-----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, HMkM4qFRcHLws+9ma1pcu/hR6E8aQ87hdJ98I1uaKrGGRFg9d2ZZ2eGUC1xoNmjz IzDxj1PHgJjfsVprVh37Sg== 0000892569-99-003104.txt : 19991117 0000892569-99-003104.hdr.sgml : 19991117 ACCESSION NUMBER: 0000892569-99-003104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755894 BUSINESS ADDRESS: STREET 1: 3916 STATE STREET STREET 2: SUITE 330 CITY: SANTA BARBARA STATE: CA ZIP: 93105 BUSINESS PHONE: 8055631566 MAIL ADDRESS: STREET 1: 3916 STATE STREET STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93105 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 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 September 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 7,753,580 shares as of November 8, 1999 Exhibit Index appears on page 12 of 12 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 1999 TABLE OF CONTENTS
PAGE NUMBER ----------- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 B. Condensed Consolidated Statements of Operations for the three-month periods ended September 30, 1999 and 1998 (Restated) 4 C. Condensed Consolidated Statements of Operations for the nine-month periods ended September 30, 1999 and 1998 (Restated) 5 D. Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 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 Disclosures About Market Risk 10 Part II: OTHER INFORMATION Items 1-3 & 5. Of Part II have been omitted because they are not applicable with respect to the current -- reporting period. Item 4. Submission of Matters to Vote of Security Holders 11 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/ Dale W. Christensen ------------------------------------ Dale W. Christensen Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 15, 1999 2 3 Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ............................................... $ 1,413,612 $ 914,796 Trade accounts receivable, less allowance for doubtful accounts of $1,847,356 in 1999 and $485,936 in 1998 .................. 8,923,326 1,835,968 Trade accounts receivable due from affiliates ........................... 7,282,222 4,350,790 Inventories, net ........................................................ 1,675,470 785,204 Prepaid expenses and other assets ....................................... 2,194,969 359,884 ------------ ------------ Total current assets ................................................ 21,489,599 8,246,642 Notes receivable ............................................................. -- 29,850 Property and equipment, net .................................................. 6,231,559 3,321,005 Capitalized software development costs, less accumulated amortization of $3,363,387 in 1999 and $2,794,275 in 1998 .................. 936,606 1,505,719 Cost in excess of net assets acquired, less accumulated amortization of $2,745,373 in 1999 and $872,996 in 1998 ................................. 9,372,887 9,976,845 Other assets ................................................................. 284,833 -- ------------ ------------ Total .............................................................. $ 38,315,484 $ 23,080,061 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable and accrued expenses ................................... $ 13,691,739 $ 4,916,314 Income and other taxes payable .......................................... 57,328 138,647 Current portion of capital lease to affiliate ........................... 61,106 -- Deferred tax liabilities ................................................ 361,726 361,726 Deferred revenue ........................................................ -- 189,839 ------------ ------------ Total current liabilities ........................................... 14,171,899 5,606,526 Capital lease payable, less current portion to affiliate ..................... 259,777 -- Amounts and notes payable to affiliates ...................................... 26,602,123 16,888,947 Note payable to officer ...................................................... 500,000 -- ------------ ------------ Total liabilities ................................................... 41,533,799 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 September 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 .................................................. (10,564,798) (6,150,353) ------------ ------------ Total stockholders' equity (deficiency) ............................. (3,218,315) 584,588 ------------ ------------ $ 38,315,484 $ 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 SEPTEMBER 30, ---------------------------- 1999 1998 ------------ ----------- (UNAUDITED) (RESTATED) Revenues: Hardware revenues ...................................................... $ 2,790,281 $ 2,958,470 Software sales and maintenance revenues ................................ 1,860,615 969,143 Telecommunication service revenues ..................................... 19,787,895 841,347 Service and license revenues ........................................... 3,414,203 1,989,946 ------------ ----------- Total revenues .................................................. 27,852,994 6,758,906 ------------ ----------- Cost of sales: Hardware cost of sales.................................................. 2,701,250 2,212,416 Software sales and maintenance cost of sales ........................... 