-----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, VvetMjb2KrPJ1Zc36NtDvz86KiVG/k/zsols/+9KMUZZcXnc7A/OsYoVS6GLQt+p Zfx6CC5IYKSH5hn2h41ShA== 0001095811-00-000606.txt : 20000322 0001095811-00-000606.hdr.sgml : 20000322 ACCESSION NUMBER: 0001095811-00-000606 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 20000321 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/A SEC ACT: SEC FILE NUMBER: 000-08358 FILM NUMBER: 574129 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/A 1 FORM 10-Q/A DATED JUNE 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended: JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to_________. Commission file number: 0-8358 MICRO GENERAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2621545 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2510 N. Redhill 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of the latest practicable date. $.05 par value Common Stock 6,549,666 shares as of August 14, 1998. Exhibit Index appears on page 11 of 11 sequentially numbered pages. 2 FORM 10-Q/A QUARTERLY REPORT QUARTER ENDED JUNE 30, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997............... 3 B. Condensed Consolidated Statements of Operations for the three months ended June 30, 1998 and June 30, 1997............................................................ 4 C. Condensed Consolidated Statements of Operations for the six months ended June 30, 1998 and June 30, 1997............................................................ 5 D. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and June 30, 1997............................................................ 6 E. Notes to Condensed Consolidated Financial Statements.......................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9 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) By: /s/ Dale W. Christensen Date: March 13, 2000 -------------------------------------------- Dale W. Christensen Chief Financial Officer (Principal Financial and Accounting Officer) 2 3 MICRO GENERAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ (Restated) (Restated) ASSETS Current assets: Cash $ 1,234,527 $ 830,784 Accounts and notes receivable, less allowance for doubtful receivables and sales returns of $193,950 at 6/30/98 and $321,844 at 12/31/97 883,225 183,340 Trade accounts receivable due from affiliates -- 4,234,765 Inventories 1,867,699 505,949 Prepaid expenses and other assets 711,778 119,432 ------------ ------------ Total current assets 4,697,229 5,874,270 ------------ ------------ Equipment and improvements, net 1,993,345 704,504 Other assets, net 33,750 -- Notes receivable -- 31,776 Capitalized software development costs, less accumulated amortization of $2,429,936 at 6/30/98 and $2,065,596 at 12/31/97 1,870,059 2,170,072 Intangibles, less accumulated amortization of $476,871 at 6/30/98 and $350,546 at 12/31/97 7,067,599 1,083,507 ------------ ------------ $ 15,661,982 $ 9,864,129 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,654,189 $ 1,243,975 Income taxes payable 17,554 -- Deferred tax liability 524,098 361,726 Deferred revenue 15,486 -- Current portion of amounts and notes payable to affiliates 1,600,000 695,620 ------------ ------------ Total current liabilities 4,811,327 2,301,321 Amounts and notes payable to affiliates 7,657,272 5,431,417 ------------ ------------ Total liabilities 12,468,599 7,732,738 Shareholders' equity: Preferred stock, $.05 par value; 1,000,000 shares authorized no shares issued and outstanding at 6/30/98 and 12/31/97 -- -- Common stock, $.05 par value; 10,000,000 shares authorized 6,546,666 shares issued at 6/30/98 and 12/31/97 327,333 327,333 Additional paid-in capital 4,407,608 3,107,608 Accumulated deficit (1,541,558) (1,303,550) ------------ ------------ Total stockholders' equity 3,193,383 2,131,391 ------------ ------------ $ 15,661,982 $ 9,864,129 ============ ============
The December 31, 1997 numbers were restated in the 1998 Form 10-K for the first time. See accompanying notes to condensed consolidated financial statements. 3 4 MICRO GENERAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED JUNE 30, ---------------------------------- 1998 1997 ----------- ----------- (Restated) (Restated) Revenues: Software sales and maintenance $ 1,220,947 $ 619,891 Hardware 4,406,447 2,162,009 Service and license 1,189,456 535,180 Telecommunication services 136,758 - ----------- ----------- Total revenues 6,953,608 3,317,080 ----------- ----------- Cost of sales: Software sales and maintenance 863,550 483,940 Hardware 3,965,803 1,687,320 Service and license 618,400 416,654 Telecommunication services (13,697) -- ----------- ----------- Total cost of sales 5,434,056 2,587,914 ----------- ----------- Gross profit 1,519,552 729,166 ----------- ----------- Operating expenses: Selling, general and administrative 931,663 622,446 Amortization of goodwill and software development costs 