SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
------------------------------------------
For the fiscal year ended December 31, 1995 Commission File
No.0-8358
MICRO GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2621545
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1740 E. Wilshire Ave.
Santa Ana, California 92705
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (714)
667-0557
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.05 par value
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 [ ]
As of December 31, 1995, the aggregate market value of the
voting stock held by non-affiliates of the registrant was
$1,820,420.
As of December 31, 1995, the registrant had 1,948,166 shares
of common stock, $.05 par value outstanding.
The information required by Part III (items 10,11,12 and 13)
is
incorporated by reference to portions of the registrant's
definitive
proxy statement for the 1996 annual meeting of shareholders which
will
be filed with the Securities and Exchange Commission within 120
days
after the close of the 1995 fiscal year.
<PAGE>
PART I
Item 1. BUSINESS
INTRODUCTION
Micro General Corporation (the "Company") designs, markets
and
sells parcel shipping systems and electronic postal scales for
use in
shipping departments and office mailrooms. The Company earns
revenues
both from the initial sale of shipping systems and scales and
from
subsequent rate updates resulting from rate changes by the U.S.
Postal
Service ("USPS"), United Parcel Service ("UPS") and other parcel
carriers (see the following "Rate Change Modifications"
discussion).
The Company's products reduce labor costs in shipping parcels and
letters and, by consistent use of accurate weight and
corresponding
shipping or postage rates, can significantly reduce shipping and
postage
rate errors.
The Company's products are programmed with the current
shipping
rates of USPS or UPS. The high-end models of the Company's
parcel
shipping systems and each of the Company's postal scale models
also
permit the customer to choose additional carriers' rates from the
Company's rate library. The Company's ability to customize a
shipping
system or postal scale to include additional carriers' rates in
accordance with each customer's shipping or mailing preferences
permits
the customer to choose the optimum carrier and class of service
for a
particular parcel or letter by quickly "rate shopping" between
the
standard shipping or postal rate of different carriers.
DEVELOPMENT OF THE COMPANY'S BUSINESS
In March 1981, the Company acquired all of the outstanding
stock of
Coda Enterprises, Inc., a California corporation ("CODA"). Since
its
1978 inception, CODA had designed and manufactured an electronic
postal
scale and a piece-count scale, and had sold those products under
a
private label contract with a distributor of mailroom equipment.
In
December 1981, CODA merged with the Company and the Company
changed its
name to Micro General Corporation. The Company has since
redirected its
resources to the development of its microprocessor-based parcel
shipping
systems and postal scales. In 1988, the Company reincorporated
in
Delaware.
INDUSTRY OVERVIEW
Prior to 1956, the USPS provided the sole means of letter or
parcel
delivery throughout the United States. Currently many other
companies,
such as UPS, FedEx and others, provide nationwide coverage in the
package delivery business. There are currently more than 30
letter and
parcel delivery companies which compete directly with the USPS.
Additionally, deregulation of the airline and trucking industries
has
lessened certain prior barriers to reducing the cost of
delivering
letters and parcels by these particular modes of transportation.
In order to provide reliable delivery information regarding
the
location of en-route parcels, parcels must be uniquely tagged so
that
package origin, destination, class of service and other data can
be
quickly read and input into the carrier's information system.
The
ability to produce this tag has created a significant potential
opportunity for the Company within the mailing and shipping
industry.
Although carriers are currently investing in plant and equipment
to
automate the handling of parcels and letters, many of their
customers
still use hand ledgers, manual zip-to-zone charts, spring scales
and
other conventional mechanical equipment which lack the accurate
weight/cost precision of the Company's family of
microprocessor-based
products. These products also make data entry less difficult.
The Company believes that the number of UPS and other parcel
carrier users who might have a need for the Company's products
represents a significant market.
PRODUCTS AND MARKETS
The Company's family of microprocessor-based parcel shipping
systems and postal scales are as follows:
PARCEL SHIPPING SYSTEMS The Company believes its parcel
shipping
systems offer cost and productivity advantages over manual
methods of
parcel shipping recording for businesses which consistently use
UPS, the
USPS or other parcel carriers. First, the Company's parcel
shipping
systems automate transaction recording and label identification
on a
package-by-package basis. For example, a system's "manifest"
printout,
by itself, adequately documents parcel shipments for pickup,
delivery
and accurate billing by a carrier. Additionally, these systems
allow
the user to determine the most economically acceptable method of
shipment, to determine and apply the correct shipping charge,
and to
record data relevant to the transaction for use both by the
shipper and
the parcel carrier.
The user places the parcel on the system's electronic scale
platform (which has a maximum rating of 150 pounds), then enters
the
desired carrier and class of service and the parcel's destination
zip
code. Each entry is accomplished by pushing a single, clearly
identified button. The user can instantly display the rates for
alternative carriers and classes of service by depressing a
single key
for each such inquiry. When a carrier and class of service have
been
selected, the user enters a package identification number and,
with a
single keystroke, prints the shipping label. Simultaneously, the
transaction is automatically entered into a computerized memory
which
both the carrier and the shipper's accounting department can
access.
The suggested retail prices for the Company's parcel
shipping
systems range from $795 to $4,295, excluding options.
MAILING SCALES The Company currently offers both digital
electronic scales as well as mechanical spring scales. The
Company's
digital display electronic postal scales are primarily designed
for
office mailroom use. Relying upon Company-designed
microprocessor-based
circuitry, parcel or letter weight is instantly displayed in
digital
format. When a class of service is selected on the membrane
switch
keyboard, the precise postage is computed and displayed.
Sophisticated
features, such as the ability to connect directly to a printer to
provide instantaneous accounting for transactions or to an
electronic
postage meter for automatic setting and dispensing of postage,
are
possible because of the microprocessor-based design. Use of the
Company's scales enables businesses to decrease postage costs by
eliminating the inefficiencies and errors which commonly occur
when
mechanical scales and manual rate tables are used. The Company's
postal
scales are available in maximum weight capacity ratings of 1 to
150
pounds. The suggested retail prices for the Company's postal
scales
range from approximately $10 to $1,295, excluding options.
COMPUTER-BASED SYSTEMS The Company currently offers
computer
software for shipping and warehouse automation. The software
programs
include many of the standard features already found in the
Company's
parcel shipping systems. The software programs have the ability
to take
advantage of all of the carriers now offered in the Company's
other
products. The suggested retail prices for the Company's software
programs, which can be sold with or without equipment, range from
$1,195
to $10,000 excluding options.
TAPE DISPENSING SYSTEMS The Company currently offers a
manual
gummed tape dispensing system. This system is used for securing
boxes
for shipment. The suggested retail price for the Company's tape
dispensing system is $279, excluding options.
SMALL PARCEL INSURANCE During 1995, the Company provided
marketing services for an insurance broker and underwriter for
small
parcel insurance which provides alternative insurance coverage
for items
shipped by customers. The Company sponsored this insurance
program
through its network of machine equipment dealers to the end-user
customers. The Company received a fee for the marketing services
provided. In May 1995, the Company transferred the existing
accounts to
an independent company and ceased sponsoring any additional
insurance.
In 1995, the fees received were not material.
RATE CHANGE MODIFICATIONS Currently, the Company maintains
a rate
library containing rate information for most national and
regional
parcel carriers. The Company updates this library whenever a
carrier's
rate change occurs.
Modifying the Company's units in the field to reflect rate
changes
by the USPS, UPS or other carriers in the Company's rate library
is done
by inserting programmable read-only memory chips ("PROMS") into
designated slots in the Company's parcel shipping systems and
postal
scales. The Company generally charges a fee for each new PROM it
provides. Alternatively, the Company will, for a one-time fee,
provide
updated rate PROMS as required for a specified period of time.
As the
Company's installed unit base grows, potential revenues
associated with
rate changes represent a significant source of revenue and profit
for
the Company. PROMS related to rate changes are sold both to the
dealer
and directly by the Company for its installed customer base. For
each
rate PROM sold to an end-user customer, a percentage of the
purchase
price is generally credited to the dealer that originally sold
the
system to the customer, provided that the dealer is still an
authorized
Company dealer. No such allowances are paid where sales of the
underlying equipment were not through dealers.
MARKETING, SALES, WARRANTIES AND CUSTOMERS
MARKETING AND SALES The Company's strategy is to select
market
niches in which its technology provides price and/or performance
advantages over products offered by the market leaders. The
Company's
position is primarily in software, but the unique appearance,
functionality and built in "ease of use" of its products are also
considered to be significant competitive advantages. With the
increase
of UPS owned equipment available to the customers, the Company
seeks new
products to replace the customers lost to UPS equipment.
The Company sells its historical dealer products through a
network
of more than 140 dealers located throughout the United States and
Canada, although approximately 30 dealers account for the
majority of
the Company's sales. The Company believes the loss of any
particular
dealer would not have a material adverse effect on the Company's
operating results. All dealer orders accepted by the Company are
shipped and invoiced to dealers at discounts from the Company's
suggested retail list price. The Company's normal sales terms to
its
qualified dealers are net 30 days from invoice date. Company
sales are
generally final and are supported by a Company-issued order entry
acknowledgment which specifies all terms and conditions of the
contracted sales transaction. However, in addition to any
product
returns resulting from product defects, the Company is obligated
under
some of its dealer agreements to accept the return of unopened
inventory
from terminated dealers (subject to a restocking fee). The
Company, at
its discretion, periodically permits dealers to return products
for
credit or exchange (subject to a restocking fee in most cases)
due to
dealers' lost sales or dealers' errors in ordering or evaluating
end-user
customer needs. Returns as a percentage of product sales for
1995,
1994, and 1993, were 16%, 12%, and 11%, respectively. The
Company
believes that the allowance for sales returns at December 31,
1995 and
December 31, 1994, is adequate in light of historical experience.
The Company typically experiences significantly higher
revenues in
the first quarter of each year, which is attributable to the
sales of
carrier rate changes. When a USPS or UPS rate change occurs many
product users update their machines with new rates which provides
significant rate change revenues to the Company.
A comparison of first quarter sales in the last 3 years in
relation
to annual sales is as follows:
<TABLE>
<CAPTION>
1st Quarter Annual Sales %
<S> <C> <C> <C>
1995 $2,173,689 $4,041,921 54%
1994 $1,844,557 $4,768,548 39%
1993 $2,049,155 $5,054,415 41%
</TABLE>
Even though history has shown that the carrier rate changes
traditionally have occurred in the first quarter, the Company
believes
this should not be included as a seasonal impact. There can be
no
assurance as to the timing of future rate changes.
In 1990, the Company established a network of manufacturer's
representatives to sell the retail products to stationary stores,
direct
mail houses, wholesalers and office product resellers. This
portion of
the business in 1995 and 1994 represents 29% and 24% of the
Company's
total product sales, respectively.
WARRANTIES Individual dealers have responsibility for
installation
and service of the Company's products. The Company's distributed
products are sold with a 90-day warranty on material and labor.
The
Company bears the costs incurred in providing such in-warranty
repairs.
The Company invoices the dealers on a time and materials basis
for
out-of-warranty repairs performed by the Company. In 1995,
1994, and 1993
the Company's costs to perform both in-warranty and
out-of-warranty
repairs, in the aggregate were 13%, 11%, and 6%, respectively, of
total
product sales.
CUSTOMERS As of December 31, 1995, the Company estimates it
had an
aggregate installed base of approximately 25,000 parcel shipping
systems, postal scales and piece count scales. Moreover, no
individual
dealer accounted for more than 10% of the Company's 1995 total
net
revenues.
BACKLOG The Company typically enters facsimile orders from
its
dealers, considers these orders part of backlog, and schedules
delivery
for a date within 10 days from receipt of the order. Subsequent
confirmation through a written purchase order is normally
obtained. On
a monthly basis, the Company generates a listing of scheduled and
confirmed backlog. Backlog cancellations have historically been
nominal.
The backlog at December 31, 1995, is not material.
COMPETITION
The Company competes in an industry characterized by
intense and
increasing competition. To the Company's knowledge, there are
approximately 20 competitors engaged in either the sale or lease
of
electronic shipping systems or postal scales. Among these,
Pitney
Bowes, Inc. has a dominant position in the postage meter market,
and UPS
has a dominant position in the parcel shipping systems market.
The Company sells principally to shippers having moderate
volumes
of daily shipments. Various firms have recently begun selling
parcel
shipping software that customers use with their existing in-house
computer systems. Also, various air express and other shipping
firms
are now providing free computerized parcel shipping systems and
offering
volume discounts to end-user customers that maintain specified
minimum
shipping volumes.
