<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, 2000
Commission File Number 0-8358
MICRO GENERAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2621545
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2510 N. Red Hill Avenue, Suite 230, Santa Ana, California 92705
----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(949) 622-4444
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
$.05 par value Common Stock 13,213,507 shares as of November 6, 2000
Exhibit Index appears on page 13 of 13 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
B. Condensed Consolidated Statements of Operations for the
three-month periods ended September 30, 2000 and 1999 4
C. Condensed Consolidated Statements of Operations for the
nine-month periods ended September 30, 2000 and 1999 5
D. Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2000 and 1999 6
E. Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II: OTHER INFORMATION
Items 1-3 and 5. of Part II have been omitted because they are not
applicable with respect to the current reporting period
Item 4. Submission of Matters to Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
</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 14, 2000
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,
2000 1999
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 2,008,203 $ 1,400,874
Trade accounts receivable, less allowance for doubtful
accounts of $858,030 in 2000 and $2,265,601 in 1999 ........... 4,514,153 3,391,824
Trade accounts receivable due from affiliates ................... 10,010,335 3,020,908
Inventories ..................................................... 70,047 438,728
Prepaid expenses and other assets ............................... 1,902,721 1,594,600
------------ ------------
Total current assets ........................................ 18,505,459 9,846,934
Property and equipment, net ......................................... 10,667,544 7,038,858
Capitalized software development costs, less accumulated
amortization of $4,019,919 in 2000 and $3,540,854 in 1999 ......... 328,615 747,680
Cost in excess of net assets acquired, less accumulated
amortization of $5,140,388 in 2000 and $3,329,898 in 1999 ......... 7,374,347 8,570,704
Investment in TXMNet, Inc. .......................................... 1,660,893 --
Investment in joint venture ......................................... -- 638,938
------------ ------------
$ 38,536,858 $ 26,843,114
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................... $ 8,979,055 $ 5,796,031
Income and other taxes payable .................................. 223,416 252,545
Deferred tax liabilities ........................................ 361,726 361,726
Deferred revenue ................................................ -- 167,000
Current portion of capital leases with affiliate ................ 392,193 387,765
Notes payable ................................................... 4,938,099 --
------------ ------------
Total current liabilities ................................... 14,894,489 6,965,067
Amounts and notes payable to affiliates ............................. 5,265,408 5,265,408
Capital leases payable-long term .................................... 1,513,067 1,834,837
Notes payable ....................................................... 1,472,200 --
Other long term liabilities ......................................... 146,067 146,067
------------ ------------
Total liabilities ........................................... 23,291,231 14,211,379
Commitments and contingencies
Subsequent events
Stockholders' equity:
Preferred stock, $.05 par value. Authorized 1,000,000 shares;
none issued and outstanding ..................................... -- --
Common stock, $.05 par value. Authorized 20,000,000 shares;
issued and outstanding 13,196,100 at September 30, 2000 and
12,535,638 shares at December 31, 1999 .......................... 659,805 626,782
Additional paid-in capital ........................................ 28,357,709 25,301,745
Accumulated deficiency ............................................ (13,771,887) (13,296,792)
------------ ------------
Total stockholders' equity .................................. 15,245,627 12,631,735
------------ ------------
$ 38,536,858 $ 26,843,114
============ ============
</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
SEPTEMBER 30,
---------------------------------
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Hardware and software sales and maintenance revenues $ 3,705,581 $ 4,650,896
Telecommunication service revenues .................. 10,351,580 19,787,895
Service and license revenues ........................ 14,407,714 3,414,203
------------ ------------
Total revenues .............................. 28,464,875 27,852,994
------------ ------------
Cost of revenues:
Hardware, software and maintenance cost of revenues . 1,754,801 2,382,769
Telecommunication service cost of revenues .......... 9,505,712 18,829,695
Service and license cost of revenues ................ 8,963,204 1,981,636
------------ ------------
Total cost of revenues ...................... 20,223,717 23,194,100
------------ ------------
Gross profit ................................ 8,241,158 4,658,894
------------ ------------
Operating expenses:
Selling, general and administrative expenses .... 4,709,907 3,771,012
Depreciation and amortization of cost in excess
of net assets acquired and capitalized software
development costs ............................. 1,975,167 1,149,187
------------ ------------
Total operating expenses .................... 6,685,074 4,920,199
------------ ------------
Operating income (loss) ..................... 1,556,084 (261,305)
