<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: July 27, 1998
MICRO GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-8358 95-2621545
-------- ------ ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
14711 Bentley Circle, Tustin, California 92780
(Address of principal executive offices)
(714) 731-0557
(Registrant's telephone number, including area code)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
On May 14, 1998, Micro General Corporation (the "Company") and
Fidelity National Financial, Inc. completed the merger of a
wholly-owned subsidiary of Micro General Corporation with ACS
Systems, Inc. a subsidiary of Fidelity National Financial, Inc. As a
result of the merger all of the outstanding shares of ACS Systems,
Inc. were exchanged for 4.6 million shares of Micro General
Corporation. Fidelity National Financial, Inc. now owns 81.4% of the
common stock of Micro General Corporation on an undiluted basis.
"Safe Harbor" Statements under the Private Securities Litigation
Reform Act of 1995: Statements which are not historical facts
contained in this release are forward looking statements that
involve risks and uncertainties, and results could vary materially
from the descriptions contained herein and other risks as may be
detailed in the Company's Securities and Exchange Commission
filings.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired. The following financial
statements of ACS Systems, Inc. are included in this Current Report:
ACS Systems, Inc.:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................... F-1
Balance Sheets as of December 31, 1997 and 1996........................ F-2
Statements of Operations and Accumulated Deficiency for each
of the years in the two-year period ended December 31, 1997.......... F-3
Statements of Cash Flows for each of the years in the two-year
period ended December 31, 1997....................................... F-4
Notes to Financial Statements for each of the years in the
two-year period ended December 31, 1997.............................. F-5
Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997.................................................... F-13
Statements of Operations and Accumulated Deficiency for the
three months ended March 31, 1998 (unaudited) and 1997 (unaudited)... F-14
Statements of Cash Flows for the three months ended March 31,
1998 (unaudited) and 1997 (unaudited)................................ F-15
</TABLE>
1
<PAGE> 3
(b) Pro Forma Financial Information. The following unaudited pro forma
combined condensed financial information is based upon the historical financial
statements of the Company and has been prepared to illustrate the effects of the
acquisition of ACS Systems, Inc. ("ACS").
The unaudited pro forma combined condensed balance sheet as of
March 31, 1998 gives effect to the ACS acquisition, as if the transaction had
been completed on March 31, 1998 and was prepared based upon the balance sheet
of the Company as of March 31, 1998.
The unaudited pro forma combined condensed statements of operations
for the year ended December 31, 1997 and the quarter ended March 31, 1998 give
effect to the transaction described above as if the transaction had been
completed at the beginning of each period presented. The unaudited pro forma
combined condensed statements of operations for the year ended December 31, 1997
were prepared based upon the historical financial statements of the Company for
the year ended December 31, 1997 and the historical financial statements of ACS
for the year ended December 31, 1997. The unaudited pro forma combined condensed
statements of operations for the quarter ended March 31, 1998 were prepared
based upon the unaudited financial statements of the Company for the quarter
ended March 31, 1998 and the unaudited financial statements of ACS for the
quarter ended March 31, 1998.
The unaudited pro forma combined condensed financial information is
provided for comparative purposes only and is not indicative of the results of
operations or financial position of the combined companies that would have
occurred had the acquisition occurred at the beginning of the period presented
or on the date indicated, nor is it indicative of future operating results or
financial position. The unaudited pro forma adjustments are based upon currently
available information and upon certain assumptions that management of the
Company believes are reasonable under the circumstances. The unaudited pro forma
combined condensed financial information and the related notes thereto should be
read in conjunction with the Company's combined financial statements and the
related notes and the combined financial statements of ACS which are listed in
item 7(a) above. In addition, the unaudited pro forma combined condensed
financial information does not reflect certain cost savings that management
believes may be realized following the ACS acquisition.
The ACS acquisition will be accounted for using the purchase method
of accounting. Accordingly, the Company's cost to acquire ACS will be allocated
to the assets acquired and liabilities assumed according to their estimated fair
values as of the date of the ACS acquisition.
