-----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, D7ojT6LEj2zbffKB51SD/p0odbynAxCLPfoWzm/gO+1en/e1hQrj3LwzTKhUelXs QplhnbKJCBjvQX1wAoswHw== 0000892569-99-002280.txt : 19990817 0000892569-99-002280.hdr.sgml : 19990817 ACCESSION NUMBER: 0000892569-99-002280 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693497 BUSINESS ADDRESS: STREET 1: 2510 N. REDHILL STREET 2: SUITE 230 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 9496224444 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 1 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 June 30, 1999 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 7,756,604 shares as of August 09,1999 Exhibit Index appears on page 12 of 12 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 1999 TABLE OF CONTENTS
Page Number ----------- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 B. Condensed Consolidated Statements of Operations for the three-month periods ended June 30, 1999 and 1998 (Restated) 4 C. Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 1999 and 1998 (Restated) 5 D. Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 1999 and 1998 (Restated) 6 E. Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 10 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 12
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) Date: August 13, 1999 By: /s/ Dale W. Christensen -------------------------------------------- Dale W. Christensen Chief Financial Officer (Principal Financial and Accounting Officer) 2 3 Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents .......................................... $ 3,893,787 $ 914,796 Trade accounts receivable, less allowance for doubtful accounts of $1,612,044 in 1999 and $485,936 in 1998 .............. 6,520,417 1,835,968 Trade accounts receivable due from affiliates ...................... 5,972,350 4,350,790 Inventories, net ................................................... 1,575,487 785,204 Prepaid expenses and other assets .................................. 632,503 359,884 ------------ ------------ Total current assets ........................................... 18,594,544 8,246,642 Notes receivable ........................................................ -- 29,850 Property and equipment, net ............................................. 5,132,296 3,321,005 Capitalized software development costs, less accumulated amortization of $3,197,192 in 1999 and $2,794,275 in 1998 ............. 1,102,801 1,505,719 Other assets ............................................................ 151,960 0 Cost in excess of net assets acquired, less accumulated amortization of $1,851,821 in 1999 and $872,996 in 1998 ............................ 10,116,440 9,976,845 ------------ ------------ $ 35,098,041 $ 23,080,061 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable and accrued expenses .............................. $ 12,697,672 $ 4,916,314 Income and other taxes payable ..................................... 57,328 138,647 Current portion of capital lease ................................... 62,472 0 Deferred tax liabilities ........................................... 361,726 361,726 Deferred revenue ................................................... 0 189,839 ------------ ------------ Total current liabilities ...................................... 13,179,198 5,606,526 Capital lease payable, less current portion ............................. 198,760 0 Amounts and notes payable to affiliates ................................. 23,620,149 16,888,947 Note payable to officer.................................................. 500,000 -- ------------ ------------ Total liabilities .............................................. 37,498,107 22,495,473 ------------ ------------ Stockholders' equity (deficiency): Preferred stock, $.05 par value. Authorized 1,000,000 shares; none issued and outstanding ..................................... -- -- Common stock, $.05 par value. Authorized 20,000,000 shares; issued and outstanding 7,753,580 at June 30, 1999 and 7,546,666 shares at December 31, 1998, respectively .................................. 387,679 377,333 Additional paid-in capital ......................................... 6,958,804 6,357,608 Accumulated deficiency ............................................. (9,746,549) (6,150,353) ------------ ------------ Total stockholders' equity (deficiency) ........................ (2,400,066) 584,588 ------------ ------------ $ 35,098,041 $ 23,080,061 ============ ============
See Notes to Condensed Consolidated Financial Statements 3 4 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three month periods ended June 30, -------------------------------- 1999 1998 ------------ ------------ (Unaudited) (Restated) Hardware revenues ........................................................ $ 3,320,512 $ 4,406,447 Software sales and maintenance revenue.................................... 1,059,438 1,220,947 Telecommunication service revenues ....................................... 18,167,433 136,758 Service and license revenues ............................................. 2,359,104 1,189,456 ------------ ------------ Total revenues .................................................. 24,906,487 6,953,608 ------------ ------------ Hardware.................................................................. 2,988,699 3,965,803 Software sales and maintenance cost of sales.............................. 1,313,190 863,550 Telecommunication service cost of sales .................................. 18,014,264 (13,697) Service and license cost of sales ........................................ 