-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KCgDuuLpgmbiNE63FJB8pF9IFu8I00N072DM7hQXSHz/f+BmxxvsKlkbn8/ezTx+ 36ihlYvvfuo2uaK83x9Tgw== 0000892569-99-000157.txt : 19990202 0000892569-99-000157.hdr.sgml : 19990202 ACCESSION NUMBER: 0000892569-99-000157 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990129 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO GENERAL CORP CENTRAL INDEX KEY: 0000067383 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 952621545 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-08358 FILM NUMBER: 99518554 BUSINESS ADDRESS: STREET 1: 2510 N. REDHILL STREET 2: SUITE 230 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 949 622-4444 MAIL ADDRESS: STREET 1: 14711 BENTLEY CIRCLE CITY: TUSTIN STATE: CA ZIP: 927807226 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 8-K/A 1 FORM 8-K AMENDMENT #1 DATED JANUARY 29, 1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A NO. 1 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: January 29, 1999 MICRO GENERAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 0-8358 95-2621545 -------- ------ ---------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification Number) 2510 North Red Hill, Suite 230, Santa Ana, California 92750 (Address of principal executive offices) (949) 622-4444 (Registrant's telephone number, including area code) 2 Item 2. Acquisition or Disposition of Assets On November 17, 1998, Micro General Corporation, ("Micro General" or the "Company") acquired LD Exchange.com, Inc, ("LDX") for $1,100,000 in cash and 1,000,000 shares of Micro General common stock. LDX became a wholly-owned subsidiary of the Company. "Safe Harbor" Statements under the Private Securities Litigation Reform Act of 1995: Statements which are not historical facts contained in this release are forward looking statements that involve risks and uncertainties, and results could vary materially from the descriptions contained herein and other risks as may be detailed in the Company's Securities and Exchange Commission filings. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Business Acquired. The following financial statements of LDX are included in this Current Report:
PAGE ---- Independent Auditors' Report........................................................................ F-1 Balance Sheet as of December 31, 1997............................................................... F-2 Statement of Operations for the period January 15, 1997 (inception) to December 31, 1997............ F-3 Statement of Stockholders' Equity for the period January 15, 1997 (inception) to December 31, 1997.. F-4 Statement of Cash Flows for the period January 15, 1997 (inception) to December 31, 1997............ F-5 Notes to Financial Statements....................................................................... F-6
(b) Pro Forma Financial Information. The following unaudited pro forma combined condensed financial information is based upon the historical financial statements of the Company and has been prepared to illustrate the effects of the acquisition of LDX. The unaudited pro forma combined condensed balance sheet as of September 30, 1998 gives effect to the LDX acquisition, as if the transaction had been completed on September 30, 1998 and was prepared based upon the balance sheet of the Company as of September 30, 1998. The unaudited pro forma combined condensed statements of operations for the year ended December 31, 1997 and the 9 month period ended September 30, 1998 give effect to the transaction described above as if the transaction had been completed at the beginning of each period presented. The unaudited pro forma combined condensed statements of operations for the year ended December 31, 1997 were prepared based upon the historical financial statements of the Company for the year ended December 31, 1997 and the historical financial statements of LDX for the period January 15, 1997 (inception) to December 31, 1997. The unaudited pro forma combined condensed