2
<PAGE> 4
MICRO GENERAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of March 31, 1998
<TABLE>
<CAPTION>
At March 31, 1998
-------------------------------------------------------------------
Micro Pro Combined
General ACS Forma Micro General
Corporation Systems, Inc. Adjustments ACS
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 178,065 -- -- 178,065
Accounts and notes receivable, less
allowance for doubtful receivables and sales
returns 187,617 1,498,624 (1,054,986) 631,255
Accounts receivable due from affiliates -- 1,447,837 (1,447,837) --
Inventories 1,116,352 772,962 1,889,314
Prepaid expenses and other assets 239,881 576,711 816,592
----------- ----------- ----------- -----------
Total currents assets 1,721,915 4,296,134 (2,502,823) 3,515,226
Equipment and improvements, net 204,178 1,254,782 1,458,960
Other assets 1,363,876 -- 1,363,876
Capitalized software development costs, net -- 2,070,226 2,070,226
Intangible assets, net -- 1,072,153 5,407,000 6,479,153
----------- ----------- ----------- -----------
Total assets $ 3,289,969 8,693,295 2,904,177 14,887,441
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 704,572 1,272,534 1,977,106
Due to affiliates -- 5,673,109 (5,673,109) --
Deferred revenue 27,856 -- 27,856
Notes payable 850,000 -- 850,000
----------- ----------- ----------- -----------
Total current liabilities 1,582,428 6,945,643 (5,673,109) 2,854,962
Long-term debt 2,750,000 -- 2,750,000
Note payable due to affiliate -- -- 3,350,650 3,350,650
Shareholders' equity:
Preferred stock, $.05 par value; 1,000,000 shares
authorized, no shares issued and outstanding at
March 31, 1998 -- -- --
Common stock, $.05 par value; 10,000,000 shares
authorized, 6,549,666 shares issued and outstanding
at March 31, 1998 97,483 230,000 327,483
Additional paid-in capital 4,176,370 3,434,941 3,309,347 10,920,658
Accumulated deficit (5,316,312) (1,687,289) 1,687,289 (5,316,312)
----------- ----------- ----------- -----------
Total shareholders' equity (1,042,459) 1,747,652 5,226,636 5,931,829
----------- ----------- ----------- -----------
$ 3,289,969 8,693,295 2,904,177 14,887,441
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Information.
3
<PAGE> 5
MICRO GENERAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the quarter ended March 31, 1998
<TABLE>
<CAPTION>
For the quarter ended March 31, 1998
-------------------------------------------------------------------
Micro Pro Combined
General ACS Forma Micro General
Corporation Systems, Inc. Adjustments ACS
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Postal product sales, net of returns of $ 278,974 -- 278,974
Service and rate revenues 754,847 -- 754,847
Software sales and maintenance -- 697,916 697,916
Hardware sales and maintenance -- 1,525,471 1,525,471
Consulting revenue -- 504,617 504,617
Servicing revenue -- 338,332 338,332
Telecommunication revenue -- 722,248 722,248
Other operating revenue -- 1,929 1,929
----------- ----------- ----------- -----------
Total revenues 1,033,821 3,790,513 -- 4,824,334
Cost of sales:
Postal product cost of sales 274,674 -- 274,674
Service and rate cost of sales 178,125 -- 178,125
Cost of hardware and software -- 1,361,988 1,361,988
----------- ----------- ----------- -----------
Total cost of sales 452,799 1,361,988 -- 1,814,787
----------- ----------- ----------- -----------
Gross profit 581,022 2,428,525 -- 3,009,547
Operating expenses:
Selling, general and administrative 382,289 2,888,066 3,270,355
Engineering and development 22,683 -- 22,683
Amortization of intangibles and software
development costs -- 175,871 67,590 243,461
----------- ----------- ----------- -----------
Total operating expenses 404,972 3,063,937 67,590 3,536,499
----------- ----------- ----------- -----------
Operating profit (loss) 176,050 (635,412) (67,590) (526,952)
Interest income (expense) (83,888) 2,643 -- (81,245)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 92,162 (632,769) (67,590) (608,197)
Provision for income taxes (benefit) 800 (249,030) (248,230)
----------- ----------- ----------- -----------
Net earnings (loss) $ 91,362 (383,739) (67,590) (359,967)
=========== =========== =========== ===========
Net earnings per share - basic $ 0.05 (0.05)
=========== ===========
Weighted average shares outstanding - basic 1,949,666 6,549,666
=========== ===========
Net earnings per share - diluted $ 0.05 (0.05)
=========== ===========
Weighted average shares outstanding - diluted 2,017,104 6,617,104
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Information.