Interest expense, net ............................... (423,992) (556,944)
------------ ------------
Income (loss) before income taxes ........... 1,132,092 (818,249)
Income tax expense .................................. -- --
------------ ------------
Net income (loss) ........................... $ 1,132,092 $ (818,249)
============ ============
Income (loss) per share - basic ..................... $ .09 $ (.11)
============ ============
Income (loss) per share - diluted ................... $ .08 $ (.11)
============ ============
Number of shares used in per share computations -
Basic ............................................. 13,101,971 7,753,580
Diluted ........................................... 14,668,582 7,753,580
</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,
---------------------------------
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Hardware and software sales and maintenance revenues $ 12,418,765 $ 13,261,993
Telecommunication service revenues .................. 35,325,137 49,159,131
Service and license revenues ........................ 30,716,810 9,650,832
------------ ------------
Total revenues .............................. 78,460,712 72,071,956
------------ ------------
Cost of revenues:
Hardware, software and maintenance cost of revenues . 6,262,545 9,046,354
Telecommunication service cost of revenues .......... 33,079,503 47,046,478
Service and license cost of revenues ................ 19,962,695 5,011,156
------------ ------------
Total cost of revenues ...................... 59,304,743 61,103,988
------------ ------------
Gross profit ................................ 19,155,969 10,967,968
------------ ------------
Operating expenses:
Selling, general and administrative expenses .... 13,686,902 11,004,145
Depreciation and amortization of cost in excess
of net assets acquired and capitalized software
development costs ............................. 4,691,776 3,137,897
------------ ------------
Total operating expenses .................... 18,378,678 14,142,042
------------ ------------
Operating income (loss) ..................... 777,291 (3,174,074)
Joint venture loss .................................. (578,045) --
Interest expense, net ............................... (674,341) (1,236,371)
------------ ------------
Loss before income taxes .................... (475,095) (4,410,445)
Income tax expense .................................. -- 4,000
------------ ------------
Net loss .................................... $ (475,095) $ (4,414,445)
============ ============
Loss per share - basic and diluted .................. $ (.04) $ (.58)
============ ============
Number of shares used in per share computations -
basic and diluted ................................. 12,937,278 7,656,945
</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,
---------------------------------
2000 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $ (475,095) $ (4,414,445)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization ........................... 4,691,776 3,137,897
Provision for doubtful accounts ......................... 515,375 --
Joint venture loss ...................................... 578,045 --
Changes in assets and liabilities:
Trade accounts receivable ............................. (1,637,704) (7,087,358)
Inventories ........................................... 368,681 (890,266)
Prepaid expenses and other assets ..................... (308,121) (1,835,085)
Accounts payable and accrued expenses ................. 3,800,267 7,894,606
Income and other taxes payable ........................ (29,129) (81,319)
Deferred revenue ...................................... -- (189,839)
Customer deposits ..................................... (167,000) --
Amounts due from affiliates ........................... (6,989,427) (2,931,432)
Amounts due to affiliates ............................. -- (284,833)
----------- ------------
Net cash provided by (used in)
operating activities ............................. 347,668 (6,682,074)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment ....................... (3,240,479) (3,285,678)
Decrease in notes receivable .............................. -- 29,850
Investment in joint venture ............................... (1,450,000) --
Investment in TXMNet, Inc. ................................ (45,000) --
----------- ------------
Net cash used in investing activities .............. (4,735,479) (3,255,828)
----------- ------------
Cash flows from financing activities:
Net increase in borrowings - note payable ................. 3,700,000 10,234,412
Principal payments under capital leases ................... (317,342) (21,236)
Payment of interest due affiliates ........................ (617,243) --
Stock issues or exercise of stock options ................. 2,369,854 223,542
Principal payments on notes payable ....................... (140,129) --
----------- ------------
Net cash provided by financing activities .......... 4,995,140 10,436,718
----------- ------------
Net increase in cash and cash equivalents .......... 607,329 498,816
Cash and cash equivalents at beginning of period .............. 1,400,874 914,796
----------- ------------
Cash and cash equivalents at end of period .................... $ 2,008,203 $ 1,413,612
=========== ============
Supplemental cash flow information:
Income taxes paid ......................................... $ -- $ 60,000
=========== ============
Interest paid ............................................. $ 737,336 $ 108,698
=========== ============
Noncash investing and financing activities:
Acquisition of Interactive Associates, Inc.