The Company believes that the price/performance features of
its
products continue to compare favorably with their various
competitors.
Nevertheless, many of the Company's competitors have far greater
financial and personnel resources than those of the Company,
including
direct sales branches and substantial marketing and product
development
programs. Consequently, there can be no assurance that future
competition from such competitors will not have a material
adverse
effect on the Company's business.
DISTRIBUTION
In recent years, the Company has increased the purchasing of
completed units manufactured outside the United States. The
foreign
manufacturers take advantage of the tooling put in place by the
Company,
in order to provide the Company with parts for its specialized
needs.
In the fourth quarter of 1995, the Company resumed manufacturing
in
their California facility to improve quality and reduce costs on
its
larger model scales.
Finished product quality inspection and final testing is
performed
prior to shipment by Company personnel at the Company's Santa
Ana,
California facility.
ENGINEERING AND DEVELOPMENT
For the years ended December 31, 1995, 1994, and 1993, the
Company's expenditures for engineering, research and development
approximated $638,000, $415,000, and $338,000, respectively. In
May
1995, the engineering department was moved to the Company's
facility in
Oxford, Connecticut. The Company's 1995 engineering, research
and
development activities included the USPS and UPS rate changes in
the
first quarter of 1995 and the USPS international rate change in
the
third quarter of 1995. The Ship-Easy product was modified to
create the
Ship-Mate product to provide a separate product for the dealer
sales
channel. A new multi-carrier computer-based product, The Eagle
Best Rate
Shipper, was designed in 1995 and was released in March 1996.
The
postage meter development project, started in 1995, is
continuing and
is designed to comply with changing U.S. Postal regulations. It
has
been reported, in various dealer newsletter publications, that
the U.S.
Postal Service is planning to announce the decertification of all
mechanical postage meters in the U.S.. The publications report
that the
phase-out period is to be completed by March 1999. It is
estimated that
774,000 meters are affected by this anticipated ruling. This
ruling
provides the Company with an opportunity to enter a major new
market.
Submission for approval to the U.S. Postal Service of the
Company's
first postage meter is expected by mid-1996.
PATENTS AND LICENSES
The Company has federally registered the trademarks "CODA,"
"MAILMATE ", "PC SHIPMATE ", "SMART METER ", "SMART LABEL , "SHIP
SAVER ", "SHIPMATE ", "SHIP MASTER ", "SHIP-EASY", "SHIP
COMMANDER ",
and "Eagle Best Rate Shipper". In 1984, the Company consolidated
the
marketing of all its products under the corporate name Micro
General
Corporation. During 1995 the Company has applied for several
patents
which pertain to the postage meter project.
EMPLOYEES
As of December 31, 1995, the Company employed 33 people. The
Company's employees are not represented by a labor union and it
has
experienced no work stoppages. The Company believes that its
employee
relations are good. The Company augments its work force with
temporary
staff during periods of rate change shipments.
Item 2. PROPERTIES
The Company's executive office, distribution and service
facility
consists of 18,550 square feet in a building located in Santa
Ana,
California. The Company leases this facility until the year
1999. In
April 1995, the Company entered into a three-year lease for a
5,000 square
feet research and development office in Oxford, Connecticut.
<PAGE>
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age and offices presently
held
by the Company's executive officers:
Thomas E. Pistilli . . . . 53 President, Chief Executive
Officer, Chief
Financial Officer and Director
John J. Horbal . . . . . . .58 Vice President - Engineering
Linda I. Morton. . . . . . .43 Corporate Secretary and
Controller
Gerald W. Simmons. . . . . .52 Vice President - Sales &
Marketing
THOMAS E. PISTILLI
Mr. Pistilli has served as the President, Chief Executive
Officer,
Chief Financial Officer, and Director since November 1994. Prior
to
joining the Company, Mr. Pistilli served as a management
consultant to
the Company for approximately two years. Mr. Pistilli is the
former
President and Chief Executive Officer of International Mailing
Systems,
Inc.(ASCOM/HASLER), Shelton, Connecticut, where he served in that
capacity for 11 years and overall with that Company for 18 years.
Mr.
Pistilli, a Certified Public Accountant, was previously employed
by KPMG
Peat Marwick LLP, for a period of seven years. Mr. Pistilli is
a
member of the Board of Directors, serving since November 1994.
JOHN J. HORBAL
Mr. Horbal joined the Company as Vice President-Research and
Development in January 1995. Prior to joining the Company, Mr.
Horbal
was with ASCOM/HASLER and Better Packages, Shelton, Connecticut,
for 25
years serving as Director of Engineering, Director of Research
and
Development, and Chief Engineer. He was named Vice President of
Engineering in June 1995.
LINDA I. MORTON
Ms. Morton joined the Company in September 1983 serving in
various
management accounting positions. She was appointed Controller in
August
1988 and Corporate Secretary in June 1991.
GERALD W. SIMMONS
Mr. Simmons was appointed as Vice President - Sales and
Marketing
in July 1995. Prior to joining the Company, Mr. Simmons was with
MOS
Scale, Costa Mesa, California for more than 10 years serving as
Vice
President - Sales and Marketing.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Principal Market and Prices
The Company's common stock is traded on the over-the-counter
market on NASDAQ under the symbol MGEN. The following table sets
forth the range of high and low closing bid quotations per share
of
the Company's common stock for the fiscal quarters indicated as
reported by the NASD on its monthly statistical reports. Such
prices represent interdealer quotations without adjustment for
retail markup, markdown, or commission, and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Quarters Bid Price
High Low
<S> <C> <C>
Year Ended December 31, 1994
First Quarter . . . . . . $ 2.13 1.75
Second Quarter . . . . . . 2.18 1.88
Third Quarter. . . . . . . 2.25 2.13
Fourth Quarter . . . . . . 2.25 2.00
Year Ended December 31, 1995
First Quarter . . . . . . $ 2.50 2.00
Second Quarter . . . . . . 2.63 2.25
Third Quarter. . . . . . . 2.38 1.75
Fourth Quarter . . . . . . 1.75 1.50
</TABLE>
Number of Common Shareholders
The number of record holders of the Company's common stock
at
December 31, 1995 was 615.
Dividends
The Company intends to continue its policy of retaining all
earnings for reinvestment in the business operations of the
Company. Under Delaware law, the Company's Board of Directors
may
declare and pay dividends on its outstanding shares in cash or
property only out of the unreserved and unrestricted earned
surplus. The Company has an accumulated deficit of $2,700,148 as
of December 31, 1995 and accordingly, Delaware law prohibits the
Company from paying cash dividends except to the extent that the
Company has net profits in any fiscal year or the preceding
fiscal
year. There were no accumulated dividends as of December 31,
1995.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data.
This
data is derived from and qualified in its entirety by the more
detailed financial statements included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended
(in thousands, except per share data)
12/31/95 12/31/94 12/31/93 12/31/92
12/31/91
<S> <C> <C> <C> <C> <C>
Net Product Sales $ 1,743 $ 2,710 $ 3,104 $ 2,525 $
2,851
Service and
Rate Change Revenue 2,299 2,059 1,950 1,944
2,331
------- ------- ------- -------
- -------
Total Revenues 4,042 4,769 5,054 4,469
5,182
Cost of Sales 1,937 2,863 2,864 2,579
2,461
------- ------- ------- -------
- -------
Gross Profit 2,105 1,906 2,190 1,890
2,271
------- ------- ------- -------
- -------
Net Earnings (Loss) $ (230) $ (297) $ 375 $ .5 $
362
======= ======= ======= =======
=======
Net Earnings (Loss)
Per Share $ (0.12) $ (0.16) $ 0.20 $ 0.00 $
0.19
======= ======= ======= =======
=======
Weighted Average Number
of Shares Used in
Computation* 1,940,666 1,883,876 1,882,240 1,882,240
1,882,240
========= ========= ========= =========
=========
</TABLE>
*Per share computations are based on the weighted average number
of
shares outstanding. The shares issuable upon exercise of stock
options and other common stock equivalents have not been included
in the computations of net earnings (loss) per share during any
of
the periods because the effect would have been antidilutive. All
share and per share data for 1991 and 1992 has been restated for
the 1 for 5 reverse stock split which became effective December
31,
1992.
<TABLE>
<CAPTION>
Year Ended
(in thousands)
12/31/95 12/31/94 12/31/93 12/31/92
12/31/91
<S> <C> <C> <C> <C> <C>
Working Capital $ 1,340 $ 1,512 $ 1,778 $ 1,338 $
1,312
Total Assets 2,084 2,420 2,575 2,052
2,255
Shareholders' Equity 1,572 1,736 2,027 1,652
1,652
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
A. COMPARISON OF FISCAL 1995 AND FISCAL 1994.
Total revenue for the Company in 1995 decreased $726,627 or 15%
compared to the same period in 1994. The overall decrease is a
combination of a decrease in product sales of $825,210 or 40% in
the
dealer channel and $141,236 or 22% in the retail channel, a
decrease in
service revenue of $155,802 or 48%, and an increase in rate
change
revenue of $395,621 or 23%. The increase in the rate change
revenue is
a result of both a UPS rate change in February 1995 and USPS rate
change's in both January and August 1995. A portion of the
January 1995
USPS rate change revenue, totaling $384,262, was recognized in
December
1994. The combination of decreased unit sales and lower average
sale
prices, primarily due to a shift in product mix, resulted in
lower
overall revenue. The Company reduced expenses by reducing
advertising
expense and improved profit margins through price adjustments in
the
retail channel, which resulted in lower volume in this channel.
The
Company is continuing to develop new products for the dealer
channel.
The new manifest computer software and turn-key system, The Eagle
Best Rate
Shipper, was introduced in March 1996. Other new product
introductions
are planned in the third and fourth quarters of 1996.
Cost of sales for product sales deceased $927,027 or 41%. The
decrease is due to a decrease in sales and the improved profit
margins
in the retail channel and a reduction in other product costs.
The
service and rate change revenue costs increased $1,714 or 0.3% as
compared to the same period in 1994.
Gross margin increased 12% for the year ended December 31, 1995
compared to the prior year. The primary reason was attributable
to
product sales with a 7% increase in gross margin compared to
1994. This
is a result of cost reductions in the retail channel and the
increase in
product mix towards lower priced, higher margin products in the
dealer
channel. The increase in service and rate change revenue gross
margin
of 5% is a result of two rate changes in the first quarter of
1995.
Operating expenses for the Company in 1995 increased $134,134
or 6%
as compared to the prior year. This was a result of a
combination of
increased expenses in engineering and research and development
and a
decrease in the sales, marketing, general and administrative
expenses as
compared to the prior year. The decrease in sales, marketing and
general and administrative expense is due to a decrease in
promotion and
advertising expense for the period in an effort to control costs.
The
increase in engineering and development expenses of $222,867 or
54%
over the prior year is due to the final development of the
computer-based
system introduced in March 1996 and the continuing development of
the Company's postage meter products. Engineering and
development
expenses are expected to increase in 1996, as the Company's
postage
meter project nears completion.
The net loss of $229,652 is $67,132 or 23% lower than the prior
year. The loss is attributable to lower product sales and an
increase
in engineering and development expenses.
B. COMPARISON OF FISCAL 1994 AND FISCAL 1993.
Total revenue for the Company in 1994 decreased $285,867 or 6%
compared to the same period in 1993. The overall decrease is a
combination of a decrease in product sales of $395,023 or 13%,
with an
increase in service and rate change revenue of $109,156 or 6%
The
increase in the service and rate change revenue is a result of
the
United States Postal Service rate change in January 1995 that was
shipped and billed in December 1994 of $384,262. While sales in
the
retail channel increased $279,812 or 75% as compared to the same
period
in 1993, the sales in the historical dealer channel decreased
$689,410
or 25%. The decrease in the historical dealer channel resulting
in a
decrease in units sold is due to temporary channel conflict and
the
introduction of lower priced models. New product introductions
in
future periods, which will include product differentiation
properly
priced for the two distribution channels, expect to improve
volume and
eliminate the possibility of any significant channel "conflict."
The
Company anticipates a reduction of expenses and improved profit
margins
in the retail channel in future years.
Cost of sales for product sales decreased $66,309 or 3%. The
decrease was due to a change in product mix and a decrease in
sales. The
service and rate change revenue costs increased $65,105 or 13% as
compared to the same period in 1993. The increase was due to an
increase in service and rate revenues for the same period.
Gross margin decreased 3% at December 31, 1994 compared to the
prior year. The primary component was attributed to product
sales which
reported a 9% decrease in gross margin compared to the same
period in
1993. Higher cost of sales in the retail channel, due to high
introductory costs, resulted in lower product gross margins for
the
Company.