4
<PAGE> 6
MICRO GENERAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
For the year ended December 31, 1997
-------------------------------------------------------------------
Micro Pro Combined
General ACS Forma Micro General
Corporation Systems, Inc. Adjustments ACS
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Postal product sales, net of returns of $ 672,049 -- 672,049
Service and rate revenues 1,102,002 -- 1,102,002
Software sales and maintenance -- 2,448,089 2,448,089
Hardware sales and maintenance -- 7,784,282 7,784,282
Consulting revenue -- 1,665,077 1,665,077
Servicing revenue -- 1,046,770 1,046,770
Telecommunication revenue -- 862,814 862,814
Other operating revenue -- 16,602 16,602
----------- ----------- ----------- -----------
Total revenues 1,774,051 13,823,634 -- 15,597,685
Cost of sales:
Postal product cost of sales 1,141,026 -- 1,141,026
Service and rate cost of sales 385,316 -- 385,316
Cost of hardware and software -- 6,861,483 6,861,483
----------- ----------- ----------- -----------
Total cost of sales 1,526,342 6,861,483 -- 8,387,825
----------- ----------- ----------- -----------
Gross profit 247,709 6,962,151 -- 7,209,860
Operating expenses:
Selling, general and administrative 1,313,650 6,443,074 7,756,724
Engineering and development 266,242 -- 266,242
Amortization of intangibles and software
development costs -- 808,274 270,360 1,078,634
----------- ----------- ----------- -----------
Total operating expenses 1,579,892 7,251,348 270,360 9,101,600
----------- ----------- ----------- -----------
Operating loss (1,332,183) (289,197) (270,360) (1,891,740)
Interest income (expense) (192,377) 15,130 (177,247)
----------- ----------- ----------- -----------
Loss before income taxes (1,524,560) (274,067) (270,360) (2,068,987)
Provision for income taxes (benefit) 800 (64,126) (63,326)
----------- ----------- ----------- -----------
Net loss $(1,525,360) (209,941) (270,360) (2,005,661)
=========== =========== =========== ===========
Net loss per share - basic $ (0.78) (0.31)
=========== ===========
Weighted average shares outstanding - basic 1,949,563 6,549,563
=========== ===========
Net loss per share - diluted $ (0.78) (0.31)
=========== ===========
Weighted average shares outstanding - diluted 1,949,563 6,549,563
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Information.
5
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
A. The unaudited pro forma combined condensed balance sheet as of March 31,
1998 has been prepared to reflect the ACS acquisition by the Company for
an aggregate purchase price of $6,900,000 plus an estimated $74,288 in
related fees and expenses, which were paid in cash. The total purchase
price was paid by issuing 4.6 million shares of Company common stock,
$.05 par value, valued at $1.50 per share.
B. The unaudited pro forma combined condensed balance sheet has been
adjusted to eliminate the stockholders' equity of ACS.
C. Accounts receivable due from affiliates and amounts due to affiliates
represent transactions with Fidelity National Financial, Inc. ("FNFI").
All such amounts have been reclassified to Note payable due to affiliate
pursuant to a $5,000,000 credit facility between the Company and
FNFI established as of the closing of the ACS acquisition.
D. The intangible assets amount reflects the excess consideration paid over
the fair value of the net assets acquired. The intangible assets are to
be amortized over 20 years.
E. The provision for income taxes related to the pro forma intangible
assets amortization adjustments is assumed to be zero due to the
non-deductibility of said expense for tax purposes.
F. The amortization expense related to the intangible assets for the 12
months ended December 31, 1997 and for the three months ended
March 31, 1998 were $270,360 and $67,590, respectively.
G. Net loss per share on a basic and diluted basis gives effect to the
issuance of 4.6 million shares of common stock of the Company.
H. Certain reclassifications have been made to the Unaudited Pro Forma
Combined Condensed Financial Information in order to conform the ACS
presentation to that of the Company.
(c) Exhibits.
Exhibit Number
10.21 Promissory note with Fidelity National
Title Company dated May 14, 1998.
23.1 Consent of KPMG Peat Marwick, LLP
6
<PAGE> 8
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 hereunto duly authorized.
