<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended: JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________.
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. Redhill 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 periods 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 issuers classes of
Common Stock, as of the latest practicable date.
$.05 par value Common Stock 6,549,666 shares as of August 14, 1998.
Exhibit Index appears on page 11 of 11 sequentially numbered pages.
<PAGE> 2
FORM 10-Q/A
QUARTERLY REPORT
QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997............... 3
B. Condensed Consolidated Statements of Operations for the three months ended
June 30, 1998 and June 30, 1997............................................................ 4
C. Condensed Consolidated Statements of Operations for the six months ended
June 30, 1998 and June 30, 1997............................................................ 5
D. Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and June 30, 1997............................................................ 6
E. Notes to Condensed Consolidated Financial Statements.......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
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
SIGNATURES
</TABLE>
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 Date: March 13, 2000
--------------------------------------------
Dale W. Christensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
2
<PAGE> 3
MICRO GENERAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,234,527 $ 830,784
Accounts and notes receivable, less allowance for
doubtful receivables and sales returns of $193,950
at 6/30/98 and $321,844 at 12/31/97 883,225 183,340
Trade accounts receivable due from affiliates -- 4,234,765
Inventories 1,867,699 505,949
Prepaid expenses and other assets 711,778 119,432
------------ ------------
Total current assets 4,697,229 5,874,270
------------ ------------
Equipment and improvements, net 1,993,345 704,504
Other assets, net 33,750 --
Notes receivable -- 31,776
Capitalized software development costs, less accumulated
amortization of $2,429,936 at 6/30/98 and $2,065,596
at 12/31/97 1,870,059 2,170,072
Intangibles, less accumulated amortization of $476,871 at
6/30/98 and $350,546 at 12/31/97 7,067,599 1,083,507
------------ ------------
$ 15,661,982 $ 9,864,129
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,654,189 $ 1,243,975
Income taxes payable 17,554 --
Deferred tax liability 524,098 361,726
Deferred revenue 15,486 --
Current portion of amounts and notes payable to affiliates 1,600,000 695,620
------------ ------------
Total current liabilities 4,811,327 2,301,321
Amounts and notes payable to affiliates 7,657,272 5,431,417
------------ ------------
Total liabilities 12,468,599 7,732,738
Shareholders' equity:
Preferred stock, $.05 par value; 1,000,000 shares
authorized no shares issued and outstanding
at 6/30/98 and 12/31/97 -- --
Common stock, $.05 par value; 10,000,000 shares
authorized 6,546,666 shares issued at
6/30/98 and 12/31/97 327,333 327,333
Additional paid-in capital 4,407,608 3,107,608
Accumulated deficit (1,541,558) (1,303,550)
------------ ------------
Total stockholders' equity 3,193,383 2,131,391
------------ ------------
$ 15,661,982 $ 9,864,129
============ ============
</TABLE>
The December 31, 1997 numbers were restated in the 1998 Form 10-K for
the first time.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
MICRO GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED JUNE 30,
----------------------------------
1998 1997
----------- -----------
(Restated) (Restated)
<S> <C> <C>
Revenues:
Software sales and maintenance $ 1,220,947 $ 619,891
Hardware 4,406,447 2,162,009
Service and license 1,189,456 535,180
Telecommunication services 136,758 -
----------- -----------
Total revenues 6,953,608 3,317,080
----------- -----------
Cost of sales:
Software sales and maintenance 863,550 483,940
Hardware 3,965,803 1,687,320
Service and license 618,400 416,654
Telecommunication services (13,697) --
----------- -----------
Total cost of sales 5,434,056 2,587,914
----------- -----------
Gross profit 1,519,552 729,166
----------- -----------
Operating expenses:
Selling, general and administrative 931,663 622,446
Amortization of goodwill and software development
costs 187,348 215,310
----------- -----------
Total operating expenses 1,119,011 837,756
----------- -----------
Operating income (loss) 400,541 (108,590)