statements of operations for the 9 month period ended September 30, 1998 were prepared based upon the unaudited financial statements of the Company for the 9 month period ended September 30, 1998 and the unaudited financial statements of LDX for the 9 month period ended September 30, 1998. The unaudited pro forma combined condensed financial information is provided for comparative purposes only and is not indicative of the results of operations or financial position of the combined companies that would have occurred had the acquisition occurred at the beginning of the period presented or on the date indicated, nor is it indicative of future operating results or financial position. The unaudited pro forma adjustments are based upon currently available information and upon certain assumptions that management of the Company believes are reasonable under the circumstances. The unaudited pro forma combined condensed financial information and the related notes thereto should be read in conjunction with the Company's financial statements and the related notes, included in the Company's 1997 Form 10-K and 1998 third quarter Form 10-Q, and the financial statements of LDX which are listed in item 7(a) above. The LDX financial information 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. Net cash provided by operating activities for LDX for the 9 months ended September 30, 1998 was $1,189,295, net cash used in investing activities was $11,701, and there was no cash provided or used in financing activities. The LDX acquisition will be accounted for using the purchase method of accounting. Accordingly, the Company's cost to acquire LDX will be allocated to the assets acquired and liabilities assumed according to their estimated fair values as of the date of the LDX acquisition. 2 3 MICRO GENERAL CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET As of September 30, 1998
As of September 30, 1998 --------------------------------------------------------------------- Combined Micro General LD Exchange.com Pro Forma Micro General Corporation Inc. Adjustments LDX ------------- --------------- ------------ ------------- ASSETS Current Assets: Cash and cash equivalents $ 896,762 1,481,533 (1,012,000) (A) 1,366,295 Accounts and notes receivable, net 829,689 672,750 0 1,502,439 Inventories 2,711,771 0 0 2,711,771 Prepaid expenses and other assets 410,955 61,764 0 472,719 ------------ ------------ ------------ ------------ Total current assets 4,849,177 2,216,047 (1,012,000) 6,053,224 Equipment and improvements, net 3,058,531 22,747 0 3,081,278 Capitalized software, net 3,567,879 0 0 3,567,879 Intangible assets, net 6,379,836 0 2,825,106 (D) 9,204,942 ------------ ------------ ------------ ------------ $ 17,855,423 2,238,794 1,813,106 21,907,323 ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,651,747 1,516,389 88,000 (A) 3,256,136 Income taxes payable (77,161) 35,000 0 (42,161) Deferred tax liability 524,097 0 0 524,097 Deferred revenue 12,303 0 0 12,303 Current portion of long-term debt with affiliates 2,350,001 0 0 2,350,001 Accounts payable to affiliates 1,901,241 0 0 1,901,241 Customer retainers 0 412,511 0 412,511 ------------ ------------ ------------ ------------ Total current liabilities 6,362,228 1,963,900 88,000 8,414,128 Long-term debt with affiliates 2,000,000 0 0 2,000,000 Note payable due to affiliate 5,009,211 0 0 5,009,211 ------------ ------------ ------------ ------------ Shareholders' equity: Preferred stock, $.05 par value; 1,000,000 shares 0 0 0 0 authorized, no shares issued and outstanding at September 30, 1998 Common stock, $.05 par value; 10,000,000 shares 327,483 170 49,830 (A)/(B) 377,483 authorized, 6,549,666 shares issued and outstanding at September 30, 1998 and 7,549,666 pro forma shares issued and outstanding at September 30, 1998 Additional paid-in capital 10,920,658 270,151 1,679,849 (A)/(B) 12,870,658 Retained earnings (accumulated deficiency) (6,764,157) 4,573 (4,573) (B) (6,764,157) ------------ ------------ ------------ ------------ 4,483,984 274,894 1,725,106 6,483,984 ------------ ------------ ------------ ------------ $ 17,855,423 2,238,794 1,813,106 21,907,323 ============ ============ ============ ============
