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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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.)
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<S> <C> <C>
2510 RED HILL AVENUE, SUITE 200 92705 (949) 622-4444
SANTA ANA, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $.05 PAR VALUE NASDAQ OTC BULLETIN BOARD
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]
As of April 13, 1999, 7,596,000 shares of common stock ($.05 par value)
were outstanding, and the aggregate market value of the shares of the common
stock held by non-affiliates of the registrant was $3,396,000.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number 34.
The information in Part III hereof is incorporated herein by reference
to the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended
December 31, 1998, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
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TABLE OF CONTENTS
FORM 10-K
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PAGE NO.
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PART I
Item 1. Business............................................................. 1
Item 2. Properties........................................................... 4
Item 3. Legal Proceedings.................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders.................. 4
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters.............................................. 5
Item 6. Selected Financial Data.............................................. 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 7
Item 7A. Quantitave and Qualitative Disclosure About Market Risk.............. 10
Item 8. Financial Statements and Supplementary Data.......................... 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant................... 33
Item 11. Executive Compensation............................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................................... 33
Item 13. Certain Relationships and Related Transactions....................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................... 33
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PART I
ITEM 1. BUSINESS
Historically, the operations of Micro General Corporation ("Micro General"
or "the Company") consisted of the design, manufacture and sale of computerized
parcel shipping systems, postal scales and piece-count scales. These operations
are currently performed through the Company's postage meter and scale division.
Following the acquisition of ACS Systems, Inc. ("ACS"), which is described
below, the Company shifted its primary focus to information technology and
telecommunication services.
On May 14, 1998, the Company and Fidelity National Financial, Inc.
("FNFI") completed the merger of Micro General with ACS, a wholly-owned
subsidiary of FNFI. As a result of the merger, all of the outstanding shares of
ACS were exchanged for 4.6 million shares of Micro General common stock. The
transaction was appraised at $1.3 million. Following the merger of Micro General
and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an
undiluted basis. The transaction has been accounted for as a reverse merger,
i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary
through a merger with ACS, with Micro General as the legal surviving entity and
ACS as the surviving entity for accounting purposes. At December 31, 1998, FNFI
owned 70.6% of the outstanding common stock of the Company.
ACS was founded in 1985 as a software company specializing in products for
the real estate industry, in particular, escrow software. ACS was acquired by
FNFI in April 1994, and was subsequently merged with the Company as described
above. ACS, through its various divisions, is currently a full-service
enterprise solutions provider that offers total voice, data and systems
integration solutions for small and medium sized businesses, primarily in the
real estate sector. ACS offers a full range of information technology services,
including voice and data network design, implementation and management. ACS also
provides services in the areas of application development, real estate industry
applications, electronic commerce ("eCommerce"), Year 2000 remediation and
consulting services and telecommunications. ACS also offers certain of these
products and services to non-affiliated companies. During 1998, 1997, and 1996,
66%, 89% and 86%, respectively, of the revenue generated by ACS was derived from
multiple servicing arrangements with FNFI and its subsidiaries.
In addition, as a result of the acquisition of LDExchange.com, Inc.
("LDExchange"), which closed on November 17, 1998, the Company has been able to
enter the international telecommunications market, which complements the range
of services offered by ACS. LDExchange is an emerging multinational carrier
focused primarily on the international long distance market. LDExchange offers
reliable, low cost switched voice services on a wholesale basis, primarily to
U.S. based long distance carriers. The LDExchange purchase price was $3.1
million, payable $1.1 million in cash and $2.0 million in Company common stock
(1,000,000 shares).
SERVICES
The Company offers its customers a portfolio of related services within
the broad categories of systems and technology services, business process
management, electronic business and telecommunications. The Company provides its
clients with a wide range of value-added products and services within each of
the categories, and will continue to respond to market needs and opportunities.
ACS
- Systems and Technology Services
Encompasses systems development, integration, telephony solutions,
including PBX, key systems and computer telephony integration, and
management. Also included are desktop services, Year 2000
remediation and consulting and enterprise software solutions.
- Business Process Management
The Company may manage an entire business process within a client
enterprise.
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- Electronic Business
Services offered include interactive marketing and payment services,
Internet and online services, electronic commerce, electronic data
interchange, and the design, development, implementation and
operation of Internet websites, corporate intranets and extranets.
As part of the Company's electronic business services, the Company
has created RealEC, the largest real estate electronic commerce
network in the nation. RealEC is a nationwide multi-vendor network
that will provide real estate and lender customers the ability to
select products and services necessary to close their transactions,
while at the same time giving them access to over 6,000 issuing
locations for title insurance across the United States.
RealEC is a joint venture developed by the Company and Stewart
Mortgage Information, a subsidiary of Stewart Information Services
Corporation (NYSE:STC). The RealEC network integrates each company's
existing systems to provide leading edge software, ultimately
connecting all parties involved with real estate transactions.
RealEC will interface with loan origination software systems,
window-based ordering systems, third party networks, real estate
office systems and the Internet. RealEC will also offer on-line
access to documents related to real estate transactions and link
with back-end title insurance and escrow production systems.
ACS AND LDEXCHANGE
- Telecommunications
The Company offers a full range of telecommunication services,
including digital subscriber lines, frame relay, domestic and
international long distance.
ACQUISITIONS AND STRATEGIC ALLIANCES
The Company has made certain acquisitions and entered into strategic
alliances in an effort to gain a competitive advantage or obtain a new or
expanded presence in targeted markets. The Company believes that the
consolidation and convergence of the computing and software, electronic commerce
and telecommunication industries will continue. Therefore, the Company expects
that its strategy to make acquisitions and/or to enter into strategic alliances
will continue in order for the Company to compete effectively.
REGULATION
Various aspects of the Company's business are subject to Federal, state
and foreign regulation, noncompliance with which, depending on the nature of the
noncompliance, could result in the suspension or revocation of any license or
registration at issue, civil fines or criminal penalties. The Company has not
experienced material difficulties in complying with the various laws and
regulations affecting its business.
COMPETITION
The Company experiences intense competition in the information technology
and telecommunications industries from large multi-national corporations, as
well as from niche-oriented or geographically focused providers. Technology,
telecommunications and their application within the business enterprise are in a
rapid and continuing state of change as new technologies, products and services
continue to be developed, introduced and implemented. The Company believes that
its ability to compete effectively will depend upon its ability to develop and
market products and services on a timely and cost effective basis that enable it
to meet the changing needs of its customers. Another key element to the
Company's competitiveness is its ability to finance and acquire the resources
necessary to offer such products and services.
SIGNIFICANCE OF FIDELITY NATIONAL FINANCIAL, INC.
Approximately 66% of the Company's total revenue in 1998 was attributable
to FNFI and its affiliates. During 1997 and 1996, 89% and 86%, respectively, of
the Company's revenue was derived from multiple servicing arrangements with FNFI
and its subsidiaries. The Company, through ACS, provides substantially all of
the
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information technology and telecommunications services for FNFI and its
subsidiaries. The loss of FNFI as a customer of the Company would have a
material adverse effect on the Company. Information technology and
telecommunication services are provided pursuant to various agreements between
the Company and FNFI.
The various service agreements between the Company and FNFI specify the
terms, conditions and scope of products and services to be provided by the
Company to FNFI. The length of the contracts are generally one to three years,
and are evaluated, modified and renewed on a regular basis. The Company believes
that the negotiated terms of its contracts with Fidelity National Financial,
Inc. are similar to third party rates and conditions; however, the relationship
between the Company and FNFI should not be considered arm's length.
The Company relies on FNFI as the primary source of capital to fund its
operations in the form of revenues generated by the Company related to products
and services provided to FNFI and as a source of funds via available financing
arrangements.
EMPLOYEES
As of March 31, 1999, the Company employed approximately 225 persons. The
Company believes that its relations with employees are generally good.
YEAR 2000 ISSUES
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from
computer programs and computer hardware that utilize only two digits to identify
a year in the date field, rather than four digits. If such programs or hardware
are not modified or upgraded, information systems could fail, lock up, or in
general fail to perform according to normal expectations. The Company has
implemented a program and committed both personnel and other resources to
determine the extent of potential Y2K issues. Included within the scope of this
program are systems used in servicing customer obligations, information
technology products and services, telecommunications services, the postage meter
and scale division, financial management, human resources, payroll and
infrastructure. In addition to a review of internal systems, the Company has
initiated formal communications with third parties with which it does business
in order to determine whether or not they are Y2K compliant and the extent to
which the Company may be vulnerable to third parties' failure to become Y2K
compliant. The Company is in the process of identifying Y2K compliant issues in
its systems, equipment and processes. The Company is making changes to such
systems, updating or replacing such equipment, and modifying such processes to
make them Y2K compliant.
The Company has developed a four phase program to become Y2K compliant.
Phase I is, "Plan Preparation and Identification of the Problem." This is an
ongoing phase that will continue into the year 2000 itself. Phase II is, "Plan
Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining
Y2K Compliance." The Company anticipates that its systems processes will be
substantially Y2K compliant by July 1999. The status of the Y2K compliance
program is monitored by senior management of the Company and the Company's Board
of Directors. The costs of the Y2K related efforts incurred to date have not
been material, and the estimate of remaining costs to be incurred is not
considered to be material. Due to the complexities of estimating the cost of
modifying applications to become Y2K compliant and the difficulties in assessing
third parties' ability to become Y2K compliant, estimates may be subject to
change.
Management of the Company believes that its electronic data processing and
information systems will be Y2K compliant; however, there can be no assurance
that all of the Company's systems will be Y2K compliant, that the costs to be
Y2K compliant will not exceed management's current expectations, or that the
failure of such systems to be Y2K compliant will not have a material adverse
effect on the Company's business. The Company believes that functions currently
performed with the assistance of electronic data processing equipment could be
performed manually or outsourced if certain systems were determined not to be
Y2K compliant on or after January 1, 2000.
The Company has not yet completed a contingency plan in the event that any
systems are not Y2K compliant, but will do so once the Phase III process of its
compliance program is begun. We expect this contingency plan to be complete by
July 1999.
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This entire section, "Year 2000 Issues", is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Company wishes to caution readers that the forward-looking statements
contained in this Form 10-K under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by any forward-looking statements made by or on behalf of
the Company. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is filing the following
cautionary statements identifying important factors that in some cases have
affected, and in the future could cause the Company's actual results to differ
materially from those expressed in any such forward-looking statements.
The factors that could cause the Company's results to differ materially
include, but are not limited to, general economic and business conditions; the
impact of competitive products and pricing; success of operating initiatives;
adverse publicity; changes in business strategy or development plans; quality of
management; availability, terms, and deployment of capital; the results of
financing efforts; business abilities and judgment of personnel; availability of
qualified personnel; employee benefit costs and changes in, or the failure to
comply with government regulations.
ITEM 2. PROPERTIES
The Company's principal offices are located in Santa Ana, California, in
two facilities providing an aggregate of approximately 28,400 square feet of
office space, 22,000 square feet are leased through August 2000, with the
remaining 6,400 square feet leased through October 2007. The Santa Ana property
is sub-leased from Fidelity National Financial, Inc. The remaining office space
consists of approximately 7,100 square feet of office space located in Tustin,
California, is leased through December 2000; approximately 8,600 square feet of
office space located in Tustin, California, is leased through July 2000 and a
5,000 square foot research and development facility, located in Oxford,
Connecticut, is leased through March 2001. The Company also leases certain
smaller spaces and additional space as needed.
The Company believes that the material terms of its leases are
commercially reasonable terms typically found in each of the respective areas in
which the Company leases space. The Company believes that its facilities are
adequate to support its current needs and that additional facilities will be
available at competitive rates as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in
the fourth quarter of 1998.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET AND PRICES
On January 14, 1997, the Company elected to have its common stock delisted
from the NASDAQ SmallCap Market. The stock is now listed on the OTC Bulletin
Board. 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.
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BID PRICE
HIGH LOW
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Year Ended December 31, 1998
First Quarter $ 2.94 $ 1.63
Second Quarter 6.06 2.50
Third Quarter 5.75 3.50
Fourth Quarter 5.00 2.50
Year Ended December 31, 1997
First Quarter $ 1.88 $ 1.13
Second Quarter 1.38 1.00
Third Quarter 1.50 1.13
Fourth Quarter 3.00 1.38
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On April 13, 1999, the last reported sale price of common stock was $4.69
per share. As of April 13, 1999, the Company had approximately 580 stockholders
of record.
DIVIDEND POLICY AND RESTRICTIONS ON DIVIDEND PAYMENTS
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 deficiency of $6,150,353, as of December
31, 1998 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, 1998.
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ITEM 6. SELECTED FINANCIAL DATA
The historical operating results data, per share data and balance sheet
data set forth below are derived from the historical financial statements of the
Company, certain of which have been restated to reflect the ACS Systems, Inc.
acquisition and the related reverse merger accounting treatment (See note 1 of
notes to consolidated financial statements). The balance sheet data includes the
accounts of ACS, the postage scale and meter division and LDExchange as of
December 31, 1998; and only the accounts of ACS as of December 31, 1997, 1996,
1995 and 1994. Operating results and per share data for the year ended December
31, 1998 include the results of operations for ACS for the year ended December
31, 1998, the results of operations for the postage scale and meter division for
the period May 14, 1998 through December 31, 1998 and the results of operations
for LDExchange for the period November 17, 1998 through December 31, 1998.
Operating results and per share data for the years ended December 31, 1997,
1996, 1995 and 1994, include only the results of operations of ACS for the years
then ended. Consolidated balance sheets at December 31, 1998 and 1997 and
consolidated statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1998, 1997 and 1996, together with
the related notes and the report of KPMG LLP, independent certified public
accountants, are included elsewhere herein and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
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(RESTATED) (RESTATED) (RESTATED) (RESTATED)
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OPERATING RESULTS DATA:
Hardware and software sales and
maintenance revenues $ 16,248,425 $ 10,232,371 $ 6,422,557 $ 4,302,056 $ 994,830
Telecommunication service 9,834,555 862,814 -- -- --
revenues
Service and license revenues 7,933,084 2,728,449 449,043 301,043 69,555
------------ ------------ ------------ ------------ ------------
Total revenues 34,016,064 13,823,634 6,871,600 4,603,099 1,064,385
------------ ------------ ------------ ------------ ------------
Hardware and software cost
of sales 15,893,689 8,452,283 5,323,851 3,893,813 271,476
Telecommunication service cost of sales 8,652,054 587,905 -- -- --
Service and license cost of sales 3,421,741 1,279,557 525,253 272,476 18,851
------------ ------------ ------------ ------------ ------------
Total cost of sales 27,967,484 10,319,745 5,849,104 4,166,289 290,327
------------ ------------ ------------ ------------ ------------
Gross profit 6,048,580 3,503,889 1,022,496 436,810 774,058
OPERATING EXPENSES:
Selling, general and
administrative expenses 9,142,574 2,984,812 1,513,319 1,041,572 704,508
Amortization of cost in excess of
net assets acquired and capitalized
software development costs 1,083,621 808,274 638,462 -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses 10,226,195 3,793,086 2,151,781 1,041,572 704,508
------------ ------------ ------------ ------------ ------------
Operating earnings (loss) (4,177,615) (289,197) (1,129,285) (604,762) 69,550
Interest income (expense) (666,788) 15,130 6,675 -- (98)
------------ ------------ ------------ ------------ ------------
Earnings (loss) before
income taxes (4,844,403) (274,067) (1,122,610) (604,762) 69,452
Income tax expense (benefit) 2,400 (64,126) (417,747) -- --
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ (4,846,803) $ (209,941) $ (704,863) $ (604,762) $ 69,452
============ ============ ============ ============ ============
PER SHARE DATA:
Earnings (loss) per share - basic
and diluted $ (.81) $ (.05) $ (.15) $ (.13) $ .02
Number of shares used in per
share computations - basic and diluted 5,954,000 4,597,000 4,597,000 4,597,000 4,597,000
Dividends $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Cash and cash equivalents $ 914,796 830,784 $ -- $ 576,780 $ 259,496
Total assets 23,080,061 9,864,129 7,168,200 3,773,366 4,129,525
Amounts and notes payable to affiliates 16,729,411 5,431,417 3,741,380 -- --
Total liabilities 22,495,473 7,732,738 4,828,868 777,433 711,542
Stockholders' equity 584,588 2,131,391 2,341,332 2,995,933 3,417,983
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of the Company. The discussion
and analysis below includes the results of operations of ACS Systems, Inc. for
each of the years ended December 31, 1998, 1997 and 1996, as the acquisition of
ACS Systems, Inc. has been accounted for as a reverse merger. The results of
operations for the year ended December 31, 1998 include the results of
operations of ACS for the year ended December 31, 1998, the results of
operations of the postage meter and scale division for the period from May 14,
1998 through December 31, 1998 and the results of operations of LDExchange for
the period November 17, 1998 through December 31, 1998. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and notes thereto appearing elsewhere HEREIN.
OVERVIEW
During the years ended December 31, 1997 and 1996, the Company's
operations consisted of the operations of ACS Systems, Inc., formerly a
wholly-owned subsidiary FNFI. ACS was acquired by FNFI in April 1994, and was
subsequently merged with the Company as described above. During 1998, 1997 and
1996, 66%, 89% and 86%, respectively, of the revenue generated by ACS was
derived from multiple servicing arrangements with FNFI and its subsidiaries.
ACS, through its various divisions, is a full-service enterprise solutions
provider that offers total voice, data and systems integration solutions for
small and medium sized businesses, primarily in the real estate sector. ACS
offers a full range of information technology services, including voice and data
network design, implementation and management. ACS also provides services in the
areas of application development, real estate industry applications, electronic
commerce ("eCommerce") and Year 2000 remediation and consulting services and
telecommunications.
Following the reverse merger with Micro General Corporation in May 1998
and the acquisition of LDExchange in November 1998, the Company added a postage
meter and scale division and a multinational carrier focused primarily on the
international long distance market. The Company's primary focus is information
technology and telecommunication services. ACS remained the primary business
unit during 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue
Revenues increased $20.2 million, or 146%, to $34.0 million in 1998 from
$13.8 million in 1997, primarily as a result of continued growth in products and
services provided to FNFI, including an increase in telecommunication services
provided by ACS, the acquisition of the postage scale and meter division and the
acquisition of LDExchange. See note 9. FNFI, as the result of favorable market
conditions, continued expansion and a commitment to implement state of the art
technology, increased the installation and upgrade of its various information
technology systems using ACS as its primary vendor during 1997 that continued
through 1998. See note 9 to the consolidated financial statements regarding
segment information. The increased utilization of ACS by FNFI led to an increase
in all forms of revenue. During 1997 and 1998, ACS was able to increase the
level of products and services provided to non-affiliates, introduced new
products and services and provided telecommunication services.
Gross Profit
Gross profit increased $2.5 million, or 73%, to $6.0 million, representing
a gross profit margin of 18%, in 1998 from $3.5 million, a gross profit margin
of 25%, in 1997. The increase in absolute dollars is consistent with the
increase in revenues. Gross profit margin as a percentage has decreased in 1998
compared to 1997 primarily as a result of the addition of the new segments. See
Comparison of Years Ended December 31, 1997 and 1996. The postage meter and
scale division and LDExchange segments represent lower margin businesses than
the information technology and telecommunication businesses of ACS.
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Expenses
Generally, selling, general and administrative expenses ("S,G & A") trend
consistently with revenues. S,G & A expenses increased $6.2 million, or 206%, to
$9.1 million in 1998 from $3.0 million in 1997. The increase is primarily a
result of the growth of ACS, which occurred in response to the increased demand
for its products and services; the acquisition of the postage scale and meter
division and the acquisition of LDExchange. The expansion in the amount of
products and services provided to FNFI required additional personnel and S,G & A
in order to meet the demand and provide an adequate level of service and
support. As ACS began to offer additional information technology services and
telecommunication services, additional personnel were required and S,G & A
related to the new offerings was incurred. The acquisition of the postage scale
and meter division and the acquisition of LDExchange also resulted in the
addition of personnel and S,G & A related to the operation of these new
segments.
The amortization of cost in excess of net assets acquired and capitalized
software development costs is a function of the characteristics of the
intangible assets recorded during a particular period and the estimated useful
life of the intangible assets. Fluctuations in the amortization of cost in
excess of net assets acquired and capitalized software result from the amount,
mix and characteristics of the intangible assets recorded as well as the
circumstances surrounding the Company's estimate of the appropriate useful life.
Interest income (expense), net, is related to the use of the Company's
available working capital, which is in the form of available cash and lines of
credit. The year over year fluctuation in interest income (expense) can be
attributed to the increase in average borrowings outstanding during 1998
compared to prior years.
Income tax expense (benefit) is recorded based on the amounts that the
Company estimates, based on the Company's taxation structure, will be due to
Federal and state taxation authorities. During 1997 and 1996, ACS was included
in the FNFI consolidated tax returns and income tax expense (benefit) was
calculated as such. During 1998, ACS was included in the Micro General
consolidated group, which pays only minimum taxes based on current operating
results due to the fact that Micro General has not historically generated
earnings.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue
Revenues increased $6.9 million, or 101%, to $13.8 million in 1997 from
$6.9 million in 1996, primarily as a result of the additional products and
services provided to FNFI. FNFI, as the result of favorable market conditions,
continued expansion and a commitment to implement state of the art technology,
increased the installation and upgrade of its various information technology
systems using ACS as its primary vendor. The increased utilization of ACS by
FNFI led to an increase in all forms of revenue. In addition, during 1997, ACS
was able to increase the level of products and services provided to
non-affiliates, introduced new products and services and began providing
telecommunication services.
Gross Profit
Gross profit increased $2.5 million, or 243%, to $3.5 million,
representing a gross profit margin of 25%, in 1997 from $1.0 million, a gross
profit margin of 15%, in 1996. The increase in gross profit, both in dollars and
percentage, is consistent with the increase in revenues primarily as a function
of the negotiation of more favorable terms with FNFI, increased efficiencies and
economies of scale. The Company believes that the renegotiated terms are similar
to third party rates and conditions, however, the relationship between the
Company and FNFI should not be considered arm's length.
Expenses
Generally, selling, general and administrative expenses trend consistently
with revenues. S,G & A increased $1.5 million, or 97%, to $3.0 million in 1997
from $1.5 million in 1996, primarily as a result of the growth of the Company
which occurred in response to the increased demand for its products and
services. The expansion in the amount of products and services provided to FNFI
required additional personnel and S,G & A in order to meet the demand and
provide an adequate level of service and support. In addition, as the Company
began to offer additional
8
<PAGE> 11
information technology services and telecommunication services additional
personnel were required and S,G & A related to the new offerings was incurred.
The amortization of cost in excess of net assets acquired and capitalized
software development costs is a function of the characteristics of the
intangible assets recorded during a particular period and the estimated useful
life of the intangible assets. Fluctuations in the amortization of cost in
excess of net assets acquired and capitalized software result from the amount
mix and characteristics of the intangible assets recorded as well as the
circumstances surrounding the Company's estimate of the appropriate useful life.
Interest income (expense), net, is related to the use of the Company's
available working capital, which is in the form of available cash and lines of
credit, and was comparable year over year.
Income tax expense (benefit) is recorded based on the amounts that the
Company estimates, based on the Company's taxation structure, will be due to
federal and state taxation authorities. During 1997 and 1996, ACS was included
in the FNFI consolidated tax returns and income tax expense (benefit) was
calculated as such.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash requirements include debt service, personnel
and other operating expenses, capital expenditures and capital for acquisitions
and expansion. The Company believes that all anticipated cash requirements will
be met from internally generated funds, future lines of credit and additional
availability from lines of credit from affiliates. Internally generated funds
fluctuate in a pattern generally consistent with revenues. Since the Company has
repositioned itself as a result of the merger with ACS Systems, Inc. and the
acquisition of LDExchange, the revenue, and therefore, cash flow base has
stabilized, particularly as a result of the amount of revenues generated by
affiliates. The Company believes that as a result of its current revenue base
and the anticipated availability of funds in the form of additional lines of
credit from affiliates and non-affiliates, all cash requirements will be met for
at least the next twelve months.
The Company relies on FNFI as the primary source of capital to fund its
operations in the form of revenues generated by the Company related to products
and services provided to FNFI and as a source of funds via available financing
arrangements.
The Company has suffered losses and negative cash flows from operations
for each of the years in the three-year period ended December 31, 1998. In
addition, the Company has an accumulated deficiency and a significant amount of
outstanding debt as of December 31, 1998. As of March 31, 1999, FNFI has
represented that it has the ability and intent to provide the Company with the
cash necessary to continue as a going concern for a period of at least twelve
months following December 31, 1998.
The Company must comply with certain affirmative and negative covenants
related to its outstanding debt and notes payable. The Company was in compliance
with or received waivers related to these covenants at December 31, 1998.
SEASONALITY AND INFLATION
The effects of seasonality and inflation on consolidated operating results
have, historically, been insignificant.
RECENT DEVELOPMENTS
The Company and FNFI completed the merger of Micro General Corporation
with ACS Systems, Inc., a wholly-owned subsidiary of FNFI on May 14, 1998. As a
result of the merger, all of the outstanding shares of ACS were exchanged for
4.6 million shares of Micro General Corporation common stock. The transaction
was valued at $1.3 million. Following the merger of Micro General Corporation
and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an
undiluted basis. The transaction has been treated as a reverse merger, i.e.,
Micro General Corporation has been acquired by Fidelity National Financial, Inc.
as a majority-owned subsidiary through a merger with and into ACS Systems, Inc.,
with Micro General Corporation as the surviving entity. As of December 31, 1998,
FNFI owned 70.6% of the outstanding common stock of the Company.