MICRO GENERAL CORPORATION
Date: July 27, 1998 By: /s/ ANTHONY J. PARK
------------------------------
Anthony J. Park,
Vice President and
Chief Financial Officer
7
<PAGE> 9
INDEX TO FINANCIAL STATEMENTS FOR ACS SYSTEMS, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................... F-1
Balance Sheets as of December 31, 1997 and 1996........................ F-2
Statements of Operations and Accumulated Deficiency for each
of the years in the two-year period ended December 31, 1997.......... F-3
Statements of Cash Flows for each of the years in the two-year
period ended December 31, 1997....................................... F-4
Notes to Financial Statements for each of the years in the
two-year period ended December 31, 1997.............................. F-5
Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997.................................................... F-13
Statements of Operations and Accumulated Deficiency for the
three months ended March 31, 1998 (unaudited) and 1997 (unaudited)... F-14
Statements of Cash Flows for the three months ended March 31,
1998 (unaudited) and 1997 (unaudited)................................ F-15
</TABLE>
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ACS Systems, Inc.:
We have audited the accompanying balance sheets of ACS Systems, Inc. (a wholly
owned subsidiary of Fidelity National Financial, Inc.) as of December 31, 1997
and 1996 and the related statements of operations and accumulated deficiency and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in notes 1 and 6 to the financial statements, as of and for the
years ended December 31, 1997 and 1996, the Company's financial position and its
results of operations and its cash flows are materially affected by certain
transactions and agreements with Fidelity National Financial, Inc. (FNFI), the
Company's ultimate parent, and FNFI's subsidiaries.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACS Systems, Inc. (indirectly,
a wholly owned subsidiary of Fidelity National Financial, Inc.) as of December
31, 1997 and 1996 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Los Angeles, California
May 4, 1998
F-1
<PAGE> 11
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 830,784 --
Trade accounts receivable, less allowance for doubtful
accounts of $321,844 in 1997 and $314,419 in 1996 183,340 32,920
Trade accounts receivable due from affiliates 1,280,154 894,557
Inventories 505,949 217,390
Prepaid expenses and other assets 119,432 52,496
----------- ----------
Total current assets 2,919,659 1,197,363
Notes receivable 31,776 2,000
Property and equipment, net 704,504 6,087
Capitalized software development costs, less accumulated
amortization of $2,060,291 in 1997 and $1,347,619 in 1996 2,170,072 2,272,646
Amounts due from affiliates 2,592,866 2,510,994
Goodwill, less accumulated amortization of $350,546 in 1997 and
$254,943 in 1996 1,083,507 1,179,110
----------- ----------
Total assets $ 9,502,384 7,168,200
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,243,956 1,085,488
Amounts due to affiliates 695,620 --
----------- ----------
Total current liabilities 1,939,576 1,085,488
Amounts due to affiliates 5,431,417 3,741,380
----------- ----------
Total liabilities 7,370,993 4,826,868
----------- ----------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value. Authorized 300,000 shares;
issued and outstanding 3,000 shares at December 31, 1997
and 1996 3,434,941 3,434,941
Accumulated deficiency (1,303,550) (1,093,609)
----------- ----------
Total stockholder's equity 2,131,391 2,341,332
----------- ----------
$ 9,502,384 7,168,200
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 12
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Statements of Operations and Accumulated Deficiency
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Software sales and maintenance revenue $ 2,448,089 1,411,514
Hardware sales and maintenance revenue 7,784,282 5,011,043
Consulting revenue 1,665,077 135,032
Servicing revenue 1,046,770 293,004
Telecommunication revenue 862,814 --
Other operating revenue 16,602 21,007
----------- -----------
Total revenues 13,823,634 6,871,600
----------- -----------
Cost of hardware and software 6,861,483 4,429,501
Personnel expenses 4,308,983 1,768,821
Other operating expenses 828,009 534,393
General and administrative expenses 1,306,082 629,708
Amortization of goodwill and capitalized software development
costs 808,274 638,462
----------- -----------
Total expenses 14,112,831 8,000,885
----------- -----------
Operating loss (289,197) (1,129,285)
Interest income 15,130 6,675
----------- -----------
Loss before income taxes (274,067) (1,122,610)
Provision for income taxes (benefit) (64,126) (417,747)
----------- -----------
Net loss (209,941) (704,863)
Accumulated deficiency, beginning of year (1,093,609) (388,746)
----------- -----------
Accumulated deficiency, end of year $(1,303,550) (1,093,609)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 13
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (209,941) (704,863)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 812,262 642,057
Changes in assets and liabilities:
Trade accounts receivable (536,017) 307,204
Inventories (288,559) 2,326
Prepaid expenses and other assets (66,936) (28,357)
Accounts payable and accrued expenses 158,468 308,055
Amounts due from affiliates (81,872) (1,683,748)
----------- ----------
Net cash used in operating activities (212,595) (1,157,326)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (702,404) --
Increase in notes receivable (29,776) (2,000)
Capitalization of software development costs (610,098) (410,663)
----------- ----------
Net cash used in investing activities (1,342,278) (412,663)
----------- ----------
Cash flows from financing activities - amounts due to affiliates 2,385,657 993,209
----------- ----------
Net cash provided by financing activities 2,385,657 993,209
----------- ----------
Net increase (decrease) in cash and cash 830,784 (576,780)
equivalents
Cash and cash equivalents at beginning of year -- 576,780
----------- ----------
Cash and cash equivalents at end of year $ 830,784 --
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 14
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ACS Systems, Inc. (the Company) was founded in 1985 as an escrow software
development company. All of the outstanding shares of the Company were
acquired by Fidelity National Financial, Inc. (FNFI) in April 1994. The
accompanying financial statements have been prepared using the purchase
method of accounting. Accordingly, the purchase price of $2.7 million was
reflected in common stock, retained earnings was eliminated and assets and
liabilities were adjusted to their fair values at the date of acquisition.
