10-Q 1 e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2000 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, 2000 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 13,122,463 shares as of August 9, 2000 Exhibit Index appears on page 12 of 12 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 2000 TABLE OF CONTENTS
PAGE NUMBER ----------- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 A. Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 B. Condensed Consolidated Statements of Operations for the three-month periods ended June 30, 2000 and 1999 4 C. Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 2000 and 1999 5 D. Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2000 and 1999 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 11 Part II: OTHER INFORMATION Items 1-3 and 5. of Part II have been omitted because they are not applicable with respect to the current reporting period 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 ------------------------------------- Dale W. Christensen Chief Financial Officer (Principal Financial and Accounting Officer) Date: August 14, 2000 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, 2000 1999 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents ................................. $ 332,713 $ 1,400,874 Trade accounts receivable, less allowance for doubtful accounts of $451,725 in 2000 and $ 2,265,601 in 1999 .... 4,583,387 3,391,824 Trade accounts receivable due from affiliates ............. 8,174,676 3,020,908 Inventories ............................................... 298,888 438,728 Prepaid expenses and other assets ......................... 2,120,639 1,594,600 ------------ ------------ Total current assets .................................. 15,510,303 9,846,934 Property and equipment, net ................................... 8,099,672 7,038,858 Capitalized software development costs, less accumulated amortization of $3,874,349 in 2000 and $3,540,854 in 1999 ... 414,185 747,680 Cost in excess of net assets acquired, less accumulated amortization of $4,513,493 in 2000 and $3,329,898 in 1999 ... 8,001,242 8,570,704 Investment in TXMNet, Inc ..................................... 1,510,893 -- Investment in joint venture ................................... -- 638,938 ------------ ------------ $ 33,536,295 $ 26,843,114 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ..................... $ 8,518,127 $ 5,178,788 Income and other taxes payable ............................ 215,764 252,545 Deferred tax liabilities .................................. 361,726 361,726 Deferred revenue .......................................... 527,027 167,000 Note payable .............................................. 2,700,000 -- Current portion of capital leases with affiliate .......... 367,820 387,765 Amounts due affiliates .................................... 383,137 -- Interest due affiliates ................................... -- 617,243 ------------ ------------ Total current liabilities ............................. 13,073,601 6,965,067 Capital leases with affiliates ................................ 1,699,754 1,834,837 Amounts and notes payable to affiliates ....................... 5,265,408 5,265,408 Other long term liabilities ................................... 146,067 146,067 ------------ ------------ Total liabilities ..................................... 20,184,830 14,211,379 Commitments and contingencies Subsequent events Stockholders' equity: Preferred stock, $.05 par value. Authorized 1,000,000 shares; none issued and outstanding ............................... -- -- Common stock, $.05 par value. Authorized 20,000,000 shares; issued and outstanding 13,087,605 at June 30, 2000 and 12,535,638 shares at December 31, 1999 .................... 654,380 626,782 Additional paid-in capital .................................. 27,601,064 25,301,745 Accumulated deficiency ...................................... (14,903,979) (13,296,792) ------------ ------------ Total stockholders' equity ............................ 13,351,465 12,631,735 ------------ ------------ $ 33,536,295 $ 26,843,114 ============ ============
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, ------------------------------ 2000 1999 ------------ ------------ (Unaudited) Revenues: Hardware and software sales and maintenance revenues ........... $ 4,898,210 $ 4,379,950 Telecommunication service revenues ............................. 12,295,944 18,167,433 Service and license revenues ................................... 12,262,269 2,359,104 ------------ ------------ Total revenues ......................................... 29,456,423 24,906,487 ------------ ------------ Cost of Revenues: Hardware, software and maintenance cost of revenues ............ 2,705,724 2,570,473 Telecommunication service cost of revenues ..................... 11,960,516 18,014,264 Service and license cost of revenues ........................... 7,981,135 1,035,818 ------------ ------------ Total cost of revenues ................................. 22,647,375 21,620,555 ------------ ------------ Gross profit ........................................... 6,809,048 3,285,932 ------------ ------------ Operating expenses: Selling, general and administrative expenses ............... 4,892,415 4,330,205 Depreciation and amortization of cost in excess of net assets acquired and capitalized software development costs......................................... 