<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
Commission File Number 0-8358
MICRO GENERAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2621545
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2510 N. Red Hill Avenue, Suite 230, Santa Ana, California 92705
- --------------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(949) 622-4444
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
$.05 par value Common Stock 7,753,580 shares as of November 8, 1999
Exhibit Index appears on page 12 of 12 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3
B. Condensed Consolidated Statements of Operations for the three-month periods ended
September 30, 1999 and 1998 (Restated) 4
C. Condensed Consolidated Statements of Operations for the nine-month periods ended
September 30, 1999 and 1998 (Restated) 5
D. Condensed Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1999 and 1998 (Restated) 6
E. Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Part II: OTHER INFORMATION
Items 1-3 & 5. Of Part II have been omitted because they are not applicable with respect to the current --
reporting period.
Item 4. Submission of Matters to Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICRO GENERAL CORPORATION
(Registrant)
By: /s/ Dale W. Christensen
------------------------------------
Dale W. Christensen
Chief Financial Officer
(Principal Financial and Accounting Officer) Date: November 15, 1999
2
<PAGE> 3
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,413,612 $ 914,796
Trade accounts receivable, less allowance for doubtful
accounts of $1,847,356 in 1999 and $485,936 in 1998 .................. 8,923,326 1,835,968
Trade accounts receivable due from affiliates ........................... 7,282,222 4,350,790
Inventories, net ........................................................ 1,675,470 785,204
Prepaid expenses and other assets ....................................... 2,194,969 359,884
------------ ------------
Total current assets ................................................ 21,489,599 8,246,642
Notes receivable ............................................................. -- 29,850
Property and equipment, net .................................................. 6,231,559 3,321,005
Capitalized software development costs, less accumulated
amortization of $3,363,387 in 1999 and $2,794,275 in 1998 .................. 936,606 1,505,719
Cost in excess of net assets acquired, less accumulated amortization
of $2,745,373 in 1999 and $872,996 in 1998 ................................. 9,372,887 9,976,845
Other assets ................................................................. 284,833 --
------------ ------------
Total .............................................................. $ 38,315,484 $ 23,080,061
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses ................................... $ 13,691,739 $ 4,916,314
Income and other taxes payable .......................................... 57,328 138,647
Current portion of capital lease to affiliate ........................... 61,106 --
Deferred tax liabilities ................................................ 361,726 361,726
Deferred revenue ........................................................ -- 189,839
------------ ------------
Total current liabilities ........................................... 14,171,899 5,606,526
Capital lease payable, less current portion to affiliate ..................... 259,777 --
Amounts and notes payable to affiliates ...................................... 26,602,123 16,888,947
Note payable to officer ...................................................... 500,000 --
------------ ------------
Total liabilities ................................................... 41,533,799 22,495,473
------------ ------------
Stockholders' equity (deficiency):
Preferred stock, $.05 par value. Authorized 1,000,000 shares;
none issued and outstanding ........................................... -- --
Common stock, $.05 par value. Authorized 20,000,000 shares; issued
and outstanding 7,753,580 at September 30, 1999 and 7,546,666 shares at
December 31, 1998, respectively ....................................... 387,679 377,333
Additional paid-in capital .............................................. 6,958,804 6,357,608
Accumulated deficiency .................................................. (10,564,798) (6,150,353)
------------ ------------
Total stockholders' equity (deficiency) ............................. (3,218,315) 584,588
------------ ------------
$ 38,315,484 $ 23,080,061
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ -----------
(UNAUDITED)
(RESTATED)
<S> <C> <C>
Revenues:
Hardware revenues ...................................................... $ 2,790,281 $ 2,958,470
Software sales and maintenance revenues ................................ 1,860,615 969,143
Telecommunication service revenues ..................................... 19,787,895 841,347
Service and license revenues ........................................... 3,414,203 1,989,946
------------ -----------
Total revenues .................................................. 27,852,994 6,758,906
------------ -----------
Cost of sales:
Hardware cost of sales.................................................. 2,701,250 2,212,416
Software sales and maintenance cost of sales ........................... 1,239,019 893,334
Telecommunication service cost of sales ................................ 18,829,695 201,855
Service and license cost of sales ...................................... 2,649,136 1,009,006
------------ -----------
Total cost of sales ............................................. 25,419,100 4,316,611
------------ -----------
Gross profit .................................................... 2,433,894 2,442,295
Operating expenses:
Selling, general and administrative expenses ........................ 1,875,707 2,976,395
Amortization of cost in excess of net assets acquired and capitalized
software development costs ........................................ 819,492 263,385
------------ -----------
Total operating expenses ........................................ 2,695,199 3,239,780
------------ -----------
Operating loss .................................................. (261,305) (797,485)
Interest expense, net .................................................... (556,944) (264,589)
------------ -----------
