-----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, RdoEGbHUfRj8F8A/mws9YNwq9gY4efFIkkFjvxP9nFa39DY0bxRgLCFE75aYDGce JDFRsq/GF3i0vkd3MwKYIw== 0000892569-00-000311.txt : 20000329 0000892569-00-000311.hdr.sgml : 20000329 ACCESSION NUMBER: 0000892569-00-000311 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 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-K405 SEC ACT: SEC FILE NUMBER: 000-08358 FILM NUMBER: 581619 BUSINESS ADDRESS: STREET 1: 3916 STATE STREET STREET 2: SUITE 330 CITY: SANTA BARBARA STATE: CA ZIP: 93105 BUSINESS PHONE: 8055631566 MAIL ADDRESS: STREET 1: 3916 STATE STREET STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93105 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-K405 1 FORM 10-K405 YEAR ENDED DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-8358 MICRO GENERAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2621545 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION) 2510 RED HILL AVENUE, SUITE 200 92705 SANTA ANA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (949) 622-4444 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.05 PAR VALUE NASDAQ OTC BULLETIN BOARD
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] As of March 20, 2000, 12,922,482 shares of common stock ($.05 par value) were outstanding, and the aggregate market value of the shares of the common stock held by non-affiliates of the registrant was $84,793,000. LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV herein on page number 35. The information in Part III hereof is incorporated herein by reference to the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended December 31, 1999, to be filed within 120 days after the close of the fiscal year that is the subject of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS FORM 10-K
PAGE NO. -------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 7 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................................................... 7 Item 6. Selected Financial Data..................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 14 Item 8. Financial Statements and Supplementary Data................. 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 35 PART III Item 10. Directors and Executive Officers of the Registrant.......... 35 Item 11. Executive Compensation...................................... 35 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 35 Item 13. Certain Relationships and Related Transactions.............. 35 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 35
i 3 PART I ITEM 1. BUSINESS Micro General Corporation ("Micro General" or "the Company") is a diversified provider of electronic commerce ("eCommerce") business solutions focused on the financial and real estate markets and also provides other information technology and telecommunications services. Historically, the Company's operations consisted of the design, manufacture and sale of computerized postal and shipping systems, but the Company, with the acquisition of ACS Systems, Inc. ("ACS") in mid-1998, shifted its focus from that business into information technology and telecommunication services. On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI") completed the merger of Micro General with ACS, a wholly-owned subsidiary of FNFI. As a result of the merger, all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General common stock. The transaction was appraised at $1.3 million. Following the merger of Micro General and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an undiluted basis. The transaction has been accounted for as a reverse merger, i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General as the legal surviving entity and ACS as the surviving entity for accounting purposes. At December 31, 1999, FNFI owned 69.3% of the outstanding common stock of the Company. On November 17, 1998, the Company completed the acquisition of LDExchange.com, Inc. ("LDExchange"), an emerging multinational carrier focused primarily on the international long distance market. LDExchange is a facilities-based, wholesale long distance carrier providing low cost international telecommunications services primarily to U.S. based long distance carriers. The range of services offered by LDExchange complements the domestic long distance services offered by ACS. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General restricted common stock (1,000,000 shares). SERVICES The Company offers its customers a portfolio of related services within the broad categories of eCommerce systems and technology services, business process management, systems and software development and telecommunications. The Company provides its clients with a wide range of value-added products and services within each of the categories, and will continue to respond to market needs and opportunities. ACS ACS was founded in 1985 as a software company specializing in products for the real estate industry, in particular, escrow software. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. ACS, through its various divisions, is currently a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. ACS offers a full range of information technology services, including voice and data network design, implementation and management. ACS also provides services in the areas of real estate industry applications, eCommerce, consulting services and telecommunications. ACS offers these products and services to both affiliated and non-affiliated companies. ACS' revenues during 1999 were $34.4 million, which represents 36% of the Company's total revenues. During 1999, 1998, and 1997, 36%, 66% and 89%, respectively, of the total Company's revenue was derived from multiple servicing arrangements between FNFI and its subsidiaries and ACS. - Systems and Technology Services These services encompass systems development, integration, telephony solutions including computer telephony integration and management. Also included are desktop services, business process management, consulting and enterprise software solutions. 1 4 - Electronic Business Services The services offered include interactive marketing and payment services, Internet and online services, eCommerce and electronic data interchange. REALEC On October 8, 1998, the Company, in conjunction with FNFI, announced the creation of RealEC, one of the largest real estate electronic commerce networks in the nation. RealEC commenced operations in mid-1999. RealEC develops, operates and maintains a secure business-to-business electronic commerce exchange used to orchestrate real estate settlement services. This open multi-vendor eCommerce network provides real estate and lender customers the ability to select products and services necessary to close their transactions, while at the same time giving them access to over 6,000 issuing locations for title insurance across the United States. RealEC is a fifty percent owned joint venture developed by the Company and Stewart Mortgage Information, a subsidiary of Stewart Information Services Corporation (NYSE:STC). The RealEC network is an Internet based system providing leading edge software that connects all parties involved with real estate transactions. RealEC interfaces with loan origination software systems, windows-based ordering systems, third party networks, real estate office systems and the Internet. RealEC also offers on-line access to documents related to real estate transactions and links with back-end title insurance and escrow production systems. TELECOMMUNICATIONS (The Company offers a full range of telecommunication services, including digital subscriber lines, frame relay, domestic and international long distance.) In 1999, the Company had total telecommunications revenues of $61.7 million. - ACS. The ACS telecommunications business consists primarily of retail domestic long distance services. ACS is certified to provide long distance services in most states and currently has customers in 17 states. During the fiscal year ended December 31, 1999, the ACS telecommunications services revenue was approximately 5% of the Company's total telecommunications services revenues. - LDExchange. LDExchange is a provider of wholesale international long distance call completion services. These services are provided primarily to U.S.-based telecommunications companies offering their services to customers whose calls originate in the U.S. and terminate in foreign countries. In the fiscal year ended December 31, 1999, LDExchange contributed 95% of the Company's telecommunication services revenue. LDExchange obtains the majority of its call completion services through purchase agreements with other international telecommunications companies; however, the Company does have direct purchase arrangements with partners in five foreign countries and is seeking additional direct purchasing arrangements in other foreign countries. LDExchange leases satellite facilities in order to transport long distance calls from its New York and California telecommunications centers to its partners foreign country locations. LDExchange has one customer that represents a significant portion of its revenues. In 1999, this customer was 42% of LDExchange's total revenues (See Risk Factors -- Customer Concentration). ESCROW.COM On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an accrued interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. 2 5 Escrow.com offers online escrow-related services designed to provide buyers and sellers with a safe, secure and easy to use system for managing payment for and delivery of products and services purchased via the Internet. As an internet transaction services provider, escrow.com provides for the secure transmission of funds between a buyer and seller by placing the funds in escrow, confirms and verifies the receipt of merchandise by the buyer, and releases the funds from escrow to the seller. While escrow.com will enable any Internet buy/sell transaction, its primary focus will be in the business-to-business Internet marketplace. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time that escrow.com has sufficient funding in place to reasonably ensure the payment of the note. While the Company has no equity interest in escrow.com at December 31, 1999, the 15.0 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. At December 31, 1999, escrow.com had 3,891,304 shares outstanding. Assuming exercise of the warrants, the Company would have a 79.4% ownership in escrow.com. Escrow.com is incurring substantial losses and will need to raise substantial additional funds in order to continue its operations. The Company's potential ownership in escrow.com may be substantially diluted as escrow.com issues additional shares to raise the necessary capital. ACQUISITIONS AND STRATEGIC ALLIANCES The Company has made certain acquisitions and entered into strategic alliances in an effort to gain a competitive advantage or to obtain a new or expanded presence in targeted markets. The Company believes that the consolidation and convergence of the computing and software, electronic commerce and telecommunication industries will continue. Therefore, the Company expects that its strategy to make acquisitions and/or to enter into strategic alliances will continue in order for the Company to compete effectively. On March 22, 1999, the Company acquired Interactive Associates, Inc. ("Interactive"), a privately held distributor of computer telephony hardware and services. This acquisition provided for the purchase of 100% of the common stock of Interactive in exchange for 50,000 shares of Micro General common stock, subject to certain conditions, including an earn out provision for up to an additional 50,000 shares. Interactive's business activities have been merged with those of ACS. This acquisition has been accounted for using the purchase method. The financial position and results of operations of Interactive are not material to the Company. For additional information related to the Company's operating segments, see Note 8 of Notes to Consolidated Financial Statements. REGULATION Various aspects of the Company's business are subject to Federal, state and foreign regulation, noncompliance with which, depending on the nature of the noncompliance, could result in the suspension or revocation of any license or registration at issue, civil fines or criminal penalties. The Company has not experienced material difficulties in complying with the various laws and regulations affecting its business (See Risk Factors -- Regulation. COMPETITION The Company experiences intense competition in the information technology and telecommunications industries from large multi-national corporations, as well as from niche-oriented or geographically focused providers. Technology, telecommunications and their application within the business enterprise are in a rapid and continuing state of change as new technologies, products and services continue to be developed, introduced and implemented. The Company believes that its ability to compete effectively will depend upon its ability to develop and market products and services on a timely and cost effective basis that enable it to meet the changing needs of its customers. Another key element to the Company's competitiveness is its ability to finance and acquire the resources necessary to offer such products and service (See Risk Factors -- Competition). 3 6 SIGNIFICANCE OF FIDELITY NATIONAL FINANCIAL, INC. Approximately 29% of the Company's total revenue in 1999 was attributable to FNFI and its affiliates. During 1998 and 1997, 66% and 89%, respectively, of the Company's revenue was derived from multiple servicing arrangements with FNFI and its subsidiaries. The Company, through ACS, provides substantially all of the information technology and telecommunications services for FNFI and its subsidiaries. The loss of FNFI as a customer of the Company would have a material adverse effect on the Company. Information technology and telecommunication services are provided pursuant to various agreements between the Company and FNFI. The service agreements between the Company and FNFI specify the terms, conditions and scope of products and services to be provided by the Company to FNFI. The length of the contracts are generally one to three years, and are evaluated, modified and renewed on a regular basis. The Company believes that the negotiated terms of its contracts with Fidelity National Financial, Inc. are similar to third party rates and conditions; however, the relationship between the Company and FNFI should not be considered arm's length. The Company has recently signed a new three-year contract with FNFI to continue the development work for new title and escrow production systems and to continue the expansion of FNFI's technology infrastructure. In addition, after the closing of the acquisition of Chicago Title Corporation ("Chicago Title") by FNFI on March 20, 2000, the Company will hire approximately 150 former Chicago Title employees. These information technology support personnel will expand the Company's commitment to supporting the combined FNFI/Chicago Title technology and telecommunications requirements. This new business from FNFI will substantially expand the Company's revenues derived through the ACS products and services over the next three years. The Company has relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI, as a source of funds via available financing arrangements, and as a guarantor of certain of the Company's lending arrangements. See Note 8 of Notes to Consolidated Financial Statements. EMPLOYEES As of March 20, 2000, the Company had 245 full-time employees of which 221 were employed in offices in California, 12 in Texas, 10 in Florida and 2 in New Jersey. The Company believes that relations with its employees are generally good. YEAR 2000 ISSUES Information technology is an integral part of the Company's business. The Company also recognizes the critical nature of and the technological challenges associated with the Year 2000 issue. The Year 2000 ("Y2K") issue results from computer programs and computer hardware that utilize only two digits to identify a year in the date field, rather than four digits. If such programs or hardware are not modified or upgraded, information systems could fail, lock up, or in general fail to perform according to normal expectations. The Company has implemented a program and committed both personnel and other resources to determine the extent of potential Y2K issues. Included within the scope of this program are systems used in servicing customer obligations, information technology products and services, telecommunications services, financial management, human resources, payroll and infrastructure. In addition to a review of internal systems, the Company has initiated formal communications with third parties with which it does business in order to determine whether or not they are Y2K compliant and the extent to which the Company may be vulnerable to third parties' failure to become Y2K compliant. The Company continues the process of identifying Y2K compliant issues in its systems, equipment and processes. The Company will make any necessary changes to such systems, updating or replacing such equipment, and modifying such processes to make them Y2K compliant. The Company developed a four phase program to become Y2K compliant. Phase I is, "Plan Preparation and Identification of the Problem." This is a continuing phase. Phase II is, "Plan Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining Y2K Compliance." The status of the Y2K 4 7 compliance program is monitored by senior management of the Company and by the Audit Committee of the Company's Board of Directors. The costs of the Y2K related efforts incurred to date have not been material, and the estimate of remaining costs to be incurred is not considered to be material. These estimates may be subject to change due to the complexities of estimating the cost of modifying applications to become Y2K compliant and the difficulties in assessing third parties' ability to become Y2K compliant. The Company has not experienced any Y2K compliance related issues to date. Management of the Company believes that its electronic data processing and information systems are Y2K compliant; however, there can be no assurance that all of the Company's systems are Y2K compliant, or that the costs to be Y2K compliant will not exceed management's current expectations, or that the failure of such systems to be Y2K compliant will not have a material adverse effect on the Company's business. The Company believes that functions currently performed with the assistance of electronic data processing equipment could be performed manually or outsourced if certain systems were determined not to be Y2K compliant. The Company has substantially completed a contingency plan in the event that any systems are not Y2K compliant. This entire section, "Year 2000 Issues", is hereby designated a "Year 2000 Readiness Disclosure", as defined in the Year 2000 Information and Readiness Disclosure Act. RISK FACTORS Technological Change Rapid technological change, characterized by the increased processing power of computers, product obsolescence, evolving industry standards, the proliferation of networks and the rapid growth in the usage of the Internet and intranets are all challenges faced by the Company. The Company must react to these changes by utilizing these new technologies to develop new products and services as its existing products and services become obsolete. There can be no assurance that the Company will be successful in adapting to continued rapid technological change, will be able to develop new products and services, or will develop new products and services that are both price and feature competitive with those products and services that may be developed by its competitors. In addition, there can be no assurance that the Company will continue to be successful in attracting and retaining key personnel with the technological skills and expertise necessary to develop new products and services in the future. Customer Concentration As discussed in Item 1. Business -- Significance of Fidelity National Financial, Inc., FNFI and its affiliates provided approximately 29% of the Company's revenue in 1999. Various service agreements and arrangements exist between the Company and FNFI and generally have a length of one to three years. While the Company has been successful in lessening its revenue from FNFI as a percentage of the Company's total revenue, FNFI continues to be ACS's major customer and the loss of FNFI as a customer would have a material adverse effect on the Company. In addition, LDExchange has one customer that represents 42% of total 1999 LDExchange revenue. This customer does not have a minimum usage commitment with the Company and can terminate its usage of the Company's services at any time. There is no guarantee that the Company can continue to offer competitive pricing to the customer, or that the customer may not elect to move its business to another telecommunications carrier. The Company's revenues and profits could be materially impacted by the loss of this customer. Competition The Company experiences intense competition in the information technology and telecommunications industries. Technology, telecommunications and their application within the business enterprise are in a rapid and continuing state of change as new technologies, products and services continue to be developed, introduced and implemented. Competitors include large, well-financed multinational corporations as well as niche-oriented or geographically focused providers. The Company believes that its ability to effectively compete in these industries will depend on its ability to develop and market new products on a timely and cost effective basis that enables it to continue to meet the needs of and retain its existing customers and to develop 5 8 new customers. There can be no assurance that management will be able to successfully continue to develop such products and services, or will be able to successfully market such products and services as they are developed. International Telecommunications The international telecommunications market is constantly changing as new long distance resellers emerge and existing providers respond to fluctuating costs and competitive pressures. The Company primarily engages in the resale of international capacity and must quickly respond to changes in costs through pricing adjustments and routing decisions. As a wholesale provider of international terminations, the business operates on narrow margins, and any failure on the Company's part to not respond quickly to changing prices and call routing alternatives could result in substantial losses. There can be no assurance that the Company will be able to continue to monitor and quickly adapt to these conditions. In addition, the Company is highly dependent on its foreign partners in the five countries to which traffic is routed directly. The Company may have limited recourse if its foreign partners do not perform under their contractual arrangements, and the Company may be burdened with satellite lease obligations of up to 12 months if a foreign partner is unable to fulfill its obligations. Regulation The Company's interstate and international telecommunication services offerings generally are subject to the regulatory jurisdiction of the FCC, state Public Utility Commissions ("PUCs") and foreign national authorities. Certain states have laws and regulations which include prior certification, notification, registration and/or tariff requirements. The Company believes it has made the filings with the FCC and the appropriate state PUCs, and has taken the actions it believes are necessary to engage in the interstate telecommunications services it currently provides. However, should the FCC or any state PUC determine to revoke the Company's authority to provide telecommunications services in that jurisdiction, it may have a material negative impact on the Company's telecommunications revenues. As the international telecommunications markets have become deregulated, service providers have developed alternative arrangements to reduce their terminating costs. The Company utilizes resale arrangements which provide multiple options for routing traffic to the destination country. The Company purchased capacity from 69 vendors in 1999. A substantial portion of this capacity is obtained through variable, per-minute short-term purchase arrangements. This leaves the Company exposed to the negative impact of unanticipated price increases and service cancellations. In addition, the Company has partners in five different foreign countries with which it has arrangements to terminate telecommunications traffic directly to the partners switching facilities in that country via satellite transmission facilities which the Company leases. The FCC or foreign regulatory agencies may take the view that certain of the Company's partners terminating arrangements do not comply with current rules and policies. The Company is seeking to substantially grow the amount of revenue derived through direct partnering arrangements. As this revenue source becomes a significant portion of the Company's overall revenue, the loss of such arrangements, whether as a result of regulatory actions, or otherwise, could have a material adverse effect on the Company's business, operating results and financial condition. Need For Additional Capital to Finance Growth and Capital Requirements The Company has a history of losses and has relied on FNFI as the primary source of capital to fund its operations. A key element in the Company's growth and competitiveness will be its ability to either finance the development of new products and services, or to have capital sufficient to acquire the necessary products and services. The Company believes that it can meet all anticipated cash requirements from internally generated funds, from existing lines of credit and from potential offerings of its shares; however, there can be no assurance that unanticipated events could not result in substantial additional funds being required to continue the Company's operations. In the event that the Company does require additional capital, there is no assurance that FNFI will make those funds available, that additional borrowing arrangements from non- 6 9 affiliated parties will be available or that the Company can successfully issue its shares into the capital markets in order to raise additional equity. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Company wishes to caution readers that the forward-looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements made by or on behalf of the Company. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Company's actual results to differ materially from those expressed in any such forward-looking statements. The factors that could cause the Company's results to differ materially include, but are not limited to, general economic and business conditions; the impact of competitive products and pricing; rapidly changing technology; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms, and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. ITEM 2. PROPERTIES The Company's principal offices are located in Santa Ana, California. Two facilities provide an aggregate of approximately 28,400 square feet of office space; 22,000 square feet are leased through August 2007, with the remaining 6,400 square feet leased through October 2007. The Santa Ana property is sub-leased from Fidelity National Financial, Inc. Additional office space consists of approximately 8,600 square feet of office and warehouse space located in Tustin, California leased through June 2007, 2,270 square feet of office space in Ft. Lauderdale, Florida leased through November 2000, 1,500 square feet of office space in Parsippany, New Jersey leased through September 2001, 3,370 square feet of office space in Houston, Texas leased through April 2001, an additional 2,000 square feet of office space in San Diego, California leased through March 2002 and 1,100 square feet of telecommunications switching space located in Los Angeles, California and leased through January 2003. The Company believes that the material terms of its leases are commercially reasonable terms typically found in each of the respective areas in which the Company leases space. The Company believes that its facilities are adequate to support its current needs and that additional facilities will be available at competitive rates as needed. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of 1999. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET AND PRICES On January 14, 1997, the Company elected to have its common stock delisted from the NASDAQ SmallCap Market. The stock is now listed on the OTC Bulletin Board. The Company currently has an application pending to obtain a listing on the NASDAQ National Market System. The following table sets 7 10 forth the range of high and low closing bid quotations per share of the Company's common stock for the fiscal quarters indicated.
BID PRICE --------------- HIGH LOW ------ ----- Year Ended December 31, 1999 First Quarter............................................. $ 4.63 $3.31 Second Quarter............................................ 4.63 3.25 Third Quarter............................................. 4.97 2.88 Fourth Quarter............................................ 18.00 4.25 Year Ended December 31, 1998 First Quarter............................................. $ 2.94 $1.63 Second Quarter............................................ 6.06 2.50 Third Quarter............................................. 5.75 3.50 Fourth Quarter............................................ 5.00 2.50
On March 20, 2000, the last reported sale price of common stock was $34.00 per share. As of March 20, 2000, the Company had approximately 799 stockholders of record. DIVIDEND POLICY AND RESTRICTIONS ON DIVIDEND PAYMENTS The Company intends to continue its policy of retaining all earnings for reinvestment in the business operations of the Company. Under Delaware law, the Company's Board of Directors may declare and pay dividends on its outstanding shares in cash or property only out of the unreserved and unrestricted earned surplus. 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, 1999. ITEM 6. SELECTED FINANCIAL DATA The historical operating results data, per share data and balance sheet data set forth below are derived from the historical financial statements of the Company, certain of which have been restated to reflect the ACS Systems, Inc. acquisition and the related reverse merger accounting treatment (See note 1 of notes to consolidated financial statements). The balance sheet data includes the accounts of ACS and LDExchange as of December 31, 1999 and 1998; and only the accounts of ACS as of December 31, 1997, 1996 and 1995. Operating results and per share data for the year ended December 31, 1999 include the results of operations for ACS and LDExchange for the entire year and the results of operations of the postage meter and scale division for a short period in early 1999 until the operations were ceased. Operating results and per share data for the year ended December 31, 1998 include the results of operations for ACS for the year ended December 31, 1998, the results of operations for the postage scale and meter division for the period May 14, 1998 through December 31, 1998 and the results of operations for LDExchange for the period November 17, 1998 through December 31, 1998. Operating results and per share data for the years ended December 31, 1997, 1996 and 1995, include only the results of operations of ACS for the years then ended. Consolidated balance sheets at December 31, 1999 and 1998 and consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997, together with the related notes and the report of KPMG LLP, independent certified public accountants, are included elsewhere herein and should be 8 11 read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ---------- OPERATING RESULTS DATA: Hardware and software sales and maintenance revenues........... $15,506,386 $16,248,425 $10,232,371 $ 6,422,557 $4,302,056 Telecommunication service revenues....................... 65,293,493 9,834,555 862,814 -- -- Service and license revenues..... 14,286,972 7,933,084 2,728,449 449,043 301,043 ----------- ----------- ----------- ----------- ---------- Total revenues.......... 95,086,851 34,016,064 13,823,634 6,871,600 4,603,099 ----------- ----------- ----------- ----------- ---------- Hardware, software and maintenance cost of sales...... 14,029,205 15,893,689 8,452,283 5,323,851 3,893,813 Telecommunication service cost of sales.......................... 58,636,140 8,652,054 587,905 -- -- Service and license cost of sales.......................... 3,875,445 3,421,741 1,279,557 525,253 272,476 ----------- ----------- ----------- ----------- ---------- Total cost of sales..... 76,540,790 27,967,484 10,319,745 5,849,104 4,166,289 ----------- ----------- ----------- ----------- ---------- Gross profit............ 18,546,061 6,048,580 3,503,889 1,022,496 436,810 Operating Expenses: Selling, general and administrative................. 20,518,097 9,142,574 2,984,812 1,513,319 1,041,572 Amortization of cost in excess of net assets acquired and capitalized software development costs.............. 3,214,940 1,083,621 808,274 638,462 -- ----------- ----------- ----------- ----------- ---------- Total operating expenses.............. 23,733,037 10,226,195 3,793,086 2,151,781 1,041,572 ----------- ----------- ----------- ----------- ---------- Operating loss.......... (5,186,976) (4,177,615) (289,197) (1,129,285) (604,762) Joint venture loss............... (42,189) -- -- -- -- Interest income (expense), net... (1,913,274) (666,788) 15,130 6,675 -- ----------- ----------- ----------- ----------- ---------- Loss before income taxes................. (7,142,439) (4,844,403) (274,067) (1,122,610) (604,762) Income tax expense (benefit)..... 4,000 2,400 (64,126) (417,747) -- ----------- ----------- ----------- ----------- ---------- Net loss................ $(7,146,439) $(4,846,803) $ (209,941) $ (704,863) $ (604,762) =========== =========== =========== =========== ========== PER SHARE DATA: Loss per share -- basic and diluted........................ $ (.92) $ (.81) $ (.05) $ (.15) $ (.13) Number of shares used in per share computations -- basic and diluted........................ 7,806,660 5,954,000 4,597,000 4,597,000 4,597,000 BALANCE SHEET DATA: Cash and cash equivalents........ $ 1,400,874 $ 914,796 $ 830,784 $ -- $ 576,780 Total assets..................... 26,843,114 23,080,061 9,864,129 7,168,200 3,733,366 Amounts and notes payable to affiliates..................... 5,265,408 16,729,411 5,431,417 3,741,380 -- Total liabilities................ 14,211,379 22,495,473 7,732,738 4,828,868 777,433 Stockholders' equity............. 12,631,735 584,588 2,131,391 2,341,332 2,995,933