1,456,978 695,591 ------------ ------------ Total operating expenses ............................... 6,349,393 5,025,796 ------------ ------------ Operating income (loss) ................................ 459,655 (1,739,864) Joint venture loss ............................................. (291,656) -- Interest expense, net .......................................... (159,802) (443,899) ------------ ------------ Income (loss) before income taxes ...................... 8,197 (2,183,763) Income tax expense.......... ................................... -- 3,200 ------------ ------------ Net income (loss) ...................................... $ 8,197 $ (2,186,963) ============ ============ Income (loss) per share - basic ............................. $ .00 $ (.29) =========== ============ Income (loss) per share - diluted ............................ $ .00 $ (.29) =========== ============ Number of shares used in per share computations - Basic ............................................ 13,004,392 7,647,172 Diluted ............................................ 14,604,923 7,647,172
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, ------------------------------ 2000 1999 ------------ ------------ (Unaudited) Revenues: Hardware and software sales and maintenance revenues........... $ 8,713,184 $ 8,611,097 Telecommunication service revenues ............................. 24,973,557 29,371,236 Service and license revenues ................................... 16,309,096 6,236,629 ----------- ------------ Total revenues ......................................... 49,995,837 44,218,962 ----------- ------------ Cost of Revenues: Hardware, software and maintenance cost of revenues ............ 4,507,744 6,663,585 Telecommunication service cost of revenues ..................... 23,573,791 28,216,783 Service and license cost of revenues ........................... 10,999,491 3,029,520 ----------- ------------ Total cost of revenues ................................. 39,081,026 37,909,888 ----------- ------------ Gross profit ........................................... 10,914,811 6,309,074 ----------- ------------ Operating expenses: Selling, general and administrative expenses ............... 8,976,995 7,633,131 Depreciation and amortization of cost in excess of net assets acquired and capitalized software development costs......................................... 2,716,609 1,588,712 ----------- ------------ Total operating expenses ............................... 11,693,604 9,221,843 ----------- ------------ Operating loss ......................................... (778,793) (2,912,769) Joint venture loss ............................................. (578,045) -- Interest expense, net .......................................... (250,349) (679,427) ------------ ------------ Loss before income taxes ............................... (1,607,187) (3,592,196) Income tax expense.......... ................................... -- 4,000 ----------- ----------- Net loss ............................................... (1,607,187) $(3,596,196) =========== =========== Loss per share - basic and diluted ............................. $ (.13) $ (.47) =========== =========== Number of shares used in per share computations - basic and diluted ............................................ 12,857,138 7,621,919
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, 2000 ------------------------------- 2000 1999 ----------- ----------- (Unaudited) Cash flows from operating activities: Net loss .................................................. $(1,607,187) $(3,596,196) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................... 2,716,609 1,742,189 Provision for doubtful accounts ......................... 109,070 -- Joint venture loss.. .................................... 578,045 -- Changes in assets and liabilities: Trade accounts receivable ............................. (1,300,637) (4,684,449) Inventories ........................................... 139,840 (790,283) Prepaid expenses and other assets ..................... (526,039) (424,579) Accounts payable and accrued expenses ................. 3,339,339 7,050,538 Income and other taxes payable ........................ (36,781) (81,319) Deferred revenue ...................................... -- (189,839) Customer deposits ..................................... 360,027 -- Amounts due from affiliates ........................... (5,153,678) (1,621,560) Amounts due to affiliates ............................. 383,137 -- ----------- ----------- Net cash used in operating activities .............. (998,345) (2,595,498) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment ....................... (2,260,324) (1,910,105) Decrease in notes receivable .............................. -- 29,850 Investment in joint venture ............................... (1,450,000) -- ----------- ----------- Net cash used in investing activities .............. (3,710,324) (1,880,225) ----------- ----------- Cash flows from financing activities: Net increase in borrowings - note payable.................. 2,700,000 7,231,202 Principal payments under capital leases ................... (155,029) -- Payment of interest due affiliates ........................ (617,243) -- Exercise of stock options ................................. 1,712,780 223,542 ----------- ----------- Net cash provided by financing activities .......... 