-----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, BZP91cyWOrv1RQ0jl4oa3hMhlhLcMA7ZEL+EPtCntHf55gog+o8Ath5SPxIKn7Iu xwGh0qzkvmcbaQhPVfRhSA== 0000892569-01-501082.txt : 20020410 0000892569-01-501082.hdr.sgml : 20020410 ACCESSION NUMBER: 0000892569-01-501082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1934 Act SEC FILE NUMBER: 000-08358 FILM NUMBER: 1791500 BUSINESS ADDRESS: STREET 1: 2510 RED HILL AVENUE STREET 2: SUITE 200 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 949-622-4444 MAIL ADDRESS: STREET 1: 2510 RED HILL AVENUE STREET 2: SUITE 200 CITY: SANTA ANA STATE: CA ZIP: 92705 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-Q 1 a77014e10-q.txt FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2001 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) 2510 N. RED HILL AVENUE, SUITE 230, SANTA ANA, CALIFORNIA 92705 - --------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (949) 622-4444 - -------------------------------------------------------------------------------- (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 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. $.05 par value Common Stock 15,294,140 shares as of November 9, 2001 Exhibit Index appears on page 14 of 14 sequentially numbered pages. FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 2001 TABLE OF CONTENTS
PAGE NUMBER ----------- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 A. Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3 B. Condensed Consolidated Statements of Operations for the three-month periods ended September 30, 2001 and 2000 4 C. Condensed Consolidated Statements of Operations for the nine-month periods ended September 30, 2001 and 2000 5 D. Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2001 and 2000 6 E. Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II: OTHER INFORMATION Items 1-3 and 5. of Part II have been omitted because they are not applicable with respect to the current reporting period 14 Item 6. Exhibits and Reports on Form 8-K 14
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/ Dale W. Christensen ------------------------------------------- Dale W. Christensen Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 14, 2001 2 Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................... $ 7,862,635 $ 5,337,553 Trade accounts receivable, less allowance for doubtful accounts of $1,790,559 in 2001 and $1,394,555 in 2000 .................................... 4,225,896 2,853,971 Inventories ............................................. 169,998 -- Trade accounts receivable due from affiliates ........... 16,788,480 14,033,919 Prepaid & other current assets .......................... 3,384,488 3,276,205 Deferred tax assets ..................................... 3,792,884 -- ------------ ------------ Total current assets ................................ 36,224,381 25,501,648 Property and equipment, net ................................. 26,222,065 17,462,272 Goodwill less accumulated amortization of $7,421,567 in 2001 and $5,789,224 in 2000 ............................... 12,084,751 6,774,736 Investments ................................................. 1,660,893 1,660,893 ------------ ------------ $ 76,192,090 $ 51,399,549 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ................... $ 13,076,122 $ 15,038,673 Income and other taxes payable .......................... 978,280 1,311,966 Deferred tax liabilities ................................ -- 361,726 Deferred revenue ........................................ 2,306,659 612,955 Other current liabilities ............................... 465,476 374,315 Current portion of capital leases with affiliate ........ 483,462 406,550 Current portion of notes payable ........................ 7,498,800 4,804,734 ------------ ------------ Total current liabilities ........................... 24,808,799 22,910,919 Amounts and notes payable to affiliates ..................... 5,265,408 5,265,408 Capital leases with affiliates .............................. 1,119,393 1,407,257 Deferred revenue ............................................ 3,866,772 1,569,478 Note payable ................................................ 1,458,231 1,933,308 Other long term liabilities ................................. 77,902 146,067 ------------ ------------ Total liabilities ................................... 36,596,505 33,232,437 Commitments and contingencies Subsequent events Stockholders' equity: Preferred stock, $.05 par value. Authorized 1,000,000 shares; none issued and outstanding ..................... -- -- Common stock, $.05 par value. Authorized 50,000,000 shares; issued and outstanding 15,277,689 at September 30, 2001 and 14,544,808 shares at December 31, 2000 .............. 763,884 661,128 Additional paid-in capital ................................ 57,434,192 28,809,431 Accumulated deficiency .................................... (18,602,491) (11,303,447) ------------ ------------ Total stockholders' equity .......................... 39,595,585 18,167,112 ------------ ------------ $ 76,192,090 $ 51,399,549 ============ ============