1,239,019 893,334 Telecommunication service cost of sales ................................ 18,829,695 201,855 Service and license cost of sales ...................................... 2,649,136 1,009,006 ------------ ----------- Total cost of sales ............................................. 25,419,100 4,316,611 ------------ ----------- Gross profit .................................................... 2,433,894 2,442,295 Operating expenses: Selling, general and administrative expenses ........................ 1,875,707 2,976,395 Amortization of cost in excess of net assets acquired and capitalized software development costs ........................................ 819,492 263,385 ------------ ----------- Total operating expenses ........................................ 2,695,199 3,239,780 ------------ ----------- Operating loss .................................................. (261,305) (797,485) Interest expense, net .................................................... (556,944) (264,589) ------------ ----------- Loss before income taxes ....................................... (818,249) (1,062,074) Income tax expense ....................................................... -- -- ------------ ----------- Net loss ........................................................ $ (818,249) $(1,062,074) ============ =========== Loss per share: Basic and diluted.................................................... $ (.11) $ (.16) ============ =========== Number of shares used in per share computations: Basic and diluted.................................................... 7,753,580 6,543,666 ============ ===========
See Notes to Condensed Consolidated Financial Statements 4 5 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTH PERIODS ENDED SEPTEMBER 30, ------------ ------------ 1999 1998 ------------ ------------ (UNAUDITED) (RESTATED) Revenues: Hardware revenues ...................................................... $ 8,515,815 $ 8,873,084 Software sales and maintenance revenues ................................ 4,746,178 2,905,310 Telecommunication service revenues...................................... 49,159,131 1,700,353 Service and license revenues ........................................... 9,650,832 4,024,280 ------------ ------------ Total revenues .................................................. 72,071,956 17,503,027 ------------ ------------ Cost of sales: Hardware cost of sales ................................................. 8,354,230 8,035,569 Software sales and maintenance cost of sales ........................... 4,981,040 2,416,561 Telecommunication service cost of sales ................................ 47,859,178 566,572 Service and license cost of sales ...................................... 6,412,722 2,065,010 ------------ ------------ Total cost of sales ............................................. 67,607,170 13,083,712 ------------ ------------ Gross profit .................................................... 4,464,786 4,419,315 ------------ ------------ Operating expenses: Selling, general and administrative expenses ........................ 5,437,626 4,825,067 Amortization of cost in excess of net assets acquired and capitalized software development costs ........................................ 2,201,234 626,604 ------------ ------------ Total operating expenses ........................................ 7,638,860 5,451,671 ------------ ------------ Operating loss .................................................. (3,174,074) (1,032,356) Interest expense, net .................................................... (1,236,371) (304,321) ------------ ------------ Loss before income taxes ........................................ (4,410,445) (1,336,677) Income tax expense (benefit) ............................................. 4,000 (36,595) ------------ ------------ Net loss ........................................................ $ (4,414,445) $ (1,300,082) ============ ============ Loss per share: Basic and diluted............................................... $ (.58) $ (.23) ============ ============ Number of shares used in per share computations: Basic and diluted............................................. 7,656,945 5,589,687 ============ ============
See Notes to Condensed Consolidated Financial Statements 5 6 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ------------ ----------- (UNAUDITED) (RESTATED) Cash flows from operating activities: Net loss .......................................................... $ (4,414,445) $(1,300,082) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ................................. 3,137,897 714,025 Changes in assets and liabilities: Trade accounts receivable ..................................... (7,087,358) 3,715,519 Inventories ................................................... (890,266) (1,835,822) Prepaid expenses and other assets ............................. (1,835,085) (291,523) Accounts payable and accrued expenses ......................... 7,894,606 (196,908) Income and other taxes payable ................................ (81,319) 92,302 Deferred revenue .............................................. (189,839) (7,283) Amounts due from affiliates ................................... (2,931,432) (3,570,594) Other assets .................................................. (284,833) -- ------------ ----------- Net cash used in operating activities ................ (6,682,074) (2,680,366) ------------ ----------- Cash flows from investing activities: Purchases of property and equipment ............................... (3,285,678) (2,614,353) Decrease in notes receivable ...................................... 29,850 31,776 Merger of Micro General and ACS ................................... -- 403,175 ------------ ----------- Net cash used in investing activities ................ (3,255,828) (2,179,402) Cash flows from financing activities: Net increase in borrowings from affiliates ........................ 10,234,412 4,925,746 Principal payments on capital lease obligations ................... (21,236) -- Proceeds from exercise of stock options ........................... 223,542 -- ------------ ----------- Net cash provided by financing activities ............ 10,436,718 4,925,746 ------------ ----------- Net increase in cash and cash equivalents ............ 498,816 65,978 Cash and cash equivalents at beginning of period ....................... 914,796 830,784 ------------ ----------- Cash and cash equivalents at end of period ............................. $ 1,413,612 $ 896,762 ============ =========== Supplemental cash flow information: Income taxes paid ................................................. $ 60,000 $ -- ============ =========== Interest paid ..................................................... $ 108,698 $ 48,133 ============ =========== 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 September 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 valued 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 nine months ended September 30, 1998 have been restated to reflect the operations of ACS prior to the merger. At September 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. The Company has other eCommerce applications under development. RealEC is a 50% owned joint venture with Stewart Title that will be a Windows and Internet based ordering and delivery system with an open, multivendor network offering products and services supporting the real estate industry. Escrow.com is an eCommerce solution under development that will provide fraud protection to both buyers and sellers engaged in Internet based transactions. Escrow.com will initially offer escrow services for Internet enabled auctions and classified transactions, will offer shipping, authentication, appraisal and financing services, and will also engage in master-merchant transaction services for all forms of portal and Internet commerce. 7 8 (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 Company recorded goodwill in the amount of approximately $145,000, which is being amortized over 5 years. The financial position and results of operations of Interactive are not material to the Company. (4) Segment Information The Company's condensed consolidated financial statements as of and for the quarter ended September 30, 1999 include three reportable segments.
ACS LDEXCHANGE CORPORATE TOTAL ------------ ------------ ----------- ------------ Total revenues........... $ 9,473,345 $ 18,379,649 $ -- $ 27,852,994 Operating profit (loss).. $ 760,755 $ (201,061) $ (820,999) $ (261,305) Interest expense, net ... (340,402) (114,917) (101,625) (556,944) ------------ ------------ ----------- ------------ Loss before income taxes. $ 420,353 $ (315,978) $ (922,624) $ (818,249) ------------ ------------ ----------- ------------ Assets .................. $ 25,798,592 $ 6,999,528 $ 5,517,364 $ 38,315,484 ============ ============ =========== ============
The Company's condensed consolidated financial statements for the nine months ended September 30, 1999 include three reportable segments.
CORPORATE AND POSTAGE METER AND SCALE ACS LDEXCHANGE DIVISION TOTAL ------------ ------------ ------------- ------------ Total revenues............ $ 26,608,554 $ 44,476,591 $ 986,811 $ 72,071,956 Operating loss............ $ (871,959) $ (515,901) $(1,786,214) $ (3,174,074) Interest expense, net .... (762,307) (131,689) (342,375) (1,236,371) ------------ ------------ ----------- ------------ Loss before income taxes.. $ 1,634,266) $ (647,590) $(2,128,589) $ (4,410,445) ============ ============ =========== ============
(5) Pro Forma Information Selected unaudited pro forma combined results of operations for the quarter ended September 30, 1998, and for the nine months ended September 30, 1998 assuming the Micro General/ACS merger and the LDExchange acquisition occurred on January 1, 1998, respectively, are presented as follows:
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------- Total revenues........... $ 6,758,906 $ 45,937,895 Net loss................. (1,062,074) (1,955,866) Net loss per share basic and diluted.... (.16) (.35)