3,640,508 7,454,744 ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,068,161) 2,978,991 Cash and cash equivalents at beginning of period .............. 1,400,874 914,796 ----------- ----------- Cash and cash equivalents at end of period .................... $ 332,713 $ 3,893,787 =========== =========== Supplemental cash flow information: Income taxes paid ......................................... $ -- $ 60,000 =========== =========== Interest paid ............................................. $ -- $ 87,088 =========== =========== Noncash investing and financing activities: Acquisition of Interactive Associates, Inc. for common stock ...................................... $ -- $ 194,000 =========== =========== Earnout payment to Interactive Associates, Inc. principals for common stock ........................... $ 614,333 $ -- =========== =========== Investment in TXMNet, Inc. .............................. $ 1,510,893 $ -- =========== ===========
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, 1999. Certain reclassifications have been made in the 1999 condensed consolidated financial statements to conform to classifications used in 2000. Basic earnings per share is based on the weighted-average number of shares outstanding and excludes any dilutive effects of options and convertible securities. Diluted earnings per share gives effect to assumed conversions of potentially dilutive securities. All outstanding options and warrants have been excluded from the calculations of diluted loss per share as their inclusion would be antidilutive. The number of exercisable options and warrants outstanding at June 30, 2000 was 2,178,844 and 587,000, respectively. (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. In 1999, the Company closed down the shipping and scales divisions and no longer generates such revenues. 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. At June 30, 2000, FNFI owned approximately 66% 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. ACS offers a full range of information technology services, including voice and data network design, implementation and management. ACS also provides services in the areas of real estate industry applications, e-Commerce, consulting services and telecommunications. 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 telecommunications 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. On May 5, 2000, the Company entered into an agreement to sell its wholly owned subsidiary, LDExchange.com, Inc. The agreement is subject to a number of contingencies, including receipt of appropriate regulatory approvals, and the sales price is anticipated to be between $9,175,000 and $15,000,000 depending upon various other contingencies. The Company believes the successful completion of this transaction will enable it to better focus on the development of its e-commerce initiatives. (3) Escrow.com On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. 7 8 Escrow.com offers online escrow-related services designed to provide buyers and sellers with a safe, secure and easy to use system for managing payment for and delivery of products and services purchased via the Internet. As an internet transaction services provider, escrow.com provides for the secure transmission of funds between a buyer and seller by placing the funds in escrow, confirms and verifies the receipt of merchandise by the buyer, and releases the funds from escrow to the seller. While escrow.com could enable any Internet buy/sell transaction, its primary focus will be in the business-to-business Internet marketplace. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time that escrow.com has sufficient funding in place to reasonably ensure the payment of the note. While the Company has no equity interest in escrow.com at June 30, 2000, the 15.0 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. Escrow.com is incurring substantial losses and may need to raise additional funds in order to continue its operations. The Company's potential ownership in escrow.com may be substantially diluted if escrow.com issues additional shares to raise the necessary capital. As previously described, the Company has warrants that, upon their exercise, will give the Company substantial ownership in escrow.com. In April 2000, escrow.com completed a private placement in which it raised gross proceeds of $30.0 million. As an inducement to invest, the Company assigned to two of the investors 250,000 of its 15.0 million warrants in escrow.com. As a result of this funding, escrow.com has 10,317,512 shares outstanding. Although escrow.com has raised additional capital, those funds are not to be used for repayment of the $4.5 million note receivable discussed above. Therefore, the note will continue to be fully reserved until such time that escrow.com has sufficient funding in place to reasonably ensure payment of the note. Assuming exercise of the warrants, the Company would have a 58.3% ownership in escrow.com. (4) TXMNet, Inc. On May 19, 2000 Micro General entered into an Asset Transfer, Right of First Refusal, and Stock Purchase Agreement ("Agreement") that provided the assets necessary to launch TXMNet as a new company. Under the Agreement, the Company sold TXMNet all software, trademarks, the website and all other intellectual property related to the TXMNet business. In addition, the Company sold to TXMNet its 50% ownership in the RealEC Joint Venture with