See Notes to Condensed Consolidated Financial Statements. 3 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ----------- ----------- (UNAUDITED) Revenues: Software, hardware and maintenance revenues ............... $ 5,364,483 $ 4,352,531 Service and consulting revenues ........................... 23,270,683 13,760,764 Telecommunication service revenues ........................ 5,614,124 10,351,580 ----------- ----------- Total revenues (related party revenues, see note 6) .... 34,249,290 28,464,875 ----------- ----------- Cost of sales: Software, hardware and maintenance cost of sales .......... 3,110,511 2,386,855 Service and consulting cost of sales ...................... 14,890,471 8,494,070 Telecommunication service cost of sales ................... 6,157,487 10,627,593 ----------- ----------- Total cost of sales .................................... 24,158,469 21,508,518 ----------- ----------- Gross profit ........................................... 10,090,821 6,956,357 Selling, general and administrative expenses .............. 5,377,275 4,773,378 ----------- ----------- Operating income ....................................... 4,713,546 2,182,979 Amortization of goodwill .................................. 455,703 626,895 Joint venture loss ........................................ -- -- Interest expense, net ..................................... 207,845 423,992 ----------- ----------- Income before income taxes ............................. 4,049,998 1,132,092 Income tax expense ........................................ 996,083 -- ----------- ----------- Net income ............................................. $ 3,053,915 $ 1,132,092 ----------- ----------- Income per share -- basic (see note 9)..................... $ .20 $ .08 =========== =========== Income per share -- diluted (see note 9) .................. $ .18 $ .07 =========== =========== Number of shares used in per share computations -- Basic (see note 9) ...................................... 15,003,704 14,412,168 Diluted (see note 9) .................................... 17,121,400 15,978,779
See Notes to Condensed Consolidated Financial Statements. 4 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, --------------------------------- 2001 2000 ------------- ------------- (UNAUDITED) Revenues: Software, hardware and maintenance revenues ............... $ 13,344,743 $ 13,997,984 Service and consulting revenues ........................... 67,386,718 29,259,471 Telecommunication service revenues ........................ 20,662,031 35,203,257 ------------- ------------- Total revenues (related party revenues, see note 6).... 101,393,492 78,460,712 ------------- ------------- Cost of sales: Software, hardware and maintenance cost of sales .......... 7,883,321 8,059,172 Service and consulting cost of sales ...................... 42,321,780 18,689,174 Telecommunication service cost of sales ................... 21,490,719 35,807,700 ------------- ------------- Total cost of sales ................................... 71,695,820 62,556,046 ------------- ------------- Gross profit .......................................... 29,697,672 15,904,666 Selling, general and administrative expenses .............. 16,078,182 13,270,716 ------------- ------------- Operating income ...................................... 13,619,490 2,633,950 Amortization of goodwill .................................. 1,634,831 1,856,659 Joint venture loss ........................................ -- 578,045 Interest expense, net ..................................... 601,251 674,341 ------------- ------------- Income (loss) before income taxes ..................... 11,383,408 (475,095) Income tax expense ........................................ 2,902,769 -- ------------- ------------- Net income (loss) ..................................... $ 8,480,639 $ (475,095) ============= ============= Income (loss) per share -- basic (see note 9) ............. $ .57 $ (.03) ============= ============= Income (loss) per share -- diluted (see note 9) ........... $ .51 $ (.03) ============= ============= Number of shares used in per share computations - Basic (see note 9)....................................... 14,769,845 14,231,006 Diluted (see note 9) .................................... 16,522,405 14,231,006
See Notes to Condensed Consolidated Financial Statements. 5 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, ------------------------------- 2001 2000 ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss) .................................................. $ 8,480,639 $ (475,095) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .................................... 5,216,093 4,691,776 Loss on disposal of property and equipment ....................... 137,816 -- Provision for doubtful accounts .................................. 327,928 515,375 Joint venture loss ............................................... -- 578,045 Tax expense against goodwill, equity, deferred taxes ............. 2,214,270 -- Changes in assets and liabilities: Trade accounts receivable ...................................... (1,054,855) (1,637,704) Inventories .................................................... (169,998) 368,681 Prepaid expenses and other assets .............................. 100,101 (308,121) Accounts payable and accrued expenses .......................... (2,063,794) 3,800,267 Income and other taxes payable ................................. (333,686) (29,129) Deferred revenue ............................................... 2,386,138 -- Customer deposit ............................................... -- (167,000) Other long term liabilities .................................... (68,165) -- Amounts due from affiliates .................................... (2,754,561) (6,989,427) ------------ ------------ Net cash provided by operating activities ................... 12,812,832 347,668 ------------ ------------ Cash flows from investing activities: Purchases of property and equipment ................................ (9,203,106) (3,240,479) Investment in joint venture ........................................ -- (1,450,000) Purchase of software ............................................... -- (45,000) Acquisition of SoftPro, net of cash acquired ....................... (1,630,526) -- ------------ ------------ Net cash used in investing activities ....................... (10,833,632) (4,735,479) ------------ ------------ Cash flows from financing activities: Net increase in borrowings on line of credit ....................... 