1,769,884 618,400 ------------ ------------ Total cost of sales ............................................. 24,086,037 5,434,056 ------------ ------------ Gross profit .................................................... 820,450 1,519,552 ------------ ------------ Operating expenses: Selling, general and administrative expenses ........................ 1,864,723 931,663 Amortization of cost in excess of net assets acquired and capitalized software development costs ........................................ 695,591 187,348 ------------ ------------ Total operating expenses ........................................ 2,560,314 1,119,011 ------------ ------------ Operating income (loss) ......................................... (1,739,864) 400,541 Interest expense, net .................................................... (443,899) (42,375) ------------ ------------ Income (loss) before income taxes ............................... (2,183,763) 358,166 Income tax expense ....................................................... 3,200 212,435 ------------ ------------ Net income (loss) ............................................... $ (2,186,963) $ 145,731 ============ ============ Income (loss) per share: Basic ............................................................... $ (.29) $ .03 ============ ============ Diluted ............................................................. $ (.29 $ .03 ============ ============ Number of shares used in per share computations: Basic ............................................................... 7,647,172 5,603,970 ============ ============ Diluted ............................................................. 7,647,172 5,823,136 ============ ============
See Notes to Condensed Consolidated Financial Statements 4 5 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six month periods ended June 30, ----------------------------- 1999 1998 ------------ ------------ (Unaudited) (Restated) Hardware revenues ........................................................ $ 5,725,534 $ 5,914,614 Software sales and maintenance revenues .................................. 2,885,563 1,936,167 Telecommunication service revenues ....................................... 29,371,236 859,006 Service and license revenues ............................................. 6,236,629 2,034,334 ------------ ------------ Total revenues .................................................. 44,218,962 10,744,121 ------------ ------------ Hardware cost of sales ................................................... 5,652,980 5,823,153 Software sales and maintenance cost of sales.............................. 3,742,021 1,523,227 Telecommunication service cost of sales .................................. 29,029,483 364,717 Service and license cost of sales ........................................ 3,763,586 1,056,004 ------------ ------------ Total cost of sales ............................................. 42,188,070 8,767,101 ------------ ------------ Gross profit .................................................... 2,030,892 1,977,020 ------------ ------------ Operating expenses: Selling, general and administrative expenses ........................ 3,561,919 1,848,672 Amortization of cost in excess of net assets acquired and capitalized software development costs ........................................ 1,381,742 363,219 ------------ ------------ Total operating expenses ........................................ 4,943,661 2,211,891 ------------ ------------ Operating loss .................................................. (2,912,769) (234,871) Interest expense, net .................................................... (679,427) (39,732) ------------ ------------ Loss before income taxes ........................................ (3,592,196) (274,603) Income tax expense (benefit) ............................................. 4,000 (36,595) ------------ ------------ Net loss ........................................................ $ (3,596,196) $ (238,008) ============ ============ Loss per share - basic and diluted ....................................... $ (.47) $ (.05) ============ ============ Number of shares used in per share computations - basic and diluted ...... 7,621,919 5,103,267 ============ ============
See Notes to Condensed Consolidated Financial Statements 5 6 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six month periods ended June 30, --------------------------- 1999 1998 ------------ ----------- (Unaudited) (Restated) Cash flows from operating activities: Net income (loss) ................................................. $(3,596,196) $ (238,008) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ................................. 1,742,189 417,629 Changes in assets and liabilities: Trade accounts receivable ..................................... (4,684,449) 94,265 Inventories ................................................... (790,283) (1,739,165) Prepaid expenses and other assets ............................. (272,619) (881,474) Accounts payable and accrued expenses ......................... 7,050,538 805,534 Income and other taxes payable ................................ (81,319) 187,018 Deferred revenue .............................................. (189,839) (4,100) Amounts due from affiliates ................................... (1,621,560) 1,249,154 Other assets .................................................. (151,960) -- ----------- ----------- Net cash provided by (used in) operating activities .. (2,595,498) (109,147) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment ............................... (1,910,105) (1,571,312) Decrease in notes receivable ...................................... 