for common stock ...................................... $ -- $ 388,000
=========== ============
Earnout payment to Interactive Associates, Inc.
principals for common stock ........................... $ 614,133 $ --
=========== ============
Investment in TXMNet, Inc. .............................. $ 1,615,893 $ --
=========== ============
Note Financing of hardware/software ..................... $ 2,850,428 $ --
=========== ============
</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, 1999.
Certain reclassifications have been made in the 1999 condensed consolidated
financial statements to conform to classifications used in 2000.
Basic earnings per share is based on the weighted-average number of shares
outstanding and excludes any dilutive effects of options and convertible
securities. Diluted earnings per share gives effect to assumed conversions of
potentially dilutive securities. All outstanding options and warrants have been
excluded from the calculations of diluted loss per share as their inclusion
would be antidilutive. The number of exercisable options and warrants
outstanding at September 30, 2000 was 2,127,876 and 587,000, respectively.
(2) Description of Business
Historically, the operations of Micro General Corporation consisted of the
design, manufacture and sale of computerized parcel shipping systems, postal
scales and piece-count scales. In 1999, the Company closed down the shipping and
scales divisions and no longer generates such revenues. 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. At September 30, 2000, FNFI owned
approximately 66% of the outstanding common stock of the Company and, along with
its affiliates, generated 56% of the Company's revenue for the 9 months ended
September 30, 2000 (32% for the nine month period ended September 30, 1999).
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. ACS offers a full range of information technology services, including
voice and data network design, implementation and management. ACS also provides
services in the areas of real estate industry applications, e-Commerce,
consulting services and telecommunications.
In addition, as a result of the acquisition of LDExchange.com, Inc., which
closed on November 17, 1998, the Company has been able to enter the
international telecommunications market, which complements the range of
telecommunications 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.
On May 5, 2000, the Company entered into an agreement to sell its wholly owned
subsidiary, LDExchange.com, Inc. The sales price is anticipated to be between
$9,175,000 and $15,000,000 depending upon various contingencies. The Company is
uncertain of the buyer's ability to perform under the purchase agreement and
there can be no assurance that the sale of LDExchange will be completed. The
Company believes that if this transaction is completed, it will enable the
Company to better focus on the development of its e-commerce initiatives.
7
<PAGE> 8
(3) Escrow.com
On October 1, 1999, Micro General entered into an Intellectual Property Transfer
Agreement that provided the financing to launch escrow.com as a new company.
Under the agreement, the Company sold the escrow.com name and trademark, the
escrow.com internet URL, a license for the Micro General proprietary escrow
trust accounting software, the Company's computer services provider business
unit and approximately $535,000 of related computer equipment. Under the terms
of the Intellectual Property Transfer Agreement, the Company received from
escrow.com a $4.5 million note with a term of seven years and an interest rate
of three percent. The Company also received a warrant giving the Company the
right to purchase 15.0 million shares of escrow.com common stock at a price of
$0.40 per share.
Escrow.com offers online escrow-related services designed to provide buyers and
sellers with a safe, secure and easy to use system for managing payment for and
delivery of products and services purchased via the Internet. As an internet
transaction services provider, escrow.com provides for the secure transmission
of funds between a buyer and seller by placing the funds in escrow, confirms and
verifies the receipt of merchandise by the buyer, and releases the funds from
escrow to the seller. While escrow.com could enable any Internet buy/sell
transaction, its primary focus will be in the business-to-business Internet
marketplace.