2,000,000 3,700,000 Capital lease obligation ........................................... (372,095) (317,342) Payment of interest due affiliates.................................. (394,906) (617,243) Stock issues or exercise of stock options........................... 1,495,148 2,182,848 Stock purchase plan ................................................ 352,876 187,006 Net pay down on notes payable ...................................... (2,535,141) (140,129) ------------ ------------ Net cash provided by financing activities ................... 545,882 4,995,140 ------------ ------------ Net increase (decrease) in cash and cash equivalents ........ 2,525,082 607,329 Cash and cash equivalents at beginning of period ....................... 5,337,553 1,400,874 ------------ ------------ Cash and cash equivalents at end of period ............................. $ 7,862,635 $ 2,008,203 ------------ ------------ Supplemental cash flow information: Cash paid during the six months for: Income taxes paid .................................................. $ 1,326,618 -- ------------ ------------ Interest paid ...................................................... $ 1,131,417 $ 737,336 ------------ ------------ Noncash investing and financing activities: Earnout payment to Interactive Associates, Inc. .................. $ 614,333 ------------ Investment in TXMNet, Inc. ....................................... $ 1,615,893 ------------ Stock dividend ................................................... $ 15,779,683 -- ------------ ------------ Note financing of hardware/software .............................. $ 2,754,130 $ 2,850,428 ------------ ------------ Assets acquired through capital lease ............................ $ 161,143 -- ------------ ------------ SoftPro acquisition .............................................. $ 6,216,228 -- ------------ ------------
See Notes to Condensed Consolidated Financial Statements. 6 MICRO GENERAL CORPORATION & SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (1) 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, 2000. Results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year ended December 31, 2001. Certain reclassifications have been made in the 2000 condensed consolidated financial statements to conform to classifications used in 2001. (2) DESCRIPTION OF BUSINESS Historically, the operations of Micro General Corporation consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations were performed through the Company's postage meter and scale division. Following the acquisition of ACS Systems, Inc. ("ACS") in mid-1998, which is described below, the Company shifted its focus to information technology and telecommunication services. On May 14, 1998, the Company and Fidelity National Financial, Inc.("FNFI") completed the merger of Micro General with ACS, a wholly owned 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 common stock. The transaction was appraised at $1.3 million. Following the merger of Micro General and ACS, FNFI owned 81.4% of the common stock of the Company on an undiluted basis. The transaction has been accounted for as a reverse merger, i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General as the legal surviving entity and ACS as the surviving entity for accounting purposes. At December 31, 2000, ACS was formally merged into Micro General. FNFI owned 64% of the Company's outstanding common stock at September 30, 2001. On November 17, 1998, the Company completed the acquisition of LDExchange.com, Inc. ("LDExchange"), an emerging multinational carrier focused primarily on the international long distance market. LDExchange is a facilities-based, wholesale long distance carrier providing low cost international telecommunication services primarily to U.S. based long distance carriers. In 2000, LDExchange obtained the necessary state certifications to begin offering domestic long distance services across the country. In addition, the telecommunication assets and customers of ACS were transferred into LDExchange and have become an integral part of the LDExchange telecommunication product offerings. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General restricted common stock (1,000,000 shares). The acquisition was accounted for as a purchase. (3) ESCROW.COM On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. 7 Escrow.com offers on-line escrow-related services designed to provide buyers and sellers with a safe, secure and easy to use system for managing payment for and delivery of products and services purchased via the Intranet. As an internet transaction services provider, escrow.com provides for the secure transmission of funds between a buyer and seller by placing the funds in escrow, confirming and verifying the receipt of merchandise by the buyer, and releasing the funds from escrow to the seller. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time escrow.com has sufficient funding in place to reasonably assure the payment of the note. While the Company has no equity interest in escrow.com as of September 30, 2001, the 15.0 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. Escrow.com is incurring substantial losses and may need to raise additional funds in order to continue its operations. The Company's potential ownership in escrow.com may be substantially diluted if escrow.com issues additional shares to raise the necessary capital. As previously described, the Company has warrants that, upon their exercise, will give the Company substantial ownership in escrow.com. In April 2000, escrow.com completed a private placement in which it raised gross proceeds of $30 million. As an inducement to invest, the Company assigned to two of the investors 250,000 of its 15.0 million warrants in escrow.com. As a result of this funding, escrow.com has 10,516,813 shares outstanding as of September 30, 