Operating expenses for the Company in 1994 increased $367,788
or
20% compared to the same period in 1993. The increase in expense
levels
was primarily due to higher retail channel selling expense. An
increase
in engineering and development expense is a result of further
development in the computer-based system. Expense levels are
expected
to remain the same in future periods.
The decrease in net earnings of $672,307 or 179% as compared to
the
same period in 1993, is the result of lower sales and higher
costs.
C. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to generate cash depends on the sale of
inventory and collection of accounts receivable. The Company's
1995
cash balance decreased $117,626 or 77% from December 31, 1994.
The
decrease is primarily attributable to less cash generated in
December
1995 as compared to December 1994 when cash was generated from
prepaid
rate change revenue for the United States Postal Service ("USPS")
rate
change which occurred January 1, 1995. The Company's 1995 net
accounts
receivable balance decreased $268,443 or 43% from December 31,
1994
levels. This decrease is due to improved accounts receivable
collections and decreased sales.
Working capital has ranged from $1,778,236 in 1993 to
$1,340,255 in
1995. The Company's current ratio at December 31, 1995 was 3.6
compared
to 3.2 at December 31, 1994.
The Company's total inventories increased 183,926 or 16% at
December 31, 1995 as compared to the prior year end. The
increase in
inventory is related to procurement of goods for the retail
channel from
overseas vendors to supply 1996 sales initiatives.
The Company has available liquidity through a line of credit
agreement with a bank (See note 6, of Notes to the Financial
Statements). The availability is based upon certain qualified
accounts
receivable and inventory balances with maximum availability of
$600,000.
At December 31, 1995, of the $600,000 available, $275,000 was
outstanding on the line of credit while at December 31, 1994, the
Company had no balance outstanding. In February 1996, the Company
reduced the outstanding balance on the line of credit to
$150,000. The
line of credit expires on April 30, 1996. The Company is
currently
negotiating to extend its existing line of credit or negotiate a
new
credit agreement. The Company expects to complete this
refinancing in
the second quarter of 1996. It is the Company's belief that
through
cash flow from operations, the replacement of its current credit
facility, or other sources of available financing, adequate
liquidity
will be available through the remainder of 1996. The Company is
considering its options with respect to equity and/or debt
financing to
fund the Company's ongoing postage meter research and development
efforts. At December 31, 1995, the Company was in compliance
with all
financial covenants associated with the line of credit agreement
or has
obtained waivers from the bank.
The Company's 1995 current liabilities have decreased 25% over
1994. This is associated with the decrease in deferred revenue,
due to
the prepayment by customers for product and service contracts
related to
the USPS rate change effective January 1, 1995. Accounts payable
decreased 83% from 1994 due to the decrease in year-end
purchases.
The Company's investment in capital expenditures for 1995 has
increased slightly over 1994. There were no material commitments
for
capital expenditures as of December 31, 1995. The Company does
not
anticipate any significant domestic capital expenditures in the
near
future.
The Company does not engage in any off balance sheet
financing.
INFLATION
The effect of inflation on operating results has,
historically,
been insignificant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
a
new statement titled "Accounting for Impairment of Long-Lived
Assets."
In October 1995, the Financial Accounting Standards Board issued
a new
statement titled "Accounting for Stock-Based Compensation" (FASB
123).
The new statements are effective for fiscal years beginning after
December 15, 1995. The Company does not believe that adoption of
the
new standards will have a material effect on the financial
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the financial statements and supplementary data
listed in
Item 14 of Part IV of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information required by
this Item in the Company's definitive proxy statement for the
1996
annual meeting of shareholders which will be filed with the
Securities
and Exchange Commission no later than 120 days after the close of
the
Company's fiscal year ended December 31, 1995.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
Documents filed with Report
Financial Statements
The financial statements listed on the accompanying Index
to
Financial Statements and Schedule are filed as part of this
report.
Financial Statement Schedule
The financial statement schedule listed on the
accompanying
Index to Financial Statements and Schedule are filed as part of
this
report.
Exhibits
The exhibits listed on the accompanying Index to Exhibits
are
filed as part of this report.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last
quarter of the fiscal year ended December 31, 1995.
<PAGE>
MICRO GENERAL CORPORATION
SEC FORM 10-K
ITEMS 8, 14(a)(1) and 14(a)(2)
Index to Financial Statements and Schedule
Financial Statements
Independent Auditor's Report
Balance Sheets - December 31, 1995 and 1994
Statements of Operations - Years ended December 31, 1995, 1994
and 1993
Statements of Shareholders Equity -
Years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows -
Years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
Schedule
Valuation and Qualifying Accounts - Schedule II
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or notes thereto.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Micro General Corporation:
We have audited the financial statements of Micro General
Corporation as listed in the accompanying index. In connection
with our audits of the financial statements, we also have
audited the financial statement schedule as listed in the
accompanying index. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule
based on our audits.
We conducted our audits 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 audits provide 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 Micro General Corporation as of December 31, 1995
and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
Orange County, California
February 23, 1996
<PAGE>
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1995 and 1994
Assets (Note 6) 1995 1994
----------
- ----------
<S> <C> <C>
Current assets:
Cash $ 35,222
152,848
Accounts and notes receivable, less
allowance for doubtful receivables and
sales returns of $46,594 in 1995 and 349,991
618,434
$81,749 in 1994
Income tax refund receivable -
7,000
Inventories (note 2) 1,324,109
1,140,183
Prepaid expenses 143,433
277,432
-----------
- ----------
Total current assets 1,852,755
2,195,897
Equipment and improvements, net (note 3) 193,691
179,206
-----------
- ----------
Other assets, net (note 4) 37,822
44,688
-----------
- ----------
$ 2,084,268
2,419,791
===========
==========
Liabilities and Shareholders' Equity
Current liabilities:
Note payable to bank (note 6) $ 275,000
- -
Accounts payable 51,278
296,071
Accrued expenses 164,545
228,072
Deferred revenue 21,677
159,853
-----------
- ----------
Total current liabilities 512,500
683,996
-----------
- ----------
Shareholders equity (note 7):
Preferred stock, $.05 par value.
Authorized 1,000,000 shares; none -
- -
issued and outstanding
Common stock, $.05 par value.
Authorized 4,000,000 shares; issued and
outstanding 1,948,166 and 1,888,166 97,408
94,408
shares in 1995 and 1994, respectively
Additional paid-in capital 4,174,508
4,111,883
Accumulated deficit (2,700,148)
(2,470,496)
-----------
- ----------
Total shareholders' equity 1,571,768
1,735,795
Commitments and contingencies (note 9)
-----------
- ----------
$ 2,084,268
2,419,791
===========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations
Years ended December 31, 1995, 1994 and 1993
1995 1994
1993
---------- ----------
- ----------
<S> <C> <C> <C>
Revenues:
Product sales, net of returns of
$278,839 in 1995, $329,235 in 1994 $ 1,742,943 2,709,389
3,104,412
and $335,832 in 1993
Service and rate change
revenues (note 9) 2,298,978 2,059,159
1,950,003
---------- ----------
- ----------
Total revenues 4,041,921 4,768,548
5,054,415
---------- ----------
- ----------
Cost of sales:
Products 1,350,017 2,277,044
2,343,353
Service and rate changes 587,367 585,653
520,548
---------- ----------
- ----------
Total cost of sales 1,937,384 2,862,697
2,863,901
---------- ----------
- ----------
Gross profit 2,104,537 1,905,851
2,190,514
Operating expenses:
Selling, general and administrative 1,674,322 1,713,511
1,443,213
Engineering and development 637,896 415,029
387,457
Provision for doubtful receivables 31,849 81,393
11,475
---------- ----------
- ----------
Operating profit (loss) (239,530) (304,082)
348,369
Interest and other income, net 10,678 8,098
17,954
---------- ----------
- ----------
Income (loss) before income tax
expense and cumulative effect of
accounting change (228,852) (295,984)
366,323
Income tax expense (note 5) 800 800
800
---------- ----------
- ----------
Income (loss) before cumulative
effect of accounting change (229,652) (296,784)
365,523
Cumulative effect of accounting
change (note 1) - -
10,000
---------- ----------
- ----------
Net income (loss) $ (229,652) (296,784)
375,523
========== ==========
==========
Net income (loss) per common share:
Income (loss) before cumulative effect
of accounting change $ (.12) (.16)
.19
Cumulative effect of accounting change - -
.01
---------- ----------
- ----------
Net income (loss) $ (.12) (.16)
.20
========== ==========
==========
Weighted average number of common
shares outstanding 1,940,666 1,883,876
1,882,240
========== ==========
==========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
MICRO GENERAL CORPORATION
Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
Additional
Preferred stock Common
stock paid-in Accumulated
Shares Amounts Shares
Amount capital deficit
------ ------- ---------
- ------ --------- ------------
<S> <C> <C> <C>
<C> <C> <C>
Balance at December 31, 1992 - $ - 1,882,240 $
94,112 $ 4,107,492 $(2,549,235)
Net Income - - -
- - 375,523
------ ------- ---------
- ------ --------- -----------
Balance at December 31, 1993 - - 1,882,240
94,112 4,107,492 (2,173,712)
Repurchase of common stock - - (4,075)
(204) (8,965) -
Stock options exercised - - 10,001
500 13,356 -
Net loss - - -
- - (296,784)
------ ------- ---------
- ------ ---------- -----------
Balance at December 31, 1994 - - 1,888,166
94,408 4,111,883 (2,470,496)
Stock options exercised - - 60,000
3,000 62,625 -
Net loss - - -
- - (229,652)
------ ------- ---------
- ------ ---------- -----------
Balance at December 31, 1995 - $ - 1,948,166 $
97,408 $ 4,174,508 $ (2,700,148)
====== ======= =========
====== ========== ===========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
1995 1994
1993
---------- ---------
- ----------
<S> <C> <C>
<C>
Cash flows from operating activities:
Net income (loss) $ (229,652) 375,523
(296,784)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 108,281 103,825
102,654
Provision for losses on accounts and 31,849 81,393
11,475
notes receivable
Provision for sales returns 62,739 53,336
46,395
Cumulative effect of accounting change - -
(10,000)
Change in assets and liabilities:
Decrease (increase) in accounts and
notes receivable 173,855 85,496
(329,320)
Decrease (increase) in income tax
receivable 7,000 (2,000)
61,675
Increase in inventories (183,926) (48,633)
(214,618)
Decrease (increase) in prepaid expenses 133,999 27,434
(225,849)
Increase in other assets (15,000) -
-
(Decrease) increase in accounts payable (244,793) 120,846
88,897
(Decrease) increase in accrued expenses (63,527) 8,311
39,715
(Decrease) increase in deferred revenue (138,176) 107,488
(71,199)
---------- --------
- ---------
Net cash provided by (used in)
operating activities (357,351) 240,712
(124,652)
---------- --------
- ---------
Cash flows used in investing activities:
Capital expenditures (100,900) (78,063)
(37,759)
---------- --------
- ---------
Cash flows from financing activities:
Proceeds from note payable to bank 275,000 -
100,000
Repayment of note payable to bank - (100,000)
-
Repurchase of common stock - (9,169)
-
Issuance of common stock 65,625 13,856
-
---------- --------
- ---------
Net cash provided by (used in)
financing activities 340,625 (95,313)
100,000
---------- --------
- ---------
Net increase (decrease) in cash (117,626) 67,336
(62,411)
---------- --------
- ---------
Cash at beginning of year 152,848 85,512
147,923
---------- --------
- ---------
Cash at end of year $ 35,222 152,848
85,512
========== ========
=========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 2,000 1,230
-
Income taxes 800 2,800
(56,420)
========== ========
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
MICRO GENERAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) Summary of Significant Accounting Policies
General
The operations of Micro General Corporation (the Company)
consist of the design, purchase, distribution and manufacturing
of
computerized parcel shipping systems, postal scales and
piece-count
scales. Product sales are achieved through the use of
authorized
company dealers and through dealers in the office products and
superstore channels throughout the United_States.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand
deposits
and investments with original maturities of three months or
less.
Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value).
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation
and
amortization are provided using the straight-line method over
the
estimated useful lives of the respective equipment and
improvements.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the
weighted average number of common shares outstanding. The
potential
exercise of stock options or warrants are not included in the
computation of net income (loss) per common share since the
effect
would be antidilutive for all years presented.
Income Taxes
In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109
(Statement 109), "Accounting for Income Taxes." Under the asset
and
liability method of Statement 109, 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. 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. Under Statement 109, 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.
