-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HbejCD0XiIVSlJULcTck4SJjyn1Na5U2Q1WHj4hOZKvJVUeQVpSSiPczrl2INvVf +5AZVqdLtywDWhmL6bRZBg== 0000067383-96-000001.txt : 19960402 0000067383-96-000001.hdr.sgml : 19960402 ACCESSION NUMBER: 0000067383-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO GENERAL CORP CENTRAL INDEX KEY: 0000067383 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 952621545 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08358 FILM NUMBER: 96542583 BUSINESS ADDRESS: STREET 1: 1740 E WILSHIRE AVE CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 7146670557 MAIL ADDRESS: STREET 1: 1740 E WILSHIRE AVE CITY: SANTA ANA STATE: CA ZIP: 92705-4615 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------ FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------------------------ For the fiscal year ended December 31, 1995 Commission File No.0-8358 MICRO GENERAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2621545 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1740 E. Wilshire Ave. Santa Ana, California 92705 (Address of principal executive offices)(Zip Code) Registrant's Telephone Number, Including Area Code: (714) 667-0557 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] As of December 31, 1995, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,820,420. As of December 31, 1995, the registrant had 1,948,166 shares of common stock, $.05 par value outstanding. The information required by Part III (items 10,11,12 and 13) is incorporated by reference to portions of the registrant's definitive proxy statement for the 1996 annual meeting of shareholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the 1995 fiscal year. PART I Item 1. BUSINESS INTRODUCTION Micro General Corporation (the "Company") designs, markets and sells parcel shipping systems and electronic postal scales for use in shipping departments and office mailrooms. The Company earns revenues both from the initial sale of shipping systems and scales and from subsequent rate updates resulting from rate changes by the U.S. Postal Service ("USPS"), United Parcel Service ("UPS") and other parcel carriers (see the following "Rate Change Modifications" discussion). The Company's products reduce labor costs in shipping parcels and letters and, by consistent use of accurate weight and corresponding shipping or postage rates, can significantly reduce shipping and postage rate errors. The Company's products are programmed with the current shipping rates of USPS or UPS. The high-end models of the Company's parcel shipping systems and each of the Company's postal scale models also permit the customer to choose additional carriers' rates from the Company's rate library. The Company's ability to customize a shipping system or postal scale to include additional carriers' rates in accordance with each customer's shipping or mailing preferences permits the customer to choose the optimum carrier and class of service for a particular parcel or letter by quickly "rate shopping" between the standard shipping or postal rate of different carriers. DEVELOPMENT OF THE COMPANY'S BUSINESS In March 1981, the Company acquired all of the outstanding stock of Coda Enterprises, Inc., a California corporation ("CODA"). Since its 1978 inception, CODA had designed and manufactured an electronic postal scale and a piece-count scale, and had sold those products under a private label contract with a distributor of mailroom equipment. In December 1981, CODA merged with the Company and the Company changed its name to Micro General Corporation. The Company has since redirected its resources to the development of its microprocessor-based parcel shipping systems and postal scales. In 1988, the Company reincorporated in Delaware. INDUSTRY OVERVIEW Prior to 1956, the USPS provided the sole means of letter or parcel delivery throughout the United States. Currently many other companies, such as UPS, FedEx and others, provide nationwide coverage in the package delivery business. There are currently more than 30 letter and parcel delivery companies which compete directly with the USPS. Additionally, deregulation of the airline and trucking industries has lessened certain prior barriers to reducing the cost of delivering letters and parcels by these particular modes of transportation. In order to provide reliable delivery information regarding the location of en-route parcels, parcels must be uniquely tagged so that package origin, destination, class of service and other data can be quickly read and input into the carrier's information system. The ability to produce this tag has created a significant potential opportunity for the Company within the mailing and shipping industry. Although carriers are currently investing in plant and equipment to automate the handling of parcels and letters, many of their customers still use hand ledgers, manual zip-to-zone charts, spring scales and other conventional mechanical equipment which lack the accurate weight/cost precision of the Company's family of microprocessor-based products. These products also make data entry less difficult. The Company believes that the number of UPS and other parcel carrier users who might have a need for the Company's products represents a significant market. PRODUCTS AND MARKETS The Company's family of microprocessor-based parcel shipping systems and postal scales are as follows: PARCEL SHIPPING SYSTEMS The Company believes its parcel shipping systems offer cost and productivity advantages over manual methods of parcel shipping recording for businesses which consistently use UPS, the USPS or other parcel carriers. First, the Company's parcel shipping systems automate transaction recording and label identification on a package-by-package basis. For example, a system's "manifest" printout, by itself, adequately documents parcel shipments for pickup, delivery and accurate billing by a carrier. Additionally, these systems allow the user to determine the most economically acceptable method of shipment, to determine and apply the correct shipping charge, and to record data relevant to the transaction for use both by the shipper and the parcel carrier. The user places the parcel on the system's electronic scale platform (which has a maximum rating of 150 pounds), then enters the desired carrier and class of service and the parcel's destination zip code. Each entry is accomplished by pushing a single, clearly identified button. The user can instantly display the rates for alternative carriers and classes of service by depressing a single key for each such inquiry. When a carrier and class of service have been selected, the user enters a package identification number and, with a single keystroke, prints the shipping label. Simultaneously, the transaction is automatically entered into a computerized memory which both the carrier and the shipper's accounting department can access. The suggested retail prices for the Company's parcel shipping systems range from $795 to $4,295, excluding options. MAILING SCALES The Company currently offers both digital electronic scales as well as mechanical spring scales. The Company's digital display electronic postal scales are primarily designed for office mailroom use. Relying upon Company-designed microprocessor-based circuitry, parcel or letter weight is instantly displayed in digital format. When a class of service is selected on the membrane switch keyboard, the precise postage is computed and displayed. Sophisticated features, such as the ability to connect directly to a printer to provide instantaneous accounting for transactions or to an electronic postage meter for automatic setting and dispensing of postage, are possible because of the microprocessor-based design. Use of the Company's scales enables businesses to decrease postage costs by eliminating the inefficiencies and errors which commonly occur when mechanical scales and manual rate tables are used. The Company's postal scales are available in maximum weight capacity ratings of 1 to 150 pounds. The suggested retail prices for the Company's postal scales range from approximately $10 to $1,295, excluding options. COMPUTER-BASED SYSTEMS The Company currently offers computer software for shipping and warehouse automation. The software programs include many of the standard features already found in the Company's parcel shipping systems. The software programs have the ability to take advantage of all of the carriers now offered in the Company's other products. The suggested retail prices for the Company's software programs, which can be sold with or without equipment, range from $1,195 to $10,000 excluding options. TAPE DISPENSING SYSTEMS The Company currently offers a manual gummed tape dispensing system. This system is used for securing boxes for shipment. The suggested retail price for the Company's tape dispensing system is $279, excluding options. SMALL PARCEL INSURANCE During 1995, the Company provided marketing services for an insurance broker and underwriter for small parcel insurance which provides alternative insurance coverage for items shipped by customers. The Company sponsored this insurance program through its network of machine equipment dealers to the end-user customers. The Company received a fee for the marketing services provided. In May 1995, the Company transferred the existing accounts to an independent company and ceased sponsoring any additional insurance. In 1995, the fees received were not material. RATE CHANGE MODIFICATIONS Currently, the Company maintains a rate library containing rate information for most national and regional parcel carriers. The Company updates this library whenever a carrier's rate change occurs. Modifying the Company's units in the field to reflect rate changes by the USPS, UPS or other carriers in the Company's rate library is done by inserting programmable read-only memory chips ("PROMS") into designated slots in the Company's parcel shipping systems and postal scales. The Company generally charges a fee for each new PROM it provides. Alternatively, the Company will, for a one-time fee, provide updated rate PROMS as required for a specified period of time. As the Company's installed unit base grows, potential revenues associated with rate changes represent a significant source of revenue and profit for the Company. PROMS related to rate changes are sold both to the dealer and directly by the Company for its installed customer base. For each rate PROM sold to an end-user customer, a percentage of the purchase price is generally credited to the dealer that originally sold the system to the customer, provided that the dealer is still an authorized Company dealer. No such allowances are paid where sales of the underlying equipment were not through dealers. MARKETING, SALES, WARRANTIES AND CUSTOMERS MARKETING AND SALES The Company's strategy is to select market niches in which its technology provides price and/or performance advantages over products offered by the market leaders. The Company's position is primarily in software, but the unique appearance, functionality and built in "ease of use" of