During 1997 and 1996, respectively, approximately 89% and 86% of the
Company's revenue was derived from multiple servicing arrangements with
FNFI and its subsidiaries, whereby the Company provides these affiliates
with comprehensive electronic data processing systems support, including
obtaining computer hardware and software products via wholesale
distributors and developing integrated title and escrow computer
applications for the affiliates' direct title operations and agency
network (see note 6).
In addition to these services, the Company provides products and services
to unaffiliated customers, including telecommunications hardware,
technical services, Internet services and computer hardware and systems
software.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with banks and
investments with original maturities of three months or less.
ACCOUNTS RECEIVABLE
The carrying amounts reported in the balance sheets for accounts
receivable approximate their fair value.
INVENTORIES
Inventories are stated at the lower of cost or market (net realizable
value) under the first-in, first-out method of accounting for inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over estimated useful lives which range from three to
seven years. Amortization of leasehold improvements is charged to expense
on a straight-line basis over the shorter of the estimated useful lives of
the assets or the term of the underlying lease.
F-5
<PAGE> 15
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs incurred after the establishment of
technological feasibility are capitalized and later amortized using the
straight-line method over the remaining estimated economic life of the
product. The Company amortizes its capitalized software development costs
over an estimated economic life of three to seven years. During 1997 and
1996, the Company capitalized software development costs of $610,098 and
$410,663, respectively. During 1997 and 1996, the Company amortized
software development costs of $712,672 and $542,857, respectively.
Included in capitalized software development costs at December 31, 1996
are costs of $399,203 which were not yet being amortized. The Company
began to amortize these costs in 1997. The Company periodically assesses
the recoverability of the cost of its capitalized software development
costs based on an analysis of the cash flows generated by the underlying
asset. In the opinion of management, no impairment of capitalized software
development costs has occurred at December 31, 1997.
GOODWILL
Goodwill was recorded as a result of the acquisition of the Company by
FNFI and was computed as the excess of the purchase price over the fair
value of the net assets of the Company on the acquisition date. Goodwill
is amortized on a straight-line basis over fifteen years. The Company
periodically assesses the recoverability of goodwill based on an analysis
of the cash flows generated by the underlying asset. No impairment of
goodwill has been noted.
REVENUE RECOGNITION
The Company has adopted the American Institute of Certified Public
Accountants (AICPA) Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), for the years ended December 31, 1997 and 1996.
Under SOP 97-2, if a software sales arrangement does not require
significant modification or customization of the software, revenue from
the sale of the software is recognized when evidence of an arrangement
exists, the fee is fixed and determinable, the license agreement has been
delivered and collection of any resulting receivable is probable. If a
software sale arrangement does involve significant modification or
customization of the software, the entire arrangement is accounted for in
conformity with Accounting Research Bulletin No. 45, "Long-Term
Construction-Type Contracts," and SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," whereby the fee
is allocated to the various elements of the arrangement, and revenue for
each element is recognized when evidence of an arrangement exists,
delivery of the element has occurred, the fee is fixed and determinable
and collection of any resulting receivable is probable.
As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued a Statement of Position which delayed for one year the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the
delivered software element in certain multiple-element arrangements that
include service elements entered into by entities that never sell the
software elements separately. The Company does not anticipate that the
resolution of this implementation issue will have a material impact on the
Company's financial statements.
F-6
<PAGE> 16
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
Revenue from the sales of hardware and other products is recognized when
delivery has occurred, the fee is fixed and determinable and collection of
any resulting receivable is probable. Revenue from maintenance, servicing
and consulting is recognized as the related services are performed.
INCOME TAXES
The Company is included in the consolidated income tax returns of FNFI and
pays such tax effects, or receives such tax benefits, as its operations
represent in the consolidated tax return. Deferred tax assets and
liabilities are recognized for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities
and expected benefits of utilizing net operating loss and capital loss
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The impact on deferred taxes of changes in tax rates and laws, if any, are
applied to the years during which temporary differences are expected to be
settled and reflected in the financial statements in the period enacted.