See Notes to Unaudited Pro Forma Combined Condensed Financial Information. 3 4 MICRO GENERAL CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 1998
For the Nine Months Ended September 30, 1998 ------------------------------------------------------------------------------------------------- Combined Micro General ACS Systems Pro Forma LD Exchange.com Pro Forma Micro General Corporation Inc. Adjustments Inc. Adjustments ACS, LDX ------------- ------------ ------------ --------------- ------------ ------------- Revenues: Postal product sales $ 605,037 0 0 0 0 605,037 Postal service and rate changes 823,334 0 0 0 0 823,334 Software sales and maintenance 1,586,545 1,231,809 0 0 0 2,818,354 Hardware sales and maintenance 5,591,032 3,298,243 0 0 0 8,889,275 Consulting revenue 1,545,713 803,407 0 0 0 2,349,120 Servicing revenue 774,706 466,174 0 0 0 1,240,880 Telecommunication service fees 1,004,405 690,950 0 16,096,516 0 17,791,871 Other operating revenue 236,234 2,053 0 0 0 238,287 ------------ ------------ ------------ ------------ ------------ ------------ Total revenues 12,167,006 6,492,636 0 16,096,516 0 34,756,158 Cost of sales: Postal products 659,759 0 0 0 0 659,759 Postal service and rate changes 222,046 0 0 0 0 222,046 Hardware and software 4,816,961 2,519,416 0 0 0 7,336,377 Direct cost of service 0 0 0 15,609,524 0 15,609,524 ------------ ------------ ------------ ------------ ------------ ------------ Total cost of sales 5,698,766 2,519,416 0 15,609,524 0 23,827,706 Operating expenses: Selling, general and administrative 7,040,376 3,765,170 0 350,289 0 11,155,835 Engineering and development 122,812 0 0 0 0 122,812 Amortization of goodwill and software development costs 273,569 271,168 101,385 (H) 0 423,765 (E) 1,069,887 ------------ ------------ ------------ ------------ ------------ ------------ Total operating expenses 7,436,757 4,036,338 101,385 350,289 423,765 12,348,534 ------------ ------------ ------------ ------------ ------------ ------------ Operating profit (loss) (968,517) (63,118) (101,385) 136,703 (423,765) (1,420,082) Interest income (expense) (466,791) 3,529 0 400 0 (462,862) ------------ ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes (1,435,308) (59,589) (101,385) 137,103 (423,765) (1,882,944) Provision for (benefit from) income taxes (78,825) (54,149) 0 35,000 0 (97,974) ------------ ------------ ------------ ------------ ------------ ------------ Net earnings (loss) $ (1,356,483) (5,440) (101,385) 102,103 (423,765) (1,784,970) ============ ============ ============ ============ ============ ============ Basic loss per share $ (0.32) (0.24) ============ ============ Weighted average shares outstanding - basic basis 4,291,791 7,549,666 ============ ============ Diluted loss per share $ (0.32) (0.24) ============ ============ Weighted average shares outstanding - diluted basis 4,291,791 7,549,666 ============ ============
See Notes to Unaudited Pro Forma Combined Condensed Financial Information 4 5 MICRO GENERAL CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS For the year ended December 31, 1997
For the year ended December 31, 1997 -------------------------------------------------------------------------------------------------- Combined Micro General ACS Systems Pro Forma LD Exchange.com Pro Forma Micro General Corporation Inc. Adjustments Inc. Adjustments ACS, LDX ------------- ----------- ----------- --------------- ----------- ------------- Revenues: Postal product sales $ 672,049 0 0 0 0 672,049 Postal service and rate changes 1,102,002 0 0 0 0 1,102,002 Software sales and maintenance 0 2,448,089 0 0 0 2,448,089 Hardware sales and maintenance 0 7,784,282 0 0 0 7,784,282 Consulting revenue 0 1,665,077 0 0 0 1,665,077 Servicing revenue 0 1,046,770 0 0 0 1,046,770 Telecommunication service fee 0 