Because of the start-up nature of escrow.com, the Company has fully reserved the
$4.5 million note receivable on its consolidated balance sheet. The gain on the
sale of assets will be realized at such time that escrow.com has sufficient
funding in place to reasonably ensure the payment of the note. While the Company
has no equity interest in escrow.com at September 30, 2000, the 15.0 million
warrants give the Company the opportunity to acquire a substantial interest in
escrow.com. Escrow.com is incurring substantial losses and may need to raise
additional funds in order to continue its operations. The Company's potential
ownership in escrow.com may be substantially diluted if escrow.com issues
additional shares to raise the necessary capital.
As previously described, the Company has warrants that, upon their exercise,
will give the Company substantial ownership in escrow.com. In April 2000,
escrow.com completed a private placement in which it raised gross proceeds of
$30.0 million. As an inducement to invest, the Company assigned to two of the
investors 250,000 of its 15.0 million warrants in escrow.com. As a result of
this funding, escrow.com has 10,539,314 shares outstanding. Although escrow.com
has raised additional capital, those funds are not to be used for repayment of
the $4.5 million note receivable discussed above. Therefore, the note will
continue to be fully reserved until such time that escrow.com has sufficient
funding in place to reasonably ensure payment of the note. Assuming exercise of
the warrants, the Company would have a 58.3% ownership in escrow.com.
(4) TXMNet, Inc.
On May 19, 2000 Micro General entered into an Asset Transfer, Right of First
Refusal, and Stock Purchase Agreement ("Agreement") that provided the assets
necessary to launch TXMNet as a new company. Under the Agreement, the Company
sold TXMNet all software, trademarks, the website and all other intellectual
property related to the TXMNet business. In addition, the Company sold to TXMNet
its 50% ownership in the RealEC Joint Venture with Stewart Title. Under the
terms of the Agreement, the Company received from TXMNet 6,500,000 shares of
Series A non-voting convertible preferred stock. Each share of convertible stock
may be converted into one share of TXMNet common stock. The Company's investment
in TXMNet is recorded at $1,510,893, which was the book value of the RealEC
investment at the time it was transferred to TXMNet. In addition, over the next
three years the shares will yield dividends at a rate of 5% annually, which will
be payable, at the Company's option, in cash or in shares of additional Series A
non-voting convertible preferred stock. The Company does not presently have a
common stock ownership in TXMNet, however, assuming conversion of the non-voting
convertible preferred stock and the earning of the additional shares over the
next three years, the Company would have an 86% ownership in TXMNet.
TXMNet intends to be a fully integrated transaction management services company.
It will offer online real estate settlement products and services designed to
provide all parties in a real estate transaction with a complete and integrated
technology solution for electronically managing their transactions. The
Company's suite of services targets both residential and commercial real estate
transactions for both the realtor and lending communities.
TXMNet is a startup enterprise. In addition to the intellectual property and 50%
ownership in the RealEC Joint Venture, TXMNet has raised a total of $1,250,000.
TXMNet is incurring substantial losses as it is implementing its business plan,
and will need to raise substantial additional funds in order to continue its
operations. The Company's potential ownership in TXMNet may be substantially
diluted as TXMNet issues additional shares to raise the necessary capital.
8
<PAGE> 9
(5) Acquisition of Interactive Associates, Inc.
On March 22, 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 50,000 shares of Micro General common stock,
subject to certain conditions, including an earn out provision for up to an
additional 50,000 shares. 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.
In June 2000, an additional 42,354 shares of Micro General common stock were
issued under the earn out provisions of the Interactive acquisition agreement.
These shares were valued at $614,333.
(6) Segment Information
The Company's condensed consolidated financial statements as of and for the
quarters ended September 30, 2000 and 1999 include three reportable segments.
