<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 June 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 7,756,604 shares as of August 09,1999
Exhibit Index appears on page 12 of 12 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
B. Condensed Consolidated Statements of Operations
for the three-month periods ended June 30, 1999
and 1998 (Restated) 4
C. Condensed Consolidated Statements of Operations
for the six-month periods ended June 30, 1999
and 1998 (Restated) 5
D. Condensed Consolidated Statements of Cash Flows
for the six-month periods ended June 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 Disclosure About Market Risk 10
Part II: OTHER INFORMATION
Items 1. - 5. Of Part II have been omitted because they are not applicable
with respect to the current reporting period. --
Item 6. Exhibits and Reports on Form 8-K 12
</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)
Date: August 13, 1999
By: /s/ Dale W. Christensen
--------------------------------------------
Dale W. Christensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
2
<PAGE> 3
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 3,893,787 $ 914,796
Trade accounts receivable, less allowance for doubtful
accounts of $1,612,044 in 1999 and $485,936 in 1998 .............. 6,520,417 1,835,968
Trade accounts receivable due from affiliates ...................... 5,972,350 4,350,790
Inventories, net ................................................... 1,575,487 785,204
Prepaid expenses and other assets .................................. 632,503 359,884
------------ ------------
Total current assets ........................................... 18,594,544 8,246,642
Notes receivable ........................................................ -- 29,850
Property and equipment, net ............................................. 5,132,296 3,321,005
Capitalized software development costs, less accumulated
amortization of $3,197,192 in 1999 and $2,794,275 in 1998 ............. 1,102,801 1,505,719
Other assets ............................................................ 151,960 0
Cost in excess of net assets acquired, less accumulated amortization
of $1,851,821 in 1999 and $872,996 in 1998 ............................ 10,116,440 9,976,845
------------ ------------
$ 35,098,041 $ 23,080,061
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses .............................. $ 12,697,672 $ 4,916,314
Income and other taxes payable ..................................... 57,328 138,647
Current portion of capital lease ................................... 62,472 0
Deferred tax liabilities ........................................... 361,726 361,726
Deferred revenue ................................................... 0 189,839
------------ ------------
Total current liabilities ...................................... 13,179,198 5,606,526
Capital lease payable, less current portion ............................. 198,760 0
Amounts and notes payable to affiliates ................................. 23,620,149 16,888,947
Note payable to officer.................................................. 500,000 --
------------ ------------
Total liabilities .............................................. 37,498,107 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 June 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 ............................................. (9,746,549) (6,150,353)
------------ ------------
Total stockholders' equity (deficiency) ........................ (2,400,066) 584,588
------------ ------------
$ 35,098,041 $ 23,080,061
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three month periods ended
June 30,
--------------------------------
1999 1998
------------ ------------
(Unaudited)
(Restated)
<S> <C> <C>
Hardware revenues ........................................................ $ 3,320,512 $ 4,406,447
Software sales and maintenance revenue.................................... 1,059,438 1,220,947
Telecommunication service revenues ....................................... 18,167,433 136,758
Service and license revenues ............................................. 2,359,104 1,189,456
------------ ------------
Total revenues .................................................. 24,906,487 6,953,608
------------ ------------
Hardware.................................................................. 2,988,699 3,965,803
Software sales and maintenance cost of sales.............................. 1,313,190 863,550
Telecommunication service cost of sales .................................. 18,014,264 (13,697)
Service and license cost of sales ........................................ 1,769,884 618,400
------------ ------------
Total cost of sales ............................................. 24,086,037 5,434,056
------------ ------------
Gross profit .................................................... 820,450 1,519,552
------------ ------------
Operating expenses:
Selling, general and administrative expenses ........................ 1,864,723 931,663
Amortization of cost in excess of net assets acquired and capitalized
software development costs ........................................ 695,591 187,348
------------ ------------
Total operating expenses ........................................ 2,560,314 1,119,011
------------ ------------
Operating income (loss) ......................................... (1,739,864) 400,541
Interest expense, net .................................................... (443,899) (42,375)
------------ ------------
Income (loss) before income taxes ............................... (2,183,763) 358,166
Income tax expense ....................................................... 3,200 212,435
------------ ------------
Net income (loss) ............................................... $ (2,186,963) $ 145,731
============ ============
Income (loss) per share:
Basic ............................................................... $ (.29) $ .03
============ ============
Diluted ............................................................. $ (.29 $ .03
============ ============
Number of shares used in per share computations:
Basic ............................................................... 7,647,172 5,603,970
============ ============
Diluted ............................................................. 7,647,172 5,823,136
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six month periods ended
June 30,
-----------------------------
1999 1998
------------ ------------
(Unaudited)
(Restated)
<S> <C> <C>
Hardware revenues ........................................................ $ 5,725,534 $ 5,914,614
Software sales and maintenance revenues .................................. 2,885,563 1,936,167
Telecommunication service revenues ....................................... 29,371,236 859,006
Service and license revenues ............................................. 6,236,629 2,034,334
------------ ------------
Total revenues .................................................. 44,218,962 10,744,121
------------ ------------
Hardware cost of sales ................................................... 5,652,980 5,823,153
Software sales and maintenance cost of sales.............................. 3,742,021 1,523,227
Telecommunication service cost of sales .................................. 29,029,483 364,717
Service and license cost of sales ........................................ 3,763,586 1,056,004
------------ ------------
Total cost of sales ............................................. 42,188,070 8,767,101
------------ ------------
Gross profit .................................................... 2,030,892 1,977,020
------------ ------------
Operating expenses:
Selling, general and administrative expenses ........................ 3,561,919 1,848,672
Amortization of cost in excess of net assets acquired and capitalized
software development costs ........................................ 1,381,742 363,219
------------ ------------
Total operating expenses ........................................ 4,943,661 2,211,891
------------ ------------
Operating loss .................................................. (2,912,769) (234,871)
Interest expense, net .................................................... (679,427) (39,732)
------------ ------------
Loss before income taxes ........................................ (3,592,196) (274,603)
Income tax expense (benefit) ............................................. 4,000 (36,595)
------------ ------------
Net loss ........................................................ $ (3,596,196) $ (238,008)
============ ============
Loss per share - basic and diluted ....................................... $ (.47) $ (.05)
============ ============
Number of shares used in per share computations - basic and diluted ...... 7,621,919 5,103,267
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six month periods ended
June 30,
---------------------------
1999 1998
------------ -----------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $(3,596,196) $ (238,008)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 1,742,189 417,629
Changes in assets and liabilities:
Trade accounts receivable ..................................... (4,684,449) 94,265
Inventories ................................................... (790,283) (1,739,165)
Prepaid expenses and other assets ............................. (272,619) (881,474)
Accounts payable and accrued expenses ......................... 7,050,538 805,534
Income and other taxes payable ................................ (81,319) 187,018
Deferred revenue .............................................. (189,839) (4,100)
Amounts due from affiliates ................................... (1,621,560) 1,249,154
Other assets .................................................. (151,960) --
----------- -----------
Net cash provided by (used in) operating activities .. (2,595,498) (109,147)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ............................... (1,910,105) (1,571,312)
Decrease in notes receivable ...................................... 29,850 31,776
Acquisition of Interactive Associates, Inc., net .................. 0 --
Capitalization of software development costs ...................... 0 --
Merger of Micro General and ACS ................................... 0 403,175
----------- -----------
Net cash used in investing activities ................ (1,880,255) (1,136,361)
----------- -----------
Cash flows from financing activities:
Net increase in borrowings from affiliates ........................ 7,231,202 1,649,251
Proceeds from exercise of stock options............................ 223,542 --
----------- ------------
Net cash provided by (used in) financing activities .. 7,454,744 1,649,251
----------- -----------
Net increase (decrease) in cash and cash equivalents . 2,978,991 403,743
Cash and cash equivalents at beginning of period ....................... 914,796 830,784
----------- -----------
Cash and cash equivalents at end of period ............................. $ 3,893,787 $ 1,234,527
=========== ===========
Supplemental cash flow information:
Income taxes paid ................................................. $ 60,000 $ --
=========== ===========
Interest paid ..................................................... $ 87,088 $ --
=========== ===========
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
<PAGE> 7
MICRO GENERAL CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Financial Statements
The financial information included in this report includes the accounts of Micro
General Corporation and its subsidiaries (collectively, the "Company") and has
been prepared in accordance with generally accepted accounting principles and
the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation, have been included. This report should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 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 June 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 appraised 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 six months ended
June 30, 1998 have been restated to reflect the operations of ACS prior to the
merger. At June 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.