its products are also considered to be significant competitive advantages. With the increase of UPS owned equipment available to the customers, the Company seeks new products to replace the customers lost to UPS equipment. The Company sells its historical dealer products through a network of more than 140 dealers located throughout the United States and Canada, although approximately 30 dealers account for the majority of the Company's sales. The Company believes the loss of any particular dealer would not have a material adverse effect on the Company's operating results. All dealer orders accepted by the Company are shipped and invoiced to dealers at discounts from the Company's suggested retail list price. The Company's normal sales terms to its qualified dealers are net 30 days from invoice date. Company sales are generally final and are supported by a Company-issued order entry acknowledgment which specifies all terms and conditions of the contracted sales transaction. However, in addition to any product returns resulting from product defects, the Company is obligated under some of its dealer agreements to accept the return of unopened inventory from terminated dealers (subject to a restocking fee). The Company, at its discretion, periodically permits dealers to return products for credit or exchange (subject to a restocking fee in most cases) due to dealers' lost sales or dealers' errors in ordering or evaluating end-user customer needs. Returns as a percentage of product sales for 1995, 1994, and 1993, were 16%, 12%, and 11%, respectively. The Company believes that the allowance for sales returns at December 31, 1995 and December 31, 1994, is adequate in light of historical experience. The Company typically experiences significantly higher revenues in the first quarter of each year, which is attributable to the sales of carrier rate changes. When a USPS or UPS rate change occurs many product users update their machines with new rates which provides significant rate change revenues to the Company. A comparison of first quarter sales in the last 3 years in relation to annual sales is as follows:
1st Quarter Annual Sales % 1995 $2,173,689 $4,041,921 54% 1994 $1,844,557 $4,768,548 39% 1993 $2,049,155 $5,054,415 41%
Even though history has shown that the carrier rate changes traditionally have occurred in the first quarter, the Company believes this should not be included as a seasonal impact. There can be no assurance as to the timing of future rate changes. In 1990, the Company established a network of manufacturer's representatives to sell the retail products to stationary stores, direct mail houses, wholesalers and office product resellers. This portion of the business in 1995 and 1994 represents 29% and 24% of the Company's total product sales, respectively. WARRANTIES Individual dealers have responsibility for installation and service of the Company's products. The Company's distributed products are sold with a 90-day warranty on material and labor. The Company bears the costs incurred in providing such in-warranty repairs. The Company invoices the dealers on a time and materials basis for out-of-warranty repairs performed by the Company. In 1995, 1994, and 1993 the Company's costs to perform both in-warranty and out-of-warranty repairs, in the aggregate were 13%, 11%, and 6%, respectively, of total product sales. CUSTOMERS As of December 31, 1995, the Company estimates it had an aggregate installed base of approximately 25,000 parcel shipping systems, postal scales and piece count scales. Moreover, no individual dealer accounted for more than 10% of the Company's 1995 total net revenues. BACKLOG The Company typically enters facsimile orders from its dealers, considers these orders part of backlog, and schedules delivery for a date within 10 days from receipt of the order. Subsequent confirmation through a written purchase order is normally obtained. On a monthly basis, the Company generates a listing of scheduled and confirmed backlog. Backlog cancellations have historically been nominal. The backlog at December 31, 1995, is not material. COMPETITION The Company competes in an industry characterized by intense and increasing competition. To the Company's knowledge, there are approximately 20 competitors engaged in either the sale or lease of electronic shipping systems or postal scales. Among these, Pitney Bowes, Inc. has a dominant position in the postage meter market, and UPS has a dominant position in the parcel shipping systems market. The Company sells principally to shippers having moderate volumes of daily shipments. Various firms have recently begun selling parcel shipping software that customers use with their existing in-house computer systems. Also, various air express and other shipping firms are now providing free computerized parcel shipping systems and offering volume discounts to end-user customers that maintain specified minimum shipping volumes. The Company believes that the price/performance features of its products continue to compare favorably with their various competitors. Nevertheless, many of the Company's competitors have far greater financial and personnel resources than those of the Company, including direct sales branches and substantial marketing and product development programs. Consequently, there can be no assurance that future competition from such competitors will not have a material adverse effect on the Company's business. DISTRIBUTION In recent years, the Company has increased the purchasing of completed units manufactured outside the United States. The foreign manufacturers take advantage of the tooling put in place by the Company, in order to provide the Company with parts for its specialized needs. In the fourth quarter of 1995, the Company resumed manufacturing in their California facility to improve quality and reduce costs on its larger model scales. Finished product quality inspection and final testing is performed prior to shipment by Company personnel at the Company's Santa Ana, California facility. ENGINEERING AND DEVELOPMENT For the years ended December 31, 1995, 1994, and 1993, the Company's expenditures for engineering, research and development approximated $638,000, $415,000, and $338,000, respectively. In May 1995, the engineering department was moved to the Company's facility in Oxford, Connecticut. The Company's 1995 engineering, research and development activities included the USPS and UPS rate changes in the first quarter of 1995 and the USPS international rate change in the third quarter of 1995. The Ship-Easy product was modified to create the Ship-Mate product to provide a separate product for the dealer sales channel. A new multi-carrier computer-based product, The Eagle Best Rate Shipper, was designed in 1995 and was released in March 1996. The postage meter development project, started in 1995, is continuing and is designed to comply with changing U.S. Postal regulations. It has been reported, in various dealer newsletter publications, that the U.S. Postal Service is planning to announce the decertification of all mechanical postage meters in the U.S.. The publications report that the phase-out period is to be completed by March 1999. It is estimated that 774,000 meters are affected by this anticipated ruling. This ruling provides the Company with an opportunity to enter a major new market. Submission for approval to the U.S. Postal Service of the Company's first postage meter is expected by mid-1996. PATENTS AND LICENSES The Company has federally registered the trademarks "CODA," "MAILMATE ", "PC SHIPMATE ", "SMART METER ", "SMART LABEL , "SHIP SAVER ", "SHIPMATE ", "SHIP MASTER ", "SHIP-EASY", "SHIP COMMANDER ", and "Eagle Best Rate Shipper". In 1984, the Company consolidated the marketing of all its products under the corporate name Micro General Corporation. During 1995 the Company has applied for several patents which pertain to the postage meter project. EMPLOYEES As of December 31, 1995, the Company employed 33 people. The Company's employees are not represented by a labor union and it has experienced no work stoppages. The Company believes that its employee relations are good. The Company augments its work force with temporary staff during periods of rate change shipments. Item 2. PROPERTIES The Company's executive office, distribution and service facility consists of 18,550 square feet in a building located in Santa Ana, California. The Company leases this facility until the year 1999. In April 1995, the Company entered into a three-year lease for a 5,000 square feet research and development office in Oxford, Connecticut. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the name, age and offices presently held by the Company's executive officers: Thomas E. Pistilli . . . . 53 President, Chief Executive Officer, Chief Financial Officer and Director John J. Horbal . . . . . . .58 Vice President - Engineering Linda I. Morton. . . . . . .43 Corporate Secretary and Controller Gerald W. Simmons. . . . . .52 Vice President - Sales & Marketing THOMAS E. PISTILLI Mr. Pistilli has served as the President, Chief Executive Officer, Chief Financial Officer, and Director since November 1994. Prior to joining the Company, Mr. Pistilli served as a management consultant to the Company for approximately two years. Mr. Pistilli is the former President and Chief Executive Officer of International Mailing Systems, Inc.(ASCOM/HASLER), Shelton, Connecticut, where he served in that capacity for 11 years and overall with that Company for 18 years. Mr. Pistilli, a Certified Public Accountant, was previously employed by KPMG Peat Marwick LLP, for a period of seven years. Mr. Pistilli is a member of the Board of Directors, serving since November 1994. JOHN J. HORBAL Mr. Horbal joined the Company as Vice President-Research and Development in January 1995. Prior to joining the Company, Mr. Horbal was with ASCOM/HASLER and Better Packages, Shelton, Connecticut, for 25 years serving as Director of Engineering, Director of Research and Development, and Chief Engineer. He was named Vice President of Engineering in June 1995. LINDA I. MORTON Ms. Morton joined the Company in September 1983 serving in various management accounting positions. She was appointed Controller in August 1988 and Corporate Secretary in June 1991. GERALD W. SIMMONS Mr. Simmons was appointed as Vice President - Sales and Marketing in July 1995. Prior to joining the Company, Mr. Simmons was with MOS Scale, Costa Mesa, California for more than 10 years serving as Vice President - Sales and Marketing. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Principal Market and Prices The Company's common stock is traded on the over-the-counter market on NASDAQ under the symbol MGEN. The following table sets forth the range of high and low closing bid quotations per share of the Company's common stock for the fiscal quarters indicated as reported by the NASD on its monthly statistical reports. Such prices represent interdealer quotations without adjustment for retail markup, markdown, or commission, and do not necessarily represent actual transactions.