9
<PAGE> 12
On October 8, 1998, the Company in conjunction with FNFI, announced the
creation of RealEC, the largest real estate electronic commerce network in the
nation. RealEC is a nationwide multi-vendor network that will provide real
estate and lender customers the ability to select products and services
necessary to close their transactions, while at the same time giving them access
to over 6,000 issuing locations for title insurance across the United States.
RealEC is a joint venture developed by the Company and Stewart Mortgage
Information, a subsidiary of Stewart Information Services Corporation
(NYSE:STC). The RealEC network integrate each company's existing systems to
provide leading edge software, ultimately connecting all parties involved the
real estate transactions. RealEC will interface with loan origination software
systems, window-based ordering systems, third party networks, real estate office
systems and the Internet. RealEC will also offer on-line access to documents
related to real estate transactions and link with back-end title insurance and
escrow production systems.
The Company completed the acquisition of LDExchange on November 17, 1998.
As a result of the LDExchange acquisition the Company has been able to enter the
international telecommunications and Internet telephony markets, which
complements the range of services offered by ACS. LDExchange is an emerging
multinational carrier focused primarily on the international long distance
market. LDExchange offers reliable, low cost switched voice services on a
wholesale basis, primarily to U.S. based long distance carriers. The LDExchange
purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million
in Company common stock (1,000,000 shares).
On March 22, 1999, the Company announced the acquisition of 100% of the
outstanding common stock of Interactive Associates, Inc., a privately held
distributor of computer telephony hardware and services. The purchase price for
Interactive Associates, Inc. was 100,000 shares of Company common stock, subject
to certain conditions. The closing price of the Company common stock on March
22, 1999, according to the NASDAQ Bulletin Board was $3.88.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", was issued by the FASB in
March 1998. SOP 98-1 requires that certain costs related to the development or
purchase of internal use software be capitalized and amortized over the
estimated useful life of the software. The provisions of SOP 98-1 are effective
for fiscal years beginning after December 15, 1998. The Company does not expect
that the adoption of SOP 98-1 will have a material impact on its financial
position or results of operations.
SOP 98-5, "Reporting on the Costs of Start-up Activities", was issued in
April 1998. SOP 98-5 provides guidance on the financial reporting of start-up
and organization costs and requires that these costs be expensed as incurred.
The provisions of SOP 98-5 are effective for fiscal years beginning after
December 15, 1998. The Company does not expect that the adoption of SOP 98-5
will have a material impact on its financial position or results of operations.
ITEM 7A. QUANTITAVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's consolidated balance sheets include liabilities whose fair
values are subject to market risks. The following sections address the
significant market risks associated with the Company's financial activities as
of year end 1998.
Interest Rate Risk
The Company's borrowings are subject to interest rate risk. Increases and
decreases in prevailing interest rates generally translate into decreases and
increases in fair values of those instruments. Additionally, fair values of
interest rate sensitive instruments may be affected by the creditworthiness of
the issuer, prepayment options, relative values of alternative investments, the
liquidity of the instrument and other general market conditions.
10
<PAGE> 13
Caution should be used in evaluating the Company's overall market risk
from the information below, since actual results could differ materially because
the information was developed using estimates and assumptions as described
below. See note 7 of notes to consolidated financial statements.
The fair value of the Company's notes payable approximate their carrying
value at December 31, 1998 as the interest rates paid approximate market value.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments would be an increase (decrease) of the fair
value approximately $750,000, if interest rates increased (decreased) 100 basis
points.
11
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MICRO GENERAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report............................................................. 13
Consolidated Balance Sheets as of December 31, 1998 and 1997 (Restated).................. 14
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 (Restated) and 1996 (Restated)................................................ 15
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 (Restated) and 1996 (Restated)....................... 16
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 (Restated) and 1996 (Restated).......................................... 17
Notes to Consolidated Financial Statements............................................... 18
Schedule II - Valuation and Qualifying Accounts and Reserves.............................
</TABLE>
All other schedules are omitted because the required information is not
applicable or the information is presented in the consolidated financial
statements or notes thereto.
12
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Micro General Corporation:
We have audited the consolidated financial statements of Micro General
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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.
As described in notes 1, 5, 6, 7 and 8 to the consolidated financial statements,
the Company's financial position, results of operations and cash flows are
materially affected by and are dependent on certain transactions and agreements
with Fidelity National Financial, Inc. (FNFI), the Company's majority owner, and
FNFI's subsidiaries.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micro General
Corporation and subsidiaries as of December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Los Angeles, California
March 31, 1999
13
<PAGE> 16
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
(Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 914,796 830,784
Trade accounts receivable, less allowance for doubtful accounts
of $485,936 in 1998 and $321,844 in 1997 1,835,968 183,340
Trade accounts receivable due from affiliates 4,350,790 4,234,765
Inventories 785,204 505,949
Prepaid expenses and other assets 359,884 119,432
------------ ------------
Total current assets 8,246,642 5,874,270
Notes receivable 29,850 31,776
Property and equipment, net 3,321,005 704,504
Capitalized software development costs, less accumulated
amortization of $2,794,275 in 1998 and $2,065,596 in 1997 1,505,719 2,170,072
Cost in excess of net assets acquired, less accumulated amortization
of $872,996 in 1998 and $350,546 in 1997 9,976,845 1,083,507
------------ ------------
$ 23,080,061 9,864,129
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,916,314 1,243,975
Income and other taxes payable 138,647 --
Deferred tax liabilities 361,726 361,726
Deferred revenue 349,375 --
Amounts due to affiliates -- 695,620
------------ ------------
Total current liabilities 5,766,062 2,301,321
Amounts and notes payable to affiliates 16,729,411 5,431,417
------------ ------------
Total liabilities 22,495,473 7,732,738
------------ ------------
Commitments and contingencies (note 5)
Subsequent events (note 12)
Stockholders' equity:
Preferred stock, $.05 par value. Authorized 1,000,000 shares;
none issued and outstanding -- --
Common stock, $.05 par value. Authorized 20,000,000 shares;
issued and outstanding 7,546,666 and 6,546,666 shares
at December 31, 1998 and 1997, respectively 377,333 327,333
Additional paid-in capital 6,357,608 3,107,608
Accumulated deficiency (6,150,353) (1,303,550)
------------ ------------
Total stockholders' equity 584,588 2,131,391
------------ ------------
$ 23,080,061 9,864,129
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 17
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C>
Hardware and software sales and maintenance
revenues $ 16,248,425 10,232,371 6,422,557
Telecommunication service revenues 9,834,555 862,814 --
Service and license revenues 7,933,084 2,728,449 449,043
------------ ------------ ------------
Total revenues (note 6) 34,016,064 13,823,634 6,871,600
------------ ------------ ------------
Hardware, software and maintenance cost of
sales 15,893,689 8,452,283 5,323,851
Telecommunication service cost of sales 8,652,054 587,905 --
Service and license cost of sales 3,421,741 1,279,557 525,253
------------ ------------ ------------
Total cost of sales 27,967,484 10,319,745 5,849,104
------------ ------------ ------------
Gross profit 6,048,580 3,503,889 1,022,496
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 9,142,574 2,984,812 1,513,319
Amortization of cost in excess of net assets
acquired and capitalized software
development costs 1,083,621 808,274 638,462
------------ ------------ ------------
Total operating expenses 10,226,195 3,793,086 2,151,781
------------ ------------ ------------
Operating loss (4,177,615) (289,197) (1,129,285)
Interest income (expense), net (666,788) 15,130 6,675
------------ ------------ ------------
Loss before income taxes (4,844,403) (274,067) (1,122,610)
Income tax expense (benefit) 2,400 (64,126) (417,747)
------------ ------------ ------------
Net loss $ (4,846,803) (209,941) (704,863)
============ ============ ============
Loss per share - basic and diluted $ (.81) (.05) (.15)
============ ============ ============
Number of shares used in per share
computations - basic and diluted 5,954,000 4,597,000 4,597,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIENCY EQUITY
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(Restated) 6,546,666 $ 327,333 3,107,608 (388,746) 3,046,195
Net loss -- -- -- (704,863) (704,863)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996
(Restated) 6,546,666 327,333 3,107,608 (1,093,609) 2,341,332
Net loss -- -- -- (209,941) (209,941)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997
(Restated) 6,546,666 327,333 3,107,608 (1,303,550) 2,131,391
Equity issued in connection
with merger (note 1) -- -- 1,300,000 -- 1,300,000
Shares issued to acquire
LDExchange.com, Inc. 1,000,000 50,000 1,950,000 -- 2,000,000
Net loss -- -- -- (4,846,803) (4,846,803)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 7,546,666 $ 377,333 6,357,608 (6,150,353) 584,588
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,846,803) (209,941) (704,863)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,423,959 812,262 642,057
Changes in assets and liabilities:
Trade accounts receivable (215,770) (536,017) 307,204
Inventories 90,745 (288,559) 2,326
Prepaid expenses and other assets (157,452) (66,936) (28,357)
Accounts payable and accrued
expenses 261,802 158,468 308,055
Income and other tax payable 85,739 -- --
Deferred revenue 329,789 -- --
Amounts due from affiliates (116,025) (81,872) (1,683,748)
----------- ----------- -----------
Net cash used in operating
activities (3,144,016) (212,595) (1,157,326)
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of LDExchange.com, Inc. 717,000 -- --
Merger of Micro General and ACS 403,175 -- --
Purchase of property and equipment (2,768,119) (702,404) --
Decrease (increase) in notes receivable 1,926 (29,776) (2,000)
Capitalization of software development costs (64,326) (610,098) (410,663)
----------- ----------- -----------
Net cash used in investing
activities (1,710,344) (1,342,278) (412,663)
----------- ----------- -----------
Cash flows from financing activities - net increase
in borrowings from affiliates 4,938,372 2,385,657 993,209
----------- ----------- -----------
Net cash provided by financing
activities 4,938,372 2,385,657 993,209
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 84,012 830,784 (576,780)
Cash and cash equivalents at beginning of year 830,784 -- 576,780
----------- ----------- -----------
Cash and cash equivalents at end of year $ 914,796 830,784 --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Historically, the operations of Micro General Corporation ("Micro
General") consisted of the design, manufacture and sale of
computerized parcel shipping systems, postal scales and piece-count
scales. These operations are currently performed through the
Company's postage meter and scale division. Following the acquisition
of ACS Systems, Inc. ("ACS"), which is described below, Micro General
(together with ACS, the "Company") shifted its primary focus to
information technology and telecommunication services.
On May 14, 1998, the Company and Fidelity National Financial, Inc.
("FNFI") completed the merger of Micro General with ACS, a wholly
owned subsidiary of FNFI. As a result of the merger, all of the
outstanding shares of ACS were exchanged for 4.6 million shares of
Micro General common stock. The transaction was appraised at $1.3
million. Following the merger of Micro General and ACS, FNFI owned
approximately 81.4% of the common stock of the Company on an
undiluted basis. The transaction has been treated as a reverse
merger, i.e., Micro General has been acquired by FNFI as a
majority-owned subsidiary through a merger with ACS, with Micro
General as the surviving legal entity and ACS as the surviving entity
for accounting purposes. As a result, the consolidated financial
statements of Micro General previously issued prior to the year ended
December 31, 1998 have been restated to reflect only the balance
sheets, operations and cash flows of ACS prior to the merger with
Micro General and to reflect ACS as the acquiror for accounting
purposes. The cost of $1.3 million was allocated to the fair value of
the assets acquired and liabilities assumed relating to Micro
General. The results of Micro General have been included in the
Company's results of operations since the merger on May 14, 1998. At
December 31, 1998, FNFI owned 70.6% of the outstanding common stock
of the Company (see note 11).
ACS was founded in 1985 as a software development company
specializing in products for the real estate industry, in particular,
escrow software. ACS was acquired by FNFI in April 1994, and was
subsequently merged with the Company as described above. ACS is a
full-service enterprise solutions provider that offers total voice,
data and systems integration solutions for small and medium sized
businesses, primarily in the real estate sector.
The Company generated 66%, 89% and 86% of its revenue during the
years ended December 31, 1998, 1997 and 1996, respectively, from
multiple servicing arrangements with FNFI and its subsidiaries.
In addition, as a result of the acquisition of LDExchange.com, Inc.
("LDExchange"), which closed on November 17, 1998, the Company has
been able to enter the international telecommunications and Internet
telephony markets, which complements the range of services offered by
ACS. The LDExchange purchase price was $3.1 million, payable $1.1
million in cash and $2.0 million in Company common stock (1,000,000
shares). The acquisition was accounted for as a purchase and
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<PAGE> 21
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
the results of operations of LDExchange have been included in the
Company's results of operations since November 17, 1998. (see note
11).
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with banks with
original maturities of three months or less.
(c) ACCOUNTS RECEIVABLE
The carrying amounts reported in the consolidated balance sheets for
accounts receivable approximate their fair value.
(d) INVENTORIES
Inventories are stated at the lower of cost or market (net realizable
value) under the first-in, first-out method of accounting for
inventories.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
on a straight-line basis over estimated useful lives which range from
three to seven years. Amortization of leasehold improvements is
charged to expense on a straight-line basis over the shorter of the
estimated useful lives of the assets or the term of the underlying
lease.
(f) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs incurred after the establishment of
technological feasibility are capitalized and later amortized using
the greater of the straight-line method or based on the estimated
revenue distribution over the remaining estimated economic life of
the products. Such policy results in the Company amortizing its
capitalized software development costs over an estimated economic
life of three to seven years. During 1998 and 1997, the Company
capitalized software development costs of $64,326 and $610,098,
respectively. During 1998 and 1997, the Company amortized software
development costs of $728,679 and $712,672, respectively. The Company
periodically assesses the recoverability of the cost of its
capitalized software development costs based on an analysis of the
cash flows generated by the underlying assets. In the opinion of
management, no impairment of capitalized software development costs
has occurred at December 31, 1998.
(g) COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is the excess of the purchase
price paid over the fair value of the net assets of the acquired
company at the date of acquisition. Cost in excess of net assets
acquired is amortized on a straight-line basis over 5 to 15 years.
The Company periodically assesses the recoverability of its cost in
excess of net assets acquired based on an analysis of the cash flows
generated by the underlying assets. In the opinion of management, no
impairment of cost in excess of net assets acquired has occurred at
December 31, 1998 (see note 11).
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<PAGE> 22
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
(h) REVENUE RECOGNITION
The Company has adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," for the years ended December 31, 1998, 1997 and
1996. Under SOP 97-2, if a software sales arrangement does not
require significant modification or customization of the software,
revenue from the sale of the software is recognized when evidence of
an arrangement exists, the fee is fixed and determinable, the license
agreement has been delivered and collection of any resulting
receivable is probable.
As a result of certain issues raised in applying SOP 97-2, in March
1998, the AICPA issued an SOP which delayed for one year the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the
delivered software element in certain multiple-element arrangements
that include service elements entered into by entities that never
sell the software elements separately. In December 1998, the AICPA
issued SOP 98-9, which amends paragraphs of SOP 97-2 to require
recognition of revenue using the residual method under certain
circumstances, and is effective for fiscal years beginning after
March 15, 1999. The Company does not expect the adoption of this SOP
to have a material impact on the Company's consolidated financial
statements.
Revenue from the sales of hardware and other products is recognized
when delivery has occurred, the fee is fixed and determinable and
collection of any resulting receivable is probable. Revenue from
maintenance, servicing and consulting is recognized as the related
services are performed.
(i) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. ("Statement") 109, "Accounting for
Income Taxes." Statement 109 provides that deferred tax assets and
liabilities be recognized for temporary differences between the
financial reporting basis and the tax basis of the Company's assets
and liabilities and expected benefits of utilizing net operating loss
and credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The impact on deferred taxes of changes in tax
rates and laws, if any, are applied to the years during which
temporary differences are expected to be settled and reflected in the
financial statements in the period enacted.
(j) MANAGEMENT ESTIMATES
The preparation of these consolidated 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.
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<PAGE> 23
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
(k) EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average number of
shares outstanding and excludes any dilutive effects of options and
convertible securities. Diluted earnings per share gives effect to
assumed conversions of potentially dilutive securities. Shares used
in the earnings per share calculations for 1998 are the
weighted-average shares of Micro General outstanding during 1998,
assuming the shares issued in connection with the merger of ACS and
Micro General were outstanding since January 1, 1998. Shares used in
the earnings per share calculations for 1997 and 1996 represent the
shares issued to FNFI in connection with the merger of ACS and Micro
General. All outstanding options and warrants (see notes 7 and 10)
have been excluded from the calculations of diluted loss per share as
their inclusion would be antidilutive.
(l) OTHER COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income," which established new rules for the reporting
and display of comprehensive income and its components. However, the
adoption of Statement 130 had no impact on the Company's consolidated
financial statements as comprehensive income is comprised only of net
loss.
(2) INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Computer equipment $482,106 403,519
Telecommunications equipment 303,098 102,430
-------- --------
$785,204 505,949
======== ========
</TABLE>
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<PAGE> 24
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
(3) INCOME TAXES
The income tax provision (benefit) for the years ended December 31,
1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ -- (16,528) (263,950)
State 2,400 (2,833) (77,326)
-------- -------- --------
2,400 (19,361) (341,276)
-------- -------- --------
Deferred:
Federal -- (33,740) (59,144)
State -- (11,025) (17,327)
-------- -------- --------
-- (44,765) (76,471)
-------- -------- --------
$ 2,400 (64,126) (417,747)
======== ======== ========
</TABLE>
The provision for income taxes differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to the loss before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax
benefit $(1,647,097) (93,183) (381,687)
State taxes, net of Federal
income tax benefit (62,681) (9,008) (61,524)
Amortization of cost in
excess of net assets 177,633 33,461 33,459
acquired
Nondeductible expenses 29,505 4,604 (7,995)
Net operating loss utilized
by affiliated group 781,366 -- --
Valuation allowance 723,674 -- --
----------- ----------- -----------
$ 2,400 (64,126) (417,747)
=========== =========== ===========
</TABLE>
22
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<PAGE> 25
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
The deferred tax assets and liabilities at December 31, 1998 consist of
the following:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
----------- -----------
<S> <C> <C>
Book over tax provision for bad debts $ 193,570 --
Reserves and accruals not recognized for
income tax purposes 218,218 --
Acquired assets adjustment to fair value 919,402 --
Net operating loss carryover 2,185,868 --
Other 1,087 --
Accelerated depreciation -- 2,482
Acquired assets adjustment to fair value -- 365,149
----------- -----------
3,518,145 367,631
Valuation allowance (3,512,240) --
----------- -----------
$ 5,905 367,631
=========== ===========
</TABLE>
The deferred tax assets and liabilities at December 31, 1997 consist of
the following:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
-------- --------
<S> <C>
Book over tax provision for bad debts $171,775 --
Acquired assets adjustment to fair value -- 533,501
-------- --------
$171,775 533,501
======== ========
</TABLE>
Statement 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The Company has established a
valuation allowance of $2,636,964 principally associated with net
operating loss carryforwards and other deferred tax assets recorded from
acquisitions and an additional allowance of $875,276 to cover the majority
of the other deferred tax assets. Any tax benefits subsequently recognized
for deferred tax assets related to these acquisitions will be allocated to
goodwill.
ACS was included as an affiliate in the consolidated income tax returns of
FNFI through mid-November 1998. Prior to May 1998, ACS paid taxes or
received such tax benefits as it contributed to the consolidated tax
position of FNFI. Micro General was included as an affiliate in the
consolidated income tax returns of FNFI from May 14, 1998 through
mid-November 1998. FNFI utilized approximately $2,298,000 of losses
generated by the Company during this period for which Micro General will
not be reimbursed by FNFI. The Company has available Federal and state net
operating loss carryforwards of $6,125,199 expiring in years 2001 through
2019, and $1,770,534 expiring in years 2000 through 2004, respectively.
23
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<PAGE> 26
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Telecommunications equipment $1,557,150 695,620
Computer equipment 1,158,642 67,840
Furniture and fixtures 605,864 28,005
Office equipment 59,571 19,209
Leasehold improvements 232,956 14,390
---------- ----------
3,614,183 825,064
Less accumulated depreciation and amortization 293,178 120,560
---------- ----------
$3,321,005 704,504
========== ==========
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company leases facilities and equipment under various operating
leases. Future minimum noncancelable lease commitments, due primarily
to affiliates, are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $1,198,426
2000 745,716
2001 657,552
2002 630,355
2003 595,716
Thereafter 2,190,883
----------
Total minimum lease payments $6,018,648
==========
</TABLE>
Rent expense was $913,059, $238,721 and $128,179 for the years ended
December 31, 1998, 1997 and 1996, respectively. Included in rent
expense for 1998, 1997 and 1996 was $721,515, $235,316 and $128,179,
respectively, paid to affiliates.
(b) LITIGATION
The Company is involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of the management,
the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
24
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<PAGE> 27
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
(6) RELATED PARTY TRANSACTIONS
As described in note 1, the Company's primary source of revenue is fees
resulting from sales and services to affiliated companies. Revenues
generated from sales and services to affiliates for the years ended
December 31, 1998, 1997 and 1996 were $22,480,042, $12,356,444 and
$5,932,524, respectively.
The amounts due to affiliates at December 31, 1997, classified as current
liabilities, relate mainly to an arrangement with a subsidiary of FNFI,
whereby the personnel costs of the Company were funded by this subsidiary
of FNFI. The Company reimbursed FNFI from time to time as funds became
available. No interest was charged to the Company in this arrangement. The
Company utilizes funds available under the Convertible Note Purchase
Agreement, described below, to currently fund its operations.
In addition, the Company has long-term amounts and notes payable to
affiliates amounting to $16,729,411 and $5,431,417 at December 31, 1998
and 1997, respectively (see note 7).
The Company also leases facilities from FNFI subsidiaries (see note 5).
(7) NOTES PAYABLE
On August 1, 1996, Micro General entered into a $3 million financing
agreement which provided additional funding, primarily for the retirement
of bank debt, operations and to fund Micro General's development of a
series of high level security postage meters designed to comply with the
new United States Postal Service proposed regulations. Two 9.5%, five-year
convertible notes were issued, one in the amount of $1 million and one in
the amount of $2 million, and are held respectively by Cal West Service
Corporation ("Cal West"), a subsidiary of FNFI, which owned 38% of the
outstanding Micro General common stock when the Cal West note was issued
and Dito Caree L.P. Holding ("Dito Caree"), which owned 5% of the
outstanding common stock of Micro General when the Dito Caree note was
issued.
Repayment of the notes was on an interest-only basis for the first two
years, with principal and interest payments for the remaining three years
of the term. The debt, secured by the assets of Micro General, is
convertible into 1,344,438 shares of the Company's common stock at prices
ranging from $2.00 to $2.50 per share. At December 31, 1998, there was
$3,000,000 outstanding on these notes. The Company is subject to certain
restrictive covenants, both financial and operational, related to these
notes. As of December 31, 1998, the Company was not in compliance with
certain of these covenants and obtained waivers for these covenants
through December 31, 1999.
On November 25, 1997, Micro General entered into a $600,000 financing
agreement, which provided additional funding to be used by Micro General
for operating cash flow purposes. Two 9.0% notes were issued in the amount
of $200,000 and $400,000, held by Cal West and Dito Caree, respectively.
Interest on the two notes is to be paid quarterly. The Company had the
right to prepay all or a portion of the interest and principal due on the
notes at any time prior to the original due date of May 31, 1998. The
amount payable under the note payable to Dito Caree was refinanced in
connection with the Convertible Note Purchase Agreement discussed below.
25
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<PAGE> 28
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
In conjunction with these short-term notes, Micro General issued to the
note holders, two detachable warrant certificates, one in the amount of
50,000 shares to Cal West and one in the amount of 100,000 shares to Dito
Caree, giving the note holders the right to purchase 150,000 shares of the
Company's common stock at $1.50 per share. The warrants can be exercised
at any time between November 25, 1997 and November 25, 2002. No warrants
have been exercised by the holders. The outstanding amount on this note at
December 31, 1998 was $200,000 and the Company was not in compliance with
certain restrictive financial covenants related to this debt. The Company
obtained waivers for these covenants through December 31, 1999, and the
due date on the note was extended through 1999.
Micro General entered into a third financing agreement to provide
additional funding to be used by Micro General for operational cash flow
purposes. On April 8, 1998, two 9.0% notes were issued, one in the amount
of $250,000 and one in the amount of $500,000, held by Cal West Service
Corporation and Dito Caree, respectively. Interest on the notes is to be
paid quarterly. Micro General had the right to prepay all or a portion of
the interest and principal due on the notes at any time prior to the due
date of October 31, 1998. The amount payable under the note payable to
Dito Caree was refinanced in connection with the Convertible Note Purchase
Agreement discussed below.
In conjunction with the notes, Micro General issued to the note holders,
two detachable warrant certificates, one in the amount of 62,500 shares to
Cal West and one in the amount of 125,000 shares to Dito Caree, giving the
note holders the right to purchase 187,500 shares of the Company's common
stock at $1.50 per share. The warrants can be exercised at any time
between April 8, 1998 and April 8, 2003. No warrants have been exercised
by the respective holders. The amount outstanding at December 31, 1998 was
$250,000 and the Company was not in compliance with certain restrictive
financial covenants related to this debt. The Company obtained waivers for
these covenants through December 31, 1999, and the due date on the note
was extended through 1999.
On October 27, 1998, the Company entered into a $15 million Convertible
Note Purchase Agreement with FNFI, which replaced a $5 million financing
agreement between the Company and a subsidiary of FNFI dated May 14, 1998,
entered into in connection with the merger with ACS. Two 10.0%, five-year
convertible notes were issued, one in the amount of $14.1 million and one
in the amount of $900,000, held by Cal West and Dito Caree, respectively.