<TABLE>
<CAPTION>
INTRA-COMPANY
ACS LDEXCHANGE CORPORATE ELIMINATIONS TOTAL
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Total revenues .................. $ 18,113,295 $ 10,351,580 $ -- $ 28,464,875
Operating income (loss) ......... $ 3,962,275 $ (1,354,937) $ (1,051,254) $ 1,556,084
Interest expense (net) .......... (254,541) (98,571) (70,880) (423,992)
------------ ------------ ------------ ------------
Income (loss) before income taxes $ 3,707,734 $ (1,453,508) $ (1,122,134) $ 1,132,092
============ ============ ============ ============
Depreciation and amortization ... $ 522,689 $ 898,741 $ 553,737 $ 1,975,167
Total assets .................... $ 22,993,961 $ 11,060,114 $ 16,403,591 (11,920,808) $ 38,536,858
============ ============ ============ ============ ============
September 30, 1999:
Total revenues .................. $ 9,473,345 $ 18,379,649 $ -- $ 27,852,994
Operating income (loss) ......... $ 760,755 $ (201,061) $ (820,999) $ (261,305)
Interest expense (net) .......... (340,402) (114,917) (101,625) (556,944)
------------ ------------ ------------ ------------
Income (loss) before income taxes $ 420,353 $ (315,978) $ (922,624) $ (818,249)
============ ============ ============ ============
Depreciation and amortization ... $ 245,450 $ 64,987 $ 838,750 $ 1,149,187
Total assets .................... $ 25,798,592 $ 13,169,553 $ 5,517,364 (6,170,025) $ 38,315,484
============ ============ ============ =========== ============
</TABLE>
9
<PAGE> 10
The Company's condensed consolidated financial statements as of and for the nine
months ended September 30, 2000 and 1999 include three reportable segments.
<TABLE>
<CAPTION>
INTRA-COMPANY
ACS LDEXCHANGE CORPORATE ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
September 30, 2000:
Total revenues .................. $ 43,135,575 $ 35,325,137 $ -- $ 78,460,712
Operating income (loss) ......... $ 7,677,464 $ (3,753,871) $ (3,146,302) $ (777,291)
Joint venture loss .............. -- -- (578,045) (578,045)
Interest expense (net) .......... (444,473) (182,738) (47,130) (674,341)
------------ ------------ ------------ ------------
Income (loss) before income taxes $ 7,232,991 $ (3,936,609) $ (3,771,477) $ (475,095)
============ ============ ============ ============
Depreciation and amortization ... $ 1,316,572 $ 1,784,186 $ 1,591,018 $ 4,691,776
Total assets .................... $ 22,993,961 $ 11,060,114 $ 16,403,591 (11,920,808) $ 38,536,858
============ ============ ============ ============ ============
</TABLE>
And for quarter end September 30, 1999:
<TABLE>
<CAPTION>
INTRA-COMPANY
ACS LDEXCHANGE CORPORATE ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <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)
============ ============ ============ ============
Depreciation and amortization ... $ 835,379 $ 331,561 $ 1,970,957 $ 3,137,897
Total assets .................... $ 25,798,592 $ 13,169,553 $ 5,517,364 (6,170,025) $ 38,315,484
============ ============ ============ =========== ============
</TABLE>
(7) Options
Under the Company's stock option plan, in the nine-months ended September 30,
2000, the Company granted options to acquire 514,000 shares at the then current
market price. Of the stock options granted, 201,667 shares are vested and the
remaining 312,333 shares will vest over periods up to four years.
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.
10
<PAGE> 11
Results of Operations
Revenue
Revenues increased $612,000 or 2%, to $28.5 million in the quarter ended
September 30, 2000 from $27.9 million in the quarter ended September 30, 1999.