187,348 215,310 ----------- ----------- Total operating expenses 1,119,011 837,756 ----------- ----------- Operating income (loss) 400,541 (108,590) Interest income (expense), net (42,375) 3,229 ----------- ----------- Earnings (loss) before income taxes 358,166 (105,361) Income tax provision (benefit) 212,435 (41,408) ----------- ----------- Net earnings (loss) $ 145,731 $ (63,953) =========== =========== Income (loss) per share: Basic $ .03 $ (.01) =========== =========== Diluted $ .03 $ (.01) =========== =========== Number of shares used in per share computations: Basic 5,603,970 4,597,000 =========== =========== Diluted 5,823,136 4,597,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 5 MICRO GENERAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30, ----------------------------------- 1998 1997 ------------ ------------ (Restated) (Restated) Revenues: Software sales and maintenance $ 1,936,167 $ 1,173,947 Hardware 5,914,614 3,814,445 Service and license 2,034,334 893,861 Telecommunication services 859,006 -- ------------ ------------ Total revenues 10,744,121 5,882,253 ------------ ------------ Cost of sales: Software sales and maintenance 1,523,227 905,035 Hardware 5,823,153 2,932,313 Service and License 1,056,004 687,826 Telecommunication services 364,717 ------------ ------------ Total cost of sales 8,767,101 4,525,174 ------------ ------------ Gross profit 1,977,020 1,357,079 ------------ ------------ Operating expenses: Selling, general and administrative 1,848,672 1,159,652 Amortization of goodwill and software development costs 363,219 363,014 ------------ ------------ Total operating expenses 2,211,891 1,522,666 ------------ ------------ Operating loss (274,871) (165,587) Interest income (expense), net (39,732) 5,404 ------------ ------------ Loss before income taxes (274,603) (160,183) Income tax (benefit) (36,595) (76,844) ------------ ------------ Net loss $ (238,008) $ (83,339) ============ ============ Loss per share: Basic $ (.05) $ (.02) ============ ============ Diluted $ (.05) $ (.02) ============ ============ Number of shares used in per share computations: Basic 5,103,267 4,597,000 ============ ============ Diluted 5,103,267 4,597,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 5 6 MICRO GENERAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTH PERIODS ENDED JUNE 30, -------------------------------- 1998 1997 ----------- ----------- (Restated) (Restated) Cash flows from operating activities: Net loss $ (238,008) $ (83,339) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 545,075 363,014 Change in assets and liabilities: Trade accounts receivable (568,027) (330,385) Inventories (991,750) (116,704) Prepaid expenses and other assets (626,096) 28,167 Accounts payable and accrued expenses 805,534 (438,075) Deferred revenue (4,100) -- Taxes payable 187,018 -- ----------- ----------- Total adjustments (652,346) (493,983) ----------- ----------- Net cash provided by (used in) in operating activities (890,754) (577,322) ----------- ----------- Cash flows used in investing activities: Purchase of equipment and improvements (1,343,251) -- (Increase) decrease in notes receivable 31,776 (39,673) Capitalization of software development costs (64,327) (354,024) Merger of Micro General Corporation and ACS 403,175 -- ----------- ----------- Net cash used in investing activities (972,627) (393,697) ----------- ----------- Cash flows from financing activities: Net increase in borrowings from affiliates 2,266,724 1,318,860 ----------- ----------- Net cash provided by financing activities 2,266,724 1,318,860 ----------- ----------- Net increase in cash 403,743 347,841 Cash - beginning of period 830,784 -- ----------- ----------- Cash - end of period $ 1,234,527 $ 347,841 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 23,750 $ -- =========== =========== Income taxes $ -- $ -- =========== =========== Non-cash transactions: Merger of Micro General Corporation and ACS $ 1,300,000 ===========
See accompanying notes to condensed consolidated financial statements. 6 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENTS The financial information included in this report includes the accounts of Micro General Corporation and its subsidiaries (collectively, the "Company") and has been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and the Company's Current Report on Form 8-K dated July 27, 1998. The accompanying financial statements have been restated from those included in the Company's original filing on Form 10-Q for the quarterly period ended June 30, 1998. The restatement was the result of a correction of the accounting method used to account for the merger of the Company and ACS. In the original filing, the Company incorrectly accounted for the merger as an acquisition of ACS, rather than a reverse merger (see note 2). Below are selected summary restated results compared to amounts originally reported.