2001. Although escrow.com has raised additional capital, those funds are not being used for repayment of the $4.5 million note receivable discussed above. Therefore, the note will be fully reserved until such time that escrow.com has sufficient funding in place to reasonably ensure payment of the note. Assuming exercise of the warrants, the Company would have a 58% ownership in escrow.com. (4) REALEC TECHNOLOGIES, INC. On October 8, 1998, the Company announced the creation of RealEC, one of the largest real estate electronic commerce networks in the nation. RealEC commenced operations in mid-1999 and was a 50% owned joint venture with Stewart Title Corporation, a subsidiary of Stewart Information Services Corporation (NYSE:STC). RealEC provides a standardized, electronic platform which lenders and realtors can utilize to order and receive products and services from multiple vendors such as credit, flood, appraisal, title and closing. This open, eCommerce network currently gives lenders and realtors access to over 2,000 vendors located across the United States. On May 19, 2000, the Company created TXMNet, Inc. and transferred its 50% ownership of RealEC into the new entity along with certain other intellectual property in exchange for 6,650,000 shares of convertible, non-voting preferred stock. The Company's investment in TXMNet was $1,660,893, which was the book value of its 50% ownership in RealEC that was part of the assets contributed by the Company into TXMNet, Inc. On December 31, 2000, Stewart Title Corporation exchanged its 50% ownership position in RealEC for 2,935,000 shares of convertible, non-voting preferred stock in TXMNet, Inc. TXMNet, Inc. changed its name to RealEC Technologies, Inc. on February 13, 2001. The Company has advanced RealEC Technologies approximately $5.3 million and has accounted for these advances using the modified equity method. Subsequent to the end of the quarter, the Company was repaid $1.5 million of these advances as a result of the transaction described in the following paragraph. Therefore, in anticipation of the receipt of these funds, the Company had reserved $3.8 million of the RealEC Technologies receivable. On October 25, 2001, Land America signed an agreement with the Company and Stewart Title Corporation to invest $4 million in RealEC Technologies for 3,065,000 shares of Series B preferred stock. Terms of the agreement include the payment of $1.5 million of this investment to the Company as repayment of funds advanced by the Company to RealEC Technologies. The Company has agreed as of October 25, 2001, to turn the remaining $3.8 million owed to Micro General into a convertible note having a term of 20 months and bearing interest of 7% annually. As of October 25, 2001, assuming conversion of the non-voting convertible preferred stock into common stock, the Company would have a 47% ownership in RealEC Technologies, Stewart Title Corporation would have a 22% ownership, Land America would have a 22% ownership, and the remaining 9% ownership by other investors. (5) SOFTPRO CORPORATION On August 20, 2001, Micro General Corporation acquired SoftPro Corporation (SoftPro), for $1.75 million in cash and 336,034 shares of the Company's common stock valued at $4,857,035. The Company also assumed the SoftPro Option Plan, which had 133,328 options issued and outstanding. The vesting of these options accelerated upon the change in ownership. The vested options were then converted to Micro General options which were valued at $1,359,194 using the Black Scholes option pricing model and are included in the purchase price. The Company has not yet completed the purchase price allocation (which includes acquisition costs of approximately $90,000). Identifiable intangibles will be amortized over their expected useful lives, which is estimated to be five years. Residual goodwill, if any, will not be amortized but will be subject to periodic testing of impairment at the reporting unit level in accordance with Financial Accounting Standards No. 142. Established in 1984, SoftPro is based in Raleigh, North 8 Carolina. SoftPro is a leading provider of real estate closing and title insurance automation software for the independent title agent marketplace. It has an installed base of more than 6,300 sites nationwide and a user base of more than 23,000. The Company's unaudited consolidated financial statements for the nine-month period ended September 30, 2001 include the results of operations of SoftPro since its acquisition on August 20, 2001. The following selected unaudited pro forma information is being provided to present a summary of the combined results of the Company and SoftPro as if the acquisition had occurred as of the beginning of each period, giving effect to preliminary purchase accounting adjustments.
FOR THE PROFORMA 9 MONTHS ENDED (Unaudited) SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ------------------ ------------------ Net revenues $ 106,551,000 $ 82,255,000 Net income (loss) 8,431,000 (1,301,000) Basic net income (loss) per share $ 0.56 $ (0.09) Diluted net income (loss) per share $ 0.50 $ (0.09)
The pro forma loss per share data is based on the Company's weighted average number of common shares outstanding during the nine month periods ended September 30, 2001 and 2000 and the addition of the 336,034 common shares issued as part of the acquisition. The unaudited pro forma data is for informational purposes only and may not necessarily reflect the results of operations of the Company had SoftPro operated as part of the Company for the nine month periods ended September 30, 2001 and 2000, nor are they indicative of future operating results. (6) SEGMENT INFORMATION The Company's condensed consolidated financial statements as of and for the quarters ended September 30, 2001 and 2000 include two reportable segments.