(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 financial position and results of operations of Interactive are not
material to the Company.
(4) Investment in Joint Venture
The Company entered into a joint venture with Stewart Title to develop a
Windows- and Internet-based ordering and delivery system. RealEC will be an
open, multi-vendor, network offering products and services supporting the real
estate industry. The Company owns 50% of the joint venture.
7
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MICRO GENERAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Segment Information
The Company's condensed consolidated financial statements as of and for the
quarter ended June 30, 1999 include three reportable segments.
<TABLE>
<CAPTION>
CORPORATE AND
POSTAGE METER
AND SCALE
ACS LDEXCHANGE DIVISION TOTAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenue ......... $ 8,114,810 $ 16,706,510 $ 85,167 $ 24,906,487
============ ============ ============ ============
Operating profit (loss) $ (424,032) $ (514,271) $ (801,561) $ (1,739,864)
Interest expense, net.. (287,927) (16,772) (139,200) (443,899)
------------ ------------ ------------ ------------
Loss before income
taxes ............... $ (711,959) $ (531,043) $ (940,761) $ (2,183,763)
============ ============ ============ ============
Assets ................ $ 21,123,132 $ 7,592,246 $ 6,382,663 $ 35,098,041
============ ============ ============ ============
</TABLE>
The Company's condensed consolidated financial statements as of and for the six
months ended June 30, 1999 include three reportable segments.
<TABLE>
<CAPTION>
CORPORATE AND
POSTAGE METER
AND SCALE
ACS LDEXCHANGE DIVISION TOTAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenue ......... $ 17,135,209 $ 26,096,942 $ 986,811 $ 44,218,962
============ ============ ============ ============
Operating profit (loss) $ (1,632,714) $ (314,840) $ (965,215) $ (2,912,769)
Interest expense, net . (421,905) (16,772) (240,750) (679,427)
------------ ------------ ------------ ------------
Loss before income
taxes ............... $ (2,054,619) $ (331,612) $ (1,205,965) $ (3,592,196)
============ ============ ============ ============
Assets ................ $ 21,123,132 $ 7,592,246 $ 6,382,663 $ 35,098,041
============ ============ ============ ============
</TABLE>
(6) Pro Forma Information
Selected unaudited pro forma combined results of operations for the quarter
ended June 30, 1998, and for the six months ended June 30, 1998 assuming the
Micro General/ACS merger and the LDExchange acquisition occurred on
January 1, 1998, respectively, are presented as follows:
Quarter ended Six months ended
June 30, 1998 June 30, 1998
------------- ----------------
Total revenue $11,187,220 $18,084,901
Net profit (loss) (371,971) (1,137,617)
Profit (loss) per share
basic and diluted (.07) (.22)
8
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MICRO GENERAL CORPORATION
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 $18.0 million, or 258%, to $24.9 million in the quarter ended
June 30, 1999 from $7.0 million in the quarter ended June 30, 1998. For the six
months ended June 30, 1999, revenue was $44.2 million, an increase of $33.5
million or 312% over revenue of $10.7 million for the six-month period ended
June 30, 1998. The increases in both the three-month and six-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 months ended June 30, 1999, gross profit decreased $699,000, or
46%, to $820,000 (3% of revenue) as compared to a $1.5 million gross profit (22%
of revenue) in the comparable 1998 period. Gross profit in the six months ended
June 30, 1999 was nearly the same as in the comparable 1998 six-month period.