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition and results of operations of the Company. The discussion and analysis below includes the results of operations of ACS Systems, Inc. for each of the years ended December 31, 1999, 1998 and 1997, as the acquisition of ACS Systems, Inc. has been accounted for as a reverse merger. The 1999 results of operations also include the results of LDExchange for the entire year and the results of operations of the postage meter and scale division for a short period in early 1999. The results of operations for the year ended December 31, 1998, include, in addition to the ACS results of operations for the entire year, the results of operations of the postage meter and scale division for the period from May 14, 1998 through December 31, 1998 and the results of operations of LDExchange for the period November 17, 1998 9 12 through December 31, 1998. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere herein. OVERVIEW During the year ended December 31, 1997 the Company's operations consisted of the operations of ACS Systems, Inc., formerly a wholly-owned subsidiary of FNFI. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described in Note 1 of the Notes to Consolidated Financial Statements. During 1999, 1998 and 1997, 29%, 66% and 89%, respectively, of the total Company's revenue was derived from multiple servicing arrangements between FNFI and its subsidiaries and ACS. ACS, through its various divisions, is a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. ACS offers a full range of information technology services, including voice and data network design, implementation and management. ACS also provides services in the areas of real estate industry applications, eCommerce, consulting services and telecommunications. The reverse merger with Micro General Corporation in May 1998, added a postage meter and scale division, which was deemphasized as a product concurrent with the ACS merger. The acquisition of LDExchange in November 1998 added to the Company's revenues a multinational telecommunications carrier focused primarily on the international long distance market. The Company's primary focus today is information technology, eCommerce and telecommunication services. ACS remained the primary business unit during 1999. COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Revenue Revenues increased $61.1 million, or 180%, to $95.1 million in 1999 from $34.0 million in 1998. ACS contributed $8.6 million of the increase while LDExchange contributed $52.4 million of the increase. The LDExchange revenue growth resulted from its acquisition on November 17, 1998, which produced a full year of LDExchange operations in 1999 as compared to one and one-half months of results in 1998. ACS experienced growth in all forms of revenue during 1999. FNFI is ACS's major source of revenue. See Note 6 to Notes to Consolidated Financial Statements. In 1999, FNFI continued to utilize ACS's technological expertise and expanded its commitment to state of the art technology and processes, and continued to increase the installation and upgrade of its various information technology systems, with ACS as the primary vendor. During 1999, the Company was also able to increase the level of products and services provided to non-affiliates, primarily in telecommunications services. Gross Profit Gross profit increased $12.5 million, or 207%, to $18.5 million, representing a gross profit margin of 19%, in 1999, from $6.0 million and a gross profit margin of 18% in 1998. The increase in total gross profit and gross profit margin as a percentage of revenue results from the substantial increase in total revenues. There was a substantial increase in gross profits on hardware, software and maintenance sales, as gross profit as a percentage of revenue increased to 10% in 1999 from 2% in 1998. This results from the transition in 1999 from the low margin postage meter and scale business and into the technology hardware and software business. Offsetting this improvement was the additional $52.4 million of LDExchange international telecommunications revenue in 1999, which revenue has substantially lower margins than the ACS products and service revenues. Expenses Selling, general and administrative expenses ("S,G&A") increased $11.4 million, or 124%, to $20.5 million in 1999 from $9.1 million in 1998. The LDExchange business is not labor intensive, as such, significant growth in the LDExchange telecommunications revenues does not require a corresponding significant increase in personnel. The ACS SG&A expenses generally trend consistently with revenues. This is because increases 10 13 in product and service revenues cause a corresponding increase in personnel expenses. This is reflected in the fact that SG&A expenses in 1999 were 22% of total revenues while SG&A expenses in 1998 were 27% of total revenues. Total employee count was increased by 20 when comparing December 31, 1999 with December 31, 1998. The amortization of cost in excess of net assets acquired and capitalized software development costs is a function of the characteristics of the intangible assets recorded during a particular period and the estimated useful life of the intangible assets. Fluctuations in the amortization of cost in excess of net assets acquired and capitalized software result from the amount, mix and characteristics of the intangible assets recorded as well as the circumstances surrounding the Company's estimate of the appropriate useful life. During 1999 the Company recorded amortization of $3.2 million, a 197% increase as compared to amortization of $1.1 million in 1998. The substantial increase in amortization is due to the goodwill created in the Micro General and ACS merger on May 14, 1998, which resulted in approximately seven and one-half months of amortization in 1998 versus 12 months of amortization in 1999, and also the goodwill from the LDExchange acquisition on November 17, 1998, which resulted in approximately one and one-half months amortization in 1998 versus twelve months amortization in 1999. Interest income (expense), net, is related to the use of the Company's available working capital, which is in the form of available cash and lines of credit. The year over year fluctuation in interest income (expense) can be attributed to the increase in average borrowings outstanding during 1999 compared to previous years. In 1999, interest expense was $1,913,000, an increase of $1,246,000 or 187% over the interest expense of $667,000 in 1998. The increase in 1999 is related to debt assumed in the Micro General/ACS merger on May 14, 1998 and also to borrowings under the $15 million convertible note that the Company entered into on October 27, 1998. While notes and leases payable decreased from $16.7 million at December 31, 1998 to $5.3 million at December 31, 1999, there were an additional $18 million in notes that were outstanding for most of 1999 which were converted into shares of the Company's common stock on December 15, 1999 (see Recent Developments). Income tax expense (benefit) is recorded based on the amounts that the Company estimates, based on the Company's taxation structure, will be due to federal and state taxation authorities. During 1997, ACS was included in the FNFI consolidated tax returns and income tax expense (benefit) was calculated as such. During 1999 and 1998, ACS was included in the Micro General consolidated group, which pays only minimum taxes based on current operating results due to the fact that Micro General has not historically generated earnings. COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenue Revenues increased $20.2 million, or 146%, to $34.0 million in 1998 from $13.8 million in 1997, primarily as a result of continued growth in products and services provided to FNFI, including an increase in telecommunication services provided by ACS, the acquisition of the postage scale and meter division and the acquisition of LDExchange. See note 10. FNFI, as the result of favorable market conditions, continued expansion and a commitment to implement state of the art technology, increased the installation and upgrade of its various information technology systems using ACS as its primary vendor during 1997 that continued through 1998. See note 6 to the consolidated financial statements regarding related party transactions and note 8 regarding segment information. The increased utilization of ACS by FNFI led to an increase in all forms of revenue. During 1997 and 1998, ACS was able to increase the level of products and services provided to non-affiliates, introduced new products and services and provided telecommunication services. Gross Profit Gross profit increased $2.5 million, or 73%, to $6.0 million, representing a gross profit margin of 18%, in 1998 from $3.5 million, a gross profit margin of 25%, in 1997. The increase in absolute dollars is consistent with the increase in revenues. Gross profit margin as a percentage has decreased in 1998 compared to 1997 primarily as a result of the addition of the new segments. The postage meter and scale division and 11 14 LDExchange segments represent lower margin businesses than the information technology and telecommunication businesses of ACS. Expenses Generally, selling, general and administrative expenses ("S,G & A") trend consistently with revenues. S,G & A expenses increased $6.2 million, or 206%, to $9.1 million in 1998 from $3.0 million in 1997. The increase is primarily a result of the growth of ACS, which occurred in response to the increased demand for its products and services; the acquisition of the postage scale and meter division and the acquisition of LDExchange. The expansion in the amount of products and services provided to FNFI required additional personnel and S,G & A in order to meet the demand and provide an adequate level of service and support. As ACS began to offer additional information technology services and telecommunication services, additional personnel were required and S,G & A related to the new offerings was incurred. The acquisition of the postage scale and meter division and the acquisition of LDExchange also resulted in the addition of personnel and S,G & A related to the operation of these new segments. The amortization of cost in excess of net assets acquired and capitalized software development costs is a function of the characteristics of the intangible assets recorded during a particular period and the estimated useful life of the intangible assets. Fluctuations in the amortization of cost in excess of net assets acquired and capitalized software result from the amount, mix and characteristics of the intangible assets recorded as well as the circumstances surrounding the Company's estimate of the appropriate useful life. Interest income (expense), net, is related to the use of the Company's available working capital, which is in the form of available cash and lines of credit. The year over year fluctuation in interest income (expense) can be attributed to the increase in average borrowings outstanding during 1998 compared to prior years. Income tax expense (benefit) is recorded based on the amounts that the Company estimates, based on the Company's taxation structure, will be due to Federal and state taxation authorities. During 1997, ACS was included in the FNFI consolidated tax returns and income tax expense (benefit) was calculated as such. During 1998 ACS was included in the Micro General consolidated group, which pays only minimum taxes based on current operating results due to the fact that Micro General has not historically generated earnings. LIQUIDITY AND CAPITAL RESOURCES The Company's current cash requirements include debt service, personnel and other operating expenses, capital expenditures and capital for acquisitions and expansion. Internally generated funds fluctuate in a pattern generally consistent with revenues. Since the Company has repositioned itself as a result of the merger with ACS Systems, Inc. and the acquisition of LDExchange, the revenue, and therefore, cash flow base has stabilized. The Company believes that as a result of its current revenue base and the anticipated availability of funds in the form of existing lines of credit, all cash requirements will be met for at least the next twelve months. The Company has suffered losses and negative cash flows from operations for each of the years in the three-year period ended December 31, 1999. The Company has historically relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI, as a source of funds via available financing arrangements, and as a guarantor of certain of the Company's lending arrangements. In December 1999, three significant transactions occurred that substantially improved both the Company's liquidity and its capital resources. First, on December 15, 1999, $18.0 million of the Company's debt was converted into common stock pursuant to a conversion election contained in the notes and exercised by the note holders. This $18.0 million addition to stockholders' equity has resulted in $12.6 million in stockholders' equity at December 31, 1999 as compared to $0.6 million at December 31, 1998. The retirement of this debt will also substantially reduce the Company's debt service requirements in the coming year. Second, also on December 15, 1999, the Company entered into a new $5.4 million five-year convertible note with FNFI. During 1999, the Company had exceeded the borrowings available under the FNFI note agreement. With the conversion of the $18.0 million of notes on December 15, 12 15 1999, the Company's borrowing arrangements no longer existed. The Company negotiated this new note to address the amounts borrowed in excess of the note limit. There are no other borrowings available or contemplated between the Company and FNFI, with the exception of a $2.0 million lease commitment from FNF Capital, Inc., a wholly owned subsidiary of FNFI. Such lease will be used to finance anticipated equipment purchases by the Company in 2000. Another balance sheet improvement is working capital at $2.9 million at December 31, 1999 as compared to $2.5 million at December 31, 1998. Finally, on December 22, 1999, the Company entered into a one-year $5.0 million revolving line of credit with Imperial Bank. As of March 20, 2000, the Company has borrowed $2.2 million under this line of credit. The Company must comply with certain affirmative and negative covenants related to its outstanding debt and notes payable. The Company was in compliance with these covenants at December 31, 1999. The Company has experienced negative cash flow from operations in each of the last three years. In addition, the Company has spent approximately $6.1 million on property and equipment in the last three years. The Company believes that its cash flow will turn positive in 2000 as the result of several factors. First, the postage meter and scale division, which used cash in 1998 and 1999, has been phased out and the Company is focusing its efforts on the higher margin technology business. Second, the LDExchange losses of $2.6 million in 1999 should be reduced or show a positive cash flow in 2000. LDExchange expended significant funds purchasing and installing equipment, implementing its international direct arrangements and on building the revenue base. The Company believes that with these costs now behind it, and the majority of the capital costs now completed, year 2000 will show significant improvement in the LDExchange operating results. Finally, the Company is hiring approximately 150 employees from Chicago Title as a result of the FNFI acquisition of Chicago Title on March 20, 2000. This new business is expected to generate substantial new revenues and profits for the Company. As a result of the above positive developments, the Company believes that it will have sufficient cash and borrowing resources to meet its operating and growth requirements. While the Company believes it has funds on hand and funds available through existing lines of credit sufficient to meet its projected needs for the next twelve months, the Company also believes it may have the option of raising additional funds through an offering of its common stock. If undertaken, the proceeds from an offering would be used to pay down existing debt, finance the development of potential new business opportunities and potential acquisitions, and also for general working capital purposes. There can be no guarantee that the Company will undertake an offering of its capital stock, or that if undertaken it will be successful in raising additional funds. SEASONALITY AND INFLATION The effects of seasonality and inflation on consolidated operating results have, historically, been insignificant. RECENT DEVELOPMENTS On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license of the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an accrued interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time that escrow.com has sufficient funding in place to reasonably ensure the payment of the note. On November 17, 1999, the 1999 Stock Incentive Plan ("Plan") was adopted by the Company's Board of Directors. Under the Plan, the Company has reserved 2.0 million shares of the Company's common stock. The Company may issue incentive stock options to its employees for up to 2.0 million shares of its common 13 16 stock, with the exercise price of the options being not less than 100% of the trading price of the Company's common stock at the close of business on the date that the options are granted. On December 15, 1999 the holders of $18.0 million of the Company's convertible debt, which was the entire amount of the Company's convertible debt outstanding on that date, exercised their conversion rights and exchanged the debt for newly issued shares of the Company's common stock. There were 4,677,771 shares of common stock issued at an average conversion price of approximately $3.85 per share. Also on December 15, 1999, the Company entered into with FNFI a new $5,265,000 five-year convertible note having an accrued interest rate of ten percent. During 1999, the Company had exceeded the borrowings available under the note agreements. With conversion of these notes on December 15, 1999, the Company's borrowing arrangements no longer existed. The Company negotiated this new note to address the amounts borrowed in excess of the note limits. The new note is convertible into common shares of the Company at a rate of $10.00 per share at any time during the five-year term. FNFI also received warrants to purchase 250,000 shares of the Company's common stock at a price of $10.00 per share. The Company recognized a $280,000 expense in regard to the warrants. On December 22, 1999, the Company entered into a one-year $5.0 million revolving line of credit with Imperial Bank, guaranteed by FNFI. The interest rate under the credit line will be, at the Company's election, either the Imperial Bank Prime Rate or 1.4 percentage points over LIBOR. As of March 20, 2000, the Company has borrowed $2.2 million under this line of credit. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's consolidated balance sheets include liabilities whose fair values are subject to market risks. The following sections address the significant market risks associated with the Company's financial activities as of year end 1999. Interest Rate Risk The Company's borrowings are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. Caution should be used in evaluating the Company's overall market risk from the information below, since actual results could differ materially because the information was developed using estimates and assumptions as described below. See note 7 of notes to consolidated financial statements. The fair value of the Company's notes payable approximate their carrying value at December 31, 1999 as the interest rates paid approximate the market value of borrowings of a similar nature. The hypothetical effects of changes in market rates or prices on the fair values of financial instruments would be an increase (decrease) of the fair value approximately $100,000, if interest rates increased (decreased) 100 basis points. 14 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MICRO GENERAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL INFORMATION
PAGE NO. -------- Independent Auditors' Report................................ 16 Consolidated Balance Sheets as of December 31, 1999 and 1998...................................................... 17 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.......................... 18 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997.............. 19 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 20 Notes to Consolidated Financial Statements.................. 21 Schedule II -- Valuation and Qualifying Accounts and Reserves.................................................. 38
All other schedules are omitted because the required information is not applicable or the information is presented in the consolidated financial statements or notes thereto. 15 18 INDEPENDENT AUDITORS' REPORT Board of Directors Micro General Corporation: We have audited the consolidated financial statements of Micro General Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in notes 1, 5, 6, 7 and 8 to the consolidated financial statements, the Company's financial position, results of operations and cash flows are materially affected by and are dependent on certain transactions and agreements with Fidelity National Financial, Inc. (FNFI), the Company's majority owner, and FNFI's subsidiaries. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Micro General Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Los Angeles, California March 28, 2000 16 19 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ------------ ----------- ASSETS Current assets: Cash and cash equivalents................................. $ 1,400,874 $ 914,796 Trade accounts receivable, less allowance for doubtful accounts of $2,265,601 in 1999 and $485,936 in 1998.... 3,391,824 1,835,968 Trade accounts receivable due from affiliates............. 3,020,908 4,350,790 Inventories............................................... 438,728 785,204 Prepaid expenses and other assets......................... 1,594,600 359,884 ------------ ----------- Total current assets.............................. 9,846,934 8,246,642 Notes receivable............................................ -- 29,850 Property and equipment, net................................. 7,038,858 3,321,005 Capitalized software development costs, less accumulated amortization of $3,540,854 in 1999 and $2,794,275 in 1998...................................................... 747,680 1,505,719 Cost in excess of net assets acquired, less accumulated amortization of $3,329,898 in 1999 and $872,996 in 1998... 8,570,704 9,976,845 Investment in joint venture................................. 638,938 -- ------------ ----------- $ 26,843,114 $23,080,061 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 5,796,031 $ 4,916,314 Income and other taxes payable............................ 252,545 138,647 Deferred tax liabilities.................................. 361,726 361,726 Deferred revenue.......................................... 167,000 349,375 Current portion of capital leases with affiliate.......... 387,765 -- ------------ ----------- Total current liabilities......................... 6,965,067 5,766,062 Capital leases with affiliate............................... 1,834,837 -- Amounts and notes payable to affiliates..................... 5,265,408 16,729,411 Other long term liabilities................................. 146,067 -- ------------ ----------- Total liabilities................................. 14,211,379 22,495,473 ------------ ----------- Commitments and contingencies............................... Subsequent events........................................... Stockholders' equity: Preferred stock, $.05 par value. Authorized 1,000,000 shares; none issued and outstanding.................... -- -- Common stock, $.05 par value. Authorized 20,000,000 shares; issued and outstanding 12,535,638 and 7,546,666 shares at December 31, 1999 and 1998, respectively..... 626,782 377,333 Additional paid-in capital................................ 25,301,745 6,357,608 Accumulated deficiency.................................... (13,296,792) (6,150,353) ------------ ----------- Total stockholders' equity........................ 12,631,735 584,588 ------------ ----------- $ 26,843,114 $23,080,061 ============ ===========
See accompanying notes to consolidated financial statements. 17 20 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- Hardware and software sales and maintenance revenues.......................................... $15,506,386 $16,248,425 $10,232,371 Telecommunication service revenues.................. 65,293,493 9,834,555 862,814 Service and license revenues........................ 14,286,972 7,933,084 2,728,449 ----------- ----------- ----------- Total revenues (related party revenues, see note 6)............................. 95,086,851 34,016,064 13,823,634 ----------- ----------- ----------- Hardware, software and maintenance cost of sales.... 14,029,205 15,893,689 8,452,283 Telecommunication service cost of sales............. 58,636,140 8,652,054 587,905 Service and license cost of sales................... 3,875,445 3,421,741 1,279,557 ----------- ----------- ----------- Total cost of sales....................... 76,540,790 27,967,484 10,319,745 ----------- ----------- ----------- Gross profit.............................. 18,546,061 6,048,580 3,503,889 ----------- ----------- ----------- Operating expenses: Selling, general and administrative expenses...... 20,518,097 9,142,574 2,984,812 Amortization of cost in excess of net assets acquired and capitalized software development costs.......................................... 3,214,940 1,083,621 808,274 ----------- ----------- ----------- Total operating expenses.................. 23,733,037 10,226,195 3,793,086 ----------- ----------- ----------- Operating loss............................ (5,186,976) (4,177,615) (289,197) Joint venture loss.................................. (42,189) -- -- Interest income (expense), net...................... (1,913,274) (666,788) 15,130 ----------- ----------- ----------- Loss before income taxes.................. (7,142,439) (4,844,403) (274,067) Income tax expense (benefit)........................ 4,000 2,400 (64,126) ----------- ----------- ----------- Net loss.................................. $(7,146,439) $(4,846,803) $ (209,941) =========== =========== =========== Loss per share -- basic and diluted................. $ (.92) $ (.81) $ (.05) =========== =========== =========== Number of shares used in per share computations -- basic and diluted................. 7,806,660 5,954,000 4,597,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. 18 21 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON STOCK ADDITIONAL TOTAL --------------------- PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIENCY EQUITY ---------- -------- ----------- ------------ ------------- Balance at December 31, 1996 (Restated)...................... 6,546,666 $327,333 $ 3,107,608 $ (1,093,609) $ 2,341,332 Net loss.......................... -- -- -- (209,941) (209,941) ---------- -------- ----------- ------------ ------------ Balance at December 31, 1997 (Restated)...................... 6,546,666 327,333 3,107,608 (1,303,550) 2,131,391 Equity issued in connection with merger (note 1)................. -- -- 1,300,000 -- 1,300,000 Shares issued to acquire LDExchange.com, Inc............. 1,000,000 50,000 1,950,000 -- 2,000,000 Net loss.......................... -- -- -- (4,846,803) (4,846,803) ---------- -------- ----------- ------------ ------------ Balance at December 31, 1998...... 7,546,666 $377,333 6,357,608 (6,150,353) 584,588 Note conversion................... 4,677,771 233,889 18,046,111 -- 18,280,000 Acquisition of Interactive Associates...................... 50,000 2,500 191,500 -- 194,000 Shares issued in connection with stock purchase plan............. 50,000 2,500 117,766 -- 120,266 Stock options exercised........... 211,201 10,560 588,760 -- 599,320 Net Loss.......................... -- -- -- (7,146,439) (7,146,439) ---------- -------- ----------- ------------ ------------ Balance at December 31, 1999...... 12,535,638 $626,782 $25,301,745 $(13,296,792) $(12,631,735) ========== ======== =========== ============ ============
See accompanying notes to consolidated financial statements. 19 22 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ------------ ----------- ----------- Cash flows from operating activities: Net loss......................................... $ (7,146,439) $(4,846,803) $ (209,941) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................. 4,311,690 1,423,959 812,262 Provision for doubtful accounts............... 2,258,585 247,437 63,683 Changes in assets and liabilities: Trade accounts receivable................... (3,789,514) (463,207) (599,700) Inventories................................. 158,763 90,745 (288,559) Prepaid expenses and other assets........... (1,234,716) (157,452) (66,936) Accounts payable and accrued expenses....... 429,717 261,802 158,468 Income and other taxes payable.............. 113,898 85,739 -- Deferred revenue............................ (182,375) 329,789 -- Other long term liabilities................. 146,067 -- -- Amounts due from affiliates................. 1,329,882 (116,025) (81,872) ------------ ----------- ----------- Net cash used in operating activities.... (3,604,442) (3,144,016) (212,595) ------------ ----------- ----------- Cash flows from investing activities: Acquisition...................................... (176,341) -- -- Joint venture in RealEC.......................... (638,938) -- -- Acquisition of LDExchange.com, Inc............... -- 717,000 -- Merger of Micro General and ACS.................. -- 403,175 -- Purchase of property and equipment............... (2,659,634) (2,768,119) (702,404) Decrease (increase) in notes receivable.......... 29,850 1,926 (29,776) Capitalization of software development costs..... -- (64,326) (610,098) ------------ ----------- ----------- Net cash used in investing activities.... (3,445,063) (1,710,344) (1,342,278) ------------ ----------- ----------- Cash flows from financing activities: Net increase in borrowings from affiliates....... 6,815,997 4,938,372 2,385,657 Exercise of stock options........................ 719,586 -- -- ------------ ----------- ----------- Net cash provided by financing activities............................. 7,535,583 4,938,372 2,385,657 ------------ ----------- ----------- Net increase in cash and cash equivalents............................ 486,078 84,012 830,784 Cash and cash equivalents at beginning of year..... 914,796 830,784 -- ------------ ----------- ----------- Cash and cash equivalents at end of year........... $ 1,400,874 $ 914,796 $ 830,784 ============ =========== =========== Supplemental Disclosure of cash flow information: Cash paid during the year for: Interest......................................... -- 103,050 -- Income taxes..................................... 4,000 2,400 -- Supplemental schedule of noncash investing and financing activities: Acquisition of Interactive Associates for stock......................................... 194,000 -- -- Acquisition of LDExchange for stock.............. -- 2,000,000 -- Conversion of long-term debt to common stock..... 18,280,000 -- -- Assets acquired through capital lease............ 2,222,602 -- --
See accompanying notes to consolidated financial statements. 20 23 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Historically, the operations of Micro General Corporation and subsidiaries ("Micro General") consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations were performed through the Company's postage meter and scale division. Following the acquisition of ACS Systems, Inc. ("ACS") in mid-1998, which is described below, Micro General (together with ACS, the "Company") shifted its primary focus to information technology and telecommunication services. On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI") completed the merger of Micro General with ACS, a wholly owned subsidiary of FNFI. As a result of the merger, all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General common stock. The transaction was appraised at $1.3 million. Following the merger of Micro General and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an undiluted basis. The transaction has been treated as a reverse merger, i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General as the surviving legal entity and ACS as the surviving entity for accounting purposes. As a result, the consolidated financial statements of Micro General previously issued prior to the year ended December 31, 1998 have been restated to reflect only the balance sheets, operations and cash flows of ACS prior to the merger with Micro General and to reflect ACS as the acquiror for accounting purposes. The cost of $1.3 million was allocated to the fair value of the assets acquired and liabilities assumed relating to Micro General. The results of Micro General have been included in the Company's results of operations since the merger on May 14, 1998. At December 31, 1999, FNFI owned 69.3% of the outstanding common stock of the Company (see note 10). ACS was founded in 1985 as a software development company specializing in products for the real estate industry, in particular, escrow software. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. ACS is a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. The Company generated 29%, 66% and 89% of its revenue during the years ended December 31, 1999, 1998 and 1997, respectively, from multiple servicing arrangements with FNFI and its subsidiaries. In addition, LDExchange has one customer that represents 42% of LDExchange's total revenue (26% of the Company's total revenues). In addition, as a result of the acquisition of LDExchange.com, Inc. ("LDExchange"), which closed on November 17, 1998, the Company has been able to enter the international telecommunications and Internet telephony markets, which complements the range of services offered by ACS. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General restricted common stock (1,000,000 shares). The acquisition was accounted for as a purchase and the results of operations of LDExchange have been included in the Company's results of operations since November 17, 1998. (see note 10). (b) Principles of Consolidation The accompanying financial statements include the consolidated accounts of the Company and its wholly owned subsidiaries: All significant intercompany transactions and balances have been eliminated in consolidation. 21 24 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Cash and Cash Equivalents Cash and cash equivalents include cash on deposit with banks with original maturities of three months or less. (d) Accounts Receivable The carrying amounts reported in the consolidated balance sheets for accounts receivable approximate their fair value. (e) Inventories Inventories are stated at the lower of cost or market (net realizable value) under the first-in, first-out method of accounting for inventories. (f) Property and Equipment Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over estimated useful lives which range from three to seven years. Amortization of leasehold improvements is charged to expense on a straight-line basis over the shorter of the estimated useful lives of the assets or the term of the underlying lease. (g) Capitalized Software Development Costs Software development costs incurred after the establishment of technological feasibility are capitalized and later amortized using the greater of the straight-line method or based on the estimated revenue distribution over the remaining estimated economic life of the products. Such policy results in the Company amortizing its capitalized software development costs over an estimated economic life of three to seven years. During 1998, the Company capitalized software development costs of $64,326. During 1999 and 1998, the Company amortized software development costs of $746,579 and $728,679, respectively. The Company periodically assesses the recoverability of the cost of its capitalized software development costs based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of capitalized software development costs has occurred at December 31, 1999. (h) Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired is the excess of the purchase price paid over the fair value of the net assets of the acquired company at the date of acquisition. Cost in excess of net assets acquired is amortized on a straight-line basis over 5 years. The Company periodically assesses the recoverability of its cost in excess of net assets acquired based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of cost in excess of net assets acquired has occurred at December 31, 1999 (see note 10). (i) Capital Lease Obligations All capital lease obligations are with affiliates and are recorded at the present value of the minimum lease payments at the beginning of the lease terms. The monthly payments under the leases are allocated between a reduction of the obligation and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the obligation. In 1999, the Company sold approximately $1.5 million in capital assets and entered into a five year lease on those assets. This transaction was entered into with an affiliate of the Company. 22 25 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (j) Revenue Recognition The Company has adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," for the years ended December 31, 1999, 1998 and 1997. Under SOP 97-2, if a software sales arrangement does not require significant modification or customization of the software, revenue from the sale of the software is recognized when evidence of an arrangement exists, the fee is fixed and determinable, the license agreement has been delivered and collection of any resulting receivable is probable. In December 1998, the AICPA issued SOP 98-9, which amends paragraphs of SOP 97-2 to require recognition of revenue using the residual method under certain circumstances, and is effective for fiscal years beginning after March 15, 1999. The Company does not expect the adoption of this SOP to have a material impact on the Company's consolidated financial statements. Revenue from the sales of hardware and other products is recognized when delivery has occurred, the fee is fixed and determinable and collection of any resulting receivable is probable. Revenue from maintenance, servicing and consulting is recognized as the related services are performed. (k) Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. ("Statement") 109, "Accounting for Income Taxes." Statement 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. (l) Management Estimates The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Earnings Per Share Basic earnings per share is based on the weighted-average number of shares outstanding and excludes any dilutive effects of options and convertible securities. Diluted earnings per share gives effect to assumed conversions of potentially dilutive securities. Shares used in the earnings per share calculations for 1998 are the weighted-average shares of Micro General outstanding during 1998, assuming the shares issued in connection with the merger of ACS and Micro General were outstanding since January 1, 1998. Shares used in the earnings per share calculation for 1997 represent the shares issued to FNFI in connection with the merger of ACS and Micro General. All outstanding options and warrants (see notes 7 and 9) have been excluded from the calculations of diluted loss per share as their inclusion would be antidilutive. 23 26 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) INVENTORIES A summary of inventories follows:
1999 1998 -------- -------- Computer equipment.......................................... $313,221 $482,106 Telecommunications equipment................................ 125,507 303,098 -------- -------- $438,728 $785,204 ======== ========
(3) INCOME TAXES The income tax provision (benefit) for the years ended December 31, 1999, 1998 and 1997 consists of the following:
1999 1998 1997 ------ ------ -------- Current: Federal.............................................. $ -- $ -- $(16,528) State................................................ 4,000 2,400 (2,833) ------ ------ -------- 4,000 2,400 (19,361) ------ ------ -------- Deferred: Federal.............................................. -- -- (33,740) State................................................ -- -- (11,025) ------ ------ -------- -- -- (44,765) ------ ------ -------- $4,000 $2,400 $(64,126) ====== ====== ========
The provision for income taxes differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to the loss before income taxes as a result of the following:
1999 1998 1997 ----------- ----------- -------- Computed "expected" tax benefit............... $(2,429,789) $(1,647,097) $(93,183) State taxes, net of Federal income tax benefit..................................... (277,273) (62,681) (9,008) Amortization of cost in excess of net assets acquired.................................... 835,347 177,633 33,461 Nondeductible expenses........................ 21,126 29,505 4,604 Net operating loss utilized by affiliated group....................................... 260,304 781,366 -- Valuation allowance........................... 1,594,285 723,674 -- ----------- ----------- -------- $ 4,000 $ 2,400 $(64,126) =========== =========== ========
24 27 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The deferred tax assets and liabilities at December 31, 1999 consist of the following:
DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ------------ ------------ Book over tax provision for bad debts...................... $ 902,489 $ -- Reserve for notes receivable............................... 1,792,548 -- Reserves and accruals not recognized for income tax purposes................................................. 394,002 -- Net operating loss carryover............................... 2,165,073 -- Acquired assets adjustment to fair value................... -- 208,657 Other liabilities.......................................... -- 300,656 ----------- -------- 5,254,112 509,313 Valuation allowance........................................ (5,106,525) -- ----------- -------- $ 147,589 $509,313 =========== ========
The deferred tax assets and liabilities at December 31, 1998 consist of the following:
DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ------------ ------------ Book over tax provision for bad debts...................... $ 193,570 $ -- Reserves and accruals not recognized for income tax purposes................................................. 218,218 -- Acquired assets adjustment to fair value................... 919,402 -- Net operating loss carryover............................... 2,185,868 -- Other...................................................... 1,087 -- Accelerated depreciation................................... -- 2,482 Acquired assets adjustment to fair value................... -- 365,149 ----------- -------- 3,518,145 367,631 Valuation allowance........................................ (3,512,240) -- ----------- -------- $ 5,905 $367,631 =========== ========
Statement 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has established a valuation allowance of $1,956,416 principally associated with net operating loss carryforwards and other deferred tax assets recorded from acquisitions and an additional allowance of $3,150,109 to cover the majority of the other deferred tax assets. Any tax benefits subsequently recognized for deferred tax assets related to these acquisitions will be allocated to goodwill. ACS was included as an affiliate in the consolidated income tax returns of FNFI through mid-November 1998. Prior to May 1998, ACS paid taxes or received such tax benefits as it contributed to the consolidated tax position of FNFI. Micro General was included as an affiliate in the consolidated income tax returns of FNFI from May 14, 1998 through mid-November 1998. FNFI utilized $3,232,207 of losses generated by the Company during this period for which Micro General will not be reimbursed by FNFI. The Company has available Federal and state net operating loss carryforwards of $6,146,828 expiring in years 2000 to 2018 and $1,288,090 expiring in years 2000 through 2003, respectively. 25 28 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) PROPERTY AND EQUIPMENT A summary of property and equipment follows:
1999 1998 ---------- ---------- Telecommunications equipment................................ $4,963,018 $1,557,150 Computer equipment.......................................... 810,525 1,158,642 Furniture and fixtures...................................... 1,704,635 605,864 Office equipment............................................ 197,673 59,571 Leasehold improvements...................................... 453,991 232,956 ---------- ---------- 8,129,842 3,614,183 Less accumulated depreciation and amortization.............. 1,090,984 293,178 ---------- ---------- $7,038,858 $3,321,005 ========== ==========
(5) COMMITMENTS AND CONTINGENCIES (a) Lease Commitments The Company leases facilities and equipment under various leases. Future minimum noncancelable lease commitments, due primarily to affiliates, are as follows: Year ending December 31: 2000...................................................... $1,586,621 2001...................................................... 1,361,712 2002...................................................... 1,281,892 2003...................................................... 1,240,241 2004...................................................... 1,123,535 Thereafter.................................................. 1,693,804 ---------- Total minimum lease payments................................ $8,287,805 ==========
Rent expense was $1,365,634, $913,059 and $238,721 for the years ended December 31, 1999, 1998 and 1997, respectively. Included in rent expense for 1999, 1998 and 1997 was $972,332, $721,515 and $235,316, respectively, paid to affiliates. (b) Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 26 29 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) RELATED PARTY TRANSACTIONS As described in note 1, the Company's primary source of revenue is fees resulting from sales and services to affiliated companies. Revenues generated from sales and services to affiliates for the years ended December 31, 1999, 1998 and 1997 are presented in the following table:
1999 1998 1997 ----------- ----------- ----------- Hardware and software sales and maintenance..... $22,390,456 $18,396,153 $ 9,885,155 Telecommunications service...................... 2,811,055 1,871,954 -- Service and license............................. 2,337,423 2,211,935 2,471,289 ----------- ----------- ----------- Total affiliated revenues............. $27,538,934 $22,480,042 $12,356,444 =========== =========== ===========
The Company has utilized funds available under the former Convertible Note Purchase Agreement, described below, to fund its operations. In addition, the Company has long-term amounts and notes payable to affiliates amounting to $5,265,408 and $16,729,411 at December 31, 1999 and 1998, respectively (see note 7). The Company also leases facilities from FNFI subsidiaries (see note 5). Additionally, the Company has a $2 million lease commitment with FNF Capital, Inc., a wholly owned subsidiary of FNFI, which is used to finance equipment purchases. As of December 31, 1999, the company had capital leases outstanding with FNF Capital Inc. of $2 million, of which $207,002 represented a utilization of this $2 million lease commitment. On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an accrued interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time that escrow.com has sufficient funding in place to reasonably ensure the payment of the note. While the Company has no equity interest in escrow.com at December 31, 1999, the 15.0 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. At December 31, 1999, escrow.com had 3,891,304 shares outstanding. Assuming exercise of the warrants, the Company would have a 79.4% ownership in escrow.com. Escrow.com is incurring substantial losses and will need to raise substantial additional funds in order to continue its operations. The Company's potential ownership in escrow.com may be substantially diluted as escrow.com issues additional shares to raise the necessary capital. The Company has a 50% ownership in Real EC, a joint venture developed by the Company and an independent party. Real EC is a real estate electronic commerce network. The Company accounts for it's investment in Real EC on the equity method, and at December 31, 1999 the Company had recorded on its books an investment in joint venture of $638,938. Operating results for 1999 were not material. (7) NOTES PAYABLE On August 1, 1996, Micro General entered into a $3 million financing agreement which provided additional funding, primarily for the retirement of bank debt, operations and to fund Micro General's 27 30 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) development of a series of high level security postage meters designed to comply with the new United States Postal Service proposed regulations. Two 9.5%, five-year convertible notes were issued, one in the amount of $1 million and one in the amount of $2 million, and issued, respectively, to Cal West Service Corporation ("Cal West"), a subsidiary of FNFI, which owned 38% of the outstanding Micro General common stock when the Cal West note was issued and Dito Caree L.P. Holding ("Dito Caree"), which owned 5% of the outstanding common stock of Micro General when the Dito Caree note was issued. Repayment of the notes was on an interest-only basis for the first two years, with principal and interest payments for the remaining three years of the term. The debt, secured by the assets of Micro General, was convertible into 1,344,438 shares of the Company's common stock at prices ranging from $2.00 to $2.50 per share. At December 31, 1998, there was $3,000,000 outstanding on these notes. These notes were converted to common stock on December 15, 1999. On November 25, 1997, Micro General entered into a $600,000 financing agreement, which provided additional funding to be used by Micro General for operating cash flow purposes. Two 9.0% notes were issued in the amount of $200,000 and $400,000, to Cal West and Dito Caree, respectively. Interest on the two notes was to be paid quarterly. The Company had the right to prepay all or a portion of the interest and principal due on the notes at any time prior to the original due date of May 31, 1998. The amount payable under the note payable to Dito Caree was refinanced in connection with the Convertible Note Purchase Agreement discussed below. In conjunction with these short-term notes, Micro General issued to the note holders, two detachable warrant certificates, one in the amount of 50,000 shares to Cal West and one in the amount of 100,000 shares to Dito Caree, giving the note holders the right to purchase 150,000 shares of the Company's common stock at $1.50 per share. The warrants can be exercised at any time between November 25, 1997 and November 25, 2002. No warrants have been exercised by the holders. The outstanding amount on this note at December 31, 1998 was $2,000,000. This note was converted into equity in 1999 as described below. Micro General entered into a third financing agreement to provide additional funding to be used by Micro General for operational cash flow purposes. On April 8, 1998, two 9.0% notes were issued, one in the amount of $250,000 and one in the amount of $500,000, to Cal West Service Corporation and Dito Caree, respectively. Interest on the notes was to be paid quarterly. Micro General had the right to prepay all or a portion of the interest and principal due on the notes at any time prior to the due date of October 31, 1998. The amount payable under the note payable to Dito Caree was refinanced in connection with the Convertible Note Purchase Agreement discussed below. In conjunction with the notes, Micro General issued to the note holders, two detachable warrant certificates, one in the amount of 62,500 shares to Cal West and one in the amount of 125,000 shares to Dito Caree, giving the note holders the right to purchase 187,500 shares of the Company's common stock at $1.50 per share. The warrants can be exercised at any time between April 8, 1998 and April 8, 2003. The amount outstanding at December 31, 1998 was $250,000. These notes were converted into equity in 1999 as described below. On October 27, 1998, the Company entered into a $15 million Convertible Note Purchase Agreement with FNFI, which replaced a $5 million financing agreement between the Company and a subsidiary of FNFI dated May 14, 1998, entered into in connection with the merger with ACS. Two 10.0%, five-year convertible notes were issued, one in the amount of $14.1 million and one in the amount of $900,000, held by Cal West and Dito Caree, respectively. Interest on these notes was to be paid quarterly. The entire unpaid balance of the notes, including principal and accrued but unpaid interest, was due and payable on October 27, 2003. The note holders had the right to convert all or a portion of the principal to be repaid on the payment date into shares of the Company's 28 31 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock at the conversion price. The debt was secured by the assets of the Company and was convertible into 3,133,333 shares of the Company's $.05 par value common stock at a price of $4.50 per share. The note holders retain the right to acquire shares until note maturity on October 27, 2003. On December 15, 1999 the holders of $18.0 million of the Company's convertible debt, which was the entire amount of the Company's convertible debt outstanding on that date, exercised their conversion rights and exchanged the debt for newly issued shares of the Company's common stock. There were 4,677,771 shares of common stock issued at an average conversion price of approximately $3.85 per share. Also on December 15, 1999, the Company entered into with FNFI a new $5,265,000 five-year convertible note purchase agreement having an accrued interest rate of ten percent, payable quarterly. During 1999, the Company had exceeded the borrowings available under its notes payable. With conversion of these notes on December 15, 1999, the Company's borrowing arrangements no longer existed. The Company negotiated this new note to address the amounts borrowed in excess of the note limits. The new note is convertible into common shares of the Company at a rate of $10.00 per share at any time during the five-year term. FNFI also received warrants to purchase 250,000 shares of the Company's common stock at a price of $10.00 per share. In 1999, the Company recognized a $280,000 expense in regard to these warrants. On December 22, 1999, the Company entered into a one-year $5.0 million revolving line of credit with Imperial Bank, guaranteed by FNFI. The interest rate under the credit line will be, at the Company's election, either the Imperial Bank Prime Rate or 1.4 percentage points over LIBOR. At December 31, 1999, the Company had not borrowed any funds under this line of credit and was not in default of any of the Imperial loan covenants. The carrying value of notes payable to affiliates approximates fair value at December 31, 1999 due to the fact that the interest rates paid on the notes payable to affiliates approximate market rates for similar notes. Principal maturities of the notes payable and long-term debt at December 31, 1999 are as follows: 2000........................................................ $ -- 2001........................................................ -- 2002........................................................ -- 2003........................................................ -- 2004........................................................ 5,265,408 ---------- $5,265,408 ==========
29 32 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) SEGMENT INFORMATION The Company's Consolidated Financial Statements as of December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998 include three reportable segments. Prior to 1998, the Company consisted only of ACS. As of and for the year ended December 31, 1999:
CORPORATE AND POSTAGE METER AND SCALE ACS LDEXCHANGE DIVISION TOTAL ----------- ----------- ------------- ----------- Total revenue....................... $34,489,244 $59,610,796 $ 986,811 $95,086,851 =========== =========== =========== =========== Operating income (loss)............. $ 424,154 $(2,431,095) $(3,180,035) $(5,186,976) Interest expense, net............... (1,247,512) (274,590) (391,172) (1,913,274) ----------- ----------- ----------- ----------- Loss before income taxes.......... $ (841,255) $(2,729,977) $(3,571,207) $(7,142,439) =========== =========== =========== =========== Depreciation and amortization....... $ 1,705,304 $ 371,122 $ 2,235,264 $ 4,311,690 =========== =========== =========== =========== Assets.............................. $ 6,147,902 $ 3,305,956 $17,389,256 $26,843,114 =========== =========== =========== ===========
As of and for the year ended December 31, 1998:
CORPORATE AND POSTAGE METER AND SCALE ACS LDEXCHANGE DIVISION TOTAL ----------- ---------- ------------- ----------- Total revenue........................ $25,938,067 $7,203,340 $ 874,657 $34,016,064 =========== ========== ========== =========== Operating loss....................... $(3,192,833) $ (97,962) $ (886,820) $(4,177,615) Interest expense, net................ (398,375) 2,462 (270,875) (666,788) ----------- ---------- ---------- ----------- Loss before income taxes........... $(3,591,208) $ (95,500) $(1,157,695) $(4,844,403) =========== ========== ========== =========== Depreciation and amortization........ $ 1,099,773 $ 18,084 $ 306,102 $ 1,423,959 =========== ========== ========== =========== Assets............................... $13,837,703 $2,401,050 $6,841,308 $23,080,061 =========== ========== ========== ===========
The activities of the three reportable segments include the following: - ACS: A computer hardware and software development sales and support division and a telecommunication division, which provides comprehensive data network systems support, including selling computer hardware and software products and developing integrated title and escrow computer applications for the title and real estate related industries. $27.5 million of the ACS revenues were derived from FNFI. Also provides telecommunications hardware and long-distance reselling, technical and consulting services, and Internet access and services. The long-distance telecommunications services portion of this business was transferred to LDExchange during 1999. - LDExchange: A provider of international telecommunication services with access to the international long-distance market for the rapidly growing wholesale telecommunications service sector. LDExchange had sales of $59.6 million in 1999 and $7.2 million in 1998. $25.0 million of the LDExchange revenues were derived from one customer. - Micro General: Corporate and the postage meter and scale division, which was deemphasized as a product concurrent with the ACS merger. 30 33 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There were no intersegment sales during the years ended December 31, 1999 and 1998. In 1999, the ACS long-distance telecommunications business was transferred to LDExchange. (9) EMPLOYEE BENEFIT PLANS Employee benefits include an employee stock purchase plan, four stock option plans and a 401(k) plan. In 1998, the Company's Board of Directors approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, there are 800,000 shares of the Company's common stock available for purchase at current market prices by Company employees who meet certain vesting requirements. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. In 1987, stockholders also approved the adoption of a Stock Option Plan ("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may grant stock options to certain key employees and nonemployee directors or officers. The number of shares issuable under the 1987 Option Plan is 220,000 shares of common stock at not less than fair market value on the date of grant. All options granted become exercisable at the discretion of the Board of Directors and expire five years from the date of grant. Options that lapse or are canceled prior to exercise are added to the shares authorized for future grants. The 1987 Option Plan expired in 1991, but was renewed by stockholders in 1993. There were no remaining shares available for grant at December 31, 1999 under the 1987 Option Plan. In 1995, stockholders approved the adoption of the 1995 Stock Option Plan ("1995 Option Plan"). The number of shares reserved for issuance under the 1995 Option Plan is 132,000 shares of common stock. All 132,000 shares were available for grant at December 31, 1999 under the 1995 Option Plan. During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,500,000 shares of common stock, plus an additional 300,000 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1998 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, nonemployee directors and officers, consultants and other service providers. The Board of Directors, or a committee consisting of two or more members of the Board of Directors, will administer the 1998 Plan (the "Administrator"). The Administrator will have the full power and authority to interpret the 1998 Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to grants under the 1998 Plan, and adopt, amend and rescind rules relating to the 1998 Plan. The term of options may not exceed 10 years from the date of grant (5 years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all 31 34 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Administrator. The maximum number of shares for which options may be granted to any one person during any one calendar year under the 1998 Plan is 1,500,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 1,500,000. The aggregate fair market value of the common stock (determined as of the date of grant) with respect to incentive stock options granted under the 1998 Plan or any other stock option plan of the Company that become exercisable for the first time by any optionee during any calendar year may not exceed $100,000. At December 31, 1999, 782,500 shares were available for grant under the 1998 Option Plan. In 1999, 50,000 shares were issued under the Plan. In 1999, the Board of Directors approved the adoption of the 1999 Stock Incentive Plan ("1999 Plan"). The 1999 Plan authorizes up to 2,000,000 shares of common stock for issuance under the terms of the 1999 Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1999 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, nonemployee directors and officers, consultants and other service providers. The 1999 Plan will be administered by the Board of Directors or a committee consisting of two or more members of the Board of Directors (the "Administrator"). The Administrator will have the full power and authority to interpret the 1999 Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to grants under the 1999 Plan, and adopt, amend and rescind rules relating to the 1999 Plan. The term of options may not exceed 10 years from the date of grant (5 years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Administrator. The maximum number of shares for which options may be granted to any one person during any one calendar year under the 1999 Plan is 500,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 2,000,000. At December 31, 1999, 1,030,450 shares were available for grant under the 1999 Option Plan. 32 35 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Company's stock option activity and related information for the years ended December 31, 1999 and 1998 is as follows. Prior to 1998, the Company's stock option activity was immaterial.
1999 1998 ---------------------- ---------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE --------- --------- --------- --------- Outstanding at beginning of year........ 1,438,916 $4.35 227,166 $1.93 Granted............................... 2,628,050 4.00 1,226,250 4.80 Exercised............................. (211,201) 2.79 -- -- Canceled.............................. (392,669) 4.55 (14,500) 1.86 --------- --------- Outstanding at end of year.............. 3,463,096 4.25 1,438,916 4.35 ========= ===== ========= ===== Options exercisable at year-end......... 2,241,143 $4.10 985,750 $4.28 ========= ===== ========= =====
The following table sets forth options outstanding and exercisable by price range at December 31, 1999:
OPTIONS OUTSTANDING - ------------------------------------------------------ OPTIONS EXERCISABLE WEIGHTED- ----------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES 12/31/99 LIFE PRICE 12/31/99 PRICE - --------------- ----------- ----------- --------- ----------- --------- $1.25 - $3.00 410,667 9.08 $2.83 402,334 $2.84 $3.13 - $3.88 1,147,713 9.30 3.62 740,392 3.63 $4.00 - $4.81 922,333 8.85 4.71 772,661 4.76 $4.88 - $9.99 982,383 9.88 5.16 326,040 5.16 ------------- --------- ---- ----- --------- ----- $1.25 - $9.94 3,463,096 9.32 $4.25 2,241,437 $4.10 ============= ========= ==== ===== ========= =====
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"), and related Interpretations in accounting for its employee stock options. As discussed below, in management's opinion, the alternative fair value accounting provided for under Statement 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net earnings and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions. The risk-free interest rate used in the calculation is the rate on the date the options were granted. The risk-free interest rate used for options granted during 1999 and 1998 was 6.35% and 5.7%, respectively. Volatility factors for the expected 33 36 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) market price of the common stock of 53.2% and 50% were used for options granted in 1999 and 1998, respectively. No dividends are paid by the Company; as a result, its expected dividend yield is 0.0%. A weighted-average expected life of 9.32 years was used in all years for 1999, and 7 years was used in all years, for 1998. The impact of applying the provisions of Statement 123 on the consolidated results of operations is not material for the years ended December 31, 1999 and 1998. The Company also offers a 401(k) profit sharing plan, a qualified voluntary contributory savings plan, available to substantially all employees. Eligible employees may contribute up to 15% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company may elect to make matching contributions. The Company has historically not made matching contributions. (10) ACQUISITIONS As discussed in note 1, Micro General and ACS merged in May 1998 and LDExchange was acquired in November 1998. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Micro General/ACS merger were as follows: Tangible assets acquired at fair value...................... $ 305,000 Cost in excess of net assets acquired....................... 5,709,000 Liabilities assumed at fair value........................... (4,717,000) ----------- Total purchase price.............................. $ 1,297,000 ===========
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the LDExchange acquisition were as follows: Tangible assets acquired at fair value...................... $ 1,592,000 Cost in excess of net assets acquired....................... 3,707,000 Liabilities assumed at fair value........................... (2,199,000) ----------- Total purchase price.............................. $ 3,100,000 ===========
Selected unaudited pro forma combined results of operations for the years ended December 31, 1998 and 1997, assuming the Micro General/ACS merger and LDExchange acquisitions occurred on January 1, 1998 and 1997, respectively, are presented as follows:
YEAR ENDED DECEMBER 31 -------------------------- 1998 1997 ----------- ----------- Total revenue............................................. $60,565,000 $17,049,000 Net loss.................................................. (5,225,549) (2,544,931) Loss per share -- basic and diluted....................... (.69) (.34)
On March 22, 1999, the Company acquired Interactive Associates, Inc., a privately held distributor of computer telephony hardware and services. This acquisition provided for the purchase of 100% of the common stock of Interactive Associates, Inc. in exchange for 50,000 shares of Micro General common stock, subject to certain conditions, including an earn out provision for up to an additional 50,000 shares. The closing price of the Company common stock on March 22, 1999, according to the NASDAQ Bulletin Board, was $3.88. This acquisition was accounted for using the purchase method. The financial position and results of operation of Interactive are not material to the Company. 34 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. THROUGH 13. Within 120 days after the close of its fiscal year, the Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended, which will include the election of directors, the report of compensation committee on annual compensation, certain relationships and related transactions and other business. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following is a list of the Consolidated Financial Statements of Micro General Corporation and its subsidiaries included in Item 8 of Part II. Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules. The following is a list of financial statement schedules filed as part of this annual report on Form 10-K. Schedule II: Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) The following exhibits are incorporated by reference or are set forth on pages to this Form 10-K:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Articles of Incorporation of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 3.11 Restated Articles of Incorporation of the Company -- Article Fourth of the Certificate of Incorporation, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3.2 Bylaws of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 10 Material Contracts 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987, incorporated by reference to Exhibit 10.1 from the Company's Annual Report on Form 10-K for the year 1984; Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987, incorporated by reference to Exhibit 10 from the Company's Annual Report on Form 10-K for the year ended December 28, 1986. 10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, incorporated by reference from Form S-8, registration number 333-64289.
35 38
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1.2 1999 Stock Incentive Plan incorporated by reference from Form S-8, registration number 333-95913. 10.18 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.19 Convertible Note Purchase Agreement between Micro General Corporation and Dito Caree L.P. dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20 Loan Agreement and Agreement to issue Detachable Warrants between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated November 25, 1997, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems, Inc., a California Corporation, a Delaware corporation, Micro General Corporation, a Delaware corporation and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.23 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated October 27, 1998, incorporated by reference from the Company's report on Form 10-K for the year ended December 1998. 10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and among Micro General Corporation, a California corporation, LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and Europa Telecommunications, incorporated by reference from the Company's report on Form 8-K dated as of November 23, 1998. 10.25 Inducement Agreement and Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes, by and between John Snedegar, Cal West Service Corporation and Micro General Corporation, dated March 30, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998. 10.26 Employment Agreement effective as of April 15, 1999 between Micro General Corporation and John Snedegar, the President and Chief Executive Officer of the Corporation 10.27 Intellectual Property Transfer, Right of First Refusal, and Warrant Purchase Agreement by and between Micro General Corporation and escrow.com, Inc. dated October 1, 1999. 10.28 Promissory Note payable to Micro General Corporation from escrow.com, Inc. in the amount of $4,500,000 dated October 1, 1999. 10.29 Convertible Note Purchase Agreement by and between Micro General Corporation and Cal West Service Corporation dated as of December 15, 1999 10.30 Credit Agreement and Promissory Note in an amount not to exceed $5,000,000 by and between Micro General Corporation and Imperial Bank entered into on December 22, 1999. 21 List of Subsidiaries 23.1 Consent of KPMG LLP 27 Financial Data Schedule
(b) Reports on Form 8-K. The Company filed reports on Form 8-K during the fourth quarter of 1999 as follows: None 36 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICRO GENERAL CORPORATION, A DELAWARE CORPORATION By: /s/ JOHN SNEDEGAR ------------------------------------ John Snedegar Chief Executive Officer President (Principal Executive Officer) Date: March 24, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ PATRICK F. STONE Chairman of the Board March 28, 2000 - --------------------------------------------------- Patrick F. Stone /s/ WILLIAM P. FOLEY Director March 28, 2000 - --------------------------------------------------- William P. Foley /s/ CARL A. STRUNK Director March 28, 2000 - --------------------------------------------------- Carl A. Strunk /s/ RICHARD H. PICKUP Director March 28, 2000 - --------------------------------------------------- Richard H. Pickup /s/ JOHN SNEDEGAR Director March 28, 2000 - --------------------------------------------------- John Snedegar /s/ DWAYNE WALKER Director March 28, 2000 - --------------------------------------------------- Dwayne Walker /s/ DALE W. CHRISTENSEN Chief Financial Officer March 28, 2000 - --------------------------------------------------- (Principal Financial and Dale W. Christensen Accounting Officer)
37 40 SCHEDULE II MICRO GENERAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
YEARS ENDED DECEMBER 31, ----------------------------------------------------- ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND AMOUNTS BALANCE AT CLASSIFICATION OF PERIOD EXPENSES WRITTEN-OFF END OF -------------- ---------- ---------- ----------- ---------- Year ended December 31, 1999: Allowance for doubtful accounts........... $485,936 $2,258,585 $478,920 $2,265,601 Year ended December 31, 1998: Allowance for doubtful accounts........... 321,844 247,437 83,345 485,936 Year ended December 31, 1997: Allowance for doubtful accounts........... 314,419 63,683 56,258 321,844
38 41 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Articles of Incorporation of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 3.11 Restated Articles of Incorporation of the Company -- Article Fourth of the Certificate of Incorporation, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3.2 Bylaws of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 10 Material Contracts 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987, incorporated by reference to Exhibit 10.1 from the Company's Annual Report on Form 10-K for the year 1984; Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987, incorporated by reference to Exhibit 10 from the Company's Annual Report on Form 10-K for the year ended December 28, 1986. 10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, incorporated by reference from Form S-8, registration number 333-64289. 10.1.2 1999 Stock Incentive Plan incorporated by reference from Form S-8, registration number 333-95913. 10.18 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.19 Convertible Note Purchase Agreement between Micro General Corporation and Dito Caree L.P. dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20 Loan Agreement and Agreement to issue Detachable Warrants between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated November 25, 1997, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems, Inc., a California Corporation, a Delaware corporation, Micro General Corporation, a Delaware corporation and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.23 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated October 27, 1998, incorporated by reference from the Company's report on Form 10-K for the year ended December 1998. 10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and among Micro General Corporation, a California corporation, LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and Europa Telecommunications, incorporated by reference from the Company's report on Form 8-K dated as of November 23, 1998.
