<PAGE> 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)
<PAGE> 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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
(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
<PAGE> 3
MICRO GENERAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of September 30, 1998
<TABLE>
<CAPTION>
As of September 30, 1998
---------------------------------------------------------------------
Combined
Micro General LD Exchange.com Pro Forma Micro General
Corporation Inc. Adjustments LDX
------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Information.
3
<PAGE> 4
MICRO GENERAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
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
------------- ------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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
============ ============
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Information
4
<PAGE> 5
MICRO GENERAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
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
------------- ----------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
=========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Information
5
<PAGE> 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
<PAGE> 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
<PAGE> 8
INDEX TO FINANCIAL STATEMENTS FOR LD EXCHANGE.COM, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
8
<PAGE> 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
<PAGE> 10
LD EXCHANGE.COM, INC.
Balance Sheet
December 31, 1997
ASSETS
<TABLE>
<S> <C>
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
=========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 11
LD EXCHANGE.COM, INC.
Statement of Operations
January 15, 1997 (inception) to December 31, 1997
<TABLE>
<S> <C>
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)
===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 12
LD EXCHANGE.COM, INC.
Statement of Stockholders' Equity
January 15, 1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIENCY TOTAL
-------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 13
LD EXCHANGE.COM, INC.
Statement of Cash Flows
January 15, 1997 (inception) to December 31, 1997
<TABLE>
<S> <C>
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 $ --
=========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 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
<PAGE> 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:
<TABLE>
<S> <C>
Computers $ 21,651
Equipment 1,666
Furniture 3,667
--------
26,984
Less accumulated depreciation (8,084)
--------
$ 18,900
========
</TABLE>
(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:
<TABLE>
<S> <C>
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 $ --
========
</TABLE>
(Continued)
F-7
<PAGE> 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
<PAGE> 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
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number
<S> <C>
23.1 Consent of KPMG Peat Marwick, LLP
</TABLE>
<PAGE> 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
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KPMG LLP
Orange County, California
January 29, 1999