(6) Options Under the Company's stock option plan, in the nine-months ended September 30, 1999, the Company granted options to acquire 1,520,333 shares at the then current market price. Of the stock options granted, 1,119,011 shares are vested and the remaining shares will vest over periods up to three years. 8 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 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 $21.1 million, or 310%, to $27.9 million in the quarter ended September 30, 1999 from $6.8 million in the quarter ended September 30, 1998. For the nine months ended September 30, 1999, revenue was $72.1 million, an increase of $54.6 million or 312% over revenue of $17.5 million for the nine-month period ended September 30, 1998. The increases in both the three-month and nine-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-month and nine-month periods ended September 30, 1999, gross profit was essentially unchanged as compared to the three and nine-month periods ended September 30, 1998. However, gross profit as a percentage of revenue declined to 9% in the three-months ended September 30, 1999 as compared to 36% in the same 1998 three-month period. Likewise, gross profit as a percentage of revenue declined to 6% in the nine-months ended September 30, 1999 from 25% in the same 1998 nine-month period. This decrease results primarily from the addition of the LDExchange revenues 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 nine-month periods but are only included in the 1998 results from the transaction date of May 14, 1998 through September 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") decreased to $1.9 million in the third quarter of 1999 from $3.0 million in the third quarter of 1998. This decrease is attributed to the closing of the Micro General shipping and scales businesses in the first months of 1999 and the resulting operating cost savings that were realized in the 1999 third quarter. For the nine months ended September 30, 1999, SG&A expenses increased to $5.4 million from $4.8 million in the nine months ended September 30, 1998. The increase in 1999 SG&A expenses is primarily attributable to the additional personnel, facilities, and other costs assumed in the LDExchange and Micro General acquisitions during 1998, 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 September 30, 1999 and 1998, amortization of costs in excess of net assets acquired and capitalized software development costs was $819,000 and $263,000, respectively. During the nine months ended September 30, 1999 and 1998, amortization of costs was $2.2 million and $627,000, 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 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 increase in interest expense can be attributed to the increase in average borrowings 9 10 outstanding during the three and nine month periods ended September 30, 1999 as compared to the similar three and nine month periods in 1998. Net interest expense in the nine months ended September 30, 1999 was $1.2 million as compared to $304,000 in the nine months ended September 30, 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. In the most recent nine month period, increases in capital leases payable, note payable to officer and borrowings on the Company's lines of credit totaled $10.5 million. 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. 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 nine months ended September 30, 1999. In addition, the Company has an accumulated deficiency and a significant amount of outstanding debt as of September 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 September 30, 1999. 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. In addition, if market interest rates were to change 10% from levels existing at September 30, 1999, the change in the market value would not be material to the Company's financial condition. 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 continues 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 a continuing phase. Phase II is, "Plan Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining Y2K Compliance." The Company believes that its systems processes are now substantially Y2K compliant. The status of the Y2K 10 11 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 and maintaining applications to be 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 are Y2K compliant; however, there can be no assurance that all of the Company's systems will be Y2K compliant, or 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 substantially completed a contingency plan in the event that any systems are not Y2K compliant. 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. Part II: OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders On August 3, 1999, the Company held its Annual Meeting of Stockholders pursuant to a Notice and Proxy Statement dated June 30, 1999. At the meeting, stockholders elected William P. Foley, II (6,349,114 for and 7,808 against), Patrick F. Stone (6,349,114 for and 7,808 against), John Snedegar (6,349,114 for and 7,808 against), Richard Pickup, (6,349,114 for and 7,808 against), Dwayne M. Walker (6,349,114 for and 7,808 against) and Carl A. Strunk (6,349,114 for and 7,808 against). The shareholders approved an amendment to the 1998 Employee Stock Option Plan by a vote of 5,882,288 for, 11,068 against, and 25,624 abstaining. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27 -- Financial Data Schedule (b) Reports on Form 8-K: None 11 12 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,143,612 0 18,052,904 1,847,356 1,675,470 21,489,599 7,204,080 972,521 38,315,484 14,171,899 27,361,900 0 0 387,679 (3,605,994) 38,315,484 72,071,956 72,071,956 67,607,170 7,638,860 0 0 1,236,371 (4,410,445) 4,000 0 0 0 0 (4,414,445) (0.58) (0.58)
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