Loss before income taxes ....................................... (818,249) (1,062,074)
Income tax expense ....................................................... -- --
------------ -----------
Net loss ........................................................ $ (818,249) $(1,062,074)
============ ===========
Loss per share:
Basic and diluted.................................................... $ (.11) $ (.16)
============ ===========
Number of shares used in per share computations:
Basic and diluted.................................................... 7,753,580 6,543,666
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
SEPTEMBER 30,
------------ ------------
1999 1998
------------ ------------
(UNAUDITED)
(RESTATED)
<S> <C> <C>
Revenues:
Hardware revenues ...................................................... $ 8,515,815 $ 8,873,084
Software sales and maintenance revenues ................................ 4,746,178 2,905,310
Telecommunication service revenues...................................... 49,159,131 1,700,353
Service and license revenues ........................................... 9,650,832 4,024,280
------------ ------------
Total revenues .................................................. 72,071,956 17,503,027
------------ ------------
Cost of sales:
Hardware cost of sales ................................................. 8,354,230 8,035,569
Software sales and maintenance cost of sales ........................... 4,981,040 2,416,561
Telecommunication service cost of sales ................................ 47,859,178 566,572
Service and license cost of sales ...................................... 6,412,722 2,065,010
------------ ------------
Total cost of sales ............................................. 67,607,170 13,083,712
------------ ------------
Gross profit .................................................... 4,464,786 4,419,315
------------ ------------
Operating expenses:
Selling, general and administrative expenses ........................ 5,437,626 4,825,067
Amortization of cost in excess of net assets acquired and capitalized
software development costs ........................................ 2,201,234 626,604
------------ ------------
Total operating expenses ........................................ 7,638,860 5,451,671
------------ ------------
Operating loss .................................................. (3,174,074) (1,032,356)
Interest expense, net .................................................... (1,236,371) (304,321)
------------ ------------
Loss before income taxes ........................................ (4,410,445) (1,336,677)
Income tax expense (benefit) ............................................. 4,000 (36,595)
------------ ------------
Net loss ........................................................ $ (4,414,445) $ (1,300,082)
============ ============
Loss per share:
Basic and diluted............................................... $ (.58) $ (.23)
============ ============
Number of shares used in per share computations:
Basic and diluted............................................. 7,656,945 5,589,687
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ -----------
(UNAUDITED)
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (4,414,445) $(1,300,082)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 3,137,897 714,025
Changes in assets and liabilities:
Trade accounts receivable ..................................... (7,087,358) 3,715,519
Inventories ................................................... (890,266) (1,835,822)
Prepaid expenses and other assets ............................. (1,835,085) (291,523)
Accounts payable and accrued expenses ......................... 7,894,606 (196,908)
Income and other taxes payable ................................ (81,319) 92,302
Deferred revenue .............................................. (189,839) (7,283)
Amounts due from affiliates ................................... (2,931,432) (3,570,594)
Other assets .................................................. (284,833) --
------------ -----------
Net cash used in operating activities ................ (6,682,074) (2,680,366)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment ............................... (3,285,678) (2,614,353)
Decrease in notes receivable ...................................... 29,850 31,776
Merger of Micro General and ACS ................................... -- 403,175
------------ -----------
Net cash used in investing activities ................ (3,255,828) (2,179,402)
Cash flows from financing activities:
Net increase in borrowings from affiliates ........................ 10,234,412 4,925,746
Principal payments on capital lease obligations ................... (21,236) --
Proceeds from exercise of stock options ........................... 223,542 --
------------ -----------
Net cash provided by financing activities ............ 10,436,718 4,925,746
------------ -----------
Net increase in cash and cash equivalents ............ 498,816 65,978
Cash and cash equivalents at beginning of period ....................... 914,796 830,784
------------ -----------
Cash and cash equivalents at end of period ............................. $ 1,413,612 $ 896,762
============ ===========
Supplemental cash flow information:
Income taxes paid ................................................. $ 60,000 $ --
============ ===========
Interest paid ..................................................... $ 108,698 $ 48,133
============ ===========
Noncash investing and financing activities:
Merger of Micro General and ACS ................................... $ -- $ 1,300,000
============ ===========
Acquisition of Interactive Associates, Inc. for common stock ...... $ 388,000 $ --
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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MICRO GENERAL CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Financial Statements
The financial information included in this report includes the accounts of Micro
General Corporation and its subsidiaries (collectively, the "Company") and has
been prepared in accordance with generally accepted accounting principles and
the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation, have been included. This report should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made in the 1998 condensed consolidated
financial statements to conform to classifications used in 1999.