Interest on these notes is to be paid quarterly. The entire unpaid balance
of the notes, including principal and accrued but unpaid interest, is due
and payable on October 27, 2003. The note holders have the right to
convert all or a portion of the principal to be repaid on the payment date
into shares of the Company's common stock at the conversion price. The
debt is secured by the assets of the Company and can be converted into
3,133,333 shares of the Company's $.05 par value common stock at a price
of $4.50 per share. The note holders retain the right to acquire shares
until note maturity on October 27, 2003. At December 31, 1998, there was
$13,279,411 outstanding on these notes. The Company is subject to
certain restrictive covenants, both financial and operational, related to
these notes. The Company was in compliance with these covenants as of
December 31, 1998.
26
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<PAGE> 29
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
The carrying value of notes payable to affiliates approximates fair value
at December 31, 1998 due to the fact that the interest rates paid on the
notes payable to affiliates approximate market rates.
Principal maturities of the notes payable and long-term debt at December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ --
2000 3,450,000
2001 --
2002 --
2003 13,279,411
-----------
$16,729,411
===========
</TABLE>
(8) LIQUIDITY AND GOING CONCERN
The Company has suffered losses and negative cash flows from operations
for each of the years in the three-year period ended December 31, 1998. In
addition, the Company has an accumulated deficiency and a significant
amount of outstanding debt as of December 31, 1998.
As a result, substantial doubt exists about the Company's ability to
continue as a going concern for a reasonable period of time following the
December 31, 1998 balance sheet date. However, as of March 31, 1999, FNFI
has represented that it has the ability and intent to provide the Company
with cash necessary to continue as a going concern for a period of at
least twelve months following December 31, 1998. Given this
representation, management believes that the Company will be able to
continue as a going concern for a reasonable period following December 31,
1998. Management has plans to expand the Company's business relationships
with unaffiliated third parties and take other measures to ultimately
generate cash flows sufficient to support its operations.
(9) SEGMENT INFORMATION
The Company's consolidated financial statements as of and for the year
ended December 31, 1998 include three reportable segments. Prior to 1998,
the Company consisted only of ACS.
<TABLE>
<CAPTION>
CORPORATE AND
POSTAGE METER
AND SCALE
ACS LDEXCHANGE DIVISION TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 25,938,067 7,203,340 874,657 34,016,064
============ ============ ============ ============
Operating loss $ (3,192,833) (97,962) (886,820) (4,177,615)
Interest expense, net (398,375) 2,462 (270,875) (666,788)
------------ ------------ ------------ ------------
Loss before
income taxes $ (3,591,208) (95,500) (1,157,695) (4,844,403)
============ ============ ============ ============
</TABLE>
27
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<PAGE> 30
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
<TABLE>
<S> <C> <C> <C> <C>
Assets $ 13,837,703 2,401,050 6,841,308 23,080,061
============ ============ ============ ============
</TABLE>
The activities of the three reportable segments include the following:
- ACS: A computer hardware and software sales and support division and
a telecommunication division, which provides comprehensive data
network systems support, including selling computer hardware and
software products and developing integrated title and escrow computer
applications for the title and real estate related industries. Also
provides telecommunications hardware and long-distance reselling,
technical and consulting services, and internet access and services.
All sales to affiliated companies are from this division (see note
6).
- LDEXCHANGE: International telecommunication services which provides
access to the international long-distance market for the rapidly
growing wholesale telecommunication service sector. LDExchange had
sales of $4,978,380 to one non-affiliated customer.
- MICRO GENERAL: Corporate and the postage meter and scale division,
which develops, manufactures and markets computerized equipment for
shipping, mailing and operations, with products ranging from low-cost
mechanical and electronic postal scales for personal and office use,
to complete systems for high-volume processing of parcels shipped by
UPS and other carriers.
The vast majority of expenditures for additions to long-lived assets, as
well as depreciation and amortization, pertain to ACS.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. There were no intersegment
sales or transfers during the year ended December 31, 1998.
(10) EMPLOYEE BENEFIT PLANS
Employee benefits include an employee stock purchase plan, three stock
option plans and a 401(k) plan.
In 1998, the Company's Board of Directors approved the adoption of an
Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, there
are 800,000 shares of the Company's common stock available for purchase at
current market prices by Company employees who meet certain vesting
requirements. The authorized number of shares is subject to adjustment in
the event of stock splits, stock dividends or certain other similar
changes in the capital structure of the Company. Pursuant to the ESPP,
Company employees may contribute an amount between 5% and 15% of their
base salary and certain commissions. The Company contributes varying
amounts as specified in the ESPP. There have been no stock purchases by
the ESPP as of December 31, 1998.
28
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<PAGE> 31
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
In 1987, stockholders also approved the adoption of a Stock Option Plan
("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company
may grant stock options to certain key employees and nonemployee directors
or officers. The number of shares issuable under the 1987 Option Plan is
220,000 shares of common stock at not less than fair market value on the
date of grant. All options granted become exercisable at the discretion of
the Board of Directors and expire five years from the date of grant.
Options that lapse or are canceled prior to exercise are added to the
shares authorized for future grants. The 1987 Option Plan expired in 1991,
but was renewed by stockholders in 1993. There were no remaining shares
available for grant at December 31, 1998 under the 1987 Option Plan.
In 1995, stockholders approved the adoption of the 1995 Stock Option Plan
("1995 Option Plan"). The number of shares reserved for issuance under the
1995 Option Plan is 132,000 shares of common stock. All 132,000 shares
were available for grant at December 31, 1998 under the 1995 Option Plan.
During 1998, stockholders approved the adoption of the 1998 Stock
Incentive Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,500,000
shares of common stock, plus an additional 300,000 shares of common stock
on the date of each annual meeting of the stockholders of the Company, for
issuance under the terms of the 1998 Plan. The authorized number of shares
is subject to adjustment in the event of stock splits, stock dividends or
certain other similar changes in the capital structure of the Company. The
1998 Plan provides for grants of "incentive stock options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified
stock options and rights to purchase shares of common stock ("Purchase
Rights"). Incentive stock options, nonqualified stock options and Purchase
Rights may be granted to employees of the Company and its subsidiaries and
affiliates. Nonqualified stock options and Purchase Rights may be granted
to employees of the Company and its subsidiaries and affiliates,
nonemployee directors and officers, consultants and other service
providers.
The Board of Directors, or a committee consisting of two or more members
of the Board of Directors, will administer the 1998 Plan (the
"Administrator"). The Administrator will have the full power and authority
to interpret the 1998 Plan, select the recipients of options and Purchase
Rights, determine and authorize the type, terms and conditions of,
including vesting provisions, and the number of shares subject to, grants
under the 1998 Plan, and adopt, amend and rescind rules relating to the
1998 Plan. The term of options may not exceed 10 years from the date of
grant (5 years in the case of a person who owns or is deemed to own more
than 10% of the total combined voting power of all classes of stock of the
Company). The option exercise price for each share granted pursuant to an
incentive stock option may not be less than 100% of the fair market value
of a share of common stock at the time such option is granted (110% of
fair market value in the case of an incentive stock option granted to a
person who owns more than 10% of the combined voting power of all classes
of stock of the Company). There is no minimum purchase price for shares of
common stock purchased pursuant to a Purchase Right, and any such purchase
price shall be determined by the Administrator. The maximum number of
shares for which options may be granted to any one person during any one
calendar year under the 1998 Plan is 1,500,000 and in no event shall the
aggregate number of shares subject to incentive stock options exceed
1,500,000. The aggregate fair market value of the common stock (determined
as of the date of grant) with respect to incentive stock options
29
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<PAGE> 32
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
granted under the 1998 Plan or any other stock option plan of the
Company that become exercisable for the first time by any optionee during
any calendar year may not exceed $100,000.
Prior to 1998, the Company's stock option activity was immaterial. A
summary of the Company's stock option activity and related information for
the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------ -----
<S> <C> <C>
Beginning outstanding at December 31, 1997 227,166 $1.93
Granted 1,226,250 4.80
Exercised -- --
Canceled (14,500) 1.86
---------
Stock options outstanding at December 31, 1998 1,438,916 4.35
========= =====
Stock options exercisable at December 31, 1998 985,750 $4.28
========= =====
</TABLE>
The weighted-average remaining contractual life of the options outstanding
at December 31, 1998 is 9.01 years.
The following table sets forth options outstanding and exercisable by
price range at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- -----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES 12/31/98 LIFE PRICE 12/31/98 PRICE
------------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.25 - $3.50 242,666 5.18 $ 2.13 186,992 $ 2.10
$4.75 - $4.75 200,000 9.61 4.75 200,000 4.75
$4.81 - $4.81 996,250 9.82 4.81 598,758 4.81
--------- ---------
$1.25 - $4.81 1,438,916 9.01 4.35 985,750 4.28
========= ===== ======= ========= ========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("Opinion 25"), and related
Interpretations in accounting for its employee stock options. As discussed
below, in management's opinion, the alternative fair value accounting
provided for
30
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<PAGE> 33
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
under Statement 123, "Accounting for Stock Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under Opinion 25, because the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect
the value of an estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Pro forma information regarding net earnings and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions. The risk-free interest rate used in the
calculation is the rate on the date the options were granted. The
risk-free interest rate used for options granted during 1998 was 5.7%. A
volatility factor for the expected market price of the common stock of 50%
was used for options granted in 1998. No dividends are paid by the
Company; as a result, its expected dividend yield is 0.0%. A
weighted-average expected life of seven years was used in all years as the
Company has little history of options being exercised.
The impact of applying the provisions of Statement 123 on the consolidated
results of operations is not material for the year ended December 31,
1998.
The Company also offers a 401(k) profit sharing plan, a qualified
voluntary contributory savings plan, available to substantially all
employees. Eligible employees may contribute up to 15% of their pretax
annual compensation, up to the amount allowed pursuant to the Internal
Revenue Code. The Company may elect to make matching contributions. The
Company has historically not made matching contributions.
(11) ACQUISITIONS
As discussed in note 1, Micro General and ACS merged in May 1998 and
LDExchange was acquired in November 1998.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Micro General/ACS merger were as follows:
<TABLE>
<S> <C>
Tangible assets acquired at fair value $ 305,000
Cost in excess of net assets acquired 5,709,000
Liabilities assumed at fair value (4,717,000)
-----------
</TABLE>
31
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<PAGE> 34
MICRO GENERAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 1998 and 1997 (Restated) and for the Years
Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
<TABLE>
<S> <C>
Total purchase price $ 1,297,000
===========
</TABLE>
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the LDExchange acquisition were as follows:
<TABLE>
<S> <C>
Tangible assets acquired at fair value $ 1,592,000
Cost in excess of net assets acquired 3,707,000
Liabilities assumed at fair value (2,199,000)
-----------
Total purchase price $ 3,100,000
===========
</TABLE>
Selected unaudited pro forma combined results of operations for the years
ended December 31, 1998 and 1997, assuming the Micro General/ACS merger
and LDExchange acquisitions occurred on January 1, 1998 and 1997,
respectively, are presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997
------------ ----------
<S> <C> <C>
Total revenue $ 60,565,000 17,049,000
Net loss (5,225,549) (2,544,931)
Loss per share - basic and diluted (.69) (.34)
</TABLE>
(12) SUBSEQUENT EVENTS
In March 1999, the Company acquired Interactive Associates, Inc., a
privately held distributor of computer telephony hardware and services.
This acquisition provides for the purchase of 100% of the common stock of
Interactive Associates, Inc. in exchange for 100,000 shares of Micro
General common stock, subject to certain conditions. The closing price of
the Company common stock on March 22, 1999, according to the NASDAQ
Bulletin Board, was $3.88. This acquisition will be accounted for using
the purchase method.
In March 1999, the postage meter and scale division ceased operations.
32
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. THROUGH 13.
Within 120 days after the close of its fiscal year, the Company intends to
file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended,
which will include the election of directors, the report of compensation
committee on annual compensation, certain relationships and related transactions
and other business.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following is a list of the Consolidated
Financial Statements of Micro General Corporation and its subsidiaries included
in Item 8 of Part II.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1998 and 1997 (Restated).
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 (Restated) and 1996 (Restated).
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 (Restated) and 1996 (Restated)
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 (Restated) and 1996 (Restated)
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K.
Schedule II: Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) The following exhibits are incorporated by reference or are set
forth on pages to this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 25,
1988, as amended.
3.11 Restated Articles of Incorporation of the Company -
Article Fourth of the Certificate of Incorporation,
incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31,
1996.
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.2 Bylaws of the Company, incorporated by reference from
the Company's Annual Report on Form 10-K for the year
ended December 25, 1988, as amended.
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 from the Company's Annual
Report on Form 10-K for the year 1984; Option Plan and
form of Incentive Stock Option Agreement in use
commencing in 1987, incorporated by reference to Exhibit
10 from the Company's Annual Report on Form 10-K for the
year ended December 28, 1986.
10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock
Purchase Plan, incorporated by reference from Form S-8,
registration number 333-64289.
10.18 Convertible Note Purchase Agreement between Micro
General Corporation and Cal West Service Corporation
dated August 1, 1996, incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.19 Convertible Note Purchase Agreement between Micro
General Corporation and Dito Caree L.P. dated August 1,
1996, incorporated by reference from the Company's
Annual Report on Form 10-K for the year ended December
31, 1996.
10.20 Loan Agreement and Agreement to issue Detachable
Warrants between Micro General Corporation and Cal West
Service Corporation and Dito Caree L.P. Holding dated
November 25, 1997, incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.22 Agreement and Plan of Reorganization dated as of May 14,
1998, among ACS Systems, Inc., Micro General
Corporation, ACS Merger, Inc. and Fidelity National
Financial, Inc., a Delaware corporation, incorporated by
reference from the Company's report on Form 8-K dated as
of May 14, 1998.
10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS
Systems, Inc., a California Corporation, a Delaware
corporation, Micro General Corporation, a Delaware
corporation and Fidelity National Financial, Inc., a
Delaware corporation, incorporated by reference from the
Company's report on Form 8-K dated as of May 14, 1998.
10.23 Convertible Note Purchase Agreement between Micro
General Corporation and Cal West Service Corporation and
Dito Caree L.P. Holding dated October 27, 1998.
10.24 Agreement and Plan of Reorganization dated November 17,
1998 by and among Micro General Corporation, a
California corporation, LDExchange.com, Inc. Joseph L.
Putegnant, III, Carolyn Hallinan and Europa
Telecommunications, incorporated by reference from the
Company's report on Form 8-K dated as of November 23,
1998.
10.25 Inducement Agreement and Agreement to Transfer and
Reissue Detachable Warrants and Convertible Notes, by
and between John Snedegar, Cal West Service Corporation
and Micro General Corporation, dated March 30, 1999.
21 List of Subsidiaries
23.1 Consent of KPMG LLP
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the
fourth quarter of 1998 as follows:
Current report on Form 8-K dated November 17, 1998, related to the
acquisition of LDExchange.com, Inc.
34
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MICRO GENERAL CORPORATION,
A DELAWARE CORPORATION
Date: April 14, 1999 By: /s/ John Snedegar
--------------------- ---------------------------------
John Snedegar
Chief Executive Officer
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Patrick F. Stone Chairman of the Board April 14, 1999
- -----------------------------------
Patrick F. Stone
/s/ William P. Foley Director April 14, 1999
- -----------------------------------
William P. Foley
/s/ Carl A. Strunk Director April 14, 1999
- -----------------------------------
Carl A. Strunk
/s/ Richard H. Pickup Director April 14, 1999
- -----------------------------------
Richard H. Pickup
Director April __, 1999
- -----------------------------------
George E. Olenik
/s/ John Snedegar Director April 14, 1999
- -----------------------------------
John Snedegar
/s/ David N. Kenneally Chief Accounting Officer April 14, 1999
- -----------------------------------
David N. Kenneally
</TABLE>
<PAGE> 38
SCHEDULE II
MICRO GENERAL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
Additions
Balance at Charged to Amounts
Beginning Costs and Written-off Balance at
Classification of Period Expenses Period End of
------------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $ 321,844 $ 247,437 $ 83,345 $ 485,936
Year ended December 31, 1997:
Allowance for doubtful accounts 314,419 63,683 56,258 321,844
Year ended December 31, 1996:
Allowance for doubtful accounts 235,157 134,428 55,166 314,419
</TABLE>
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, incorporated by
reference from the Company's Annual Report on Form 10-K for the year
ended December 25, 1988, as amended.
3.11 Restated Articles of Incorporation of the Company - Article Fourth
of the Certificate of Incorporation, incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
3.2 Bylaws of the Company, incorporated by reference from the Company's
Annual Report on Form 10-K for the year ended December 25, 1988, as
amended.
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 from the Company's Annual Report on Form 10-K for the year
1984; Option Plan and form of Incentive Stock Option Agreement in
use commencing in 1987, incorporated by reference to Exhibit 10 from
the Company's Annual Report on Form 10-K for the year ended December
28, 1986.
10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan,
incorporated by reference from Form S-8, registration number
333-64289.
10.18 Convertible Note Purchase Agreement between Micro
General Corporation and Cal West Service Corporation
dated August 1, 1996, incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.19 Convertible Note Purchase Agreement between Micro General
Corporation and Dito Caree L.P. dated August 1, 1996, incorporated
by reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
10.20 Loan Agreement and Agreement to issue Detachable Warrants between
Micro General Corporation and Cal West Service Corporation and Dito
Caree L.P. Holding dated November 25, 1997, incorporated by
reference from the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among
ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and
Fidelity National Financial, Inc., a Delaware corporation,
incorporated by reference from the Company's report on Form 8-K
dated as of May 14, 1998.
10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems,
Inc., a California Corporation, a Delaware corporation, Micro
General Corporation, a Delaware corporation and Fidelity National
Financial, Inc., a Delaware corporation, incorporated by reference
from the Company's report on Form 8-K dated as of May 14, 1998.
10.23 Convertible Note Purchase Agreement between Micro General
Corporation and Cal West Service Corporation and Dito Caree L.P.
Holding dated October 27, 1998.
10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and
among Micro General Corporation, a California corporation,
LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and
Europa Telecommunications, incorporated by reference from the
Company's report on Form 8-K dated as of November 23, 1998.
10.25 Inducement Agreement and Agreement to Transfer and Reissue
Detachable Warrants and Convertible Notes, by and between John
Snedegar, Cal West Service Corporation and Micro General
Corporation, dated March 30, 1999.
21 List of Subsidiaries
23.1 Consent of KPMG LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.23
================================================================================
CONVERTIBLE NOTE PURCHASE AGREEMENT
by and between
MICRO GENERAL CORPORATION,
a Delaware corporation,
and
CALWEST SERVICE CORPORATION,
a California corporation
Dated as of October 27, 1998
CONVERTIBLE NOTE
DUE OCTOBER 27, 2003
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article I - Definitions and Other Provisions of General Application......................... 2
Section 101. Definitions.............................................................. 2
Section 102. Effect of Headings and Table of Contents................................. 4
Section 103. Successors and Assigns................................................... 4
Section 104. Severability Clause...................................................... 4
Section 105. Benefits of Agreement.................................................... 4
Section 106. Governing Law............................................................ 4
Section 107. Legal Holidays........................................................... 4
Section 108. Execution in Counterparts................................................ 5
Section 109. Attorneys' Fees.......................................................... 5
Section 110. Notices.................................................................. 5
Article II - The Note....................................................................... 6
Section 201. Form Generally........................................................... 6
Section 202. Conversion Notice........................................................ 6
Section 203. Designation, Amount and Issuance of the Note............................. 6
Section 204. Execution of the Note.................................................... 6
Article III - Covenants of the Company...................................................... 7
Section 301. Payment of Principal and Interest........................................ 7
Section 302. Corporate Existence...................................................... 7
Section 303. Payment of Taxes and Other Claims........................................ 7
Section 304. Dividends/Compensation................................................... 7
Section 305. Corporate Existence; Foreign Qualification............................... 7
Section 306. Books, Records and Inspections........................................... 7
Section 307. Compliance with Laws..................................................... 7
Section 308. Maintenance of Permits................................................... 7
Section 309. Capital Expenditures/Debt................................................ 7
Article IV - Representations and Warranties................................................. 8
Section 401. Customer Contracts....................................................... 8
Section 402. Board of Directors....................................................... 9
Section 403. Organization, Etc........................................................ 9
Section 404. Capital Stock; Stock Options............................................. 9
Section 405. Corporate Authority...................................................... 9
Section 406. Notes and Accounts Receivable............................................ 9
Section 407. Actions, Suits, Etc...................................................... 10
Section 408. Material Contracts....................................................... 10
Section 409. Absence of Undisclosed Liabilities....................................... 11
Section 410. Accuracy of Information.................................................. 11
Section 411. Real Estate Leases....................................................... 11
Section 412. Personal Property Leases................................................. 11
Section 413. Intellectual Property.................................................... 11
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C>
Section 414. Trade Secrets............................................................ 12
Section 415. Software and Information Systems......................................... 12
Section 416. Insurance................................................................ 12
Article V - Defaults; Remedies.............................................................. 13
Section 501. Events of Default........................................................ 13
Section 502. Acceleration of Maturity, Rescission and Annulment;
Other Remedies................................................................... 14
Section 503. Collection of Indebtedness and Suits for Enforcement..................... 15
Section 504. Lender May File Proofs of Claim.......................................... 15
Section 505. Application of Money Collected........................................... 16
Section 506. Rights and Remedies Cumulative........................................... 16
Section 507. Delay or Omission Not Waiver............................................. 16
Section 508. Waiver of Stay or Extension Laws......................................... 16
Article VI - Reports by Company............................................................. 17
Section 601. Annual Statement......................................................... 17
Section 602. Reports by Company....................................................... 17
Section 603. Quarterly Financial Reports.............................................. 17
Article VII - Consolidation, Merger, Conveyance, Transfer , Sale or Lease................... 17
Section 701. Company May Consolidate. etc., on Certain Terms.......................... 17
Section 702. Right of First Refusal of Lenders........................................ 18
Article VIII - Redemption of Note by the Company............................................ 18
Section 801. Right to Redeem.......................................................... 18
Section 802. Notice of Redemption..................................................... 18
Article IX - Right to Convert Note and/or Right to Purchase Stock........................... 19
Section 901. Rights Granted........................................................... 19
Section 902. Anti-Dilution Rights of Lender........................................... 19
Section 903. Manner of Exercise of Conversion Privilege............................... 20
Section 904. Notice to Lender Prior to Certain Corporate Actions...................... 20
Section 905. Reservation of Shares of Common Stock.................................... 21
Section 906. Taxes Upon Conversion.................................................... 21
Section 907. Covenants as to Common Stock............................................. 21
Section 908. Piggyback Registration Rights............................................ 21
Article X - Conditions Precedent............................................................ 22
Section 1001. Conditions Precedent.................................................... 22
</TABLE>
- ii -
<PAGE> 4
CONVERTIBLE NOTE PURCHASE AGREEMENT
This CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is made and
effective as of October 27, 1998, by and between MICRO GENERAL CORPORATION, a
corporation duly organized and existing under the laws of the State of Delaware
(herein called the "Company"), having its principal office at 2510 Redhill
Avenue, Santa Ana, California 92705, and CALWEST SERVICE CORPORATION, a
California corporation ("Lender").
RECITALS
WHEREAS, Lender has agreed to make a series of loans to the Company; and
WHEREAS, in order to evidence its agreement to repay said loans, the
Company has duly authorized the issuance of two (2) separate convertible
promissory notes, one in the principal amount of $900,000.00 and one in the
principal amount of $14,100,000.00, and each of which permits the Lender to
convert said note into a certain number of shares of the Company's common
capital stock or to purchase a certain number of shares of the Company's common
capital stock, and in connection therewith, the parties have authorized the
execution and delivery of two (2) separate purchase agreements substantially in
the form hereof, and
WHEREAS, as contemplated hereinabove, the Company has, contemporaneously
herewith, issued its convertible promissory note (the "Note") in the original
principal amount of $14,100,000.00, and the Lender has agreed to purchase said
Note; and
WHEREAS, in order to set forth the terms and conditions upon which the
Note is to be issued by the Company and purchased by the Lender, the Company and
Lender have duly authorized the execution and delivery of this Agreement; and
WHEREAS, as an inducement to Lender to purchase the Note, whether or not
the Company borrows the full amount of the Note, the Company has agreed to give
Lender the right, but not the obligation, throughout the five (5) year term of
the Note, to either convert all or a portion of the principal of the Note into,
or to purchase directly from the Company, an aggregate of 3,133,333 shares of
the Company's common stock five cent ($.05) par value common capital stock (the
"Common Stock"), at $4.50 per share;
WHEREAS, Lender has previously made loans to the Company on November 25,
1997 in the amount of $200,000 and on April 8, 1998 in the amount of $250,000
and now desires to forgive said loans and replace them with this Agreement and
Note it being understood that detachable warrants arising out of the November
25, 1997 loan and the April 8, 1998 loan will continue as obligations of the
Company, it being understood that the Convertible Note Purchase Agreement and
Promissory Note of August 1, 1996 remain in full force and effect;
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreements hereinafter set forth, and intending to be legally bound hereby, the
parties hereto agree as follows:
<PAGE> 5
ARTICLE I
DEFINITIONS AND
OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned
to them in this Article and include the plural as well as the singular;
(2) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as are
generally accepted at the date of such computation; and
(3) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
"Administrative Agent" means CalWest Service Corporation, a California
corporation, which shall act as agent for the Lenders.
"Agreement" means this instrument as originally executed or, if amended
or supplemented as herein provided, as so amended or supplemented.
"Board of Directors" means either the board of directors of the Company
or any duly authorized committee of the board of directors of the Company.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in the City of Los
Angeles, California are authorized or required to close.
"Common Stock" means the five cent ($.05) par value Common Stock of the
Company as the same exists at the date of the execution of this Agreement or
shares of any class or classes resulting from any reclassification or
reclassifications thereof and which have no preference in respect of dividends
or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which are not subject to redemption
by the Company; provided, however, that if at any time there shall be more than
one such resulting class, the share of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of shares of
all such classes resulting from all such reclassifications.