Stewart Title. Under the terms of the Agreement, the Company received from TXMNet 6,500,000 shares of Series A non-voting convertible preferred stock. Each share of convertible stock may be converted into one share of TXMNet common stock. The Company's investment in TXMNet is recorded at $1,510,893, which was the book value of the RealEC investment at the time it was transferred to TXMNet. In addition, over the next three years the shares will yield dividends at a rate of 5% annually, which will be payable, at the Company's option, in cash or in shares of additional Series A non-voting convertible preferred stock. The Company does not presently have a common stock ownership in TXMNet, however, assuming conversion of the non-voting convertible preferred stock and the earning of the additional shares over the next three years, the Company would have an 88% ownership in TXMNet. TXMNet intends to be a fully integrated transaction management services company. It will offer online real estate settlement products and services designed to provide all parties in a real estate transaction with a complete and integrated technology solution for electronically managing their transactions. The Company's suite of services targets both residential and commercial real estate transactions for both the realtor and lending communities. TXMNet is a startup enterprise. In addition to the intellectual property and 50% ownership in the RealEC Joint Venture, TXMNet has raised a total of $1.0 million. TXMNet is incurring substantial losses as it is implementing its business plan, and will need to raise substantial additional funds in order to continue its operations. The Company's potential ownership in TXMNet may be substantially diluted as TXMNet issues additional shares to raise the necessary capital. (5) Acquisition of Interactive Associates, Inc. On March 22, 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 50,000 shares of Micro General common stock, subject to certain conditions, including an earn out provision for up to an additional 50,000 shares. 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. In June 2000, an additional 42,354 shares of Micro General common stock were issued under the earn out provisions of the Interactive acquisition agreement. These shares were valued at $614,333. 8 9 (6) Segment Information The Company's condensed consolidated financial statements as of and for the quarters ended June 30, 2000 and 1999 include three reportable segments.
ACS LDEXCHANGE CORPORATE TOTAL ------------ ------------ ------------ ------------ June 30, 2000: Total revenues .................. $ 17,160,479 $ 12,295,944 $ -- $ 29,456,423 Operating profit (loss) ......... $ 3,328,594 $ (1,479,208) $ (1,389,731) $ 459,655 Joint venture loss .............. -- -- (291,656) (291,656) Interest expense (net) .......... (159,545) (257) -- (159,802) ------------ ------------ ------------ ------------ Income (loss) before income taxes $ 3,169,049 $ (1,479,465) $ (1,681,387) $ 8,197 Depreciation and amortization ... $ 374,961 $ 559,106 $ 522,911 $ 1,456,978 Total assets .................... $ 15,160,006 $ 1,877,827 $ 16,498,462 $ 33,536,295 ============ ============ ============ ============ June 30, 1999: Total revenues .................. $ 8,114,810 $ 16,706,510 $ 85,167 $ 24,906,487 Operating 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) Depreciation and amortization ... $ 161,091 $ 51,628 $ 482,872 $ 695,591 Total 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, 2000 and 1999 include three reportable segments.
ACS LDEXCHANGE CORPORATE TOTAL ------------ ------------ ------------ ------------ June 30, 2000: Total revenues .................. $ 25,144,161 $ 24,851,676 $ -- $ 49,995,837 Operating profit (loss) ......... $ 3,715,189 $ (2,398,934) $ (2,095,048) $ (778,793) Joint venture loss .............. -- -- (578,045) (578,045) Interest expense (net) .......... (189,932) (84,167) 23,750 (250,349) ------------ ------------ ------------ ------------ Income (loss) before income taxes $ 3,525,257 $ (2,483,101) $ (2,649,343) $ (1,607,187) Depreciation and amortization ... $ 793,883 $ 885,445 $ 1,037,281 $ 2,716,609 Total assets .................... $ 15,160,006 $ 1,877,827 $ 16,498,462 $ 33,536,295 ============ ============ ============ ============ June 30, 1999: Total revenues .................. $ 17,135,209 $ 26,096,942 $ 986,811 $ 44,218,962 Operating 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) $ (314,840) $ (1,205,965) $ (3,592,196) Depreciation and amortization ... $ 281,191 $ 97,756 $ 1,209,765 $ 1,588,712 Total assets .................... $ 21,123,132 $ 7,592,246 $ 6,382,663 $ 35,098,041 ============ ============ ============ ============
