-----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, S+kSjmydmTAkGVI1+LUdxEUbkhdZXMm4aqHUOUjY/3UL74V5h89M8FZcv4DYsSyX MqFyFXt63L9ikxeGIAz5dg== 0001095811-01-502333.txt : 20010516 0001095811-01-502333.hdr.sgml : 20010516 ACCESSION NUMBER: 0001095811-01-502333 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1639692 BUSINESS ADDRESS: STREET 1: 2510 RED HILL AVENUE STREET 2: SUITE 200 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 949-622-4444 MAIL ADDRESS: STREET 1: 2510 RED HILL AVENUE STREET 2: SUITE 200 CITY: SANTA ANA STATE: CA ZIP: 92705 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-Q 1 a72488e10-q.txt 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2001 Commission File Number 0-8358 MICRO GENERAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2621545 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2510 N. Red Hill Avenue, Suite 230, Santa Ana, California 92705 - --------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (949) 622-4444 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. $.05 par value Common Stock 13,317,541 shares as of May 10, 2001 Exhibit Index appears on page 10 of 10 sequentially numbered pages. 2 FORM 10-Q QUARTERLY REPORT Quarter Ended March 31, 2001 TABLE OF CONTENTS
PAGE NUMBER ----------- Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements A. Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000........................................ 3 B. Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2001 and 2000............ 4 C. Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2001 and 2000............ 5 D. Notes to Condensed Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 10 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 4. Submission of Matters to Vote of Security Holders............ 10 Item 6. Exhibits and Reports on Form 8-K............................. 10
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: May 14, 2001 2 3 Part I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 5,026,463 $ 5,337,553 Trade accounts receivable, less allowance for doubtful accounts of $1,761,199 in 2001 and $1,394,555 in 2000 2,966,145 2,853,971 Trade accounts receivable due from affiliates 17,815,995 14,033,919 Inventories 45,000 -- Prepaid expenses and other assets 2,330,471 3,276,205 ------------ ------------ Total current assets 28,185,074 25,501,648 Property and equipment, net 21,348,033 17,462,272 Goodwill less accumulated amortization of $6,429,963 in 2001 and $5,789,224 in 2000 5,344,564 6,774,736 Investments 1,660,893 1,660,893 ------------ ------------ $ 56,538,564 $ 51,399,549 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 12,918,319 $ 15,038,673 Income and other taxes payable 1,321,715 1,311,966 Deferred tax liabilities 361,726 361,726 Deferred revenue 606,570 612,955 Other current liabilities 500,755 374,315 Current portion of capital leases with affiliates 423,638 406,550 Current portion of notes payable 6,761,386 4,804,734 ------------ ------------ Total current liabilities 22,894,109 22,901,919 Amounts and notes payable to affiliates 5,265,408 5,265,408 Capital leases with affiliates 1,306,335 1,407,257 Deferred revenue 2,882,467 1,569,478 Notes payable 2,826,470 1,933,308 Other long term liabilities 97,378 146,067 ------------ ------------ Total liabilities 35,272,167 33,232,437 Commitments and contingencies Subsequent event 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 13,316,187 at March 31, 2001 and 13,222,553 shares at December 31, 2000 665,809 661,128 Additional paid-in capital 29,096,193 28,809,431 Accumulated deficiency (8,495,605) (11,303,447) ------------ ------------ Total stockholders' equity 21,266,397 18,167,112 ------------ ------------ $ 56,538,564 $ 51,399,549 ============ ============
See Notes to Condensed Consolidated Financial Statements. 3 4 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, --------------------------------- 2001 2000 ------------ ------------ (UNAUDITED) Revenues: Hardware, software and maintenance revenues $ 4,138,336 $ 4,261,871 Service and consulting revenues 21,466,472 3,721,810 Telecommunication service revenues 8,994,680 12,555,733 ------------ ------------ Total revenues (related party revenues, see note 5) 34,599,488 20,539,414 ------------ ------------ Cost of sales: Hardware, software and maintenance cost of sales 2,941,271 2,676,795 Service and consulting cost of sales 12,473,184 2,342,659 Telecommunication service cost of sales 9,200,046 12,305,786 ------------ ------------ Total cost of sales 24,614,501 17,326,240 ------------ ------------ Gross profit 9,984,987 3,213,174 Selling, general and administrative expenses 5,501,035 3,836,740 ------------ ------------ Operating income (loss) 4,483,952 (623,566) Amortization of goodwill (640,739) (614,882) Joint venture loss -- (286,389) Interest income (expense), net (245,938) (90,547) ------------ ------------ Income (loss) before income taxes 3,597,275 (1,615,384) Income tax expense 789,433 -- ------------ ------------ Net income (loss) $ 2,807,842 $ (1,615,384) ============ ============ Income (loss) per share - basic (see note 7) $ .19 $ (.12) ============ ============ Income (loss) per share - diluted (see note 7) $ .18 $ (.12) ============ ============ Number of shares used in per share computations - Basic (see note 7) 14,609,107 14,041,638 Diluted (see note 7) 15,962,999 14,041,638