(2) Description of Business
Historically, the operations of Micro General Corporation consisted of the
design, manufacture and sale of computerized parcel shipping systems, postal
scales and piece-count scales. As of September 30, 1999, the Company has closed
down the shipping and scales business and no longer generates revenues from
these business lines. Following the acquisitions of ACS Systems, Inc. ("ACS")
and LDExchange.com, Inc. ("LDExchange"), which are described below, the Company
shifted its primary focus to information technology and telecommunication
services.
On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI")
completed the merger of Micro General with ACS, a wholly-owned subsidiary of
FNFI. As a result of the merger, all of the outstanding shares of ACS were
exchanged for 4.6 million shares of Micro General common stock. The transaction
was valued at $1.3 million. Following the merger of Micro General and ACS,
FNFI owned approximately 81.4% of the common stock of the Company on an
undiluted basis. The transaction has been accounted for as a reverse merger,
i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary
through a merger with ACS, with Micro General as the legal surviving entity and
ACS as the surviving entity for accounting purposes. Therefore, the condensed
consolidated financial statements as of and for the quarter and nine months
ended September 30, 1998 have been restated to reflect the operations of ACS
prior to the merger. At September 30, 1999, FNFI owned approximately 69% of the
outstanding common stock of the Company.
ACS was founded in 1985 as a software company specializing in products for the
real estate industry, in particular, escrow software. ACS was acquired by FNFI
in April 1994, and was subsequently merged with the Company as described above.
ACS, through its various divisions, is currently a full-service enterprise
solutions provider that offers total voice, data and systems integration
solutions for small and medium sized businesses, primarily in the real estate
sector.
In addition, as a result of the acquisition of LDExchange, which closed on
November 17, 1998, the Company has been able to enter the international
telecommunications market, which complements the range of services offered by
ACS. LDExchange is an emerging multinational carrier focused primarily on the
international long distance market. LDExchange offers reliable, low cost
switched voice services on a wholesale basis, primarily to U.S. based long
distance carriers. The LDExchange purchase price was $3.1 million, payable $1.1
million in cash and $2.0 million in Company common stock (1,000,000 shares). The
acquisition was accounted for as a purchase.
The Company has other eCommerce applications under development. RealEC is a 50%
owned joint venture with Stewart Title that will be a Windows and Internet based
ordering and delivery system with an open, multivendor network offering products
and services supporting the real estate industry. Escrow.com is an eCommerce
solution under development that will provide fraud protection to both buyers and
sellers engaged in Internet based transactions. Escrow.com will initially offer
escrow services for Internet enabled auctions and classified transactions, will
offer shipping, authentication, appraisal and financing services, and will also
engage in master-merchant transaction services for all forms of portal and
Internet commerce.
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(3) Acquisition of Interactive Associates, Inc.
In March 1999, the Company acquired Interactive Associates, Inc.