862,814 0 1,451,213 0 2,314,027 Other operating revenue 0 16,602 0 0 0 16,602 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues 1,774,051 13,823,634 0 1,451,213 0 17,048,898 Cost of sales: Postal products 1,141,026 0 0 0 0 1,141,026 Postal service and rate changes 385,316 0 0 0 0 385,316 Hardware and software 0 6,861,483 0 0 0 6,861,483 Direct costs of service 0 0 0 1,430,850 0 1,430,850 ----------- ----------- ----------- ----------- ----------- ----------- Total cost of sales 1,526,342 6,861,483 0 1,430,850 0 9,818,675 Operating expenses: Selling, general and administrative 1,313,650 6,443,074 0 118,243 0 7,874,967 Engineering and development 266,242 0 0 0 0 266,242 Amortization of goodwill and software development costs 0 808,274 270,360 (H) 0 541,478 (E) 1,620,112 ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses 1,579,892 7,251,348 270,360 118,243 541,478 9,761,321 ----------- ----------- ----------- ----------- ----------- ----------- Operating profit (loss) (1,332,183) (289,197) (270,360) (97,880) (541,478) (2,531,098) Interest income (expense) (192,377) 15,130 0 350 0 (176,897) ----------- ----------- ----------- ----------- ----------- ----------- Earnings (loss) before income taxes (1,524,560) (274,067) (270,360) (97,530) (541,478) (2,707,995) Provision for (benefit from) income taxes 800 (64,126) 0 0 0 (63,326) ----------- ----------- ----------- ----------- ----------- ----------- Net earnings (loss) $(1,525,360) (209,941) (270,360) (97,530) (541,478) (2,644,669) =========== =========== =========== =========== =========== =========== Basic loss per share $ (0.78) (0.35) =========== =========== Weighted average shares outstanding - basic basis 1,949,563 7,549,666 =========== =========== Diluted loss per share $ (0.78) (0.35) =========== =========== Weighted average shares outstanding - diluted basis 1,949,563 7,549,666 =========== ===========
See Notes to Unaudited Pro Forma Combined Condensed Financial Information 5 6 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION A. The unaudited pro forma combined condensed balance sheet as of September 30, 1998 has been prepared to reflect the LDX acquisition by the Company for an aggregate purchase price of $3,100,000. The total purchase price was paid by $1,100,000 in cash and by issuing 1 million shares of Company common stock, $.05 par value, valued at $2.00 per share. B. The unaudited pro forma combined condensed balance sheet has been adjusted to eliminate the stockholders' equity of LDX. C. The unaudited pro forma combined condensed statement of operations for the year ended December 31, 1997 includes the period January 15, 1997 (inception) to December 31, 1997 for which LDX was in operation. D. The intangible assets amount reflects the excess consideration paid over the fair value of the net assets acquired. The intangible assets are to be amortized over 5 years. E. The amortization expense related to the intangible assets for the period January 15, 1997 (inception) to December 31, 1997 and for the 9 months ended September 30, 1998 were $541,478 and $423,765, respectively. F. Net loss per share on a basic and diluted basis gives effect to the issuance of 1 million shares of common stock of the Company. G. Certain reclassifications have been made to the unaudited pro forma combined condensed financial information in order to conform the LDX presentation to that of the Company. H. Reflects the impact of the acquisition of ACS Systems, Inc. ("ACS") on May 15,1998, as though the acquisition had occurred as of the beginning of the period reflected. Refer to Form 8-K/A dated July 27, 1998. (c) Exhibits. Exhibit Number 23.1 Consent of KPMG Peat Marwick, LLP 6 7 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 hereunto duly authorized. MICRO GENERAL CORPORATION Date: January 29, 1999 By: /s/ BROOKS A. CORBIN ------------------------------------- Brooks A. Corbin Senior Vice President and Chief Financial Officer 7 8 INDEX TO FINANCIAL STATEMENTS FOR LD EXCHANGE.COM, INC.