- 2 -
<PAGE> 6
"Company" means the Person named as the "Company" in the first paragraph
of this instrument until a successor corporation shall have become such pursuant
to applicable provisions of this Agreement, and thereafter "Company" shall mean
such successor corporation.
"Conversion Notice" has the meaning specified in Sections 202 and 903
hereof.
"Conversion Price" has the meaning specified in Section 901 hereof.
"Corporation" includes corporations, associations, companies and
business trusts.
"Dollars" and "$" means the lawful money of the United States of
America.
"Event of Default" has the meaning specified in Section 501 hereof.
"Executive Employee" means any employee of the Company who holds the
title of Vice President or above.
"Indebtedness" means money borrowed.
"Lender," when used in the singular, means Dito Caree L.P.; and
"Lenders," when used in the plural, means collectively Dito Caree L.P. and
CalWest Service Corporation.
"Interest Payment Date" has the meaning specified in Section 203 hereof.
"Note," when used in the singular, means the Note executed by the
Company and delivered to the Lender under this Agreement as specified in the
recitals hereof; and "Notes," when used in the plural, means collectively the
two Notes executed by the Company and delivered to the Lenders under this
Agreement as specified in the recitals hereof.
"Note Rate" has the meaning specified in Section 203 hereof.
"Notice of Redemption" has the meaning specified in Section 802 hereof.
"Officer's Certificate" means a certificate signed by the President of
the Company and delivered to Lender describing with particularity the use of
proceeds of an advance on the Note, representing that there are no defaults
under this Agreement or the Note, or relating to such other matters as may be
required hereunder.
"Payment Date" shall mean an Interest Payment Date or a Principal
Payment Date.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
- 3 -
<PAGE> 7
"Principal Payment Date" means any date on which a payment of principal
and interest on the Note shall be due.
"Redemption Date" has the meaning specified in Section 802 hereof.
"Subsidiary" means any corporation more than fifty percent (50%) of the
outstanding voting stock of which is at the time owned, directly or indirectly,
by the Company or by one or more other Subsidiaries, or by the Company and one
or more other Subsidiaries. For purposes of this definition, the term "voting
stock" means stock which ordinarily has voting power for the election of
directors, whether at all times or only so long as no senior class of stock has
such voting power by reason of any contingency.
"Vice President," when used with respect to the Company, means any vice
president, whether or not designated by a number or a word or words added before
or after the title "vice president."
SECTION 102. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 103. SUCCESSORS AND ASSIGNS. All covenants and agreements in
this Agreement by either party shall bind its successors and assigns, whether so
expressed or not. Any act or proceeding by any provision of this Agreement
authorized or required to be done or performed by any board, committee or
officer of either party shall and may be done and performed with like force and
effect by the board, committee or officer of any corporation that shall at the
time be the lawful sole successor of either party.
SECTION 104. SEVERABILITY CLAUSE. In case any provision in this
Agreement or in the Note shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 105. BENEFITS OF AGREEMENT. Nothing in this Agreement or in the
Note, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder any benefit or any legal or equitable
right, remedy or claim under this Agreement.
SECTION 106. GOVERNING LAW. Each of this Agreement and the Note shall be
governed by and construed in accordance with the laws of the State of
California.
SECTION 107. LEGAL HOLIDAYS. In any case where the date of maturity of
or interest on or principal of the Note or the date fixed for redemption or for
purchase of the Note or the last day on which Lender has the right to convert
the Note shall not be a Business Day then (notwithstanding any other provision
of this Agreement or of the Note) payment of such interest, premium or principal
or conversion of the Note need not be made on such date but may be made on the
next succeeding Business Day with the same force and effect as if made on the
date of maturity or the date fixed for redemption or for purchase or the last
day for conversion, and interest shall accrue for the period
- 4 -
<PAGE> 8
from and after such date of maturity or date fixed for redemption or for
purchase or last day for conversion to such next succeeding Business Day.
SECTION 108. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, including facsimile counterparts, each of which
shall be an original, but all of which counterparts shall together constitute
one and the same instrument.
SECTION 109. ATTORNEYS' FEES. Should suit be filed seeking enforcement
or interpretation of this Agreement and/or the Note, the prevailing party in any
such action shall be entitled to receive in addition to any other sums awarded
to such party, attorneys' fees and all other costs of collection actually
incurred in such action.
SECTION 110. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing, and shall be personally delivered or
sent by registered or certified mail, postage prepaid, return receipt requested,
overnight courier, or by facsimile, addressed to the parties as set forth
herein. Any such notice shall be deemed received upon the earlier of (a) if
personally delivered, the date of delivery to the address of the person to
receive such notice, (b) if mailed, four (4) business days after the date of
posting by the United States post office, (c) if given by overnight courier,
upon receipt by the person to receive such notice, or (d) if sent by facsimile,
when sent.
To the Company: Micro General Corporation
2510 Redhill Avenue
Santa Ana, California 92705
Attn: President
Facsimile: 949/477-6802
To Lender: CalWest Service Corporation
17911 Von Karman Avenue, Suite 300
Irvine, California 92614
Attn: Secretary
Facsimile: 949/622-4104
Any notice, request, demand, direction or other communication sent by telecopy
must be confirmed within forty-eight (48) hours by letter mailed or delivered in
accordance with the foregoing. Notice of change of address shall be given by
written notice in the manner detailed in this Section 110. Rejection or other
refusal to accept or the inability to deliver because of changed address of
which no notice was given shall be deemed to constitute receipt of the notice,
demand, request or communication sent.
- 5 -
<PAGE> 9
ARTICLE II
THE NOTE
SECTION 201. FORM GENERALLY. The Note shall be in substantially the form
set forth on Exhibit "A" attached hereto, but with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Agreement, and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with applicable securities laws.
SECTION 202. CONVERSION NOTICE. A Conversion Notice, substantially in
the form of Exhibit "B" attached hereto, shall be attached to the Note and shall
be used by Lender to exercise the right to convert the Note into Common Stock.
SECTION 203. DESIGNATION, AMOUNT AND ISSUANCE OF THE NOTE.
(a) The Note shall be designated as a "convertible note" of the
Company, and shall be one of two (2) such "convertible notes," to-wit, the Notes
that are the subject of this Agreement, one in the face amount of Nine Hundred
Thousand Dollars ($900,000.00) and the other in the face amount of Fourteen
Million One Dollars ($14,100,000.00); provided, however, that following the
repayment of $7,816,000.00 in short term borrowing owed to CalWest Service
Corporation further disbursements of principal under the Note shall be limited
to no more than $250,000.00 per disbursement during the term of the Note to be
approved by Lender upon each disbursement request, and Lender shall have no
obligation to make any disbursement under the Note until it shall have received
an Officer's Certificate with respect to each such disbursement in compliance
with the requirements of Section 1001(a) hereof.
(b) The Note shall be dated the date of its issue and shall bear
simple interest from the date thereof at the rate of ten percent (10%) per annum
(the "Note Rate"), and shall be payable as follows: Accrued interest only on the
principal amount of the Note shall be payable quarterly in arrears during the
first five (5) years of the term thereof commencing October 27, 1998 (each, an
"Interest Payment Date"). The entire unpaid balance of the Note, including
principal and accrued but unpaid interest, shall be due and payable on October
27, 2003.
SECTION 204. EXECUTION OF THE NOTE. The Note shall be executed on behalf
of the Company by its President or one of its Vice Presidents, under its
corporate seal reproduced thereon, and by its Secretary, one of its Assistant
Secretaries, its Chief Financial Officer, or any Assistant Treasurer.
- 6 -
<PAGE> 10
ARTICLE III
COVENANTS OF THE COMPANY
For so long as this Agreement shall remain in effect, the Company
covenants that:
SECTION 301. PAYMENT OF PRINCIPAL AND INTEREST. It will duly and
punctually pay the principal of and interest on the Note at the place, at the
respective times and in the manner provided in the Note; and each installment of
principal and/or interest on the Note shall be paid by mailing checks or wire
transferring funds for the amount due to Lender in a manner reasonably
calculated to cause such funds to be received on or prior to a Payment Date.
SECTION 302. CORPORATE EXISTENCE. Subject to Article VII hereof, the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence.
SECTION 303. PAYMENT OF TAXES AND OTHER CLAIMS. The Company has paid and
will in the future pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (a) all taxes, assessments and governmental
charges levied or imposed upon the Company or upon the income, profits or
property of the Company, and (b) all lawful claims against the Company for
labor, materials and supplies which in the case of either clause (a) or (b) of
this Section 303, if unpaid, might by law become a lien upon its property;
provided, however, that the Company shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings.
SECTION 304. DIVIDENDS/COMPENSATION. It shall not (a) declare, pay or
make any dividend or distribution (in cash, property or obligations) on any
shares of any class of its capital stock (now or hereafter outstanding) of the
Company or on any warrants, options or other rights with respect to any shares
of any class of capital stock (now or hereafter outstanding) of the Company, or
apply any of its funds, property or assets to the purchase, redemption, sinking
fund or other retirement of any shares of any class of capital stock (now or
hereafter outstanding) of the Company or any option, warrant or other right to
acquire shares of the Company's capital stock, or (b) make any deposit for any
of the foregoing purposes. No additional salary, bonus or other cash or non-cash
compensation shall be paid to any of the Company's Executive Employees in an
amount greater than the amount set forth in any existing employment contracts
with such individuals, or, in the case of "at-will" Executive Employees, any
increase in the compensation paid for such Executive Employees shall require the
prior written approval of the Company's Board of Directors and the
Administrative Agent, which approval will not be unreasonably withheld. No
non-cash compensation shall be paid to any employees of the Company without the
prior written approval of the Company's Board of Directors and the
Administrative Agent, which approval will not be unreasonably withheld.
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SECTION 305. CORPORATE EXISTENCE; FOREIGN QUALIFICATION. It will do and
cause to be done at all times all things necessary to (a) maintain and preserve
the corporate existence of the Company (b) be duly qualified to do business and
in good standing as foreign corporations in each jurisdiction where the nature
of its business makes such qualification necessary, and (c) comply with all
contractual obligations and requirements of law binding upon it.
SECTION 306. BOOKS, RECORDS AND INSPECTIONS. It shall:
(a) maintain, and cause each of its Subsidiaries, if any, to
maintain complete and accurate books and records;
(b) permit, and cause each of its Subsidiaries, if any, to permit
access at reasonable times by Lender to its books and records;
(c) permit, and cause each of its Subsidiaries, if any, to permit
Lender to inspect at reasonable times its properties and operations; and
(d) permit, and cause each of its Subsidiaries, if any, to permit
Lender to discuss its business, operations and financial condition with its
officers and employees or with its outside auditors.
SECTION 307. COMPLIANCE WITH LAWS. It shall comply with all federal,
state and local laws, rules and regulations related to its businesses;
SECTION 308. MAINTENANCE OF PERMITS. It shall maintain all permits,
licenses and consents as may be required for the conduct of its business by any
state, federal or local government agency or instrumentality.
SECTION 309. CAPITAL EXPENDITURES/DEBT. It shall not, without the
express prior written consent of Lender, (a) make any capital expenditures not
made with the proceeds of the sale of the Note, and the use of all proceeds for
capital expenditures shall be substantially as described in the Officer's
Certificate applicable thereto, or (b) other than the Note or any other
"convertible note" as referenced in Section 203(a) hereof, incur any new
Indebtedness, liability or obligation to any third party.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants as follows to Lender:
SECTION 401. CUSTOMER CONTRACTS. The Company represents and warrants to
Lender that, as of the date hereof, to its knowledge all contracts and
agreements between it and purchasers of its goods and services (whether payable
in cash or in kind) are valid and in full force and effect, all
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amounts due and owing to the Company thereunder have been paid, no default
exists either on the part of the Company or of any other party to any such
contract and that the list of such contracts appearing on Schedule 401 attached
hereto is true, accurate and complete;
SECTION 402. BOARD OF DIRECTORS. As of the date hereof, the list of
Directors making up its Board of Directors set forth on Schedule 402 attached
hereto is true, accurate and complete, and all such Directors have been duly
elected by valid shareholder action in the manner required by the Certificate of
Incorporation and/or the Bylaws of the Company;
SECTION 403. ORGANIZATION, ETC. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has no active Subsidiaries at the date hereof. The company has
corporate power to own or lease its properties and to carry on its business as
and in the places where such properties are now owned, leased or operated, and
its business is now conducted, and the Company has complied in all material
respects with all material federal, state and local laws with respect to the
operation and the conduct of its business. Copies of the Certificate of
Incorporation and all amendments thereto, bylaws as amended and currently in
force, stock records and corporate minutes and records of the Company heretofore
made available to Lender are complete and correct at the date hereof;
SECTION 404. CAPITAL STOCK; STOCK OPTIONS.
(a) The Company has authorized capital stock consisting of
10,000,000 shares of Common Stock, five cent ($.05) par value, of which
6,910,452 shares are issued and outstanding as of October 27, 1998, and
1,000,000 shares of Preferred Stock, five cent ($.05) par value, none of which
are issued or outstanding. All of the issued and outstanding shares of Common
Stock are duly authorized and validly issued, fully-paid and nonassessable, were
offered, issued and sold in accordance with applicable federal and state
securities laws, and there are no preemptive rights in respect thereof. There
are no other classes of stock of the Company other than the Common Stock and
Preferred Stock.
(b) There are no outstanding options, warrants, rights, calls,
commitments, conversion rights, plans or other agreements or instruments of any
character providing for the purchase or other acquisition by the holders thereof
or issuance of any company securities of any description, except as set forth on
Schedule 404(b) attached hereto.
SECTION 405. CORPORATE AUTHORITY. The Company has full legal right and
corporate power and authority, without the consent of any other person, to make,
execute, deliver and perform this Agreement and the transactions contemplated
hereby, and the execution, delivery and performance of this Agreement by the
Company has been duly authorized by all necessary corporate action of the
Company.
SECTION 406. NOTES AND ACCOUNTS RECEIVABLE. To its knowledge, all notes
receivable and accounts receivable are valid obligations of the respective
makers thereof, are as set forth on
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Schedule 406 attached hereto; except as disclosed in such Schedule 406, are not
subject to any valid offset or counterclaim; and are not subject to any
assignment, claim, lien or security interest.
SECTION 407. ACTIONS, SUITS, ETC. There are no actions, suits, claims,
complaints, charges, hearings, investigations, arbitrations (or other dispute
resolution proceedings) or other proceedings pending or, to its knowledge,
threatened against, by or affecting the Company in any court or panel or before
any arbitrator or governmental agency, domestic or foreign, other than (a)
actions related to garnishments of employee wages, or (b) routine matters
covered by insurance. The Company has not been charged with, and to its
knowledge is not under investigation with respect to, any charge concerning any
violation of any provision of any federal, state or other applicable law or
administrative regulation with respect to its business. There are no judgments
unsatisfied against the Company and no consent decrees to which the Company is
subject. The Company is not involved in or threatened with any labor dispute
which could have a material adverse effect on the business and operations of the
Company.
SECTION 408. MATERIAL CONTRACTS. Schedule 408 attached hereto sets forth
an accurate, correct and complete list of all instruments, commitments,
agreements, arrangements and understandings related to its business to which the
Company is a party or bound, or pursuant to which the Company is a beneficiary,
meeting any of the descriptions set forth below (the "Material Contracts"):
(a) Real estate leases, personal property leases, licenses of
intellectual property, technical information or software, employment contracts
and benefit plans;
(b) Any contract for capital expenditures or for the purchase of
goods or services in excess of $5,000;
(c) Any instrument evidencing indebtedness (other than routine
purchase orders), any liability for borrowed money, any obligation for the
deferred payment of the purchase price for property in excess of $5,000
(excluding normal trade payables), or any instrument guaranteeing any
indebtedness, obligation or liability;
(d) Any advertising contract not terminable without payment or
penalty on thirty (30) days (or less) notice;
(e) Any license or royalty agreement;
(f) Any contract for the purchase or sale of any assets in excess
of $5,000 other than in the ordinary course of business or granting an option or
preferential rights to purchase or sell any assets in excess of $5,000;
(g) Any contract containing covenants not to compete in any line
of business or with any person in any geographical area;
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(h) Any contract relating to the acquisition of a business or the
equity of any other person;
(i) Any other contract, commitment, agreement, arrangement or
understanding related to its business which provides for payment or performance
by any party thereto having an aggregate value of $5,000 or more, and is not
terminable without payment or penalty on thirty (30) days (or less) notice.
Accurate, correct and complete copies of each such contract have been made
available to Lender. Each contract is in full force and effect and is valid,
binding and enforceable as to the Company in accordance with its terms. The
Company and, to the Company's knowledge, each other party has complied in all
material respects with all material commitments and obligations on its part to
be performed or observed under each such contract. The Company has not received
any written or, to its knowledge, other notice of a default, offset or
counterclaim under any contract, or any other written or, to its knowledge,
other communication calling upon the Company to comply with any provision of any
contract or asserting noncompliance by the Company.
SECTION 409. ABSENCE OF UNDISCLOSED LIABILITIES. To its knowledge, the
Company does not have any indebtedness, liability or obligation of any nature,
whether absolute, accrued, contingent or otherwise, related to or arising from
the operation of its business or the ownership, possession or use of any assets,
except as set forth on Schedule 409 attached hereto.
SECTION 410. ACCURACY OF INFORMATION. None of the information furnished
by the Company to Lender in writing shall contain any untrue statement of a
material fact or shall omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
circumstances under which they were made, not misleading.
SECTION 411. REAL ESTATE LEASES. Schedule 411 attached hereto sets forth
an accurate, correct and complete list of all real estate which is leased or
subleased by the Company, including identification of the lease or sublease,
street address, and list of material contracts, agreements, leases, subleases,
options and commitments, oral or written, affecting such real estate or any
interest therein to which the Company is a party or by which the Company is
bound (the "Real Estate Leases"). The Company has made available to Lender
accurate, correct and complete copies of each Real Estate Lease and no default
exists under any Real Estate Lease.
SECTION 412. PERSONAL PROPERTY LEASES. Schedule 412 attached hereto
contains an accurate, correct and complete list of each lease of personal
property used in the business which provides for annual lease payments in excess
of $5,000 (the "Personal Property Leases"). The Company has made available to
Lender accurate, correct and complete copies of each Personal Property Lease and
no default exists under any Personal Property Lease.
SECTION 413. INTELLECTUAL PROPERTY. Schedule 413 attached hereto
contains an accurate, correct and complete list and summary description of all
patents, trademarks, trademark rights, trade names, trade styles, trade dress,
service marks, copyrights and applications for any of the foregoing
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utilized by the business (the "Intellectual Property"). During the preceding
five (5) years, the Company has not been known by or done business under any
name other than Micro General Corporation. Schedule 413 contains an accurate,
correct and complete list and summary description of all licenses and other
agreements relating to any Intellectual Property. Except as set forth on
Schedule 413, with respect to the Intellectual Property, (a) the Company is the
sole and exclusive owner and, to the knowledge of the company, has the sole and
exclusive right to use the Intellectual Property; (b) no action, suit,
proceeding or investigation is pending or, to the Company's knowledge,
threatened; (c) to the knowledge of the Company, none of the Intellectual
Property interferes with, infringes upon, conflicts with or otherwise violates
the rights of others or is being interfered with or infringed upon by others,
and none is subject to any outstanding order, decree, judgment, stipulation or
charge; (d) there are no royalty, commission or similar arrangements, and no
licenses, sublicenses or agreements, pertaining to any of the Intellectual
Property; (e) the Company has not agreed to indemnify any person for or against
any infringement of or by the Intellectual Property; and (f) the Intellectual
Property constitutes all such assets, properties and rights which are used in or
necessary for the conduct of its business. To the knowledge of the Company, the
operation of its business by the Company after the date hereof, in the manner
and geographic areas in which its business is currently conducted by the Company
or is to be conducted as a result of its plans to expand its business into other
geographic areas, will not interfere with or infringe upon any currently issued
United States Letters Patent or trademarks currently registered in the Primary
Register of the United States Patent and Trademark Office. The Company is not
subject to any judgment, order, writ, injunction or decree of any court or any
federal, state, local or other governmental agency or instrumentality, domestic
or foreign, or any arbitrator, and has not entered into or is not a party to any
contract which restricts or impairs the use of any Intellectual Property.
SECTION 414. TRADE SECRETS. Schedule 414 attached hereto contains an
accurate, correct and complete list and summary description of all information
in the nature of proprietary information, including databases, compilations of
information, copyrightable material and technical information, if any, relating
to its business "Technical Information"). The Company has the right to use the
Technical Information by virtue of ownership or by virtue of the license
agreements identified in Schedule 414. The Company has no knowledge of any
violation of any trade secret rights or copyrights with respect to such
Technical Information.
SECTION 415. SOFTWARE AND INFORMATION SYSTEMS. The Company has the right
to use all electronic data processing systems, information systems, hardware,
computer software programs, indexes, program specifications, charts, procedures,
source codes, input data, routines, data bases and report layouts and formats,
record file layouts, diagrams, functional specifications and narrative
descriptions, flow charts and other related material (if any) used in and
reasonably necessary for the conduct of its business (collectively the
"Software"). Schedule 415 attached hereto contains an accurate, correct and
complete summary description of all Software (other than non-proprietary
commercially available Software).
SECTION 416. INSURANCE. Set forth on Schedule 416 attached hereto is a
true, accurate and complete list of all policies of insurance currently in force
in which the Company is named as insured, loss payee, or additional insured,
premiums on all of such policies have been paid, and
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copies of all policies have been delivered to Lender at the date hereof, and
Lender has been named as loss payee or additional insured on all such policies
on which such coverage is available.
ARTICLE V
DEFAULTS; REMEDIES
SECTION 501. EVENTS OF DEFAULT. "Event of Default," wherever used herein
with respect to the Note, means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) BY THE COMPANY.
(1) default in the payment of any installment of principal
and/or interest on the Note as and when it becomes due and payable, whether by
virtue of the terms of the Note as to payments of principal and/or interest, at
maturity, in connection with any redemption, or otherwise and the passage of
seven (7) days following written notice thereof to the Company; or
(2) default in the performance, or breach, of any material
covenant, representation or warranty of the Company in this Agreement and the
passage of thirty (30) days following written notice thereof to the Company, or,
if such default cannot be cured within such thirty (30) days, commencement of
the cure of such default within such thirty (30) days and diligent prosecution
of such cure to completion; or
(3) the entry by a court having jurisdiction in the
premises of (A) a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or (B) a decree or order
adjudging the Company a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company under any applicable Federal or state law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of all or substantially all of its property,
or ordering the winding up or liquidation of its affairs, and-the continuance of
any such decree or order for relief or for any such other decree or order
unstayed and in effect for a period of 45 consecutive days;
(4) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law, other consent by it to the appointment of
or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the company or of all or
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substantially all of its property, or the making by it of a general assignment
for the benefit of creditors; or
(5) until all sums due under the Note have been repaid, or
any increase by the Company of the number of members of its Board of Directors
to a number greater than the number who hold office at the time of execution of
the Note, or any change in the actual members of the Company's Board of
Directors, without the prior written consent of the Lender; or
(6) the failure of the Company to provide any information
or report to Lender required to be provided pursuant to Article VI hereof and
the passage of thirty (30) days following written notice thereof to the Company,
or, if such default cannot be cured within such thirty (30) days, commencement
of the cure of such default within such thirty (30) days and diligent
prosecution of such cure to completion.
(b) BY THE LENDER. The failure of the Lender to fund pursuant to
Section 203(a) hereof in the event that a proper Officer's Certificate pursuant
to Section 1001(a) is received and the Company is in compliance with all
covenants of this Agreement and the Note.
SECTION 502. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT; OTHER
REMEDIES.
(a) LENDER'S REMEDIES.
(i) Upon the occurrence of an Event of Default under any
event described in Section 501(a) (other than an Event of Default described in
Sections 501(a)(4) and 501(a)(5) hereof), then in every such case Lenders may
declare the principal amounts of the Notes to be due and payable immediately, by
a notice in writing to the Company and upon any such declaration such principal
amounts shall become immediately due and payable. The Company specifically
acknowledges and agrees that the occurrence of any Event of Default under any
event described in Section 501(a) hereof will automatically cause all existing
Notes to be in default, and all Events of Default under all Notes must be cured
before any one Event of Default shall be deemed cured.
(ii) At any time after such a declaration of acceleration
with respect to the Note has been made and before a judgment or decree for
payment of the money due has been obtained by Lender as hereinafter in this
Article provided, Lender may, by written notice to the Company, rescind and
annul such declaration and its consequences if, (1) the Company has paid to
Lender a sum sufficient to pay (A) all overdue interest on the Note, (B) the
principal on the Note which has become due otherwise than by such declaration of
acceleration and interest thereon at the Note Rate, (C) to the extent that
payment of such interest is lawful, interest upon overdue interest at the Note
Rate, and (D) all sums paid or advanced by Lender hereunder and the actual
compensation, expenses, disbursements and advances of Lender, its agents and
counsel; and (2) all Events of Default with respect to the Note, other than the
nonpayment of the principal of the Note which has become due solely by such
declaration of acceleration, have been cured or waived by Lender. No such
rescission shall affect any subsequent default or impair any right consequent
thereon. In the case of any Event of Default described in Section 501(a)(4) or
501(a)(5), all unpaid principal of and accrued interest
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on the Note shall be due and payable immediately without any declaration or
other act on the part of Lender.
(iii) Obligations of this Note are secured by the Security
Agreement dated August 1, 1996.
(b) THE COMPANY'S REMEDIES. Upon the occurrence of an Event of
Default as described in Section 501(b) hereof, then the option amount referred
to in Section 901 hereof shall be limited to a number equal in value to the
amount already funded.