3 months as originally 3 months reported as restated ------------- ----------- Revenue $ 4,372,672 $ 6,953,608 Net income (Loss) (481,838) 145,731 Earnings (loss per Share (0.11) 0.03 Total Assets 17,918,590 15,661,982 Shareholders' Equity 5,449,991 3,193,383
6 months as originally 6 months reported as restated ------------- ----------- Revenue $ 5,406,483 $10,744,121 Net income (Loss) (390,476) (238,008) Earnings (loss) per Share (0.12) (0.05) Total Assets 17,918,590 15,661,982 Shareholders' Equity 5,449,991 3,193,383
DESCRIPTION OF BUSINESS Historically, the operations of the Company consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations are currently performed through the Company's postage meter and scale division. NOTE 2. ACQUISITIONS On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI") completed the merger of Micro General Corporation with ACS Systems, Inc. ("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 Corporation common stock. The transaction was valued at $1.3 million. Following the merger of Micro General Corporation 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 Corporation has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General Corporation 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 and June 30, 1997 have been restated to reflect the operations of ACS prior to the merger. 7 8 ACS, a wholly-owned subsidiary of the Company, was founded in 1985 as an escrow software development company. ACS was acquired by FNFI in April 1994 and subsequently merged into the Company on May 14, 1998 for 4.6 million shares of the Company's common stock. Approximately 86% of the revenue generated by ACS is derived from multiple servicing arrangements with FNFI and its subsidiaries whereby ACS provides comprehensive electronic data processing systems support, including selling computer hardware and software products and developing integrated title and escrow computer applications for FNFI's direct title operations and agency network. In addition to these services, ACS provides products and services to FNFI and unaffiliated customers, including telecommunications hardware and long distance reselling, technical services, consulting services, Internet access and services and computer hardware and systems software. Pro forma results assuming the acquisition of ACS had occurred on January 1, 1998, and January 1, 1997, are as follows:
SIX MONTHS ENDED ---------------------------------- JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- Revenue $ 11,899,915 $ 7,191,775 ============ =========== Net loss $ (394,909) $ (500,027) ============ =========== Net loss per share - basic and diluted (1) $ (0.06) $ (0.11) ============ =========== Weighted average shares outstanding - basic and diluted (1) 6,549,666 4,597,000 ============ ===========
- --------------- (1) Earnings per share on a diluted basis is anti-dilutive given that the Company had a net loss for the period presented; therefore basic and diluted shares and earnings per share are equal. NOTE 3. RELATED PARTY TRANSACTIONS On May 14, 1998, in connection with the Company's acquisition of ACS, a $5.0 million line of credit facility was established between the Company and Fidelity National Title Company, a subsidiary of FNFI. Under the terms of the agreement, accrued interest shall be payable quarterly with any unpaid balance, including principle and accrued interest, due and payable on May 14, 2000. Interest accrues at a rate of 9% per annum. As described in Note 1, the primary source of revenue for both ACS and the Company is fees resulting from sales and services to FNFI and subsidiaries, an affiliate. Revenues generated from the sales and services to affiliates during the three and six-month periods ended June 30, 1998 were 338,000 and $5,356,000, which represents 77.0% and 77.6% of total revenue, respectively. Included in notes payable and long-term debt at June 30, 1998 is $450,000 and $1,000,000, respectively, due to Cal West Service Corporation, a subsidiary of FNFI. Also included in notes payable and long-term debt at June 30, 1998 is $900,000 and $2,000,000, respectively, due to Dito Caree L.P. Holding, an affiliate. NOTE 4. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supercedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's financial reporting. 