Fiscal Quarters Bid Price High Low Year Ended December 31, 1994 First Quarter . . . . . . $ 2.13 1.75 Second Quarter . . . . . . 2.18 1.88 Third Quarter. . . . . . . 2.25 2.13 Fourth Quarter . . . . . . 2.25 2.00 Year Ended December 31, 1995 First Quarter . . . . . . $ 2.50 2.00 Second Quarter . . . . . . 2.63 2.25 Third Quarter. . . . . . . 2.38 1.75 Fourth Quarter . . . . . . 1.75 1.50
Number of Common Shareholders The number of record holders of the Company's common stock at December 31, 1995 was 615. Dividends The Company intends to continue its policy of retaining all earnings for reinvestment in the business operations of the Company. Under Delaware law, the Company's Board of Directors may declare and pay dividends on its outstanding shares in cash or property only out of the unreserved and unrestricted earned surplus. The Company has an accumulated deficit of $2,700,148 as of December 31, 1995 and accordingly, Delaware law prohibits the Company from paying cash dividends except to the extent that the Company has net profits in any fiscal year or the preceding fiscal year. There were no accumulated dividends as of December 31, 1995. Item 6. SELECTED FINANCIAL DATA The following table summarizes selected financial data. This data is derived from and qualified in its entirety by the more detailed financial statements included elsewhere herein.
Year Ended (in thousands, except per share data) 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 Net Product Sales $ 1,743 $ 2,710 $ 3,104 $ 2,525 $ 2,851 Service and Rate Change Revenue 2,299 2,059 1,950 1,944 2,331 ------- ------- ------- ------- - ------- Total Revenues 4,042 4,769 5,054 4,469 5,182 Cost of Sales 1,937 2,863 2,864 2,579 2,461 ------- ------- ------- ------- - ------- Gross Profit 2,105 1,906 2,190 1,890 2,271 ------- ------- ------- ------- - ------- Net Earnings (Loss) $ (230) $ (297) $ 375 $ .5 $ 362 ======= ======= ======= ======= ======= Net Earnings (Loss) Per Share $ (0.12) $ (0.16) $ 0.20 $ 0.00 $ 0.19 ======= ======= ======= ======= ======= Weighted Average Number of Shares Used in Computation* 1,940,666 1,883,876 1,882,240 1,882,240 1,882,240 ========= ========= ========= ========= =========
*Per share computations are based on the weighted average number of shares outstanding. The shares issuable upon exercise of stock options and other common stock equivalents have not been included in the computations of net earnings (loss) per share during any of the periods because the effect would have been antidilutive. All share and per share data for 1991 and 1992 has been restated for the 1 for 5 reverse stock split which became effective December 31, 1992.
Year Ended (in thousands) 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 Working Capital $ 1,340 $ 1,512 $ 1,778 $ 1,338 $ 1,312 Total Assets 2,084 2,420 2,575 2,052 2,255 Shareholders' Equity 1,572 1,736 2,027 1,652 1,652
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS A. COMPARISON OF FISCAL 1995 AND FISCAL 1994. Total revenue for the Company in 1995 decreased $726,627 or 15% compared to the same period in 1994. The overall decrease is a combination of a decrease in product sales of $825,210 or 40% in the dealer channel and $141,236 or 22% in the retail channel, a decrease in service revenue of $155,802 or 48%, and an increase in rate change revenue of $395,621 or 23%. The increase in the rate change revenue is a result of both a UPS rate change in February 1995 and USPS rate change's in both January and August 1995. A portion of the January 1995 USPS rate change revenue, totaling $384,262, was recognized in December 1994. The combination of decreased unit sales and lower average sale prices, primarily due to a shift in product mix, resulted in lower overall revenue. The Company reduced expenses by reducing advertising expense and improved profit margins through price adjustments in the retail channel, which resulted in lower volume in this channel. The Company is continuing to develop new products for the dealer channel. The new manifest computer software and turn-key system, The Eagle Best Rate Shipper, was introduced in March 1996. Other new product introductions are planned in the third and fourth quarters of 1996. Cost of sales for product sales deceased $927,027 or 41%. The decrease is due to a decrease in sales and the improved profit margins in the retail channel and a reduction in other product costs. The service and rate change revenue costs increased $1,714 or 0.3% as compared to the same period in 1994. Gross margin increased 12% for the year ended December 31, 1995 compared to the prior year. The primary reason was attributable to product sales with a 7% increase in gross margin compared to 1994. This is a result of cost reductions in the retail channel and the increase in product mix towards lower priced, higher margin products in the dealer channel. The increase in service and rate change revenue gross margin of 5% is a result of two rate changes in the first quarter of 1995. Operating expenses for the Company in 1995 increased $134,134 or 6% as compared to the prior year. This was a result of a combination of increased expenses in engineering and research and development and a decrease in the sales, marketing, general and administrative expenses as compared to the prior year. The decrease in sales, marketing and general and administrative expense is due to a decrease in promotion and advertising expense for the period in an effort to control costs. The increase in engineering and development expenses of $222,867 or 54% over the prior year is due to the final development of the computer-based system introduced in March 1996 and the continuing development of the Company's postage meter products. Engineering and development expenses are expected to increase in 1996, as the Company's postage meter project nears completion. The net loss of $229,652 is $67,132 or 23% lower than the prior year. The loss is attributable to lower product sales and an increase in engineering and development expenses. B. COMPARISON OF FISCAL 1994 AND FISCAL 1993. Total revenue for the Company in 1994 decreased $285,867 or 6% compared to the same period in 1993. The overall decrease is a combination of a decrease in product sales of $395,023 or 13%, with an increase in service and rate change revenue of $109,156 or 6% The increase in the service and rate change revenue is a result of the United States Postal Service rate change in January 1995 that was shipped and billed in December 1994 of $384,262. While sales in the retail channel increased $279,812 or 75% as compared to the same period in 1993, the sales in the historical dealer channel decreased $689,410 or 25%. The decrease in the historical dealer channel resulting in a decrease in units sold is due to temporary channel conflict and the introduction of lower priced models. New product introductions in future periods, which will include product differentiation properly priced for the two distribution channels, expect to improve volume and eliminate the possibility of any significant channel "conflict." The Company anticipates a reduction of expenses and improved profit margins in the retail channel in future years. Cost of sales for product sales decreased $66,309 or 3%. The decrease was due to a change in product mix and a decrease in sales. The service and rate change revenue costs increased $65,105 or 13% as compared to the same period in 1993. The increase was due to an increase in service and rate revenues for the same period. Gross margin decreased 3% at December 31, 1994 compared to the prior year. The primary component was attributed to product sales which reported a 9% decrease in gross margin compared to the same period in 1993. Higher cost of sales in the retail channel, due to high introductory costs, resulted in lower product gross margins for the Company. Operating expenses for the Company in 1994 increased $367,788 or 20% compared to the same period in 1993. The increase in expense levels was primarily due to higher retail channel selling expense. An increase in engineering and development expense is a result of further development in the computer-based system. Expense levels are expected to remain the same in future periods. The decrease in net earnings of $672,307 or 179% as compared to the same period in 1993, is the result of lower sales and higher costs. C. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's ability to generate cash depends on the sale of inventory and collection of accounts receivable. The Company's 1995 cash balance decreased $117,626 or 77% from December 31, 1994. The decrease is primarily attributable to less cash generated in December 1995 as compared to December 1994 when cash was generated from prepaid rate change revenue for the United States Postal Service ("USPS") rate change which occurred January 1, 1995. The Company's 1995 net accounts receivable balance decreased $268,443 or 43% from December 31, 1994 levels. This decrease is due to improved accounts receivable collections and decreased sales. Working capital has ranged from $1,778,236 in 1993 to $1,340,255 in 1995. The Company's current ratio at December 31, 1995 was 3.6 compared to 3.2 at December 31, 1994. The Company's total inventories increased 183,926 or 16% at December 31, 1995 as compared to the prior year end. The increase in inventory is related to procurement of goods for the retail channel from overseas vendors to supply 1996 sales initiatives. The Company has available liquidity through a line of credit agreement with a bank (See note 6, of Notes to the Financial Statements). The availability is based upon certain qualified accounts receivable and inventory balances with maximum availability of $600,000. At December 31, 1995, of the $600,000 available, $275,000 was outstanding on the line of credit while at December 31, 1994, the Company had no balance outstanding. In February 1996, the Company reduced the outstanding balance on the line of credit to $150,000. The line of credit expires on April 30, 1996. The Company is currently negotiating to extend its existing line of credit or negotiate a new credit agreement. The Company expects to complete this refinancing in the second quarter of 1996. It is the Company's belief that through cash flow from operations, the replacement of its current credit facility, or other sources of available financing, adequate liquidity will be available through the remainder of 1996. The Company is considering its options with respect to equity and/or debt financing to fund the Company's ongoing postage meter research and development efforts. At December 31, 1995, the Company was in compliance with all financial covenants associated with the line of credit agreement or has obtained waivers from the bank. The Company's 1995 current liabilities have decreased 25% over 1994. This is associated with the decrease in deferred revenue, due to the prepayment by customers for product and service contracts related to the USPS rate change effective January 1, 1995. Accounts payable decreased 83% from 1994 due to the decrease in year-end purchases. The Company's investment in capital expenditures for 1995 has increased slightly over 1994. There were no material commitments for capital expenditures as of December 31, 1995. The Company does not anticipate any significant domestic capital expenditures in the near future. The Company does not engage in any off balance sheet financing. INFLATION The effect of inflation on operating results has, historically, been insignificant. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Impairment of Long-Lived Assets." In October 1995, the Financial Accounting Standards Board issued a new statement titled "Accounting for Stock-Based Compensation" (FASB 123). The new statements are effective for fiscal years beginning after December 15, 1995. The Company does not believe that adoption of the new standards will have a material effect on the financial statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to the financial statements and supplementary data listed in Item 14 of Part IV of this Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference is the information required by this Item in the Company's definitive proxy statement for the 1996 annual meeting of shareholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company's fiscal year ended December 31, 1995. Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference is the information required by this Item in the Company's definitive proxy statement for the 1996 annual meeting of shareholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company's fiscal year ended December 31, 1995. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference is the information required by this Item in the Company's definitive proxy statement for the 1996 annual meeting of shareholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company's fiscal year ended December 31, 1995. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference is the information required by this Item in the Company's definitive proxy statement for the 1996 annual meeting of shareholders which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company's fiscal year ended December 31, 1995. Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K Documents filed with Report Financial Statements The financial statements listed on the accompanying Index to Financial Statements and Schedule are filed as part of this report. Financial Statement Schedule The financial statement schedule listed on the accompanying Index to Financial Statements and Schedule are filed as part of this report. Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this report. Reports on Form 8-K No reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended December 31, 1995. MICRO GENERAL CORPORATION SEC FORM 10-K ITEMS 8, 14(a)(1) and 14(a)(2) Index to Financial Statements and Schedule Financial Statements Independent Auditor's Report Balance Sheets - December 31, 1995 and 1994 Statements of Operations - Years ended December 31, 1995, 1994 and 1993 Statements of Shareholders Equity - Years ended December 31, 1995, 1994 and 1993 Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993 Notes to Financial Statements Schedule Valuation and Qualifying Accounts - Schedule II All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or notes thereto. Independent Auditors' Report The Board of Directors and Shareholders Micro General Corporation: We have audited the financial statements of Micro General Corporation as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Micro General Corporation as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Orange County, California February 23, 1996
Balance Sheets December 31, 1995 and 1994 Assets (Note 6) 1995 1994 ---------- - ---------- Current assets: Cash $ 35,222 152,848 Accounts and notes receivable, less allowance for doubtful receivables and sales returns of $46,594 in 1995 and 349,991 618,434 $81,749 in 1994 Income tax refund receivable - 7,000 Inventories (note 2) 1,324,109 1,140,183 Prepaid expenses 143,433 277,432 ----------- - ---------- Total current assets 1,852,755 2,195,897 Equipment and improvements, net (note 3) 193,691 179,206 ----------- - ---------- Other assets, net (note 4) 37,822 44,688 ----------- - ---------- $ 2,084,268 2,419,791 =========== ========== Liabilities and Shareholders' Equity Current liabilities: Note payable to bank (note 6) $ 275,000 - - Accounts payable 51,278 296,071 Accrued expenses 164,545 228,072 Deferred revenue 21,677 159,853 ----------- - ---------- Total current liabilities 512,500 683,996 ----------- - ---------- Shareholders equity (note 7): Preferred stock, $.05 par value. Authorized 1,000,000 shares; none - - - issued and outstanding Common stock, $.05 par value. Authorized 4,000,000 shares; issued and outstanding 1,948,166 and 1,888,166 97,408 94,408 shares in 1995 and 1994, respectively Additional paid-in capital 4,174,508 4,111,883 Accumulated deficit (2,700,148) (2,470,496) ----------- - ---------- Total shareholders' equity 1,571,768 1,735,795 Commitments and contingencies (note 9) ----------- - ---------- $ 2,084,268 2,419,791 =========== ==========
[FN] See accompanying notes to financial statements.
Statements of Operations Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 ---------- ---------- - ---------- Revenues: Product sales, net of returns of $278,839 in 1995, $329,235 in 1994 $ 1,742,943 2,709,389 3,104,412 and $335,832 in 1993 Service and rate change revenues (note 9) 2,298,978 2,059,159 1,950,003 ---------- ---------- - ---------- Total revenues 4,041,921 4,768,548 5,054,415 ---------- ---------- - ---------- Cost of sales: Products 1,350,017 2,277,044 2,343,353 Service and rate changes 587,367 585,653 520,548 ---------- ---------- - ---------- Total cost of sales 1,937,384 2,862,697 2,863,901 ---------- ---------- - ---------- Gross profit 2,104,537 1,905,851 2,190,514 Operating expenses: Selling, general and administrative 1,674,322 1,713,511 1,443,213 Engineering and development 637,896 415,029 387,457 Provision for doubtful receivables 31,849 81,393 11,475 ---------- ---------- - ---------- Operating profit (loss) (239,530) (304,082) 348,369 Interest and other income, net 10,678 8,098 17,954 ---------- ---------- - ---------- Income (loss) before income tax expense and cumulative effect of accounting change (228,852) (295,984) 366,323 Income tax expense (note 5) 800 800 800 ---------- ---------- - ---------- Income (loss) before cumulative effect of accounting change (229,652) (296,784) 365,523 Cumulative effect of accounting change (note 1) - - 10,000 ---------- ---------- - ---------- Net income (loss) $ (229,652) (296,784) 375,523 ========== ========== ========== Net income (loss) per common share: Income (loss) before cumulative effect of accounting change $ (.12) (.16) .19 Cumulative effect of accounting change - - .01 ---------- ---------- - ---------- Net income (loss) $ (.12) (.16) .20 ========== ========== ========== Weighted average number of common shares outstanding 1,940,666 1,883,876 1,882,240 ========== ========== ==========
[FN] See accompanying notes to financial statements.