("Interactive"), a privately held distributor of computer telephony hardware and
services. This acquisition provided for the purchase of 100% of the common stock
of Interactive in exchange for 100,000 shares of Micro General common stock
valued at $388,000. Interactive's business activities have been merged with
those of ACS. This acquisition has been accounted for using the purchase method.
The Company recorded goodwill in the amount of approximately $145,000, which is
being amortized over 5 years. The financial position and results of operations
of Interactive are not material to the Company.
(4) Segment Information
The Company's condensed consolidated financial statements as of and for the
quarter ended September 30, 1999 include three reportable segments.
<TABLE>
<CAPTION>
ACS LDEXCHANGE CORPORATE TOTAL
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total revenues........... $ 9,473,345 $ 18,379,649 $ -- $ 27,852,994
Operating profit (loss).. $ 760,755 $ (201,061) $ (820,999) $ (261,305)
Interest expense, net ... (340,402) (114,917) (101,625) (556,944)
------------ ------------ ----------- ------------
Loss before income taxes. $ 420,353 $ (315,978) $ (922,624) $ (818,249)
------------ ------------ ----------- ------------
Assets .................. $ 25,798,592 $ 6,999,528 $ 5,517,364 $ 38,315,484
============ ============ =========== ============
</TABLE>
The Company's condensed consolidated financial statements for the nine months
ended September 30, 1999 include three reportable segments.
<TABLE>
<CAPTION>
CORPORATE AND
POSTAGE METER
AND SCALE
ACS LDEXCHANGE DIVISION TOTAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenues............ $ 26,608,554 $ 44,476,591 $ 986,811 $ 72,071,956
Operating loss............ $ (871,959) $ (515,901) $(1,786,214) $ (3,174,074)
Interest expense, net .... (762,307) (131,689) (342,375) (1,236,371)
------------ ------------ ----------- ------------
Loss before income taxes.. $ 1,634,266) $ (647,590) $(2,128,589) $ (4,410,445)
============ ============ =========== ============
</TABLE>
(5) Pro Forma Information
Selected unaudited pro forma combined results of operations for the quarter
ended September 30, 1998, and for the nine months ended September 30, 1998
assuming the Micro General/ACS merger and the LDExchange acquisition occurred on
January 1, 1998, respectively, are presented as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ -------------------
<S> <C> <C>
Total revenues........... $ 6,758,906 $ 45,937,895
Net loss................. (1,062,074) (1,955,866)
Net loss per share basic
and diluted.... (.16) (.35)
</TABLE>
(6) Options
Under the Company's stock option plan, in the nine-months ended September 30,
1999, the Company granted options to acquire 1,520,333 shares at the then
current market price. Of the stock options granted, 1,119,011 shares are vested
and the remaining shares will vest over periods up to three years.
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors That May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
The reader should consult the risk factors listed from time to time in the
Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of
1933, as amended.
Results of Operations
Revenue
Revenues increased $21.1 million, or 310%, to $27.9 million in the quarter ended
September 30, 1999 from $6.8 million in the quarter ended September 30, 1998.
For the nine months ended September 30, 1999, revenue was $72.1 million, an
increase of $54.6 million or 312% over revenue of $17.5 million for the
nine-month period ended September 30, 1998. The increases in both the
three-month and nine-month periods are primarily a result of the acquisition of
LDExchange in November 1998 and continued growth in products and services
provided to both FNFI and others.
Gross Profit
In the three-month and nine-month periods ended September 30, 1999, gross profit
was essentially unchanged as compared to the three and nine-month periods ended
September 30, 1998. However, gross profit as a percentage of revenue declined to
9% in the three-months ended September 30, 1999 as compared to 36% in the same
1998 three-month period. Likewise, gross profit as a percentage of revenue
declined to 6% in the nine-months ended September 30, 1999 from 25% in the same
1998 nine-month period. This decrease results primarily from the addition of the
LDExchange revenues in 1999, which revenues have a lower gross profit than the
information technology and telecommunication businesses of ACS. Also, Micro
General results are included for the entire 1999 three and nine-month periods
but are only included in the 1998 results from the transaction date of May 14,
1998 through September 30, 1998, and also reflect the shutdown of the postage
and scale division in the 1999 second quarter.