42
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.25 Inducement Agreement and Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes, by and between John Snedegar, Cal West Service Corporation and Micro General Corporation, dated March 30, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998. 10.26 Employment Agreement effective as of April 15, 1999 between Micro General Corporation and John Snedegar, the President and Chief Executive Officer of the Corporation 10.27 Intellectual Property Transfer, Right of First Refusal, and Warrant Purchase Agreement by and between Micro General Corporation and escrow.com, Inc. dated October 1, 1999. 10.28 Promissory Note payable to Micro General Corporation from escrow.com, Inc. in the amount of $4,500,000 dated October 1, 1999. 10.29 Convertible Note Purchase Agreement by and between Micro General Corporation and Cal West Service Corporation dated as of December 15, 1999 10.30 Credit Agreement and Promissory Note in an amount not to exceed $5,000,000 by and between Micro General Corporation and Imperial Bank entered into on December 22, 1999. 21 List of Subsidiaries 23.1 Consent of KPMG LLP 27 Financial Data Schedule
EX-10.26 2 MATERIAL CONTRACT 1 EXHIBIT 10.26 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of April 15,1999 (the "Effective Date"), by and between MICRO GENERAL CORPORATION, a Delaware corporation (the "Company"), and JOHN SNEDEGAR (the "Employee"), and supersedes any and all prior employment agreements or understandings entered into between the parties; provided, however, this Agreement shall not supersede or otherwise affect (i) any Company options or other securities previously granted the Employee or (ii) the terms and conditions of that certain Inducement Agreement, dated August 11, 1998. In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Employment and Duties. Subject to the terms and conditions of this Agreement, the Company employs the Employee to serve in an executive and managerial capacity as the President and Chief Executive Officer of the Company, and the Employee accepts such employment and agrees to perform such reasonable responsibilities and duties commensurate with the aforesaid positions as lawfully directed by the Company's Board of Directors (the "Board"), or as set forth in the Bylaws of the Company. 2. Term. The term of this Agreement shall commence on the Effective Date and shall continue for a period of three (3) years ending April 14, 2002, subject to prior termination as set forth in Section 7, below (the "Term"). The Term may be extended at any time upon mutual agreement of the parties. 3. Salary. During the Term, the Company shall pay the Employee a minimum base annual salary of Two Hundred Fifty Thousand Dollars ($250,000), payable at the times and in the manner dictated by the Company's standard payroll policies (the "Base salary"). The Base Salary shall be periodically reviewed and increased at the discretion of the Board to reflect, among other matters, cost of living increases and performance results. 4. Other Compensation and Fringe Benefits. During the Term, as additional compensation, the Employee shall be entitled to receive and participate in the following: (a) Incentive Bonus. A year-end bonus equal to ten percent (10%) of the "audited pre-tax profits" of the Company for each calendar year during the Term of this Agreement (the "Incentive Bonus"). For calendar year 1999 only, the Incentive Bonus calculation shall be pro-rated for the period from the Effective Date through December 31, 1999, but shall in no event be less than One Hundred Fifty Thousand Dollars ($150,000). For calendar year 2002 only, he Incentive Bonus calculation shall be pro-rated for the period from January 1, 2002 through the end of the Term. As used herein, "audited pre-tax profits" shall mean the audited pre-tax profits of the Company determined by the Company's outside accounting firm in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis and will include the results of the Company and its subsidiaries on a consolidated basis. In addition, "audited pre-tax profits" shall be determined only after the amount of the Employee's year-end Incentive Bonus has been taken into account by the Company and shall be adjusted by deduction of supplementary bonuses and/or advances paid to other "key" employee's of the Company for the applicable year (which employees shall be designated and agreed upon by the Employee and the Board). The accrual of the Incentive Bonus shall commence as of the Effective Date. Although the Incentive Bonus is deemed earned on December 31 of the year for which such bonus is being calculated, if the Employee's employment with the Company is terminated pursuant to Section 7 below, whether voluntarily or involuntarily, prior to December 31 of the year to which the Incentive 2 Bonus relates, then the Company's obligation to pay the Employee all or a portion of the Incentive Bonus for the year in which termination occurs shall be governed by the appropriate provision of Section 7 below; provided, however, that expiration of the Term shall not constitute a voluntary or involuntary termination of employment. Any Incentive Bonus due for a given year of the term shall be paid no later than April 15th of the following year (including no later than April 15, 2003 for the pro-rated bonus earned in 2002); and (b) Transaction Bonus. In connection with the sale or transfer to a person or entity other than Fidelity National Financial Inc. ("FNFI") or its "affiliates" (as defined in Section 21 below) of (i) all or a majority of the outstanding capital stock or other equity interest of any subsidiary of the Company; or (ii) all or substantially all of the assets of any material division of the Company or any of its subsidiaries, the Company shall pay the Employee a bonus (the "Transaction Bonus") equal to five percent (5%) of "Net Transaction Proceeds." For purposes of this subsection (b), the term "Net Transaction Proceeds" shall mean (A) the value of the consideration actually received by the Company in connection with such transaction, less (B) the sum of (i) the Company's cost basis, as determined by the Company's outside accounting firm in accordance with GAAP, in the securities or assets being sold (the "Company's Investment"), plus (ii) an amount equal to a ten percent (10%) cumulative annualized rate of return on the Company's Investment. Notwithstanding anything to the contrary above, the Transaction Bonus shall not apply to a sale or transfer by the Company of the assets comprising the postal meter and/or postal scale division of the Company. The Transaction Bonus shall be paid to the Employee within ninety (90) days of the later of (i) the closing of the applicable transaction; or (ii) the date on which the Company actually receives at least eighty percent (80%) of the total consideration to be received in connection with such transaction. In addition, the Transaction Bonus will be due and payable to the Employee notwithstanding the termination of this Agreement if (i) this Agreement is terminated (a) as a result of the failure by the Company to extend the Term, (b) after the first full year of this Agreement, by either the Company pursuant to Section 7(b) or the Employee for Good Reason pursuant to Section 7(b), (c) as a result of the Employee's disability or death pursuant to Sections 7(c) and 7(d), respectively and (ii) prior to such termination, the transaction giving rise to the Transaction Bonus was reduced to a definitive written agreement and the transaction closes within six (6) months of the date of termination in substantial accordance with the terms of the written agreement. Moreover, if this Agreement is terminated by the Employee under Section 7(b) for any reason other than Good Reason, then the Transaction Bonus will be due and payable to the Employee notwithstanding the termination of this Agreement, provided the transaction in question formally closed prior to the date of termination. (c) Options. A grant on the Effective Date under the Company's Executive Stock Option Plan of options to purchase Fifty Thousand (50,000) shares of the Company's Common Stock. The exercise price for such options shall be the closing price on the Effective Date of the Company's publicly traded Common Stock. In addition, all such options shall vest options the Effective Date, after which the Employee shall have ten (10) years to exercise the options, subject to any terms to the contrary in the Company's Executive Stock Option Plan; and (d) Standard Benefits. The standard Company benefits enjoyed by the Company's other senior executives; and (e) Club Membership. Payment by the Company of the Employee's membership dues in a social and/or recreational club as deemed necessary and appropriate by the Employee (and pre-approved by the Company) to maintain various business relationships on behalf of the Company; 3 provided, however, that the Company shall not be obligated to pay for any of the Employee's personal purchases and expenses at such club; and (f) Medical Insurance. Provision by the Company during the Term and any extensions thereof to the Employee and his dependents of the medical and other insurance coverage provided by FNFI to its senior executives; and (g) Life Insurance. The procurement of insurance on the Employee's life in the amount of one million dollars ($1,000,000). The premiums of such policy shall be paid by the Company and the Employee shall be entitled, in his sole discretion, to designate the beneficiary of such policy. At the Employee's request at the end of the Term, the Company will assign the insurance policy to the Employee and the Employee shall have no obligation to the Company in respect of premiums previously paid. The Company shall deduct from all compensation payable under this Agreement to the Employee any taxes or withholdings the Company is required to deduct pursuant to applicable state and federal laws or by mutual agreement between the parties. 5. Vacation. For and during each year of the Term and any extensions thereof, the Employee shall be entitled to reasonable paid vacation periods consistent with his position with the Company and in accordance with the Company's standard policies, or such greater entitlement as the Board may approve. In addition, the Employee shall be entitled to such holidays consistent with the Company's standard policies or such greater entitlement as the Board may approve. 6. Expense Reimbursement. In addition to the compensate and benefits provided herein, the Company shall, upon receipt of appropriate documentation, reimburse the Employee each month for his reasonable travel, lodging, entertainment, promotion and other ordinary and necessary business expenses. The arrangement set forth in this Section 6 is intended to constitute an accountable plan within the meaning of Section 162 of the Internal Revenue Code, as amended (the "Code"), and the accompanying regulations, and the Employee agrees to comply with all reasonable guidelines established by the Company from time to time to meet the requirements of Section 162 of the Code and the accompanying regulations. 7. Termination. (a) For Cause. Notwithstanding anything to the contrary contained herein, the Company may terminate this Agreement immediately for "cause" upon written notice to the Employee, in which event the Company shall be obligated to pay the Employee that portion of the Base Salary due him through the date of termination, and accrued and unpaid expense reimbursement pursuant to Section 6 hereof. For purposes of this Agreement, "cause" shall mean (i) a material breach by the Employee of this Agreement, which breach is not cured within thirty (30) days after written notice thereof from the Company to the Employee; (ii) the repeated failure of the Employee to comply with the Company's lawful corporate policies to the extent set forth in writing; (iii) misconduct, dishonesty, insubordination, or any other act by the Employee that in any way has a direct and substantial adverse effect on the Company's business or reputation, or its relationship with its customers or employees, including, without limitation (a) the use of alcohol such as to materially interfere with the Employee's obligations hereunder, (b) the use of illegal drugs, or (c) conviction of a felony or of any crime involving moral turpitude or theft; or (iv) the failure by the Employee to comply with applicable laws or governmental regulations pertaining to his employment hereunder which non-compliance has a material adverse effect on the Company. 4 (b) Without Cause. Either party may terminate this Agreement immediately without cause by giving written notice to the other. If the Company terminates under this Section 7(b) within the first (1st) full year of this Agreement, then the Company shall only be obligated to pay to the Employee that portion of the Base Salary due him through the date of termination, and accrued and unpaid expense reimbursement pursuant to Section 6 hereof. If, after the first (1st) full year of this Agreement, the Company terminates under this Section 7(b) or if the Employee resigns for "Good Reason" (as defined below), then the Company shall pay to the Employee an amount equal to the Base Salary in effect as of the date of termination multiplied by the greater of (A) the number of years (including partial years) remaining in the Term, or (B) the number two (2); (ii) any pro-rated Incentive Bonus earned by the Employee through the date of termination; (iii) any Transaction Bonus due the Employee in accordance with the terms of Section 4(b); and (iv) accrued and unpaid expense reimbursement pursuant to Section 6 hereof Such payment shall be made in a lump sum on or before the fifth (5th) day following the date of termination, or as otherwise directed by the Employee; provided, however, that the pro-rated Incentive Bonus and the Transaction Bonus, if any, shall be paid in accordance with Sections 4(a) and 4(b), respectively. For purposes of this Section 4(b), the term "Good Reason" shall mean a material and substantial reduction in the Employee's responsibilities and duties hereunder, which reduction was not preapproved in writing by the employee. If the Employee terminates under this Section 7(b) other than for Good Reason, then the Company shall only be obligated to pay the Employee (i) the Base Salary due him through the date of termination; (ii) accrued and unpaid expense reimbursement pursuant to Section 6 hereof, and (iii) any Transaction Bonus, provided the transaction in question formally closed prior to the date of termination. (c) Disability. If the Employee fails to perform his duties hereunder on account of illness or other incapacity for a period of four (4) consecutive months, then the Company shall have the right upon written notice to the Employee to terminate this Agreement without further obligation by paying the Employee (1) the Base Salary, without offset, for the remainder of the Term in a lump sum or as otherwise directed by the Employee; (ii) any pro-rated Incentive Bonus earned by the Employee through the date of termination; (iii) any Transaction Bonus due the Employee in accordance with the terms of Section 4(b); and (iv) accrued and unpaid expense reimbursement pursuant to Section 6 hereof Such payment shall be made in a lump sum on or before the fifth (5th) day following the date of termination, or as otherwise directed by the Employee; provided, however, that the pro-rated Incentive Bonus and the Transaction Bonus, if any, shall be paid in accordance with Sections 4(a) and 4(b), respectively. (d) Death. If the Employee dies during the Term, then this Agreement shall terminate immediately and the Employee's legal representatives shall be entitled to receive (i) the Base Salary through the date of death (ii) any pro-rated Incentive Bonus earned by the Employee through the date of death; (iii) any Transaction Bonus due the Employee in accordance with the terms of Section 4(b); and (iv) accrued and unpaid expense reimbursement pursuant to Section 6 hereof. Such payment shall be made in a lump sum on or before the fifth (5th) day following the date of death, or as otherwise directed by the Employee's legal representative; provided, however, that the pro-rated Incentive Bonus and the Transaction Bonus, if any, shall be paid in accordance with Sections 4(a) and 4(b), respectively. (e) Effect of Termination. Termination for any reason or for no reason shall not constitute a waiver of the Company's or the Employee's rights under this Agreement nor a release of the Employee from any obligation hereunder except his obligation to perform his day-to-day duties as an employee. The Company's payment obligations to the Employee under Section 7 shall survive any such termination. 5 8. Severance Payment. (a) The Employee may terminate his employment hereunder in the event of a if change in control of the Company," which, for purposes of this Agreement, shall be deemed to have occurred if (i) there shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger, or (y) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (ii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (iii) any "person" (such as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Company, FNFI or any "person" who, on the date hereof, is a director or officer of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, unless such "person" acquires such securities from FNFI. The Employee may only terminate this Agreement due to a change in control of the Company during the period commencing 60 days and expiring 365 days after such change in control. (b) If, after a change in control of the Company, the Company terminates the Employee's employment in breach of this Agreement or pursuant to Section 7(b), or the Employee resigns for Good Reason pursuant to Section 7(b), then: (i) the Company shall pay the Base Salary due him through the date of termination; (ii) in lieu of any further salary and bonus payments or other payments due to the Employee for periods subsequent to the date of termination, the Company shall pay, as severance to the Employee, an amount equal to the product of (A) the Employee's Base Salary in effect as of the date of termination plus the total Incentive Bonus paid or payable to the employee for the most recently ended calendar year, multiplied by (B) the number 2, such payment to be made in a lump sum on or before the fifth (5th) day following the date of termination; and (iii) the Company shall maintain in full force and effect, for the continued benefit of the Employee for the number of years (including partial years) remaining in the Term, all employee benefit plans and programs in which the Employee was entitled to participate immediately prior to the date of termination, provided that the Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Employee's participation in any such plan or program is prohibited, the Company shall, at it's expense, arrange to provide the Employee with benefits substantially similar to those which the Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is prohibited. (c) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 8 or Section 7(b), above, by seeking other employment or otherwise, nor 6 shall any compensation or other payments received by the Employee after the date of termination reduce any payments due under this Section 8 or Section 7(b), above. (d) Notwithstanding anything to the contrary herein, if any payment pursuant to this Section 8 would be a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended), such payment shall be limited to the largest portion of such payment as can be paid without being deemed a "parachute payment." 9. Non-Delegation of Employee's Rights. The obligations, rights and benefits of the Employee hereunder are personal and may not be delegated, assigned or transferred in any manner whatsoever, nor are such obligations, rights or benefits subject to involuntary alienation, assignment or transfer. 10. Confidential Information. The Employee acknowledges that 'n his capacity as an employee of the Company he will occupy a position of trust and confidence and he further acknowledges that he will have access to and learn substantial information about the Company and its "affiliates" (as defined in Section 21 below) and their respective operations that is confidential or not generally known in the industry including, without limitation, information that relates to purchasing, sales, customers, marketing, and the Company's and its affiliates' financial position and financing arrangements (the "Confidential Information"). The Employee agrees that all such Confidential Information is proprietary or confidential, or constitutes trade secrets and is the sole property of the Company and/or its affiliates. The Employee will keep confidential, and will not reproduce, copy or disclose to any other person or entity, any such Confidential Information, nor will the Employee advise, discuss with or in any way assist any other person or entity in obtaining or learning about any such Confidential Information; provided, however, that the Employee (i) shall be able to use the Confidential Information in the course of performing his duties hereunder; and (ii) may disclose any Confidential Information pursuant to any law, subpoena or regulation. Accordingly, the Employee agrees that during the Term and at all times thereafter he will not disclose, or permit or encourage anyone else to disclose, any such information, nor will he utilize any such information, either alone or with others, outside the scope of his duties and responsibilities with the Company. The term "Confidential Information" shall not include (i) any information available to the general public; or (ii) any information known by the Employee prior to the date he became a member of the Board which was obtained from a source who was not bound by a confidentiality obligation to the Company. 11. Non-Competition During Employment Term. The Employee agrees that, during the Term and any extensions thereof, he will devote substantially all his business time and effort, and give undivided loyalty, to the Company. Notwithstanding anything to the contrary in the preceding sentence, the Employee shall be entitled to (i) be on the Board of Directors of the companies that are disclosed on Schedule I hereto; and (ii) spend time on charitable and community organizations that do materially not interfere with the Employee's perfon-nance of his obligations hereunder. During the Term, the Employee will not engage in any way whatsoever, directly or indirectly (other than being on the Board of Directors of the companies set forth on Schedule I hereto), in any business that is competitive with the Company or its affiliates, nor solicit, or in any other manner work for or assist any business which is competitive with the Company or its affiliates. In addition, during the Tenn and any extensions thereof, the Employee will undertake no planning for or organization of any business activity competitive with the work he perfon-ns as an employee of the Company, and the Employee will not combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 7 12. Non-Solicitation After Employment Term. The parties acknowledge that the Employee will acquire substantial knowledge and information concerning the business of the Company and its affiliates as a result of his employment. The parties further acknowledge that the scope of business in which the Company is engaged as of the Effective Date is national and very competitive and one in which few companies can successfully compete. The solicitation of the Company's customers or employees by the Employee after this Agreement is terminated would severely injure the Company. Accordingly, for a period of one (1) year after this Agreement is terminated or the Employee leaves the employment of the Company for any reason whatsoever, the Employee agrees not to solicit any person or business that was at the time of such termination and remains a customer or prospective customer, or an employee of the Company or any of its affiliates, except for the Employee's administrative assistant. 13. Return of Company Documents. Upon termination of this Agreement, Employee shall return promptly to the Company all records and documents of or pertaining to the Company and shall not make or retain any copy or extract of any such record or document. 14. Improvements and Inventions. Any and all improvements or inventions which the Employee may conceive, make or participate in during the period of his employment, which are based upon or relate to such employment, shall be the sole and exclusive property of the Company. The Employee will, whenever requested by the Company, at the sole cost and expense of the Company, execute and deliver any and all documents which the Company shall deem appropriate in order to apply for and obtain patents for such improvements or inventions or in order to assign and convey to the Company the sole and exclusive right, title and interest in and to such improvements, inventions, patents or applications. 15. Actions. The parties agree and acknowledge that the rights conveyed by this Agreement are of a unique and special nature and that the Company will not have an adequate remedy at law in the event of a failure by the Employee to abide by its terms and conditions nor will money damages adequately compensate for such injury. It is therefore agreed between the parties that, in the event of a breach by the Employee of any of his obligations contained in this Agreement, the Company shall have the right, among other rights, to damages sustained thereby and to obtain an injunction or decree of specific performance from any court of competent jurisdiction to restrain or compel the Employee to perform as agreed herein. The Employee agrees that this Section 14 shall survive the termination of his employment and he shall be bound by its ten-ns at all times subsequent to the termination of his employment for so long a period as Company continues to conduct the same business or businesses as conducted during the Ten-n or any extensions thereof Nothing herein contained shall in any way limit or exclude any other right granted by law or equity to the Company. 16. Indemnification. For the period commencing on the Effective Date and continuing for five (5) years following the expiration or prior termination of this Agreement, regardless of the reason therefor, the Employee shall be indemnified under the Company's Articles of Incorporation and Bylaws, and the Employee shall be covered by the directors' and officers' liability insurance, the fiduciary liability insurance and the professional liability insurance policies that are the same as, or provide coverage at least equivalent to, those applicable or made available by the Company to the senior management of the Company. Independent of the above provisions, if at any time the Employee is made, or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that the Employee is or was a director or officer of the Company, then the Employee shall be indemnified by the Company, and the Company pay the Employee's related expenses (including, 8 without limitation, reasonable attorneys' fees and costs) when and as incurred, all to the fullest extent permitted by law. 17. Amendment. This Agreement contains, and its terms constitute, the entire agreement of the parties, and it may be amended only by a written document signed by both parties to this Agreement. 18. Governing Law. California law shall govern the construction and enforcement of this Agreement and the parties agree that any litigation pertaining to this Agreement shall be adjudicated in courts located in California. 19. Severability. If any section, subsection or provision hereof is found for any reason whatsoever to be invalid or inoperative, that section, subsection or provision shall be deemed severed and shall not affect the force and validity of any other provision of this Agreement. If any covenant herein is determined by a court to be overly broad thereby making the covenant unenforceable, the parties agree and it is their desire that such court shall substitute a reasonable judicially enforceable limitation in place of the offensive part of the covenant and that as so modified the covenant shall be as fully enforceable as if set forth herein by the parties themselves in the modified form. The covenants of the Employee in this Agreement shall each be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants in this Agreement. 20. Notices. Any notice, request, or instruction to be given hereunder shall be in writing and shall be deemed given when personally delivered or three (3) days after being sent by United States certified mail, postage prepaid, with return receipt requested, to the parties at their respective addresses set for the below: To the Company: Micro General Corporation 2510 North Red Hill Avenue Santa Ana, CA 92705 With a copy to: Gregory S. Lane, Esq. 3916 State Street, Suite 300 Santa Barbara, CA 93105 To the Employee: John Snedegar -------------------------------------- -------------------------------------- With a copy to: Martin Eric Weisberg, Esq. Parker Chapin Flattau & Klimpl, LLP 1211 Avenue of the Americas New York, New York 10036 20. Waiver of Breach. The waiver by any party of any provisions of this Agreement shall not operate or be construed as a waiver of any prior or subsequent breach by the other party. 9 21. Definition of "Affiliate". For purposes of this Agreement, the term "affiliate" shall mean a person or entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS VMEREOF the parties have executed this Agreement to be effective as of the date first set forth above. MICRO GENERAL CORPORATION By: ------------------------------------------ Its: ----------------------------------------- JOHN SNEDEGAR --------------------------------------------- EX-10.27 3 MATERIAL CONTRACT 1 EXHIBIT 10.27 INTELLECTUAL PROPERTY TRANSFER, RIGHT OF FIRST REFUSAL, AND WARRANT PURCHASE AGREEMENT THIS INTELLECTUAL PROPERTY TRANSFER, RIGHT OF FIRST REFUSAL AND WARRANT PURCHASE AGREEMENT (the "Agreement") is entered into as of October 1, 1999 (the "Effective Date"), by and between Micro General Corporation, a Delaware corporation ("Assignor"), and escrow.com, Inc., a Delaware corporation ("Assignee"). RECITALS A. Assignor desires to assign to Assignee the entire right, title, and interest in the Intellectual Property (as hereinafter defined). B. Assignee desires to sell to Assignor, and Assignor desires to purchase from Assignee, a warrant to purchase 15,000,000 shares of Common Stock of Assignee. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: AGREEMENT 1. Definitions. (a) "Copyrights" shall mean any and all copyrights and copyright applications, whether or not registration for any such copyright exists or is pending, that Assignor or any subsidiary of Assignor may own or have the right to sublicense hereunder, currently held by Assignor, and any renewal or extension thereof, together with all other copyright interests accruing by reason of international copyright conventions and any moral rights pertaining thereto, including the right to sue for, settle, or release any past, present, or future infringement thereof, developed for or acquired in connection with the escrow.com website and the escrow.com business, including, without limitation, those copyrights and copyright registrations set forth on Exhibit A hereto. (b) "Excluded Technology" means the technology set forth on Exhibit B hereto, provided, however, that such technology is limited in all instances to standard routines, development tools, programming techniques and other code or content that are non-specific to the escrow.com website and the escrow.com business plan and that existed prior to and independent of any development of the Intellectual Property and Software. (c) "Intellectual Property" shall mean all Copyrights, Trademarks, Patents, the Website, business plans, financial data, marketing plans, supplier or customer lists, forecasts, the agreements set forth on Exhibit A hereto, know-how, concepts, inventions, techniques, system designs, prototypes, ideas or other intellectual property or proprietary rights of Assignor or any subsidiary of Assignor, developed for or acquired in connection with the escrow.com website and the escrow.com business, other than the Software and the Excluded Technology. (d) "Patents" shall mean all patents, patent applications and patents pending that Assignor or any subsidiary of Assignor owns or has the right to sublicense hereunder, including, without limitation, 2 those patents, patent applications and patents pending set forth on Exhibit A hereto, developed for or acquired in connection with the escrow.com website and the escrow.com business. (e) "Software" shall mean the software commonly referred to as the "Escrow Trust Accounting System," in object code and source code, and all documentation, derivative works, copies and licenses thereof, and all intellectual property underlying such software. (f) "Trademarks" shall mean all United States and foreign registered and common law trademarks, trade names, service marks and logos, or applications therefore, whether or not registration for such mark exists or is pending, that Assignor or any subsidiary of Assignor may own, or have the right to sublicense hereunder, together with all other trademark, trade name, service mark or logo interests accruing by reason of international trademark conventions, accompanied by the goodwill of all business connected with the use of and symbolized by such marks including the right to sue for, settle, or release any past, present, or future infringement thereof or unfair competition involving the same, which were developed for or acquired in connection with the escrow.com website and the escrow.com business, including, without limitation, those marks set forth on Exhibit A hereto. (g) "Website" shall mean all images, text, graphics, Internet domain names (together with all foreign, state or national registrations thereof and accompanied by the goodwill of all business connected with the use of and symbolized by such domain names, including the right to sue for, settle, or release any past, present, or future infringement thereof or unfair competition involving the same), computer code, website designs and processes, uniform resource locators and other technology of Assignor, developed for or acquired in connection with the escrow.com website and the escrow.com business. 2. Assignment. Assignor hereby assigns, grants, transfers, and sets over to Assignee all right, title, and interest in and to the Intellectual Property and all goodwill associated with such Intellectual Property, including, without limitation, (a) the right to use, copy, modify, exploit, license, assign, convey and pledge the Intellectual Property, (b) the right to exclude others from using the Intellectual Property, (c) the right to sue others and collect damages for past present and future infringement of the Intellectual Property, (d) the right to create derivatives of the Intellectual Property and retain full ownership thereof, and (e) the right to file and prosecute applications for registration, now pending or hereinafter initiated, to protect any rights in the Intellectual Property. 3. Irrevocable License. Assignor hereby grants to Assignee a worldwide, royalty-free, perpetual, nonexclusive, transferable, sublicensable and irrevocable license to use and otherwise exploit the Software and Excluded Technology in any manner and for any purpose. 4. Covenant Not to Compete. (a) For a period of five (5) years after the date hereof, Assignor shall not, for itself or any third party, directly or indirectly engage in the business of Assignee as now conducted or proposed to be conducted, including without limitation providing escrow services as defined in Section 17003 of the California Financial Code, as amended, anywhere in the world. 3 (b) The parties hereto intend that the covenant not to compete under this Section 4 shall be construed as a series of covenants, one in each county, state, country, province or territory in the world. If in any judicial proceedings a court shall refuse to enforce any of the separate covenants deemed included in this Section 4, then such unenforceable covenant shall be deemed eliminated from this Section 4 for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. (c) Assignor acknowledges and agrees (i) that the covenants and agreements of Assignor in this Section 4 are reasonably necessary to protect the interests of Assignee in whose favor such covenants and agreements are imposed, (ii) the restrictions imposed by this Section 4 are not greater than are 'necessary for the protection of Assignee in light of the harm that Assignee will suffer if Assignor breaches this Agreement, (iii) the period, nature, kind and character of the restrictions are reasonably required to protect the interests of Assignee, (iv) the geographical restrictions are reasonable in light of Assignee's world-wide business, and (v) Assignee would not have otherwise entered into this Agreement without the protection afforded under this Section 4. 5. Further Assurances. Assignor agrees to execute such additional documents, complete such other formalities, and extend such other cooperation as may be reasonably requested or required to perfect Assignee's interest in the Intellectual Property and to permit Assignee to be duly recorded as the registered owner and proprietor of the rights hereby conveyed, including, without limitation, any appropriate instruments required to be filed in the applicable national trademark, copyright or patent offices or other appropriate offices. 6. Issuance of Warrant and Note. Assignee hereby agrees to issue to Assignor, and Assignor agrees to purchase from Assignee, for the purchase price of Ten Thousand Dollars ($10,000), a warrant to purchase up to 15,000,000 shares of Assignee's common stock at an exercise price per share of $.40 in substantially the form attached hereto as Exhibit C (the "Warrant"). The shares of Common Stock issued upon exercise of the Warrant shall be subject to registration and other investor rights granted to investors in the Company's next round of Series A financing managed by Madison Securities. In addition, as consideration for the assignment of the Intellectual Property as described in Section 2 hereof and the irrevocable licenses in Section 3 hereof, Assignee shall issue to Assignor a promissory note in the amount of $4,500,000 bearing interest at a rate of 3% per annum, with principal and accrued interest payable on October 1, 2006 in substantially the form attached hereto as Exhibit D. 7. Right of First Refusal. (a) Pro Rata Right. Assignee hereby grants to Assignor the right of first refusal to purchase a pro rata share of all New Securities (as defined in paragraph 7(b) below) which Assignee may, from time to time, propose to sell and issue. Assignor's pro rata share, for purposes of this right of first refusal, is a ratio, (A) the numerator of which is the number of shares of common stock held by Assignor or issuable upon exercise of the Warrant then held by Assignor on the date of the Company's written notice pursuant to paragraph 7(c) below; and (B) the denominator of which is the total number of shares of common stock then outstanding (assuming full conversion and exercise of all securities convertible or exercisable into shares of common stock). 