29,850 31,776 Acquisition of Interactive Associates, Inc., net .................. 0 -- Capitalization of software development costs ...................... 0 -- Merger of Micro General and ACS ................................... 0 403,175 ----------- ----------- Net cash used in investing activities ................ (1,880,255) (1,136,361) ----------- ----------- Cash flows from financing activities: Net increase in borrowings from affiliates ........................ 7,231,202 1,649,251 Proceeds from exercise of stock options............................ 223,542 -- ----------- ------------ Net cash provided by (used in) financing activities .. 7,454,744 1,649,251 ----------- ----------- Net increase (decrease) in cash and cash equivalents . 2,978,991 403,743 Cash and cash equivalents at beginning of period ....................... 914,796 830,784 ----------- ----------- Cash and cash equivalents at end of period ............................. $ 3,893,787 $ 1,234,527 =========== =========== Supplemental cash flow information: Income taxes paid ................................................. $ 60,000 $ -- =========== =========== Interest paid ..................................................... $ 87,088 $ -- =========== =========== Noncash investing and financing activities: Merger of Micro General and ACS ................................... -- $ 1,300,000 Acquisition of Interactive Associates, Inc. for common stock ...... $ 388,000 $ -- =========== ===========
See Notes to Condensed Consolidated Financial Statements 6 7 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, 1998. Certain reclassifications have been made in the 1998 condensed consolidated financial statements to conform to classifications used in 1999. (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. As of June 30, 1999, the Company has closed down the shipping and scales business and no longer generates revenues from these business lines. Following the acquisitions of ACS Systems, Inc. ("ACS") and LDExchange.com, Inc. ("LDExchange"), which are described below, the Company shifted its primary 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 approximately 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. Therefore, the condensed consolidated financial statements as of and for the quarter and six months ended June 30, 1998 have been restated to reflect the operations of ACS prior to the merger. At June 30, 1999, FNFI owned approximately 69% of the outstanding common stock of the Company. ACS was founded in 1985 as a software company specializing in products for the real estate industry, in particular, escrow software. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. ACS, through its various divisions, is currently a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. In addition, as a result of the acquisition of LDExchange, which closed on November 17, 1998, the Company has been able to enter the international telecommunications market, which complements the range of services offered by ACS. LDExchange is an emerging multinational carrier focused primarily on the international long distance market. LDExchange offers reliable, low cost switched voice services on a wholesale basis, primarily to U.S. based long distance carriers. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Company common stock (1,000,000 shares). The acquisition was accounted for as a purchase. (3) Acquisition of Interactive Associates, Inc. In March 1999, the Company acquired Interactive Associates, Inc. ("Interactive"), a privately held distributor of computer telephony hardware and services. This acquisition provided for the purchase of 100% of the common stock of Interactive in exchange for 100,000 shares of Micro General common stock valued at $388,000. Interactive's business activities have been merged with those of ACS. This acquisition has been accounted for using the purchase method. The financial position and results of operations of Interactive are not material to the Company. (4) Investment in Joint Venture The Company entered into a joint venture with Stewart Title to develop a Windows- and Internet-based ordering and delivery system. RealEC will be an open, multi-vendor, network offering products and services supporting the real estate industry. The Company owns 50% of the joint venture. 7 8 MICRO GENERAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (5) Segment Information The Company's condensed consolidated financial statements as of and for the quarter ended June 30, 1999 include three reportable segments.
CORPORATE AND POSTAGE METER AND SCALE ACS LDEXCHANGE DIVISION TOTAL ------------ ------------ ------------- ------------ Total revenue ......... $ 8,114,810 $ 16,706,510 $ 85,167 $ 24,906,487 ============ ============ ============ ============ Operating profit (loss) $ (424,032) $ (514,271) $ (801,561) $ (1,739,864) Interest expense, net.. (287,927) (16,772) (139,200) (443,899) ------------ ------------ ------------ ------------ Loss before income taxes ............... $ (711,959) $ (531,043) $ (940,761) $ (2,183,763) ============ ============ ============ ============ Assets ................ $ 21,123,132 $ 7,592,246 $ 6,382,663 $ 35,098,041 ============ ============ ============ ============
The Company's condensed consolidated financial statements as of and for the six months ended June 30, 1999 include three reportable segments.