Effective January 1, 1993, the Company adopted Statement 109.
The
cumulative effect of this change in the method of accounting for
income taxes in the accompanying 1993 statement of operations
was an
increase to income of $10,000.
Warranties
The Company's products are sold with a 90-day warranty on
materials and workmanship. Estimated warranty costs based on
historical experience are accrued as an expense at the time
products
are sold.
Intangible Assets
Intangible assets are classified under other assets and are
amortized on a straight-line basis over periods ranging from 10
to
15 years.
Revenue Recognition
Product sales are recorded by the Company when products are
shipped to dealers and customers. Rate change revenues are
recorded
by the Company at the time memory chips are reprogrammed with
new
tariffs and shipped to the customer.
The Company collects fees from some customers in anticipation of
future rate changes. Customers prepaying future rate changes
receive memory chips with the new tariffs, upon notice of a rate
change, without paying an additional charge. These prepaid rate
change fees are recorded as revenue on a pro rata basis over the
prepaid period.
Sales Returns
The majority of the Company's product sales are to its
authorized dealers who resell the Company's products. The
Company's
policy is that all sales are final, but dealers may, at the
Company's sole discretion and subject to a restocking fee,
return
certain out-of-warranty products in exchange for products of
comparable sales value. Additionally, dealers may, at the
Company's
sole discretion, be permitted to return their unopened inventory
in
the event they or the Company terminate their dealership
agreement,
again subject to a restocking fee. Upon acceptance of returned
goods, the Company reconditions the goods, at a nominal cost,
and
restocks them in inventory to be sold at a later date. The
Company
provides an allowance for such returns equal to the estimated
gross
profit on the portion of sales estimated to be returned. This
specific allowance is a component of the Company's allowance for
doubtful receivables and sales returns.
Financial Instruments
The carrying amount of cash, accounts and notes receivable,
prepaid expenses, other assets, accounts payable, accrued
expenses,
notes payable to bank and deferred revenue are measured at cost
which approximates their fair value due to the short maturity of
these instruments.<PAGE>
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make
estimates and assumptions that affect the reported amounts of
assets
and liabilities and disclosure of contingent assets and
liabilities
at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual
results
could differ from those estimates.
(2) Inventories
Inventories are comprised of the following at December 31,
1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Parts and supplies $ 919,459 753,456
Purchased finished goods 372,763 292,099
Consigned inventory 31,887 94,628
----------- ------------
$1,324,109 1,140,183
</TABLE>
(3) Equipment and Improvements
Equipment and improvements consist of the following at
December
31, 1995 and 1994:
<TABLE>
<CAPTION>
Useful life 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Production equipment,
including tooling 5 years $ 432,902 424,848
Office furniture and
equipment 5 years 563,557 484,229
Leasehold improvements 5 years 30,606 19,381
----------- ----------
1,027,065 928,458
Less accumulated depreciation
and amortization 833,374 749,252
----------- ----------
$ 193,691 179,206
=========== ==========
</TABLE>
(4)Other Assets
Other assets consist of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
Estimated
useful life 1995 1994
----------- ----------
- ----------
<S> <C> <C> <C>
Excess cost of assets
purchased over fair
market value 15 years $ 232,531
232,531
License rights 10 years 41,382
26,382
Other intangible assets 15 years 23,388
23,388
----------
- ----------
297,301
282,301
Less accumulated amortization 259,479
237,613
----------
- ----------
$ 37,822
44,688
==========
==========
</TABLE>
(5)Income Taxes
Income tax expense for the three years ended December 31, 1995
represents the state minimum tax.
The expected income tax expense (benefit) computed by
multiplying
income (loss) before income tax expense (benefit) and cumulative
effect of accounting change by the statutory Federal income tax
rate
of 34% differs from the actual income tax expense (benefit) as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------
- ----------
<S> <C> <C> <C>
Expected tax
expense (benefit) $ (78,000) (101,000) 125,000
Effect of net operating
loss carryforward not
recognized for financial
statement purposes until
utilization is more
likely than not 71,000 94,000 -
Utilization of net operating
loss carryforward - -
(132,000)
Nondeductible amortization of
the excess cost of assets
purchased over fair
market value 7,000 7,000 7,000
State income tax expense 800 800 800
---------- ----------
- ----------
$ 800 800 800
========== ==========
==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities
for financial reporting purposes and the amounts used for income
tax
purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 652,000 581,000
Reserves and accruals not recognized
for income tax purposes 89,000 105,000
Tax credit carryforwards 85,000 85,000
---------- ----------
Total deferred tax assets 826,000 771,000
Less valuation allowance (822,000) (751,000)
---------- ----------
Net deferred tax assets 4,000 20,000
Deferred tax liabilities:
Accelerated depreciation for income
tax purposes in excess of financial
statement depreciation (4,000) (20,000)
---------- ----------
Deferred taxes recognized on the
accompanying balance sheets $ - -
========== ==========
</TABLE>
Deferred income tax assets include the tax impact of net
operating
loss carryforwards. Realization of these assets is contingent
on
future taxable income. The Company believes that it is more
likely
than not that net deferred tax assets of $4,000 at December 31,
1995
(after considering the valuation allowance of $822,000) will be
realized because it expects that the underlying deductions and
net
operating loss carryforwards can be utilized to offset the
effects
of the temporary difference for accelerated depreciation which
may
give rise to taxable income in future periods. The net change
in
the total valuation allowance during 1995 was an increase of
$71,000.
At December 31, 1995, the Company had net operating loss
carryforwards of approximately $1,839,000 and $217,000 for
Federal
and state income tax purposes, respectively. If not used to
offset
future taxable income, the net operating loss carryforwards will
expire at various years through 2010. The Company also has
investment tax credit and research and experimentation credit
carryforwards aggregating approximately $85,000 which expire
during
the period 1996 to 2002.
(6) Note Payable to Bank
The Company has a line of credit which is secured by
substantially
all of the Company's assets and cannot exceed 70% of qualifying
accounts receivable plus 40% of qualifying inventory up to a
maximum
credit line of $600,000. The interest rate on the line of
credit is
at the bank's prime rate (8.25% at December_31, 1995) plus 2.0%
and
the Company paid a $2,000 commitment fee. At December_31, 1995,
the
Company was either in compliance with all financial covenants or
had
obtained waivers of such covenants from the bank. At December
31,
1995, there was $275,000 outstanding on this line of credit.
The
line of credit expires on April 30, 1996.
The Company is currently negotiating to extend its existing line
of
credit or negotiate a new credit agreement. The Company expects
to
complete this refinancing in the second quarter of 1996. It is
the
Company's belief that through cash flow from operations, the
replacement of its current credit facility, or other sources of
available financing adequate liquidity will be available through
the
remainder of 1996.
(7) Stock Option Plans
Under terms of the Company's Incentive Stock Option Plan (the
Plan),
the exercise price of options granted is to be equal to the
stock's
fair market value at the date of grant. Common stock initially
available for option under the Plan was 220,000 shares. Options
are
execrable no later than 5 years from the date of grant. Options
which are not exercised or canceled revert back to the Plan and
are
subject to subsequent reissuance. This Plan expired on October
7,
1991 and was renewed at the 1993 annual shareholders' meeting.
There are 10,499 remaining shares available for grant under this
Plan as of December_31, 1995. In 1995, the Company's Board of
Directors approved a new stock option plan. Company stock
available
for option under this plan is 200,000 shares and all shares were
available for grant as of December_31, 1995.
In 1984, the Company adopted a nonqualified stock option plan
whereby the Board of Directors could grant stock options to
employees, officers or directors at no less than 85% of the fair
market value of the Company's stock at the date of grant. The
number of shares initially available for option under this plan
was
20,000 shares. In 1990, the Board of Directors approved making
an
additional 20,000 shares available for option. The options were
exercisable no later than ten years from the date of grant.
There
were no shares granted under this plan and the plan expired on
February_16,_1994.
A summary of all stock option transactions for the three-year
period
ended December_31, 1995 follows:
<TABLE>
<CAPTION>
Shares Exercise
price
--------
- --------------
<S> <C> <C>
Options granted and outstanding:
At December_31, 1992 111,000 $ 1.093 to
2.50
Granted 103,000 1.375
Exercised - -
Canceled (2,000) 1.875
---------
- ---------------
At December_31, 1993 212,000 1.093 to
2.50
Granted 42,000
2.125
Exercised (10,001) 1.375 to
1.406
Canceled (54,499) 1.375 to
2.187
---------
- ---------------
At December_31, 1994 189,500 1.093 to
2.50
Granted 110,000 2.125 to
2.50
Exercised (60,000)
1.093
Canceled (100,000) 1.375 to
2.50
---------
- ---------------
At December_31, 1995 139,500 $ 1.25 to
2.50
=========
===============
</TABLE>
At December_31, 1995, options for 12,999 shares of common stock
were
vested and exercisable at prices ranging from $1.25 to $2.50 per
share.
(8) 401(k) Plan
Effective January 1, 1989 and as subsequently amended, the
Company
adopted a 401(k) plan whereby all employees who have completed
three
months of service may elect to make pretax contributions of 1%
to
20% of their annual pay not to exceed contributions of $9,240
per
year. The Company has a 25% employer matching program
contingent
upon Company earnings of at least $100,000. As the Company did
not
meet the minimum earnings requirement for employer matching in
1995
and 1994, no Company contributions were made to the plan for
those
years. The Company paid approximately $15,000 to the plan based
on
employee contributions of approximately $62,000 in 1993.
(9)Commitments and Contingencies
Noncancelable operating lease commitments consist principally of
the
lease for the Company's distribution and administrative
facility.
In February 1994, the Company extended its facility lease
through
1999. At December_31, 1995, the Company was committed to the
following noncancelable operating lease payments which includes
the
lease extension:
<TABLE>
<CAPTION>
Year ending December:
<S> <C>
1996 $ 139,000
1997 145,000
1998 124,000
1999 29,000
----------
$ 437,000
==========
</TABLE>
Rental expense was approximately $130,400 in 1995, $118,000 in
1994
and $155,300 in 1993.
The Company has a license agreement with Pitney Bowes which
enables
the Company to manufacture and sell certain products. The
license
agreement expires in 2004. Annual expenses for the license
agreement are minor.
From time to time, the United States Postal Service (USPS) or
United
Parcel Service (UPS) change their rates. For a fee, the Company
provides its customers with programmable memory chips with the
new
tariffs which can be inserted into the Company's products. In
some
instances, customers prepay a fee to the Company which assures
they
will receive new programmable memory chips for all rate changes
which occur within a predetermined period. In other instances,
customers incur a fee for each time they decide to procure a new
programmable memory chip. The Company has experienced UPS rate
changes in 1993, 1994 and 1995 and a USPS rate change in 1995.
During 1995, 1994 and 1993, the Company recorded revenues from
rate
changes totaling approximately $2,132,000, $1,736,000 and
$1,668,000, respectively. Gross profits related to rate changes
in
1995, 1994 and 1993 totaled approximately $1,805,000, $1,396,000
and
$1,442,000, respectively. A UPS rate change also occurred in
January 1996. However, there can be no assurance that future
rate
changes by UPS or USPS will occur.
<PAGE>
<TABLE>
<CAPTION>
Schedule II
MICRO GENERAL CORPORATION
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
Additions
Balance at charged to
beginning of costs and
Balance at
Description period expenses
Deductions end of period
- -------------------------------------- ---------- ----------
- ---------- -------------
<S> <C> <C>
<C> <C>
Allowance for doubtful receivables:
Year ended December 31, 1995 $ 74,749 31,849
67,004 39,594
========== =======
======= =======
Year ended December 31, 1994 $ 66,085 81,393
72,729 74,749
========== =======
======= =======
Year ended December 31, 1993 $ 78,535 11,475
23,925 66,085
========== =======
======= =======
Allowance for sales returns:
Year ended December 31, 1995 $ 7,000 62,739
62,734* 7,000
========== =======
======= =======
Year ended December 31, 1994 $ 7,000 53,336
53,336* 7,000
========== =======
======= =======
Year ended December 31, 1993 $ 44,017 46,395
83,412* 7,000
========== =======
======= =======
</TABLE>
[FN]
* Represents gross profit on sales returns of $278,839, $329,235
and $335,832
for the years ended December 31, 1995, 1994 and 1993,
respectively.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Sequentially
Number Description of Exhibit Numbered
Page
3.1 Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit
3.1 to the Company's Annual Report on Form 10-K
for the year ended December 25, 1988 (the "1988
Form 10-K Amendment 1"))
3.2 Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the "1988 Form 10-K
Amendment 1")
10.1 Incentive Stock Option Plan and form of
Incentive Stock Option Agreement in use prior
to 1987 (incorporated by reference to Exhibit
10.1 to the 1984 Form 10-K) Option Plan and
form of Incentive Stock Option Agreement in use
commencing in 1987 (incorporated by reference
to Exhibit 10. to the Company's Annual Report
for the year ended December 28, 1986 (the "1986
Form 10-K"))
10.2 Nonqualified Stock Option Plan and form of
Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to
the 1984 Form 10-K)
10.3 Lease of 1740 E. Wilshire Ave., Santa Ana,
California, 92705, facilities between Shaw
Investment and the Company (incorporated by
reference to the Company's Annual Report on
Form 10-K for the year ended December 25, 1988
(the "1988 Form 10-K Amendment 1"))
10.11 Form of Dealer Agreement (incorporated by
reference to Exhibit 10.14(1) to Amendment No.