See Notes to Condensed Consolidated Financial Statements. 4 5 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, ------------------------------- 2001 2000 ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss) $ 2,807,842 $(1,615,384) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,636,854 1,259,631 Loss on disposal of property and equipment 137,816 -- Provision for doubtful accounts 359,500 84,070 Joint venture loss -- 286,389 Tax expense against goodwill 789,433 -- Changes in assets and liabilities: Trade accounts receivable (471,674) (1,618,806) Inventories (45,000) 123,402 Prepaid expenses and other assets 945,734 539,270 Accounts payable and accrued expenses (1,993,914) 620,515 Income and other taxes payable 9,749 (84,157) Deferred revenue 1,306,604 680,961 Other long term liabilities (48,689) -- Amounts due from affiliates (3,782,076) (3,050,510) ----------- ----------- Net cash provided by (used in) operating activities 1,652,179 (2,774,619) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (2,132,707) (1,173,623) ----------- ----------- Net cash used in investing activities (2,132,707) (1,173,623) ----------- ----------- Cash flows from financing activities: Net increase in borrowings on line of credit 1,000,000 2,200,000 Capital lease obligation (140,177) (134,309) Stock issues or exercise of stock options 203,949 1,413,366 Stock purchase plan 87,494 50,049 Net paydown on notes payable (980,828) -- ----------- ----------- Net cash provided by financing activities 170,438 3,529,106 ----------- ----------- Net decrease in cash and cash equivalents (310,090) (419,136) Cash and cash equivalents at beginning of period 5,337,553 1,400,874 ----------- ----------- Cash and cash equivalents at end of period $ 5,027,463 $ 981,738 =========== =========== Supplemental cash flow information: Cash paid during the quarter for: Income taxes paid $ 26,818 $ -- =========== =========== Interest paid $ 372,907 $ 688,362 =========== =========== Noncash investing and financing activities: Note financing of hardware/software $ 2,886,985 $ -- =========== ===========
See Notes to Condensed Consolidated Financial Statements. 5 6 MICRO GENERAL CORPORATION & SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (1) Basis of Financial Statements The financial information included in this report includes the accounts of Micro General Corporation and its subsidiaries (collectively, the "Company") and has been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain reclassifications have been made in the 2000 condensed consolidated financial statements to conform to classifications used in 2001. 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 for the three month period ended March 31, 2000, as their inclusion would be antidilutive. The number of exercisable options and warrants outstanding at March 31, 2001 was 2,442,693 and 587,500 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. These operations were performed through the Company's postage meter and scale division. Following the acquisition of ACS Systems, Inc. ("ACS") in mid-1998, which is described below, the Company shifted its focus to information technology and telecommunication services. On May 14, 1998, the Company and Fidelity National Financial, Inc.("FNFI") completed the merger of Micro General with ACS, a wholly-owned subsidiary of FNFI. As a result of the merger, all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General common stock. The transaction was appraised at $1.3 million. Following the merger of Micro General and ACS, FNFI owned 81.4% of the common stock of the Company on an undiluted basis. The transaction has been accounted for as a reverse merger, i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General as the legal surviving entity and ACS as the surviving entity for accounting purposes. At December 31, 2000, ACS was formally merged into Micro General. FNFI owned 65.7% of the Company's outstanding common stock at March 31, 2001. On November 17, 1998, the Company completed the acquisition of LDExchange.com, Inc. ("LDExchange"), an emerging multinational carrier focused primarily on the international long distance market. LDExchange is a facilities-based, wholesale long distance carrier providing low cost international telecommunication services primarily to U.S. based long distance carriers. In 2000, LDExchange obtained the necessary state certifications to begin offering domestic long distance services across the country. In addition, the telecommunication assets and customers of ACS were transferred into LDExchange and have become an integral part of the LDExchange telecommunication product offerings. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General restricted common stock (1,000,000 shares). The acquisition was accounted for as a purchase. (3) Escrow.com On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. 6 7 Escrow.com offers on-line escrow-related services designed to provide buyers and sellers with a safe, secure and easy to use system for managing payment for and delivery of products and services purchased via the Intranet. As an internet transaction services provider, escrow.com provides for the secure transmission of funds between a buyer and seller by placing the funds in escrow, confirming and verifing the receipt of merchandise by the buyer, and releasing the funds from escrow to the seller. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time escrow.com has sufficient funding in place to reasonably assure the payment of the note. While the Company has no equity interest in escrow.com as of March 31, 2001, the 15.0 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. Escrow.com is incurring substantial losses and may need to raise additional funds in order to continue its operations. The Company's potential ownership in escrow.com may be substantially diluted if escrow.com issues additional shares to raise the necessary capital. As previously described, the Company has warrants that, upon their exercise, will give the Company substantial ownership in escrow.com. In April 2000, escrow.com completed a private placement in which it raised gross proceeds of $30 million. As an inducement to invest, the Company assigned to two of the investors 250,000 of its 15.0 million warrants in escrow.com. As a result of this funding, escrow.com has 10,541,813 shares outstanding as of March 31, 2001. Although escrow.com has raised additional capital, those funds are not being used for repayment of the $4.5 million note receivable discussed above. Therefore, the note will be fully reserved until such time that escrow.com has sufficient funding in place to reasonably ensure payment of the note. Assuming exercise of the warrants, the Company would have a 58% ownership in escrow.com. (4) RealEC Technologies, Inc. On October 8, 1998, the Company announced the creation of RealEC, one of the largest real estate electronic commerce networks in the nation. RealEC commenced operations in mid-1999 and was a 50% owned joint venture with Stewart Title Corporation, a subsidiary of Stewart Information Services Corporation (NYSE:STC). RealEC provides a standardized, electronic platform which lenders and realtors can utilize to order and receive products and services from multiple vendors such as credit, flood, appraisal, title and closing. This open, eCommerce network currently gives lenders and realtors access to over 2,000 vendors located across the United States. On May 19, 2000, the Company created TXMNet, Inc. and transferred its 50% ownership of RealEC into the new entity along with certain other intellectual property in exchange for 6,650,000 shares of convertible, non-voting preferred stock. The Company's investment in TXMNet was $1,660,893, which was the book value of its 50% ownership in RealEC that was part of the assets contributed by the Company into TXMNet, Inc. On December 31, 2000, Stewart Title Corporation exchanged its 50% ownership position in RealEC for 2,935,000 shares of convertible, non-voting preferred stock in TXMNet, Inc. TXMNet, Inc. changed its name to RealEC Technologies, Inc. on February 13, 2001. The Company has accounted for the approximately $2.7 million advanced to RealEC Technologies using the modified equity accounting method, and has, as of March 31, 2001, fully reserved this receivable. The reserve will be reversed at such time RealEC Technologies has sufficient funding to repay the amounts advanced to it by the Company and to conduct its operations for at least the next year. RealEC Technologies has also retained an investment banker to raise $4 - $8 million which is expected to be completed in the second quarter of 2001. On a fully diluted basis, the Company has a 62% ownership in RealEC Technologies, Stewart Title Corporation has a 27% ownership and the remaining 11% ownership is by other investors. (5) Segment Information The Company's condensed consolidated financial statements as of and for the quarters ended March 31, 2001 and 2000 include two reportable segments. As of March 31, 2001:
INTRA-COMPANY MICRO GENERAL LDEXCHANGE ELIMINATIONS TOTAL ------------- ---------- ------------- ----- Total revenues $ 25,604,809 $ 8,994,679 $ $34,599,488 Related party revenues 24,477,751 710,518 25,188,269 Operating income (loss) 5,453,217 (969,265) 4,483,592 Interest expense (net) 212,378 33,560 245,938 Income (loss) before income taxes 4,630,100 (1,032,825) 3,597,275 Depreciation and amortization 1,245,592 391,262 1,636,854 Total assets 60,703,496 8,682,144 (12,847,076) 56,538,564