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT.
(a) The Company covenants that if default is made in the payment
of any principal and/or interest on the Note when such principal and/or interest
becomes due and payable, whether at a time specified in the Note, at maturity of
the Note or in connection with any redemption or otherwise, the Company will,
upon demand of Lender, pay to it the whole amount then due and payable on the
Note for principal and interest and, to the extent that payment of such interest
shall be legally enforceable, interest on any overdue principal and-on any
overdue interest, at the Note Rate, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
Lender, its agents and counsel, it being understood that as to the Lenders, any
payments will be applied on a pro rata basis among the Lenders based on each
Lender's respective Note amount. If the Company fails to pay such amounts
forthwith upon such demand, Lender may prosecute a proceeding to judgment or
final decree and may enforce the same against the Company or any other obligor
on the Note and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company or of any other
obligor on the Note, wherever situated, it being understood that any monies
collected shall be applied on a pro rata basis among the Lenders based on each
Lender's respective Note. In addition, Lender may give notice to customers of
the Company that all payments under contracts listed on Schedule 401 shall,
until further notice, be paid directly to Lender, and the Company consents to
each such notice.
(b) If an Event of Default with respect to the Note occurs,
Lender may in its discretion proceed to protect and enforce its rights by such
appropriate judicial proceedings as it shall deem most effectual to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Agreement or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
SECTION 504. LENDER MAY FILE PROOFS OF CLAIM. In case of the pendency of
any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceeding relative to
the Company or of any other obligor on the Note or the property of the Company
or of such other obligor or their creditors, Lender (irrespective of whether the
principal of the Note shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether it shall have made any
demand on the Company for the
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payment of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of principal
and interest owing and unpaid in respect of the Note and to file such other
papers and documents as may be necessary or advisable in order to have the
claims of Lender (including any claim to the right to own Common Stock or for
the reasonable compensation, expenses, disbursements and advances of Lender, its
agents and counsel) allowed in such judicial proceeding, and
(b) to collect and receive any monies or other property payable
or deliverable on any such claims.
SECTION 505. APPLICATION OF MONEY COLLECTED. Any money collected by
Lender pursuant to this Article V shall be applied in the following order, at
the date or dates fixed by Lender and, in case of the distribution of such money
on account of principal or interest, upon presentation of the Note and the
notation thereon of the payment if only partially said and upon surrender
thereof if fully paid:
First: To the costs and expenses of Lender in collecting sums due
it hereunder;
Second: To the payment of the amounts then due and unpaid first
for interest on and then for principal of all outstanding Notes, applied on a
pro rata basis among the Lenders based on each Lender's respective Note; and
Third: To the payment of the remainder, if any, to the Company or
any other Person lawfully entitled thereto.
SECTION 506. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein
conferred upon or reserved to Lender is intended to be exclusive of any other
right or remedy, and every right and remedy shall, to the extent permitted by
law, be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
SECTION 507. DELAY OR OMISSION NOT WAIVER. No delay or omission of
Lender to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default. Every right and remedy given by this Article V or by law may be
exercised from time to time, and as often as may be deemed expedient by Lender.
SECTION 508. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
or plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Agreement; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all
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benefit or advantage of any such law and covenants that it will not hinder,
delay or impede the execution of any power herein granted to Lender, but will
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE VI
REPORTS BY COMPANY
SECTION 601. ANNUAL STATEMENT. The Company will deliver to Lender,
within 30 days after the end of each fiscal year of the Company, an Officer's
Certificate stating that to the best of such officer's knowledge, the Company
has fulfilled all its obligations under this Agreement throughout such year, or,
if there has been a default in the fulfillment of any such obligation and such
default is continuing, specifying each such default of which such officer has
knowledge, and the nature and status thereof.
SECTION 602. REPORTS BY COMPANY. The Company shall file with Lender,
such information, documents and other reports, and such summaries thereof, as
Lender shall request, immediately upon request, but without request the Company
shall deliver to Lender audited financial statements of the Company prepared by
independent certified public accountants ("Accountants") within ninety (90) days
of the end of each Company fiscal year.
SECTION 603. QUARTERLY FINANCIAL REPORTS. Throughout the term of this
Agreement and for so long as any amount remains unpaid under the Note, the
Company shall furnish Lender with copies of its quarterly financial reports no
later than forty-five (45) days following the end of the subject fiscal quarter.
ARTICLE VII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, SALE OR LEASE
SECTION 701. COMPANY MAY CONSOLIDATE. ETC., ON CERTAIN TERMS. The
Company shall not consolidate with or merge into any other corporation or
convey, transfer, sell or lease its properties and assets as, or substantially
as, an entirety to any Person, issue any capital stock (including Common Stock)
of the Company unless (a) prior to such transaction Lender has released in
writing its Right of First Refusal as required by Section 702 hereof, and (b)
upon any such consolidation, merger, sale, conveyance or exchange of or by the
Company, (i) the Company is the continuing corporation and the Company's Common
Stock outstanding immediately prior to the merger is not exchanged for
securities, cash or other property of another corporation, (ii) there is an
exchange of the Note for other securities in connection with such transaction,
or (iii) the due and punctual payment of the principal of and interest on, the
Note, according to their tenor, and the due and punctual performance and
observance of all of the covenants and conditions of the Agreement to be
performed by the Company, are expressly assumed by a note supplemental to the
Note by the
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corporation formed by such consolidation, or whose securities, cash or other
property will immediately after the merger be owned, by virtue of the merger, by
the holders of Common Stock of the Company immediately prior to the merger, or
by the corporation that shall have acquired such property or securities.
Furthermore, the Company shall not consolidate with or merge into any other
corporation or convey, transfer, sell or lease its properties and assets as, or
substantially as, an entirety to any Person, or enter into any statutory
exchange of securities with another corporation, unless the Right of First
Refusal has been released and unless immediately after giving effect to such
transaction no Event of Default shall have occurred and be continuing, and the
Company shall have delivered to Lender an Officer's Certificate stating that
such transaction and such supplemental agreement comply with this Agreement.
SECTION 702. RIGHT OF FIRST REFUSAL OF LENDERS. For so long as any
amounts due under the Note shall be outstanding, Lenders shall have and retain
the first option to purchase any and all assets of the Company and any and all
capital stock (including Common Stock) of the Company, upon the same terms and
subject to the same conditions as may be offered to the Company by a third party
for such assets or capital stock; provided, however, that any non-cash
consideration offered for any such assets or capital stock shall be given its
then current market value in cash and Lenders shall have the opportunity to pay
the amount of such cash in lieu of any non-cash consideration offered by a
prospective owner of any assets or capital stock on a pro rata basis as to the
Lenders' exercise of that right. Immediately upon receipt of any offer to
purchase any assets or capital stock, or upon determining that the Company
desires to sell any assets or capital stock, the Company shall immediately
notify Lenders of the assets and/or capital stock proposed to be bought and
sold, and of the terms of such proposed purchase and sale. Within twenty (20)
days of being so notified, Lenders shall notify either the Company and/or the
owner of the capital stock in question that they (or any one of them) will
exercise the right of first refusal granted herein ("Right of First Refusal"),
or, in the alternative, that they (or any one of them) thereby release such
Right of First Refusal and consents to the sale of the assets or capital stock
on the terms described. Any change in such terms shall give each Lender the
right to once again exercise or release its Right of First Refusal within an
additional time period identical to that specified above.
ARTICLE VIII
REDEMPTION OF NOTE BY THE COMPANY
SECTION 801. RIGHT TO REDEEM. The Company may, at its option, redeem all
or, from time to time, any part of the Note, on any date prior to maturity, in
the manner specified in this Article VIII, at the original principal amount
thereof, plus accrued and unpaid interest, if any, to the date fixed for
redemption, but no such redemption shall in any way impair the right of Lender
to convert the Note into shares of Common Stock as specified in this Agreement
or in the Right of First Refusal granted hereunder.
SECTION 802. NOTICE OF REDEMPTION.
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<PAGE> 22
(a) In case the Company shall desire to exercise its right to
redeem all or any part of the Note pursuant to Section 801 hereof, it shall fix
a date for redemption (a "Redemption Date"), shall notify Lenders in writing of
such date, and shall mail or cause to be mailed a notice of such redemption (a
"Notice of Redemption") at least ten (10) and not more than thirty (30) days
prior to the date fixed for redemption to Lenders at their principal executive
offices. Such mailing shall be by first class mail. The Company agrees to
exercise said right of redemption on an equitable and pro rata basis among the
Lenders.
(b) The Notice of Redemption shall specify the principal amount
of the Note to be redeemed, the Redemption Date for the Note, and the Redemption
Price at which the Note is to be redeemed, and shall state that payment of the
Redemption Price of the Note or portions thereof to be redeemed will be made on
surrender of the Note to be redeemed, that interest accrued to such Redemption
Date will be paid as specified in such notice, and that from and after such date
interest thereon will cease to accrue. In the event of full redemption of the
Note, such Notice of Redemption shall also state that the right to convert the
Note or portion thereof into Common Stock will expire at the close of business
on October 27, 2003.
(c) On or prior to each Redemption Date specified in each Notice
of Redemption given as provided in this Section 802, the Company will pay to
Lender an amount of money sufficient to redeem on such Redemption Date the Note
or portion thereof so called for redemption at the appropriate Redemption Price,
together with accrued interest to the Redemption Date.
(d) If the Note called for redemption shall not be so paid upon
surrender thereof for redemption, the principal shall, until paid, bear interest
from the date fixed for redemption at the Note Rate and the Note shall remain
convertible into Common Stock until October 27, 2003, or until all amounts due
under the Note have been repaid in full.
ARTICLE IX
RIGHT TO CONVERT NOTE AND/OR RIGHT TO PURCHASE STOCK
SECTION 901. RIGHTS GRANTED. Subject to and upon compliance with the
provisions of this Article IX, and specifically Section 902 hereof, Lender shall
have the right, at its option, at any time or from time to time on or prior to
the close of business on October 27, 2003, to convert the principal amount of
the Note up to a value of $14,100,000.00 into, an aggregate of 3,133,333 shares
of Common Stock at a price of $4.50 per share (the "Conversion Price"), or to
pay in cash in an amount up to $14,100,000.00..
SECTION 902. ANTI-DILUTION RIGHTS OF LENDER. The Company will not, by
any voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the conversion privilege set forth in Section 901 hereof,
but will at all times in good faith carry out the provisions and intent of
Section 901 and take all such action as may be necessary or appropriate to
protect against impairment of the rights of Lender to convert the Note into, or
to purchase, Common Stock. In the event that, at any time prior to full exercise
by Lender of its right to purchase such Common
-19-
<PAGE> 23
Stock, the Company shall sell or otherwise transfer any Common Stock, the
Company undertakes and agrees to make any adjustments that may be necessary to
permit Lender to purchase an equal number of shares of the Common Stock for a
per share price equal to the per share price paid by such other purchaser or
transferee, including, if necessary, refunding to Lender any sums necessary to
cause Lender to receive the benefit of this Section 902, such benefit to survive
the repayment of the Note and to be applicable with respect to issuances of
Common Stock until October 27, 1998. Nothing in this Section 902 shall be
interpreted to permit or require any increase in the consideration to be paid by
Lender in exchange for 200,000 shares of the Common Stock.
SECTION 903. MANNER OF EXERCISE OF CONVERSION PRIVILEGE. In order to
exercise the conversion privilege, Lender shall surrender the Note, duly
endorsed or assigned to the Company or in blank, at the office of the Company,
together with the Conversion Notice duly executed, that Lender elects to convert
the Note or the portion thereof specified in said Conversion Notice or,
alternatively, that Lender will purchase such Common Stock. Such Conversion
Notice shall also state the name or names, together with the address or
addresses in which the certificate or certificates for shares of Common Stock
which shall be issuable in such conversion or purchase shall be issued as
promptly as practicable after the surrender of the Note and the receipt of such
Conversion Notice, the Company shall issue and deliver to Lender, or on Lender's
written order, a certificate or certificates for the number of full shares of
Common Stock issuable upon the conversion of the Note or portion thereof in
accordance with the provisions of this Article IX. In case the Note shall be
surrendered for partial conversion, the Company shall execute and deliver to or
upon the order of Lender, at the expense of the Company, a new note or notes in
authorized denominations in an aggregate principal amount equal to the
unconverted portion of the surrendered Note. Each conversion shall be deemed to
have been effected immediately prior to the close of business on the date on
which the Note shall have been surrendered and such Conversion Notice received
by the Company as aforesaid, and the Person or Persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion or purchase shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date.
SECTION 904. NOTICE TO LENDER PRIOR TO CERTAIN CORPORATE ACTIONS. In
case:
(a) the Company shall authorize the granting to the holders of
its Common Stock generally of rights, warrants or options to subscribe for or
purchase any shares of stock of any class or of any other rights; or
(b) there shall be any reorganization or reclassification of the
Common Stock (other than a change in the par value of the Common Stock), or any
permissible consolidation or merger to which the Company is a party, or any
permissible conveyance, transfer, sale or lease of the Company's properties and
assets as, or substantially as, an entity; or
(c) there shall be a voluntary or in-voluntary dissolution,
liquidation or winding-up of the Company;
-20-
<PAGE> 24
then the Company shall cause to be given to Lender, in the manner provided in
Section 110 hereof, and with respect to the events described in subsections (a),
(b) and (c) of this Section 904, as promptly as possible, but in any event at
least twenty (20) days prior to the applicable date hereinafter specified, a
notice stating (i) the date on which the Company expects to file a Registration
Statement covering the Common Stock, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance, transfer,
sale, lease, dissolution, liquidation, or winding-up is expected to become
effective or occur, and, if applicable, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance, transfer,
sale, lease, dissolution, liquidation, or winding-up, subject to compliance with
the Right of First Refusal required by Section 702 hereof.
SECTION 905. RESERVATION OF SHARES OF COMMON STOCK. The Company
covenants that it will at all times reserve and keep available, free from
preemptive rights, out of the aggregate of its authorized but unissued shares of
Common Stock, for the purpose of effecting conversion of the Note, the full
number of shares of Common Stock deliverable upon the conversion of the Note.
SECTION 906. TAXES UPON CONVERSION. The Company will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on conversion of the Note pursuant
hereto.
SECTION 907. COVENANTS AS TO COMMON STOCK. The Company covenants that
all shares of Common Stock which may be delivered upon conversion of the Note
will, upon delivery, be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any preemptive
rights.
SECTION 908. PIGGYBACK REGISTRATION RIGHTS. If the Company shall
determine to register any of its securities, either for its own account or for
the account of a security holder or holders, other than a registration relating
solely to employee benefit plans, or a registration on any registration form
that does not permit secondary sales, the Company will promptly give to Lender
written notice thereof and use its best efforts to include in such registration
(and any related qualification under applicable Blue Sky laws or other
compliance), and any underwriting involved therein, Common Stock specified in a
written request made by Lender within twenty (20) days after the written notice
of the Company provided for above is given. Such written request may specify all
or a part of Lender's Common Stock. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
company shall so advise as a part of the written notice given as required above.
In such event the right of Lender to registration shall be conditioned upon
Lender's participation in such underwriting and the inclusion of its Common
Stock in the underwriting. Lender shall enter with the Company into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company. Notwithstanding the above,
if the representative of the underwriters advises the Company in writing that
marketing factors require a limitation of the number of shares to be
underwritten, the representative may exclude Lender's Common Stock from, or
limit the number of shares of Lender's Common Stock to be included in, the
registration and underwriting. The number of shares of
-21-
<PAGE> 25
securities that are entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being sold for its own
account, then to Lender to the extent of securities it has elected to sell for
its own account, and thereafter to all other owners of Common Stock with the
right to participate in such registration and underwriting pro rata in
proportion to the percentage of all outstanding Common Stock owned by each such
Person immediately prior to commencement of such registration and underwriting.
If any Person does not agree to the terms of any such underwriting, he shall be
excluded therefrom by written notice from the Company or the underwriter. Any
Common Stock or other securities excluded or withdrawn from such underwriting
shall be withdrawn from such registration. If shares are so withdrawn from the
registration or if the number of shares of Common Stock to be included in such
registration is increased during the period of such registration, the Company
shall offer first to Lender and then, if additional shares may be sold in the
registration to all other Persons who have retained the right to include
securities in the registration, the right to include additional securities in
the registration in an aggregate amount equal to the number of shares so
withdrawn, with such shares to be allocated among the Persons requesting
additional inclusion pro rata in proportion to the percentage that each Person's
Common Stock represents of the total amount of Common Stock owned by all such
Persons prior to commencement of such registration and underwriting.
ARTICLE X
CONDITIONS PRECEDENT
SECTION 1001. CONDITIONS PRECEDENT. The obligation of Lender to purchase
the Note(s) and to make all individual disbursements thereunder is expressly
conditioned upon the following:
(a) The Lender's receipt from the Company, in each instance, of
an Officer's Certificate signed by its President satisfactory to Lender in which
such President represents and warrants to Lender on behalf of the Company that
(1) use of the proceeds from any disbursement of principal of the Note shall be
dedicated to such corporate uses as the Company's Board of Directors may deem
proper; and (2) there are no defaults under this Agreement or the Note.
(b) The Lender's receipt of a Certificate of Good Standing
certified by the Secretary of State of the State of Delaware as to the corporate
status of the Company; and
-22-
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, and their respective seals to be hereunto fixed and attested, all
as of the day and year first above written.
MICRO GENERAL CORPORATION
(the "Company")
By: _____________________________________
Name:____________________________________
Title:___________________________________
CALWEST SERVICE CORPORATION ("Lender")
By: _____________________________________
Name:____________________________________
Title:___________________________________
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<PAGE> 27
EXHIBIT "A"
MICRO GENERAL CORPORATION
CONVERTIBLE NOTE
(MULTIPLE ADVANCES)
$14,100,000.00 Irvine, California
October 27, 1998
MICRO GENERAL CORPORATION, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor corporation or corporations under the Agreement hereinafter referred
to), for value received, hereby promises to pay to Fidelity National Financial,
Inc., at its office at 17911 Von Karman Avenue, Suite 300, Irvine, California
92614 ("Lender"), or order, principal sum of Fourteen Million One Hundred
Thousand Dollars ($14,100,000.00), or so much thereof as shall have been
disbursed by Lender and which at that time remains unpaid, together with simple
interest thereon from the date hereof at the rate of ten percent (10%) per
annum, in such coin or currency of the United States of America as at the time
of payment shall be legal tender for the payment of public and private debts,
payable as follows: Accrued interest only on the principal amount hereof shall
be payable quarterly in arrears during the first five (5) years of the term
hereof commencing October 27, 1998. Thereafter, on October 27, 2003 the entire
unpaid balance of this Note, including principal and accrued but unpaid
interest, shall be due and payable.
This Note may be prepaid in whole or in part at any time with the prior
written consent of Lender so long as the Company gives ten (10) days' prior
written notice to Lender of the Company's intent to prepay this Note or any
portion hereof. Such notice shall state the proposed payment date (the "Payment
Date") and the principal amount to be repaid. At any time during the term
hereof, the Lender may, but shall not be obligated to, elect to convert all or
any portion of the principal to be repaid on the Payment Date into shares of the
Company's common stock (the "Common Stock") at the "Conversion Price" (as that
term is defined in the Agreement hereinafter referred to) then in effect by
delivering to the Company, to the attention of its President, written notice of
its election to exercise its conversion rights as set forth herein.
Notwithstanding anything contained herein to the contrary, and notwithstanding
the Company's payment of this Note in whole or in part, the Lender shall retain
the right to convert the then-outstanding principal balance hereof into the
subject shares of Common Stock throughout the five (5) year term of this Note at
the Conversion Price.
Any partial prepayments made hereunder shall be applied to installments
due hereunder in inverse order of maturity.
This Note is duly authorized and issued by the Company, is designated as
set forth on the face hereof, and is limited to the aggregate principal amount
of $14,100,000.00 issued under and pursuant to that certain Convertible Note
Purchase Agreement, dated as of October 27, 1998 (herein called the
"Agreement"), duly executed and delivered by the Company and Lender, to which
Agreement reference is hereby made for a further description of the rights,
limitation of rights, obligations, and
-24-
<PAGE> 28
duties thereunder of the Company and Lender. In case an Event of Default shall
have occurred under this Note or under the Agreement (as the term "Event of
Default" is defined in said Agreement), the principal balance hereof and all
accrued but unpaid interest thereon may be declared, and upon such declaration
shall become, due and payable, in the manner, with the effect and subject to the
conditions provided in the Agreement.
Reference is hereby made to the further provisions of the Agreement,
including, without limitation, provisions giving the Lender of this Note the
right to convert this Note into Common Stock on the terms and subject to the
limitations more fully specified in the Agreement. Such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
Capitalized terms used in this Note and not otherwise defined still have the
meanings assigned to such terms in the Agreement.
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by its duly authorized officers.
Dated: _______________________ MICRO GENERAL CORPORATION (the "Company")
By: _____________________________________
Name:____________________________________
Title:___________________________________
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<PAGE> 29
EXHIBIT "B"
CONVERSION NOTICE
To: Micro General Corporation
2510 Redhill Avenue
Santa Ana, California 92705
The undersigned, as the owner of that certain Convertible Promissory
Note dated October 27, 1998 (the "Note"), hereby irrevocably exercises the
option to convert the Note, or that portion of the Note designed herein below,
into _____________ shares of Common Stock of Micro General Corporation at a
price of $_______ per share, in accordance with the terms of that certain
Convertible Note Purchase Agreement between the undersigned and Micro General
Corporation as referenced in the Note, and directs that the shares issuable and
deliverable upon the conversion be issued and delivered to the holder hereof
unless a different name has been indicated below. If shares or any portion of
this Note not converted are to be issued in the name of a person other than the
undersigned, the undersigned has herein below named the transferee to whom the
new Note should be issued.
Dated: _____________________________
_______________________________________
Signature(s)
By: ___________________________________
Name:__________________________________
Title:_________________________________
<PAGE> 30
MICRO GENERAL CORPORATION
CONVERTIBLE NOTE
(MULTIPLE ADVANCES)
$14,100,000.00 Irvine, California
October 27, 1998
MICRO GENERAL CORPORATION, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor corporation or corporations under the Agreement hereinafter referred
to), for value received, hereby promises to pay to Fidelity National Financial,
Inc., at its office at 17911 Von Karman Avenue, Suite 300, Irvine, California
92614 ("Lender"), or order, principal sum of Fourteen Million One Hundred
Thousand Dollars ($14,100,000.00), or so much thereof as shall have been
disbursed by Lender and which at that time remains unpaid, together with simple
interest thereon from the date hereof at the rate of ten percent (10%) per
annum, in such coin or currency of the United States of America as at the time
of payment shall be legal tender for the payment of public and private debts,
payable as follows: Accrued interest only on the principal amount hereof shall
be payable quarterly in arrears during the first five (5) years of the term
hereof commencing October 27, 1998. Thereafter, on October 27, 2003 the entire
unpaid balance of this Note, including principal and accrued but unpaid
interest, shall be due and payable.
This Note may be prepaid in whole or in part at any time with the prior
written consent of Lender so long as the Company gives ten (10) days' prior
written notice to Lender of the Company's intent to prepay this Note or any
portion hereof. Such notice shall state the proposed payment date (the "Payment
Date") and the principal amount to be repaid. At any time during the term
hereof, the Lender may, but shall not be obligated to, elect to convert all or
any portion of the principal to be repaid on the Payment Date into shares of the
Company's common stock (the "Common Stock") at the "Conversion Price" (as that
term is defined in the Agreement hereinafter referred to) then in effect by
delivering to the Company, to the attention of its President, written notice of
its election to exercise its conversion rights as set forth herein.
Notwithstanding anything contained herein to the contrary, and notwithstanding
the Company's payment of this Note in whole or in part, the Lender shall retain
the right to convert the then-outstanding principal balance hereof into the
subject shares of Common Stock throughout the five (5) year term of this Note at
the Conversion Price.
Any partial prepayments made hereunder shall be applied to installments
due hereunder in inverse order of maturity.
This Note is duly authorized and issued by the Company, is designated as
set forth on the face hereof, and is limited to the aggregate principal amount
of $14,100,000.00 issued under and pursuant to that certain Convertible Note
Purchase Agreement, dated as of October 27, 1998 (herein called the
"Agreement"), duly executed and delivered by the Company and Lender, to which
Agreement reference is hereby made for a further description of the rights,
limitation of rights, obligations, and duties thereunder of the Company and
Lender. In case an Event of Default shall have occurred under
<PAGE> 31
this Note or under the Agreement (as the term "Event of Default" is defined in
said Agreement), the principal balance hereof and all accrued but unpaid
interest thereon may be declared, and upon such declaration shall become, due
and payable, in the manner, with the effect and subject to the conditions
provided in the Agreement.
Reference is hereby made to the further provisions of the Agreement,
including, without limitation, provisions giving the Lender of this Note the
right to convert this Note into Common Stock on the terms and subject to the
limitations more fully specified in the Agreement. Such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
Capitalized terms used in this Note and not otherwise defined still have the
meanings assigned to such terms in the Agreement.
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by its duly authorized officers.