3 to the Company's Registration Statement on
Form S-2 (registration No. 33-8240), filed on
June 4, 1987 (the "1986 Form S-2 Amendment
Number 3"))
10.16.1 Loan Agreement between the Company and Silicon
Valley Bank dated September 12, 1991.
(Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1991)
10.16.2 Amendment to Loan Agreement between the Company
and Silicon Valley Bank dated December 2, 1992.
(Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1992)
10.16.3 Amendment to Loan Agreement between the Company
and Silicon Valley Bank dated December 10,
1993. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1993)
10.16.4 Amendment to Loan Agreement between the Company
and Silicon Valley Bank dated January 27, 1994.
(Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994)
10.17 Loan Agreement between the Company and First Bank
and Trust dated November 15, 1995.(filed herewith)
33
24 Consent of KPMG Peat Marwick LLP (filed herewith)
32
LOAN AGREEMENT
Borrower: MICRO GENERAL CORPORATION Lender: FIRST BANK & TRUST
1740 Wilshire Avenue Santa Ana Regional Office
Santa Ana, CA 92705 2900 South Harbor
P.O. Box 25988
Santa Ana, CA 92704
___________________________________________________________________________
THIS LOAN AGREEMENT between MICRO GENERAL CORPORATION ("Borrower") and
FIRST BANK & TRUST ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender
or has applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and
agrees that: (a) in granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in this Agreement; (b) the granting, renewing, or extending of any
Loan by Lender at all times shall be subject to Lender's sole judgment and
discretion; and all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of November 15, 1995, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code. All references to dollar amounts shall mean amounts in lawful money
of the United States of America.
Agreement. The word "Agreement" means this Loan Agreement, as this
Loan Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Loan Agreement from
time to time.
Account. The word "Account" means a trade account, account
receivable, or other right to payment for goods sold or services
rendered owing to Borrower (or to a third party grantor acceptable to
Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under
this Agreement.
Borrower. The word "Borrower" means MICRO GENERAL CORPORATION. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by
Lender from time to time, the lesser of (a) $600,000.00; or (b) the
sum of (I) 70.000% of the aggregate amount of Eligible Accounts, plus
(ii) 40.000% of the aggregate amount of Eligible Inventory.
Business Day. The words "Business Day" mean a day on which commercial
banks are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for
a Loan, whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien
or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise. The word "Collateral"
includes without limitation all collateral described below in the
section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time,
all of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts,
credits, and offsets of any nature. Unless otherwise agreed to by
Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or its
shareholders, officers, or directors.
Accounts with respect to which goods are placed on
consignment, guaranteed sale, or other terms by reason of which
the payment by the Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts
are supported by insurance, bonds or other assurances
satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become
liable to the Account Debtor for goods sold or services rendered
by the Account Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or
setoff.
(g) Accounts with respect to which the goods have not been
shipped or delivered, or the services have not been rendered, to
the Account Debtor.
(h) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition of
the Account Debtor to be unsatisfactory.
(I) Accounts of any Account Debtor who has filed or has had
filed against it a petition in bankruptcy or an application for
relief under any provision of any state or federal bankruptcy,
insolvency, or debtor-in-relief acts; or who has had appointed a
trustee, custodian, or receiver for the assets of such Account
Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its
debts (including its payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the
United States government or any department or agency of the
United States.
(k) Accounts which have not been paid in full within 90 days
from date of invoice from the invoice date. The entire balance
of any Account of any single Account debtor will be ineligible
whenever the portion of the Account which has not been paid
within 90 days from date of invoice from the invoice date is in
excess of 15.000% of the total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor
which exceeds 20.000% of all of Borrower's Accounts.
Eligible Inventory. The words "Eligible Inventory" mean, at any time,
all of Borrower's Inventory ad defined below except:
(a) Inventory which is not owned by Borrower free and clear of
all security interests, liens, encumbrances, and claims of third
parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation
each and all of the persons or entities granting a Security Interest
in any Collateral for the Indebtedness, including without limitation
all Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become
barred by any statute of limitations; and whether such Indebtedness
may be or hereafter may become otherwise unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw
materials, work in process, finished goods, merchandise, parts and
supplies, of every kind and description, and goods held for sale or
lease or furnished under contracts of service in which Borrower now
has or hereafter acquires any right, whether held by Borrower or
others, and all documents of title, warehouse receipts, bills of
lading, and all other documents of every type covering all or any part
of the foregoing. Inventory includes inventory temporarily out of
Borrower's custody or possession and all returns on Accounts.
Lender. The word "Lender" means FIRST BANK & TRUST, its successors
and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's receivables.
Loan. The word "Loan" or "Loans" means and includes without
limitation any and all commercial loans and financial accommodations
from Lender to Borrower, whether now or hereafter existing, and
however evidenced, including without limitation those loans and
financial accommodations described herein or described on any exhibit
or schedule attached to this Agreement from time to time.
Note. The word "Note" means and includes without limitation
Borrower's promissory note or notes, if any, evidencing Borrower's
Loan obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations which are not
yet delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract,
lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1`986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness
and liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to
time from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed
the Borrowing Base, Within the foregoing limits, Borrower may borrow,
partially or wholly prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is
subject to the following conditions precedent, with all documents,
instruments, opinions, reports, and other items required under this
Agreement to be in form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and
all Related Documents have been duly authorized, executed, and
delivered by Borrower to Lender.
(b) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may request.
The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and
shall be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit
shall have been executed by each Guarantor, delivered to Lender,
and be in full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books,
records, and operations, and Lender shall be satisfied as to
their condition.
(f) Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents as
are then due and payable.
(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement,
and Borrower shall have delivered to Lender the compliance
certificate called for in the paragraph below titled "Compliance
Certificate."
Making Loan Advances. Advances under the Line of Credit may be
requested orally by authorized persons. All oral requests shall be
confirmed in writing on the day of the request. Each Advance shall be
conclusively deemed to have been made at the request of and for the
benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance
with the instructions of an authorized person. Lender, at its option,
may set a cutoff time, after which all requests for Advances will be
treated as having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal
amount of the outstanding Advances shall exceed the applicable
Borrowing Base, Borrower, immediately upon written or oral notice from
Lender, shall pay to Lender an amount equal to the difference between
the outstanding principal balance of the Advances and the Borrowing
Base. On the Expiration Date, Borrower shall pay to Lender in full
the aggregate unpaid principal amount of all Advances then outstanding
and all accrued unpaid interest, together with all other applicable
fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account
in which Lender shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the
credit facility. Lender shall provide Borrower with periodic
statements of Borrower's account, which statements shall be considered
to be correct and conclusively binding on Borrower unless Borrower
notifies Lender to the contrary with thirty (30) days after Borrower's
receipt of any such statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower
(and others, if required) shall grant to Lender Security Interests in such
property and assets as Lender may require (the "Collateral"), including
without limitation Borrower's present and future Accounts, general
intangibles, and inventory. Lender's Security Interests in the Collateral
shall be continuing liens and shall include the proceeds and products of
the Collateral, including without limitation the proceeds of any insurance.
With respect to the Collateral, Borrower agrees and represents and warrants
to Lender:
Perfection of Security Interests. Borrower agrees to execute such
financing statements and to take whatever other actions are requested
by Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender
any and all of the documents evidencing or constituting the
Collateral, and Borrower will note Lender's interest upon any and all
chattel paper if not delivered to Lender for possession by Lender.
Contemporaneous with the execution of this Agreement, Borrower will
execute one or more UCC financing statements and any similar
statements as may be required by applicable law, and will file such
financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as
its irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue any Security Interest.
Lender may at any time, and without further authorization from
Borrower, file a carbon, photograph, facsimile, or other reproduction
of any financing statement for use as a financing statement. Borrower
will reimburse Lender for all expenses for the perfection,
termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify
Lender of any change in Borrower's name including any change to the
assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify
Lender in writing prior to any change in address or location of
Borrower's principal governance office or should Borrower merge or
consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter
shall, keep correct and accurate records of the Collateral, all of
which records shall be available to Lender or Lender's representative
upon demand for inspection and copying at any reasonable time. With
respect to the Accounts, Borrower agrees to keep and maintain such
records as Lender may require, including without limitation
information concerning Eligible Accounts and Account balances and
agings. With respect to the Inventory, Borrower agrees to keep and
maintain such records as Lender may require, including without
limitation information concerning Eligible Inventory and records
itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the
daily withdrawals and additions to Inventory.
Collateral Schedules. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender schedules
of Accounts and Inventory and Eligible Accounts and Eligible
Inventory, in form and substance satisfactory to the Lender.
Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and Eligible Inventory and
such other matters and information relating to the Accounts and
Inventory as Lender may request. Supplemental schedules shall be
delivered according to the following schedule: Monthly Accounts
Receivable and Accounts Payable aging, within 5 days from month end
accompanied by a Borrowing Base certificate.
Representations and Warranties Concerning Accounts. With respect to
the Accounts, Borrower represents and warrants to Lender: (a) Each
Account represented by Borrower to be an Eligible Account for purposes
of this Agreement conforms to the requirements of the definition of an
Eligible Account; (b) All Account information listed on schedules
delivered to Lender will be true and correct, subject to immaterial
variance; and Lender, its assigns, or agents shall have the right at
any time and at Borrower's expense to inspect, examine, and audit
Borrower's records and to confirm with Account Debtors the accuracy of
such Accounts.
Representations and Warranties Concerning Inventory. With respect to
the Inventory, Borrower represents and warrants to Lender: (a) All
Inventory represented by Borrower to be Eligible Inventory for
purposes of this Agreement conforms to the requirements of the
definition of Eligible Inventory; (b) All Inventory values listed on
schedules delivered to Lender will be true and correct, subject to
immaterial variance; The value of the Inventory will be determined
on a consistent accounting basis; (d) Except as agreed to the contrary
by Lender in writing, all Eligible Inventory is now and at all times
hereafter will be in Borrower's physical possession and shall not be
held by others on consignment, sale on approval, or sale or return;
(e) Except as reflected in the Inventory schedules delivered to
Lender, all Eligible Inventory is now and at all times hereafter will
be of good and merchantable quality, free from defects; (f) Eligible
Inventory is not now and will not at any time hereafter be stored with
a bailee, warehouseman, or similar party without Lender's prior
written consent, and, in such event, Borrower will concurrently at the
time of bailment cause any such bailee, warehouseman, or similar party
to issue and deliver to Lender, in form acceptable to Lender,
warehouse receipts in Lender's name evidencing the storage of
Inventory; and (g) Lender, its assigns, or agents shall have the right
at any time and at Borrower's expense to inspect and examine the
Inventory and to check and test the same as to quality, quantity,
value, and condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender, as of the date of this Agreement, as of the date of each
disbursement of Loan proceeds, as of the date of any renewal, extension or
modification of any Loan, and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in
which it is presently engage or presently proposes to engage.
Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly
authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of,
or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
Properties. Except for Permitted Liens, Borrower owns and has good
title to all of Borrower's properties free and clear of all Security
Interests, and has not executed any security documents or financing
statements relating to such properties. All of Borrower's properties
are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the
last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used
in this Agreement, shall have the same meanings as set forth in the
"CERLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 49
U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20
of the California Health and Safety Code, Section 25100, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants
that: (a) During the period of Borrower's of the properties, there
has been no use, generation, manufacture, storage, treatment,
disposal, release or threatened release of any hazardous waste or
substance by any person on, under, about or from any of the
properties. (b) Borrower has no knowledge of, or reason to believe
that there has been (I) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous
waste or substance on, under, about or from the properties by any
prior owners or occupants of any of the properties, or (ii) any actual
or threatened litigation or claims of any kind by any person relating
to such matters. Neither Borrower nor any tenant, contractor, agent
or other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste
or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including
without limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the
properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender
shall be at Borrower's expense and for Lender's purposes only and
shall not be construed to create any responsibility or liability on
the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and
waives any future claims against Lender for indemnity or contribution
in the event Borrower becomes liable for cleanup or other costs under
any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal,
release or threatened release occurring prior to Borrower's ownership
or interest in the properties, whether or not the same was or should
have been known to Borrower. The provisions of this section of the
Agreement, including the obligation to indemnify, shall survive the
payment of the Indebtedness and the termination or expiration of this
Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or
otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for
unpaid taxes) against Borrower is pending or threatened, and no other
event has occurred which may materially adversely affect Borrower's
financial condition or properties, other than litigation, claims, or
other events, if any, that have been disclosed to and acknowledged by
Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and
reports of Borrower that are or were required to be filed, have been
filed, and all taxes, assessments and other governmental charges have
been paid in full, except those presently being or to be contested by
Borrower in good faith in the ordinary course of business and for
which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which
Borrower may have liability complies in all material respects with all
applicable requirements of law and regulations, and (I) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred
with respect to any such plan, (ii) Borrower has not withdrawn from
any such plan or initiated steps to do so, and (iii) no steps have
been taken to terminate any such plan.
Location of Borrower's Offices and Records. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 1740 Wilshire Avenue, Santa
Ana, CA 92705. Unless Borrower ha designated otherwise in writing
this location is also the office or offices where Borrower keeps its
records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's Indebtedness shall be
paid in full, or until this Agreement shall be terminated in the
manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and all threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any |Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but
in no event later than ninety (90) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year
ended, audited by a certified public accountant satisfactory to
Lender, and, as soon as available, but in no event later than thirty
(30) days after the end of each fiscal quarter, Borrower's balance
sheet and profit and loss statement for the period ended, prepared and
certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to
Lender. All financial reports required to be provided under this
Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivable and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants
and ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not
less than $1,800,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to
Tangible Net Worth of less than 1.50 to 1.00.
Current Ratio. Maintain a ratio of Current Assets to Current
Liabilities in excess of 2.50 to 1.00.
The following provisions shall apply for purposes of determining
compliance with the foregoing financial covenants and ratios: AT
DECEMBER 31, 1995. Except as provided above, all computations made to
determine compliance with the requirements contained in this paragraph
shall be made in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower
as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be canceled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which Lender holds
or is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following:
(a) the name of the insurer; (b) the risks insured; the amount of
the policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually),Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal
shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and
any other party and notify Lender immediately in writing of any
default in connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the
legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books
adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish
to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written
statement of any assessments, taxes, charges, levies, liens and claims
against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender
of any change in executive and management personnel; conduct its
business affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses
and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time
hereafter maintains any records (including without limitation computer
generated records and computer software programs for the generation of
such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free
access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender WITHIN FIVE (5) DAYS OF MONTH END and at the time of each
disbursement of Loan proceeds with a certificate executed by
Borrower's chief financial officer, or other officer or person
acceptable to Lender, certifying that the representations and
warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of
the certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonable request to evidence and secure
the Loans and to perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any
law, rule, regulation or guideline, or the interpretation or application of
any thereof by any court or administrative or governmental authority
(including any request or policy not having the force of law) shall impose,
modify or make applicable any taxes (except U.S. federal, state or local
income or franchise taxes imposed on Lender), reserve requirements, capital
adequacy requirements or other obligations which would (a) increase the
cost to Lender for extending or maintaining the credit facilities to which
this Agreement relates, (b) reduce the amounts payable to Lender under this
Agreement or the Related Documents, or reduce the rate of return on
Lender's capital as a consequence of Lender's obligations with respect to
the credit facilities to which this Agreement relates, then Borrower agrees
to pay Lender such additional amounts as will compensate Lender therefor,
within five (5) days after Lender's written demand for such payment, which
demand shall be accompanied by an explanation of such imposition or charge
and calculation in reasonable detail of the additional amounts payable by
Borrower, which explanation and calculations shall be conclusive in the
absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while
this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or sell
with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of Default
has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in
the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership
of shares of stock of Borrower, or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital
structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan
to Borrower, whether under this Agreement or under any other agreement,
Lender shall have no obligation to make Loan Advances or to disburse Loan
proceeds if: (a) Borrower or any Guarantor is in default under the terms
of this Agreement or any of the Related Documents or any other agreement
that Borrower or any Guarantor has with Lender; (b) Borrower or any
Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, oris adjudged a bankrupt; there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke
such Guarantor's guaranty of the Loan or any other loan with Lender; or (e)
Lender in good faith deems itself insecure, even though no Event of Default
shall have occurred.
CONDITIONS. 1). Borrower to provide to Lender Corporate Tax Returns and
SEC Form 10-K within ten (10) days of filing. 2). Independent Accounts
Receivable audit of the Borrower's books and records is to be conducted
once annually at the Banks discretion, and Borrower agrees to incur the
cost of the audit. 3). Borrower to provide Lender within five (5) days of
month end with a monthly certification of Inventory balances prepared and
certified to be true and correct by the Chief Financial Officer or
President. __________Initial Here).
DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account), including without limitation all accounts held jointly with
someone else and all accounts Borrower may open in the future, excluding
however all IRA, Keogh, and trust accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or
to perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of
the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as
a going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply
if there is a good faith dispute by Borrower or Grantor, as the case
may be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or
Grantor gives Lender written notice of the creditor or forfeiture
proceeding and furnishes reserves or a surety bond for the creditor or
forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of,
or liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's
estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure
the Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness,
is curable and if Borrower or Grantor, as the case may be, has not
been given a notice of a similar default within the preceding twelve
(12) months, it may be cured (and no Event of Default will have
occurred) if Borrower or Grantor, as the case may be, after receiving
written notice from Lender demanding cure of such default (a) cures
the default within fifteen (15) days; or (b) if the cure requires more
than fifteen (15) days, immediately initiates steps which Lender deems
in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's
option, all Indebtedness immediately will become due and payable, all
without notice of any kind to Borrower, except that in the case of an Event
of Default of the type described in the "Insolvency" subsection above, such
acceleration shall be automatic and not optional. In addition, Lender
shall have all the rights and remedies provided in the Related Documents or
available at law, in equity, or otherwise. Except as may be prohibited by
applicable law, all of Lender's rights and remedies shall be cumulative and
may be exercised singularly or concurrently. Election by Lender to pursue
any remedy shall not exclude pursuit of any other remedy, and an election
to make expenditures or to take action to perform an obligation of Borrower
or of any Grantor shall not affect Lender's right to declare a default and
to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of Orange County, the State of California. Lender and
Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender or Borrower
against the other.(Initial Here/s/lim /s/jjh) This Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the Borrowers signing below is responsible for all obligations in this
Agreement.
Consent to Loan Participation. Borrower agrees and consents to
Lender's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any
rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may
enforce Borrower's obligation under the Loans irrespective of the
failure or insolvency of any holder of any interest in the Loans.
Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal
claims or defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of
Lender's expenses, including without limitation attorneys' fees,
incurred in connection with the preparation, execution, enforcement,
modification and collection of this Agreement or in connection with
the Loans made pursuant to this Agreement. Lender may pay someone
else to help collect the Loans and to enforce this Agreement, and
Borrower will pay that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees
for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated
post-judgment
collection services. Borrower also will pay any court costs,
in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimilie, and shall be
effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may
change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of
the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower agrees to keep Lender informed at all times of
Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any
provision of this Agreement to be invalid or unenforceable as to any
person or circumstance, such find shall not render that provision
invalid or unenforceable as to any other persons or circumstances. If
feasible, any such offending provision shall be deemed to be modified
to be within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and
affiliates of Borrower. Notwithstanding the foregoing however, under
no circumstances shall this Agreement be construed to require Lender
to make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or
on behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent
of Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever
the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is
required, and in all cases such consent may be granted or withheld in
the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
NOVEMBER 15, 1995.
BORROWER:
MICRO GENERAL CORPORATION
By:___/s/ JOHN J HORBAL ___________ By:_/s/ LINDA I MORTON___________
JOHN J. HORBAL, VICE PRESIDENT LINDA I. MORTON, CONTROLLER
LENDER:
FIRST BANK & TRUST
By:_________________________________
Authorized Officer
<PAGE>
CORPORATE RESOLUTION TO BORROW
Borrower: MICRO GENERAL CORPORATION FIRST BANK & TRUST
1740 Wilshire Avenue Santa Ana Regional Office
Santa Ana, CA 92705 2900 South Harbor
P.O. Box 25988
Santa Ana, CA 92704
I, the undersigned Secretary or Assistant Secretary of MICRO GENERAL
CORPORATION (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
Delaware as a corporation for profit, with its principal office at 1740
Wilshire Avenue, Santa Ana, CA 92705, and is duly authorized to transact
business in the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or
by other duly authorized corporate action in lieu of a meeting), duly
called and held on August 31, 1995, at which a quorum was present and
voting, the following resolutions were adopted:
BE IT RESOLVED, that any two (2) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
THOMAS E. PISTILLI PRESIDENT /s/Thomas E. Pistilli
JOHN J. HORBAL VICE PRESIDENT /s/John J. Horbal
LINDA I. MORTON CONTROLLER /s/Linda I. Morton
acting for and on behalf of this Corporation and as its act and deed be,
and they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from FIRST BANK & TRUST
("Lender"), on such terms as may be agreed upon between the officers,
employees, or agents and Lender, such sum or sums of money as in their
judgment should be borrowed; however, not exceeding at any one time
the amount of Six Hundred Thousand & 00/100 Dollars ($600,000.00), in
addition to such sum or sums of money as may be currently borrowed by
the Corporation from Lender.
Execute Notes. To execute and deliver to Lender the promissory note
or notes, or other evidence of credit accommodations of the
Corporation, on Lender's forms, at such rates of interest and on such
terms as may be agreed upon, evidencing the sums of money so borrowed
or any indebtedness of the Corporation to Lender, and also to execute
and deliver to Lender one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the
notes, any portion of the notes, or any other evidence of credit
accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate,
or otherwise encumber and deliver to Lender, as security for the
payment of any loans or credit accommodations so obtained, any
promissory notes so executed (including any amendments to or
modifications, renewals, and extensions of such promissory notes), or
any other or further indebtedness of the Corporation to Lender at any
time owing, however the same may be evidenced, any property now or
hereafter belonging to the Corporation or in which the Corporation now
or hereafter may have an interest, including without limitation all
real property and all personal property (tangible or intangible) of
the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such
loans are obtained or such indebtedness is incurred, or at any other
time or times, and may be either in addition to or in lieu of any
property theretofore mortgaged, pledged, transferred, endorsed,
hypothecated, or encumbered.
Execute Security Documents. To execute and deliver to Lender the
forms of mortgage, deed of trust, pledge agreement, hypothecation
agreement, and other security agreements and financing statements
which may be submitted by Lender, and which shall evidence the terms
and conditions under and pursuant to which such liens and
encumbrances, or any of them, are given; and also to execute and
deliver to Lender any other written instruments, any chattel paper, or
any other collateral, of any kind or nature, which they may in their
discretion deem reasonably necessary or proper in connection with or
pertaining to the giving of the liens and encumbrances.
Notwithstanding the foregoing, any one of the above authorized
officers, employees, or agents may execute, deliver, or record
financing statements.
Negotiate Items. To draw, endorse, and discount with Lender all
drafts, trade acceptances, promissory notes, or other evidences of
indebtedness payable to or belonging to the Corporation or in which
the Corporation may have an interest, and either to receive cash for
the same or to cause such proceeds to be credited to the account of
the Corporation with Lender, or to cause such other disposition of the
proceeds derived therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such documents and agreements, including agreements waiving the right
to a trial by jury, as they may in their discretion deem reasonable
necessary or proper in order to carry into effect the provisions of
these Resolutions. The following person or persons are authorized to
request advances and authorize payments under the line of credit until
Lender receives written notice of revocation of their authority:
THOMAS E. PISTILLI, PRESIDENT; JOHN J. HORBAL, VICE PRESIDENT; and
LINDA I. MORTON, CONTROLLER.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full
force and effect and Lender may rely on these Resolutions until written
notice of their revocation shall have been delivered to and received by
Lender. Any such notice shall not affect any of the Corporation's
agreements or commitments in effect at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and have
not been modified or revoked in any manner whatsoever. The Corporation has
no corporate seal, and therefore, no seal is affixed to this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on November 15, 1995 and
attest that the signatures set opposite the names listed above are their
genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/Linda I. Morton
*Secretary or Assistant Secretary
X
*NOTE: In case the Secretary or other certifying officer is designated by
the foregoing resolutions as one of the signing officers, it is advisable
to have this certificate signed by a second Officer or Director of the
Corporation.