4 (b) Definition of New Securities. "New Securities" shall mean any capital stock of Assignee whether now authorized or not, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that are, or may become, convertible into or exercisable for shares of capital stock. New Securities, however, shall not include any of the following issuances or sales: (i) securities to employees, consultants, officers or directors pursuant to any stock purchase plan or arrangement, stock option plan or other stock incentive plan or agreement approved by the Board of Directors; (ii) securities pursuant to or after consummation of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities to the general public for the account of Assignee; (iii) securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) one or more warrants to purchase up to 15,000,000 shares of Common Stock issued to MicroGeneral Corporation, a Delaware corporation, or the issuance of such Common Stock upon exercise of such warrants as contemplated herein; (v) up to 500,000 shares of Common Stock issued and sold to ShopNow.com, Inc., a Washington Corporation ("ShopNow.com"); (vi) up to 2,000,000 shares of Series A Preferred Stock issued and sold to ShopNow.com; (vii) one or more warrants to purchase up to 500,000 shares of Common Stock issued to ShopNow.com, and the issuance of such Common Stock upon exercise of such warrants; (viii) up to 1,400,000 shares of Common Stock issued and sold in the next round of private financing following the date of filing of this Restated Certificate at a price per share of not less than $0.25; (ix) up to 5,600,000 shares of Series A Preferred Stock issued and sold in the Corporation's next round of private financing following the date of filing of this Restated Certificate at a price per share of not less than $2.00; (x) Common Stock issued in connection with the acquisition of all or part of another company by the Corporation by merger or other reorganization, or by purchase of all or part of the assets of another company, pursuant to a plan or arrangement approved by the Board of Directors, and (xi) Common Stock issued in connection with equipment lease or bank financings, as approved by the Board of Directors of the Corporation. 5 (c) Required Notices. In the event Assignee proposes to undertake an issuance of New Securities, it shall give Assignor written notice of the proposed issuance, describing the type of New Securities, the price, the general terms upon which Assignee proposes to issue the same and the pro rata portion of such New Securities Assignor is entitled to purchase. Assignor shall have thirty (30) days after the date of receipt of such notice to agree to purchase Assignor's pro rata share of such New Securities for the price and upon the general terms specified in the notice by giving written notice to Assignee and stating therein the quantity of New Securities to be purchased. (d) Assignee's Right to Sell. In the event Assignor fails to exercise the right of first refusal within the 30 day period, Assignee shall have sixty (60) days after the expiration of such period to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) and to sell all such New Securities respecting which the Holders' options were not exercised, at a price and upon general terms no more favorable in any material respect to the purchasers thereof than specified in Assignee's notice. In the event Assignee has not sold within said sixty (60) day period or entered into an agreement to sell all such New Securities within said sixty (60) day period (or sold and issued all such New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), Assignee shall not thereafter issue or sell any New Securities, without first offering such securities to Assignor in the manner provided above. (e) Assignment. The right of first refusal set forth in this Section 7 is transferable by Assignor provided that any such transferee executes any agreement to be bound by the terms and conditions hereof. 8. Representations and Warranties of Assignee. Assignee hereby represents and warrants to Assignor as follows: (a) Authorization. The execution and delivery by Assignee of this Agreement and the issuance of the Warrant (and the Common Stock issuable upon exercise thereof) by Assignee, as contemplated herein, have been duly authorized by all requisite corporate action of Assignee. (b) Valid Issuance of Stock. The Warrant (and the Common Stock issuable upon exercise thereof) have been duly and validly authorized and, when issued and paid for in accordance with the terms hereof and thereof, will be validly issued securities of Assignee. 9. Representations and Warranties of Assignor. Assignor hereby represents and warrants to Assignee as follows: (a) Investment Representations. (i) Assignor, understands that the Warrant (and the Common Stock issuable upon exercise thereof) will be issued by Assignee without registration under the Securities Act of 1933 ("Securities Act") and without qualification or registration under applicable state securities laws ("Blue Sky Laws") pursuant to exemptions from registration or qualification contained in the Securities Act and in the Blue Sky Laws. Assignor understands that the Warrant 6 (and the Common Stock issuable upon exercise thereof) must be held indefinitely unless subsequently registered or qualified under the Securities Act and under the Blue Sky Laws unless exemptions from the registration or qualification requirements under the Securities Act and under the Blue Sky Laws are available in connection with any proposed transfer of the Warrant (and the Common Stock issuable upon exercise thereoo by Assignor. (ii) Assignor agrees that none of the Warrant (and the Common Stock issuable upon exercise thereof), nor any interest in the Warrant (and the Common Stock issuable upon exercise thereof), will be resold or otherwise transferred by Assignor without registration or qualification under the Securities Act and the Blue Sky Laws unless Assignor first demonstrates to the satisfaction of Assignee that specific exemptions from such registration or qualification requirements are available with respect to the proposed transfer and provides Assignee an opinion of counsel satisfactory to Assignee that the proposed transfer may be made without violation of the Securities Act or the Blue Sky Laws and will not affect the exemptions relied upon by Assignee in connection with the original issuance of the Warrant (and the Common Stock issuable upon exercise thereof). (iii) Assignor is aware of Assignee's business affairs and financial condition and has acquired sufficient information about Assignee to reach an informed and knowledgeable decision regarding the merits and risks of investing in the Warrant (and the Common Stock issuable upon exercise thereof). Assignor has had ample opportunity to review information regarding Assignee and to ask questions of Assignee and its representatives and to seek independent investment, tax, and legal advice prior to investing in the Warrant (and the Common Stock issuable upon exercise thereof). THE ASSIGNOR RECOGNIZES THAT THE WARRANT (AND THE COMMON STOCK ISSUABLE UPON EXERCISE THEREOF) ARE A SPECULATIVE INVESTMENT INVOLVING A HIGH DEGREE OF RISK OF LOSS BY THE ASSIGNOR AND THAT THE ASSIGNOR COULD LOSE THE ENTIRE AMOUNT OF THE ASSIGNOR'S INVESTMENT. THE ASSIGNOR IS ABLE TO BEAR THE ECONOMIC RISK OF SAID INVESTMENT AND AT THE PRESENT TIME COULD AFFORD A COMPLETE LOSS OF SAID INVESTMENT. (iv) The Warrant (and the Common Stock issuable upon exercise thereof) are being acquired for private investment for Assignor's own account and not with a view to or for sale in connection with any distribution of the Warrant (and the Common Stock issuable upon exercise thereof) to others. (v) The sale of the Warrant (and the Common Stock issuable upon exercise thereof) to Assignor was not accompanied by the publication of any written or printed communication or any communication by means of recorded telephone messages or spoken on radio, television, or similar communications media. (vi) Assignor is duly organized in the State of Delaware. (vii) Assignor is an "Accredited Investor" as defined under Section 501(a) of the Securities Act of 1933, as amended. 7 (viii) Assignor acknowledges that the certificates representing the Warrant (and the Common Stock issuable upon exercise thereof) will bear the legends set forth herein: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. (ix) Assignor understands that the Warrant (and the Common Stock issuable upon exercise thereof) constitute "restricted securities" for the purposes of Rule 144 promulgated under the Securities Act. (x) Assignor understands that Assignee will rely upon the foregoing for the purposes of issuing the Warrant (and the Common Stock issuable upon exercise thereof). Assignor hereby agrees to indemnify Assignee and its officers, directors, agents, and counsel and hold them harmless from and against any and all damages suffered and liabilities incurred by them (including costs of investigation, defense, and attorneys' fees) arising out of any breach by Assignor of the agreements or inaccuracy in the representations and warranties which Assignor has made herein. (b) Intellectual Property Warranties. (i) To the best of Assignor's knowledge, the Intellectual Property assigned and the Software and Excluded Technology licensed hereunder shall be sufficient in all respects for the operation of the business of Assignee as now conducted and as proposed to be conducted. (ii) The Intellectual Property has been independently created and developed solely by Assignor, and Assignor owns or has obtained all rights, licenses, releases, assignments, or other rights, and made all payments and satisfied all obligations to any third party or employee, necessary to make the assignment set forth in Section 2 hereof. No third party or employee shall have any right, title or interest in and to the Intellectual Property. Each employee, consultant or contractor of Assignor who has contributed to the development of the Intellectual Property has entered into an agreement requiring such employee, consultant or contractor to assign to Assignor forever all right, title and interest that such employee, consultant or contractor may have accrued in the Intellectual Property, and Assignee shall not incur any liability or obligation, including payment or other compensation, to such employee, consultant, contractor or other third party by reason of the assignment in Section 2 hereof (iii) Assignee has the full corporate power to enter into this Agreement and to carry out its obligations under this Agreement. Assignor has not previously granted, and will not grant, any right, license or interest in, to or under the Intellectual Property, Software or Excluded Technology, or any portion thereof, which is inconsistent with the rights and licenses granted to 8 Assignee herein or that will adversely affect any exercise by Assignee of its rights under this Agreement. There are no actions, suits, investigations, claims or proceedings pending or, to the knowledge of Assignor, threatened in any way relating to the Intellectual Property, Software or Excluded Technology. (iv) The Intellectual Property, Software or Excluded Technology do not and will not infringe or misappropriate any patents, copyrights, trade secrets, trade names or other intellectual or proprietary rights of any third-party, and Assignor is not aware of any claims or basis for such infringement. (v) The Software will function correctly when dealing with dates, times, and date/time (including calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year calculations, and with respect to the processing of date/time data, the Software will neither contain nor create any logical or mathematical inconsistency, will not malfunction, and will not cease to function. 10. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California. 11. Entire Agreement; Waiver, Amendment. This Agreement shall constitute the entire agreement between the parties pertaining to the subject matter hereof, and shall supersede all prior and contemporaneous oral negotiations, agreements, commitments, representations, and understandings relating to the subject matter hereof. No supplement, modification, waiver, or amendment to this Agreement shall be binding on any party unless in writing and signed by the party against whom enforcement is sought. 12. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 13. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the Effective Date. MICROGENERAL CORPORATION, ESCROW.COM,INC. A DELAWARE CORPORATION A DELAWARE CORPORATION By: By: -------------------------------- ---------------------------------- Name: Name: ------------------------------ -------------------------------- Title: Title: ----------------------------- ------------------------------- 9 EXHIBIT A 1. Assigned Contracts 2. Copyrights and Copyright Registrations All graphics, text and interfaces relating to the Website. 3. Trademarks "escrow.com," and all Trademarks containing such word or words of similar import. 4. Patents 5. Website escrow.com URL, Internet site at escrow.com URL, database and business model 10 EXHIBIT B EXCLUDED TECHNOLOGY None. 11 EXHIBIT C WARRANT 12 EXHIBIT D NOTE 13 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), HAVE BEEN TAKEN FOR INVESTMENT, AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF AS MAY BE AUTHORIZED UNDER THE 1933 ACT OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER. WARRANT NO. 1 WARRANT TO PURCHASE COMMON STOCK OF ESCROW.COM, INC. VOID AFTER OCTOBER 1, 2006 This certifies that MicroGeneral Corporation or its registered assigns ("Holder"), for valuable consideration received, is entitled, on the terms set forth below, at any time or from time-to-time during the period beginning on October 1, 1999 and ending at 5:00 P.M., Pacific Daylight Time, ending on the earlier of, seven (7) years thereafter, or the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities to the general public for the account of the Company ("IPO") (the "Exercise Period"), to purchase from escrow.com, Inc., a Delaware corporation (the "Company"), up to 15,000,000 shares of the Common Stock of the Company (the "Warrant Shares") at a price per share equal to Forty Cents ($0.40) (the "Exercise Price"). The term "Warrant" as used herein shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein. 1. EXERCISE AND PAYMENT. This Warrant may be exercised at any time in full for the maximum number of Warrant Shares called for hereby, or from time-to-time for any lesser number thereof, on any business day during the Exercise Period, by delivering to the principal office of the Company the subscription in the form attached hereto as Exhibit A duly executed along with payment equal to the product of (i) the number of Warrant Shares then being purchased under this Warrant multiplied by (ii) the Exercise Price (the "Purchase Price"). The Purchase Price may be paid by delivery of cash or check, wire transfer, the cancellation of all or a portion of the then outstanding principal and accrued interest under that certain Promissory Note issued by the Company to Holder on the date hereof, or as provided in Section 2 below. Upon any partial exercise of this Warrant, this Warrant shall be surrendered, and a new Warrant of the same tenor and for the purchase of the number of such shares not purchased upon such exercise shall be issued by the Company to Holder. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Warrant Shares shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As soon as practicable on or after such date, the Company shall issue and deliver to the person or persons 14 entitled to receive the same a certificate or certificates for the number of full Warrant Shares issuable upon such exercise, together with cash, in lieu of any fraction of a share, equal to such fraction of the current market value of one full share. 2. NET ISSUANCE. In lieu of payment of all or a portion of the Purchase Price described in Section 1, the Holder may elect to receive, without the payment by the Holder of any additional consideration, shares equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company. Upon such election, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: where: X = Y (A-B) ------- A X = the number of shares to be issued to the Holder pursuant to this Section 2. Y = the number of shares covered by this Warrant in respect of which the net issuance election is made pursuant to this Section 2. A = the fair market value of one share of Common Stock, as determined in accordance with the provisions of this Section 2. B = the Exercise Price in effect under this Warrant at the time the net issuance election is made pursuant to this Section 2. For purposes of this Section 2, the "fair market value" per share of the Common Stock shall mean that price determined in good faith by the Board of Directors of the Company. 3. PAYMENT OF TAXES. All Warrant Shares issued upon the exercise of a Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof, except any transfer taxes that may be payable in respect of any transfer involved in the issuance of any certificate for shares in a name other than that of the Holder or Holder's transferee. 4. TRANSFER AND EXCHANGE. Subject to such restrictions on transfer as may be contained in this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, on the books of the Company maintained for such purpose at its principal office referred to above by the Holder in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Upon any partial transfer, the Company will issue and deliver to the Holder a new Warrant or Warrants with respect to the portion of the Warrant not so transferred. This Warrant is exchangeable at the principal office of the Company for Warrants for the same 15 aggregate number of Warrant Shares, each new Warrant to represent the right to purchase such number of Warrant Shares as Holder shall designate at the time of such exchange. 5. MERGERS, CONSOLIDATIONS, ASSET SALES AND DISSOLUTIONS. If at any time there shall be any consolidation or merger of the Company with another corporation, a sale of all or substantially all of the Company's assets to another corporation, a voluntary or involuntary dissolution, liquidation or winding-up of the Company or an IPO, then the Company shall give, by certified or registered mail, postage prepaid, addressed to the registered Holder of this Warrant at the address of such Holder as shown on the books of the Company, at least thirty (30) days prior written notice of the date when the same shall take place. Upon receipt of such notice, the Holder shall have the right to exercise this Warrant, either in full or in any lesser amount prior to the occurrence of an event described above. If the Holder of this Warrant does not exercise this Warrant prior to the occurrence of an event described above, this Warrant shall expire and be of no effect to the extent that it has not been exercised by the Holder prior to the occurrence of the event. 6. FRACTIONAL SHARES. The Company shall not issue any fractional shares or script representing fractional shares upon the exercise or exchange of this Warrant. With respect to any fraction of a share resulting from the exercise or exchange hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current fair market value per share of Common Stock, be the then current fair market value determined in such reasonable manner as may be prescribed by the Company's Board of Directors in good faith but in no event less than book value. 7. NON-IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of the Warrant against dilution or other impairment. 8. ANTIDILUTION ADJUSTMENTS. The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment as follows: (a) Stock Dividends. If at any time prior to the exercise of this Warrant in full (i) the Company shall fix a record date for the issuance of any stock dividend payable in shares of Common Stock or (ii) the number of shares of Common Stock shall have been increased by a subdivision or split-up of shares of Common Stock, then, on the record date fixed for the determination of holders of Common Stock entitled to receive such dividend or immediately after the effective date of subdivision or split-up, as the case may be, the number of shares of Common Stock to be delivered upon exercise of this Warrant will increased so that Holder will be entitled to receive the number of shares of Common Stock that such Holder would have owned immediately following such action had this Warrant been exercised immediately prior thereto, and the Exercise Price will be adjusted as provided below in paragraph (d). 16 (b) Combination of Stock. If at any time prior to the exercise of this Warrant in full the number of shares of Common Stock outstanding shall have been decreased by a combination of the outstanding shares of Common Stock, then, immediately after the effective date of such combination, the number of shares of Common Stock to be delivered upon exercise of this Warrant will be decreased so that the Holder thereafter will be entitled to receive the number of shares of Common Stock that such Holder would have owned immediately following such action had this Warrant been exercised immediately prior thereto, and the Exercise Price will be adjusted as provided below in paragraph (d). (c) Carryover. Notwithstanding any other provision of this Section 8, no adjustment shall be made to the number of shares of Common Stock to be delivered to the Holder (or to the Exercise Price) if such adjustment represents less than 1% of the number of shares to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to 1% or more of the number of shares to be so delivered. (d) Exercise Price Adjustment. Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted, as herein provided, the Exercise Price payable upon the exercise of this Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (e) No Duplicate Adjustments. Notwithstanding anything else to the contrary contained herein, in no event will an adjustment be made under the provisions of this Section 8 to the number of Warrant Shares issuable upon exercise of this Warrant or the Exercise Price for any event if an adjustment having substantially the same effect to the Holder as any adjustment that otherwise would be made under the provisions of this Section 8 is made by the Company for any such event to the number of shares of Common Stock (or other securities) issuable upon exercise of this Warrant. (f) Notice of Adjustment. Whenever the number of Warrant Shares or the Exercise Price of such Warrant Shares is adjusted, as herein provided, the Company shall promptly mail by first class, postage prepaid, to the Holder, notice of such adjustment or adjustments and a certificate of the chief financial officer of the Company setting forth the number of Warrant Shares and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 9. LOSS OR MUTILATION. Upon receipt by the Company of evidence satisfactory to it (in the exercise of reasonable discretion) of the ownership of and the loss, theft, destruction or mutilation of any Warrant, the Company will execute and deliver in lieu thereof a new Warrant of like tenor. 17 10. RESERVATION OF COMMON STOCK. The Company shall at all times reserve and keep available for issue upon the exercise of Warrant such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant. 11. RESTRICTIVE LEGEND. Each certificate representing (i) this Warrant or (ii) Warrant Shares shall (unless such securities have been registered under the 1933 Act or sold under Rule 144 promulgated under the 1933 Act) be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any other legend required under any applicable state securities law): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE 1933 ACT OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER. 12. NOTICES. Unless otherwise provided, all notices and other communications required or permitted under this Agreement shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or by a courier addressed to the party to be notified at the address or facsimile number furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address to the Company in writing. 13. CHANGE; WAIVER. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 14. TITLES AND SUBTITLES. The headings in this Warrant are for convenience only and are not to be considered in construing or interpreting this Warrant. 15. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 18 IN WITNESS WHEREOF, the undersigned has executed this Warrant as of October 1, 1999. ESCROW.COM, INC. By: --------------------------------------- John Snedegar, Chief Executive Officer By: --------------------------------------- Mark Attaway, President 19 Exhibit A SUBSCRIPTION FORM (To be executed only upon exercise of Warrant) The undersigned registered owner of this Warrant irrevocably exercises this Warrant and purchases____________ shares of Common Stock (the "Common Stock") of ESCROW.COM, INC., purchasable with this Warrant, and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant. The undersigned hereby represents and warrants that the undersigned is acquiring such stock for its own account and not for resale or with a view to, or for resale in connection with, the distribution of any part thereof, and accepts such shares subject to the restrictions of contained in the Warrant. DATED: ----------------- ----------------------------------------- (Signature of Registered Owner) ----------------------------------------- (Street Address) ----------------------------------------- (City) (State) (Zip) ----------------------------------------- Social Security No. or Federal Tax I.D. Number EX-10.28 4 MATERIAL CONTRACT 1 EXHIBIT 10.28 THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, IN RELIANCE ON EXEMPTIONS FROM SUCH REGISTRATION AND QUALIFICATION FOR NONPUBLIC OFFERINGS. ACCORDINGLY, THE SALE, TRANSFER OR OTHER DISPOSITION OF SUCH SECURITIES OR ANY PORTION THEREOF MAY NOT BE ACCOMPLISHED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED. PROMISSORY NOTE $4,500,000 Santa Ana, California October 1, 1999 1. FOR VALUE RECEIVED, ESCROW.COM, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of MICROGENERAL CORPORATION, a Delaware corporation (the "Lender") at Lender's offices (or such other place as Lender may direct from time to time), in lawful money of the United States, the principal sum of Four Million Five Hundred Thousand Dollars ($4,500,000). This note shall bear interest at the rate of three percent (3%) per annum. All principal and accrued interest shall be due and payable on October 1, 2006. 2. The principal of this Note is payable only to the registered holder of this Note. With the prior written consent of Lender, the Borrower may at any time and without penalty prepay all or any portion of the principal owing hereunder. 3. This Note is unsecured, full recourse and shall be governed by the laws of the State of California. 4. In the event of (i) a material default by Borrower under that certain Intellectual Property Transfer, Right of First Refusal and Warrant Purchase Agreement of even date herewith by and between Borrower and Lender or that certain Warrant to purchase Common Stock of Borrower of even date herewith issued by Borrower to Lender, and such default is not cured within thirty (30) days of notice thereof or (ii) a Bankruptcy of Borrower, Lender may declare the entire principal and unpaid accrued interest immediately due and payable by written notice to Borrower. As used herein, "Bankruptcy" means (Y) the institution by Borrower of proceeding to be adjudicated as bankrupt or insolvent, or consent by it to the institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of Borrower, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by Borrower in furtherance of any such action, or, (Z) if, within sixty (60) days after the commencement of an action against Borrower (and service of process in connection therewith on Borrower), seeking any bankruptcy, insolvency, 2 reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of Borrower or all orders or proceedings thereunder affecting the operations or the business of Borrower stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without consent or acquiescence of Borrower or of all or any substantial part of the properties of Borrower, such appointment shall not have been vacated. IN WITNESS WHEREOF, this Note is executed as of the date first written above. ESCROW.COM, INC A Delaware corporation By: --------------------------------------- Mark Attaway, President EX-10.29 5 MATERIAL CONTRACT 1 EXHIBIT 10.29 CONVERTIBLE NOTE PURCHASE AGREEMENT by and between MICRO GENERAL CORPORATION, a Delaware corporation, and CALWEST SERVICE CORPORATION, a California corporation Dated as of December 15, 1999 CONVERTIBLE NOTE DUE DECEMBER 14, 2004 2 TABLE OF CONTENTS Article I - Definitions and Other Provisions of General Application..........................2 Section 101. Definitions...............................................................2 Section 102. Effect of Headings and Table of Contents..................................4 Section 103. Successors and Assigns....................................................4 Section 104. Severability Clause.......................................................4 Section 105. Benefits of Agreement.....................................................4 Section 106. Governing Law.............................................................4 Section 107. Legal Holidays............................................................4 Section 108. Execution in Counterparts.................................................5 Section 109. Attorneys' Fees...........................................................5 Section 110. Notices...................................................................5 Article II - The Note........................................................................6 Section 201. Form Generally............................................................6 Section 202. Conversion Notice.........................................................6 Section 203. Designation, Amount and Issuance of the Note..............................6 Section 204. Execution of the Note.....................................................6 Article III - Issuance of Detachable Warrants................................................7 Section 301. Warrants Issued...........................................................7 Section 302. Form of Warrant and Notice of Exercise....................................7 Section 303. Anti-Dilution Rights......................................................7 Section 304. Manner of Exercise of Warrants............................................7 Section 305. Notice to Lender Prior to Certain Corporate Actions.......................8 Section 306. Reservation. of Shares of Common Stock....................................8 Section 307. Taxes Upon Exercise.......................................................9 Section 308. Covenants as to Common Stock..............................................9 Section 309. Piggyback Registration Rights.............................................9 Article IV - Covenants of the Company.......................................................10 Section 401. Payment of Principal and Interest........................................10 Section 402. Corporate Existence......................................................10 Section 403. Payment of Taxes and Other Claims........................................10 Section 404. Dividends/Compensation...................................................10 Section 405. Corporate Existence; Foreign Qualification...............................11 Section 406. Books, Records and Inspections...........................................11 Section 407. Compliance with Laws.....................................................11 Section 408. Maintenance of Permits...................................................11 Section 409. Capital Expenditures/Debt................................................11 Article V -Representations and Warranties...................................................11
-i- 3 Section 501. Customer Contracts.......................................................11 Section 502. Board of Directors.......................................................12 Section 503. Organization, Etc........................................................12 Section 504. Capital Stock; Stock Options.............................................12 Section 505. Corporate Authority......................................................12 Section 506. Notes and Accounts Receivable............................................12 Section 507. Actions, Suits, Etc......................................................13 Section 508. Material Contracts.......................................................13 Section 509. Absence of Undisclosed Liabilities.......................................14 Section 510. Accuracy of Information..................................................14 Section 511. Real Estate Leases.......................................................14 Section 512. Personal Property Leases.................................................14 Section 513. Intellectual Property....................................................14 Section 514. Trade Secrets............................................................15 Section 515. Software and Information Systems.........................................15 Section 516. Insurance................................................................15 Article VI - Defaults; Remedies.............................................................16 Section 601. Events of Default........................................................16 Section 602. Acceleration of Maturity, Rescission and Annulment; Other Remedies...................................................................17 Section 603. Collection of Indebtedness and Suits for Enforcement.....................18 Section 604. Lender May File Proofs of Claim..........................................18 Section 605. Application of Money Collected...........................................19 Section 606. Rights and Remedies Cumulative...........................................19 Section 607. Delay or Omission Not Waiver.............................................19 Section 608. Waiver of Stay or Extension Laws.........................................19 Article VII - Reports by Company............................................................20 Section 701. Annual Statement.........................................................20 Section 702. Reports by Company.......................................................20 Section 703. Quarterly Financial Reports..............................................20 Article VIII - Consolidation, Merger, Conveyance, Transfer , Sale or Lease..................20 Section 801. Company May Consolidate. etc., on Certain Terms..........................20 Section 802. Right of First Refusal of Lenders........................................21 Article IX - Redemption of Note by the Company..............................................21 Section 901. Right to Redeem..........................................................21 Section 902. Notice of Redemption.....................................................21 Article X - Right to Convert Note and/or Right to Purchase Stock............................22 Section 1001. Rights Granted..........................................................22 Section 1002. Anti-Dilution Rights of Lender..........................................22
-ii- 4 Section 1003. Manner of Exercise of Conversion Privilege..............................23 Section 1004. Notice to Lender Prior to Certain Corporate Actions.....................23 Section 1005. Reservation of Shares of Common Stock...................................24 Section 1006. Taxes Upon Conversion...................................................24 Section 1007. Covenants as to Common Stock............................................24 Section 1008. Piggyback Registration Rights...........................................24 Article XI - Conditions Precedent...........................................................25 Section 1101. Conditions Precedent....................................................25