(7) Options Under the Company's stock option plan, in the six-months ended June 30, 2000, the Company granted options to acquire 514,000 shares at the then current market price. Of the stock options granted, 201,667 shares are vested and the remaining 312,333 shares will vest over periods up to four years. 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. 9 10 Results of Operations Revenue Revenues increased $4.6 million or 18%, to $29.5 million in the quarter ended June 30, 2000 from $24.9 million in the quarter ended June 30, 1999. For the six months ended June 30, 2000, revenue was $50.0 million, an increase of $5.8 million or 13% over revenue of $44.2 million for the six-month period ended June 30, 1999. The increase in both the three-month and six-month periods are a result of an approximate $10 million increase in the most recent quarter in service and license revenues, offset by an approximate $6 million decrease in telecommunication service revenues. The increase in service and license revenues can be attributed to the substantial additional business that has been directed to the Company by Fidelity as a result of its Chicago Title acquisition. In April 2000, the Company hired approximately 150 former Chicago Title information technology employees, and at the same time entered into an agreement to provide information technology services to Fidelity/Chicago Title. The Company anticipates that this agreement will provide substantial additional revenues to the Company from Fidelity/Chicago Title. The decrease in telecommunication service revenues in the Company's subsidiary LDExchange results from the loss of several international telecommunications services arrangements combined with a decision by LDExchange to decrease the volumes of certain low margin international traffic. Gross Profit For the three months ended June 30, 2000, gross profit increased $3.5 million, or 107%, to $6.8 million (23% of revenue) as compared to gross profit of $3.3 million (13% of revenue) in the comparable 1999 period. Gross profit in the six months ended June 30, 2000 was $10.9 million (22% of revenue), which was an increase of $4.6 million, or 73%, from gross profit of $6.3 million (14% of revenue) in the comparable 1999 period. Gross profit as a percentage of revenue increased in both the three and six-month periods due to the additional service and license revenues in the second quarter. The gross profit from service and license revenues was $4.3 million in the 2000 second quarter as compared to $1.3 million in the 1999 second quarter. In addition, the lower margin telecommunications revenues were 42% of total revenues in the three months ended June 30, 2000, a decrease of 31% from being 73% of revenues in the comparable 1999 period. This change in revenue mix away from the lower margin telecommunications revenue and into the higher margin service and license revenues will continue to have a positive impact on the Company's gross profit. Expenses Selling, general and administrative expenses ("SG&A") increased to $4.9 million in the second quarter of 2000 from $4.3 million in the second quarter of 1999. SG&A expenses increased to $9.0 million from $7.6 million in the six months ended June 30, 2000 and 1999, respectively. The increase in SG&A expenses in the 2000 periods was primarily caused by two factors. First, there was a substantial increase in SG&A in the Company's LDExchange business unit. LDExchange employee headcount and other infrastructure costs increased significantly due to the Company's expansion into the international direct business during the latter part of 1999. Second, the hiring of approximately 150 former Chicago Title employees caused a substantial increase in general and administrative expenses related to those new employees. Depreciation of property and equipment and amortization of cost in excess of net assets acquired and capitalized software development costs is a function of the characteristics of the tangible and intangible assets recorded during a particular period and the estimated useful life of those assets. Fluctuations in depreciation and amortization expense 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, 2000 and 1999, depreciation of property and equipment and amortization of costs in excess of net assets acquired and capitalized software development costs was $1,457,000 and $696,000, respectively. During the six months ended June 30, 2000 and 1999, depreciation and amortization was $2,717,000 and $1,589,000, respectively. The increase in the 2000 period results from the Company's determination in mid-1999 to amortize all costs in excess of net assets acquired over 5 years, rather than over the 5 to 15 year periods that had previously been used. In addition, the Company's depreciable property and equipment increased from $5,786,000 at June 30, 1999 to $10,418,000 at June 30, 2000. 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. Interest expense, net, decreased by $284,000 in the three months ended June 30, 2000, to $160,000 as compared with $444,000 in the three months ended June 30, 1999. This decrease results from the conversion of $18.0 million of debt into equity in December 1999. At June 30, 2000, there is $10.0 million of interest bearing debt outstanding as compared to $23.9 million that was outstanding at June 30, 1999. Income tax expense 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. 