For the nine months ended September 30, 2000, revenue was $78.5 million, an
increase of $6.4 million or 9% over revenue of $72.1 million for the nine-month
period ended September 30, 1999. The increase is a result of an approximate
$21.1 million increase in the nine-month period in service and license revenues,
offset by an approximate $13.8 million decrease in telecommunication service
revenues. The increase in service and license revenues can be attributed to the
substantial additional business that has been directed to the Company by
Fidelity as a result of its Chicago Title acquisition. In April 2000, the
Company hired approximately 150 former Chicago Title information technology
employees, and at the same time entered into an agreement to provide information
technology services to Fidelity/Chicago Title. The Company anticipates that this
agreement will provide substantial additional revenues to the Company from
Fidelity/Chicago Title. The decrease in telecommunication service revenues in
the Company's subsidiary LDExchange resulted from the loss of several
international telecommunications services arrangements combined with a decision
by LDExchange to decrease the volumes of certain low margin international
traffic. The percentage of revenue generated from multiple service arrangements
with Fidelity National Financial, Inc. and affiliates was 56% for the nine
months ended September 30, 2000 versus 32% for the nine-month period ended
September 30, 1999.
Gross Profit
For the three months ended September 30, 2000, gross profit increased $3.6
million, or 77%, to $8.2 million (29% of revenue) as compared to gross profit of
$4.7 million (17% of revenue) in the comparable 1999 period. Gross profit in the
nine months ended September 30, 2000 was $19.2 million (24% of revenue), which
was an increase of $8.2 million, or 75%, from gross profit of $11 million (15%
of revenue) in the comparable 1999 period. Gross profit as a percentage of
revenue increased in both the three and nine-month periods due to the additional
service and license revenues in the third quarter. The gross profit from service
and license revenues was $5.4 million in the 2000 third quarter as compared to
$1.4 million in the 1999 third quarter. In addition, the lower margin
telecommunications revenues were 36% of total revenues in the three months ended
September 30, 2000, a decrease from being 71% of revenues in the comparable 1999
period. This change in revenue mix away from the lower margin telecommunications
revenue and into the higher margin service and license revenues will continue to
have a positive impact on the Company's gross profit.
Expenses
Selling, general and administrative expenses ("SG&A") increased to $4.7 million
in the third quarter of 2000 from $3.8 million in the third quarter of 1999.
SG&A expenses increased to $13.7 million from $11.3 million in the nine months
ended September 30, 2000 and 1999, respectively. The increase in SG&A expenses
in the 2000 periods was primarily caused by the hiring of approximately 150
former Chicago Title employees which caused a substantial increase in general
and administrative expenses related to those new employees.
Depreciation of property and equipment and amortization of cost in excess of net
assets acquired and capitalized software development costs is a function of the
characteristics of the tangible and intangible assets recorded during a
particular period and the estimated useful life of those assets. Fluctuations in
depreciation and amortization expense 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, 2000 and 1999, depreciation of property and
equipment and amortization of costs in excess of net assets acquired and
capitalized software development costs was $2 million and $1.2 million,
respectively. During the nine months ended September 30, 2000 and 1999,
depreciation and amortization was $4.7 million and $2.8 million, respectively.
The increase in the 2000 period results from the Company's determination in
mid-1999 to amortize all costs in excess of net assets acquired over 5 years,
rather than over the 5 to 15 year periods that had previously been used. In
addition, the Company's depreciable property and equipment increased from $7.2
million at September 30, 1999 to $14.2 million at September 30, 2000.
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. Interest
expense, net, decreased by $133,000 in the three months ended September 30,
2000, to $424,000 as compared with $557,000 in the three months ended September
30, 1999. This decrease results from the conversion of $18.0 million of debt
into equity in December 1999. At September 30, 2000, there is $11.7 million of
interest bearing debt outstanding as compared to $22.3 million that was
outstanding at September 30, 1999.
Income tax expense 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.
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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 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. In addition, in the
quarter ended September 30, 2000, the Company reported a profit of $1.1 million
as opposed to a loss of $818,000 in the previous years comparable quarter, and
compares favorably with the most recent quarter ended June 30, 2000 in which
the Company reported net income of $8,000. The Company believes that as a result
of its current revenue base, improved profitability, increased margins, the
anticipated availability of funds in the form of existing lines of credit and
the potential sale of LDExchange, all cash requirements will be met for at least
the next twelve months.