-iii- 5 CONVERTIBLE NOTE PURCHASE AGREEMENT This CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is made and effective as of December 15, 1999, by and between MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 2510 Redhill Avenue, Santa Ana, California 92705, and CALWEST SERVICE CORPORATION, a California corporation ("Lender"). RECITALS WHEREAS, Lender has made a series of loans to the Company; and WHEREAS, in order to evidence its agreement to repay said loans, the Company has duly authorized the issuance of a convertible promissory note in the principal amount of $5,265,408 which permits the Lender to convert said note into a certain number of shares of the Company's common stock, and in connection therewith, the Lender shall also receive 250,000 detachable warrants at $10.00 per share to purchase 250,000 shares of the Company's common stock. The parties have authorized the execution and delivery of a purchase agreement substantially in the form hereof, and WHEREAS, as contemplated hereinabove, the Company has, contemporaneously herewith, issued its convertible promissory note (the "Note") in the original principal amount of $5,265,408, and the Lender has agreed to purchase said Note; and WHEREAS, in order to set forth the terms and conditions upon which the Note is to be issued by the Company and purchased by the Lender, the Company and Lender have duly authorized the execution and delivery of this Agreement; and WHEREAS, as an inducement to Lender to purchase the Note, whether or not the Company borrows the full amount of the Note, the Company has agreed to give Lender the right, but not the obligation, throughout the five (5) year term of the Note, to either convert all or a portion of the principal of the Note into, or to purchase directly from the Company, an aggregate of 250,000 shares of the Company's common stock (the "Common Stock"), at $10.00 per share and as an additional inducement the Company has agreed to deliver to the Lender detachable warrants which shall authorize the holders thereof to purchase and acquire, pursuant to the terms of the warrants, up to 250,000 shares of the Company's Common Stock; and WHEREAS, Lender has previously made loans to the Company and is owed in interest, and as evidenced by the above principal amount now desires to add the accrued interest through October 31, 1999 to the principal amount of this Agreement and Note, it being understood that detachable warrants arising out of the November 25, 1997 loan and the April 8, 1998 loan will continue as obligations of the Company, and it being understood that the Convertible Note Purchase -4- 6 Agreements and Promissory Notes of August 1, 1996, and October 27, 1998 will be canceled upon conversion of the debt to the Company's Common Stock. NOW, THEREFORE, for and in consideration of the premises and the mutual agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (3) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. "Administrative Agent" means CalWest Service Corporation, a California corporation, which shall act as agent for the Lenders. "Agreement" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of the board of directors of the Company. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in the City of Los Angeles, California are authorized or required to close. "Common Stock" means the five cent ($.05) par value Common Stock of the Company as the same exists at the date of the execution of this Agreement or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided, -5- 7 however, that if at any time there shall be more than one such resulting class, the share of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to applicable provisions of this Agreement, and thereafter "Company" shall mean such successor corporation. "Conversion Notice" has the meaning specified in Sections 202 and 903 hereof. "Conversion Price" has the meaning specified in Section 901 hereof. "Corporation" includes corporations, associations, companies and business trusts. "Dollars" and "$" means the lawful money of the United States of America. "Event of Default" has the meaning specified in Section 501 hereof. "Executive Employee" means any employee of the Company who holds the title of Vice President or above. "Indebtedness" means money borrowed. "Lender," means Cal West Service Corporation. "Interest Payment Date" has the meaning specified in Section 203 hereof. "Note," means the Note executed by the Company and delivered to the Lender under this Agreement as specified in the recitals hereof. "Note Rate" has the meaning specified in Section 203 hereof. "Notice of Redemption" has the meaning specified in Section 802 hereof. "Officer's Certificate" means a certificate signed by the President of the Company and delivered to Lender describing with particularity the use of proceeds of an advance on the Note, representing that there are no defaults under this Agreement or the Note, or relating to such other matters as may be required hereunder. "Payment Date" shall mean an Interest Payment Date or a Principal Payment Date. -6- 8 "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal Payment Date" means any date on which a payment of principal and interest on the Note shall be due. "Redemption Date" has the meaning specified in Section 802 hereof. "Subsidiary" means any corporation more than fifty percent (50%) of the outstanding voting stock of which is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, the term "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Vice President," when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." Common Stock of the Company as evidenced by a detachable warrant referenced in this Agreement. "Warrant" means the right to purchase SECTION 102. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 103. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement by either party shall bind its successors and assigns, whether so expressed or not. Any act or proceeding by any provision of this Agreement authorized or required to be done or performed by any board, committee or officer of either party shall and may be done and performed with like force and effect by the board, committee or officer of any corporation that shall at the time be the lawful sole successor of either party. SECTION 104. SEVERABILITY CLAUSE. In case any provision in this Agreement or in the Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 105. BENEFITS OF AGREEMENT. Nothing in this Agreement or in the Note, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder any benefit or any legal or equitable right, remedy or claim under this Agreement. SECTION 106. GOVERNING LAW. Each of this Agreement and the Note shall be governed by and construed in accordance with the laws of the State of California. SECTION 107. LEGAL HOLIDAYS. In any case where the date of maturity of or interest on or principal of the Note or the date fixed for redemption or for purchase of the Note or the last day on which Lender has the right to convert the Note shall not be a Business Day then (notwithstanding -7- 9 any other provision of this Agreement or of the Note) payment of such interest, premium or principal or conversion of the Note need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption or for purchase or the last day for conversion, and interest shall accrue for the period from and after such date of maturity or date fixed for redemption or for purchase or last day for conversion to such next succeeding Business Day. SECTION 108. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, including facsimile counterparts, each of which shall be an original, but all of which counterparts shall together constitute one and the same instrument. SECTION 109. ATTORNEYS' FEES. Should suit be filed seeking enforcement or interpretation of this Agreement and/or the Note, the prevailing party in any such action shall be entitled to receive in addition to any other sums awarded to such party, attorneys' fees and all other costs of collection actually incurred in such action. SECTION 110. NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, overnight courier, or by facsimile, addressed to the parties as set forth herein. Any such notice shall be deemed received upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice, (b) if mailed, four (4) business days after the date of posting by the United States post office, (c) if given by overnight courier, upon receipt by the person to receive such notice, or (d) if sent by facsimile, when sent. To the Company: Micro General Corporation 2510 Redhill Avenue Santa Ana, California 92705 Attn: President Facsimile: 949/477-6802 To Lender: CalWest Service Corporation 17911 Von Karman Avenue, Suite 300 Irvine, California 92614 Attn: Secretary Facsimile: 949/622-4104 Any notice, request, demand, direction or other communication sent by telecopy must be confirmed within forty-eight (48) hours by letter mailed or delivered in accordance with the foregoing. Notice of change of address shall be given by written notice in the manner detailed in this Section 110. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. -8- 10 ARTICLE II THE NOTE SECTION 201. FORM GENERALLY. The Note shall be in substantially the form set forth on Exhibit "A" attached hereto, but with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Agreement, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with applicable securities laws. SECTION 202. CONVERSION NOTICE. A Conversion Notice, substantially in the form of Exhibit "B" attached hereto, shall be attached to the Note and shall be used by Lender to exercise the right to convert the Note into Common Stock. SECTION 203. DESIGNATION, AMOUNT AND ISSUANCE OF THE NOTE. (a) The Note shall be designated as a "convertible note" of the Company, and shall be the subject of this Agreement in the face amount of $5,265,408. (b) The Note shall be dated the date of its issue and shall bear simple interest from the date thereof at the rate of ten percent (10%) per annum (the "Note Rate"), and shall be payable as follows: Accrued interest only on the principal amount of the Note shall be payable quarterly in arrears during the first five (5) years of the term thereof commencing December 15, 1999 (each, an "Interest Payment Date"). The entire unpaid balance of the Note, including principal and accrued but unpaid interest, shall be due and payable on December 14, 2004. (C) Accrued interest which is not paid when due to lender shall be convertible into shares of common Stock of the Company at the option of the lender on the same terms as the principal is convertible (i.e. $10.00 per share conversion). SECTION 204. EXECUTION OF THE NOTE. The Note shall be executed on behalf of the Company by its President or one of its Vice Presidents, under its corporate seal reproduced thereon, and by its Secretary, one of its Assistant Secretaries, its Chief Financial Officer, or any Assistant Treasurer. -9- 11 ARTICLE III ISSUANCE OF DETACHABLE WARRANTS SECTION 301. Warrants Issued. In consideration for Lender making the loan as provided hereunder, and in consideration for the risks which Lender may incur as a result of making said loan, and for other material consideration, the Company shall, simultaneous with the execution of this Agreement, issue and deliver to Lender a certificate evidencing detachable warrants, which shall grant to the holders of said warrants the right to purchase from the Company 250,000 shares of the Company's Common Stock, with the right of exercise of purchase of Common Stock to be exercised by the holder of the warrants at any time after the issuance date and prior to 5:00 p.m. (PST) on December 14, 2004. The warrant certificate shall represent 250,000 shares and be issued in favor of CalWest. Each warrant is issued under the terms of the detachable warrant certificate and shall grant to the holder the right to purchase form the Company one (1) fully paid and non-assessable share for each warrant at an Exercise Price of ten dollars ($10.00), subject to any adjustment based upon the provisions of Section 303 of this Agreement (the "Exercise Price"). The Holder of the Warrant certificate may exercise a warrant, in whole or in part, pursuant to the terms specified in the holder's certificate and, at the holder's election, the holder may assign all or a portion of the warrants to one or more third party assignees. SECTION 302. Form of Warrant and Notice of Exercise. The form of the warrant shall be substantially in the form of Exhibit "C" attached hereto, with the Exercise Notice attached to said warrant to be utilized by the holder to exercise the rights of purchase of shares under the warrant. The holders of a warrant shall, at any time during the term of said warrant, have the right to exercise said warrant by acquiring one (1) share of Common Stock of the Company for each warrant so held. SECTION 303. Anti-Dilution Rights. The Company will not, by an voluntary action, avoid or seek to avoid performance of any of the terms of the detachable warrant, as is set forth in Section 301 hereinabove, but will at all times, in good faith, carry out the provisions and intent of Section 301 and the warrants issued under such Section and take all actions as may be necessary or appropriate to protect against the impairment of any rights of Lender, or any holder of the warrant to exercise rights thereunder and to purchase Common Stock. In the event, at any time prior to the full exercise by any holder of the warrant of all rights to purchase Common Stock, the Company shall sell or otherwise transfer any Common Stock or adjust in any manner its capital structure, the Company undertakes and agrees to make adjustments as may be necessary to protect the holder of the warrant to purchase a number of shares of Common Stock for a price per share equal to the price per share originally contemplated under the terms of the Warrant and to adhere to and comply with all provisions set forth in the warrant concerning anti-dilution rights extended to the holder of the warrant. SECTION 304. Manner of Exercise of Warrants. The warrants, as represented by the certificate as issued under the provisions of Section 301 of this Agreement, shall be exercisable, at -10- 12 the election of the holder of the warrant, either in their entirety or, from time to time, for a part only the number of warrants specified in the certificate issued to the holder of the warrant and in the Exercise Notice with respect to the exercise thereof. If not all of the warrants evidenced by a certificate are exercised at any time prior to the expiration of the warrant, a new certificate or certificates (as the case may be) shall be promptly issued for the balance of the warrants not so exercised, by the Company. All certificates surrendered upon exercise of the warrants shall be cancelled by the Company. Upon surrender of any certificate and payment of the exercise price, the Company shall promptly issue and cause to be delivered to, or upon the written order of, the holder of the warrant and, in such case, the name or names as the holder of the warrant may designate, a certificate or other documents representing the share or shares issuable upon the exercise of the warrants evidenced by said certificate. The certificate representing the shares shall be deemed to have been issued and any person so designated therein shall be deemed to become a holder of record of such shares as of the date of the surrender of any certificate and the payment of the exercise price by the holder of the warrant. SECTION 305. Notice to Lender Prior to Certain Corporate Actions. In case: (a) the Company shall authorize the granting to the holders of its Common Stock generally of rights, Warrants or options to subscribe for or purchase any shares of stock of any class or of any other rights; or (b) there shall be any reorganization of the Common Stock (other than a change in the par value of the Common Stock), or any permissible consolidation or merger to which the Company is a party, or any permissible conveyance, transfer, sale or lease of the Company's properties and assets as, or substantially as, an entity; or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be given to Lender, in the manner provided in Section 110 hereof, and with respect to the events described in subsections (a), (b) and (c) of this Section 305, as promptly as possible, but in any even at least twenty (20) days prior to the applicable date hereinafter specified, a notice stating (i) the date on which the Company expects to file a Registration Statement covering the Common Stock, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding up is expected to become effective or occur, and, if applicable, the date as of which it is excepted that holders of Common Stock or record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding up. SECTION 306. Reservation of Shares of Common Stock. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of effecting issuance of -11- 13 shares upon exercise of warrants, the full number of shares of Common Stock deliverable upon exercise of a warrant. SECTION 307. Taxes Upon Exercise. The Company will pay any and all documentary stamp or similar issue of transfer taxes payable in respect of the issue or delivery of shares of Common Stock upon exercise of the warrants pursuant thereto. SECTION 308. Covenants as to Common Stock. The Company covenants that all shares of Common Stock which may be delivered upon exercise of the Warrants will, upon delivery, be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. SECTION 309. Piggyback Registration Rights. If the Company shall determine to register any of its securities, either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration on any registration form that does not permit secondary sales, the Company will promptly give to Lender written notice thereof and use its best efforts to include in such registration (and any related qualification under applicable Blue Sky laws or other compliance), and any underwriting involved therein, Common Stock specified in a written request made by Lender within twenty (20) days after the written notice of the Company provided for above is given. Such written request may specify all or a part of the Lender Common Stock. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise as a part of the written notice given as required above. In such event the right of Lender to registration shall be conditioned upon Lender participation in such underwriting and the inclusion of its Common Stock in the underwriting. Lender shall enter with the Company into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding the above, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, the representative may exclude Lender Common Stock from, or limit the number of shares of Lender Common stock to be included in the registration and underwriting. The number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account, then to Lender to the extent of securities they have elected to sell for their own accounts, and thereafter to all other owners of Common Stock with the right to participate in such registration and underwriting pro rata in proportion to the percentage of all outstanding Common Stock owned by each such person immediately prior to commencement of such registration and underwriting. If any person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Common Stock or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the number of shares of Common Stock to be included in such registration is increased during the period of such registration, the Company shall offer first to Lender and then, if additional shares may be sold in the registration to all other persons who have retained the right to include securities in the registration, the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated -12- 14 among the persons requesting additional inclusion pro rata in proportion to the percentage that each person's Common Stock represents of the total amount of Common Stock owned by all such persons prior to commencement of such registration and underwriting. -13- 15 ARTICLE IV COVENANTS OF THE COMPANY For so long as this Agreement shall remain in effect, the Company covenants that: SECTION 401. PAYMENT OF PRINCIPAL AND INTEREST. It will duly and punctually pay the principal of and interest on the Note at the place, at the respective times and in the manner provided in the Note; and each installment of principal and/or interest on the Note shall be paid by mailing checks or wire transferring funds for the amount due to Lender in a manner reasonably calculated to cause such funds to be received on or prior to a Payment Date. SECTION 402. CORPORATE EXISTENCE. Subject to Article VII hereof, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 403. PAYMENT OF TAXES AND OTHER CLAIMS. The Company has paid and will in the future pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or property of the Company, and (b) all lawful claims against the Company for labor, materials and supplies which in the case of either clause (a) or (b) of this Section 303, if unpaid, might by law become a lien upon its property; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 404. DIVIDENDS/COMPENSATION. It shall not (a) declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of its capital stock (now or hereafter outstanding) of the Company or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Company, or apply any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of any shares of any class of capital stock (now or hereafter outstanding) of the Company or any option, warrant or other right to acquire shares of the Company's capital stock, or (b) make any deposit for any of the foregoing purposes. No additional salary, bonus or other cash or non-cash compensation shall be paid to any of the Company's Executive Employees in an amount greater than the amount set forth in any existing employment contracts with such individuals, or, in the case of "at-will" Executive Employees, any increase in the compensation paid for such Executive Employees shall require the prior written approval of the Company's Board of Directors and the Administrative Agent, which approval will not be unreasonably withheld. No non-cash compensation shall be paid to any employees of the Company without the prior written approval of the Company's Board of Directors and the Administrative Agent, which approval will not be unreasonably withheld. -14- 16 SECTION 405. CORPORATE EXISTENCE; FOREIGN QUALIFICATION. It will do and cause to be done at all times all things necessary to (a) maintain and preserve the corporate existence of the Company (b) be duly qualified to do business and in good standing as foreign corporations in each jurisdiction where the nature of its business makes such qualification necessary, and (c) comply with all contractual obligations and requirements of law binding upon it. SECTION 406. BOOKS, RECORDS AND INSPECTIONS. It shall: (a) maintain, and cause each of its Subsidiaries, if any, to maintain complete and accurate books and records; (b) permit, and cause each of its Subsidiaries, if any, to permit access at reasonable times by Lender to its books and records; (c) permit, and cause each of its Subsidiaries, if any, to permit Lender to inspect at reasonable times its properties and operations; and (d) permit, and cause each of its Subsidiaries, if any, to permit Lender to discuss its business, operations and financial condition with its officers and employees or with its outside auditors. SECTION 407. COMPLIANCE WITH LAWS. It shall comply with all federal, state and local laws, rules and regulations related to its businesses; SECTION 408. MAINTENANCE OF PERMITS. It shall maintain all permits, licenses and consents as may be required for the conduct of its business by any state, federal or local government agency or instrumentality. SECTION 409. CAPITAL EXPENDITURES/DEBT. It shall not, without the express prior written consent of Lender, (a) make any capital expenditures not made with the proceeds of the sale of the Note, and the use of all proceeds for capital expenditures shall be substantially as described in the Officer's Certificate applicable thereto, or (b) other than the Note or any other "convertible note" as referenced in Section 203(a) hereof, incur any new Indebtedness, liability or obligation to any third party. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants as follows to Lender: -15- 17 SECTION 501. CUSTOMER CONTRACTS. The Company represents and warrants to Lender that, as of the date hereof, to its knowledge all contracts and agreements between it and purchasers of its goods and services (whether payable in cash or in kind) are valid and in full force and effect, all amounts due and owing to the Company thereunder have been paid, no default exists either on the part of the Company or of any other party to any such contract and that the list of such contracts appearing on Schedule 401 attached hereto is true, accurate and complete; SECTION 502. BOARD OF DIRECTORS. As of the date hereof, the list of Directors making up its Board of Directors set forth on Schedule 402 attached hereto is true, accurate and complete, and all such Directors have been duly elected by valid shareholder action in the manner required by the Certificate of Incorporation and/or the Bylaws of the Company; SECTION 503. ORGANIZATION, ETC. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has no active Subsidiaries at the date hereof. The company has corporate power to own or lease its properties and to carry on its business as and in the places where such properties are now owned, leased or operated, and its business is now conducted, and the Company has complied in all material respects with all material federal, state and local laws with respect to the operation and the conduct of its business. Copies of the Certificate of Incorporation and all amendments thereto, bylaws as amended and currently in force, stock records and corporate minutes and records of the Company heretofore made available to Lender are complete and correct at the date hereof; SECTION 504. CAPITAL STOCK; STOCK OPTIONS. (a) The Company has authorized capital stock consisting of 10,000,000 shares of Common Stock, five cent ($.05) par value, of which 7,753,580 shares are issued and outstanding as of November 8, 1999, and 1,000,000 shares of Preferred Stock, five cent ($.05) par value, none of which are issued or outstanding. All of the issued and outstanding shares of Common Stock are duly authorized and validly issued, fully-paid and non-assessable, were offered, issued and sold in accordance with applicable federal and state securities laws, and there are no preemptive rights in respect thereof. There are no other classes of stock of the Company other than the Common Stock and Preferred Stock. (b) There are no outstanding options, warrants, rights, calls, commitments, conversion rights, plans or other agreements or instruments of any character providing for the purchase or other acquisition by the holders thereof or issuance of any company securities of any description, except as set forth on Schedule 404(b) attached hereto. SECTION 505. CORPORATE AUTHORITY. The Company has full legal right and corporate power and authority, without the consent of any other person, to make, execute, deliver and perform this Agreement and the transactions contemplated hereby, and the execution, delivery and performance of this Agreement by the Company has been duly authorized by all necessary corporate action of the Company. -16- 18 SECTION 506. NOTES AND ACCOUNTS RECEIVABLE. To its knowledge, all notes receivable and accounts receivable are valid obligations of the respective makers thereof, are as set forth on Schedule 406 attached hereto; except as disclosed in such Schedule 406, are not subject to any valid offset or counterclaim; and are not subject to any assignment, claim, lien or security interest. SECTION 507. ACTIONS, SUITS, ETC. There are no actions, suits, claims, complaints, charges, hearings, investigations, arbitrations (or other dispute resolution proceedings) or other proceedings pending or, to its knowledge, threatened against, by or affecting the Company in any court or panel or before any arbitrator or governmental agency, domestic or foreign, other than (a) actions related to garnishments of employee wages, or (b) routine matters covered by insurance. The Company has not been charged with, and to its knowledge is not under investigation with respect to, any charge concerning any violation of any provision of any federal, state or other applicable law or administrative regulation with respect to its business. There are no judgments unsatisfied against the Company and no consent decrees to which the Company is subject. The Company is not involved in or threatened with any labor dispute which could have a material adverse effect on the business and operations of the Company. SECTION 508. MATERIAL CONTRACTS. Schedule 408 attached hereto sets forth an accurate, correct and complete list of all instruments, commitments, agreements, arrangements and understandings related to its business to which the Company is a party or bound, or pursuant to which the Company is a beneficiary, meeting any of the descriptions set forth below (the "Material Contracts"): (a) Real estate leases, personal property leases, licenses of intellectual property, technical information or software, employment contracts and benefit plans; (b) Any contract for capital expenditures or for the purchase of goods or services in excess of $100,000; (c) Any instrument evidencing indebtedness (other than routine purchase orders), any liability for borrowed money, any obligation for the deferred payment of the purchase price for property in excess of $100,000 (excluding normal trade payables), or any instrument guaranteeing any indebtedness, obligation or liability; (d) Any advertising contract not terminable without payment or penalty on thirty (30) days (or less) notice; (e) Any license or royalty agreement; (f) Any contract for the purchase or sale of any assets in excess of $100,000 other than in the ordinary course of business or granting an option or preferential rights to purchase or sell any assets in excess of $100,000; -17- 19 (g) Any contract containing covenants not to compete in any line of business or with any person in any geographical area; (h) Any contract relating to the acquisition of a business or the equity of any other person; (i) Any other contract, commitment, agreement, arrangement or understanding related to its business which provides for payment or performance by any party thereto having an aggregate value of $100,000 or more, and is not terminable without payment or penalty on thirty (30) days (or less) notice. Accurate, correct and complete copies of each such contract have been made available to Lender. Each contract is in full force and effect and is valid, binding and enforceable as to the Company in accordance with its terms. The Company and, to the Company's knowledge, each other party has complied in all material respects with all material commitments and obligations on its part to be performed or observed under each such contract. The Company has not received any written or, to its knowledge, other notice of a default, offset or counterclaim under any contract, or any other written or, to its knowledge, other communication calling upon the Company to comply with any provision of any contract or asserting noncompliance by the Company. SECTION 509. ABSENCE OF UNDISCLOSED LIABILITIES. To its knowledge, the Company does not have any indebtedness, liability or obligation of any nature, whether absolute, accrued, contingent or otherwise, related to or arising from the operation of its business or the ownership, possession or use of any assets, except as set forth on Schedule 409 attached hereto. SECTION 510. ACCURACY OF INFORMATION. None of the information furnished by the Company to Lender in writing shall contain any untrue statement of a material fact or shall omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of circumstances under which they were made, not misleading. SECTION 511. REAL ESTATE LEASES. Schedule 411 attached hereto sets forth an accurate, correct and complete list of all real estate which is leased or subleased by the Company, including identification of the lease or sublease, street address, and list of material contracts, agreements, leases, subleases, options and commitments, oral or written, affecting such real estate or any interest therein to which the Company is a party or by which the Company is bound (the "Real Estate Leases"). The Company has made available to Lender accurate, correct and complete copies of each Real Estate Lease and no default exists under any Real Estate Lease. SECTION 512. PERSONAL PROPERTY LEASES. Schedule 412 attached hereto contains an accurate, correct and complete list of each lease of personal property used in the business which provides for annual lease payments in excess of $25,000 (the "Personal Property Leases"). The Company has made available to Lender accurate, correct and complete copies of each Personal Property Lease and no default exists under any Personal Property Lease. -18- 20 SECTION 513. INTELLECTUAL PROPERTY. Schedule 413 attached hereto contains an accurate, correct and complete list and summary description of all patents, trademarks, trademark rights, trade names, trade styles, trade dress, service marks, copyrights and applications for any of the foregoing utilized by the business (the "Intellectual Property"). During the preceding five (5) years, the Company has not been known by or done business under any name other than Micro General Corporation. Schedule 413 contains an accurate, correct and complete list and summary description of all licenses and other agreements relating to any Intellectual Property. Except as set forth on Schedule 413, with respect to the Intellectual Property, (a) the Company is the sole and exclusive owner and, to the knowledge of the company, has the sole and exclusive right to use the Intellectual Property; (b) no action, suit, proceeding or investigation is pending or, to the Company's knowledge, threatened; (c) to the knowledge of the Company, none of the Intellectual Property interferes with, infringes upon, conflicts with or otherwise violates the rights of others or is being interfered with or infringed upon by others, and none is subject to any outstanding order, decree, judgment, stipulation or charge; (d) there are no royalty, commission or similar arrangements, and no licenses, sublicenses or agreements, pertaining to any of the Intellectual Property; (e) the Company has not agreed to indemnify any person for or against any infringement of or by the Intellectual Property; and (f) the Intellectual Property constitutes all such assets, properties and rights which are used in or necessary for the conduct of its business. To the knowledge of the Company, the operation of its business by the Company after the date hereof, in the manner and geographic areas in which its business is currently conducted by the Company or is to be conducted as a result of its plans to expand its business into other geographic areas, will not interfere with or infringe upon any currently issued United States Letters Patent or trademarks currently registered in the Primary Register of the United States Patent and Trademark Office. The Company is not subject to any judgment, order, writ, injunction or decree of any court or any federal, state, local or other governmental agency or instrumentality, domestic or foreign, or any arbitrator, and has not entered into or is not a party to any contract which restricts or impairs the use of any Intellectual Property. SECTION 514. TRADE SECRETS. Schedule 414 attached hereto contains an accurate, correct and complete list and summary description of all information in the nature of proprietary information, including databases, compilations of information, copyrightable material and technical information, if any, relating to its business "Technical Information"). The Company has the right to use the Technical Information by virtue of ownership or by virtue of the license agreements identified in Schedule 414. The Company has no knowledge of any violation of any trade secret rights or copyrights with respect to such Technical Information. SECTION 515. SOFTWARE AND INFORMATION SYSTEMS. The Company has the right to use all electronic data processing systems, information systems, hardware, computer software programs, indexes, program specifications, charts, procedures, source codes, input data, routines, data bases and report layouts and formats, record file layouts, diagrams, functional specifications and narrative descriptions, flow charts and other related material (if any) used in and reasonably necessary for the conduct of its business (collectively the "Software"). Schedule 415 attached hereto contains an accurate, correct and complete summary description of all Software (other than non-proprietary commercially available Software). -19- 21 SECTION 516. INSURANCE. Set forth on Schedule 416 attached hereto is a true, accurate and complete list of all policies of insurance currently in force in which the Company is named as insured, loss payee, or additional insured, premiums on all of such policies have been paid, and copies of all policies have been delivered to Lender at the date hereof, and Lender has been named as loss payee or additional insured on all such policies on which such coverage is available. ARTICLE VI DEFAULTS; REMEDIES SECTION 601. EVENTS OF DEFAULT. "Event of Default," wherever used herein with respect to the Note, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) BY THE COMPANY. (1) default in the payment of any installment of principal and/or interest on the Note as and when it becomes due and payable, whether by virtue of the terms of the Note as to payments of principal and/or interest, at maturity, in connection with any redemption, or otherwise and the passage of seven (7) days following written notice thereof to the Company; or (2) default in the performance, or breach, of any material covenant, representation or warranty of the Company in this Agreement and the passage of thirty (30) days following written notice thereof to the Company, or, if such default cannot be cured within such thirty (30) days, commencement of the cure of such default within such thirty (30) days and diligent prosecution of such cure to completion; or (3) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of all or substantially all of its property, or ordering the winding up or liquidation of its affairs, and-the continuance of any such decree or order for relief or for any such other decree or order unstayed and in effect for a period of 45 consecutive days; (4) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, other consent by it to the appointment of or taking possession by a custodian, -20- 22 receiver, liquidator, assignee, trustee, sequestrator or similar official of the company or of all or substantially all of its property, or the making by it of a general assignment for the benefit of creditors; or (5) until all sums due under the Note have been repaid, or any increase by the Company of the number of members of its Board of Directors to a number greater than the number who hold office at the time of execution of the Note, or any change in the actual members of the Company's Board of Directors, without the prior written consent of the Lender; or (6) the failure of the Company to provide any information or report to Lender required to be provided pursuant to Article VI hereof and the passage of thirty (30) days following written notice thereof to the Company, or, if such default cannot be cured within such thirty (30) days, commencement of the cure of such default within such thirty (30) days and diligent prosecution of such cure to completion. (b) BY THE LENDER. The failure of the Lender to fund pursuant to Section 203(a) hereof in the event that a proper Officer's Certificate pursuant to Section 1001(a) is received and the Company is in compliance with all covenants of this Agreement and the Note. SECTION 602. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT; OTHER REMEDIES. (a) LENDER'S REMEDIES. (i) Upon the occurrence of an Event of Default under any event described in Section 501(a) (other than an Event of Default described in Sections 501(a)(4) and 501(a)(5) hereof), then in every such case Lender may declare the principal amounts of the Note to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amount shall become immediately due and payable. The Company specifically acknowledges and agrees that the occurrence of any Event of Default under any event described in Section 501(a) hereof will automatically cause the Note to be in default, and all Events of Default under the Note must be cured before any one Event of Default shall be deemed cured. (ii) At any time after such a declaration of acceleration with respect to the Note has been made and before a judgment or decree for payment of the money due has been obtained by Lender as hereinafter in this Article provided, Lender may, by written notice to the Company, rescind and annul such declaration and its consequences if, (1) the Company has paid to Lender a sum sufficient to pay (A) all overdue interest on the Note, (B) the principal on the Note which has become due otherwise than by such declaration of acceleration and interest thereon at the Note Rate, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the Note Rate, and (D) all sums paid or advanced by Lender hereunder and the actual compensation, expenses, disbursements and advances of Lender, its agents and counsel; and (2) all Events of Default with respect to the Note, other than the nonpayment of the principal of the Note which has become due solely by such declaration of acceleration, have been cured or waived by Lender. No such rescission -21- 23 shall affect any subsequent default or impair any right consequent thereon. In the case of any Event of Default described in Section 501(a)(4) or 501(a)(5), all unpaid principal of and accrued interest on the Note shall be due and payable immediately without any declaration or other act on the part of Lender. (iii) Obligations of this Note are secured by the Security Agreement dated August 1, 1996. (b) THE COMPANY'S REMEDIES. Upon the occurrence of an Event of Default as described in Section 501(b) hereof, then the option amount referred to in Section 901 hereof shall be limited to a number equal in value to the amount already funded. SECTION 603. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT. (a) The Company covenants that if default is made in the payment of any principal and/or interest on the Note when such principal and/or interest becomes due and payable, whether at a time specified in the Note, at maturity of the Note or in connection with any redemption or otherwise, the Company will, upon demand of Lender, pay to it the whole amount then due and payable on the Note for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and-on any overdue interest, at the Note Rate, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of Lender, its agents and counsel, it being understood that as to the Lenders, any payments will be applied on a pro rata basis among the Lenders based on each Lender's respective Note amount. If the Company fails to pay such amounts forthwith upon such demand, Lender may prosecute a proceeding to judgment or final decree and may enforce the same against the Company or any other obligor on the Note and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or of any other obligor on the Note, wherever situated, it being understood that any monies collected shall be applied on a pro rata basis among the Lenders based on each Lender's respective Note. In addition, Lender may give notice to customers of the Company that all payments under contracts listed on Schedule 401 shall, until further notice, be paid directly to Lender, and the Company consents to each such notice. (b) If an Event of Default with respect to the Note occurs, Lender may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as it shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Agreement or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 604. LENDER MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or of any other obligor on the Note or the property of the Company or of such other obligor or their creditors, Lender (irrespective of whether the principal of the Note shall then be due and payable as therein expressed or by -22- 24 declaration or otherwise and irrespective of whether it shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Note and to file such other papers and documents as may be necessary or advisable in order to have the claims of Lender (including any claim to the right to own Common Stock or for the reasonable compensation, expenses, disbursements and advances of Lender, its agents and counsel) allowed in such judicial proceeding, and (b) to collect and receive any monies or other property payable or deliverable on any such claims. SECTION 605. APPLICATION OF MONEY COLLECTED. Any money collected by Lender pursuant to this Article V shall be applied in the following order, at the date or dates fixed by Lender and, in case of the distribution of such money on account of principal or interest, upon presentation of the Note and the notation thereon of the payment if only partially said and upon surrender thereof if fully paid: First: To the costs and expenses of Lender in collecting sums due it hereunder; Second: To the payment of the amounts then due and unpaid first for interest on and then for principal of all outstanding Notes, applied on a pro rata basis among the Lenders based on each Lender's respective Note; and Third: To the payment of the remainder, if any, to the Company or any other Person lawfully entitled thereto. SECTION 606. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to Lender is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 607. DELAY OR OMISSION NOT WAIVER. No delay or omission of Lender to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default. Every right and remedy given by this Article V or by law may be exercised from time to time, and as often as may be deemed expedient by Lender. SECTION 608. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, -23- 25 now or at any time hereafter in force, which may affect the covenants or the performance of this Agreement; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to Lender, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VII REPORTS BY COMPANY SECTION 701. ANNUAL STATEMENT. The Company will deliver to Lender, within 30 days after the end of each fiscal year of the Company, an Officer's Certificate stating that to the best of such officer's knowledge, the Company has fulfilled all its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation and such default is continuing, specifying each such default of which such officer has knowledge, and the nature and status thereof. SECTION 702. REPORTS BY COMPANY. The Company shall file with Lender, such information, documents and other reports, and such summaries thereof, as Lender shall request, immediately upon request, but without request the Company shall deliver to Lender audited financial statements of the Company prepared by independent certified public accountants ("Accountants") within ninety (90) days of the end of each Company fiscal year. SECTION 703. QUARTERLY FINANCIAL REPORTS. Throughout the term of this Agreement and for so long as any amount remains unpaid under the Note, the Company shall furnish Lender with copies of its quarterly financial reports no later than forty-five (45) days following the end of the subject fiscal quarter. ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, SALE OR LEASE SECTION 801. COMPANY MAY CONSOLIDATE. ETC., ON CERTAIN TERMS. The Company shall not consolidate with or merge into any other corporation or convey, transfer, sell or lease its properties and assets as, or substantially as, an entirety to any Person, issue any capital stock (including Common Stock) of the Company unless (a) prior to such transaction Lender has released in writing its Right of First Refusal as required by Section 702 hereof, and (b) upon any such consolidation, merger, sale, conveyance or exchange of or by the Company, (i) the Company is the continuing corporation and the Company's Common Stock outstanding immediately prior to the merger is not exchanged for securities, cash or other property of another corporation, (ii) there is an exchange of the Note for other securities in connection with such transaction, or (iii) the due and punctual payment of the principal of and interest on, the Note, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Agreement -24- 26 to be performed by the Company, are expressly assumed by a note supplemental to the Note by the corporation formed by such consolidation, or whose securities, cash or other property will immediately after the merger be owned, by virtue of the merger, by the holders of Common Stock of the Company immediately prior to the merger, or by the corporation that shall have acquired such property or securities. Furthermore, the Company shall not consolidate with or merge into any other corporation or convey, transfer, sell or lease its properties and assets as, or substantially as, an entirety to any Person, or enter into any statutory exchange of securities with another corporation, unless the Right of First Refusal has been released and unless immediately after giving effect to such transaction no Event of Default shall have occurred and be continuing, and the Company shall have delivered to Lender an Officer's Certificate stating that such transaction and such supplemental agreement comply with this Agreement. SECTION 802. RIGHT OF FIRST REFUSAL OF LENDERS. For so long as any amounts due under the Note shall be outstanding, Lender shall have and retain the first option to purchase any and all assets of the Company and any and all capital stock (including Common Stock) of the Company, upon the same terms and subject to the same conditions as may be offered to the Company by a third party for such assets or capital stock; provided, however, that any non-cash consideration offered for any such assets or capital stock shall be given its then current market value in cash and Lender shall have the opportunity to pay the amount of such cash in lieu of any non-cash consideration offered by a prospective owner of any assets or capital stock on a pro rata basis as to the Lender's exercise of that right. Immediately upon receipt of any offer to purchase any assets or capital stock, or upon determining that the Company desires to sell any assets or capital stock, the Company shall immediately notify Lender of the assets and/or capital stock proposed to be bought and sold, and of the terms of such proposed purchase and sale. Within twenty (20) days of being so notified, Lenders shall notify either the Company and/or the owner of the capital stock in question that they (or any one of them) will exercise the right of first refusal granted herein ("Right of First Refusal"), or, in the alternative, that they (or any one of them) thereby release such Right of First Refusal and consents to the sale of the assets or capital stock on the terms described. Any change in such terms shall give each Lender the right to once again exercise or release its Right of First Refusal within an additional time period identical to that specified above. ARTICLE IX REDEMPTION OF NOTE BY THE COMPANY SECTION 901. RIGHT TO REDEEM. The Company may, at its option, redeem all or, from time to time, any part of the Note, on any date prior to maturity, in the manner specified in this Article VIII, at the original principal amount thereof, plus accrued and unpaid interest, if any, to the date fixed for redemption, but no such redemption shall in any way impair the right of Lender to convert the Note into shares of Common Stock as specified in this Agreement or in the Right of First Refusal granted hereunder. SECTION 902. NOTICE OF REDEMPTION. -25- 27 (a) In case the Company shall desire to exercise its right to redeem all or any part of the Note pursuant to Section 801 hereof, it shall fix a date for redemption (a "Redemption Date"), shall notify Lenders in writing of such date, and shall mail or cause to be mailed a notice of such redemption (a "Notice of Redemption") at least ten (10) and not more than thirty (30) days prior to the date fixed for redemption to Lenders at their principal executive offices. Such mailing shall be by first class mail. The Company agrees to exercise said right of redemption on an equitable and pro rata basis among the Lenders. (b) The Notice of Redemption shall specify the principal amount of the Note to be redeemed, the Redemption Date for the Note, and the Redemption Price at which the Note is to be redeemed, and shall state that payment of the Redemption Price of the Note or portions thereof to be redeemed will be made on surrender of the Note to be redeemed, that interest accrued to such Redemption Date will be paid as specified in such notice, and that from and after such date interest thereon will cease to accrue. In the event of full redemption of the Note, such Notice of Redemption shall also state that the right to convert the Note or portion thereof into Common Stock will expire at the close of business on December 14, 2004. (c) On or prior to each Redemption Date specified in each Notice of Redemption given as provided in this Section 802, the Company will pay to Lender an amount of money sufficient to redeem on such Redemption Date the Note or portion thereof so called for redemption at the appropriate Redemption Price, together with accrued interest to the Redemption Date. (d) If the Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the date fixed for redemption at the Note Rate and the Note shall remain convertible into Common Stock until December 14, 2004, or until all amounts due under the Note have been repaid in full. ARTICLE X RIGHT TO CONVERT NOTE AND/OR RIGHT TO PURCHASE STOCK SECTION 1001. RIGHTS GRANTED. Subject to and upon compliance with the provisions of this Article IX, and specifically Section 902 hereof, Lender shall have the right, at its option, at any time or from time to time on or prior to the close of business on December 14, 2004, to convert the principal amount of the Note up to a value of $5,265,408 into, an aggregate of 526,541 shares of Common Stock at a price of $10.00 per share (the "Conversion Price"). SECTION 1002. ANTI-DILUTION RIGHTS OF LENDER. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the conversion privilege set forth in Section 901 hereof, but will at all times in good faith carry out the provisions and intent of Section 901 and take all such action as may be necessary or appropriate to protect against impairment of the rights of Lender to convert the Note into, or to purchase, Common Stock. In the event that, at any time prior to full exercise by Lender of its right to purchase such Common -26- 28 Stock, the Company shall sell or otherwise transfer any Common Stock, the Company undertakes and agrees to make any adjustments that may be necessary to permit Lender to purchase an equal number of shares of the Common Stock for a per share price equal to the per share price paid by such other purchaser or transferee, including, if necessary, refunding to Lender any sums necessary to cause Lender to receive the benefit of this Section 902, such benefit to survive the repayment of the Note and to be applicable with respect to issuances of Common Stock until December 14, 1999. -27- 29 SECTION 1003. MANNER OF EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, Lender shall surrender the Note, duly endorsed or assigned to the Company or in blank, at the office of the Company, together with the Conversion Notice duly executed, that Lender elects to convert the Note or the portion thereof specified in said Conversion Notice or, alternatively, that Lender will purchase such Common Stock. Such Conversion Notice shall also state the name or names, together with the address or addresses in which the certificate or certificates for shares of Common Stock which shall be issuable in such conversion or purchase shall be issued as promptly as practicable after the surrender of the Note and the receipt of such Conversion Notice, the Company shall issue and deliver to Lender, or on Lender's written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of the Note or portion thereof in accordance with the provisions of this Article IX. In case the Note shall be surrendered for partial conversion, the Company shall execute and deliver to or upon the order of Lender, at the expense of the Company, a new note or notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the Note shall have been surrendered and such Conversion Notice received by the Company as aforesaid, and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion or purchase shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date. SECTION 1004. NOTICE TO LENDER PRIOR TO CERTAIN CORPORATE ACTIONS. In case: (a) the Company shall authorize the granting to the holders of its Common Stock generally of rights, warrants or options to subscribe for or purchase any shares of stock of any class or of any other rights; or (b) there shall be any reorganization or reclassification of the Common Stock (other than a change in the par value of the Common Stock), or any permissible consolidation or merger to which the Company is a party, or any permissible conveyance, transfer, sale or lease of the Company's properties and assets as, or substantially as, an entity; or (c) there shall be a voluntary or in-voluntary dissolution, liquidation or winding-up of the Company; then the Company shall cause to be given to Lender, in the manner provided in Section 110 hereof, and with respect to the events described in subsections (a), (b) and (c) of this Section 904, as promptly as possible, but in any event at least twenty (20) days prior to the applicable date hereinafter specified, a notice stating (i) the date on which the Company expects to file a Registration Statement covering the Common Stock, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding-up is expected to become effective or occur, and, if applicable, the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, -28- 30 consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding-up, subject to compliance with the Right of First Refusal required by Section 702 hereof. SECTION 1005. RESERVATION OF SHARES OF COMMON STOCK. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of effecting conversion of the Note, the full number of shares of Common Stock deliverable upon the conversion of the Note. SECTION 1006. TAXES UPON CONVERSION. The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Note pursuant hereto. SECTION 1007. COVENANTS AS TO COMMON STOCK. The Company covenants that all shares of Common Stock which may be delivered upon conversion of the Note will, upon delivery, be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. SECTION 1008. PIGGYBACK REGISTRATION RIGHTS. If the Company shall determine to register any of its securities, either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration on any registration form that does not permit secondary sales, the Company will promptly give to Lender written notice thereof and use its best efforts to include in such registration (and any related qualification under applicable Blue Sky laws or other compliance), and any underwriting involved therein, Common Stock specified in a written request made by Lender within twenty (20) days after the written notice of the Company provided for above is given. Such written request may specify all or a part of Lender's Common Stock. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the company shall so advise as a part of the written notice given as required above. In such event the right of Lender to registration shall be conditioned upon Lender's participation in such underwriting and the inclusion of its Common Stock in the underwriting. Lender shall enter with the Company into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding the above, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, the representative may exclude Lender's Common Stock from, or limit the number of shares of Lender's Common Stock to be included in, the registration and underwriting. The number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account, then to Lender to the extent of securities it has elected to sell for its own account, and thereafter to all other owners of Common Stock with the right to participate in such registration and underwriting pro rata in proportion to the percentage of all outstanding Common Stock owned by each such Person immediately prior to commencement of such registration and underwriting. If any Person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Common Stock or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the -29- 31 number of shares of Common Stock to be included in such registration is increased during the period of such registration, the Company shall offer first to Lender and then, if additional shares may be sold in the registration to all other Persons who have retained the right to include securities in the registration, the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the Persons requesting additional inclusion pro rata in proportion to the percentage that each Person's Common Stock represents of the total amount of Common Stock owned by all such Persons prior to commencement of such registration and underwriting. ARTICLE XI CONDITIONS PRECEDENT SECTION 1101. CONDITIONS PRECEDENT. The obligation of Lender to purchase the Note(s) and to make all individual disbursements thereunder is expressly conditioned upon the following: (a) The Lender's receipt from the Company, in each instance, of an Officer's Certificate signed by its President satisfactory to Lender in which such President represents and warrants to Lender on behalf of the Company that (1) use of the proceeds from any disbursement of principal of the Note shall be dedicated to such corporate uses as the Company's Board of Directors may deem proper; and (2) there are no defaults under this Agreement or the Note. (b) The Lender's receipt of a Certificate of Good Standing certified by the Secretary of State of the State of Delaware as to the corporate status of the Company; and -30- 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, and their respective seals to be hereunto fixed and attested, all as of the day and year first above written. MICRO GENERAL CORPORATION (the "Company") By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- CALWEST SERVICE CORPORATION ("Lender") By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- -31- 33 EXHIBIT "A" MICRO GENERAL CORPORATION CONVERTIBLE NOTE $5,265,408.00 Irvine, California December 15, 1999 MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor corporation or corporations under the Agreement hereinafter referred to), for value received, hereby promises to pay to Fidelity National Financial, Inc., at its office at 17911 Von Karman Avenue, Suite 300, Irvine, California 92614 ("Lender"), or order, principal sum of FIVE MILLION TWO HUNDRED SIXTY FIVE THOUSAND FOUR HUNDRED-EIGHT DOLLARS ($5,265,408.00), or so much thereof as shall have been disbursed by Lender and which at that time remains unpaid, together with simple interest thereon from the date hereof at the rate of ten percent (10%) per annum, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, payable as follows: Accrued interest only on the principal amount hereof shall be payable quarterly in arrears during the first five (5) years of the term hereof commencing December 15, 1999. Thereafter, on December 14, 2004, the entire unpaid balance of this Note, including principal and accrued but unpaid interest, shall be due and payable. This Note may be prepaid in whole or in part at any time with the prior written consent of Lender so long as the Company gives ten (10) days' prior written notice to Lender of the Company's intent to prepay this Note or any portion hereof. Such notice shall state the proposed payment date (the "Payment Date") and the principal amount to be repaid. At any time during the term hereof, the Lender may, but shall not be obligated to, elect to convert all or any portion of the principal to be repaid on the Payment Date into shares of the Company's common stock (the "Common Stock") at the "Conversion Price" (as that term is defined in the Agreement hereinafter referred to) then in effect by delivering to the Company, to the attention of its President, written notice of its election to exercise its conversion rights as set forth herein. Notwithstanding anything contained herein to the contrary, and notwithstanding the Company's payment of this Note in whole or in part, the Lender shall retain the right to convert the then-outstanding principal balance hereof into the subject shares of Common Stock throughout the five (5) year term of this Note at the Conversion Price. Any partial prepayments made hereunder shall be applied to installments due hereunder in inverse order of maturity. This Note is duly authorized and issued by the Company, is designated as set forth on the face hereof, and is limited to the aggregate principal amount of $5,265,408 issued under and pursuant to that certain Convertible Note Purchase Agreement, dated as of December 14, 1999 (herein called -32- 34 the "Agreement"), duly executed and delivered by the Company and Lender, to which Agreement reference is hereby made for a further description of the rights, limitation of rights, obligations, and duties thereunder of the Company and Lender. In case an Event of Default shall have occurred under this Note or under the Agreement (as the term "Event of Default" is defined in said Agreement), the principal balance hereof and all accrued but unpaid interest thereon may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Agreement. Reference is hereby made to the further provisions of the Agreement, including, without limitation, provisions giving the Lender of this Note the right to convert this Note into Common Stock on the terms and subject to the limitations more fully specified in the Agreement. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used in this Note and not otherwise defined still have the meanings assigned to such terms in the Agreement. IN WITNESS WHEREOF, the Company has caused this instrument to be signed manually or by facsimile by its duly authorized officers. Dated: December 15, 1999 MICRO GENERAL CORPORATION (the "Company") By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ -33- 35 EXHIBIT "B" CONVERSION NOTICE To: Micro General Corporation 2510 Redhill Avenue Santa Ana, California 92705 The undersigned, as the owner of that certain Convertible Promissory Note dated December 15, 1999 (the "Note"), hereby irrevocably exercises the option to convert the Note, or that portion of the Note designed herein below, into _____________ shares of Common Stock of Micro General Corporation at a price of $_______ per share, in accordance with the terms of that certain Convertible Note Purchase Agreement between the undersigned and Micro General Corporation as referenced in the Note, and directs that the shares issuable and deliverable upon the conversion be issued and delivered to the holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a person other than the undersigned, the undersigned has herein below named the transferee to whom the new Note should be issued. Dated: ----------------- ------------------------------------------ By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ -34- 36 EXHIBIT "C" MICRO GENERAL CORPORATION (Formed under the laws of the State of California) DETACHABLE WARRANT CERTIFICATE Date of Issuance: December 15, 1999 Number of Warrant Shares Subject to this Certificate on the Date of Issuance: 250,000 Registered Holder: CAL WEST SERVICE CORPORATION Void after 5:00 p.m. Pacific Daylight Time, December 14, 2004 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS AND, IF NECESSARY, RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO MICRO GENERAL CORPORATION THAT REGISTRATION IS NOT REQUIRED. ANY SUCH SECURITIES MAY ONLY BE SUBJECT PURSUANT TO THE TERMS AND PROVISIONS AND CONDITIONS SPECIFIED IN THAT CERTAIN "LOAN AGREEMENT AND AGREEMENT TO ISSUE DETACHABLE WARRANTS" DATED DECEMBER ____, 1999, BY AND BETWEEN MICRO GENERAL CORPORATION AND CAL WEST SERVICE CORPORATION, A CALIFORNIA CORPORATION AS LENDER (THE "AGREEMENT"), A COMPLETE COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF MICRO GENERAL CORPORATION AND A CONFORMED COPY WHICH WILL BE FURNISHED TO THE HOLDER OF SUCH SECURITIES UPON WRITTEN REQUEST AND UPON PAYMENT OF REASONABLE CHARGE. NO TRANSFER OF SUCH SECURITIES SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL ANY CONDITIONS RELATING TO TRANSFER OF SUCH SECURITIES SO SPECIFIED IN THE AGREEMENT SHALL HAVE BEEN COMPLIES WITH. FOR VALUE RECEIVED, Micro General Corporation, a Delaware corporation (the "Company") hereby certifies that CAL WEST SERVICE CORPORATION ( the "Investor"), or any registered assignee of Investor, is the registered holder (the "Holder") of 250,000 Series 3 Warrants -35- 37 (the "Warrants") to purchase from the Company 250,000 newly issued shares of Common Stock of the Company (each, a "Share" and collectively, the "Shares"). The Warrants evidenced by this Certificate are part of a duly authorized issue of Warrants to purchase a total of 250,000 newly issued shares simultaneously with the making of loans by Cal West Service Corporation under the terms of the Agreement. The Agreement is incorporated in this Certificate by this reference and must be referred to for a complete description of the rights, obligations and duties of the Company and the Holders of the warrants issued pursuant to the Agreement. In the event of any conflict between the terms of this Certificate and the terms of the Agreement, the terms of the Agreement will control. Capitalized terms not defied in this Certificate will have the meanings assigned to them under the Agreement. 1. Exercise of Warrants. (a) On or before 5:00 p.m. Pacific Standard Time on December 14, 2004, the Holder shall have the right to purchase from the Company one (1) fully paid and non-assessable Share for each Warrant at the exercise price of TEN DOLLARS ($10.00) per Share, subject to any adjustment under paragraph 6 of this Certificate (the "Exercise Price"), and upon surrender to the Company at its principal office of this Certificate evidencing such Warrants, with the form of election to purchase attached hereto and signed, (specifying the number of Shares for which the Warrant is exercisable), and upon payment to the Company of the Exercise Price in cash, lawful currency of the United States of America, Share(s) shall be issued. (b) The Warrants represented by this Certificate shall be exercisable, at the election of the Holder, either in their entirety or from time to time for part only of the number of warrants specified in this Certificate and in the notice with respect to the exercise thereof. If less than all of the Warrants evidenced by this Certificate are exercised at any time prior to the Maturity Date, a new Certificate or Certificates, as the case may be, shall promptly be issued for the balance of the Warrants not so exercised, but no fractional numbers. All Certificates surrendered upon exercise of Warrants shall be canceled by the Company. (c) Upon surrender of any Certificates and payment of the Exercise Price, Company shall promptly issue and cause to be delivered to, or upon the written order of, the Holder, and in such name or names as the Holder may designate, a certificate or other document representing the Share or Shares issuable upon the exercise of the Warrants evidenced by this Certificate. The certificate representing the Shares shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Shares as of the date of the surrender of any Certificate and payment of the Exercise Price. 2. Right to Transfer (a) Notwithstanding anything contained in the Agreement or this Certificate to the contrary, the Warrants represented by this Certificate may be pledged, together with the rights of the -36- 38 Investor, in whole or in part, to any bank, savings and loan association or other institutional lender affiliated with Investor (in each case, and "Institutional Lender") as collateral to secure a bona fide loan form such Institutional Lender, and may be transferred to such Institutional Lender upon the foreclosure of the security interest created by such pledge, provided that such pledge or transfer (in each case, an "Institutional Transfer"), as the case may be, is in compliance with the Securities Act and any applicable state securities and insurance laws. (b) Except as otherwise set forth below, the warrants represented by this Certificate may also be pledged, assigned, sold or otherwise transferred in whole or in part (in each case, a "Transfer") to any other "Person" or "Persons" (as hereinafter defined), on the condition that such Transfer is in compliance with the Securities Act and any applicable state securities and insurance laws. (c) With respect to any offer, sale or other disposition of any Warrants or any Shares acquired on exercise of any Warrants which have not been registered pursuant ;to the terms of the Agreement, the Holder will give written notice to the Company prior to any such offer, requested by Company, with a written opinion of such Holder's counsel, to the effect that such offer, sale or other disposition may be effected without registration or qualification under any federal or state law then in effect. Within fifteen (15) days after receiving a Transfer Notice (the "Notice Period") and reasonably satisfactory opinion, if so requested, Company shall notify such Holder that such Holder may offer, sell or otherwise dispose of the Warrants or any Shares acquired on exercise of any Warrants, all in accordance with the terms of the Transfer Notice delivered to Company. Such transfer must be effected within ninety (90) calendar days following the Holder's receipt of written consent from Company with respect to such transfer. If company has determined that the opinion of counsel for the Holder is not reasonable or satisfactory to the Company, Company shall so notify the Holder within the Notice Period that such determination has been made. Each of the Warrants and Shares with respect to which any Warrant may be exercised thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act unless, in the opinion of counsel for Company, it is determined that such legend is not required in order to ensure compliance and Company may issue stop transfer instructions to its transfer agent in connection with such restriction. In the event that Company fails to respond to a Transfer Notice prior to the expiration of the Notice Period, the Holder may sell or otherwise transfer the Warrants or any Common Stock acquired as a consequence of exercising any Warrants in the manner described in such Transfer Notice; provided, however, that such transfer is effected within ninety (90) calendar days following the expiration of the Notice Period. (d) The following terms shall be defined as follows: (i) "Person" or "Persons" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof; and (ii) "Investor Controlled Affiliates" shall be any trusts, corporations, associations, limited partnerships, general partnerships or other business entities in -37- 39 which more than fifty percent (50%) of the stock of each class having ordinary voting power or beneficial or other ownership interest, as appropriate, shall, at the time as of which any determination is being made, be owned or controlled, directly or indirectly by Investor or any general or limited partner of Investor is an "affiliate," as such term is defined under Rule 405 promulgated under the Securities Act and the regulations, rulings and decisions promulgated thereunder. (e) Company may deem and treat each registered Holder of a Warrant Certificates as the absolute owner thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for the purpose of any exercise thereof, any distribution to the Holder, or any other purposes. (f) Company shall promptly register any transfer of record ownership of any outstanding Certificates on the Company Register upon surrender thereof accompanied, if so required by Company, by a written instrument or instruments of transfer duly executed by Holder or by its duly authorized attorney. Upon a proper registration of transfer, a new Certificate shall be issued to the transferee and the surrendered Certificate shall be canceled by Company; provided, however, in the event of a partial transfer, Company shall promptly issue to the transferer a new Certificate representing the retained portion of the transferor's Warrants and, in connection with any transfer permitted under terms of the Agreement, the transferor can require Company to reissue the Certificates representing the Warrants for any number of Warrants, but no fractional shares. -38- 40 EXERCISE OF WARRANT Cal West Service Corporation hereby irrevocably elects to exercise the purchase rights represented by this Certificate with respect to the following number of shares of Common Stock of MICRO GENERAL CORPORATION, a Delaware corporation (the "Company"), upon the terms and subject to the conditions specified in that certain Convertible Note Purchase Agreement dated December 15, 1999, by and between Company and Cal West Service Corporation, a California corporation as lenders. Number of Shares_________________ Exercise Price $10.00 per Share Total Cost: _____________________ Dated: _________________ CAL WEST SERVICE CORPORATION By:_______________________________ Title:____________________________ * Subject to any adjustments as provided under Terms and Provisions of the Certificate or the Agreement. -39- EX-10.30 6 MATERIAL CONTRACT 1 EXHIBIT 10.30 CREDIT AGREEMENT This Credit Agreement ("Agreement") is made and entered into on December 22, 1999,by and between Micro General Corporation, a Delaware corporation, ("Borrower") and Imperial Bank, a California banking corporation, ("Bank"). Subject to the terms and conditions of this Agreement, any security agreements) executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor of Bank, or any other agreements executed in conjunction therewith (collectively, the "Loan Documents"), Bank shall make the loans and or advances (individually a "Loan" and collectively "Loans") referred to below to Borrower. In consideration of mutual covenants and conditions hereof, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.01 REVOLVING CREDIT COMMITMENT. (a) REVOLVING LINE OF CREDIT. Subject to the terms and conditions of this Agreement, provided that no event of default then has occurred and is continuing, Bank shall, upon Borrower's request make advances ("Revolving Loans") to Borrower, for general corporate purposes, in an amount not to exceed $5,000,000 (the "Revolving Line of Credit") until June 5, 2000 (the "Revolving Line of Credit Maturity Date"). Revolving Loans may be repaid and reborrowed, subject to the provisions of the LIBOR Addendum attached to the promissory note evidencing the Revolving Line of Credit, provided that all outstanding principal and accrued interest on the Revolving Loans shall be payable in full on the Revolving Credit Maturity Date. (b) REVOLVING NOTE. The interest rate, principal and interest payments, maturity date and certain other terms of the Revolving Loan will be contained in a promissory note dated the date of this agreement, as such may be amended or replaced from time to time. 1.02 DOCUMENTATION FEE, COSTS AND EXPENSES. In addition to any other amounts due, or to become due, concurrently with the execution hereof, Borrower agrees to pay to Bank a documentation fee in the amount of $250.00, and all other costs and expenses incurred by the Bank the perfection of any security interest granted to Bank by Borrower. 1.03 COLLATERAL. Borrower shall grant or cause to be granted to Bank a first priority lien on any and all personal property assets of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest or pursuant to the terms of any security agreement, an intellectual property security agreement or otherwise as security for all of Borrower's obligations to Bank, all as may be subject to Section 5.03 herein. 2. REPRESENTATIONS OF BORROWER Borrower represents and warrants that: 2.01 EXISTENCE AND RIGHTS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of Delaware, without limit as to the duration of its existence. 1 2 Borrower is authorized and in good standing to do business in the state of its incorporation; Borrower has the appropriate powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing in each state in which the character of the properties owned by it therein or the conduct of its business makes such qualification necessary; and Borrower has the power and adequate authority to make and carry out this Agreement. Borrower has not other investment in any other business entity except for those disclosed in it's annual report 10-K, or quarterly report 10Q, as filed with the U. S. Securities and Exchange Commission. 2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement and the Loan Documents are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of or in conflict with any law or regulation or any term or provision of Borrower's charter/articles of incorporation, by-laws, or similar document as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms; subject only to bankruptcy, insolvency or similar laws affecting creditors' rights generally. 2.03 NO CONFLICT. The execution, delivery and performance of this Agreement and the Loan Documents are not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrower is a party or by, which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 2.04 LITIGATION. Except as disclosed in writing to bank by Borrower, there is no litigation or other proceeding pending or threatened against or affecting Borrower which if determined adversely to Borrower or its interest would have a material adverse effect on the financial condition of Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. 2.05 FINANCIAL CONDITION. The consolidated balance sheet of Borrower as of March 31, 1999, and the related profit and loss statement for the three month period ended as of that date, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct in all material aspects, and said balance sheet truly presents the financial condition of Borrower as of the date thereof, and has been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date there have been no material adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. 2.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are not subject to any liens or encumbrances other than those permitted by Section 5.03 hereof. 2.07 TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 2 3 2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 2.09 REGULATION U. None of the proceeds of any Loan shall be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). 2.10 ERISA. All defined benefit pension plans as defined in the Employees Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet, as of the date hereof, the minimum funding standards of Section 302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in ERISA has occurred with respect to any such plan. 2.11 YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable, have reviewed the areas within their operations and business which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the Year 2000 Problem and have made related appropriate inquiry of material suppliers and vendors, and based on such review and program, the Year 2000 Problem will not have a material adverse effect upon its financial condition, operations or business as now conducted. "Year 2000 Problem" means the possibility that any computer applications or equipment used by Borrower may be unable to recognize and properly perform date sensitive functions involving certain dates prior to and any dates on or after December 31, 1999. 3. CONDITIONS PRECEDENT TO LOAN. Prior to Bank being obligated to make any Loan pursuant to this Agreement, Bank must receive all of the following, each of which must be in form and substance satisfactory to Bank: 3.01 PROMISSORY NOTE(S). Original, executed promissory note(s). 3.02 SECURITY AGREEMENT. Original, executed security agreements) covering the personal property collateral securing the Loan(s). 