MICRO GENERAL CORPORATION Statements of Shareholders' Equity Years ended December 31, 1995, 1994, and 1993 Additional Preferred stock Common stock paid-in Accumulated Shares Amounts Shares Amount capital deficit ------ ------- --------- - ------ --------- ------------ Balance at December 31, 1992 - $ - 1,882,240 $ 94,112 $ 4,107,492 $(2,549,235) Net Income - - - - - 375,523 ------ ------- --------- - ------ --------- ----------- Balance at December 31, 1993 - - 1,882,240 94,112 4,107,492 (2,173,712) Repurchase of common stock - - (4,075) (204) (8,965) - Stock options exercised - - 10,001 500 13,356 - Net loss - - - - - (296,784) ------ ------- --------- - ------ ---------- ----------- Balance at December 31, 1994 - - 1,888,166 94,408 4,111,883 (2,470,496) Stock options exercised - - 60,000 3,000 62,625 - Net loss - - - - - (229,652) ------ ------- --------- - ------ ---------- ----------- Balance at December 31, 1995 - $ - 1,948,166 $ 97,408 $ 4,174,508 $ (2,700,148) ====== ======= ========= ====== ========== ===========
[FN] See accompanying notes to financial statements.
Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 ---------- --------- - ---------- Cash flows from operating activities: Net income (loss) $ (229,652) 375,523 (296,784) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 108,281 103,825 102,654 Provision for losses on accounts and 31,849 81,393 11,475 notes receivable Provision for sales returns 62,739 53,336 46,395 Cumulative effect of accounting change - - (10,000) Change in assets and liabilities: Decrease (increase) in accounts and notes receivable 173,855 85,496 (329,320) Decrease (increase) in income tax receivable 7,000 (2,000) 61,675 Increase in inventories (183,926) (48,633) (214,618) Decrease (increase) in prepaid expenses 133,999 27,434 (225,849) Increase in other assets (15,000) - - (Decrease) increase in accounts payable (244,793) 120,846 88,897 (Decrease) increase in accrued expenses (63,527) 8,311 39,715 (Decrease) increase in deferred revenue (138,176) 107,488 (71,199) ---------- -------- - --------- Net cash provided by (used in) operating activities (357,351) 240,712 (124,652) ---------- -------- - --------- Cash flows used in investing activities: Capital expenditures (100,900) (78,063) (37,759) ---------- -------- - --------- Cash flows from financing activities: Proceeds from note payable to bank 275,000 - 100,000 Repayment of note payable to bank - (100,000) - Repurchase of common stock - (9,169) - Issuance of common stock 65,625 13,856 - ---------- -------- - --------- Net cash provided by (used in) financing activities 340,625 (95,313) 100,000 ---------- -------- - --------- Net increase (decrease) in cash (117,626) 67,336 (62,411) ---------- -------- - --------- Cash at beginning of year 152,848 85,512 147,923 ---------- -------- - --------- Cash at end of year $ 35,222 152,848 85,512 ========== ======== ========= Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest $ 2,000 1,230 - Income taxes 800 2,800 (56,420) ========== ======== =========
[FN] See accompanying notes to financial statements. MICRO GENERAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 (1) Summary of Significant Accounting Policies General The operations of Micro General Corporation (the Company) consist of the design, purchase, distribution and manufacturing of computerized parcel shipping systems, postal scales and piece-count scales. Product sales are achieved through the use of authorized company dealers and through dealers in the office products and superstore channels throughout the United_States. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits and investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Equipment and Improvements Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the respective equipment and improvements. Net Income (Loss) per Common Share Net income (loss) per common share is computed based on the weighted average number of common shares outstanding. The potential exercise of stock options or warrants are not included in the computation of net income (loss) per common share since the effect would be antidilutive for all years presented. Income Taxes In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 (Statement 109), "Accounting for Income Taxes." Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, the Company adopted Statement 109. The cumulative effect of this change in the method of accounting for income taxes in the accompanying 1993 statement of operations was an increase to income of $10,000. Warranties The Company's products are sold with a 90-day warranty on materials and workmanship. Estimated warranty costs based on historical experience are accrued as an expense at the time products are sold. Intangible Assets Intangible assets are classified under other assets and are amortized on a straight-line basis over periods ranging from 10 to 15 years. Revenue Recognition Product sales are recorded by the Company when products are shipped to dealers and customers. Rate change revenues are recorded by the Company at the time memory chips are reprogrammed with new tariffs and shipped to the customer. The Company collects fees from some customers in anticipation of future rate changes. Customers prepaying future rate changes receive memory chips with the new tariffs, upon notice of a rate change, without paying an additional charge. These prepaid rate change fees are recorded as revenue on a pro rata basis over the prepaid period. Sales Returns The majority of the Company's product sales are to its authorized dealers who resell the Company's products. The Company's policy is that all sales are final, but dealers may, at the Company's sole discretion and subject to a restocking fee, return certain out-of-warranty products in exchange for products of comparable sales value. Additionally, dealers may, at the Company's sole discretion, be permitted to return their unopened inventory in the event they or the Company terminate their dealership agreement, again subject to a restocking fee. Upon acceptance of returned goods, the Company reconditions the goods, at a nominal cost, and restocks them in inventory to be sold at a later date. The Company provides an allowance for such returns equal to the estimated gross profit on the portion of sales estimated to be returned. This specific allowance is a component of the Company's allowance for doubtful receivables and sales returns. Financial Instruments The carrying amount of cash, accounts and notes receivable, prepaid expenses, other assets, accounts payable, accrued expenses, notes payable to bank and deferred revenue are measured at cost which approximates their fair value due to the short maturity of these instruments. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) Inventories Inventories are comprised of the following at December 31, 1995 and 1994:
1995 1994 ------------ ------------ Parts and supplies $ 919,459 753,456 Purchased finished goods 372,763 292,099 Consigned inventory 31,887 94,628 ----------- ------------ $1,324,109 1,140,183
(3) Equipment and Improvements Equipment and improvements consist of the following at December 31, 1995 and 1994:
Useful life 1995 1994 ------------ ----------- ---------- Production equipment, including tooling 5 years $ 432,902 424,848 Office furniture and equipment 5 years 563,557 484,229 Leasehold improvements 5 years 30,606 19,381 ----------- ---------- 1,027,065 928,458 Less accumulated depreciation and amortization 833,374 749,252 ----------- ---------- $ 193,691 179,206 =========== ==========
(4)Other Assets Other assets consist of the following at December 31, 1995 and 1994:
Estimated useful life 1995 1994 ----------- ---------- - ---------- Excess cost of assets purchased over fair market value 15 years $ 232,531 232,531 License rights 10 years 41,382 26,382 Other intangible assets 15 years 23,388 23,388 ---------- - ---------- 297,301 282,301 Less accumulated amortization 259,479 237,613 ---------- - ---------- $ 37,822 44,688 ========== ==========
(5)Income Taxes Income tax expense for the three years ended December 31, 1995 represents the state minimum tax. The expected income tax expense (benefit) computed by multiplying income (loss) before income tax expense (benefit) and cumulative effect of accounting change by the statutory Federal income tax rate of 34% differs from the actual income tax expense (benefit) as follows:
1995 1994 1993 ---------- ---------- - ---------- Expected tax expense (benefit) $ (78,000) (101,000) 125,000 Effect of net operating loss carryforward not recognized for financial statement purposes until utilization is more likely than not 71,000 94,000 - Utilization of net operating loss carryforward - - (132,000) Nondeductible amortization of the excess cost of assets purchased over fair market value 7,000 7,000 7,000 State income tax expense 800 800 800 ---------- ---------- - ---------- $ 800 800 800 ========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1995 and 1994 are as follows:
1995 1994 ---------- ---------- Deferred tax assets: Net operating loss carryforwards $ 652,000 581,000 Reserves and accruals not recognized for income tax purposes 89,000 105,000 Tax credit carryforwards 85,000 85,000 ---------- ---------- Total deferred tax assets 826,000 771,000 Less valuation allowance (822,000) (751,000) ---------- ---------- Net deferred tax assets 4,000 20,000 Deferred tax liabilities: Accelerated depreciation for income tax purposes in excess of financial statement depreciation (4,000) (20,000) ---------- ---------- Deferred taxes recognized on the accompanying balance sheets $ - - ========== ==========
Deferred income tax assets include the tax impact of net operating loss carryforwards. Realization of these assets is contingent on future taxable income. The Company believes that it is more likely than not that net deferred tax assets of $4,000 at December 31, 1995 (after considering the valuation allowance of $822,000) will be realized because it expects that the underlying deductions and net operating loss carryforwards can be utilized to offset the effects of the temporary difference for accelerated depreciation which may give rise to taxable income in future periods. The net change in the total valuation allowance during 1995 was an increase of $71,000. At December 31, 1995, the Company had net operating loss carryforwards of approximately $1,839,000 and $217,000 for Federal and state income tax purposes, respectively. If not used to offset future taxable income, the net operating loss carryforwards will expire at various years through 2010. The Company also has investment tax credit and research and experimentation credit carryforwards aggregating approximately $85,000 which expire during the period 1996 to 2002. (6) Note Payable to Bank The Company has a line of credit which is secured by substantially all of the Company's assets and cannot exceed 70% of qualifying accounts receivable plus 40% of qualifying inventory up to a maximum credit line of $600,000. The interest rate on the line of credit is at the bank's prime rate (8.25% at December_31, 1995) plus 2.0% and the Company paid a $2,000 commitment fee. At December_31, 1995, the Company was either in compliance with all financial covenants or had obtained waivers of such covenants from the bank. At December 31, 1995, there was $275,000 outstanding on this line of credit. The line of credit expires on April 30, 1996. The Company is currently negotiating to extend its existing line of credit or negotiate a new credit agreement. The Company expects to complete this refinancing in the second quarter of 1996. It is the Company's belief that through cash flow from operations, the replacement of its current credit facility, or other sources of available financing adequate liquidity will be available through the remainder of 1996. (7) Stock Option Plans Under terms of the Company's Incentive Stock Option Plan (the Plan), the exercise price of options granted is to be equal to the stock's fair market value at the date of grant. Common stock initially available for option under the Plan was 220,000 shares. Options are execrable no later than 5 years from the date of grant. Options which are not exercised or canceled revert back to the Plan and are subject to subsequent reissuance. This Plan expired on October 7, 1991 and was renewed at the 1993 annual shareholders' meeting. There are 10,499 remaining shares available for grant under this Plan as of December_31, 1995. In 1995, the Company's Board of Directors approved a new stock option plan. Company stock available for option under this plan is 200,000 shares and all shares were available for grant as of December_31, 1995. In 1984, the Company adopted a nonqualified stock option plan whereby the Board of Directors could grant stock options to employees, officers or directors at no less than 85% of the fair market value of the Company's stock at the date of grant. The number of shares initially available for option under this plan was 20,000 shares. In 1990, the Board of Directors approved making an additional 20,000 shares available for option. The options were exercisable no later than ten years from the date of grant. There were no shares granted under this plan and the plan expired on February_16,_1994. A summary of all stock option transactions for the three-year period ended December_31, 1995 follows:
Shares Exercise price -------- - -------------- Options granted and outstanding: At December_31, 1992 111,000 $ 1.093 to 2.50 Granted 103,000 1.375 Exercised - - Canceled (2,000) 1.875 --------- - --------------- At December_31, 1993 212,000 1.093 to 2.50 Granted 42,000 2.125 Exercised (10,001) 1.375 to 1.406 Canceled (54,499) 1.375 to 2.187 --------- - --------------- At December_31, 1994 189,500 1.093 to 2.50 Granted 110,000 2.125 to 2.50 Exercised (60,000) 1.093 Canceled (100,000) 1.375 to 2.50 --------- - --------------- At December_31, 1995 139,500 $ 1.25 to 2.50 ========= ===============
At December_31, 1995, options for 12,999 shares of common stock were vested and exercisable at prices ranging from $1.25 to $2.50 per share. (8) 401(k) Plan Effective January 1, 1989 and as subsequently amended, the Company adopted a 401(k) plan whereby all employees who have completed three months of service may elect to make pretax contributions of 1% to 20% of their annual pay not to exceed contributions of $9,240 per year. The Company has a 25% employer matching program contingent upon Company earnings of at least $100,000. As the Company did not meet the minimum earnings requirement for employer matching in 1995 and 1994, no Company contributions were made to the plan for those years. The Company paid approximately $15,000 to the plan based on employee contributions of approximately $62,000 in 1993. (9)Commitments and Contingencies Noncancelable operating lease commitments consist principally of the lease for the Company's distribution and administrative facility. In February 1994, the Company extended its facility lease through 1999. At December_31, 1995, the Company was committed to the following noncancelable operating lease payments which includes the lease extension:
Year ending December: 1996 $ 139,000 1997 145,000 1998 124,000 1999 29,000 ---------- $ 437,000 ==========
Rental expense was approximately $130,400 in 1995, $118,000 in 1994 and $155,300 in 1993. The Company has a license agreement with Pitney Bowes which enables the Company to manufacture and sell certain products. The license agreement expires in 2004. Annual expenses for the license agreement are minor. From time to time, the United States Postal Service (USPS) or United Parcel Service (UPS) change their rates. For a fee, the Company provides its customers with programmable memory chips with the new tariffs which can be inserted into the Company's products. In some instances, customers prepay a fee to the Company which assures they will receive new programmable memory chips for all rate changes which occur within a predetermined period. In other instances, customers incur a fee for each time they decide to procure a new programmable memory chip. The Company has experienced UPS rate changes in 1993, 1994 and 1995 and a USPS rate change in 1995. During 1995, 1994 and 1993, the Company recorded revenues from rate changes totaling approximately $2,132,000, $1,736,000 and $1,668,000, respectively. Gross profits related to rate changes in 1995, 1994 and 1993 totaled approximately $1,805,000, $1,396,000 and $1,442,000, respectively. A UPS rate change also occurred in January 1996. However, there can be no assurance that future rate changes by UPS or USPS will occur.