Interest income (expense), net (42,375) 3,229
----------- -----------
Earnings (loss) before income taxes 358,166 (105,361)
Income tax provision (benefit) 212,435 (41,408)
----------- -----------
Net earnings (loss) $ 145,731 $ (63,953)
=========== ===========
Income (loss) per share:
Basic $ .03 $ (.01)
=========== ===========
Diluted $ .03 $ (.01)
=========== ===========
Number of shares used in per share computations:
Basic 5,603,970 4,597,000
=========== ===========
Diluted 5,823,136 4,597,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
MICRO GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED JUNE 30,
-----------------------------------
1998 1997
------------ ------------
(Restated) (Restated)
<S> <C> <C>
Revenues:
Software sales and maintenance $ 1,936,167 $ 1,173,947
Hardware 5,914,614 3,814,445
Service and license 2,034,334 893,861
Telecommunication services 859,006 --
------------ ------------
Total revenues 10,744,121 5,882,253
------------ ------------
Cost of sales:
Software sales and maintenance 1,523,227 905,035
Hardware 5,823,153 2,932,313
Service and License 1,056,004 687,826
Telecommunication services 364,717
------------ ------------
Total cost of sales 8,767,101 4,525,174
------------ ------------
Gross profit 1,977,020 1,357,079
------------ ------------
Operating expenses:
Selling, general and administrative 1,848,672 1,159,652
Amortization of goodwill and software development
costs 363,219 363,014
------------ ------------
Total operating expenses 2,211,891 1,522,666
------------ ------------
Operating loss (274,871) (165,587)
Interest income (expense), net (39,732) 5,404
------------ ------------
Loss before income taxes (274,603) (160,183)
Income tax (benefit) (36,595) (76,844)
------------ ------------
Net loss $ (238,008) $ (83,339)
============ ============
Loss per share:
Basic $ (.05) $ (.02)
============ ============
Diluted $ (.05) $ (.02)
============ ============
Number of shares used in per share computations:
Basic 5,103,267 4,597,000
============ ============
Diluted 5,103,267 4,597,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
MICRO GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED JUNE 30,
--------------------------------
1998 1997
----------- -----------
(Restated) (Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (238,008) $ (83,339)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 545,075 363,014
Change in assets and liabilities:
Trade accounts receivable (568,027) (330,385)
Inventories (991,750) (116,704)
Prepaid expenses and other assets (626,096) 28,167
Accounts payable and accrued expenses 805,534 (438,075)
Deferred revenue (4,100) --
Taxes payable 187,018 --
----------- -----------
Total adjustments (652,346) (493,983)
----------- -----------
Net cash provided by (used in) in operating activities (890,754) (577,322)
----------- -----------
Cash flows used in investing activities:
Purchase of equipment and improvements (1,343,251) --
(Increase) decrease in notes receivable 31,776 (39,673)
Capitalization of software development costs (64,327) (354,024)
Merger of Micro General Corporation and ACS 403,175 --
----------- -----------
Net cash used in investing activities (972,627) (393,697)
----------- -----------
Cash flows from financing activities:
Net increase in borrowings from affiliates 2,266,724 1,318,860
----------- -----------
Net cash provided by financing activities 2,266,724 1,318,860
----------- -----------
Net increase in cash 403,743 347,841
Cash - beginning of period 830,784 --
----------- -----------
Cash - end of period $ 1,234,527 $ 347,841
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 23,750 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash transactions:
Merger of Micro General Corporation and ACS $ 1,300,000
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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,
1997 and the Company's Current Report on Form 8-K dated July 27, 1998.
The accompanying financial statements have been restated from those included
in the Company's original filing on Form 10-Q for the quarterly period ended
June 30, 1998. The restatement was the result of a correction of the accounting
method used to account for the merger of the Company and ACS. In the original
filing, the Company incorrectly accounted for the merger as an acquisition of
ACS, rather than a reverse merger (see note 2). Below are selected summary
restated results compared to amounts originally reported.