PAGE ---- Independent Auditors' Report....................................................................... F-1 Balance Sheet as of December 31, 1997.............................................................. F-2 Statement of Operations for the period January 15, 1997 (inception) to December 31, 1997........... F-3 Statement of Stockholders' Equity for the period January 15, 1997 (inception) to December 31, 1997.............................................................. F-4 Statement of Cash Flows for the period January 15, 1997 (inception) to December 31, 1997........... F-5 Notes to Financial Statements...................................................................... F-6
8 9 INDEPENDENT AUDITORS' REPORT The Board of Directors LD Exchange.com, Inc.: We have audited the accompanying balance sheet of LD Exchange.com, Inc. as of December 31, 1997 and the related statements of operations, stockholders' equity and cash flows for the period January 15, 1997 (inception) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LD Exchange.com, Inc. as of December 31, 1997 and the results of their operations and their cash flows for the period January 15, 1997 (inception) to December 31, 1997 in conformity with generally accepted accounting principles. Orange County, California January 15, 1999 F-1 10 LD EXCHANGE.COM, INC. Balance Sheet December 31, 1997 ASSETS Current assets: Cash and cash equivalents $ 303,939 Accounts receivable 4,557 Prepaid expenses and other current assets 28,001 --------- Total current assets 336,497 Property and equipment, net 18,900 --------- $ 355,397 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 121,067 Customer retainers 61,549 --------- Total current liabilities 182,616 Stockholders' equity : Common stock, $ 0.001 par value; 10,000,000 shares authorized, 170,454 shares issued and outstanding 170 Additional paid-in capital 270,141 Accumulated deficiency (97,530) --------- Total stockholders' equity 172,781 Commitments and contingencies Subsequent event --------- $ 355,397 =========
See accompanying notes to financial statements. F-2 11 LD EXCHANGE.COM, INC. Statement of Operations January 15, 1997 (inception) to December 31, 1997 Telecommunication service fees $ 1,451,213 Direct costs of service 1,430,850 ----------- Gross profit 20,363 ----------- Operating expenses: Selling, general and administrative 110,159 Depreciation 8,084 ----------- Total operating expenses 118,243 ----------- Loss from operations (97,880) Other income: Interest income 350 ----------- Net loss $ (97,530) ===========
See accompanying notes to financial statements. F-3 12 LD EXCHANGE.COM, INC. Statement of Stockholders' Equity January 15, 1997 (inception) to December 31, 1997
COMMON STOCK ADDITIONAL ----------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIENCY TOTAL -------- -------- ---------- ------------ -------- Balance at inception, January 15, 1997 -- $ -- -- -- -- Issuance of common stock 170,454 170 270,141 -- 270,311 Net loss -- -- -- (97,530) (97,530) -------- -------- -------- -------- -------- Balance at December 31, 1997 170,454 $ 170 270,141 (97,530) 172,781 ======== ======== ======== ======== ========
See accompanying notes to financial statements. F-4 13 LD EXCHANGE.COM, INC. Statement of Cash Flows January 15, 1997 (inception) to December 31, 1997 Cash flows from operating activities: Net loss $ (97,530) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 8,084 Changes in operating assets and liabilities: Accounts receivable (4,557) Prepaid expenses and other current assets (28,001) Accounts payable 121,067 Retainers 61,549 --------- Net cash provided by operating activities 60,612 --------- Cash flows from investing activities - purchases of property and equipment (6,702) --------- Cash flows from financing activities - proceeds from issuance of common stock 250,029 --------- Net increase in cash and cash equivalents 303,939 Cash and cash equivalents, beginning of period -- --------- Cash and cash equivalents, end of period $ 303,939 ========= Supplemental disclosure of noncash transaction - increase in property and equipment acquired through the issuance of common stock $ 20,282 ========= Supplemental disclosures of cash flow information: Cash paid for interest $ -- ========= Cash paid for income taxes $ -- =========
See accompanying notes to financial statements. F-5 14 LD EXCHANGE.COM, INC. Notes to Financial Statements December 31, 1997 (1) NATURE OF BUSINESS LD Exchange.com, Inc. (the Company) was incorporated on January 15, 1997 under the laws of the State of Delaware. The Company is a facilities based, wholesale carrier providing international telecommunication services. The Company operates as a switched international carrier of long distance telephone call traffic. The Company has focused on providing services to other long distance carriers, rather than trying to service corporate or personal customers. (2) SIGNIFICANT ACCOUNTING POLICIES (a) REVENUE RECOGNITION The Company generates substantially all of its revenue from long distance telecommunication services. The Company recognizes revenue as services are provided based on minutes of traffic processed and contracted fees. (b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less on their acquisition date to be cash equivalents. As of December 31, 1997, cash and cash equivalents include cash and money market accounts. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight line method over the estimated useful lives of the respective assets. Estimated useful lives of computers, furniture and equipment range from three to five years. When assets are sold or otherwise retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in operations. (d) CUSTOMER RETAINERS The Company requires certain of its customers to prepay for telecommunication services. These payments are reflected as cash and customer retainers in the accompanying balance sheet. (e) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (Continued) F-6 15 LD EXCHANGE.COM, INC. Notes to Financial Statements December 31, 1997 (f) USE OF ESTIMATES AND ASSUMPTIONS The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) PROPERTY AND EQUIPMENT Property and equipment consists of the following: Computers $ 21,651 Equipment 1,666 Furniture 3,667 -------- 26,984 Less accumulated depreciation (8,084) -------- $ 18,900 ========
(4) INCOME TAXES The Company has had losses since inception and therefore has not provided for Federal income taxes. At December 31, 1997, the Company has net operating loss carryforwards of approximately $88,372 and $34,977 for Federal and state income tax purposes, respectively. These carryforwards begin to expire in 1998 and 2012 for Federal and state purposes, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss carryforwards. Significant components of the Company's deferred income tax assets are as follows: Deferred tax assets: Depreciation, start-up and organization costs deferred for tax purposes $ 474 Net operating loss carryforward 33,138 State taxes 272 -------- 33,884 Valuation allowance (33,884) -------- Total $ -- ========
(Continued) F-7 16 LD EXCHANGE.COM, INC. Notes to Financial Statements December 31, 1997 Due to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future tax returns, the Company has fully reserved its deferred tax assets as of December 31, 1997. In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In addition, the utilization of the net operating loss carryforwards may be limited due to restrictions imposed under applicable Federal and state tax law. (5) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments that potentially subject the Company to concentration of credit risk are trade receivables. Credit risk on trade receivables is limited as a result of the Company's customer base, the use of retainers and the dispersion of customers across different geographic regions. The Company had sales to two customers which represented 76% and 11% of telecommunication service fees, respectively. No other customer accounted for more than 10% of telecommunication service fees in 1997. (6) COMMITMENTS AND CONTINGENCIES The Company is a switched international carrier, and offers its products directly to its customers. The Company rents two switches from one company, on a month-to-month basis, which are used to route customer call traffic to the Company's suppliers. Through December 31, 1997, the Company obtained capacity from eight suppliers. Contracts with both customers and suppliers, as well as the rental arrangements for the switches, are short-term, and there can be no assurance that the loss of any one customer and/or supplier will not have a material impact on the Company's business, financial condition and results of operations. (7) YEAR 2000 (UNAUDITED) The Year 2000 (Y2K) issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The Company has considered the impact of Y2K on its computer systems and applications and believes that its systems are either compliant or are scheduled for conversion in 1999. Expenditures in 1997 for the Y2K project have not been significant as certain planned software conversions and upgrades were already contemplated. Future expenditures are not expected to be significant. The Company is also at risk in relation to the Y2K issue if its suppliers, including the switch rental company, are not Y2K compliant. The Company has not yet performed a formal evaluation as to the Y2K readiness of its suppliers. The Company has also not yet established a Y2K contingency plan for its critical business processes. (Continued) F-8 17 LD EXCHANGE.COM, INC. Notes to Financial Statements December 31, 1997 (8) SUBSEQUENT EVENT In November, 1998, the Company entered into a merger agreement with Micro General Corporation whereby Micro General Corporation acquired all of the capital stock of the Company, and the Shareholders of the Company received consideration of $1,100,000 in cash and 1,000,000 shares of Micro General Corporation common stock. As a result of this transaction, the Company became a wholly owned subsidiary of Micro General Corporation. F-9 18 EXHIBIT INDEX
Exhibit Number 23.1 Consent of KPMG Peat Marwick, LLP
EX-23.1 2 CONSENT OF KPMG PEAT MARWICK, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Micro General Corporation: We consent to the use of our report dated January 15, 1999 relating to the balance sheet of LD Exchange.com, Inc. as of December 31, 1997 and the related statements of operations, stockholders' equity and cash flows for the period January 15, 1997 (inception) to December 31, 1997. /s/ KPMG LLP ----------------------- KPMG LLP Orange County, California January 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----