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 1923 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. The reader should consult the risk factors listed from time to time and other information disclosed in the Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of 1933, as amended. 9 10 Results of Operations The following discussion and analysis reflects the results of operations for the Company for the three and six-month periods ended June 30, 1998 and 1997. As discussed in Note 2, the merger of the Company and ACS on May 14, 1998 has been accounted for as a reverse acquisition. Therefore, the 1997 financial statements have been restated to reflect the ACS operations and included in the second quarter and six-month periods ended June 30, 1998 is 47 days of operations of Micro General Corporation. Due to the merger with ACS, results of operations may differ substantially when comparing 1998 periods with 1997 periods. The following table presents information regarding the components of revenues and expenses for the Company on a historical basis by division:
THREE MONTHS ENDED ------------------------------------------------------ JUNE 30, 1998 JUNE 30, 1997 ------------------------------------------------------ POSTAL DIVISION ACS TOTAL ACS ---------- ---------- ---------- ---------- Revenues $ 99,000 $6,855,000 $6,954,000 $3,317,000 Cost of sales 112,000 5,322,000 5,434,000 2,588,000 ---------- ---------- ---------- ---------- Gross profit (loss) (13,000) 1,533,000 1,520,000 729,000 Operating expenses 166,000 953,000 1,119,000 837,000 Interest expense (income), net 43,000 (1,000) 42,000 (3,000) Income tax provision (benefit) -- 213,000 213,000 (41,000) ---------- ---------- ---------- ----------- Net loss $ (222,000) $ 368,000 $ 146,000 $ (64,000) ========== ========== ========== ==========
SIX MONTHS ENDED -------------------------------------------------------- JUNE 30, 1998 JUNE 30, 1997 ---------------------------------------- ------------- POSTAL DIVISION ACS TOTAL ACS ----------- ----------- ----------- ----------- Revenues $ 99,000 $10,645,000 $10,744,000 $ 5,882,000 Cost of sales 112,000 8,655,000 8,767,000 4,525,000 ----------- ----------- ----------- ----------- Gross profit (loss) (13,000) 1,990,000 1,977,000 1,357,000 Operating expenses 166,000 2,046,000 2,212,000 1,523,000 Interest expense (income), net 43,000 (3,000) 40,000 (6,000) Income tax benefit -- (37,000) (37,000) (77,000) ----------- ------------ ------------ ------------ Net loss $ (222,000) $ (16,000) $ (238,000) $ (83,000) =========== =========== =========== ===========
(1) The Micro General Corporation results are included in the Company's historical financial statements for 47 days during the second quarter of 1998 and excluded entirely from 1997 results. Total revenues for the quarter ended June 30, 1998 increased 110% to $6,954,000 from $3,317,000 for the second quarter of 1997. Total revenues for the six months ended June 30, 1998 increased 83% to $10,744,000 from $5,882,000 for the comparable 1997 period. The ACS contribution for the three and six-month periods ended June 30, 1998 was $6,855,000 or 98.6%, and $10,645,000 or 99.1% of total revenues. ACS sales and services to FNFI have grown substantially. In addition, the Company began offering telecommunications services and has grown that business from nothing in 1997 to $137,000 in the three months ended June 30, 1998 (2.0% of total revenues), and to $859,000 in the six months ended June 30, 1998 (8.0% of total revenues). In addition, sales growth was across all product lines. In the three months, ended June 30, 1998, software and maintenance revenue increased 97%, hardware revenue grew 104% and service and license revenue was up 112% as compared to the comparable 1997 period. For the six months ended June 30, 1998, software and maintenance revenue increased 65%, hardware revenue grew 55% and service and license revenue was up 128% when compared to the similar 1997 period. Postal product sales were consistent in the quarter over quarter comparison. Cost of sales for the second quarter of 1998 increased 110% to $5,434,000 from $2,588,000 in the 1997 second quarter. For the six months ended June 30, 1998 cost of sales increased to $8,767,000, a 94% increase from $4,525,000 for the comparable 1997 period. Included in cost of sales for the three and six-month periods ended June 30, 1998 is $5,322,000, or 97.9% and $8,655,000 or 98.7% of the total cost of sales, respectively, relating to the operations of ACS. See Note 2. The increases in the 1998 cost of sales as compared to the 1997 cost of sales is directly related to a proportional growth in the Company's revenues. 