The Company has historically suffered losses and negative cash flows from
operations, and has relied on FNFI as the primary source of capital to fund its
operations in the form of revenues generated by the Company related to products
and services provided to FNFI, as a source of funds via available financing
arrangements, and as a guarantor of certain of the Company's lending
arrangements. In December 1999, three significant transactions occurred that
substantially improved both the Company's liquidity and its capital resources.
First, on December 15, 1999, $18.0 million of the Company's debt was converted
into common stock pursuant to a conversion election contained in the notes and
exercised by the note holders. The conversion of this debt caused an improvement
from a negative stockholders' equity to $12.6 million in stockholders' equity at
December 31, 1999. The conversion of this debt will also substantially reduce
the Company's debt service requirements in the coming year. Second, also on
December 15, 1999, the Company entered into a new $5.4 million five-year
convertible note with FNFI. During 1999, the Company had exceeded the borrowings
available under the FNFI note agreement. With the conversion of the $18.0
million of notes on December 15, 1999, the Company's borrowing arrangements no
longer existed. The Company negotiated this new note to address the amounts
borrowed in excess of the note limit. There are no other borrowings available or
contemplated between the Company and FNFI, with the exception of a $2.0 million
lease commitment from FNF Capital, Inc., a wholly owned subsidiary of FNFI. Such
leases will be used to finance anticipated equipment purchases by the Company in
2000. Also, on December 22, 1999, the Company entered into a one-year $5.0
million revolving line of credit with Imperial Bank. As of September 30, 2000
the Company has borrowed $3.7 million under this line of credit. Finally, the
Company has entered into a number of hardware and software financing
arrangements totaling $2.9 Million as of September 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
these covenants at September 30, 2000.
While the Company has historically experienced negative cash flow from
operations, the Company believes that its cash flow will improve significantly
in the remainder of 2000 as the result of several factors. First, the postage
meter and scale division, which used cash in 1999, has been phased out and the
Company is focusing its efforts on the higher margin technology business.
Second, LDExchange expended significant funds purchasing and installing
equipment, implementing its international direct arrangements and building the
revenue base. The Company believes that with these costs now behind it, and the
majority of the capital costs now completed, LDExchange should show significant
improvement in it's cash flow. Finally, the Company has hired approximately 150
employees from Chicago Title as a result of the FNFI acquisition of Chicago
Title on March 20, 2000. This new business is generating substantial new
revenues and profits for the Company. As a result of the above positive
developments, the Company believes that it will have sufficient cash and
borrowing resources to meet its operating and growth requirements.
While the Company believes it has funds on hand and funds available through
existing lines of credit sufficient to meet its projected needs for the next
twelve months, the Company also believes it may have the option of raising
additional funds through an offering of its common stock. If undertaken, the
proceeds from an offering would be used to pay down existing debt, finance the
development of potential new business opportunities and potential acquisitions,
and also for general working capital purposes. There can be no guarantee that
the Company will undertake an offering of its capital stock, or that if
undertaken it will be successful in raising additional funds.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not believe there have been any material changes in market
risks since December 31, 1999, 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, 2000, the change in the market value would not be material to the Company's
financial condition.
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<PAGE> 13
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 ("Y2K") issue 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, 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 will make any necessary changes to such systems, updating or replacing
such equipment, and modifying such processes to make them Y2K compliant.
The Company 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 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. These estimates may be
subject to change 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.
The Company has not experienced any Y2K compliance related issues to date.
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 are Y2K compliant, or 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. 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 July 20, 2000, the Company held its Annual Meeting of Stockholders pursuant
to a Notice and Proxy Statement dated June 2, 2000. At the meeting, stockholders
elected as directors William P. Foley II, Patrick F. Stone, John Snedegar,
Richard Pickup, Dwayne Walker, Carl A. Strunk, Bradley Inman and John McGraw.
The vote for each of the directors was 10,678,043 for and 11,674 against.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None
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