MANAGEMENT ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computer equipment $403,519 217,390
Telecommunications equipment 102,430 --
-------- --------
$505,949 217,390
======== ========
</TABLE>
(3) INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1997
and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Current:
Federal $(16,528) (263,950)
State (2,833) (77,326)
-------- ---------
(19,361) (341,276)
-------- ---------
</TABLE>
F-7
<PAGE> 17
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred:
Federal (33,740) (59,144)
State (11,025) (17,327)
-------- ---------
(44,765) (76,471)
-------- ---------
$(64,126) (417,747)
======== =========
</TABLE>
The provision for income taxes differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% to the loss before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Computed "expected" tax
benefit $(95,923) (392,913)
State taxes, net of Federal
income tax benefit (9,008) (61,524)
Meals and entertainment 7,344 3,231
Goodwill amortization 33,461 33,459
-------- ---------
$(64,126) (417,747)
======== =========
</TABLE>
The deferred tax assets are included with amounts due to or from
affiliates in 1997 and 1996, offset against other intercompany balances
with FNFI and result primarily from employee benefit accruals and the
allowance for doubtful accounts.
There was no valuation allowance for deferred tax assets as of December
31, 1997 or 1996. Based on the Company's current and historical pretax
earnings, management believes it is more likely than not that the Company
will realize the benefit of the existing deferred tax assets at December
31, 1997. Management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates net
taxable income; however, there can be no assurance that the Company will
generate any earnings or any specific level of continuing earnings in
future years. Certain tax planning or other strategies could be
implemented, if necessary, to supplement income from operations to fully
realize recorded tax benefits.
Income tax benefits receivable from FNFI at December 31, 1997 and 1996 are
$632 and $341,276, respectively, and are included with amounts due to
affiliates in 1997 and amounts due from affiliates in 1996, netted against
other intercompany balances with FNFI.
F-8
<PAGE> 18
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Telecommunications equipment $695,620 --
Computer equipment 67,840 64,661
Furniture and fixtures 28,005 28,005
Office equipment 19,209 19,209
Leasehold improvements 14,390 10,785
-------- --------
825,064 122,660
Less accumulated depreciation and amortization 120,560 116,573
-------- --------
$704,504 6,087
======== ========
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a facility under an operating lease which expires on
October 31, 2000. Future minimum noncancelable lease commitments are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $ 20,566
1999 21,389
2000 18,414
--------
Total minimum lease payments $ 60,369
========
</TABLE>
Rent expense was $238,721 and $128,179 for the years ended December 31,
1997 and 1996, respectively. Included in rent expense for 1997 and 1996
was $235,316 and $128,179, respectively, paid to affiliates.
401(K) PROFIT SHARING PLAN
The Company participates in employee benefit plans sponsored by FNFI.
Employee benefits include group insurance, an employee stock purchase
plan, a stock option plan and a 401(k) plan.
LITIGATION
The Company is subject to lawsuits which arise in the ordinary course of
business. Management is of the opinion that the liability of the Company,
if any, arising from existing and threatened lawsuits would not have a
material adverse effect on the Company's financial position or results of
operations.
F-9
<PAGE> 19
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
YEAR 2000
The most recent version of the Company's internally developed software
product is Year 2000 compliant; however, certain of the Company's
affiliated and unaffiliated customers currently have legacy versions of
this product which are not Year 2000 compliant. The Company has offered to
give these customers a Year 2000 compliant version of the software at no
additional cost. The Company does not expect that providing customers with
this newer version of the software will result in significant additional
expenses to the Company, as the costs associated with modifying the newer
version to make it Year 2000 compliant were expensed as they were
incurred.
(6) RELATED PARTY TRANSACTIONS
As described in note 1, the Company's primary source of revenue is fees
resulting from sales and services to affiliated companies. Revenues
generated from sales and services to affiliates for the years ended
December 31, 1997 and 1996 were $12,356,444 and $5,932,524, respectively.
F-10
<PAGE> 20
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
The amounts due to affiliates at December 31, 1997 and 1996, classified as
noncurrent liabilities, relate mainly to an arrangement with Fidelity
National Title Insurance Company (FNTIC), a subsidiary of FNFI, whereby
the personnel costs of the Company are funded by FNTIC. The Company
reimburses FNTIC from time to time as funds become available. No interest
is charged to the Company in this arrangement. The remaining amounts due
to affiliates at December 31, 1997, classified as noncurrent liabilities,
relate mainly to amounts due to Fidelity Asset Management, Inc. (FAMI), a
subsidiary of FNFI, pursuant to various cost allocation arrangements
related to the Company's use of equipment owned by FAMI. These amounts are
classified as a noncurrent liability because FNFI has represented that
FNFI and its subsidiaries will not require the Company to repay any of
these amounts within one year after the December 31, 1997 balance sheet
date.