<PAGE>
COMMERCIAL SECURITY AGREEMENT
Borrower: MICRO GENERAL CORPORATION Lender: FIRST BANK & TRUST
1740 E. Wilshire Avenue Santa Ana Regional Office
Santa Ana, CA 92705 2900 South Harbor
P.O. Box 25988
Santa Ana, Ca 92704
THIS COMMERCIAL SECURITY AGREEMENT is entered into between MICRO GENERAL
CORPORATION (referred to below as "Grantor"); and FIRST BANK & TRUST
(referred to below as "Lender"). For valuable consideration, Grantor
grants to Lender a security interest in the Collateral to secure the
Indebtedness and agrees that Lender shall have the rights stated in this
Agreement with respect to the Collateral, in addition to all other rights
which Lender may have by law.
DEFINITIONS. The following words shall have the following meaning when
used in this Agreement. Terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code. All references to dollar amounts shall mean amounts in lawful money
of the United States of America.
Agreement. The word "Agreement" means the Commercial Security
Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached to this Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following described
property of Grantor, whether now owned or hereafter acquired, whether
now existing or hereafter arising, and wherever located:
All inventory, chattel paper, accounts, equipment and general
intangibles
In addition, the word "Collateral" includes all the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located:
(a) All attachments, accessions accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.
(b) All products and produce of any of the property described in
this Collateral section.
(c) All accounts, contract rights, general intangibles,
instruments, rents, monies, payments and all other rights,
arising out of a sale, lease, or other disposition of any of the
property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property
described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche, or electronic media,
together with all of Grantor's right, title, and interest in and
to all computer software required to utilize, create, maintain,
and process any such records or data on electronic media.
Event of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "Events of Default."
Grantor. The "Grantor" means MICRO GENERAL CORPORATION, its
successors and assigns.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness
evidenced by the Note, including all principal and interest, together
with all other indebtedness and costs and expenses for which Grantor
is responsible under this Agreement or under any of the Related
Documents. In addition, the word "Indebtedness" includes all other
obligations, debts and liabilities, plus interest thereon, of Grantor,
or any one or more of them, to Lender, as well as all claims by Lender
against Grantor, or any one or more of them, whether existing now or
later; whether they are voluntary or involuntary, due or not due,
direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly
with others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such
indebtedness may be or hereafter may become barred by statute of
limitations; and whether such indebtedness may be or hereafter may
become otherwise unenforceable. (Initial Here /s/LIM JJH )
Lender. The word "Lender" means FIRST BANK & TRUST, its successors
and assigns.
Note. The word "Note" means the note or credit agreement dated
November 15, 1995, in the principal amount of $600,000.00 from Grantor
to Lender, together with all renewals of, extensions of, modifications
of, refinancings of, consolidations of and substitutions for the note
or credit agreement.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the indebtedness.
DEPOSIT ACCOUNTS. Grantor hereby grants Lender a contractual possessory
security interest in and hereby assigns, conveys, delivers, pledges, and
transfers all of Grantor's right, title and interest in and to Grantor's
accounts with Lender (whether checking, savings, or some other account),
including all accounts held jointly with someone else and all accounts
Grantor may open in the future, excluding however all IRA, Keogh, and trust
accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as
follows:
Perfection of Security Interest. Grantor agrees to execute such
financing statements and to take whatever other actions are requested
by Lender to perfect and continue Lender's secutiy interest in the
Collateral. Upon request of Lender, Grantor will deliver to lender
any and all of the documents evidencing or constituting the
Collateral, and Grantor will note Lender's interest upon any and all
chattel paper if not delivered to Lender for possession by Lender.
Grantor hereby appoints Lender as its irrevocable attorney-in-fact for
the purpose of executing any documents necessary to perfect or to
continue the security interest granted in this Agreement. Lender may
at any time, and without further authorization from Grantor, file a
carbon, photographic or other reproduction of any financing statement
or of this Agreement for use as a financing statement. Grantor will
reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in
effect even though all or any part of the indebtedness is paid in full
and even though for a period of time Grantor may not be indebted to
Lendor.
No Violation. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantoer is
a party, and its certificate or articles of incorporation and bylaws
do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists
of accounts, chattel papter, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies
with applicable laws concerning form, content and manner of
preparation and execution, and all persons appearing to be obligated
on the Collateral have authority and capacity to contract and are in
fact obligated as they appear to be on the Collateral. At the time
any accounts becomes subject to a security interest in favor of
Lender, the account shall be a good and valid account representing an
undisputed, bona fide iondebtedness incurred by the account debtor,
for merchandise held subject to delivery instructions or theretofore
shipped or delivered pursuant to a contract of sale, or for services
theretofore performed by Grantor with or for the account debtor; there
shall be not setoffs or counterclaims against any such account; and
not agreement under which any deductions or discounts may be claimed
shall have been made with the account debtor except those disclosed to
Lender in writing.
Location of the Collateral. Grantor, upon request of Lender, will
deliver to lender in form satisfactory to Lender a schedule of real
properties and Collateral locatons relating to Grantor's operations,
including without limitation the following: (a) all real property
owned or being purchased by Grantor; (b) all real property being
rented or leased by Grantor; (c) all storage facilities owned,
rented, leased, or being used by Grantor; and (d) all other
properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the
Collateral from its existing locations without the prior written
consent of Lender.
Removal of Collateral. Grantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as
accounts, the records concerning the Collateral) at Grantor's address
shown above, or at such other locations as are acceptable to Lender.
Except in the ordinary course of its business, including the sales of
inventory, Grantor shall not remove the Collateral from its existing
locations without the prior written consent of Lender. To the extent
that the Collateral consists of vehicles, or other titled property,
Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the
State of California, without prior written consent of Lender.
Transactions involving Collateral. Except for inventory sold or
accounts collected in the ordinary course of Grantor's business,
Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral. While Grantor is not in default under this
Agreement, Grantor may sell inventory, but only in the ordinary course
of its business and only to buyers who qualify as a buyer in the
ordinary course of business. A sale in the ordinary course of
Grantor's business does not include a transfer in partial or total
satisfaction of a debt or any bulk sale. Grantor shall not pledge,
mortgage, encumber or otherwise permit the Collateral to be subject to
any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if
junior in right to the security interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition
of the Collateral (for whatever reason) shall be held in trust for
Lender and shall not be commingled with any other funds; provided
however, this requirement shall not constitute consent by Lender to
any sale or other disposition. Upon receipt, Grantor shall
immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good
and marketable title to the Collateral, free and clear of all liens
and encumbrances except for the lien of this Agreement. No financing
statement covering any of the Collateral is on file in any public
office other than those which reflect the security interest created by
this Agreement or to which Lender has specifically consented. Grantor
shall defend Lender's rights in the Collateral against the claims and
demands of all other persons.
Collateral Schedules and Locations. As often as Lender shall require
and insofar as the Collateral consists of accounts and general
intangibles, Grantor shall deliver to Lender schedules of such
Collateral, including such information as Lender may require,
including without limitation names and addresses of account debtors
and agings of accounts and general intangibles. Insofar as the
Collateral consists of inventory and equipment, Grantor shall deliver
to Lender, as often as Lender shall require, such lists, descriptions,
and designations of such Collateral as Lender may require to identify
the nature, extent, and location of such Collateral. Such information
shall be submitted for Grantor and each of its subsidiaries or related
companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not
commit or permit damage to or destruction of the Collateral or any
part of the Collateral. Lender and its designated representatives and
agents shall have the right at all reasonable times to examine,
inspect, and audit the Collateral wherever located. Grantor shall
immediately notify Lender of all cases involving the return,
rejection, repossession, loss or damage of or to any Collateral; of
any request for credit or adjustment or of any other dispute arising
with respect to the Collateral; and generally of all happenings and
events affecting the Collateral or the value or the amount of the
Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor
is in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral
is not jeopardized in the Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days,
Grantor shall deposit with Lender cash, a sufficient corporate surety
bond or other security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest, costs,
attorneys' fees or other charges that could accrue as a result of
foreclosure or sale of the Collateral. In any contest Grantor shall
defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender
as an additional obligee under any surety bond furnished in the
contest proceedings.
Compliance With Governmental Requirements. Grantor shall comply
promptly with all laws, ordinances, rules and regulations of all
governmental authorities, now or hereafter in effect, applicable to
the ownership, production, disposition, or use of the Collateral.
Grantor may contest in good faith any such law, ordinance or
regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Lender's interest in the Collateral,
in Lender's opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement
remains a lien on the Collateral, used for the generation,
manufacture, storage, transportation, treatment, disposal, release or
threatened release of any hazardous waste or substance, as those terms
are defined in the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986,
Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and
Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.5 through
7.7 of Division 20 of the California Health and Safety Code, Section
25100, et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. The terms
"hazardous wast" and "hazardous substance" shall also include, without
limitation, petroleum and petroleum by-products or any fraction
thereof and asbestos. The representations and warranties contained
herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims and losses resulting from a
breach of this provision of this Agreement. This obligation to
indemnify shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain
all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may
require with respect to the Collateral, in form, amounts, coverages
and basis reasonably acceptable to Lender and issued by a company or
companies reasonably acceptable to Lender. Grantor, upon request of
Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished
without at least ten (10) days' prior written notice to Lender and not
including any disclaimer of the insurer's liability for failure to
give such a notice. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be
impaired in any way by any act, omission or default of Grantor or any
other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will
provide Lender with such loss payable or other endorsements as Lender
may require. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but shall not
be obligated to) obtain such insurance as Lender deems appropriate,
including if it so chooses "single interest insurance," which will
cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify
Lender of any loss or damage to the Collateral. Lender may make proof
of loss if Grantor fails to do so within fifteen (15) days of the
casualty. All proceeds of any insurance on the Collateral, including
accrued proceeds thereon, shall be held by Lender as part of the
Collateral. If Lender consents to repair or replacement of the
damaged or destroyed Collateral, Lender shall, upon satisfactory proof
of expenditure, pay or reimburse Grantor from the proceeds for the
reasonable cost of repair or restoration. If Lender does not consent
to repair or replacement of the Collateral, Lender shall retain a
sufficient amount of the proceeds to pay all of the Indebtedness, and
shall pay the balance to Grantor. Any proceeds which have not been
disbursed within six (6) months after their receipt and which Grantor
has not committed to the repair or restoration of the Collateral shall
be used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with
Lender reserves for payment of insurance premiums, which reserves
shall be created by monthly payments from Grantor of a sum estimated
by Lender to be sufficient to produce, at least fifteen (15) days
before the premium due date, amounts at least equal to the insurance
premiums to be paid. If fifteen (15) days before payment is due, the
reserve funds are insufficient, Grantor shall upon demand pay any
deficiency to Lender. The reserve funds shall be held by Lender as a
general deposit and shall constitute a non-interest-bearing account
which Lender may satisfy by payment of the insurance premiums required
to be paid by Grantor as they become due. Lender does not hold the
reserve funds in trust for Grantor, and Lender is not the agent of
Grantor for payment of the insurance premiums required to be paid by
Grantor. The responsibility for the payment of premiums shall remain
Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount
of the policy; (d) the property insured; (e) the then current value
on the basis of which insurance has been obtained and the manner of
determining that value; and (f) the expiration date of the policy.
In addition, Grantor shall upon request by Lender (however not more
often than annually) have an independent appraiser satisfactory to
Lender determine, as applicable, the cash value or replacement cost of
the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and
except as otherwise provided below with respect to accounts, Grantor may
have possession of the tangible personal property and beneficial use of all
the Collateral and may use it in any lawful manner not inconsistent with
this Agreement or the Related Documents, provided that Grantor's right to
possession and beneficial use shall not apply to any Collateral where
possession of the Collateral by Lender is required by law to perfect
Lender's security interest in such Collateral. Until otherwise notified by
Lender, Grantor may collect any of the Collateral consisting of accounts.