INTRA-COMPANY AS OF SEPTEMBER 30, 2001: MICRO GENERAL LDEXCHANGE ELIMINATIONS TOTAL ------------- ----------- ------------- ----------- Total revenues $28,635,165 $ 5,614,125 $ $34,249,290 Related party revenues 27,471,510 608,540 28,080,050 Operating income (loss) 5,808,414 (1,094,868) 4,713,546 Interest expense (net) 171,078 36,767 207,845 Income (loss) before income taxes 5,181,628 (1,131,630) 4,049,998 Depreciation and amortization 1,620,526 360,893 1,981,419 Total assets 92,516,158 6,909,749 (23,233,817) 76,192,090
INTRA-COMPANY AS OF SEPTEMBER 30, 2000: MICRO GENERAL LDEXCHANGE ELIMINATIONS TOTAL ------------- ----------- ------------- ------------ Total revenues $18,547,408 $ 9,917,467 $ $28,464,875 Related party revenues 16,202,134 687,472 16,889,606 Operating income (loss) 3,437,654 (1,254,675) 2,182,979 Joint Venture loss 0 Interest expense (net) 325,421 98,571 423,992 Income (loss) before income taxes 2,585,597 (1,453,505) 1,132,092 Depreciation and amortization 1,076,427 898,741 1,975,168 Total assets 39,397,552 11,060,114 (11,920,808) 38,536,858
9 The Company's condensed consolidated financial statements as of and for the nine months ended September 30, 2001 and 2000 include two reportable segments.
INTRA-COMPANY AS OF SEPTEMBER 30, 2001: MICRO GENERAL LDEXCHANGE ELIMINATIONS TOTAL ------------- ----------- ------------- ----------- Total revenues $ 80,731,460 $20,662,032 $ $101,393,492 Related party revenues 76,826,950 2,153,387 78,980,337 Operating income (loss) 14,365,428 (745,938) 13,619,490 Interest expense (net) 496,998 104,253 601,251 Income (loss) before income taxes 14,582,083 (3,198,675) 11,383,408 Depreciation and amortization 4,086,852 1,129,241 5,216,093 Total assets 92,516,158 6,909,749 (23,233,817) 76,192,090
INTRA-COMPANY AS OF SEPTEMBER 30, 2000: MICRO GENERAL LDEXCHANGE ELIMINATIONS TOTAL ------------- ----------- ------------- ----------- Total revenues $ 43,691,567 $34,769,145 $ $ 78,460,712 Related party revenues 39,299,122 1,892,434 41,191,556 Operating income (loss) 6,100,578 (3,466,628) 2,633,950 Joint Venture loss (578,045) (578,045) Interest expense (net) 491,604 182,737 674,341 Income (loss) before income taxes 3,461,502 (3,936,597) (475,095) Depreciation and amortization 2,907,591 1,784,185 4,691,776 Total assets 39,397,552 11,060,111 (11,920,807) 38,536,856
(7) OPTIONS Under the Company's stock option plan, in the nine-months ended September 30, 2001, the Company granted options to acquire 1,694,584 shares at the then current market price. Of the stock options granted, 84,784 shares are vested and the remaining shares will vest over periods up to four years. (8) STOCKHOLDER'S EQUITY Common stock increased from $661,128 at December 31, 2000 to $763,883 as of September 30, 2001. This increase was the result of stock option exercises ($16,872), shares issued to the employee stock purchase plan ($2,500), stock dividend ($66,581) paid as of June 1, 2001, and stock issued related to the SoftPro acquisition ($16,802). On May 8, 2001, the Company declared a stock dividend of 10 percent to shareholders of record at the close of business on May 18, 2001, payable June 1, 2001. Cash was paid in lieu of fractional shares. Accordingly, the weighted average shares outstanding have been restated to reflect a 10% stock dividend for each of the periods presented. The total stock dividend was $15,779,685. Additional paid in capital increased from $28,809,431 at December 31, 2000 to $57,432,192 as of September 15, 2001. Contributing to this increase were stock option exercises ($1,478,275), employee stock purchase plan purchases and employer match ($350,376), stock dividend ($15,713,101), and stock issued related to the SoftPro acquisition ($6,199,427). In addition, an entry was made to additional paid in capital to recognize the tax benefits of options exercised in the amount of ($4,883,582). Common stock issued and outstanding as of December 31, 2000 was 13,222,553. Common stock issued and outstanding as of September 30, 2001 is 15,277,689. This is an increase in issued and outstanding shares of 2,055,136 and is attributable to the following transactions: Stock Exercises 337,483 Shares Issued to Employee Stock Purchase Plan 50,000 Stock Dividend 1,331,619 SoftPro Acquisition 336,034 --------- Total Shares Issued 2,055,136 =========
(9) CALCULATION OF EARNINGS PER SHARE
Three-month periods ended Nine-month periods ended September 30, September 30, 2001 2000 2001 2000 ------------- ------------- ------------ ------------ Basic Earnings Per Share: Numerator Net income (loss)............................. $ 3,053,915 $ 1,132,092 $ 8,480,639 $ (475,095) ------------- ------------- ------------ ----------- Denominator Weighted average shares outstanding 15,003,704 13,101,971 14,769,845 12,937,278 10% Stock Dividend -- 1,310,197 -- 1,293,728 ------------- ------------- ------------ ----------- Basic weighted average shares outstanding 15,003,704 14,412,168 14,769,845 14,231,006 ------------- ------------- ------------ ----------- Basic earnings (loss) per share: ............ $ 0.20 $ 0.08 $ 0.57 $ (0.03) ============= ============= ============ =========== Diluted Earnings Per Share: Numerator Net income (loss) ............................ $ 3,053,915 $ 1,132,092 $ 8,480,639 $ (475,095) ------------- ------------- ------------ ----------- Denominator Basic weighted average shares outstanding 15,003,704 13,101,971 14,769,845 12,937,278 Incremental common shares attributable to: Outstanding Warrants 424,945 344,454 337,248 0 Outstanding Options 1,692,751 1,222,157 1,415,312 0 10% Stock Dividend 0 1,310,197 0 1,293,728 ------------- ------------- ------------ ----------- 2,117,696 2,876,808 1,752,560 1,293,728 Diluted weighted average shares outstanding 17,121,400 15,978,779 16,522,405 14,231,006 ------------- ------------- ------------ ----------- diluted earnings (loss) per share $ 0.18 $ 0.07 $ 0.51 $ (0.03) ============= ============= ============ ===========
