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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 March 31, 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 13,005,237 shares as of May 10, 2000
Exhibit Index appears on page 11 of 11 sequentially numbered pages.
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
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Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
B. Condensed Consolidated Statements of Operations for the three-month
periods ended March 31, 2000 and 1999 4
C. Condensed Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 2000 and 1999 5
D. Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 10
</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 Date: May 15, 2000
--------------------------------------------
Dale W. Christensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 981,738 $ 1,400,874
Trade accounts receivable, less allowance for doubtful
accounts of $609,898 in 2000 and $ 2,265,601 in 1999 ..... 4,926,560 3,391,824
Trade accounts receivable due from affiliates ............... 6,071,418 3,020,908
Inventories ................................................. 315,326 438,728
Prepaid expenses and other assets ........................... 1,055,330 1,594,600
------------ ------------
Total current assets .................................... 13,350,372 9,846,934
Property and equipment, net ..................................... 7,729,302 7,038,858
Capitalized software development costs, less accumulated
amortization of $3,729,779 in 2000 and $3,540,854 in 1999 ..... 558,755 747,680
Cost in excess of net assets acquired, less accumulated
amortization of $3,917,425 in 2000 and $3,329,898 in 1999 ..... 7,983,177 8,570,704
Investment in joint venture ..................................... 352,549 638,938
------------ ------------
$ 29,974,155 $ 26,843,114
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................... $ 6,416,546 $ 5,796,031
Income and other taxes payable .............................. 168,388 252,545
Deferred tax liabilities .................................... 361,726 361,726
Deferred revenue ............................................ 847,961 167,000
Note payable ................................................ 2,200,000 --
Current portion of capital leases with affiliate ............ 367,820 387,765
------------ ------------
Total current liabilities ............................... 10,362,441 6,965,067
Capital leases with affiliates .................................. 1,720,473 1,834,837
Amounts and notes payable to affiliates ......................... 5,265,408 5,265,408
Other long term liabilities ..................................... 146,067 146,067
------------ ------------
Total liabilities ....................................... 17,494,389 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 12,983,085 at March 31, 2000 and
12,535,638 shares at December 31, 1999................... 649,154 626,782
Additional paid-in capital .................................. 26,742,788 25,301,745
Accumulated deficiency ...................................... (14,912,176) (13,296,792)
------------ ------------
Total stockholders' equity .............................. 12,479,766 12,631,735
------------ ------------
$ 29,974,155 $ 26,843,114
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three month periods ended
March 31,
------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Hardware and software sales and maintenance revenues ........... $ 3,814,974 $ 4,231,147
Telecommunication service revenues ............................. 12,677,613 11,203,803
Service and license revenues ................................... 4,046,827 3,877,525
------------ ------------
Total revenues ......................................... 20,539,414 19,312,475
------------ ------------
Cost of Sales:
Hardware, software and maintenance cost of sales ............... 1,802,020 4,093,112
Telecommunication service cost of sales ........................ 11,613,275 10,202,519
Service and license cost of sales .............................. 3,018,356 1,993,702
------------ ------------
Total cost of sales .................................... 16,433,651 16,289,333
------------ ------------
Gross profit ........................................... 4,105,763 3,023,142
------------ ------------
Operating expenses:
Selling, general and administrative expenses ............... 4,084,580 3,302,926
Depreciation and amortization of cost in excess of net
assets acquired and capitalized software development costs 1,259,631 893,121
------------ ------------
Total operating expenses ............................... 5,344,211 4,196,047
------------ ------------
Operating loss ......................................... (1,238,448) (1,172,905)
Joint venture loss ............................................. (286,389) --
Interest expense, net .......................................... (90,547) (235,528)
------------ ------------
Loss before income taxes ............................... (1,615,384) (1,408,433)
Income tax expense.......... ................................... -- 800
------------ ------------
Net loss ............................................... $ (1,615,384) $ (1,409,233)
============ ============
Loss per share - basic and diluted ............................. $ (.13) $ (.19)
============ ============
Number of shares used in per share computations -
basic and diluted ............................................ 12,709,884 7,563,000
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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MICRO GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three month periods ended
March 31,
----------------------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $(1,615,384) $(1,409,233)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................... 1,259,631 893,121
Provision for doubtful accounts......................... 84,070 124,255
Joint venture-RealEC .................................... 286,389 --