Expenses
Selling, general and administrative expenses ("SG&A") decreased to $1.9 million
in the third quarter of 1999 from $3.0 million in the third quarter of 1998.
This decrease is attributed to the closing of the Micro General shipping and
scales businesses in the first months of 1999 and the resulting operating cost
savings that were realized in the 1999 third quarter. For the nine months ended
September 30, 1999, SG&A expenses increased to $5.4 million from $4.8 million in
the nine months ended September 30, 1998. The increase in 1999 SG&A expenses is
primarily attributable to the additional personnel, facilities, and other costs
assumed in the LDExchange and Micro General acquisitions during 1998, along
with the additional expenses incurred to support the growth of the business.
The amortization of cost in excess of net assets acquired and capitalized
software development costs is a function of the characteristics of the
intangible assets recorded during a particular period and the estimated useful
life of the intangible assets. Fluctuations in the amortization of cost in
excess of net assets acquired and capitalized software result from the amount,
mix and characteristics of the intangible assets recorded as well as the
circumstances surrounding the Company's estimate of the appropriate useful life.
During the three months ended September 30, 1999 and 1998, amortization of costs
in excess of net assets acquired and capitalized software development costs was
$819,000 and $263,000, respectively. During the nine months ended September 30,
1999 and 1998, amortization of costs was $2.2 million and $627,000,
respectively. The increase in the 1999 periods is primarily related to
amortizing the cost in excess of net assets acquired in connection with the May
1998 ACS transaction and the November 1998 LDExchange acquisition.
Interest expense, net, is related to the use of the Company's available working
capital, which is in the form of available cash and lines of credit. The year
over year increase in interest expense can be attributed to the increase in
average borrowings
9
<PAGE> 10
outstanding during the three and nine month periods ended September 30, 1999 as
compared to the similar three and nine month periods in 1998. Net interest
expense in the nine months ended September 30, 1999 was $1.2 million as compared
to $304,000 in the nine months ended September 30, 1998. The increase in
interest expense in the 1999 periods as compared to the 1998 periods is related
to funding the growth in the Company's business, which has included incurring
net losses, additions to property and equipment and growth in the Company's
receivables. In the most recent nine month period, increases in capital leases
payable, note payable to officer and borrowings on the Company's lines of credit
totaled $10.5 million.
Income tax expense (benefit) is recorded based on the amounts that the Company
estimates, based on the Company's taxation structure, will be due to Federal and
state taxation authorities. Micro General pays only minimum taxes based on
current operating results due to the fact that Micro General has not
historically generated earnings.
Liquidity and Capital Resources
The Company's current cash requirements include debt service, personnel and
other operating expenses, capital expenditures and capital for acquisitions and
expansion. Internally generated funds have been negative but fluctuate in a
pattern generally consistent with revenues. Since the Company has repositioned
itself as a result of the merger with ACS Systems, Inc. and the acquisition of
LDExchange, the revenue, and therefore, cash flow base has stabilized,
particularly as a result of the amount of revenues generated by affiliates. The
Company believes that as a result of its current revenue base and the
anticipated availability of funds in the form of additional lines of credit from
affiliates and non-affiliates, all cash requirements will be met for at least
the next twelve months.
The Company relies on FNFI as the primary source of capital to fund its
operations in the form of revenues generated by the Company related to products
and services provided to FNFI and as a source of funds via available financing
arrangements.
The Company has historically suffered losses and negative cash flows from
operations and continued to do so during the nine months ended September 30,
1999. In addition, the Company has an accumulated deficiency and a significant
amount of outstanding debt as of September 30, 1999. FNFI has represented that
it has the ability and intent to provide the Company with the cash necessary to
continue as a going concern for a period of at least twelve months following
September 30, 1999.
The Company must comply with certain affirmative and negative covenants related
to its outstanding debt and notes payable. The Company was in compliance with or
has received waivers related to these covenants.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not believe there have been any material changes in the market
risks since December 31, 1998, which would impact the fair value of certain
liabilities included in the condensed consolidated balance sheets. In addition,
if market interest rates were to change 10% from levels existing at September
30, 1999, the change in the market value would not be material to the Company's
financial condition.