<TABLE>
<CAPTION>
3 months
as originally 3 months
reported as restated
------------- -----------
<S> <C> <C>
Revenue $ 4,372,672 $ 6,953,608
Net income (Loss) (481,838) 145,731
Earnings (loss per
Share (0.11) 0.03
Total Assets 17,918,590 15,661,982
Shareholders' Equity 5,449,991 3,193,383
</TABLE>
<TABLE>
<CAPTION>
6 months
as originally 6 months
reported as restated
------------- -----------
<S> <C> <C>
Revenue $ 5,406,483 $10,744,121
Net income (Loss) (390,476) (238,008)
Earnings (loss) per
Share (0.12) (0.05)
Total Assets 17,918,590 15,661,982
Shareholders' Equity 5,449,991 3,193,383
</TABLE>
DESCRIPTION OF BUSINESS
Historically, the operations of the Company consisted of the design,
manufacture and sale of computerized parcel shipping systems, postal scales and
piece-count scales. These operations are currently performed through the
Company's postage meter and scale division.
NOTE 2. ACQUISITIONS
On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI")
completed the merger of Micro General Corporation with ACS Systems, Inc.
("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
Corporation common stock. The transaction was valued at $1.3 million. Following
the merger of Micro General Corporation 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 Corporation has been
acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with
Micro General Corporation 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 and June
30, 1997 have been restated to reflect the operations of ACS prior to the
merger.
7
<PAGE> 8
ACS, a wholly-owned subsidiary of the Company, was founded in 1985 as an
escrow software development company. ACS was acquired by FNFI in April 1994 and
subsequently merged into the Company on May 14, 1998 for 4.6 million shares of
the Company's common stock. Approximately 86% of the revenue generated by ACS is
derived from multiple servicing arrangements with FNFI and its subsidiaries
whereby ACS provides comprehensive electronic data processing systems support,
including selling computer hardware and software products and developing
integrated title and escrow computer applications for FNFI's direct title
operations and agency network.
In addition to these services, ACS provides products and services to FNFI
and unaffiliated customers, including telecommunications hardware and long
distance reselling, technical services, consulting services, Internet access and
services and computer hardware and systems software.
Pro forma results assuming the acquisition of ACS had occurred on
January 1, 1998, and January 1, 1997, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Revenue $ 11,899,915 $ 7,191,775
============ ===========
Net loss $ (394,909) $ (500,027)
============ ===========
Net loss per share - basic and diluted (1) $ (0.06) $ (0.11)
============ ===========
Weighted average shares outstanding -
basic and diluted (1) 6,549,666 4,597,000
============ ===========
</TABLE>
- ---------------
(1) Earnings per share on a diluted basis is anti-dilutive given that the
Company had a net loss for the period presented; therefore basic and diluted
shares and earnings per share are equal.
NOTE 3. RELATED PARTY TRANSACTIONS
On May 14, 1998, in connection with the Company's acquisition of ACS, a
$5.0 million line of credit facility was established between the Company and
Fidelity National Title Company, a subsidiary of FNFI. Under the terms of
the agreement, accrued interest shall be payable quarterly with any unpaid
balance, including principle and accrued interest, due and payable on May
14, 2000. Interest accrues at a rate of 9% per annum.
As described in Note 1, the primary source of revenue for both ACS and
the Company is fees resulting from sales and services to FNFI and
subsidiaries, an affiliate. Revenues generated from the sales and services
to affiliates during the three and six-month periods ended June 30, 1998
were 338,000 and $5,356,000, which represents 77.0% and 77.6% of total
revenue, respectively.
Included in notes payable and long-term debt at June 30, 1998 is
$450,000 and $1,000,000, respectively, due to Cal West Service Corporation,
a subsidiary of FNFI. Also included in notes payable and long-term debt at
June 30, 1998 is $900,000 and $2,000,000, respectively, due to Dito Caree
L.P. Holding, an affiliate.