Changes in assets and liabilities:
Trade accounts receivable ........................... (1,618,806) (2,316,837)
Inventories ......................................... 123,402 (221,758)
Prepaid expenses and other assets ................... 539,270 (231,567)
Accounts payable and accrued expenses ............... 620,515 4,437,603
Income and other taxes payable ...................... (84,157) (21,319)
Deferred revenue..................................... 680,961 (175,699)
Amounts due from affiliates ......................... (3,050,510) (7,071,582)
----------- -----------
Net cash used in operating activities ........ (2,774,619) (5,993,016)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ..................... (1,173,623) (476,391)
Decrease in notes receivable ............................ -- 29,850
Acquisition of Interactive Associates, Inc., net ........ -- 1,054
Capitalization of software development costs ............ -- (572,326)
----------- -----------
Net cash used in investing activities ........ (1,173,623) (1,017,813)
----------- -----------
Cash flows from financing activities:
Amounts and notes payable to affiliate .................. -- 6,926,524
Net increase in borrowings - credit line ................ 2,200,000 --
Principal payments under capital leases ................. (134,309) --
Exercise of stock options ............................... 1,463,415 --
----------- -----------
Net cash provided by financing activities .... 3,529,106 6,926,524
----------- -----------
Net decrease in cash and cash equivalents .... (419,136) (84,305)
Cash and cash equivalents at beginning of period ............ 1,400,874 914,796
----------- -----------
Cash and cash equivalents at end of period .................. $ 981,738 $ 830,491
=========== ===========
Supplemental cash flow information:
Income taxes paid ....................................... $ -- $ 60,000
=========== ===========
Interest paid ........................................... $ 688,362 $ 87,083
=========== ===========
Noncash investing and financing activities:
Acquisition of Interactive Associates, Inc. for common
stock ............................................... $ -- $ 194,000
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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MICRO GENERAL CORPORATION & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) Basis of Financial Statements
The financial information included in this report includes the accounts of Micro
General Corporation and its subsidiaries (collectively, the "Company") and has
been prepared in accordance with generally accepted accounting principles and
the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation, have been included. This report should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 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.
(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 March 31, 2000, 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. 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, 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 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,
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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 March 31, 2000, the 15.0 million
warrants give the Company the opportunity to acquire a substantial interest in
escrow.com. At March 31, 2000, escrow.com had 4,353,780 shares outstanding.
Assuming exercise of the warrants, the Company would have a 77.5% ownership in
escrow.com. Escrow.com is incurring substantial losses and will need to raise
substantial additional funds in order to continue its operations. The Company's
potential ownership in escrow.com may be substantially diluted as escrow.com
issues additional shares to raise the necessary capital. See Note 7 --
Subsequent Events.
The Company also owns 50% of a joint venture with Stewart Title, which will be a
Windows and Internet based ordering and delivery system with an open,
multivendor network offering products and services supporting the real estate
industry.
(3) 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.
(4) Segment Information
The Company's condensed consolidated financial statements as of and for the
quarters ended March 31, 2000 and 1999 include three reportable segments.
<TABLE>
<CAPTION>
ACS LDEXCHANGE CORPORATE TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
March 31, 2000:
Total revenues ................... $ 7,983,682 $ 12,555,732 $ -- $ 20,539,414
Operating profit (loss) .......... $ 386,595 $ (919,726) $ (705,317) $ (1,238,448)
Joint Venture profit (loss) ...... -- -- (286,389) (286,389)
Interest expense (net) .......... (30,387) (83,910) 23,750 (90,547)
------------ ------------ ------------ ------------
Income (loss) before income taxes $ 356,208 $ (1,003,636) $ (967,956) $ (1,615,384)
Depreciation and amortization .... $ 418,922 $ 326,379 $ 514,370 $ 1,259,631
Total assets...................... $ 9,988,022 $ 17,950,230 $ 2,035,903 $ 29,974,155
============ ============ ============ ============
March 31, 1999:
Total revenues.................... $ 9,020,399 $ 9,390,432 $ 901,644 $ 19,312,475
Operating profit (loss)........... $ (168,993) $ 199,430 $ (1,203,342) $ (1,172,905)
Interest expense (net)............ (101,550) -- (133,978) (235,528)
------------ ------------ ------------ ------------
Income (loss) before income taxes. $ (270,543) $ 199,430 $ (1,337,320) $ (1,408,433)
Depreciation and amortization..... $ 120,100 $ 46,128 $ 726,893 $ 893,121
Total assets...................... $ 23,295,284 $ 3,196,491 $ 6,540,510 $ 33,032,285
============ ============ ============ ============
</TABLE>
(5) Options
Under the Company's stock option plan, in the three-months ended March 31, 2000,
the Company granted options to acquire 388,500 shares at the then current market
price. Of the stock options granted, 200,000 shares are vested and the remaining
188,500 shares will vest over periods up to three years.