Schedule II MICRO GENERAL CORPORATION Valuation and Qualifying Accounts Years ended December 31, 1995, 1994 and 1993 Additions Balance at charged to beginning of costs and Balance at Description period expenses Deductions end of period - -------------------------------------- ---------- ---------- - ---------- ------------- Allowance for doubtful receivables: Year ended December 31, 1995 $ 74,749 31,849 67,004 39,594 ========== ======= ======= ======= Year ended December 31, 1994 $ 66,085 81,393 72,729 74,749 ========== ======= ======= ======= Year ended December 31, 1993 $ 78,535 11,475 23,925 66,085 ========== ======= ======= ======= Allowance for sales returns: Year ended December 31, 1995 $ 7,000 62,739 62,734* 7,000 ========== ======= ======= ======= Year ended December 31, 1994 $ 7,000 53,336 53,336* 7,000 ========== ======= ======= ======= Year ended December 31, 1993 $ 44,017 46,395 83,412* 7,000 ========== ======= ======= =======
[FN] * Represents gross profit on sales returns of $278,839, $329,235 and $335,832 for the years ended December 31, 1995, 1994 and 1993, respectively. INDEX TO EXHIBITS Exhibit Sequentially Number Description of Exhibit Numbered Page 3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 25, 1988 (the "1988 Form 10-K Amendment 1")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the "1988 Form 10-K Amendment 1") 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987 (incorporated by reference to Exhibit 10.1 to the 1984 Form 10-K) Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987 (incorporated by reference to Exhibit 10. to the Company's Annual Report for the year ended December 28, 1986 (the "1986 Form 10-K")) 10.2 Nonqualified Stock Option Plan and form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the 1984 Form 10-K) 10.3 Lease of 1740 E. Wilshire Ave., Santa Ana, California, 92705, facilities between Shaw Investment and the Company (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1988 (the "1988 Form 10-K Amendment 1")) 10.11 Form of Dealer Agreement (incorporated by reference to Exhibit 10.14(1) to Amendment No. 3 to the Company's Registration Statement on Form S-2 (registration No. 33-8240), filed on June 4, 1987 (the "1986 Form S-2 Amendment Number 3")) 10.16.1 Loan Agreement between the Company and Silicon Valley Bank dated September 12, 1991. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1991) 10.16.2 Amendment to Loan Agreement between the Company and Silicon Valley Bank dated December 2, 1992. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.16.3 Amendment to Loan Agreement between the Company and Silicon Valley Bank dated December 10, 1993. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.16.4 Amendment to Loan Agreement between the Company and Silicon Valley Bank dated January 27, 1994. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10.17 Loan Agreement between the Company and First Bank and Trust dated November 15, 1995.(filed herewith) 33 24 Consent of KPMG Peat Marwick LLP (filed herewith) 32 EX-10 2 LOAN AGREEMENT Borrower: MICRO GENERAL CORPORATION Lender: FIRST BANK & TRUST 1740 Wilshire Avenue Santa Ana Regional Office Santa Ana, CA 92705 2900 South Harbor P.O. Box 25988 Santa Ana, CA 92704 ___________________________________________________________________________ THIS LOAN AGREEMENT between MICRO GENERAL CORPORATION ("Borrower") and FIRST BANK & TRUST ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of November 15, 1995, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. Account. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). Account Debtor. The words "Account Debtor" mean the person or entity obligated upon an Account. Advance. The word "Advance" means a disbursement of Loan funds under this Agreement. Borrower. The word "Borrower" means MICRO GENERAL CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $600,000.00; or (b) the sum of (I) 70.000% of the aggregate amount of Eligible Accounts, plus (ii) 40.000% of the aggregate amount of Eligible Inventory. Business Day. The words "Business Day" mean a day on which commercial banks are open for business in the State of California. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, or setoff. (g) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (I) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (j) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (k) Accounts which have not been paid in full within 90 days from date of invoice from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within 90 days from date of invoice from the invoice date is in excess of 15.000% of the total amount outstanding on the Account. (l) That portion of the Accounts of any single Account Debtor which exceeds 20.000% of all of Borrower's Accounts. Eligible Inventory. The words "Eligible Inventory" mean, at any time, all of Borrower's Inventory ad defined below except: (a) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties. (b) Inventory which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Expiration Date. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Inventory. The word "Inventory" means all of Borrower's raw materials, work in process, finished goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts of service in which Borrower now has or hereafter acquires any right, whether held by Borrower or others, and all documents of title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory includes inventory temporarily out of Borrower's custody or possession and all returns on Accounts. Lender. The word "Lender" means FIRST BANK & TRUST, its successors and assigns. Line of Credit. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's receivables. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1`986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base, Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. Conditions Precedent to Each Advance. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, Inventory, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." Making Loan Advances. Advances under the Line of Credit may be requested orally by authorized persons. All oral requests shall be confirmed in writing on the day of the request. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary with thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts, general intangibles, and inventory. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: Perfection of Security Interests. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. With respect to the Inventory, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Inventory and records itemizing and describing the kind, type, quality, and quantity of Inventory, Borrower's Inventory costs and selling prices, and the daily withdrawals and additions to Inventory. Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and Inventory and Eligible Accounts and Eligible Inventory, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and Eligible Inventory and such other matters and information relating to the Accounts and Inventory as Lender may request. Supplemental schedules shall be delivered according to the following schedule: Monthly Accounts Receivable and Accounts Payable aging, within 5 days from month end accompanied by a Borrowing Base certificate. Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. Representations and Warranties Concerning Inventory. With respect to the Inventory, Borrower represents and warrants to Lender: (a) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (b) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; The value of the Inventory will be determined on a consistent accounting basis; (d) Except as agreed to the contrary by Lender in writing, all Eligible Inventory is now and at all times hereafter will be in Borrower's physical possession and shall not be held by others on consignment, sale on approval, or sale or return; (e) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; (f) Eligible Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender's name evidencing the storage of Inventory; and (g) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engage or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (I) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have liability complies in all material respects with all applicable requirements of law and regulations, and (I) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 1740 Wilshire Avenue, Santa Ana, CA 92705. Unless Borrower ha designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any |Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than thirty (30) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivable and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than $1,800,000.00. Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.50 to 1.00. Current Ratio. Maintain a ratio of Current Assets to Current Liabilities in excess of 2.50 to 1.00. The following provisions shall apply for purposes of determining compliance with the foregoing financial covenants and ratios: AT DECEMBER 31, 1995. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually),Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender WITHIN FIVE (5) DAYS OF MONTH END and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonable request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, oris adjudged a bankrupt; there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. CONDITIONS. 1). Borrower to provide to Lender Corporate Tax Returns and SEC Form 10-K within ten (10) days of filing. 2). Independent Accounts Receivable audit of the Borrower's books and records is to be conducted once annually at the Banks discretion, and Borrower agrees to incur the cost of the audit. 3). Borrower to provide Lender within five (5) days of month end with a monthly certification of Inventory balances prepared and certified to be true and correct by the Chief Financial Officer or President. __________Initial Here). DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender, in good faith, deems itself insecure. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Orange County, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other.(Initial Here/s/lim /s/jjh) This Agreement shall be governed by and construed in accordance with the laws of the State of California. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such find shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF NOVEMBER 15, 1995. BORROWER: MICRO GENERAL CORPORATION By:___/s/ JOHN J HORBAL ___________ By:_/s/ LINDA I MORTON___________ JOHN J. HORBAL, VICE PRESIDENT LINDA I. MORTON, CONTROLLER LENDER: FIRST BANK & TRUST By:_________________________________ Authorized Officer CORPORATE RESOLUTION TO BORROW Borrower: MICRO GENERAL CORPORATION FIRST BANK & TRUST 1740 Wilshire Avenue Santa Ana Regional Office Santa Ana, CA 92705 2900 South Harbor P.O. Box 25988 Santa Ana, CA 92704 I, the undersigned Secretary or Assistant Secretary of MICRO GENERAL CORPORATION (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware as a corporation for profit, with its principal office at 1740 Wilshire Avenue, Santa Ana, CA 92705, and is duly authorized to transact business in the State of California. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or by other duly authorized corporate action in lieu of a meeting), duly called and held on August 31, 1995, at which a quorum was present and voting, the following resolutions were adopted: BE IT RESOLVED, that any two (2) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES THOMAS E. PISTILLI PRESIDENT /s/Thomas E. Pistilli JOHN J. HORBAL VICE PRESIDENT /s/John J. Horbal LINDA I. MORTON CONTROLLER /s/Linda I. Morton acting for and on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: Borrow Money. To borrow from time to time from FIRST BANK & TRUST ("Lender"), on such terms as may be agreed upon between the officers, employees, or agents and Lender, such sum or sums of money as in their judgment should be borrowed; however, not exceeding at any one time the amount of Six Hundred Thousand & 00/100 Dollars ($600,000.00), in addition to such sum or sums of money as may be currently borrowed by the Corporation from Lender. Execute Notes. To execute and deliver to Lender the promissory note or notes, or other evidence of credit accommodations of the Corporation, on Lender's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to Lender, and also to execute and deliver to Lender one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, any portion of the notes, or any other evidence of credit accommodations. Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender, as security for the payment of any loans or credit accommodations so obtained, any promissory notes so executed (including any amendments to or modifications, renewals, and extensions of such promissory notes), or any other or further indebtedness of the Corporation to Lender at any time owing, however the same may be evidenced, any property now or hereafter belonging to the Corporation or in which the Corporation now or hereafter may have an interest, including without limitation all real property and all personal property (tangible or intangible) of the Corporation. Such property may be mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered at the time such loans are obtained or such indebtedness is incurred, or at any other time or times, and may be either in addition to or in lieu of any property theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered. Execute Security Documents. To execute and deliver to Lender the forms of mortgage, deed of trust, pledge agreement, hypothecation agreement, and other security agreements and financing statements which may be submitted by Lender, and which shall evidence the terms and conditions under and pursuant to which such liens and encumbrances, or any of them, are given; and also to execute and deliver to Lender any other written instruments, any chattel paper, or any other collateral, of any kind or nature, which they may in their discretion deem reasonably necessary or proper in connection with or pertaining to the giving of the liens and encumbrances. Notwithstanding the foregoing, any one of the above authorized officers, employees, or agents may execute, deliver, or record financing statements. Negotiate Items. To draw, endorse, and discount with Lender all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Lender, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. Further Acts. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such documents and agreements, including agreements waiving the right to a trial by jury, as they may in their discretion deem reasonable necessary or proper in order to carry into effect the provisions of these Resolutions. The following person or persons are authorized to request advances and authorize payments under the line of credit until Lender receives written notice of revocation of their authority: THOMAS E. PISTILLI, PRESIDENT; JOHN J. HORBAL, VICE PRESIDENT; and LINDA I. MORTON, CONTROLLER. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Lender may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Lender. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. The Corporation has no corporate seal, and therefore, no seal is affixed to this certificate. IN TESTIMONY WHEREOF, I have hereunto set my hand on November 15, 1995 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X /s/Linda I. Morton *Secretary or Assistant Secretary X *NOTE: In case the Secretary or other certifying officer is designated by the foregoing resolutions as one of the signing officers, it is advisable to have this certificate signed by a second Officer or Director of the Corporation. COMMERCIAL SECURITY AGREEMENT Borrower: MICRO GENERAL CORPORATION Lender: FIRST BANK & TRUST 1740 E. Wilshire Avenue Santa Ana Regional Office Santa Ana, CA 92705 2900 South Harbor P.O. Box 25988 Santa Ana, Ca 92704 THIS COMMERCIAL SECURITY AGREEMENT is entered into between MICRO GENERAL CORPORATION (referred to below as "Grantor"); and FIRST BANK & TRUST (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meaning when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means the Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All inventory, chattel paper, accounts, equipment and general intangibles In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All accounts, contract rights, general intangibles, instruments, rents, monies, payments and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section. (e) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The "Grantor" means MICRO GENERAL CORPORATION, its successors and assigns. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus interest thereon, of Grantor, or any one or more of them, to Lender, as well as all claims by Lender against Grantor, or any one or more of them, whether existing now or later; whether they are voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be obligated as guarantor, surety, accommodation party or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. (Initial Here /s/LIM JJH ) Lender. The word "Lender" means FIRST BANK & TRUST, its successors and assigns. Note. The word "Note" means the note or credit agreement dated November 15, 1995, in the principal amount of $600,000.00 from Grantor to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. DEPOSIT ACCOUNTS. Grantor hereby grants Lender a contractual possessory security interest in and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or some other account), including all accounts held jointly with someone else and all accounts Grantor may open in the future, excluding however all IRA, Keogh, and trust accounts. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: Perfection of Security Interest. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's secutiy interest in the Collateral. Upon request of Lender, Grantor will deliver to lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lendor. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantoer is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel papter, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any accounts becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide iondebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; there shall be not setoffs or counterclaims against any such account; and not agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. Location of the Collateral. Grantor, upon request of Lender, will deliver to lender in form satisfactory to Lender a schedule of real properties and Collateral locatons relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without prior written consent of Lender. Transactions involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Collateral Schedules and Locations. As often as Lender shall require and insofar as the Collateral consists of accounts and general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require, including without limitation names and addresses of account debtors and agings of accounts and general intangibles. Insofar as the Collateral consists of inventory and equipment, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in the Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Compliance With Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous wast" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by the Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (I) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judical proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Grantor. Any of the preceding events occurs with respect to any Grantor of any of the Indebtedness or such Guarantor dies or becomes incompetent. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the quaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender, in good faith, deems itself insecure. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of an remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless theCollateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limiation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Orange County, State of California. Lender and Grantor hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Grantor against the other. (Initial Here /s/ JJH LIM ) This Agreement shall be governed by and construed in accordance with the laws of the State of California. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Preference Payments. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstances, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Waiver of Co-obligor's Rights. If more than one person is obligated for the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED NOVEMBER 15, 1995. BORROWER: MICRO GENERAL CORPORATION By: /s/John J. Horbal By: /s/Linda I. Morton JOHN J. HORBAL, VICE PRESIDENT LINDA I. MORTON, CONTROLLER PROMISSORY NOTE Borrower: MICRO GENERAL CORPORATION FIRST BANK & TRUST 1740 Wilshire Avenue Santa Ana Regional Office Santa Ana, CA 92705 2900 South Harbor P.O. Box 25988 Santa Ana, CA 92704 Principal Amount: $600,00.00 Initial Rate: 10.500% Date of Note: November 15, 1995 PROMISE TO PAY. MICRO GENERAL CORPORATION ("Borrower") promises to pay to FIRST BANK & TRUST ("Lender"), or order, in lawful money of the United States of America, the principal amount of Six Hundred Thousand & 00/100 Dollars ($600,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one payment of all outstanding principle plus all accrued unpaid interest on April 30, 1996. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning December 30, 1995, and all subsequent interest payments are due on the same day of each month after that. Interest on this note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Prime rate as published in the Wall Street Journal. When a range of rates has been published, the higher of the rates will be used (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. The Index currently is 8.750% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.750 percentage points over the Index, resulting in an initial rate of 10.5000% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of$250.00. Other than Borrower's obligations to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $1.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occured) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note to 6.750 percentage points over the Index. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorney's fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any utomatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuite, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of OrangeCounty, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. (Initial Here /s/LIM JJH ) This Note shall be governed by and construed in accordance with the laws of the State of Califoirnia DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security interestin, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account) including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and other trust accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or by an authorized person. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: THOMAS E. PISTILLI, PRESIDENT; JOHN J. HORBAL, VICE PRESIDENT; and LINDA I. MORTON, CONTROLLER. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice of anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: MICRO GENERAL CORPORATION By: /s/John J. Horbal By: /s/Linda I. Morton JOHN J. HORBAL, VICE PRESIDENT LINDA I. MORTON, CONTROLLER EX-23 3 ACCOUNTANTS' CONSENT The Board of Directors Micro General Corporation: We consent to incorporation by reference in the Registration Statements No. 33-22240, No. 2-85485 and No. 2-92490 on Form S-8 of Micro General Corporation of our report dated February 23, 1996, relating to the balance sheets of Micro General Corporation as of December 31, 1995 and December 31, 1994 and the related statements of operations, shareholders' equity and cash flows and related schedule for each of the years in the three-year period ended December 31, 1995, which report appears in the December 31, 1995 annual report on Form 10-K of Micro General Corporation. KPMG Peat Marwick LLP Orange County, California March 29, 1996 EX-27 4
5 0000067383 MICRO GENERAL CORPORATION 1 YEAR DEC-31-1995 DEC-31-1995 35,222 0 396,585 46,594 1,324,109 1,852,755 1,027,065 833,374 2,084,268 512,500 0 0 0 97,408 1,474,360 1,571,768 4,041,921 4,041,921 1,937,384 1,937,384 2,312,218 31,849 (10,678) (228,852) 800 (229,652) 0 0 0 (229,652) (.12) (.12)
-----END PRIVACY-ENHANCED MESSAGE-----