NOTE 4.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for public
business enterprises to report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement supercedes FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. SFAS 131 requires, among other items, that a public business
enterprise report a measure of segment profit or loss, certain specific
revenue and expense items, segment assets, information about the revenues
derived from the enterprise's products or services and major customers. SFAS
131 also requires that the enterprise report descriptive information about
the way that the operating segments were determined and the products and
services provided by the operating segments. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated. SFAS 131 need not be applied to interim financial statements in
the initial year of its application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application. Management
has not determined whether the adoption of SFAS 131 will have a material
impact on the Company's financial reporting.
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 1923 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 and other information disclosed in the Company's
reports on Forms 10-Q, 10-K and filings under the Securities Act of 1933, as
amended.
9
<PAGE> 10
Results of Operations
The following discussion and analysis reflects the results of operations
for the Company for the three and six-month periods ended June 30, 1998 and
1997. As discussed in Note 2, the merger of the Company and ACS on May 14,
1998 has been accounted for as a reverse acquisition. Therefore, the 1997
financial statements have been restated to reflect the ACS operations and
included in the second quarter and six-month periods ended June 30, 1998 is
47 days of operations of Micro General Corporation. Due to the merger with
ACS, results of operations may differ substantially when comparing 1998
periods with 1997 periods.
The following table presents information regarding the components of
revenues and expenses for the Company on a historical basis by division:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------------------------------------------------
POSTAL
DIVISION ACS TOTAL ACS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 99,000 $6,855,000 $6,954,000 $3,317,000
Cost of sales 112,000 5,322,000 5,434,000 2,588,000
---------- ---------- ---------- ----------
Gross profit (loss) (13,000) 1,533,000 1,520,000 729,000
Operating expenses 166,000 953,000 1,119,000 837,000
Interest expense
(income), net 43,000 (1,000) 42,000 (3,000)
Income tax provision
(benefit) -- 213,000 213,000 (41,000)
---------- ---------- ---------- -----------
Net loss $ (222,000) $ 368,000 $ 146,000 $ (64,000)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
---------------------------------------- -------------
POSTAL
DIVISION ACS TOTAL ACS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 99,000 $10,645,000 $10,744,000 $ 5,882,000
Cost of sales 112,000 8,655,000 8,767,000 4,525,000
----------- ----------- ----------- -----------
Gross profit (loss) (13,000) 1,990,000 1,977,000 1,357,000
Operating expenses 166,000 2,046,000 2,212,000 1,523,000
Interest expense
(income), net 43,000 (3,000) 40,000 (6,000)
Income tax benefit
-- (37,000) (37,000) (77,000)
----------- ------------ ------------ ------------
Net loss $ (222,000) $ (16,000) $ (238,000) $ (83,000)
=========== =========== =========== ===========
</TABLE>
(1) The Micro General Corporation results are included in the Company's
historical financial statements for 47 days during the second quarter of
1998 and excluded entirely from 1997 results.
Total revenues for the quarter ended June 30, 1998 increased 110% to
$6,954,000 from $3,317,000 for the second quarter of 1997. Total revenues
for the six months ended June 30, 1998 increased 83% to $10,744,000 from
$5,882,000 for the comparable 1997 period. The ACS contribution for the
three and six-month periods ended June 30, 1998 was $6,855,000 or 98.6%, and
$10,645,000 or 99.1% of total revenues. ACS sales and services to FNFI have
grown substantially. In addition, the Company began offering
telecommunications services and has grown that business from nothing in 1997
to $137,000 in the three months ended June 30, 1998 (2.0% of total
revenues), and to $859,000 in the six months ended June 30, 1998 (8.0% of
total revenues). In addition, sales growth was across all product lines. In
the three months, ended June 30, 1998, software and maintenance revenue
increased 97%, hardware revenue grew 104% and service and license revenue
was up 112% as compared to the comparable 1997 period. For the six months
ended June 30, 1998, software and maintenance revenue increased 65%,
hardware revenue grew 55% and service and license revenue was up 128% when
compared to the similar 1997 period. Postal product sales were consistent in
the quarter over quarter comparison.