7 8 As of March 31, 2000:
INTRA-COMPANY MICRO GENERAL LDEXCHANGE ELIMINATIONS TOTAL ------------- ---------- ------------- ----- Total revenues $ 7,983,682 $ 12,555,732 $ $20,539,414 Related party revenues 6,865,339 597,456 7,462,795 Operating income (loss) 194,212 (817,778) (623,566) Joint Venture loss (286,389) -- (286,389) Interest expense (net) 6,637 83,910 90,547 Income (loss) before income taxes (611,748) (1,003,636) (1,615,384) Depreciation and amortization 933,252 326,379 1,259,631 Total assets 27,938,252 10,499,054 (8,463,151) 29,974,155
(6) Options Under the Company's stock option plan, in the three-months ended March 31, 2001, the Company granted options to acquire 156,000 shares at the then current market price. Of the stock options granted, 0 shares are vested and the remaining 156,000 shares will vest over periods up to four years. (7) Subsequent Event On May 8, 2001, the Company declared a stock dividend of 10 percent to shareholders of record at the close of business on May 18, 2001, payable June 1, 2001. Cash is to be paid in lieu of fractional shares. Accordingly, the weighted average shares outstanding have been restated to reflect the stock dividend of approximately 1,331,700 shares for the periods presented. The earnings per share would have been $0.21 basic and $0.19 diluted for the first quarter of 2001 and $(0.13) basic and diluted earnings per share for the first quarter of 2000. After the inclusion of shares related to the stock dividend, the earnings per share are $0.19 basic and $0.18 diluted for the first quarter of 2001 and $(0.12) basic and diluted for the first quarter of 2000. 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 $14.0 million, or 68%, to $34.6 million in the quarter ended March 31, 2001 from $21.5 million in the comparable 2000 period. Although telecommunication services revenue declined by $3.6 million, service and consulting revenue climbed $17.7 million to $22.5 million from $3.7 million. The increase in service and consulting revenue can be attributed to the additional business that has been directed to the Company by FNFI as a result of its acquisition of Chicago Title and the substantial development of Net Global Solutions ("NGS"), a web-based software platform developed to substantially increase the efficiency of the title production process, that began in the last half of 2000. In April 2000, the Company hired approximately 150 Chicago Title information technology employees and entered into an agreement to provide information technology service to Fidelity/Chicago Title. Hardware, software and maintenance revenues fell slightly by $124,000 or 3%, to $4.1 million from $4.3 million in the comparable 2000 period while telecommunications service revenues fell $3.6 million or 28%, to $9.0 million from $12.6 million. The drop in telecommunications service revenues in the Company's LDExchange subsidiary resulted from the loss of several international telecommunications services agreements combined with the decision to decrease the amount of certain low margin international traffic. Gross Profit Gross profit increased $6.8 million or 211%, to $10.0 million from $3.2 million in the comparable 2000 period and represents a gross margin percentage of 29% versus 16%. The change in revenue mix away from the lower margin telecommunications revenue and into the higher margin service and consulting revenues resulted in a substantial improvement over the quarter ended March 31, 2000. In 8 9 addition, the Company's gross profit increased to 42% of service and consulting revenues in the March 31, 2001 quarter, as compared to 37% in the March 31, 2000 quarter. This increase in gross profit was primarily due to a significant increase in billable hours in support of multiple projects, including NGS. Expenses Selling, general and administrative expenses ("SG&A") increased $1.7 million or 43%, to $5.5 million from $3.8 million in the comparable period. The increase was due primarily to a $1.4 million reserve expense for receivables due from RealEC Technologies. Under modified equity accounting, the Company was required to fully reserve the receivable from RealEC Technologies until such time it is deemed RealEC Technologies has sufficient funding in place to pay the receivable in full and recover losses previously recognized through subsequent income. The amortization of goodwill is a function of the characteristics of the intangible assets recorded during a particular period and the estimated useful life of the intangible assets. Fluctuations in the amortization of goodwill result from the amount, mix and characteristics of the intangible assets recorded as well as the circumstances surrounding the Company's estimate of the appropriate useful life. Interest income (expense), net, is related to the use