The amounts due to affiliates at December 31, 1997, classified as current
liabilities, relate mainly to amounts due to FAMI, for the purchase of
$695,620 of fixed assets.
The amounts due from affiliates at December 31, 1997 and 1996 relate
mainly to amounts due from FNFI subsidiaries for electronic data
processing support services and sales of internally developed software to
these affiliates. In addition, at December 31, 1996, the Company had a
receivable from FNFI of approximately $1,700,000 resulting from a loan to
FNFI which was repaid in 1997. No interest was charged to FNFI for this
loan.
The amounts included in trade accounts receivable due from affiliates at
December 31, 1997 and 1996 relate to the sales of externally acquired
hardware to FNFI and its subsidiaries.
FNFI provides certain accounting, finance and management services to the
Company. The costs related to these services are not allocated to the
Company.
(7) SUBSEQUENT EVENTS
On April 3, 1998, Micro General Corporation (Micro General) announced that
its Board of Directors had approved a plan to acquire 100% of the
outstanding stock of the Company from FNFI in exchange for approximately
4.6 million common shares of Micro General with an estimated fair market
value of $6.9 million, based on the quoted market price of Micro General
shares on April 3, 1998. At December 31, 1997, FNFI owned 37.5% of the
outstanding common shares of Micro General. After the acquisition FNFI
will own approximately 72%, on a diluted basis, of Micro General.
(8) LIQUIDITY
Cash used in operating activities exceeded cash provided by operating
activities by $212,595 and $1,157,326 in 1997 and 1996, respectively.
Additionally, the Company was indebted to FNTIC for personnel costs of
$4,756,646 and $3,672,042 at December 31, 1997 and 1996, respectively, the
liability for which is included in amounts due to affiliates. As a result,
substantial doubt exists about the Company's ability to continue as a
going concern for a reasonable period of time following the December 31,
1997 balance sheet date. However, as of May 1, 1998, FNFI has represented
that it has the ability and intent to provide the Company with cash
necessary to continue as a going concern for a reasonable period of time
following December 31, 1998. Given this representation, management
believes
F-11
<PAGE> 21
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Notes to Financial Statements, Continued
that the Company will be able to continue as a going concern for a
reasonable period following December 31, 1997. Management has plans to
expand the Company's business relationships with unaffiliated third
parties and expects the Company to generate cash flows sufficient to
support its operations in the future.
F-12
<PAGE> 22
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Balance Sheets
As of March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1998 DECEMBER 31,
UNAUDITED 1997
-------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- 830,784
Trade accounts receivable, less allowance for doubtful
accounts of $260,368 in 1998 and $321,844 in 1997 415,230 183,340
Trade accounts receivable due from affiliates 1,054,986 1,280,154
Inventories 772,962 505,949
Prepaid expenses and other assets 576,711 119,432
----------- -----------
Total current assets 2,819,889 2,919,659
Notes receivable 28,408 31,776
Property and equipment, net 1,254,782 704,504
Capitalized software development costs, less accumulated
amortization of $2,225,777 in 1998 and $2,060,291 in 1997 2,070,226 2,170,072
Amounts due from affiliates 1,447,837 2,592,866
Intangible assets, less accumulated amortization of $361,885 in
1998 and $350,546 in 1997 1,072,153 1,083,507
----------- -----------
Total assets $ 8,693,295 9,502,384
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,272,534 1,243,956
Amounts due to affiliates -- 695,620
----------- -----------
Total current liabilities 1,272,534 1,939,576
Amounts due to affiliates 5,673,109 5,431,417
----------- -----------
Total liabilities 6,945,643 7,370,993
----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value. Authorized 300,000 shares;
issued and outstanding 3,000 shares at March 31, 1998 3,434,941 3,434,941
Accumulated deficiency (1,687,289) (1,303,550)
----------- -----------
Total stockholder's equity 1,747,652 2,131,391
----------- -----------
$ 8,693,295 9,502,384
=========== ===========
</TABLE>
F-13
<PAGE> 23
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Unaudited Statements of Operations and Accumulated Deficiency
Three months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Software sales and maintenance revenue $ 697,916 554,057
Hardware sales and maintenance revenue 1,525,471 1,697,271
Consulting revenue 504,617 193,333
Servicing revenue 338,332 162,166
Telecommunication revenue 722,248 0
Other operating revenue 1,929 3,182
----------- -----------
Total revenues 3,790,513 2,610,009
----------- -----------
Cost of hardware and software 1,361,988 1,332,178
Personnel expenses 1,701,335 837,141
Other operating expenses 488,728 86,766
General and administrative expenses 698,003 177,357
Amortization of intangible assets and capitalized software
development costs 175,871 161,839
----------- -----------
Total expenses 4,425,925 2,595,281
----------- -----------
Operating income (loss) (635,412) 14,728
Interest income 2,643 2,175
----------- -----------
Income (loss) before income taxes (632,769) 16,903
Provision for income taxes (249,030) (35,435)
----------- -----------
Net income (loss) (383,739) 52,338
Accumulated deficiency, beginning of period (1,303,550) (1,093,609)
----------- -----------
Accumulated deficiency, end of period $(1,687,289) (1,041,271)
=========== ===========
</TABLE>
F-14
<PAGE> 24
ACS SYSTEMS, INC.