Dated: October 27, 1998 MICRO GENERAL CORPORATION (the "Company")
By: /s/ Jeff Sanderson
Name: Jeff Sanderson
Title: Executive Vice President
- 2 -
<PAGE> 32
================================================================================
CONVERTIBLE NOTE PURCHASE AGREEMENT
by and between
MICRO GENERAL CORPORATION,
a Delaware corporation,
and
DITO CAREE L.P.,
a Nevada limited partnership
Dated as of October 27, 1998
CONVERTIBLE NOTE
DUE OCTOBER 27, 2003
================================================================================
<PAGE> 33
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article I - Definitions and Other Provisions of General Application...............................................2
Section 101. Definitions...................................................................................2
Section 102. Effect of Headings and Table of Contents......................................................4
Section 103. Successors and Assigns........................................................................4
Section 104. Severability Clause...........................................................................4
Section 105. Benefits of Agreement.........................................................................4
Section 106. Governing Law.................................................................................4
Section 107. Legal Holidays................................................................................4
Section 108. Execution in Counterparts.....................................................................5
Section 109. Attorneys' Fees...............................................................................5
Section 110. Notices.......................................................................................5
Article II - The Note.............................................................................................5
Section 201. Form Generally................................................................................5
Section 202. Conversion Notice.............................................................................6
Section 203. Designation, Amount and Issuance of the Note..................................................6
Section 204. Execution of the Note.........................................................................6
Article III - Covenants of the Company............................................................................6
Section 301. Payment of Principal and Interest.............................................................6
Section 302. Corporate Existence...........................................................................7
Section 303. Payment of Taxes and Other Claims.............................................................7
Section 304. Dividends/Compensation........................................................................7
Section 305. Corporate Existence; Foreign Qualification....................................................7
Section 306. Books, Records and Inspections................................................................7
Section 307. Compliance with Laws..........................................................................8
Section 308. Maintenance of Permits........................................................................8
Section 309. Capital Expenditures/Debt.....................................................................8
Article IV - Representations and Warranties.......................................................................8
Section 401. Customer Contracts............................................................................8
Section 402. Board of Directors............................................................................8
Section 403. Organization, Etc.............................................................................8
Section 404. Capital Stock; Stock Options..................................................................9
Section 405. Corporate Authority...........................................................................9
Section 406. Notes and Accounts Receivable.................................................................9
Section 407. Actions, Suits, Etc...........................................................................9
Section 408. Material Contracts...........................................................................10
Section 409. Absence of Undisclosed Liabilities...........................................................11
Section 410. Accuracy of Information......................................................................11
Section 411. Real Estate Leases...........................................................................11
Section 412. Personal Property Leases.....................................................................11
Section 413. Intellectual Property........................................................................11
</TABLE>
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<PAGE> 34
<TABLE>
<S> <C>
Section 414. Trade Secrets................................................................................12
Section 415. Software and Information Systems.............................................................12
Section 416. Insurance....................................................................................12
Article V - Defaults; Remedies...................................................................................12
Section 501. Events of Default............................................................................12
Section 502. Acceleration of Maturity, Rescission and Annulment;
Other Remedies.....................................................................................14
Section 503. Collection of Indebtedness and Suits for Enforcement.........................................14
Section 504. Lender May File Proofs of Claim..............................................................15
Section 505. Application of Money Collected...............................................................15
Section 506. Rights and Remedies Cumulative...............................................................16
Section 507. Delay or Omission Not Waiver.................................................................16
Section 508. Waiver of Stay or Extension Laws.............................................................16
Article VI - Reports by Company..................................................................................16
Section 601. Annual Statement.............................................................................16
Section 602. Reports by Company...........................................................................16
Section 603. Quarterly Financial Reports..................................................................17
Article VII - Consolidation, Merger, Conveyance, Transfer , Sale or Lease........................................17
Section 701. Company May Consolidate. etc., on Certain Terms..............................................17
Section 702. Right of First Refusal of Lenders............................................................17
Article VIII - Redemption of Note by the Company.................................................................18
Section 801. Right to Redeem..............................................................................18
Section 802. Notice of Redemption.........................................................................18
Article IX - Right to Convert Note and/or Right to Purchase Stock................................................19
Section 901. Rights Granted...............................................................................19
Section 902. Anti-Dilution Rights of Lender...............................................................19
Section 903. Manner of Exercise of Conversion Privilege...................................................19
Section 904. Notice to Lender Prior to Certain Corporate Actions..........................................20
Section 905. Reservation of Shares of Common Stock........................................................20
Section 906. Taxes Upon Conversion........................................................................21
Section 907. Covenants as to Common Stock.................................................................21
Section 908. Piggyback Registration Rights................................................................21
Article X - Conditions Precedent.................................................................................21
Section 1001. Conditions Precedent........................................................................21
</TABLE>
- ii -
<PAGE> 35
CONVERTIBLE NOTE PURCHASE AGREEMENT
This CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is made and
effective as of October 27, 1998, by and between MICRO GENERAL CORPORATION, a
corporation duly organized and existing under the laws of the State of Delaware
(herein called the "Company"), having its principal office at 2510 Redhill
Avenue, Santa Ana, California 92705, and DITO CAREE, L.P., a Nevada limited
partnership ("Lender").
RECITALS
WHEREAS, Lender has agreed to make a series of loans to the Company; and
WHEREAS, in order to evidence its agreement to repay said loans, the
Company has duly authorized the issuance of two (2) separate convertible
promissory notes, one in the principal amount of $900,000.00 and one in the
principal amount of $14,100,000.00, and each of which permits the Lender to
convert said note into a certain number of shares of the Company's common
capital stock or to purchase a certain number of shares of the Company's common
capital stock, and in connection therewith, the parties have authorized the
execution and delivery of two (2) separate purchase agreements substantially in
the form hereof, and
WHEREAS, as contemplated hereinabove, the Company has, contemporaneously
herewith, issued its convertible promissory note (the "Note") in the original
principal amount of $900,000.00, and the Lender has agreed to purchase said
Note; and
WHEREAS, in order to set forth the terms and conditions upon which the
Note is to be issued by the Company and purchased by the Lender, the Company and
Lender have duly authorized the execution and delivery of this Agreement; and
WHEREAS, as an inducement to Lender to purchase the Note, whether or not
the Company borrows the full amount of the Note, the Company has agreed to give
Lender the right, but not the obligation, throughout the five (5) year term of
the Note, to either convert all or a portion of the principal of the Note into,
or to purchase directly from the Company, an aggregate of 200,000 shares of the
Company's common stock five cent ($.05) par value common capital stock (the
"Common Stock"), at $4.50 per share;
WHEREAS, Lender has previously made loans to the Company on November 25,
1997 in the amount of $400,000 and on April 8, 1998 in the amount of $500,000
and now desires to forgive said loans and replace them with this Agreement and
Note it being understood that detachable warrants arising out of the November
25, 1997 loan and the April 8, 1998 loan will continue as obligations of the
Company, it being understood that the Convertible Note Purchase Agreement and
Promissory Note of August 1, 1996 remain in full force and effect;
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreements hereinafter set forth, and intending to be legally bound hereby, the
parties hereto agree as follows:
<PAGE> 36
ARTICLE I
DEFINITIONS AND
OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned
to them in this Article and include the plural as well as the singular;
(2) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as are
generally accepted at the date of such computation; and
(3) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
"Administrative Agent" means CalWest Service Corporation, a California
corporation, which shall act as agent for the Lenders.
"Agreement" means this instrument as originally executed or, if amended
or supplemented as herein provided, as so amended or supplemented.
"Board of Directors" means either the board of directors of the Company
or any duly authorized committee of the board of directors of the Company.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in the City of Los
Angeles, California are authorized or required to close.
"Common Stock" means the five cent ($.05) par value Common Stock of the
Company as the same exists at the date of the execution of this Agreement or
shares of any class or classes resulting from any reclassification or
reclassifications thereof and which have no preference in respect of dividends
or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which are not subject to redemption
by the Company; provided, however, that if at any time there shall be more than
one such resulting class, the share of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of shares of
all such classes resulting from all such reclassifications.
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"Company" means the Person named as the "Company" in the first paragraph
of this instrument until a successor corporation shall have become such pursuant
to applicable provisions of this Agreement, and thereafter "Company" shall mean
such successor corporation.
"Conversion Notice" has the meaning specified in Sections 202 and 903
hereof.
"Conversion Price" has the meaning specified in Section 901 hereof.
"Corporation" includes corporations, associations, companies and
business trusts.
"Dollars" and "$" means the lawful money of the United States of
America.
"Event of Default" has the meaning specified in Section 501 hereof.
"Executive Employee" means any employee of the Company who holds the
title of Vice President or above.
"Indebtedness" means money borrowed.
"Lender," when used in the singular, means Dito Caree L.P.; and
"Lenders," when used in the plural, means collectively Dito Caree L.P. and
CalWest Service Corporation.
"Interest Payment Date" has the meaning specified in Section 203 hereof.
"Note," when used in the singular, means the Note executed by the
Company and delivered to the Lender under this Agreement as specified in the
recitals hereof; and "Notes," when used in the plural, means collectively the
two Notes executed by the Company and delivered to the Lenders under this
Agreement as specified in the recitals hereof.
"Note Rate" has the meaning specified in Section 203 hereof.
"Notice of Redemption" has the meaning specified in Section 802 hereof.
"Officer's Certificate" means a certificate signed by the President of
the Company and delivered to Lender describing with particularity the use of
proceeds of an advance on the Note, representing that there are no defaults
under this Agreement or the Note, or relating to such other matters as may be
required hereunder.
"Payment Date" shall mean an Interest Payment Date or a Principal
Payment Date.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
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"Principal Payment Date" means any date on which a payment of principal
and interest on the Note shall be due.
"Redemption Date" has the meaning specified in Section 802 hereof.
"Subsidiary" means any corporation more than fifty percent (50%) of the
outstanding voting stock of which is at the time owned, directly or indirectly,
by the Company or by one or more other Subsidiaries, or by the Company and one
or more other Subsidiaries. For purposes of this definition, the term "voting
stock" means stock which ordinarily has voting power for the election of
directors, whether at all times or only so long as no senior class of stock has
such voting power by reason of any contingency.
"Vice President," when used with respect to the Company, means any vice
president, whether or not designated by a number or a word or words added before
or after the title "vice president."
SECTION 102. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 103. SUCCESSORS AND ASSIGNS. All covenants and agreements in
this Agreement by either party shall bind its successors and assigns, whether so
expressed or not. Any act or proceeding by any provision of this Agreement
authorized or required to be done or performed by any board, committee or
officer of either party shall and may be done and performed with like force and
effect by the board, committee or officer of any corporation that shall at the
time be the lawful sole successor of either party.
SECTION 104. SEVERABILITY CLAUSE. In case any provision in this
Agreement or in the Note shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 105. BENEFITS OF AGREEMENT. Nothing in this Agreement or in the
Note, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder any benefit or any legal or equitable
right, remedy or claim under this Agreement.
SECTION 106. GOVERNING LAW. Each of this Agreement and the Note shall be
governed by and construed in accordance with the laws of the State of
California.
SECTION 107. LEGAL HOLIDAYS. In any case where the date of maturity of
or interest on or principal of the Note or the date fixed for redemption or for
purchase of the Note or the last day on which Lender has the right to convert
the Note shall not be a Business Day then (notwithstanding any other provision
of this Agreement or of the Note) payment of such interest, premium or principal
or conversion of the Note need not be made on such date but may be made on the
next succeeding Business Day with the same force and effect as if made on the
date of maturity or the date fixed for redemption or for purchase or the last
day for conversion, and interest shall accrue for the period
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<PAGE> 39
from and after such date of maturity or date fixed for redemption or for
purchase or last day for conversion to such next succeeding Business Day.
SECTION 108. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, including facsimile counterparts, each of which
shall be an original, but all of which counterparts shall together constitute
one and the same instrument.
SECTION 109. ATTORNEYS' FEES. Should suit be filed seeking enforcement
or interpretation of this Agreement and/or the Note, the prevailing party in any
such action shall be entitled to receive in addition to any other sums awarded
to such party, attorneys' fees and all other costs of collection actually
incurred in such action.
SECTION 110. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing, and shall be personally delivered or
sent by registered or certified mail, postage prepaid, return receipt requested,
overnight courier, or by facsimile, addressed to the parties as set forth
herein. Any such notice shall be deemed received upon the earlier of (a) if
personally delivered, the date of delivery to the address of the person to
receive such notice, (b) if mailed, four (4) business days after the date of
posting by the United States post office, (c) if given by overnight courier,
upon receipt by the person to receive such notice, or (d) if sent by facsimile,
when sent.
To the Company: Micro General Corporation
2510 Redhill Avenue
Santa Ana, California 92705
Attn: President
Facsimile: 949/477-6802
To Lender: Dito Caree L.P.
3735 Howard Hughes Parkway, Suite 200
Las Vegas, Nevada 89109
Any notice, request, demand, direction or other communication sent by telecopy
must be confirmed within forty-eight (48) hours by letter mailed or delivered in
accordance with the foregoing. Notice of change of address shall be given by
written notice in the manner detailed in this Section 110. Rejection or other
refusal to accept or the inability to deliver because of changed address of
which no notice was given shall be deemed to constitute receipt of the notice,
demand, request or communication sent.
ARTICLE II
THE NOTE
SECTION 201. FORM GENERALLY. The Note shall be in substantially the form
set forth on Exhibit "A" attached hereto, but with such appropriate insertions,
omissions, substitutions and other variations as are required or permitted by
this Agreement, and may have such letters, numbers or
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other marks of identification and such legends or endorsements placed thereon as
may be required to comply with applicable securities laws.
SECTION 202. CONVERSION NOTICE. A Conversion Notice, substantially in
the form of Exhibit "B" attached hereto, shall be attached to the Note and shall
be used by Lender to exercise the right to convert the Note into Common Stock.
SECTION 203. DESIGNATION, AMOUNT AND ISSUANCE OF THE NOTE.
(a) The Note shall be designated as a "convertible note" of the
Company, and shall be one of two (2) such "convertible notes," to-wit, the Notes
that are the subject of this Agreement, one in the face amount of Nine Hundred
Thousand Dollars ($900,000.00) and the other in the face amount of Fourteen
Million One Dollars ($14,100,000.00); provided, however, that following the
repayment of $7,816,000 in short term borrowings owed to CalWest Service
Corporation further disbursements of principal under the Note shall be limited
to no more than $250,000.00 per disbursement during the term of the Note to be
approved by Lender upon each disbursement request, and Lender shall have no
obligation to make any disbursement under the Note until it shall have received
an Officer's Certificate with respect to each such disbursement in compliance
with the requirements of Section 1001(a) hereof.
(b) The Note shall be dated the date of its issue and shall bear
simple interest from the date thereof at the rate of ten percent (10%) per annum
(the "Note Rate"), and shall be payable as follows: Accrued interest only on the
principal amount of the Note shall be payable quarterly in arrears during the
first five (5) years of the term thereof commencing October 27, 1998 (each, an
"Interest Payment Date"). The entire unpaid balance of the Note, including
principal and any accrued but unpaid interest, shall be due and payable on
October 27, 2003.
SECTION 204. EXECUTION OF THE NOTE. The Note shall be executed on behalf
of the Company by its President or one of its Vice Presidents, under its
corporate seal reproduced thereon.
ARTICLE III
COVENANTS OF THE COMPANY
For so long as this Agreement shall remain in effect, the Company
covenants that:
SECTION 301. PAYMENT OF PRINCIPAL AND INTEREST. It will duly and
punctually pay the principal of and interest on the Note at the place, at the
respective times and in the manner provided in the Note; and each installment of
principal and/or interest on the Note shall be paid by mailing checks or wire
transferring funds for the amount due to Lender in a manner reasonably
calculated to cause such funds to be received on or prior to a Payment Date.
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<PAGE> 41
SECTION 302. CORPORATE EXISTENCE. Subject to Article VII hereof, the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence.
SECTION 303. PAYMENT OF TAXES AND OTHER CLAIMS. The Company has paid and
will in the future pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (a) all taxes, assessments and governmental
charges levied or imposed upon the Company or upon the income, profits or
property of the Company, and (b) all lawful claims against the Company for
labor, materials and supplies which in the case of either clause (a) or (b) of
this Section 303, if unpaid, might by law become a lien upon its property;
provided, however, that the Company shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings.
SECTION 304. DIVIDENDS/COMPENSATION. It shall not (a) declare, pay or
make any dividend or distribution (in cash, property or obligations) on any
shares of any class of its capital stock (now or hereafter outstanding) of the
Company or on any warrants, options or other rights with respect to any shares
of any class of capital stock (now or hereafter outstanding) of the Company, or
apply any of its funds, property or assets to the purchase, redemption, sinking
fund or other retirement of any shares of any class of capital stock (now or
hereafter outstanding) of the Company or any option, warrant or other right to
acquire shares of the Company's capital stock, or (b) make any deposit for any
of the foregoing purposes. No additional salary, bonus or other cash or non-cash
compensation shall be paid to any of the Company's Executive Employees in an
amount greater than the amount set forth in any existing employment contracts
with such individuals, or, in the case of "at-will" Executive Employees, any
increase in the compensation paid for such Executive Employees shall require the
prior written approval of the Company's Board of Directors and the
Administrative Agent, which approval will not be unreasonably withheld. No
non-cash compensation shall be paid to any employees of the Company without the
prior written approval of the Company's Board of Directors and the
Administrative Agent, which approval will not be unreasonably withheld.
SECTION 305. CORPORATE EXISTENCE; FOREIGN QUALIFICATION. It will do and
cause to be done at all times all things necessary to (a) maintain and preserve
the corporate existence of the Company (b) be duly qualified to do business and
in good standing as foreign corporations in each jurisdiction where the nature
of its business makes such qualification necessary, and (c) comply with all
contractual obligations and requirements of law binding upon it.
SECTION 306. BOOKS, RECORDS AND INSPECTIONS. It shall:
(a) maintain, and cause each of its Subsidiaries, if any, to
maintain complete and accurate books and records;
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(b) permit, and cause each of its Subsidiaries, if any, to
permit access at reasonable times by Lender to its books and records;
(c) permit, and cause each of its Subsidiaries, if any, to
permit Lender to inspect at reasonable times its properties and operations; and
(d) permit, and cause each of its Subsidiaries, if any, to
permit Lender to discuss its business, operations and financial condition with
its officers and employees or with its outside auditors.
SECTION 307. COMPLIANCE WITH LAWS. It shall comply with all federal,
state and local laws, rules and regulations related to its businesses;
SECTION 308. MAINTENANCE OF PERMITS. It shall maintain all permits,
licenses and consents as may be required for the conduct of its business by any
state, federal or local government agency or instrumentality.
SECTION 309. CAPITAL EXPENDITURES/DEBT. It shall not, without the
express prior written consent of Lender, (a) make any capital expenditures not
made with the proceeds of the sale of the Note, and the use of all proceeds for
capital expenditures shall be substantially as described in the Officer's
Certificate applicable thereto, or (b) other than the Note or any other
"convertible note" as referenced in Section 203(a) hereof, incur any new
Indebtedness, liability or obligation to any third party.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants as follows to Lender:
SECTION 401. CUSTOMER CONTRACTS. The Company represents and warrants to
Lender that, as of the date hereof, to its knowledge all contracts and
agreements between it and purchasers of its goods and services (whether payable
in cash or in kind) are valid and in full force and effect, all amounts due and
owing to the Company thereunder have been paid, no default exists either on the
part of the Company or of any other party to any such contract and that the list
of such contracts appearing on Schedule 401 attached hereto is true, accurate
and complete;
SECTION 402. BOARD OF DIRECTORS. As of the date hereof, the list of
Directors making up its Board of Directors set forth on Schedule 402 attached
hereto is true, accurate and complete, and all such Directors have been duly
elected by valid shareholder action in the manner required by the Certificate of
Incorporation and/or the Bylaws of the Company;
SECTION 403. ORGANIZATION, ETC. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has no active Subsidiaries
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<PAGE> 43
at the date hereof. The company has corporate power to own or lease its
properties and to carry on its business as and in the places where such
properties are now owned, leased or operated, and its business is now conducted,
and the Company has complied in all material respects with all material federal,
state and local laws with respect to the operation and the conduct of its
business. Copies of the Certificate of Incorporation and all amendments thereto,
bylaws as amended and currently in force, stock records and corporate minutes
and records of the Company heretofore made available to Lender are complete and
correct at the date hereof;
SECTION 404. CAPITAL STOCK; STOCK OPTIONS.
(a) The Company has authorized capital stock consisting of
10,000,000 shares of Common Stock, five cent ($.05) par value, of which
6,910,452 shares are issued and outstanding as of October 27, 1998, and
1,000,000 shares of Preferred Stock, five cent ($.05) par value, none of which
are issued or outstanding. All of the issued and outstanding shares of Common
Stock are duly authorized and validly issued, fully-paid and nonassessable, were
offered, issued and sold in accordance with applicable federal and state
securities laws, and there are no preemptive rights in respect thereof. There
are no other classes of stock of the Company other than the Common Stock and
Preferred Stock.
(b) There are no outstanding options, warrants, rights, calls,
commitments, conversion rights, plans or other agreements or instruments of any
character providing for the purchase or other acquisition by the holders thereof
or issuance of any company securities of any description, except as set forth on
Schedule 404(b) attached hereto.
SECTION 405. CORPORATE AUTHORITY. The Company has full legal right and
corporate power and authority, without the consent of any other person, to make,
execute, deliver and perform this Agreement and the transactions contemplated
hereby, and the execution, delivery and performance of this Agreement by the
Company has been duly authorized by all necessary corporate action of the
Company.
SECTION 406. NOTES AND ACCOUNTS RECEIVABLE. To its knowledge, all notes
receivable and accounts receivable are valid obligations of the respective
makers thereof, are as set forth on Schedule 406 attached hereto; except as
disclosed in such Schedule 406, are not subject to any valid offset or
counterclaim; and are not subject to any assignment, claim, lien or security
interest.
SECTION 407. ACTIONS, SUITS, ETC. There are no actions, suits, claims,
complaints, charges, hearings, investigations, arbitrations (or other dispute
resolution proceedings) or other proceedings pending or, to its knowledge,
threatened against, by or affecting the Company in any court or panel or before
any arbitrator or governmental agency, domestic or foreign, other than (a)
actions related to garnishments of employee wages, or (b) routine matters
covered by insurance. The Company has not been charged with, and to its
knowledge is not under investigation with respect to, any charge concerning any
violation of any provision of any federal, state or other applicable law or
administrative regulation with respect to its business. There are no judgments
unsatisfied against the Company and no consent decrees to which the Company is
subject. The Company is not involved
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in or threatened with any labor dispute which could have a material adverse
effect on the business and operations of the Company.
SECTION 408. MATERIAL CONTRACTS. Schedule 408 attached hereto sets forth
an accurate, correct and complete list of all instruments, commitments,
agreements, arrangements and understandings related to its business to which the
Company is a party or bound, or pursuant to which the Company is a beneficiary,
meeting any of the descriptions set forth below (the "Material Contracts"):
(a) Real estate leases, personal property leases, licenses of
intellectual property, technical information or software, employment contracts
and benefit plans;
(b) Any contract for capital expenditures or for the purchase of
goods or services in excess of $5,000;
(c) Any instrument evidencing indebtedness (other than routine
purchase orders), any liability for borrowed money, any obligation for the
deferred payment of the purchase price for property in excess of $5,000
(excluding normal trade payables), or any instrument guaranteeing any
indebtedness, obligation or liability;
(d) Any advertising contract not terminable without payment or
penalty on thirty (30) days (or less) notice;
(e) Any license or royalty agreement;
(f) Any contract for the purchase or sale of any assets in
excess of $5,000 other than in the ordinary course of business or granting an
option or preferential rights to purchase or sell any assets in excess of
$5,000;
(g) Any contract containing covenants not to compete in any line
of business or with any person in any geographical area;
(h) Any contract relating to the acquisition of a business or
the equity of any other person;
(i) Any other contract, commitment, agreement, arrangement or
understanding related to its business which provides for payment or performance
by any party thereto having an aggregate value of $5,000 or more, and is not
terminable without payment or penalty on thirty (30) days (or less) notice.
Accurate, correct and complete copies of each such contract have been made
available to Lender. Each contract is in full force and effect and is valid,
binding and enforceable as to the Company in accordance with its terms. The
Company and, to the Company's knowledge, each other party has complied in all
material respects with all material commitments and obligations on its part to
be performed or observed under each such contract. The Company has not received
any written or, to
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its knowledge, other notice of a default, offset or counterclaim under any
contract, or any other written or, to its knowledge, other communication calling
upon the Company to comply with any provision of any contract or asserting
noncompliance by the Company.
SECTION 409. ABSENCE OF UNDISCLOSED LIABILITIES. To its knowledge, the
Company does not have any indebtedness, liability or obligation of any nature,
whether absolute, accrued, contingent or otherwise, related to or arising from
the operation of its business or the ownership, possession or use of any assets,
except as set forth on Schedule 409 attached hereto.
SECTION 410. ACCURACY OF INFORMATION. None of the information furnished
by the Company to Lender in writing shall contain any untrue statement of a
material fact or shall omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
circumstances under which they were made, not misleading.
SECTION 411. REAL ESTATE LEASES. Schedule 411 attached hereto sets forth
an accurate, correct and complete list of all real estate which is leased or
subleased by the Company, including identification of the lease or sublease,
street address, and list of material contracts, agreements, leases, subleases,
options and commitments, oral or written, affecting such real estate or any
interest therein to which the Company is a party or by which the Company is
bound (the "Real Estate Leases"). The Company has made available to Lender
accurate, correct and complete copies of each Real Estate Lease and no default
exists under any Real Estate Lease.
SECTION 412. PERSONAL PROPERTY LEASES. Schedule 412 attached hereto
contains an accurate, correct and complete list of each lease of personal
property used in the business which provides for annual lease payments in excess
of $5,000 (the "Personal Property Leases"). The Company has made available to
Lender accurate, correct and complete copies of each Personal Property Lease and
no default exists under any Personal Property Lease.