CORPORATE AND POSTAGE METER AND SCALE ACS LDEXCHANGE DIVISION TOTAL ------------ ------------ ------------- ------------ Total revenue ......... $ 17,135,209 $ 26,096,942 $ 986,811 $ 44,218,962 ============ ============ ============ ============ Operating profit (loss) $ (1,632,714) $ (314,840) $ (965,215) $ (2,912,769) Interest expense, net . (421,905) (16,772) (240,750) (679,427) ------------ ------------ ------------ ------------ Loss before income taxes ............... $ (2,054,619) $ (331,612) $ (1,205,965) $ (3,592,196) ============ ============ ============ ============ Assets ................ $ 21,123,132 $ 7,592,246 $ 6,382,663 $ 35,098,041 ============ ============ ============ ============
(6) Pro Forma Information Selected unaudited pro forma combined results of operations for the quarter ended June 30, 1998, and for the six months ended June 30, 1998 assuming the Micro General/ACS merger and the LDExchange acquisition occurred on January 1, 1998, respectively, are presented as follows: Quarter ended Six months ended June 30, 1998 June 30, 1998 ------------- ---------------- Total revenue $11,187,220 $18,084,901 Net profit (loss) (371,971) (1,137,617) Profit (loss) per share basic and diluted (.07) (.22) 8 9 MICRO GENERAL CORPORATION 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 $18.0 million, or 258%, to $24.9 million in the quarter ended June 30, 1999 from $7.0 million in the quarter ended June 30, 1998. For the six months ended June 30, 1999, revenue was $44.2 million, an increase of $33.5 million or 312% over revenue of $10.7 million for the six-month period ended June 30, 1998. The increases in both the three-month and six-month periods are primarily a result of the acquisition of LDExchange in November 1998 and continued growth in products and services provided to both FNFI and others. Gross Profit In the three months ended June 30, 1999, gross profit decreased $699,000, or 46%, to $820,000 (3% of revenue) as compared to a $1.5 million gross profit (22% of revenue) in the comparable 1998 period. Gross profit in the six months ended June 30, 1999 was nearly the same as in the comparable 1998 six-month period. However, in 1999 the gross profit was down to 5% of revenue from the 1998 gross profit which was 18% of revenue. Gross profit as a percentage of revenue decreased in the three-month and six-month 1999 periods as compared to the comparable 1998 periods primarily as a result of the LDExchange revenues being added in 1999, which revenues have a lower gross profit than the information technology and telecommunication businesses of ACS. Also, Micro General results are included for the entire 1999 three and six-month periods but are only included in the 1998 results from the transaction date of May 14, 1998 through June 30, 1998, and also reflect the shutdown of the postage and scale division in the 1999 second quarter. Expenses Selling, general and administrative expenses ("SG&A") increased to $1.9 million in the second quarter of 1999 from $932,000 in the second quarter of 1998. For the six months ended June 30, 1999, SG&A expenses increased to $3.6 million from $1.8 million in the six months ended June 30, 1998. The increase in 1999 SG&A expenses is primarily attributable to the additional personnel, facilities, and other costs assumed in the LD Exchange and Micro General acquisitions, along with the additional expenses incurred to support the growth of the business. The amortization of cost in excess of net assets acquired and capitalized software development costs 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 cost in excess of net assets acquired and capitalized software 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. During the three months ended June 30, 1999 and 1998, amortization of costs in excess of net assets acquired and capitalized software development cost was $696,000 and $187,000, respectively. During the six months ended June 30, 1999 and 1998, amortization was $1.4 million and $363,000, respectively. The increase in the 1999 periods is primarily related to amortizing the cost in excess of net assets acquired in connection with the May 1998 ACS transaction and the November 1998 LDExchange acquisition. Interest income (expense), net, is related to the use of the Company's available working capital, which is in the form of available cash and lines of credit. The year over year fluctuation in interest income (expense) can be attributed to the increase in average borrowings outstanding during the three and six month periods ended June 30, 1999 as compared to the similar three and six month periods in 1998. The increase in interest expense in the 1999 periods as compared to the 1998 periods is related to funding the growth in the Company's business, which has included incurring net losses, additions to property and equipment and growth in the Company's receivables. 9 10 MICRO GENERAL CORPORATION Income tax expense (benefit) is recorded based on the amounts that the Company estimates, based on the Company's taxation structure, will be due to Federal and state taxation authorities. Micro General pays only minimum taxes based on current operating results due to the fact that Micro General has not historically generated earnings. Liquidity and Capital Resources The Company's current cash requirements include debt service, personnel and other operating expenses, capital expenditures and capital for acquisitions and expansion. The Company believes that all anticipated cash requirements will be met from future lines of credit and additional availability from lines of credit from affiliates. Internally generated funds have been negative but fluctuate in a pattern generally consistent with revenues. Since the Company has repositioned itself as a result of the merger with ACS Systems, Inc. and the acquisition of LDExchange, the revenue, and therefore, cash flow base has stabilized, particularly as a result of the amount of revenues generated by affiliates. The