(A Wholly Owned Subsidiary of
Fidelity National Financial, Inc.)
Unaudited Statements of Cash Flows
Three months ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (383,739) 52,338
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 175,871 161,839
Changes in assets and liabilities:
Trade accounts receivable (6,722) (452,456)
Inventories (267,013) 11,977
Prepaid expenses and other assets (457,279) 25,027
Accounts payable and accrued expenses 28,578 (293,438)
Amounts due from affiliates 1,145,029 298,335
----------- -----------
Net cash used in operating activities 234,725 (196,378)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (680,589) --
Increase in notes receivable 3,368 (42,695)
Capitalization of software development costs 65,640 (179,200)
----------- -----------
Net cash used in investing activities (611,581) (221,895)
----------- -----------
Cash flows from financing activities - amounts due to affiliates (453,928) 915,227
----------- -----------
Net cash provided by financing activities (453,928) 915,227
----------- -----------
Net increase (decrease) in cash and cash equivalent (830,784) 496,954
Cash and cash equivalents at beginning of period 830,784 --
----------- -----------
Cash and cash equivalents at end of period $ -- 496,954
=========== ===========
</TABLE>
F-15
<PAGE> 25
EXHIBIT INDEX
Exhibit Number
10.21 Promissory Note with Fidelity National Title
Company dated May 14, 1998.
23.1 Consent of KPMG Peat Marwick, LLP
<PAGE> 1
EXHIBIT 10.21
MICRO GENERAL CORPORATION
PROMISSORY NOTE
$5,000,000 Irvine, California
May 14, 1998
MICRO GENERAL CORPORATION, a corporation duly organized and existing
under the laws of Delaware (hereinafter the "Company," which term includes any
successor corporation or corporations under the Agreement hereinafter referred
to), for value received, hereby promises to pay to FIDELITY NATIONAL TITLE
COMPANY, a California corporation, at its office at 17911 Von Karman Avenue,
Suite 300, Irvine, California 92614, or order ("Lender"), the principal sum of
Five Million Dollars ($5,000,000), or so much thereof as shall have been
disbursed by Lender and which at that time remains unpaid, together with simple
interest thereon from the date hereof at the rate of nine percent (9%) per
annum, in such coin or currency of the United States of America as at the time
pf payment shall be legal tender for the payment of public and private debts,
payable as follows: Accrued interest shall be payable quarterly and the entire
unpaid balance of this Note, including principal and all accrued interest, shall
be due and payable on May 14, 2000. All payments shall be applied first to
accrued interest and then to principal.
This Note may be prepaid in whole or in part at any time with the prior
written consent of Lender so long as the Company gives ten (10) days' prior
written notice to Lender of the Company's intent to prepay this Note or any
portion hereof. Such notice of prepayment shall state the proposed payment date
and the principal amount to be repaid.
The obligation of this Note shall be subordinated to the obligations of
the Company in favor of Cal West Service Corporation and Dito Caree L.P.
Holding, as Lenders, under the terms and provisions of a Convertible Note
Purchase Agreement.
This Note is duly authorized and issued by the Company, is designated as
set forth on the fact hereof, and is limited to the aggregate principal amount
of $5,000,000 issued under and pursuant to the terms of a Loan Agreement dated
May 14, 1998 duly executed and delivered by the Company and Fidelity National
Title Company, as Lender, to which Agreement reference is made hereby for
further description of the rights, limitation of rights, obligations and duties
thereunder by the Company and the Lender. In case of an Event of Default shall
have occurred under this Note or under the terms of the Agreement (as the term
"event of Default" is defined in said Agreement), the principal balance hereof
and all accrued by unpaid interest thereon may be declared, and upon such
declaration shall become, due and payable, in the manner, with the effect and
subject to the conditions provided in this Agreement.
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by its duly authorized officers.
MICRO GENERAL CORPORATION
a Delaware corporation
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Micro General Corporation:
We consent to the use of our reports included herein.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
July 27, 1998