SECTION 413. INTELLECTUAL PROPERTY. Schedule 413 attached hereto
contains an accurate, correct and complete list and summary description of all
patents, trademarks, trademark rights, trade names, trade styles, trade dress,
service marks, copyrights and applications for any of the foregoing utilized by
the business (the "Intellectual Property"). During the preceding five (5) years,
the Company has not been known by or done business under any name other than
Micro General Corporation. Schedule 413 contains an accurate, correct and
complete list and summary description of all licenses and other agreements
relating to any Intellectual Property. Except as set forth on Schedule 413, with
respect to the Intellectual Property, (a) the Company is the sole and exclusive
owner and, to the knowledge of the company, has the sole and exclusive right to
use the Intellectual Property; (b) no action, suit, proceeding or investigation
is pending or, to the Company's knowledge, threatened; (c) to the knowledge of
the Company, none of the Intellectual Property interferes with, infringes upon,
conflicts with or otherwise violates the rights of others or is being interfered
with or infringed upon by others, and none is subject to any outstanding order,
decree, judgment, stipulation or charge; (d) there are no royalty, commission or
similar arrangements, and no licenses, sublicenses or agreements, pertaining to
any of the Intellectual Property; (e) the Company has not agreed to indemnify
any person for or against any infringement of or by the Intellectual Property;
and (f) the
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<PAGE> 46
Intellectual Property constitutes all such assets, properties and rights which
are used in or necessary for the conduct of its business. To the knowledge of
the Company, the operation of its business by the Company after the date hereof,
in the manner and geographic areas in which its business is currently conducted
by the Company or is to be conducted as a result of its plans to expand its
business into other geographic areas, will not interfere with or infringe upon
any currently issued United States Letters Patent or trademarks currently
registered in the Primary Register of the United States Patent and Trademark
Office. The Company is not subject to any judgment, order, writ, injunction or
decree of any court or any federal, state, local or other governmental agency or
instrumentality, domestic or foreign, or any arbitrator, and has not entered
into or is not a party to any contract which restricts or impairs the use of any
Intellectual Property.
SECTION 414. TRADE SECRETS. Schedule 414 attached hereto contains an
accurate, correct and complete list and summary description of all information
in the nature of proprietary information, including databases, compilations of
information, copyrightable material and technical information, if any, relating
to its business "Technical Information"). The Company has the right to use the
Technical Information by virtue of ownership or by virtue of the license
agreements identified in Schedule 414. The Company has no knowledge of any
violation of any trade secret rights or copyrights with respect to such
Technical Information.
SECTION 415. SOFTWARE AND INFORMATION SYSTEMS. The Company has the right
to use all electronic data processing systems, information systems, hardware,
computer software programs, indexes, program specifications, charts, procedures,
source codes, input data, routines, data bases and report layouts and formats,
record file layouts, diagrams, functional specifications and narrative
descriptions, flow charts and other related material (if any) used in and
reasonably necessary for the conduct of its business (collectively the
"Software"). Schedule 415 attached hereto contains an accurate, correct and
complete summary description of all Software (other than non-proprietary
commercially available Software).
SECTION 416. INSURANCE. Set forth on Schedule 416 attached hereto is a
true, accurate and complete list of all policies of insurance currently in force
in which the Company is named as insured, loss payee, or additional insured,
premiums on all of such policies have been paid, and copies of all policies have
been delivered to Lender at the date hereof, and Lender has been named as loss
payee or additional insured on all such policies on which such coverage is
available.
ARTICLE V
DEFAULTS; REMEDIES
SECTION 501. EVENTS OF DEFAULT. "Event of Default," wherever used herein
with respect to the Note, means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
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<PAGE> 47
(a) BY THE COMPANY.
(1) default in the payment of any installment of principal
and/or interest on the Note as and when it becomes due and payable, whether by
virtue of the terms of the Note as to payments of principal and/or interest, at
maturity, in connection with any redemption, or otherwise and the passage of
seven (7) days following written notice thereof to the Company; or
(2) default in the performance, or breach, of any material
covenant, representation or warranty of the Company in this Agreement and the
passage of thirty (30) days following written notice thereof to the Company, or,
if such default cannot be cured within such thirty (30) days, commencement of
the cure of such default within such thirty (30) days and diligent prosecution
of such cure to completion; or
(3) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable Federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of all or substantially all of its property,
or ordering the winding up or liquidation of its affairs, and-the continuance of
any such decree or order for relief or for any such other decree or order
unstayed and in effect for a period of 45 consecutive days;
(4) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or state bankruptcy, insolvency,
reorganization or other similar law, other consent by it to the appointment of
or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the company or of all or substantially all
of its property, or the making by it of a general assignment for the benefit of
creditors; or
(5) until all sums due under the Note have been repaid, or any
increase by the Company of the number of members of its Board of Directors to a
number greater than the number who hold office at the time of execution of the
Note, or any change in the actual members of the Company's Board of Directors,
without the prior written consent of the Lender; or
(6) the failure of the Company to provide any information or
report to Lender required to be provided pursuant to Article VI hereof and the
passage of thirty (30) days following written notice thereof to the Company, or,
if such default cannot be cured within such thirty (30) days, commencement of
the cure of such default within such thirty (30) days and diligent prosecution
of such cure to completion.
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<PAGE> 48
(b) BY THE LENDER. The failure of the Lender to fund pursuant to
Section 203(a) hereof in the event that a proper Officer's Certificate pursuant
to Section 1001(a) is received and the Company is in compliance with all
covenants of this Agreement and the Note.
SECTION 502. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT; OTHER
REMEDIES.
(a) LENDER'S REMEDIES.
(i) Upon the occurrence of an Event of Default under any
event described in Section 501(a) (other than an Event of Default described in
Sections 501(a)(4) and 501(a)(5) hereof), then in every such case Lenders may
declare the principal amounts of the Notes to be due and payable immediately, by
a notice in writing to the Company and upon any such declaration such principal
amounts shall become immediately due and payable. The Company specifically
acknowledges and agrees that the occurrence of any Event of Default under any
event described in Section 501(a) hereof will automatically cause all existing
Notes to be in default, and all Events of Default under all Notes must be cured
before any one Event of Default shall be deemed cured.
(ii) At any time after such a declaration of
acceleration with respect to the Note has been made and before a judgment or
decree for payment of the money due has been obtained by Lender as hereinafter
in this Article provided, Lender may, by written notice to the Company, rescind
and annul such declaration and its consequences if, (1) the Company has paid to
Lender a sum sufficient to pay (A) all overdue interest on the Note, (B) the
principal on the Note which has become due otherwise than by such declaration of
acceleration and interest thereon at the Note Rate, (C) to the extent that
payment of such interest is lawful, interest upon overdue interest at the Note
Rate, and (D) all sums paid or advanced by Lender hereunder and the actual
compensation, expenses, disbursements and advances of Lender, its agents and
counsel; and (2) all Events of Default with respect to the Note, other than the
nonpayment of the principal of the Note which has become due solely by such
declaration of acceleration, have been cured or waived by Lender. No such
rescission shall affect any subsequent default or impair any right consequent
thereon. In the case of any Event of Default described in Section 501(a)(4) or
501(a)(5), all unpaid principal of and accrued interest on the Note shall be due
and payable immediately without any declaration or other act on the part of
Lender.
(iii) Obligations of this Note are secured by the
Security Agreement dated August 1, 1996.
(b) THE COMPANY'S REMEDIES. Upon the occurrence of an Event of
Default as described in Section 501(b) hereof, then the option amount referred
to in Section 901 hereof shall be limited to a number equal in value to the
amount already funded.
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT.
(a) The Company covenants that if default is made in the payment
of any principal and/or interest on the Note when such principal and/or interest
becomes due and payable, whether
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<PAGE> 49
at a time specified in the Note, at maturity of the Note or in connection with
any redemption or otherwise, the Company will, upon demand of Lender, pay to it
the whole amount then due and payable on the Note for principal and interest
and, to the extent that payment of such interest shall be legally enforceable,
interest on any overdue principal and-on any overdue interest, at the Note Rate,
and, in addition thereto, such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of Lender, its agents and counsel, it being
understood that as to the Lenders, any payments will be applied on a pro rata
basis among the Lenders based on each Lender's respective Note amount. If the
Company fails to pay such amounts forthwith upon such demand, Lender may
prosecute a proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor on the Note and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company or of any other obligor on the Note, wherever situated,
it being understood that any monies collected shall be applied on a pro rata
basis among the Lenders based on each Lender's respective Note. In addition,
Lender may give notice to customers of the Company that all payments under
contracts listed on Schedule 401 shall, until further notice, be paid directly
to Lender, and the Company consents to each such notice.
(b) If an Event of Default with respect to the Note occurs,
Lender may in its discretion proceed to protect and enforce its rights by such
appropriate judicial proceedings as it shall deem most effectual to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Agreement or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
SECTION 504. LENDER MAY FILE PROOFS OF CLAIM. In case of the pendency of
any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceeding relative to
the Company or of any other obligor on the Note or the property of the Company
or of such other obligor or their creditors, Lender (irrespective of whether the
principal of the Note shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether it shall have made any
demand on the Company for the payment of overdue principal or interest) shall be
entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of principal
and interest owing and unpaid in respect of the Note and to file such other
papers and documents as may be necessary or advisable in order to have the
claims of Lender (including any claim to the right to own Common Stock or for
the reasonable compensation, expenses, disbursements and advances of Lender, its
agents and counsel) allowed in such judicial proceeding, and
(b) to collect and receive any monies or other property payable
or deliverable on any such claims.
SECTION 505. APPLICATION OF MONEY COLLECTED. Any money collected by
Lender pursuant to this Article V shall be applied in the following order, at
the date or dates fixed by Lender and, in case of the distribution of such money
on account of principal or interest, upon presentation of the
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<PAGE> 50
Note and the notation thereon of the payment if only partially said and upon
surrender thereof if fully paid:
First: To the costs and expenses of Lender in collecting sums
due it hereunder;
Second: To the payment of the amounts then due and unpaid first
for interest on and then for principal of all outstanding Notes, applied on a
pro rata basis among the Lenders based on each Lender's respective Note; and
Third: To the payment of the remainder, if any, to the Company
or any other Person lawfully entitled thereto.
SECTION 506. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein
conferred upon or reserved to Lender is intended to be exclusive of any other
right or remedy, and every right and remedy shall, to the extent permitted by
law, be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
SECTION 507. DELAY OR OMISSION NOT WAIVER. No delay or omission of
Lender to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default. Every right and remedy given by this Article V or by law may be
exercised from time to time, and as often as may be deemed expedient by Lender.
SECTION 508. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
or plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Agreement; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law and covenants that it will not hinder,
delay or impede the execution of any power herein granted to Lender, but will
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE VI
REPORTS BY COMPANY
SECTION 601. ANNUAL STATEMENT. The Company will deliver to Lender,
within 30 days after the end of each fiscal year of the Company, an Officer's
Certificate stating that to the best of such officer's knowledge, the Company
has fulfilled all its obligations under this Agreement throughout such year, or,
if there has been a default in the fulfillment of any such obligation and such
default is continuing, specifying each such default of which such officer has
knowledge, and the nature and status thereof.
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<PAGE> 51
SECTION 602. REPORTS BY COMPANY. The Company shall file with Lender,
such information, documents and other reports, and such summaries thereof, as
Lender shall request, immediately upon request, but without request the Company
shall deliver to Lender audited financial statements of the Company prepared by
independent certified public accountants ("Accountants") within ninety (90) days
of the end of each Company fiscal year.
SECTION 603. QUARTERLY FINANCIAL REPORTS. Throughout the term of this
Agreement and for so long as any amount remains unpaid under the Note, the
Company shall furnish Lender with copies of its quarterly financial reports no
later than forty-five (45) days following the end of the subject fiscal quarter.
ARTICLE VII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, SALE OR LEASE
SECTION 701. COMPANY MAY CONSOLIDATE. ETC., ON CERTAIN TERMS. The
Company shall not consolidate with or merge into any other corporation or
convey, transfer, sell or lease its properties and assets as, or substantially
as, an entirety to any Person, issue any capital stock (including Common Stock)
of the Company unless (a) prior to such transaction Lender has released in
writing its Right of First Refusal as required by Section 702 hereof, and (b)
upon any such consolidation, merger, sale, conveyance or exchange of or by the
Company, (i) the Company is the continuing corporation and the Company's Common
Stock outstanding immediately prior to the merger is not exchanged for
securities, cash or other property of another corporation, (ii) there is an
exchange of the Note for other securities in connection with such transaction,
or (iii) the due and punctual payment of the principal of and interest on, the
Note, according to their tenor, and the due and punctual performance and
observance of all of the covenants and conditions of the Agreement to be
performed by the Company, are expressly assumed by a note supplemental to the
Note by the corporation formed by such consolidation, or whose securities, cash
or other property will immediately after the merger be owned, by virtue of the
merger, by the holders of Common Stock of the Company immediately prior to the
merger, or by the corporation that shall have acquired such property or
securities. Furthermore, the Company shall not consolidate with or merge into
any other corporation or convey, transfer, sell or lease its properties and
assets as, or substantially as, an entirety to any Person, or enter into any
statutory exchange of securities with another corporation, unless the Right of
First Refusal has been released and unless immediately after giving effect to
such transaction no Event of Default shall have occurred and be continuing, and
the Company shall have delivered to Lender an Officer's Certificate stating that
such transaction and such supplemental agreement comply with this Agreement.
SECTION 702. RIGHT OF FIRST REFUSAL OF LENDERS. For so long as any
amounts due under the Note shall be outstanding, Lenders shall have and retain
the first option to purchase any and all assets of the Company and any and all
capital stock (including Common Stock) of the Company, upon the same terms and
subject to the same conditions as may be offered to the Company by a third party
for such assets or capital stock; provided, however, that any non-cash
consideration offered for any
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<PAGE> 52
such assets or capital stock shall be given its then current market value in
cash and Lenders shall have the opportunity to pay the amount of such cash in
lieu of any non-cash consideration offered by a prospective owner of any assets
or capital stock on a pro rata basis as to the Lenders' exercise of that right.
Immediately upon receipt of any offer to purchase any assets or capital stock,
or upon determining that the Company desires to sell any assets or capital
stock, the Company shall immediately notify Lenders of the assets and/or capital
stock proposed to be bought and sold, and of the terms of such proposed purchase
and sale. Within twenty (20) days of being so notified, Lenders shall notify
either the Company and/or the owner of the capital stock in question that they
(or any one of them) will exercise the right of first refusal granted herein
("Right of First Refusal"), or, in the alternative, that they (or any one of
them) thereby release such Right of First Refusal and consents to the sale of
the assets or capital stock on the terms described. Any change in such terms
shall give each Lender the right to once again exercise or release its Right of
First Refusal within an additional time period identical to that specified
above.
ARTICLE VIII
REDEMPTION OF NOTE BY THE COMPANY
SECTION 801. RIGHT TO REDEEM. The Company may, at its option, redeem all
or, from time to time, any part of the Note, on any date prior to maturity, in
the manner specified in this Article VIII, at the original principal amount
thereof, plus accrued and unpaid interest, if any, to the date fixed for
redemption, but no such redemption shall in any way impair the right of Lender
to convert the Note into shares of Common Stock as specified in this Agreement
or in the Right of First Refusal granted hereunder.
SECTION 802. NOTICE OF REDEMPTION.
(a) In case the Company shall desire to exercise its right to
redeem all or any part of the Note pursuant to Section 801 hereof, it shall fix
a date for redemption (a "Redemption Date"), shall notify Lenders in writing of
such date, and shall mail or cause to be mailed a notice of such redemption (a
"Notice of Redemption") at least ten (10) and not more than thirty (30) days
prior to the date fixed for redemption to Lenders at their principal executive
offices. Such mailing shall be by first class mail. The Company agrees to
exercise said right of redemption on an equitable and pro rata basis among the
Lenders.
(b) The Notice of Redemption shall specify the principal amount
of the Note to be redeemed, the Redemption Date for the Note, and the Redemption
Price at which the Note is to be redeemed, and shall state that payment of the
Redemption Price of the Note or portions thereof to be redeemed will be made on
surrender of the Note to be redeemed, that interest accrued to such Redemption
Date will be paid as specified in such notice, and that from and after such date
interest thereon will cease to accrue. In the event of full redemption of the
Note, such Notice of Redemption shall also state that the right to convert the
Note or portion thereof into Common Stock will expire at the close of business
on October 27, 2003.
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<PAGE> 53
(c) On or prior to each Redemption Date specified in each Notice
of Redemption given as provided in this Section 802, the Company will pay to
Lender an amount of money sufficient to redeem on such Redemption Date the Note
or portion thereof so called for redemption at the appropriate Redemption Price,
together with accrued interest to the Redemption Date.
(d) If the Note called for redemption shall not be so paid upon
surrender thereof for redemption, the principal shall, until paid, bear interest
from the date fixed for redemption at the Note Rate and the Note shall remain
convertible into Common Stock until October 27, 2003, or until all amounts due
under the Note have been repaid in full.
ARTICLE IX
RIGHT TO CONVERT NOTE AND/OR RIGHT TO PURCHASE STOCK
SECTION 901. RIGHTS GRANTED. Subject to and upon compliance with the
provisions of this Article IX, and specifically Section 902 hereof, Lender shall
have the right, at its option, at any time or from time to time on or prior to
the close of business on October 27, 2003, to convert the principal amount of
the Note up to a value of $900,000.00 into, an aggregate of 200,000 shares of
Common Stock at a price of $4.50 per share (the "Conversion Price")or to pay in
cash in an amount up to $900,000.00.
SECTION 902. ANTI-DILUTION RIGHTS OF LENDER. The Company will not, by
any voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the conversion privilege set forth in Section 901 hereof,
but will at all times in good faith carry out the provisions and intent of
Section 901 and take all such action as may be necessary or appropriate to
protect against impairment of the rights of Lender to convert the Note into, or
to purchase, Common Stock. In the event that, at any time prior to full exercise
by Lender of its right to purchase such Common Stock, the Company shall sell or
otherwise transfer any Common Stock, the Company undertakes and agrees to make
any adjustments that may be necessary to permit Lender to purchase an equal
number of shares of the Common Stock for a per share price equal to the per
share price paid by such other purchaser or transferee, including, if necessary,
refunding to Lender any sums necessary to cause Lender to receive the benefit of
this Section 902, such benefit to survive the repayment of the Note and to be
applicable with respect to issuances of Common Stock until October 27, 1998.
Nothing in this Section 902 shall be interpreted to permit or require any
increase in the consideration to be paid by Lender in exchange for 200,000
shares of the Common Stock.
SECTION 903. MANNER OF EXERCISE OF CONVERSION PRIVILEGE. In order to
exercise the conversion privilege, Lender shall surrender the Note, duly
endorsed or assigned to the Company or in blank, at the office of the Company,
together with the Conversion Notice duly executed, that Lender elects to convert
the Note or the portion thereof specified in said Conversion Notice or,
alternatively, that Lender will purchase such Common Stock. Such Conversion
Notice shall also state the name or names, together with the address or
addresses in which the certificate or certificates for shares of Common Stock
which shall be issuable in such conversion or purchase shall be issued
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<PAGE> 54
as promptly as practicable after the surrender of the Note and the receipt of
such Conversion Notice, the Company shall issue and deliver to Lender, or on
Lender's written order, a certificate or certificates for the number of full
shares of Common Stock issuable upon the conversion of the Note or portion
thereof in accordance with the provisions of this Article IX. In case the Note
shall be surrendered for partial conversion, the Company shall execute and
deliver to or upon the order of Lender, at the expense of the Company, a new
note or notes in authorized denominations in an aggregate principal amount equal
to the unconverted portion of the surrendered Note. Each conversion shall be
deemed to have been effected immediately prior to the close of business on the
date on which the Note shall have been surrendered and such Conversion Notice
received by the Company as aforesaid, and the Person or Persons in whose name or
names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion or purchase shall be deemed to have become the
holder or holders of record of the shares represented thereby at such time on
such date.
SECTION 904. NOTICE TO LENDER PRIOR TO CERTAIN CORPORATE ACTIONS. In
case:
(a) the Company shall authorize the granting to the holders of
its Common Stock generally of rights, warrants or options to subscribe for or
purchase any shares of stock of any class or of any other rights; or
(b) there shall be any reorganization or reclassification of the
Common Stock (other than a change in the par value of the Common Stock), or any
permissible consolidation or merger to which the Company is a party, or any
permissible conveyance, transfer, sale or lease of the Company's properties and
assets as, or substantially as, an entity; or
(c) there shall be a voluntary or in-voluntary dissolution,
liquidation or winding-up of the Company;
then the Company shall cause to be given to Lender, in the manner provided in
Section 110 hereof, and with respect to the events described in subsections (a),
(b) and (c) of this Section 904, as promptly as possible, but in any event at
least twenty (20) days prior to the applicable date hereinafter specified, a
notice stating (i) the date on which the Company expects to file a Registration
Statement covering the Common Stock, or (ii) the date on which such
reorganization, reclassification, consolidation, merger, conveyance, transfer,
sale, lease, dissolution, liquidation, or winding-up is expected to become
effective or occur, and, if applicable, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance, transfer,
sale, lease, dissolution, liquidation, or winding-up, subject to compliance with
the Right of First Refusal required by Section 702 hereof.
SECTION 905. RESERVATION OF SHARES OF COMMON STOCK. The Company
covenants that it will at all times reserve and keep available, free from
preemptive rights, out of the aggregate of its authorized but unissued shares of
Common Stock, for the purpose of effecting conversion of the Note, the full
number of shares of Common Stock deliverable upon the conversion of the Note.
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<PAGE> 55
SECTION 906. TAXES UPON CONVERSION. The Company will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on conversion of the Note pursuant
hereto.
SECTION 907. COVENANTS AS TO COMMON STOCK. The Company covenants that
all shares of Common Stock which may be delivered upon conversion of the Note
will, upon delivery, be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any preemptive
rights.
SECTION 908. PIGGYBACK REGISTRATION RIGHTS. If the Company shall
determine to register any of its securities, either for its own account or for
the account of a security holder or holders, other than a registration relating
solely to employee benefit plans, or a registration on any registration form
that does not permit secondary sales, the Company will promptly give to Lender
written notice thereof and use its best efforts to include in such registration
(and any related qualification under applicable Blue Sky laws or other
compliance), and any underwriting involved therein, Common Stock specified in a
written request made by Lender within twenty (20) days after the written notice
of the Company provided for above is given. Such written request may specify all
or a part of Lender's Common Stock. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
company shall so advise as a part of the written notice given as required above.
In such event the right of Lender to registration shall be conditioned upon
Lender's participation in such underwriting and the inclusion of its Common
Stock in the underwriting. Lender shall enter with the Company into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company. Notwithstanding the above,
if the representative of the underwriters advises the Company in writing that
marketing factors require a limitation of the number of shares to be
underwritten, the representative may exclude Lender's Common Stock from, or
limit the number of shares of Lender's Common Stock to be included in, the
registration and underwriting. The number of shares of securities that are
entitled to be included in the registration and underwriting shall be allocated
first to the Company for securities being sold for its own account, then to
Lender to the extent of securities it has elected to sell for its own account,
and thereafter to all other owners of Common Stock with the right to participate
in such registration and underwriting pro rata in proportion to the percentage
of all outstanding Common Stock owned by each such Person immediately prior to
commencement of such registration and underwriting. If any Person does not agree
to the terms of any such underwriting, he shall be excluded therefrom by written
notice from the Company or the underwriter. Any Common Stock or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration. If shares are so withdrawn from the registration or if the number
of shares of Common Stock to be included in such registration is increased
during the period of such registration, the Company shall offer first to Lender
and then, if additional shares may be sold in the registration to all other
Persons who have retained the right to include securities in the registration,
the right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among the Persons requesting additional inclusion pro rata in
proportion to the percentage that each Person's Common Stock represents of the
total amount of Common Stock owned by all such Persons prior to commencement of
such registration and underwriting.
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<PAGE> 56
ARTICLE X
CONDITIONS PRECEDENT
SECTION 1001. CONDITIONS PRECEDENT. The obligation of Lender to purchase
the Note(s) and to make all individual disbursements thereunder is expressly
conditioned upon the following:
(a) The Lender's receipt from the Company, in each instance, of
an Officer's Certificate signed by its President satisfactory to Lender in which
such President represents and warrants to Lender on behalf of the Company that
(1) use of the proceeds from any disbursement of principal of the Note is shall
be dedicated to such corporate uses as the Company's Board of Directors may deem
proper; and (2) there are no defaults under this Agreement or the Note; and.
(b) The Lender's receipt of a Certificate of Good Standing
certified by the Secretary of State of the State of Delaware as to the corporate
status of the Company.
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<PAGE> 57
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, and their respective seals to be hereunto fixed and attested, all
as of the day and year first above written.
MICRO GENERAL CORPORATION
(the "Company")
By: ________________________________
Name:_______________________________
Title:______________________________
DITO CAREE L.P. ("Lender")
By: ________________________________
Name:_______________________________
Title:______________________________
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<PAGE> 58
EXHIBIT "A"
MICRO GENERAL CORPORATION
CONVERTIBLE NOTE
(MULTIPLE ADVANCES)
$900,000.00 Irvine, California
October 27, 1998
MICRO GENERAL CORPORATION, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor corporation or corporations under the Agreement hereinafter referred
to), for value received, hereby promises to pay to Dito Caree L.P., a Nevada
limited partnership, at its office at 3735 Howard Hughes Parkway, Suite 200, Las
Vegas, Nevada 89109 ("Lender"), or order, principal sum of Nine Hundred Thousand
Dollars ($900,000.00), or so much thereof as shall have been disbursed by Lender
and which at that time remains unpaid, together with simple interest thereon
from the date hereof at the rate of ten percent (10%) per annum, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts, payable as follows:
Accrued interest only on the principal amount hereof shall be payable quarterly
in arrears during the first five (5) years of the term hereof commencing October
27, 1998. Thereafter, on October 27, 2003 the entire unpaid balance of this
Note, including principal and accrued but unpaid interest, shall be due and
payable.