Year 2000 Issues
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from
computer programs and computer hardware that utilize only two digits to identify
a year in the date field, rather than four digits. If such programs or hardware
are not modified or upgraded information systems could fail, lock up, or in
general fail to perform according to normal expectations. The Company has
implemented a program and committed both personnel and other resources to
determine the extent of potential Y2K issues. Included within the scope of this
program are systems used in title plants, title policy processing, escrow
production, claims processing, real estate related services, financial
management, human resources, payroll and infrastructure. In addition to a review
of internal systems, the Company has initiated formal communications with third
parties with which it does business in order to determine whether or not they
are Y2K compliant and the extent to which the Company may be vulnerable to third
parties' failure to become Y2K compliant. The Company continues the process of
identifying Y2K compliant issues in its systems, equipment and processes. The
Company is making changes to such systems, updating or replacing such equipment,
and modifying such processes to make them Y2K compliant.
The Company has developed a four phase program to become Y2K compliant. Phase I
is, "Plan Preparation and Identification of the Problem." This is a continuing
phase. Phase II is, "Plan Execution and Remediation." Phase III is, "Testing."
Phase IV is, "Maintaining Y2K Compliance." The Company believes that its systems
processes are now substantially Y2K compliant. The status of the Y2K
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<PAGE> 11
compliance program is monitored by senior management of the Company and by the
Audit Committee of the Company's Board of Directors. The costs of the Y2K
related efforts incurred to date have not been material, and the estimate of
remaining costs to be incurred is not considered to be material. Due to the
complexities of estimating the cost of modifying and maintaining applications to
be Y2K compliant and the difficulties in assessing third parties', including
various local governments upon which the Company relies upon to provide
title-related data, ability to become Y2K compliant, estimates may be subject to
change.
Management of the Company believes that its electronic data processing and
information systems are Y2K compliant; however, there can be no assurance that
all of the Company's systems will be Y2K compliant, or the costs to be Y2K
compliant will not exceed management's current expectations, or that the failure
of such systems to be Y2K compliant will not have a material adverse effect on
the Company's business. The Company believes that functions currently performed
with the assistance of electronic data processing equipment could be performed
manually or outsourced if certain systems were determined not to be Y2K
compliant on or after January 1, 2000.
The Company has substantially completed a contingency plan in the event that any
systems are not Y2K compliant.
This entire section, "Year 2000 Issues", is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
Part II: OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
On August 3, 1999, the Company held its Annual Meeting of Stockholders pursuant
to a Notice and Proxy Statement dated June 30, 1999. At the meeting,
stockholders elected William P. Foley, II (6,349,114 for and 7,808 against),
Patrick F. Stone (6,349,114 for and 7,808 against), John Snedegar (6,349,114 for
and 7,808 against), Richard Pickup, (6,349,114 for and 7,808 against), Dwayne M.
Walker (6,349,114 for and 7,808 against) and Carl A. Strunk (6,349,114 for and
7,808 against). The shareholders approved an amendment to the 1998 Employee
Stock Option Plan by a vote of 5,882,288 for, 11,068 against, and 25,624
abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None
11
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,143,612
<SECURITIES> 0
<RECEIVABLES> 18,052,904
<ALLOWANCES> 1,847,356
<INVENTORY> 1,675,470
<CURRENT-ASSETS> 21,489,599
<PP&E> 7,204,080
<DEPRECIATION> 972,521
<TOTAL-ASSETS> 38,315,484
<CURRENT-LIABILITIES> 14,171,899
<BONDS> 27,361,900
0
0
<COMMON> 387,679
<OTHER-SE> (3,605,994)
<TOTAL-LIABILITY-AND-EQUITY> 38,315,484
<SALES> 72,071,956
<TOTAL-REVENUES> 72,071,956
<CGS> 67,607,170
<TOTAL-COSTS> 7,638,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,236,371
<INCOME-PRETAX> (4,410,445)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,414,445)
<EPS-BASIC> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