At any time and even though no Event of Default exists, Lender may exercise
its rights to collect the accounts and to notify account debtors to make
payments directly to Lender for application to the Indebtedness. If Lender
at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care
in the custody and preservation of the Collateral if Lender takes such
action for that purpose as Grantor shall request or as Lender, in Lender's
sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be
a failure to exercise reasonable care. Lender shall not be required to
take any steps necessary to preserve any rights in the Collateral against
prior parties, nor to protect, preserve or maintain any security interest
given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may
(but shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may
(but shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by
Lender for such purposes will then bear interest at the rate charged under
the Note from the date incurred or paid by the Lender to the date of
repayment by Grantor. All such expenses shall become a part of the
Indebtedness and, at Lender's option, will (a) be payable on demand, (b)
be added to the balance of the Note and be apportioned among and be payable
with any installment payments to become due during either (I) the term of
any applicable insurance policy or (ii) the remaining term of the Note, or
(c) be treated as a balloon payment which will be due and payable at the
Note's maturity. This Agreement also will secure payment of these amounts.
Such right shall be in addition to all other rights and remedies to which
Lender may be entitled upon the occurrence of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when
due on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or in any other agreement
between Lender and Grantor.
Insolvency. The dissolution or termination of Grantor's existence as
a going business, the insolvency of Grantor, the appointment of a
receiver for any part of Grantor's property, any assignment for the
benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judical proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Grantor as
to the validity or reasonableness of the claim which is the basis of
the creditor or forfeiture proceeding and if Grantor gives Lender
written notice of the creditor or forfeiture proceeding and deposits
with Lender monies or a surety bond for the creditor or forfeiture
proceeding, in an amount determined by Lender, in its sole discretion,
as being an adequate reserve or bond for the dispute.
Events Affecting Grantor. Any of the preceding events occurs with
respect to any Grantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent. Lender, at its option, may, but shall
not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the quaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the California Uniform Commercial Code. In addition
and without limitation, Lender may exercise any one or more of the
following rights and remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to
pay, immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender
all or any portion of the Collateral and any and all certificates of
title and other documents relating to the Collateral. Lender may
require Grantor to assemble the Collateral and make it available to
Lender at a place to be designated by Lender. Lender also shall have
full power to enter upon the property of Grantor to take possession of
an remove the Collateral. If the Collateral contains other goods not
covered by this Agreement at the time of repossession, Grantor agrees
Lender may take such other goods, provided that Lender makes
reasonable efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of Grantor. Lender may sell the Collateral at
public auction or private sale. Unless theCollateral threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Lender will give Grantor reasonable notice of the
time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice
shall be met if such notice is given at least ten (10) days, or such
lesser time as required by state law, before the time of the sale or
disposition. All expenses relating to the disposition of the
Collateral, including without limiation the expenses of retaking,
holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date
of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter
of right, (b) the receiver may be an employee of Lender and may serve
without bond, and (c) all fees of the receiver and his or her attorney
shall become part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date
of expenditure until repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from
the Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as Lender may determine.
Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or
similar property, Lender may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Collateral
as Lender may determine, whether or not Indebtedness or Collateral is
then due. For these purposes, Lender may, on behalf of and in the
name of Grantor, receive, open and dispose of mail addressed to
Grantor; change any address to which mail and payments are to be sent;
and endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to
Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights
provided in this Agreement. Grantor shall be liable for a deficiency
even if the transaction described in this subsection is a sale of
accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and
remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as may be amended from time to time. In addition,
Lender shall have and may exercise any or all other rights and
remedies it may have available at law, in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make
expenditures or take action to perform an obligation of Grantor under
this Agreement, after Grantor's failure to perform, shall not affect
Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit,
Grantor agrees upon Lender's request to submit to the jurisdiction of
the courts of Orange County, State of California. Lender and Grantor
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Grantor against the other.
(Initial Here /s/ JJH LIM ) This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this
Agreement, and Grantor shall pay the costs and expenses of such
enforcement. Costs and expenses include Lender's attorneys' fees and
legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (and including
efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services.
Grantor also shall pay all court costs and such additional fees as may
be directed by the court.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor
under this Agreement shall be joint and several, and all references to
Grantor shall mean each and every Grantor. This means that each of
the Borrowers signing below is responsible for all obligations in this
Agreement.
Notices. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimilie, and shall be
effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may
change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of
the notice is to change the party's address. To the extent permitted
by applicable law, if there is more than one Grantor, notice to any
Grantor will constitute notice to all Grantors. For notice purposes,
Grantor agrees to keep Lender informed at all times of Grantor's
current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact, irrevocably, with full power of substitution
to do the following: (a) to demand, collect, receive, receipt for,
sue and recover all sums of money or other property which may now or
hereafter become due, owing or payable from the Collateral; (b) to
execute, sign and endorse any and all claims, instruments, receipts,
checks, drafts or warrants issued in payment for the Collateral; (c)
to settle or compromise any and all claims arising under the
Collateral, and, in the place and stead of Grantor, to execute and
deliver its release and settlement for the claim; and (d) to file any
claim or claims or to take any action or institute or take part in any
proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary
or advisable. This power is given as security for the Indebtedness,
and the authority hereby conferred is and shall be irrevocable and
shall remain in full force and effect until renounced by Lender.
Preference Payments. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
Severability. If a court of competent jurisdiction finds any
provision of this Agreement to be invalid or unenforceable as to any
person or circumstances, such finding shall not render that provision
invalid or unenforceable as to any other persons or circumstances. If
feasible, any such offending provision shall be deemed to be modified
to be within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Grantor, shall constitute a waiver of any Lender's
rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance
shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted
or withheld in the sole discretion of Lender.
Waiver of Co-obligor's Rights. If more than one person is obligated
for the Indebtedness, Borrower irrevocably waives, disclaims and
relinquishes all claims against such other person which Borrower has
or would otherwise have by virtue of payment of the Indebtedness or
any part thereof, specifically including but not limited to all rights
of indemnity, contribution or exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED NOVEMBER 15, 1995.
BORROWER:
MICRO GENERAL CORPORATION
By: /s/John J. Horbal By: /s/Linda I. Morton
JOHN J. HORBAL, VICE PRESIDENT LINDA I. MORTON, CONTROLLER
<PAGE>
PROMISSORY NOTE
Borrower: MICRO GENERAL CORPORATION FIRST BANK & TRUST
1740 Wilshire Avenue Santa Ana Regional Office
Santa Ana, CA 92705 2900 South Harbor
P.O. Box 25988
Santa Ana, CA 92704
Principal Amount: $600,00.00 Initial Rate: 10.500% Date of Note:
November 15, 1995
PROMISE TO PAY. MICRO GENERAL CORPORATION ("Borrower") promises to pay to
FIRST BANK & TRUST ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Six Hundred Thousand & 00/100
Dollars ($600,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance.
Interest shall be calculated from the date of each advance until repayment
of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made,
in one payment of all outstanding principle plus all accrued unpaid
interest on April 30, 1996. In addition, Borrower will pay regular monthly
payments of accrued unpaid interest beginning December 30, 1995, and all
subsequent interest payments are due on the same day of each month after
that. Interest on this note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a
year of 360 days, multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or
at such other place as Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will be applied first to
accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to
change from time to time based on changes in an independent index which is
the Prime rate as published in the Wall Street Journal. When a range of
rates has been published, the higher of the rates will be used (the
"Index"). The Index is not necessarily the lowest rate charged by Lender
on its loans. If the Index becomes unavailable during the term of this
loan, Lender may designate a substitute index after notice to Borrower.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than each day.
The Index currently is 8.750% per annum. The interest rate to be applied
to the unpaid principal balance of this Note will be at a rate of 1.750
percentage points over the Index, resulting in an initial rate of 10.5000%
per annum. NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees
and other prepaid finance charges are earned fully as of the date of the
loan and will not be subject to refund upon early payment (whether
voluntary or as a result of default), except as otherwise required by law.
In any event, even upon full prepayment of this Note, Borrower understands
that Lender is entitled to a minimum interest charge of$250.00. Other than
Borrower's obligations to pay any minimum interest charge, Borrower may pay
without penalty all or a portion of the amount owed earlier than it is due.
Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be
charged 5.000% of the unpaid portion of the regularly scheduled payment or
$1.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to comply with or to
perform when due any other term, obligation, covenant, or condition
contained in this Note or any agreement related to this Note, or in any
other agreement or loan Borrower has with Lender. (c) Borrower defaults
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's ability
to repay this Note or perform Borrower's obligations under this Note or any
of the Related Documents. (d) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or
misleading in any material respect either now or at the time made or
furnished. (e) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property, Borrower makes an assignment for the benefit
of creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's
accounts with Lender. (g) Any of the events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes
the prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occured) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within
fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon
Borrower's failure to pay all amounts declared due pursuant to this
section, including failure to pay upon final maturity, Lender, at its
option, may also, if permitted under applicable law, increase the variable
interest rate on this Note to 6.750 percentage points over the Index.
Lender may hire or pay someone else to help collect this Note if Borrower
does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including
attorney's fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any utomatic stay or injunction), appeals, and
any anticipated post-judgment collection services. Borrower also will pay
any court costs, in addition to all other sums provided by law. This Note
has been delivered to Lender and accepted by Lender in the State of
California. If there is a lawsuite, Borrower agrees upon Lender's request
to submit to the jurisdiction of the courts of OrangeCounty, the State of
California. Lender and Borrower hereby waive the right to any jury trial
in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other. (Initial Here /s/LIM JJH ) This Note shall
be governed by and construed in accordance with the laws of the State of
Califoirnia
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if
Borrower makes a payment on Borrower's loan and the check or preauthorized
charge with which Borrower pays is later dishonored.
DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory
security interestin, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account) including without limitation all accounts held jointly with
someone else and all accounts Borrower may open in the future, excluding
however all IRA, Keogh, and other trust accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or by an authorized
person. All oral requests shall be confirmed in writing on the day of the
request. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the
line of credit until Lender receives from Borrower at Lender's address
shown above written notice of revocation of their authority: THOMAS E.
PISTILLI, PRESIDENT; JOHN J. HORBAL, VICE PRESIDENT; and LINDA I. MORTON,
CONTROLLER. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on
this Note or by Lender's internal records, including daily computer
print-outs. Lender will have no obligation to advance funds under this
Note if:
(a) Borrower or any guarantor is in default under the terms of this Note or
any agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower
or any guarantor ceases doing business or is insolvent; (c) any guarantor
seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Note or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Note for purposes
other than those authorized by Lender; or (e) Lender in good faith deems
itself insecure under this Note or any other agreement between Lender and
Borrower.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on its demand. Lender may delay or
forgo enforcing any of its rights or remedies under this Note without
losing them. Borrower and any other person who signs, guarantees or
endorses this Note, to the extent allowed by law, waive any applicable
statute of limitations, presentment, demand for payment, protest and notice
of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note,
whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or notice of
anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom
the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE NOTE.
BORROWER:
MICRO GENERAL CORPORATION
By: /s/John J. Horbal By: /s/Linda I. Morton
JOHN J. HORBAL, VICE PRESIDENT LINDA I. MORTON, CONTROLLER
ACCOUNTANTS' CONSENT
The Board of Directors
Micro General Corporation:
We consent to incorporation by reference in the Registration Statements
No. 33-22240, No. 2-85485 and No. 2-92490 on Form S-8 of Micro General
Corporation of our report dated February 23, 1996, relating to the balance
sheets of Micro General Corporation as of December 31, 1995 and
December 31, 1994 and the related statements of operations,
shareholders' equity and cash flows and related schedule for each of the
years in the three-year period ended December 31, 1995, which report
appears in the December 31, 1995 annual report on Form 10-K of
Micro General Corporation.
KPMG Peat Marwick LLP
Orange County, California
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000067383
<NAME> MICRO GENERAL CORPORATION
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 35,222
<SECURITIES> 0
<RECEIVABLES> 396,585
<ALLOWANCES> 46,594
<INVENTORY> 1,324,109
<CURRENT-ASSETS> 1,852,755
<PP&E> 1,027,065
<DEPRECIATION> 833,374
<TOTAL-ASSETS> 2,084,268
<CURRENT-LIABILITIES> 512,500
<BONDS> 0
0
0
<COMMON> 97,408
<OTHER-SE> 1,474,360
<TOTAL-LIABILITY-AND-EQUITY> 1,571,768
<SALES> 4,041,921
<TOTAL-REVENUES> 4,041,921
<CGS> 1,937,384
<TOTAL-COSTS> 1,937,384
<OTHER-EXPENSES> 2,312,218
<LOSS-PROVISION> 31,849
<INTEREST-EXPENSE> (10,678)
<INCOME-PRETAX> (228,852)
<INCOME-TAX> 800
<INCOME-CONTINUING> (229,652)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (229,652)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