This Note may be prepaid in whole or in part at any time with the prior
written consent of Lender so long as the Company gives ten (10) days' prior
written notice to Lender of the Company's intent to prepay this Note or any
portion hereof. Such notice shall state the proposed payment date (the "Payment
Date") and the principal amount to be repaid. At any time during the term
hereof, the Lender may, but shall not be obligated to, elect to convert all or
any portion of the principal to be repaid on the Payment Date into shares of the
Company's common stock (the "Common Stock") at the "Conversion Price" (as that
term is defined in the Agreement hereinafter referred to) then in effect by
delivering to the Company, to the attention of its President, written notice of
its election to exercise its conversion rights as set forth herein.
Notwithstanding anything contained herein to the contrary, and notwithstanding
the Company's payment of this Note in whole or in part, the Lender shall retain
the right to convert the then-outstanding principal balance hereof into the
subject shares of Common Stock throughout the five (5) year term of this Note at
the Conversion Price.
Any partial prepayments made hereunder shall be applied to installments
due hereunder in inverse order of maturity.
This Note is duly authorized and issued by the Company, is designated as
set forth on the face hereof, and is limited to the aggregate principal amount
of $900,000.00 issued under and pursuant to that certain Convertible Note
Purchase Agreement, dated as of October 27, 1998 (herein called the
"Agreement"), duly executed and delivered by the Company and Lender, to which
Agreement reference is hereby made for a further description of the rights,
limitation of rights, obligations, and
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<PAGE> 59
duties thereunder of the Company and Lender. In case an Event of Default shall
have occurred under this Note or under the Agreement (as the term "Event of
Default" is defined in said Agreement), the principal balance hereof and all
accrued but unpaid interest thereon may be declared, and upon such declaration
shall become, due and payable, in the manner, with the effect and subject to the
conditions provided in the Agreement.
Reference is hereby made to the further provisions of the Agreement,
including, without limitation, provisions giving the Lender of this Note the
right to convert this Note into Common Stock on the terms and subject to the
limitations more fully specified in the Agreement. Such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
Capitalized terms used in this Note and not otherwise defined still have the
meanings assigned to such terms in the Agreement.
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by its duly authorized officers.
Dated: _______________________ MICRO GENERAL CORPORATION (the
"Company")
By: ________________________________
Name:_______________________________
Title:______________________________
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<PAGE> 60
EXHIBIT "B"
CONVERSION NOTICE
To: Micro General Corporation
2510 Redhill Avenue
Santa Ana, California 92705
The undersigned, as the owner of that certain Convertible Promissory
Note dated October 27, 1998 (the "Note"), hereby irrevocably exercises the
option to convert the Note, or that portion of the Note designed herein below,
into _____________ shares of Common Stock of Micro General Corporation at a
price of $_______ per share, in accordance with the terms of that certain
Convertible Note Purchase Agreement between the undersigned and Micro General
Corporation as referenced in the Note, and directs that the shares issuable and
deliverable upon the conversion be issued and delivered to the holder hereof
unless a different name has been indicated below. If shares or any portion of
this Note not converted are to be issued in the name of a person other than the
undersigned, the undersigned has herein below named the transferee to whom the
new Note should be issued.
Dated: _____________________________
____________________________________
Signature(s)
By: ________________________________
Name:_______________________________
Title:______________________________
<PAGE> 61
MICRO GENERAL CORPORATION
CONVERTIBLE NOTE
(MULTIPLE ADVANCES)
$900,000.00 Irvine, California
October 27, 1998
MICRO GENERAL CORPORATION, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor corporation or corporations under the Agreement hereinafter referred
to), for value received, hereby promises to pay to Dito Caree L.P., a Nevada
limited partnership, at its office at 3735 Howard Hughes Parkway, Suite 200, Las
Vegas, Nevada 89109 ("Lender"), or order, principal sum of Nine Hundred Thousand
Dollars ($900,000.00), or so much thereof as shall have been disbursed by Lender
and which at that time remains unpaid, together with simple interest thereon
from the date hereof at the rate of ten percent (10%) per annum, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts, payable as follows:
Accrued interest only on the principal amount hereof shall be payable quarterly
in arrears during the first five (5) years of the term hereof commencing October
27, 1998. Thereafter, on October 27, 2003 the entire unpaid balance of this
Note, including principal and accrued but unpaid interest, shall be due and
payable.
This Note may be prepaid in whole or in part at any time with the prior
written consent of Lender so long as the Company gives ten (10) days' prior
written notice to Lender of the Company's intent to prepay this Note or any
portion hereof. Such notice shall state the proposed payment date (the "Payment
Date") and the principal amount to be repaid. At any time during the term
hereof, the Lender may, but shall not be obligated to, elect to convert all or
any portion of the principal to be repaid on the Payment Date into shares of the
Company's common stock (the "Common Stock") at the "Conversion Price" (as that
term is defined in the Agreement hereinafter referred to) then in effect by
delivering to the Company, to the attention of its President, written notice of
its election to exercise its conversion rights as set forth herein.
Notwithstanding anything contained herein to the contrary, and notwithstanding
the Company's payment of this Note in whole or in part, the Lender shall retain
the right to convert the then-outstanding principal balance hereof into the
subject shares of Common Stock throughout the five (5) year term of this Note at
the Conversion Price.
Any partial prepayments made hereunder shall be applied to installments
due hereunder in inverse order of maturity.
This Note is duly authorized and issued by the Company, is designated as
set forth on the face hereof, and is limited to the aggregate principal amount
of $900,000.00 issued under and pursuant to that certain Convertible Note
Purchase Agreement, dated as of October 27, 1998 (herein called the
"Agreement"), duly executed and delivered by the Company and Lender, to which
Agreement reference is hereby made for a further description of the rights,
limitation of rights, obligations, and duties thereunder of the Company and
Lender. In case an Event of Default shall have occurred under
<PAGE> 62
this Note or under the Agreement (as the term "Event of Default" is defined in
said Agreement), the principal balance hereof and all accrued but unpaid
interest thereon may be declared, and upon such declaration shall become, due
and payable, in the manner, with the effect and subject to the conditions
provided in the Agreement.
Reference is hereby made to the further provisions of the Agreement,
including, without limitation, provisions giving the Lender of this Note the
right to convert this Note into Common Stock on the terms and subject to the
limitations more fully specified in the Agreement. Such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
Capitalized terms used in this Note and not otherwise defined still have the
meanings assigned to such terms in the Agreement.
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by its duly authorized officers.
Dated: October 27, 1998 MICRO GENERAL CORPORATION (the
"Company")
By: /s/ Jeff Sanderson
---------------------------------
Name: Jeff Sanderson
-------------------------------
Title: Executive Vice President
------------------------------
- 2 -
<PAGE> 1
EXHIBIT 10.25
INDUCEMENT AGREEMENT
THIS INDUCEMENT AGREEMENT ("Agreement") dated March 30 , 1999 and is
entered into by and between JOHN SNEDEGAR ("Snedegar"), CAL WEST SERVICE
CORPORATION, a California corporation ("Cal West"), and MICRO GENERAL
CORPORATION, a Delaware corporation ("MGC").
Whereas, Snedegar has significant expertise in the
telecommunications industry; and
Whereas, the major shareholders of MGC, a computer and
telecommunications company, desire to utilize Snedegar's expertise to grow MGC
by strategic acquisitions; and
Whereas, Snedegar is willing to provide his expertise to MGC's
management;
Now, therefore, it is agreed as follows:
1. Snedegar has agreed to provide advice and counsel on strategic
acquisitions for MGC for a period of two years from August 11, 1998 and has been
providing such advice and counsel since August 11, 1998.
2. As compensation for the services Mr. Snedegar renders to MGC, MGC,
agrees to issue certain convertible debt and warrants of MGC to Snedegar; one
half on March 31, 1999 and one half on January 1, 2000 consisting of:
100,000 warrants having an exercise price of $1.50 per warrant;
and
$500,000 of face indebtedness of convertible debt of MGC with an
average conversion price of $2.25.
Said issuance shall occur in two equal parts, half on March 31,
1999 and half on January 1, 2000. In the event that Snedegar's
consulting relationship with MGC terminates for any reason
whatsoever prior to January 1, 2000, the convertible debt and
warrants which are not vested will vest on January 1, 2000.
CalWest agrees to transfer all rights granted to it in the above listed warrants
and convertible debt back to MGC over the period described above with the
understanding that CalWest will be repaid by MGC as said transfers to Snedegar
occur pursuant to the Convertible Note Purchase Agreement and ancillary
documents and the Loan Agreement and Agreement to Issue Detachable Warrants and
ancillary documents relative to the convertible debt and warrants.
1
<PAGE> 2
3. Snedegar will be and at all times during the term of this Agreement
shall remain an independent contractor. As such, Snedegar shall have sole
control over the manner and means of performing the services outlined in
Paragraph 1 above. Nothing in this Agreement or in any subsequent modifications
hereto shall be interpreted to create any relationship of employer/ employee,
principal/agent, partnership or joint venture. Snedegar shall have no power to
obligate, commit or legally bind the other parties in any manner whatsoever, and
the other parties shall have no liability to Mr. Snedegar or to others for any
acts or omissions of Snedegar. It is acknowledged and agreed that Snedegar has
numerous business commitments and he shall not be obligated to devote any
particular amount of time to the performance of his services hereunder.
4. In the event of any dispute or claim regarding any provision of this
Agreement, or any aspect of Snedegar's independent contractor relationship or
the cessation of that relationship, the parties agree to submit the dispute or
claim to binding arbitration in Orange County, California before an experienced
arbitrator licensed to practice law in California and selected in accordance
with the rules and procedures of the American Arbitration Association as the
exclusive remedy for any such dispute or claim.
5. No provision of this Agreement shall be construed against any party
merely because that party or its/his/her attorney drafted or revised the
provision in question. The provisions of this Agreement are severable, and if
any part of it is found to be unenforceable, the other provisions shall remain
fully valid and enforceable.
6. This Agreement and the Agreement to Transfer and Reissue Detachable
Warrants and Convertible Notes of MGC (the "Transfer Agreement"), by and between
the parties hereto together constitute the sole and entire agreement and
understanding of the parties relating to the subject matter hereof and thereof.
This Agreement, together with the Transfer Agreement, supersede and
automatically cancel any and all prior discussions, negotiations, commitments
and understandings between the parties, whether oral, written, or otherwise,
relating to the subject matter hereof and thereof. This Agreement shall not be
modified, amended, changed or supplemented in any way except by a written
document signed by all parties to this Agreement. This Agreement may be executed
in separate counterparts, each of which shall constitute an original and all of
which, when taken together, shall constitute one and the same Agreement.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates written below, opposite their name.
Date: March 30, 1999 /s/ John Snedegar
------------------------------------
JOHN SNEDEGAR
CAL WEST SERVICE CORPORATION,
a California corporation
Date: April 2, 1999 By: /s/ M'Liss Jones Kane
------------------------------------
Secretary
MICRO GENERAL CORPORATION,
a Delaware corporation
Date: April 2, 1999 By: /s/ Patrick F. Stone
------------------------------------
Chief Executive Officer
3
<PAGE> 4
AGREEMENT TO TRANSFER AND REISSUE
DETACHABLE WARRANTS AND CONVERTIBLE NOTES
OF
MICRO GENERAL CORPORATION,
A DELAWARE CORPORATION
(BY AND BETWEEN CALWEST SERVICE CORPORATION,
A CALIFORNIA CORPORATION, MICRO GENERAL CORPORATION, A DELAWARE CORPORATION, AND
JOHN SNEDEGAR, AN INDIVIDUAL)
THIS AGREEMENT is made, entered into and is effective as of March 30,
1999 (this "Agreement"), by and between CALWEST SERVICE CORPORATION, A
CALIFORNIA CORPORATION ("CalWest"), and an affiliate of Fidelity National
Financial, Inc., a Delaware corporation and major stockholder of Micro General
Corporation, a Delaware corporation ("MGC"), MGC and JOHN SNEDEGAR, AN
INDIVIDUAL ("Snedegar"), and is made with reference to the following facts:
A. Simultaneously with the execution of this Agreement, Snedegar has
entered into an agreement with respect to Snedegar providing consulting services
to and for the benefit of MGC (the "Inducement Agreement"), and, in partial
consideration for the services to be rendered by Snedegar now and in the future
under the terms of such consulting arrangement, CalWest, as lender and
shareholder of MGC, has agreed to convey to MGC those certain rights and
interests as provided hereinbelow with the understanding that as said rights and
interests are to be reissued to Snedegar pursuant to the Inducement Agreement.
MGC will simultaneously repay CalWest for its conveyance to MGC. In
consideration for such conveyance by CalWest and reissuance by MGC, Snedegar
agrees that he will faithfully perform those obligations as provided under the
terms of his consulting arrangement with MGC.
B. CalWest is currently the holder of certain rights and interests under
Detachable Warrants issued by MGC in favor of CalWest and is further the lender
and the holder of certain rights under Convertible Promissory Notes issued by
MGC. In consideration for the services provided and to be provided by Snedegar
to MGC, CalWest shall, subject to the terms provided herein, transfer back to
MGC and MGC shall reissue to Snedegar over a period as follows: the first half
(1/2) issued on March 31, 1999 and the second half (1/2) issued on January 1,
2000 or earlier as described in section 2 of the Inducement Agreement granting
to Snedegar the right to exercise such Warrants and receive upon exercise up to
100,000 shares of MGC common stock at a warrant exercise price of $1.50 per
share of MGC common stock; and, further in two parts over the period described
above, interests in Convertible Promissory Notes issued by MGC granting to
Snedegar, as the holder of said Promissory Notes, in a total face indebtedness
of $500,000, the right to convert $300,000 of indebtedness into MGC common stock
at a conversion price of $2.25 per share of MGC common stock, $100,000 of
indebtedness into MGC common stock at a conversion price of $2.00
1
<PAGE> 5
per share of MGC common stock, and $100,000 of indebtedness into MGC common
stock at a conversion price of $2.50 per share of MGC common stock. MGC agrees
to repay CalWest over the above described period for the interests which CalWest
is transferring to back to MGC to be reissued to Snedegar.
NOW, THEREFORE, the parties agree as follows:
1. Assignment of Detachable Warrants. CalWest, as the owner and holder
of a Detachable Warrant Certificate dated November 25, 1997, entitling the
holder thereof to acquire up to 50,000 shares of the common stock of MGC at a
warrant exercise price of $1.50 per share, and, as the holder of a Detachable
Warrant Certificate dated April 8, 1998, permitting the holder thereof to
acquire up to 62,500 shares at an exercise price of $1.50 per share, does hereby
agree to convey unto MGC rights under said Warrants to acquire up to 100,000
shares of MGC at an exercise price of $1.50 per share. Said conveyance of said
rights under such 100,000 Warrants shall be effected one half on March 31, 1999
and one half on January 1, 2000 and MGC will reissue Warrants, in the name of
Snedegar representing rights to exercise Warrants for up to 50,000 shares on
March 31, 1999 and up to 50,000 shares on January 1, 2000, subject to such
reissuance of warrants being subject to all terms and conditions of the
Detachable Warrant Certificates issued November 25, 1997 and April 8, 1998.
Snedegar acknowledges that such assignment shall be effective in accordance with
the provisions of Section 2 of the Detachable Warrant Certificates and shall
include the providing of notice under the provisions of Section 2(c) to MGC and
an acknowledgment by Snedegar that such acquisition of warrants by Snedegar
shall be for his personal investment purposes and shall be held as an investment
by Snedegar without a view to further transfer or assign any interests so
acquired and may require submission of a written opinion by counsel that such
transfer to Snedegar shall not be violative of any federal or state securities
act or securities law.
2. Transfer of Interests Under Convertible Promissory Notes. Over the
aforementioned period, CalWest does hereby assign and transfer to MGC interests
under Convertible Promissory Notes held by CalWest issued by CalWest and dated
July 24, 1996, November 25, 1997 and April 8, 1998 representing the transfer of
a portion of the indebtedness held by CalWest under Convertible Promissory Notes
issued by MGC, which interests transferred shall represent a transfer of
$300,000 of MGC indebtedness as represented by such Promissory Notes notes which
shall be subject to conversion to common stock of MGC at a conversion price of
$2.25 per share ($150,000 of MGC indebtedness on March 31, 1999 and $150,000 of
MGC indebtedness on January 1, 2000), a further transfer of $100,000 of such
Promissory Notes convertible to common stock of MGC at a conversion price of
$2.00 per share ($50,000 of such Promissory Notes on March 31, 1999 and $50,000
of MGC promissory notes on January 1, 2000), and an additional $100,000 of
indebtedness under such Promissory Notes of MGC convertible to common stock of
MGC at a conversion price of $2.50 per share ($50,000 of MGC promissory notes on
March 31, 1999 and $50,000 of MGC promissory notes on January 1, 2000). MGC will
reissue convertible promissory notes in said amounts registered in the name of
Snedegar convertible at the prices indicated hereinabove.
2
<PAGE> 6
3. Rights Subject to Terms of Warrants and Convertible Notes. Snedegar
does hereby represent to and for the benefit of CalWest, MGC and Dito Caree L.P.
Holding, a Nevada limited partnership ("Caree") (an entity who had participated
in the loan and warrant agreements together with CalWest), that Snedegar has
read and reviewed all terms and provisions of the loan agreements and agreements
between CalWest and MGC to issue Detachable Warrants, as dated July 24, 1996,
November 25, 1997 and April 8, 1998, and Snedegar acknowledges that he shall be
bound by all of the terms and conditions thereof as a holder of Detachable
Warrants and Convertible Promissory Notes, including, but not limited to, all
terms and provisions of a Memorandum of Understanding dated November 25, 1997
and April 8, 1998 by and between CalWest and Caree concerning "equalization of
rights" upon the event of any defaults which shall result in enforcement rights
by holders of notes or debentures as against MGC, and Snedegar does further
agree to be bound by and agree to appoint CalWest as custodian in connection
with the holding and filing of security agreements and UCC Financing Statements
under the terms and provisions of the Convertible Promissory Notes and the
Detachable Warrants, together with rights under the loan agreement pursuant to
which such Promissory Notes and Detachable Warrants were issued. MGC does
further acknowledge that Snedegar shall be entitled to such benefits as CalWest
had in its capacity as a lender under the General Assignment and Security
Agreements executed and entered into by MGC in favor of CalWest and Caree, and
as further evidenced by UCC-1 filings in favor of CalWest, as an agent for
"lenders," under the terms of the Loan Agreement and Agreements to Issue
Detachable Warrants dated July 24, 1996, November 25, 1997 and April 8, 1998 and
all rights under the aforementioned agreements relating to the Detachable
Warrants and Convertible Promissory Notes, including, without limitation, all
piggyback registration rights.
4. CalWest Service Corporation. CalWest does represent to and for the
benefit of MGC and Snedegar that:
A. CalWest is the absolute owner of the Detachable Warrants and
Promissory Notes which are being conveyed to MGC and then reissued by MGC to
Snedegar under the terms of this Agreement, free and clear of any liens,
pledges, security interests or other encumbrances of any nature whatsoever.
B. CalWest has both the power and authority to effect the
assignments as contemplated under the terms of this Agreement and does hold all
requisite corporate authorization and authority to make such assignment and
transfer, and effecting such assignments does not require the consent of, or
notice to, any third party.
C. CalWest is not aware of any event, condition or circumstance
which would prevent or prohibit the assignment being made and effected to
Snedegar hereunder. Except as herein expressly provided, CalWest is making no
other representation or warranty concerning the interests to be assigned
hereunder, and the assignments are made without recourse.
3
<PAGE> 7
5. Acknowledgment by Snedegar. Snedegar does hereby acknowledge to and
for the benefit of CalWest, MGC, and Caree that:
A. Snedegar has made his own independent evaluation concerning
the interests being acquired and is relying upon no representations, express or
implied, by CalWest or any other party concerning the value of the Convertible
Promissory Notes or Warrants being issued herein and recognizes that such
issuance is without recourse as to CalWest or any other party (excepting the
enforcement of those rights which exist under the terms of the Convertible
Promissory Notes and Detachable Warrants as against MGC) and CalWest's
obligation hereunder.
B. Snedegar has made his own independent evaluation of MGC, the
value of MGC and its ability to perform under the terms and provisions of the
Convertible Promissory Notes and Detachable Warrants and is not relying in any
respect upon any representations of CalWest concerning the values of the
interests as issued to Snedegar.
C. Snedegar is accepting the interests under the Detachable
Warrants and the Convertible Notes for his own personal purposes and investment
and has no current intention to further assign or transfer such interests nor in
any respect act as an underwriter of any rights or interests acquired under the
Loan Agreement or the Detachable Warrants and acknowledges that the Detachable
Warrants and any right to stock under the terms of the Convertible Notes
represents interests being acquired in securities which are not registered under
the Securities Act of 1933, as amended, nor under any applicable state
securities laws, and, therefore, any rights to subsequently assign, transfer or
pledge any interests in securities acquired under the terms of this Agreement
shall require compliance with applicable federal and state securities laws and
further transfer or assignment of any interests acquired may, if necessary,
require receipt by MGC of an opinion of counsel reasonably satisfactory to MGC
that registration is not required and/or that such transfer is in conformity
with applicable federal and state securities laws or an exemption thereunder.
D. Snedegar acknowledges that he shall be entitled to receipt of
all rights under the terms of the Loan Agreement and debentures as it relates to
the interests acquired, including, without limitation, piggyback registration
rights and security interests, and acknowledges that any such rights shall be
subject to his performance of the terms and provisions of the Loan Agreement as
an assignee and successor to CalWest.
6. Acknowledgment of Cooperation. CalWest and Snedegar agree that they
shall, from and after the date of this Agreement, reasonably cooperate doing any
and all acts necessary or convenient to effect a conveyance and issuance of the
interests under the Detachable Warrants and convertible promissory notes from
CalWest to MGC and from MGC to Snedegar, including, without limitation,
providing appropriate notices and transfer and issuance documents to Snedegar.
7. Notices. Any notices or other communications required or permitted
hereunder shall be in writing, and shall be personally delivered or sent by
registered or certified mail, postage prepaid, return receipt requested,
overnight courier (with all costs prepaid) or by facsimile, addressed
4
<PAGE> 8
to the parties as set forth herein. Any such notice shall be deemed received
upon the earlier of (a) if personally delivered, the date of delivery to the
address of the person to receive such notice, (b) if mailed, four (4) business
days after the date of posting by the United States post office, (c) if given by
overnight courier, upon receipt by the person to receive such notice, or (d) if
sent by facsimile, when sent.
To Snedegar: ___________________________
___________________________
___________________________
Attn:______________________
Facsimile:_________________
To CalWest: CalWest Service Corporation
17911 Von Karman Avenue
Suite 300
Irvine, California 92614
Facsimile: (949) 622-4104
To MGC: ___________________________
___________________________
___________________________
Attn:______________________
Facsimile:_________________
Any notice, request, demand, direction or other communication sent by facsimile
must be confirmed within forty-eight (48) hours by letter mailed or delivered in
accordance with the foregoing. Notice of change of address shall be given by
written notice in the manner detailed in this Section 7. Rejection or other
refusal to accept or the inability to deliver because of a changed address of
which no notice was given shall be deemed to constitute receipt of the notice,
demand, request or communication sent.
8. Miscellaneous.
A. Rights under the terms of this Agreement given to Snedegar as
an individual, subject to transfer in compliance with applicable securities
laws, shall not be subject to assignment or transfer without the written consent
of CalWest having first been had and obtained. This Agreement shall inure to the
benefit of and be binding upon the heirs, estate and personal representatives of
Snedegar. Any attempt at assignment without compliance of this provision shall
be null and void and of no force or effect.
5
<PAGE> 9
B. The provisions of this Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of California.
MICRO GENERAL CORPORATION, CALWEST SERVICE CORPORATION,
A DELAWARE CORPORATION CALIFORNIA CORPORATION
By: /s/ Patrick F. Stone By: /s/ M'Liss Jones Kane
------------------------------- ---------------------------------
Name: Patrick F. Stone Name: M'Liss Jones Kane
Title:Chief Executive Officer Title: Secretary
/s/ John Snedegar
---------------------------------
JOHN SNEDEGAR, AN INDIVIDUAL
6
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
OF
MICRO GENERAL CORPORATION
1. ACS Systems, Inc.
2. LDExchange.com, Inc.
3. Interactive Associates, Inc.
17
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Micro General Corporation:
We consent to incorporation by reference in the registration statements
(No. 2-85485, 2-92490, 333-22240 and 333-64289) on Form S-8 of Micro General
Corporation of our report dated March 31, 1999, relating to the consolidated
balance sheets of Micro General Corporation as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 1998, and the related schedule, which report appears in the
December 31, 1998 annual report on Form 10-K of Micro General Corporation.
KPMG LLP
Los Angeles, California
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 914,796
<SECURITIES> 0
<RECEIVABLES> 6,672,694
<ALLOWANCES> 485,936
<INVENTORY> 785,204
<CURRENT-ASSETS> 8,246,642
<PP&E> 3,614,183
<DEPRECIATION> 293,178
<TOTAL-ASSETS> 23,080,061
<CURRENT-LIABILITIES> 5,766,062
<BONDS> 16,729,411
0
0
<COMMON> 377,333
<OTHER-SE> 207,255
<TOTAL-LIABILITY-AND-EQUITY> 23,080,061
<SALES> 34,016,064
<TOTAL-REVENUES> 34,016,064
<CGS> 27,967,484
<TOTAL-COSTS> 10,226,195
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 666,788
<INCOME-PRETAX> (4,844,403)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (4,846,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,846,803
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.81)
</TABLE>