of the Company's working capital, which is in the form of available cash and lines of credit. The increase in interest expense to $246,000 from $91,000 can be attributed to additional software and hardware financing arrangements entered into by the Company. Income tax expense (benefit) is recorded on the amounts the Company estimates based on the Company's taxation structure, will be due to state and federal taxation authorities. Certain acquired Net Operating Loss carryforwards were available to the Company for applying against income. For the quarter ending March 31, 2001, the Company recorded a tax expense of $789,000 that was offset as a reduction in goodwill. Liquidity and Capital Resources The Company's current cash requirements include debt service, personnel and other operating expenses, capital expenditures coupled with capital for potential acquisitions and expansion. Internally generated funds fluctuate in a pattern generally consistent with revenues. For the quarter ended March 31, 2001, the Company reported a pre-tax profit of $3.6 million versus a loss of $1.6 million in the comparable 2000 period. The Company believes as a result of its current revenue base, improved profitability, increased margins and the anticipated availability of funds in the form of existing lines of credit, all cash requirements will be met for at least 12 months. The Company had relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI. FNFI had also been a source of funds via available financing arrangements and is a guarantor of certain of the Company's lending arrangements. The Company has a five-year convertible note with FNFI. The Company also has a $5.0 million revolving line of credit with Imperial Bank guaranteed by FNFI, which extends through July 31, 2001. As of March 31, 2001, the Company has borrowed $3.5 million. In addition, the Company has also entered into a number of note financing arrangements with both IBM Global Credit and GE Capital totaling $6.1 million. The Company's LDExchange subsidiary continues to operate in a difficult, extremely competitive pricing environment. In the quarter ended March 31, 2001, LDExchange experienced a loss of $1,032,825 and an earnings before interest, tax, depreciation and amortization (EBITDA) loss of $608,003. The Company had entered into an agreement to sell the telecommunications subsidiary in the fourth quarter of 2000, but the buyer was unable to complete its financing of the purchase. While the Company believes that it can have LDExchange operate on a positive cash flow basis in the second half of 2001, the Company is currently reviewing the operations of LDExchange and is evaluating its options for this business. While the Company believes it has funds on hand and funds available through existing lines of credit sufficient to meet its projected needs for the next twelve months, the Company also believes it may have the option of raising additional funds through an offering of its common stock. If undertaken, the proceeds from an offering would be used to pay down existing debt, finance the development of potential new business opportunities and potential acquisitions, and also for general working capital purposes. There can be no guarantee the Company will undertake an offering of its common stock, or that if undertaken, it will be successful in raising additional funds. 9 10 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 March 31, 2001. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company's consolidated balance sheets include liabilities whose fair values are subject to market risks. The following sections address the significant market risks associated with the Company's financial activities as of March 31, 2001. Market Risk Exposures The following discussion about our market risk disclosures contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates. We do not have derivative financial instruments for hedging, speculative or trading purposes. Interest Rate Risk The Company's borrowings are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. Caution should be used in evaluating the Company's overall market risk from the information below. Actual results could differ materially because the information was developed using estimates and assumptions as described below. The fair value of the Company's notes payable approximate their carrying value at March 31, 2001 as the interest rates paid approximate the market value of borrowings of a similar nature. The hypothetical effects of changes in market rates or prices on the fair values of financial instruments, which relate to the Company's line of credit, would be an increase (decrease) of the fair value approximately $25,000, if interest rates increased (decreased) 100 basis points. Part II: OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders - None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 10 -----END PRIVACY-ENHANCED MESSAGE-----