(6) Subsequent Events
As previously described in Note 2, 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 one of the
investors 200,000 of its 15.0 million warrants in escrow.com. As a result of
this funding, at April 27, 2000 Escrow.com had 10,317,512 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 in note 2
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.
On May 5, 2000, the Company entered into an agreement to sell its wholly owned
subsidiary, LDExchange.com, Inc. The agreement is subject to a number of
contingencies, including receipt of appropriate regulatory approvals, and the
sales price is anticipated to be between $9,175,000 and $15,000,000 depending
upon various other contingencies. The Company believes the successful completion
of this transaction will enable it to better focus on the development of its
e-commerce initiatives.
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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 $1.2 million, or 6%, to $ 20.5 million in the quarter ended
March 31, 2000 from $19.3 million in the quarter ended March 31, 1999. This
increase is primarily a result of growth of $1.5 million or a 13% increase in
the Company's international telecommunication service revenues and growth of
$200,000 or a 4% increase in service and license revenues. These increases were
partially offset by a decrease of $400,000 or a 10% decrease in hardware and
software sales and maintenance revenues. This decrease is attributed to the
October 1999 sale of the Company's computer services provider business unit to
escrow.com.
Gross Profit
Gross profit in the three months ended March 31, 2000 was $4.1 million, an
increase of $1.1 million over the gross profit of $3.0 million in the three
months ended March 31, 1999. This increase comes from a substantial increase in
gross profit from hardware and software sales and maintenance revenues, which in
the 2000 period was $2.0 million versus $100,000 in the 1999 period. The 1999
period was negatively impacted by the postage and scale meter businesses, which
were phased out in the 1999 first quarter.
Expenses
Selling, general and administrative expenses ("SG&A") increased to $4.1 million
in the first quarter of 2000 from $3.3 million in the first quarter of 1999. The
majority of this increase was caused by a substantial increase in SG&A in the
Company's LDExhange business unit. LDExchange employee headcount and other
infrastructure costs increased significantly due to the Company's expansion into
the international direct business during 1999.
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 March 31, 2000 and 1999, depreciation of property and
equipment and amortization of costs in excess of net assets acquired and
capitalized software development costs was $1,260,000 and $893,000,
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 $4,110,047 at March 31, 1999 to $9,303,465 at March 31, 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 $145,000 in the three months ended March 31, 2000, to
$91,000 as compared with $236,000 in the three months ended march 31, 1999. This
decrease results from the conversion of $18.0 million of debt into equity in
December 1999. At March 31, 2000, there is $9.5 million of interest bearing debt
outstanding as compared to $23.8 million that was outstanding at March 31, 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.
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
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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. The Company believes that as a result of its current revenue
base and the anticipated availability of funds in the form of existing lines of
credit, 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 $12.5 million in stockholders' equity at
March 31, 2000. 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 lease will be used to
finance anticipated equipment purchases by the Company in 2000. Finally, on
December 22, 1999, the Company entered into a one-year $5.0 million revolving
line of credit with Imperial Bank. As of March 31, 2000, the Company has
borrowed $2.2 million under this line of credit.
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 March 31, 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 on building
the revenue base. The Company believes that with these costs now behind it, and
the majority of the capital costs now completed, year 2000 will show significant
improvement in the LDExchange cash flow. In addition, on May 5, 2000, the
Company entered into an agreement to sell LDExchange. See Footnote 6 --
Subsequent Events. The majority of the sales price will be paid in cash.
Finally, the Company is hiring approximately 150 employees from Chicago Title as
a result of the FNFI acquisition of Chicago Title on March 20, 2000. This new
business is expected to generate 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 the 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 March 31,
2000, the change in the market value would not be material to the Company's
financial condition.
Year 2000 Issues
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 ("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
9
<PAGE> 10
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None
10
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