However, in 1999 the gross profit was down to 5% of revenue from the 1998 gross
profit which was 18% of revenue. Gross profit as a percentage of revenue
decreased in the three-month and six-month 1999 periods as compared to the
comparable 1998 periods primarily as a result of the LDExchange revenues being
added 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 six-month periods but are only
included in the 1998 results from the transaction date of May 14, 1998 through
June 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") increased to $1.9 million
in the second quarter of 1999 from $932,000 in the second quarter of 1998. For
the six months ended June 30, 1999, SG&A expenses increased to $3.6 million from
$1.8 million in the six months ended June 30, 1998. The increase in 1999 SG&A
expenses is primarily attributable to the additional personnel, facilities, and
other costs assumed in the LD Exchange and Micro General acquisitions, 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 June 30, 1999 and 1998, amortization of costs in
excess of net assets acquired and capitalized software development cost was
$696,000 and $187,000, respectively. During the six months ended June 30, 1999
and 1998, amortization was $1.4 million and $363,000, 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 income (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 fluctuation in interest income (expense) can be attributed to the
increase in average borrowings outstanding during the three and six month
periods ended June 30, 1999 as compared to the similar three and six month
periods in 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.
9
<PAGE> 10
MICRO GENERAL CORPORATION
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. The Company believes that all anticipated cash requirements will be
met from future lines of credit and additional availability from lines of credit
from affiliates. 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 six months ended June 30, 1999. In
addition, the Company has an accumulated deficiency and a significant amount of
outstanding debt as of June 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 June 30, 2000.
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.
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 is in the process of
identifying Y2K compliant issues in its systems, equipment and processes. The
Company is making changes to such systems, updating or replacing such equipment,
and modifying such processes to make them Y2K compliant.
The Company has developed a four phase program to become Y2K compliant. Phase I
is, "Plan Preparation and Identification of the Problem." This is an ongoing
phase that will continue beyond the year 2000 itself. Phase II is, "Plan
Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining
Y2K Compliance." The Company
10
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MICRO GENERAL CORPORATION
anticipates that its systems processes will be substantially Y2K compliant by
September 1999. The status of the Y2K compliance program is monitored by senior
management of the Company and by the Audit Committee of the Company's Board of
Directors. The costs of the Y2K related efforts incurred to date have not been
material, and the estimate of remaining costs to be incurred is not considered
to be material. Due to the complexities of estimating the cost of modifying
applications to become 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 will be Y2K compliant; however, there can be no assurance
that all of the Company's systems will be Y2K compliant, that the costs to be
Y2K compliant will not exceed management's current expectations, or that the
failure of such systems to be Y2K compliant will not have a material adverse
effect on the Company's business. The Company believes that functions currently
performed with the assistance of electronic data processing equipment could be
performed manually or outsourced if certain systems were determined not to be
Y2K compliant on or after January 1, 2000.
The Company has not yet completed a contingency plan in the event that any
systems are not Y2K compliant, but will do so once the Phase III process of its
compliance program is begun. We expect this contingency plan to be complete by
September 1999.
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.
11
<PAGE> 12
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
Current report on Form 8-K, dated April 14, 1999, related to the repositioning
of the Company's historical operations from the postage and scale industry into
the information and telecommunications industry. Also, as of April 14, 1999,
Thomas Pistilli is no longer a director and John Horbal is no longer Vice
President. In addition, John Snedegar became President and Chief Executive
Officer and Patrick Stone became Chairman of the Board.
Current report on Form 8-K, dated May 13, 1999, related to the resignation on
May 11, 1999 of Brooks Corbin as the Chief Financial Officer.
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,893,787
<SECURITIES> 0
<RECEIVABLES> 14,104,811
<ALLOWANCES> 1,612,044
<INVENTORY> 1,575,487
<CURRENT-ASSETS> 18,594,544
<PP&E> 5,785,520
<DEPRECIATION> 653,224
<TOTAL-ASSETS> 35,098,041
<CURRENT-LIABILITIES> 13,179,198
<BONDS> 24,318,909
0
0
<COMMON> 387,679
<OTHER-SE> (2,787,745)
<TOTAL-LIABILITY-AND-EQUITY> 35,098,041
<SALES> 44,218,962
<TOTAL-REVENUES> 44,218,962
<CGS> 42,188,070
<TOTAL-COSTS> 4,943,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 679,427
<INCOME-PRETAX> (3,592,196)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,596,196)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