For the nine month period ended September 30, 2000, 1.6 million shares related to the possible exercise of outstanding options and warrants were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. 10 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 1933 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 in the Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of 1933, as amended. RESULTS OF OPERATIONS Revenue Revenues increased $5.8 million, or 20.3%, to $34.3 million in the quarter ended September 30, 2001 from $28.5 million in the comparable 2000 period. For the nine months ended September 30, 2001, revenue was $101.4 million, an increase of $22.9 million or 29.2% over revenue of $78.5 million for the nine-month period ended September 30, 2000. The majority of the revenue increase was due to service and consulting revenues, which were $23.3 million for the quarter ended September 30, 2001, a $9.5 million increase from the comparable quarter last year. This increase is attributed to the continued development of Net Global Solutions ("NGS"), a web-based software platform developed to substantially increase the efficiency of the title production process. For the quarter ended September 30, 2001, software, hardware and maintenance revenues increased $1.0 million, or 23.2%, to $5.4 million from $4.4 million in the comparable 2000 period while telecommunications service revenues fell $4.7 million, or 45.8%, to $5.6 million from $10.3 million in the comparable 2000 period. In the nine months ended September 30, 2001, software, hardware, and maintenance revenues fell $653,000 or 4.7%, to $13.3 million from $14.0 million in the comparable nine month period ended September 30, 2001 while telecommunications service revenues fell $14.5 million, or 41.3%, to $20.7 million from $35.2 million for the same period in 2000. The increase in software, hardware and maintenance revenues in the third quarter was primarily in the area of software maintenance and is attributable to additional software service agreements placed with Fidelity period since September 30, 2000. The decrease for the nine-month period is from a reduction of new installations of SIMON, the legacy back office system solution for title offices, in anticipation of the NGS system. The drop in telecommunications service revenues in the Company's LDExchange subsidiary was a result of the loss of several international telecommunications services agreements combined with the decision to decrease the amount of certain low margin international traffic. In the quarter ended September 30, 2001, total related party revenue was $28.1 million (82.0% of total revenue), an increase of $11.2 million compared to $16.9 million (59.3% of total revenue) for the quarter ended September 30, 2000. For the nine month period ended September 30, 2001, the total related party revenue was $79.0 million (77.9% of total revenue), an increase of $37.8 million compared to $41.2 million (52.5% of total revenue) for the nine month period ended September 30, 2000. Gross Profit For the three months ended September 30, 2001, gross profit increased $3.1 million or 45.1%, to $10.1 million (29% of revenue) as compared to gross profit of $7.0 million (24% of revenue) in the prior year comparable quarter. Gross profit in the nine months ended September 30, 2001 was $29.7 million (29% of revenue), an increase of $13.8 million, or 86.7%, from gross profit of $15.9 million (20% of revenue) in the comparable 2000 period. The continued change in revenue mix into the higher margin service and consulting revenues and the de-emphasis of lower margin telecommunications revenue resulted in significant gross profit improvement for the three and nine month periods ended September 30, 2001 when compared to the same periods in 2000. Expenses For the quarter ended September 30, 2001 selling, general and administrative expenses ("SG&A") increased $0.6 million or 12.7%, to $5.4 million from $4.8 million in the comparable 2000 period. For the nine months ended September 30, 2001, SG&A expenses increased to $16.1 million, a $2.8 million, or 21% increase over the same period in 2000. This increase is primarily due to the $2.3 million RealEC Technologies reserve expense for receivables due from RealEC Technologies for the first six months of the year using modified equity accounting. 