product labor and overhead. Operating expenses for the second quarter of 1998 increased to $2,335,000, an increase of $1,921,000, or 464.0%, from $414,000 in the 1997 second quarter. For the six-month period ended June 1998 operating expenses were $2,740,000, an increase of $1,905,000, or 228.1% over operating expenses of $835,000 for the comparable 1997 period. Excluding ACS operating expenses of $1,952,000, or 83.6% and 71.2% of total operating expenses for the three and six-month periods ended June 1998, respectively, operating expenses decreased $31,000 in the second quarter and $47,000 for the six-month period ended June 30, 1998 due to a further decrease in operating expenses of $16,000 during the first quarter of 1998. The first quarter 1998 decrease represents a minor increase in selling, general and administrative expenses offset by a decrease in postage meter development expenses as more development costs were capitalized. The second quarter 1998 decrease reflects increased sales expense associated with a concerted effort to market the new products and to stimulate interest in the postage meter, offset by a decrease in certain general and administrative salaries, consulting fees and an increase in capitalized postage meter development costs. Interest expense incurred by the Company relates to notes payable, long-term debt and a note to an affiliate. See Note 3. Interest expense for the second quarter of 1998 increased 205.3% to $116,000 from $38,000 in the 1997 second quarter. For the six months ended June 1998, interest expense increased $130,000, or 188.4%, to $199,000 from $69,000 in the same 1997 period. Excluding the interest expense related to ACS of $31,000, or 26.7% and 15.6% of total interest expense for the three and six-month periods ended June 30, 1998, respectively, interest expense increased $47,000, or 123.7%, and $99,000, or 143.5%, for those periods. The increase in interest expense for the three and six-month periods ended June 1998 as compared to the 1997 periods reflects the increase in average debt balances of $2,467,000, to $4,267,000 for the quarter ended June 1998 from $1,800,000 for the same 1997 quarter, and an increase of $2,200,000, to $3,850,000 for the six months ended June 1998 compared to $1,650,000 for the same 1997 period. The interest rates on the various financing agreements are between 9% and 9.5% depending on convertibility features and warrants. Liquidity and Capital Resources The Company's cash requirements include debt service, operating expenses and potential acquisitions. The Company believes that all anticipated cash requirements will be met from internally generated funds and through 9 11 existing credit facilities with affiliates. Cash provided by operating activities exceeded cash used by operating activities by $1,035,000 for the six months ended June 30, 1998, which compares favorably with cash used in operating activities exceeding cash provided by operating activities of $633,000 for the six months ended June 30, 1997. The increase in cash from operations primarily relates to payments received on accounts receivable from affiliates which were acquired in the non-cash acquisition of ACS. Management believes that short-term modifications of existing affiliate credit facilities will enable the Company to expand its business relationships with unaffiliated third parties and expects the Company to generate cash flows sufficient to support its future operations. 10 12 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. 27. Financial Data Schedule b. Current Reports on Form 8-K: Current Report on Form 8-K, dated July 27, 1998, relating to the merger of a wholly-owned subsidiary of Micro General Corporation into ACS Systems, Inc. on May 14, 1998. 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,234,527 0 1,094,488 (193,950) 2,615,114 5,717,335 3,236,424 (1,015,018) 17,918,590 4,811,327 0 0 0 327,483 5,122,508 17,918,590 5,406,493 5,406,493 2,839,300 2,839,300 2,726,824 13,000 199,491 (372,122) 18,354 (390,476) 0 0 0 (390,476) (.12) (.12)
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