10 11 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 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. In addition, in the quarter ended June 30, 2000, the Company reported a profit of $8,000 as opposed to a loss of $2,184,000 in the previous years comparable quarter, and compares favorably with the most recent quarter ending March 31, 2000 in which the Company lost $1,615,000. The Company believes that as a result of its current revenue base, improved profitability, the anticipated availability of funds in the form of existing lines of credit and the potential sale of LDExchange, all cash requirements will be met for at least the next twelve months. The Company has historically suffered losses and negative cash flows from operations, and has relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI, as a source of funds via available financing arrangements, and as a guarantor of certain of the Company's lending arrangements. In December 1999, three significant transactions occurred that substantially improved both the Company's liquidity and its capital resources. First, on December 15, 1999, $18.0 million of the Company's debt was converted into common stock pursuant to a conversion election contained in the notes and exercised by the note holders. The conversion of this debt caused an improvement from a negative stockholders' equity to $12.5 million in stockholders' equity at March 31, 2000. The conversion of this debt will also substantially reduce the Company's debt service requirements in the coming year. Second, also on December 15, 1999, the Company entered into a new $5.4 million five-year convertible note with FNFI. During 1999, the Company had exceeded the borrowings available under the FNFI note agreement. With the conversion of the $18.0 million of notes on December 15, 1999, the Company's borrowing arrangements no longer existed. The Company negotiated this new note to address the amounts borrowed in excess of the note limit. There are no other borrowings available or contemplated between the Company and FNFI, with the exception of a $2.0 million lease commitment from FNF Capital, Inc., a wholly owned subsidiary of FNFI. Such lease will be used to finance anticipated equipment purchases by the Company in 2000. Finally, on December 22, 1999, the Company entered into a one-year $5.0 million revolving line of credit with Imperial Bank. As of June 30, 2000 the Company has borrowed $2.7 million under this line of credit. The Company must comply with certain affirmative and negative covenants related to its outstanding debt and notes payable. The Company was in compliance with these covenants at June 30, 2000. While the Company has historically experienced negative cash flow from operations, the Company believes that its cash flow will improve significantly in the remainder of 2000 as the result of several factors. First, the postage meter and scale division, which used cash in 1999, has been phased out and the Company is focusing its efforts on the higher margin technology business. Second, LDExchange expended significant funds purchasing and installing equipment, implementing its international direct arrangements and building the revenue base. The Company believes that with these costs now behind it, and the majority of the capital costs now completed, year 2000 will show significant improvement in the LDExchange cash flow. In addition, on May 5, 2000, the Company entered into an agreement to sell LDExchange. The majority of the sales price will be paid in cash. Finally, the Company has hired approximately 150 employees from Chicago Title as a result of the FNFI acquisition of Chicago Title on March 20, 2000. This new business is generating substantial new revenues and profits for the Company. As a result of the above positive developments, the Company believes that it will have sufficient cash and borrowing resources to meet its operating and growth requirements. While the Company believes it has funds on hand and funds available through existing lines of credit sufficient to meet its projected needs for the next twelve months, the Company also believes it may have the option of raising additional funds through an offering of its common stock. If undertaken, the proceeds from an offering would be used to pay down existing debt, finance the development of potential new business opportunities and potential acquisitions, and also for general working capital purposes. There can be no guarantee that the Company will undertake an offering of its capital stock, or that if undertaken it will be successful in raising additional funds. 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, 1999, 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 June 30, 2000, the change in the market value would not be material to the Company's financial condition. 11 12 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 ("Y2K") issue 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, 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 will make any necessary changes to such systems, updating or replacing such equipment, and modifying such processes to make them Y2K compliant. The Company 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 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. These estimates may be subject to change 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. The Company has not experienced any Y2K compliance related issues to date. 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 are Y2K compliant, or 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. 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 July 20, 2000, the Company held its Annual Meeting of Stockholders pursuant to a Notice and Proxy Statement dated June 2, 2000. At the meeting, stockholders elected as directors William P. Foley II, Patrick F. Stone, John Snedegar, Richard Pickup, Dwayne Walker, Carl A. Strunk, Bradley Inman and John McGraw. The vote for each of the directors was 10,678,043 for and 11,674 against. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27 -- Financial Data Schedule (b) Reports on Form 8-K: None 12