11 The amortization of goodwill is a function of the characteristics of the intangible assets recorded during a particular period and the estimated useful life of the intangible assets. Fluctuations in the amortization of goodwill result from the amount, mix and characteristics of the intangible assets recorded as well as the circumstances surrounding the Company's estimate of the appropriate useful life. Amortization expense was slightly lower for the three and nine month periods when comparing 2001 and 2000. This is attributed to the lowering of amortization due to the reduction of goodwill by the utilization of pre-acquisition net operating loss carry-forwards of $1.0 million. Interest expense, net is interest income earned net of interest expense related to the use of the Company's working capital, which is in the form of available cash and lines of credit. In the quarter ended September 30, 2001, the decrease in interest expense, net to $208,000 from $424,000 in the comparable quarter was driven by lower interest costs associated with fewer draws on the company's credit line and lower interest expense recorded on amortized note payments made. For the nine month comparable 2001 period ended September 30, 2001, the decrease of $73,000 in interest expense, net over the nine months ended September 30, 2000 was also attributed to a favorable interest rate environment. Income tax expense (benefit) is recorded on the amounts the Company estimates, based on the Company's taxation structure, will be due to state and federal taxation authorities. For the nine months ended September 30, 2001, the Company recorded a taxable expense of $3.0 million. The effective tax rate of 25% differs from the statutory tax rate of 34% due to the recognition of net operating tax loss carryforwards in light of the Company's profitability in 2001. Liquidity and Capital Resources The Company's current cash requirements include debt service, personnel and other operating expenses, stock repurchase program, capital expenditures coupled with capital for potential acquisitions and expansion. Internally generated funds fluctuate in a pattern generally consistent with revenues. For the quarter ended September 30, 2001, the Company recorded a net income of $3.0 million compared to income of $1.1 million in the comparable 2000 period. For the nine months ended September 30, 2001, the Company had a net income of $8.5 million compared to a net loss of ($475,000) for the nine months ended September 30, 2000. The Company believes as a result of its current revenue base, improved profitability, increased margins and the anticipated availability of funds in the form of existing lines of credit, all cash requirements will be met for at least 12 months. On August 21, 2001, Micro General acquired SoftPro, a privately owned company that is a leading provider of closing and title automation software. This division is expected to post revenues of over $1.6 million for the remainder of 2001, and be profitable. The purchase price was $8.1 million, with approximately $1.75 million paid in cash and the remainder in Micro General common stock and stock options. Micro General has advanced RealEC Technologies $5.3 million in the first nine months of 2001, and, as required by modified equity accounting, has reserved $3.5 million of this receivable as of September 30, 2001 (see note 4). On October 25, 2001, Land America signed an agreement with the Company and Stewart Title Corporation to invest $4 million into RealEC Technologies for 3,065,000 shares of Series B preferred stock. Terms of the agreement include $1.5 million of this investment going to the Company as a reduction in receivables due the Company. The Company has agreed to turn the remaining receivables as of October 25, 2001 into a convertible note going forward. This investment relieves Micro General of the position of ongoing advancement of funds to RealEC Technologies. In the event RealEC Technologies reaches positive cash flows, the company will see repayment of the $3.8 million previously reserved. The Company has relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI. FNFI had also been a source of funds via available financing arrangements and is a guarantor of certain of the Company's lender arrangements. The Company has a five-year convertible note with FNFI due December, 2004. The Company also has a $10.0 million revolving line of credit with Imperial Bank, $5 million of which is guaranteed by FNFI, which extends through September 2002. As of September 30, 2001, the Company has borrowed $4.5 million. In addition, the Company has also entered into a number of note financing arrangements with IBM Global Credit and GE Capital totaling $2.9 million in the first nine months of 2001. In connection with the continuing development of the NGS system, Micro General anticipates that an additional $1 to $3 million in capital purchases will be required over the remainder of 2001. The Company believes the necessary financing is available from existing financing resources to complete these capital purchases. The Company's LDExchange subsidiary continues to operate in a difficult, extremely competitive pricing environment. For the quarter ended September 30, 2001, LDExchange experienced a loss of $1.2 million, and for the nine months ended, a loss of $3.2 12 million. Earnings before interest, tax, depreciation and amortization (EBITDA) were a loss of $734,000 and $2.0 million for the three and nine-month periods ended September 30, 2001. The Company is currently reviewing the operations of LDExchange and is evaluating its options for this business. While the Company believes it has funds on hand and funds available through existing lines of credit sufficient to meet its projected needs for the next twelve months, the Company also believes it may have the option of raising additional funds through an offering of its common stock. If undertaken, the proceeds from an offering would be used to pay down existing debt, finance the development of potential new business opportunities and potential acquisitions, and also for general working capital purposes. There can be no guarantee the Company will undertake an offering of its common stock, or that if undertaken, it will be successful in raising additional funds. The Company must comply with certain affirmative and negative covenants related to its outstanding debt and notes payable. The Company was in compliance with these covenants at September 30, 2001. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. The provisions of the statement require the recognition of all derivatives as either assets or liabilities in the consolidated balance sheet and the measurement of those instruments at fair value. The accounting for the changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. We have not historically entered into derivative contracts or related instruments. We adopted SFAS 133, as amended, effective April 1, 2001, the implementation of which resulted in no material impact on our consolidated financial statements and results of operations. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 14, "Goodwill and Other Intangible Assets." The Company is required to adopt the provisions of SFAS No. 141 immediately. SFAS No. 141 requires that all business combinations be accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 required that the purchase method be used for business combinations initiated after September 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. Under SFAS No. 142, the amortization of goodwill ceases upon adoption of the Statement, is effective for fiscal years beginning after December 15, 2001 and shall be initially applied at the beginning of a fiscal year. The Company has historically amortized its goodwill and other intangible assets over their estimated useful lives. Beginning with the adoption of SFAS No. 142, the Company will cease amortizing its goodwill and certain intangible assets. The Company anticipates adopting SFAS No. 142 as of the beginning of fiscal year 2002 (i.e., January 1, 2002). The Company recorded amortization expense in the amount of $2,460,000 for the fiscal year ended December 31, 2000, $456,000 and $1,635,000 for the three and nine months ended September 30, 2001 and $627,000 and $1,857,000 for the three and nine months ended September 30, 2000. To the extent that no impairment charges are recorded upon adoption or application of SFAS No. 142, similar amounts of amortization will not be recorded in future periods. Because of the extensive effort needed to comply with adopting SFAS No. 141 and No. 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements. The financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS"), No. 143, "Accounting for Asset Retirement Obligations" in September 2001. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associate asset retirement costs. Management does not believe the application of these standards will have a material effect on the Company's financial position, results of operations or liquidity. The Financial Accounting Standards Board issue Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" in October 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment of disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe the application of these standards will have a material effect on the Company's financial position, results of operations or liquidity. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company's consolidated balance sheets include liabilities whose fair values are subject to market risks. The following sections address the significant market risks associated with the Company's financial activities as of September 30, 2001. 13 MARKET RISK EXPOSURES The following discussion about our market risk disclosures contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates. We do not have derivative financial instruments for hedging, speculative or trading purposes. INTEREST RATE RISK The Company's borrowings are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decrease and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. Caution should be used in evaluating the Company's overall market risk from the information below. Actual results could differ materially because the information was developed using estimates and assumptions as described below. The fair value of the Company's notes payable approximate their carrying value at September 30, 2001 as the interest rates paid approximate the market value of borrowings of a similar nature. The hypothetical effects of changes in market rates or prices on the fair values of financial instruments, which relate to the Company's line of credit, would be an increase (decrease) of the fair value approximately $ 45,000, if interest rates increased (decreased) 100 basis points. Part II: OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: SoftPro Acquisition filed on September 4, 2001. Stock Repurchase Program filed on October 11, 2001. 14 -----END PRIVACY-ENHANCED MESSAGE-----