Cost of sales for the second quarter of 1998 increased 110% to
$5,434,000 from $2,588,000 in the 1997 second quarter. For the six months
ended June 30, 1998 cost of sales increased to $8,767,000, a 94% increase
from $4,525,000 for the comparable 1997 period. Included in cost of sales
for the three and six-month periods ended June 30, 1998 is $5,322,000, or
97.9% and $8,655,000 or 98.7% of the total cost of sales, respectively,
relating to the operations of ACS. See Note 2. The increases in the 1998
cost of sales as compared to the 1997 cost of sales is directly related to a
proportional growth in the Company's revenues.
10
<PAGE> 11
Operating expenses for the second quarter of 1998 increased to
$1,119,000, an increase of $281,000, or 34%, from $838,000 in the 1997
second quarter. For the six-month period ended June 30, 1998 operating
expenses were $2,212,000, an increase of $689,000, or 45% over operating
expenses of $1,523,000 for the comparable 1997 period. The increase in 1998
operating expenses as compared to 1997 operating expenses results from the
significant revenue growth in 1998 and the resulting increases in corporate
infrastructure. In addition, the Company began an expanded sales and
marketing effort in an attempt to begin increasing revenues from
non-affiliated companies.
Interest expense, net of interest income, incurred by the Company
relates to notes payable, long-term debt and a note to an affiliate. See
Note 3. Interest expense for the second quarter of 1998 increased to $42,000
from no interest expense in the 1997 second quarter. For the six months
ended June 1998, interest expense increased to $40,000 from no interest
expense in the same 1997 period. The increase in interest expense for the
three and six-month periods ended June 30, 1998, as compared to the same
1997 periods reflects the increase in debt balances during 1998, which
result from increases in borrowing under the Company's credit facility (See
Note 3), and also the inclusion of Micro General Corporation that began to
be reported using the reverse acquisition accounting treatment as of May 14,
1998. The interest rates on the various financing agreements are between 9%
and 9.5% depending on convertibility features and warrants.
Liquidity and Capital Resources
The Company's cash requirements include debt service, operating expenses
and potential acquisitions. The Company believes that all anticipated cash
requirements will be met from internally generated funds and through
existing credit facilities with affiliates. Cash used in operating
activities exceeded cash provided by operating activities by $890,000 for
the six months ended June 30, 1998, which compares favorably with cash used
in operating activities exceeding cash provided by operating activities of
$577,000 for the six months ended June 30, 1997. Management believes that
short-term modifications of existing affiliate credit facilities will enable
the Company to expand its business relationships with unaffiliated third
parties and expects the Company to generate cash flows sufficient to support
its future operations.
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
servicing customer obligations, information technology products and
services, telecommunications services, the postage meter and scale division,
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 is developing 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 anticipates that its systems
processes will be substantially Y2K compliant by July 1999. The status of
the Y2K compliance program is monitored by senior management of the Company
and by 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', ability to
become Y2K compliant, estimates may be subject to change.
11
<PAGE> 12
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 complaint, 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 July 1999.
The 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits (listed by numbers corresponding to the Exhibit Table of Item
601 of Regulation S-K):
11. Computation of earnings (loss) per share is not provided as the
calculation can be clearly determined from the material contained in
Item 1 of Part I.
27. Financial Data Schedule
b. Current Reports on Form 8-K: Current Report on Form 8-K, dated July 27,
1998, relating to the merger of a wholly-owned subsidiary of Micro
General Corporation into ACS Systems, Inc. on May 14, 1998.
12
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