Company believes that as a result of its current revenue base and the anticipated availability of funds in the form of additional lines of credit from affiliates and non-affiliates, all cash requirements will be met for at least the next twelve months. The Company relies 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 and as a source of funds via available financing arrangements. The Company has historically suffered losses and negative cash flows from operations and continued to do so during the six months ended June 30, 1999. In addition, the Company has an accumulated deficiency and a significant amount of outstanding debt as of June 30, 1999. FNFI has represented that it has the ability and intent to provide the Company with the cash necessary to continue as a going concern for a period of at least twelve months following June 30, 2000. The Company must comply with certain affirmative and negative covenants related to its outstanding debt and notes payable. The Company was in compliance with or has received waivers related to these covenants. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company does not believe there have been any material changes in the market risks since December 31, 1998, which would impact the fair value of certain liabilities included in the condensed consolidated balance sheets. Year 2000 Issues Information technology is an integral part of the Company's business. The Company also recognizes the critical nature of and the technological challenges associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from computer programs and computer hardware that utilize only two digits to identify a year in the date field, rather than four digits. If such programs or hardware are not modified or upgraded information systems could fail, lock up, or in general fail to perform according to normal expectations. The Company has implemented a program and committed both personnel and other resources to determine the extent of potential Y2K issues. Included within the scope of this program are systems used in title plants, title policy processing, escrow production, claims processing, real estate related services, financial management, human resources, payroll and infrastructure. In addition to a review of internal systems, the Company has initiated formal communications with third parties with which it does business in order to determine whether or not they are Y2K compliant and the extent to which the Company may be vulnerable to third parties' failure to become Y2K compliant. The Company is in the process of identifying Y2K compliant issues in its systems, equipment and processes. The Company is making changes to such systems, updating or replacing such equipment, and modifying such processes to make them Y2K compliant. The Company has developed a four phase program to become Y2K compliant. Phase I is, "Plan Preparation and Identification of the Problem." This is an ongoing phase that will continue beyond the year 2000 itself. Phase II is, "Plan Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining Y2K Compliance." The Company 10 11 MICRO GENERAL CORPORATION anticipates that its systems processes will be substantially Y2K compliant by September 1999. The status of the Y2K compliance program is monitored by senior management of the Company and by the Audit Committee of the Company's Board of Directors. The costs of the Y2K related efforts incurred to date have not been material, and the estimate of remaining costs to be incurred is not considered to be material. Due to the complexities of estimating the cost of modifying applications to become Y2K compliant and the difficulties in assessing third parties', including various local governments upon which the Company relies upon to provide title-related data, ability to become Y2K compliant, estimates may be subject to change. Management of the Company believes that its electronic data processing and information systems will be Y2K compliant; however, there can be no assurance that all of the Company's systems will be Y2K compliant, that the costs to be Y2K compliant will not exceed management's current expectations, or that the failure of such systems to be Y2K compliant will not have a material adverse effect on the Company's business. The Company believes that functions currently performed with the assistance of electronic data processing equipment could be performed manually or outsourced if certain systems were determined not to be Y2K compliant on or after January 1, 2000. The Company has not yet completed a contingency plan in the event that any systems are not Y2K compliant, but will do so once the Phase III process of its compliance program is begun. We expect this contingency plan to be complete by September 1999. This entire section, "Year 2000 Issues", is hereby designated a "Year 2000 Readiness Disclosure", as defined in the Year 2000 Information and Readiness Disclosure Act. 11 12 Part II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27 -- Financial Data Schedule (b) Reports on Form 8-K: Current report on Form 8-K, dated April 14, 1999, related to the repositioning of the Company's historical operations from the postage and scale industry into the information and telecommunications industry. Also, as of April 14, 1999, Thomas Pistilli is no longer a director and John Horbal is no longer Vice President. In addition, John Snedegar became President and Chief Executive Officer and Patrick Stone became Chairman of the Board. Current report on Form 8-K, dated May 13, 1999, related to the resignation on May 11, 1999 of Brooks Corbin as the Chief Financial Officer. 12 13 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3,893,787 0 14,104,811 1,612,044 1,575,487 18,594,544 5,785,520 653,224 35,098,041 13,179,198 24,318,909 0 0 387,679 (2,787,745) 35,098,041 44,218,962 44,218,962 42,188,070 4,943,661 0 0 679,427 (3,592,196) 4,000 0 0 0 0 (3,596,196) (0.47) (0.47)
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