10 11 Operating expenses for the second quarter of 1998 increased to $1,119,000, an increase of $281,000, or 34%, from $838,000 in the 1997 second quarter. For the six-month period ended June 30, 1998 operating expenses were $2,212,000, an increase of $689,000, or 45% over operating expenses of $1,523,000 for the comparable 1997 period. The increase in 1998 operating expenses as compared to 1997 operating expenses results from the significant revenue growth in 1998 and the resulting increases in corporate infrastructure. In addition, the Company began an expanded sales and marketing effort in an attempt to begin increasing revenues from non-affiliated companies. Interest expense, net of interest income, incurred by the Company relates to notes payable, long-term debt and a note to an affiliate. See Note 3. Interest expense for the second quarter of 1998 increased to $42,000 from no interest expense in the 1997 second quarter. For the six months ended June 1998, interest expense increased to $40,000 from no interest expense in the same 1997 period. The increase in interest expense for the three and six-month periods ended June 30, 1998, as compared to the same 1997 periods reflects the increase in debt balances during 1998, which result from increases in borrowing under the Company's credit facility (See Note 3), and also the inclusion of Micro General Corporation that began to be reported using the reverse acquisition accounting treatment as of May 14, 1998. The interest rates on the various financing agreements are between 9% and 9.5% depending on convertibility features and warrants. Liquidity and Capital Resources The Company's cash requirements include debt service, operating expenses and potential acquisitions. The Company believes that all anticipated cash requirements will be met from internally generated funds and through existing credit facilities with affiliates. Cash used in operating activities exceeded cash provided by operating activities by $890,000 for the six months ended June 30, 1998, which compares favorably with cash used in operating activities exceeding cash provided by operating activities of $577,000 for the six months ended June 30, 1997. Management believes that short-term modifications of existing affiliate credit facilities will enable the Company to expand its business relationships with unaffiliated third parties and expects the Company to generate cash flows sufficient to support its future operations. 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 servicing customer obligations, information technology products and services, telecommunications services, the postage meter and scale division, 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 is developing 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 anticipates that its systems processes will be substantially Y2K compliant by July 1999. The status of the Y2K compliance program is monitored by senior management of the Company and by 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', ability to become Y2K compliant, estimates may be subject to change. 11 12 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 complaint, 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 July 1999. The 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 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K): 11. Computation of earnings (loss) per share is not provided as the calculation can be clearly determined from the material contained in Item 1 of Part I. 27. Financial Data Schedule b. Current Reports on Form 8-K: Current Report on Form 8-K, dated July 27, 1998, relating to the merger of a wholly-owned subsidiary of Micro General Corporation into ACS Systems, Inc. on May 14, 1998. 12 EX-27 2 RESTATED FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,234,527 0 1,077,175 (193,950) 1,867,699 4,697,229 2,075,504 (82,159) 15,661,982 4,811,327 0 0 0 327,333 4,407,608 15,661,982 10,744,121 10,744,121 8,767,101 8,767,101 2,211,891 0 39,732 (274,603) (36,595) (238,008) 0 0 0 (238,008) (.05) (.05)
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