3.03 FINANCING STATEMENT. Financing statement(s) executed by Borrower. 3.04 GUARANTEE. Continuing Guarantee in favor of Bank executed by Fidelity National Financial, Inc. ("Guarantor") in the amount of $5,000,000. 3.05 INSURANCE. Borrower shall have delivered to Bank evidence of insurance coverage required pursuant that Agreement to Provide Insurance executed by Borrower, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank. 3.06 ORGANIZATIONAL DOCUMENTS. Copies of the charter/articles of incorporation, or similar document as the case may be, of the Borrower and Guarantor. 3.07 AUTHORIZATIONS. Certified copies of all action taken by the Borrower and Guarantor to authorize the execution, delivery and performance of the Loan Documents. 3 4 3.08 GOOD STANDING. Good standing certificates from the appropriate secretary of state of the state in which the Borrower and Guarantor is organized and in each state in which it is required to be qualified to do business. 3.09 ADDITIONAL DOCUMENTS. Such other documents as Bank may reasonably deem necessary. 4. AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, under borrowings, or other indebtedness, or so long as Bank has any obligation to' extend credit to Borrower it will, unless Bank shall other-wise consent in writing, which consent shall not be unreasonably withheld: 4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. 4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for purposes specified in Section I of this Agreement. 4.03 INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses and/or in the exercise of good business judgment, and as required by that Agreement to Provide Insurance executed by Borrower, with the Bank to be shown as Lenders Loss Payee on such policies. 4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it to be adequate with respect thereto. 4.05 RECORDS AND REPORTS. Maintain a standard and modem system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times and upon reasonable notice during normal business hours; and furnish Bank: (a) QUARTERLY FINANCIAL STATEMENT-BORROWER. As soon as available, and in any event within forty-five (45) days after the close of each quarter, a consolidated balance sheet, profit and loss statement and reconciliation of Borrower's capital balance accounts as of the close of such period and covering 4 5 operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower. (b) QUARTERLY FINANCIAL STATEMENT-GUARANTOR. As soon as available, and in any event within sixty (60) days after the close of each quarter, Borrower to cause Guarantor to provide a consolidated balance sheet, profit and loss statement and reconciliation of Guarantor's capital balance accounts as of the close of such period and covering operations for the portion of Guarantor's fiscal year ending on the last day of such period, all in reasonable detail and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Guarantor and certified by an appropriate officer of Guarantor. (c) ANNUAL FINANCIAL STATEMENT-BORROWER. As soon as available, and in any event within one hundred twenty (120) days after and as of the close of each fiscal year of Borrower a consolidated report of audit of Borrower, all in reasonable detail, by an independent certified public accountant selected by Borrower and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower. (d) ANNUAL FINANCIAL STATEMENT-GUARANTOR. As soon as available, and in any event within one hundred twenty (120) days after and as of the close of each fiscal year of Guarantor, Borrower to cause Guarantor to provide a consolidated report of audit of Guarantor, all in reasonable detail, by an independent certified public accountant selected by Guarantor and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Guarantor and certified by an appropriate officer of Guarantor. (e) OFFICER'S CERTIFICATE. Within forty-five days (45) days after the end of each quarter and fiscal year of Borrower, a certificate of the chief financial officer of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof . (f) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND REPORTS. Promptly after the same are available, copies of all such proxy statements, financial statements and reports as Borrower or any subsidiary shall send to its members or stockholders as appropriate, if any, and copies of all reports which Borrower or any subsidiary may file with the Securities and Exchange Commission. (g) OTHER INFORMATION. Such other information relating to the affairs of Borrower as the Bank reasonably may request from time to time. 4.06 OUT OF DEBT: The unpaid balance of the Revolving Loans shall be zero (-0-) for at least thirty (30) consecutive days during the term of this Agreement. 5 6 4.07 ERISA. Cause all defined benefit pension plans, as defined in ERISA, of Borrower to, at all times, meet the minimum funding standards of Section 302 of ERISA, and ensure that no Reportable Event or Prohibited Transaction, as defined in ERISA, will occur with respect to any such plan. 4.08 LAWS. At all times comply with, or cause to be complied with, all laws, statutes, rules, regulations, orders and directions of any governmental authority having jurisdiction over Borrower or Borrower's business. 4.09 GAAP. Compliance with all financial covenants shall be calculated based on generally accepted accounting principles applied on a consistent basis as maintained by Borrower. 4.10 YEAR 2000 COMPLIANT. Borrower shall perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors whose compliance is likely to be material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Agent such certifications or other evidence of Borrower's compliance with the ten-ns of this paragraph as Bank may from time to time require. 4.11 NOTICES. Promptly notify Bank in writing of (i) the occurrence of any Event of Default hereunder or any event which upon notice and lapse of time would be an Event of Default; (ii) all litigation affecting Borrower where the amount is $250,000 or more; any substantial dispute which may exist between Borrower and any governmental regulatory body or law enforcement authority; any change in Borrower's name or principal place of business; or any other matter which has resulted or might result in a material adverse change in Borrower's financial condition or operations. 5. NEGATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, or so long as Bank has any obligation to extend credit to Borrower, it will not, without Bank's written consent: 5.01 TYPE OF BUSINESS: Make any substantial change in the character of its business. 5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than Loans from the Bank except obligations now existing as shown in the financial statement dated March 31, 1999, excluding those obligations being refinanced by Bank, and other than loans or advances made by FNFI or its subsidiaries to Borrower from time to time, or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due or to become due. 5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned or hereafter acquired by it, other than liens for taxes not delinquent and liens in Bank's favor and other than liens agreed to in writing by Bank. 6 7 5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary and normal course of its business as now conducted; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. 5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. 6. EVENTS OF DEFAULT The occurrence of any of the following events of default ("Events of Default") shall, at Bank's option, terminate Bank's commitment to lend and make all sums of principal and interest then remaining unpaid on all Borrower's indebtedness to Bank immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived: 6.01 FAILURE TO PAY. Failure to pay any installment of principal or of interest on any indebtedness of Borrower to Bank within, five (5) days of its due date. 6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or condition of this Agreement or any Loan Document binding upon Borrower. 6.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect. 6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business. 6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $ 250,000, writ or warrant of attachment, or similar process shall be entered or filed against Borrower or any of its assets and shall remain unvacated, unbonded or unstayed for a period of ten (10) days or in any event later than five (5) days prior to the date of any proposed sale thereunder. 6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrower and, if instituted against it, shall not be dismissed within thirty (30) days thereafter. 6.07 REVOCATION OF GUARANTEE. Any guarantee required hereunder is breached or becomes ineffective; or any Guarantor or subordination creditor disavows or attempts to revoke or terminate such guarantee or subordination agreement. 7 8 6.08 OWNERSHIP. Any change in ownership which results in the Guarantor owning less than twenty percent (20%) of Borrower's voting stock. 6.09 CESSATION OF BUSINESS. Borrower shall voluntarily suspend its business. 6.10 ADVERSE CHANGE. Any change which, in the opinion of Bank, is materially adverse to the financial condition of Borrower or any Guarantor; or should Bank, for any reason, believe that the prospect of Borrower's payment or performance hereunder or under any other agreement or instrument with Bank be impaired. 6.11 OTHER DEFAULTS. Borrower, or any Guarantor of Borrower's obligations to Bank, shall commit or do or fall to commit or do any act or thing which would constitute an event of default under any of the terms of any other agreement, document or instrument executed or to be executed by it concerning the obligation to pay money. 6.12 ADVANCES. Notwithstanding anything to the contrary contained herein, Bank shall have no duty to make advances while any event of default exists notwithstanding any cure period provided for herein. 7. MISCELLANEOUS PROVISIONS 7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank or any holder of notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or any note (s) issued in connection with a Loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 7.02 COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement, and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes any prior agreements, written or oral, with respect thereto. 7.03 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after notice, with interest thereon from the date of expenditure at the rate applicable to the Loan, reasonable attorneys' fees and all costs and expenses paid or incurred by Bank in collecting or compromising the Loan after the occurrence of an Event of Default, whether or not suit is filed. If suit is brought to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and court costs in addition to any other remedy or recovery awarded by the court. 7.04 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 7.05 INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assigns of Borrower. 8 9 7.06 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the state of California, to the Jurisdiction of whose courts the parties hereby agree to submit. 7.07 OFFSET. In addition to and not in limitation of all rights of offset that Bank or other holder of the Loan may have under applicable law, Bank or other holder of any note issued hereunder shall, upon the occurrence of any Event of Default or any event which with the passage of time or notice would constitute such an Event of Default, have the right to appropriate and apply to the payment of the Loan any and all balances, credits, deposits, accounts or monies of Borrower then or thereafter with Bank or other holder, within ten (10) days after the Event of Default, and notice of the occurrence of any Event of Default by Bank to Borrower. 7.08 SEVERABILITY. Should any one or more provisions of the Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 7.09 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 7.10 ACCOUNTING. All accounting terms shall have the meanings applied under generally accepted accounting principles unless otherwise specified. 7.11 REFERENCE PROVISION. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Credit Agreement, any security agreement executed by Borrower in favor of Bank or any note executed by Borrower in favor of Bank or any other agreement or instrument issued in favor of Bank by Borrower (collectively in this Section, the "Agreement") which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et @se . of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of 9 10 law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the state of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the state of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 7.13 This Agreement may be modified only by a writing signed by all parties hereto. 10 11 This Agreement is executed on behalf of the parties by duly authorized officers as of the date first above written. IMPERIAL BANK MICRO GENERAL CORPORATION ("BANK") ("BORROWER") By: By: --------------------------------- ------------------------------------ Its: Its: -------------------------------- ----------------------------------- By: ------------------------------------ Its: ----------------------------------- 11 12 THIS SPACE FOR USE OF FILING OFFICER FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - -------------------------------------------------------------------------------------------- A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional) - -------------------------------------------------------------------------------------------- C. RETURN COPY TO: (Name and Mailing Address) ----- ----- IMPERIAL BANK LOAN DOCUMENTATION SERVICES 9920 S. LA CIENEGA BLVD., STE 628 INGLEWOOD, CA 90301 ----- ----- - ------------------------------------------------------------------------------------------------------------------------------------ D. OPTIONAL DESIGNATION (if applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) FILED WITH: CALIFORNIA --------------------------------------------------------------------------------------------------------------------------------- 1a. ENTITY's NAME MICRO GENERAL CORPORATION OR --------------------------------------------------------------------------------------------------------------------------------- 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 2510 N. RED HILL AVENUE, SUITE 230 SANTA ANA CA 92705 - ------------------------------------------------------------------------------------------------------------------------------------ 1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #, if any 95-2621545 ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) 1070-004 1070-004 - ------------------------------------------------------------------------------------------------------------------------------------ 2a. ENTITY's NAME OR --------------------------------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #, if any ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) - ------------------------------------------------------------------------------------------------------------------------------------ 3a. ENTITY's NAME IMPERIAL BANK OR --------------------------------------------------------------------------------------------------------------------------------- 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS CA 90212-9762 - ------------------------------------------------------------------------------------------------------------------------------------ 4. This FINANCING STATEMENT covers the following types or items of property: ALL PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR; WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND ACCOUNTS PROCEEDS). - ------------------------------------------------------------------------------------------------------------------------------------ 5. CHECK This FINANCING STATEMENT is signed by the Secured Party instead 7. If filed in Florida (check one) BOX [ ] of the Debtor to perfect a security interest (a) in collateral Documentary Documentary stamp (if applicable) already subject to a security interest in another jurisdiction [ ] stamp tax paid [X] tax not applicable when it was brought into this state, or when the debtor's location was changed to this state, or (b) in accordance with other statutory provisions (additional data may be required) - ------------------------------------------------------------------------------------------------------------------------------------ 6. REQUIRED SIGNATURE(S) 8. [ ] This FINANCING STATEMENT is to be filed (for record) THE LIGHTSPAN PARTNERSHIP, INC. (or recorded) in the REAL ESTATE RECORDS /s/ [Signature Illegible] Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------------------------------ 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] /s/ [Signature Illegible] (optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2 - ------------------------------------------------------------------------------------------------------------------------------------ CFI PROSERVICES, INC. 400 S.W. 6TH AVENUE, PORTLAND, OREGON 97204 (1) FILING OFFICER COPY - NATIONAL FINANCING STATEMENT (FORM UCC 1) (TRANS) (REV. 12/18/95)
13 THIS SPACE FOR USE OF FILING OFFICER FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - -------------------------------------------------------------------------------------------- A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional) - -------------------------------------------------------------------------------------------- C. RETURN COPY TO: (Name and Mailing Address) ----- ----- IMPERIAL BANK LOAN DOCUMENTATION SERVICES 9920 S. LA CIENEGA BLVD., STE 628 INGLEWOOD, CA 90301 ----- ----- - ------------------------------------------------------------------------------------------------------------------------------------ D. OPTIONAL DESIGNATION (if applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) FILED WITH: CALIFORNIA --------------------------------------------------------------------------------------------------------------------------------- 1a. ENTITY's NAME MICRO GENERAL CORPORATION OR --------------------------------------------------------------------------------------------------------------------------------- 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 2510 N. RED HILL AVENUE, SUITE 230 SANTA ANA CA 92705 - ------------------------------------------------------------------------------------------------------------------------------------ 1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #, if any 95-2621545 ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) 1070-004 1070-004 - ------------------------------------------------------------------------------------------------------------------------------------ 2a. ENTITY's NAME OR --------------------------------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #, if any ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) - ------------------------------------------------------------------------------------------------------------------------------------ 3a. ENTITY's NAME IMPERIAL BANK OR --------------------------------------------------------------------------------------------------------------------------------- 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS CA 90212-9762 - ------------------------------------------------------------------------------------------------------------------------------------ 4. This FINANCING STATEMENT covers the following types or items of property: ALL PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR; WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND ACCOUNTS PROCEEDS). - ------------------------------------------------------------------------------------------------------------------------------------ 5. CHECK This FINANCING STATEMENT is signed by the Secured Party instead 7. If filed in Florida (check one) BOX [ ] of the Debtor to perfect a security interest (a) in collateral Documentary Documentary stamp (if applicable) already subject to a security interest in another jurisdiction [ ] stamp tax paid [X] tax not applicable when it was brought into this state, or when the debtor's location was changed to this state, or (b) in accordance with other statutory provisions (additional data may be required) - ------------------------------------------------------------------------------------------------------------------------------------ 6. REQUIRED SIGNATURE(S) 8. [ ] This FINANCING STATEMENT is to be filed (for record) THE LIGHTSPAN PARTNERSHIP, INC. (or recorded) in the REAL ESTATE RECORDS /s/ [Signature Illegible] Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------------------------------ 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] /s/ [Signature Illegible] (optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2 - ------------------------------------------------------------------------------------------------------------------------------------ CFI PROSERVICES, INC. 400 S.W. 6TH AVENUE, PORTLAND, OREGON 97204 (2) ACKNOWLEDGMENT COPY - NATIONAL FINANCING STATEMENT (FORM UCC 1) (TRANS) (REV. 12/18/95)
14 THIS SPACE FOR USE OF FILING OFFICER FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - -------------------------------------------------------------------------------------------- A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional) - -------------------------------------------------------------------------------------------- C. RETURN COPY TO: (Name and Mailing Address) ----- ----- IMPERIAL BANK LOAN DOCUMENTATION SERVICES 9920 S. LA CIENEGA BLVD., STE 628 INGLEWOOD, CA 90301 ----- ----- - ------------------------------------------------------------------------------------------------------------------------------------ D. OPTIONAL DESIGNATION (if applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) FILED WITH: CALIFORNIA --------------------------------------------------------------------------------------------------------------------------------- 1a. ENTITY's NAME MICRO GENERAL CORPORATION OR --------------------------------------------------------------------------------------------------------------------------------- 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 2510 N. RED HILL AVENUE, SUITE 230 SANTA ANA CA 92705 - ------------------------------------------------------------------------------------------------------------------------------------ 1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #, if any 95-2621545 ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) 1070-004 1070-004 - ------------------------------------------------------------------------------------------------------------------------------------ 2a. ENTITY's NAME OR --------------------------------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #, if any ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) - ------------------------------------------------------------------------------------------------------------------------------------ 3a. ENTITY's NAME IMPERIAL BANK OR --------------------------------------------------------------------------------------------------------------------------------- 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS CA 90212-9762 - ------------------------------------------------------------------------------------------------------------------------------------ 4. This FINANCING STATEMENT covers the following types or items of property: ALL PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR; WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND ACCOUNTS PROCEEDS). - ------------------------------------------------------------------------------------------------------------------------------------ 5. CHECK This FINANCING STATEMENT is signed by the Secured Party instead 7. If filed in Florida (check one) BOX [ ] of the Debtor to perfect a security interest (a) in collateral Documentary Documentary stamp (if applicable) already subject to a security interest in another jurisdiction [ ] stamp tax paid [X] tax not applicable when it was brought into this state, or when the debtor's location was changed to this state, or (b) in accordance with other statutory provisions (additional data may be required) - ------------------------------------------------------------------------------------------------------------------------------------ 6. REQUIRED SIGNATURE(S) 8. [ ] This FINANCING STATEMENT is to be filed (for record) THE LIGHTSPAN PARTNERSHIP, INC. (or recorded) in the REAL ESTATE RECORDS /s/ [Signature Illegible] Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------------------------------ 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] /s/ [Signature Illegible] (optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2 - ------------------------------------------------------------------------------------------------------------------------------------ CFI PROSERVICES, INC. 400 S.W. 6TH AVENUE, PORTLAND, OREGON 97204 (3) SEARCH REQUEST COPY - NATIONAL FINANCING STATEMENT (FORM UCC 1) (TRANS) (REV. 12/18/95)
15 THIS SPACE FOR USE OF FILING OFFICER FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - -------------------------------------------------------------------------------------------- A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional) - -------------------------------------------------------------------------------------------- C. RETURN COPY TO: (Name and Mailing Address) ----- ----- IMPERIAL BANK LOAN DOCUMENTATION SERVICES 9920 S. LA CIENEGA BLVD., STE 628 INGLEWOOD, CA 90301 ----- ----- - ------------------------------------------------------------------------------------------------------------------------------------ D. OPTIONAL DESIGNATION (if applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) FILED WITH: CALIFORNIA --------------------------------------------------------------------------------------------------------------------------------- 1a. ENTITY's NAME MICRO GENERAL CORPORATION OR --------------------------------------------------------------------------------------------------------------------------------- 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 2510 N. RED HILL AVENUE, SUITE 230 SANTA ANA CA 92705 - ------------------------------------------------------------------------------------------------------------------------------------ 1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #, if any 95-2621545 ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) 1070-004 1070-004 - ------------------------------------------------------------------------------------------------------------------------------------ 2a. ENTITY's NAME OR --------------------------------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #, if any ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) - ------------------------------------------------------------------------------------------------------------------------------------ 3a. ENTITY's NAME IMPERIAL BANK OR --------------------------------------------------------------------------------------------------------------------------------- 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS CA 90212-9762 - ------------------------------------------------------------------------------------------------------------------------------------ 4. This FINANCING STATEMENT covers the following types or items of property: ALL PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR; WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND ACCOUNTS PROCEEDS). - ------------------------------------------------------------------------------------------------------------------------------------ 5. CHECK This FINANCING STATEMENT is signed by the Secured Party instead 7. If filed in Florida (check one) BOX [ ] of the Debtor to perfect a security interest (a) in collateral Documentary Documentary stamp (if applicable) already subject to a security interest in another jurisdiction [ ] stamp tax paid [X] tax not applicable when it was brought into this state, or when the debtor's location was changed to this state, or (b) in accordance with other statutory provisions (additional data may be required) - ------------------------------------------------------------------------------------------------------------------------------------ 6. REQUIRED SIGNATURE(S) 8. [ ] This FINANCING STATEMENT is to be filed (for record) THE LIGHTSPAN PARTNERSHIP, INC. (or recorded) in the REAL ESTATE RECORDS /s/ [Signature Illegible] Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------------------------------ 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] /s/ [Signature Illegible] (optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2 - ------------------------------------------------------------------------------------------------------------------------------------ CFI PROSERVICES, INC. 400 S.W. 6TH AVENUE, PORTLAND, OREGON 97204 (4) DEBTOR COPY - NATIONAL FINANCING STATEMENT (FORM UCC 1) (TRANS) (REV. 12/18/95)
16 THIS SPACE FOR USE OF FILING OFFICER FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - -------------------------------------------------------------------------------------------- A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional) - -------------------------------------------------------------------------------------------- C. RETURN COPY TO: (Name and Mailing Address) ----- ----- IMPERIAL BANK LOAN DOCUMENTATION SERVICES 9920 S. LA CIENEGA BLVD., STE 628 INGLEWOOD, CA 90301 ----- ----- - ------------------------------------------------------------------------------------------------------------------------------------ D. OPTIONAL DESIGNATION (if applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) FILED WITH: CALIFORNIA --------------------------------------------------------------------------------------------------------------------------------- 1a. ENTITY's NAME MICRO GENERAL CORPORATION OR --------------------------------------------------------------------------------------------------------------------------------- 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 2510 N. RED HILL AVENUE, SUITE 230 SANTA ANA CA 92705 - ------------------------------------------------------------------------------------------------------------------------------------ 1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D. #, if any 95-2621545 ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) 1070-004 1070-004 - ------------------------------------------------------------------------------------------------------------------------------------ 2a. ENTITY's NAME OR --------------------------------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D. #, if any ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ]NONE - ------------------------------------------------------------------------------------------------------------------------------------ 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) - ------------------------------------------------------------------------------------------------------------------------------------ 3a. ENTITY's NAME IMPERIAL BANK OR --------------------------------------------------------------------------------------------------------------------------------- 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS CA 90212-9762 - ------------------------------------------------------------------------------------------------------------------------------------ 4. This FINANCING STATEMENT covers the following types or items of property: ALL PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR; WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND ACCOUNTS PROCEEDS). - ------------------------------------------------------------------------------------------------------------------------------------ 5. CHECK This FINANCING STATEMENT is signed by the Secured Party instead 7. If filed in Florida (check one) BOX [ ] of the Debtor to perfect a security interest (a) in collateral Documentary Documentary stamp (if applicable) already subject to a security interest in another jurisdiction [ ] stamp tax paid [X] tax not applicable when it was brought into this state, or when the debtor's location was changed to this state, or (b) in accordance with other statutory provisions (additional data may be required) - ------------------------------------------------------------------------------------------------------------------------------------ 6. REQUIRED SIGNATURE(S) 8. [ ] This FINANCING STATEMENT is to be filed (for record) THE LIGHTSPAN PARTNERSHIP, INC. (or recorded) in the REAL ESTATE RECORDS /s/ [Signature Illegible] Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------------------------------ 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] /s/ [Signature Illegible] (optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2 - ------------------------------------------------------------------------------------------------------------------------------------ CFI PROSERVICES, INC. 400 S.W. 6TH AVENUE, PORTLAND, OREGON 97204 (5) SECURED PARTY COPY - NATIONAL FINANCING STATEMENT (FORM UCC 1) (TRANS) (REV. 12/18/95)
17 [IMPERIAL BANK LETTERHEAD] IMPERIAL BANK Member FDIC PROMISSORY NOTE
============================================================================================================= Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials ============================================================================================================= $5,000,000.00 12-22-1999 12-20-2000 155 - ------------------------------------------------------------------------------------------------------------- REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR LOAN OR ITEM. ============================================================================================================= BORROWER: MICRO GENERAL CORPORATION LENDER: IMPERIAL BANK 2510 N. RED HILL AVENUE, SUITE 230 FINANCIAL SERVICES GROUP SANTA ANA, CA 92705 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS, CA 92012-9762 ============================================================================================================= PRINCIPAL AMOUNT: $5,000,000.00 INITIAL RATE: 8.500% DATE OF NOTE: DECEMBER 22, 1999
PROMISE TO PAY. MICRO GENERAL CORPORATION ("BORROWER") PROMISES TO PAY TO IMPERIAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE MILLION & 00/100 DOLLARS ($5,000,000.00) 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 IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON DECEMBER 20, 2000. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING JANUARY 20, 2000, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. The annual interest rate for this Note is computed on a 365/360 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 any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to change from time to time based on changes in an index which is the Imperial Bank Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as its Prime Rate of interest from time to time. 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 8.500%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL RATE OF 8.500%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. INTEREST RATE OPTIONS. The following interest rate options are available under this Note: (a) Default Option. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph above (the "Default Option"). (b) LIBOR. A margin of 1,400 percentage points over LIBOR. For purposes of this Note, LIBOR shall mean London Inter-Bank Offered Rate as provided in the LIBOR ADDENDUM TO NOTE attached hereto and made a part hereof. When the interest rate is based on a fixed rate, the rate shall be in effect for a period of the number of days or months as indicated in the rate option description (the "Interest Period"), in any case extended to the next succeeding business day when necessary, beginning on a borrowing date, conversion date or expiration date of the then current Interest Period. Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Provided Borrower is not in default under this Note, Borrower may designate in advance which of the above interest rate indexes shall be applicable to any loan advance under this Note and shall designate any optional Interest Period applicable to any fixed rate loan or advance. In the absence of any such designation the interest rate option shall be the Default Option. Thereafter unpaid principal balances under this Note may be converted (at the end of an Interest Period if the index used to determine the interest rate therefore is a fixed rate) to another of the above interest rate options, or continued for an additional interest period, when applicable, as designated by Borrower in advance; and in the absence of sufficient advance designation as to conversion to or continuation of a fixed rate index, the index shall be converted to the Default Option. Notwithstanding the foregoing, a fixed rate index may not be elected for a loan or advance under this Note, nor any conversion to or continuation of a fixed rate index be elected, if the Interest Period thereof would extend beyond the maturity of this Note. Each loan or advance under this Note at conversion into or continuation of a fixed rate index shall be a minimum amount of $500,000.00. Unless otherwise provided herein, accrued interest on amounts for which the interest rate is based on a fixed rate shall be due and payable at the end of the respective Interest Period thereof. PREPAYMENT; MINIMUM INTEREST CHARGE. In the 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 obligation 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. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any material 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) 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. (d) 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. (e) 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. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender reasonably and in good faith believes the prospect of payment or performance of the indebtedness is impaired. (h) Lender reasonably and in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been reasonably and in good faith 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 occurred) if Borrower, after receiving written notice from Lender demanding cure of such default; (a) cures the default within ten (10) days; or (b) if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's reasonable 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, do one or both of the following: (a) increase the variable interest rate on this Note to 5.000 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). 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 reasonable attorney's fees and Lender's reasonable legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses 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. THIS NOTE 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 LOS ANGELES 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 ____) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual 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 and Keogh 18 12-22-1999 PROMISSORY NOTE Page 2 (Continued) ================================================================================ accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such 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 person or persons 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: PATRICK F. STONE, AUTHORIZED SIGNER; JOHN SNEDEGAR, CHIEF EXECUTIVE OFFICER; JEFF SANDERSON, AUTHORIZED SIGNER; AND DALE CHRISTENSEN, AUTHORIZED SIGNER. 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 of 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. CREDIT AGREEMENT. This Note is subject to the provisions of the Credit Agreement dated December 22, 1999 and all amendments thereto and replacements therefor. GENERAL PROVISIONS. Lender may delay or forego 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 to 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 X /s/ {Signature illegible) X /s/ (Signature illegible) --------------------------------- ------------------------------------ AUTHORIZED OFFICER AUTHORIZED OFFICER =============================================================================== 19 [IMPERIAL BANK LETTERHEAD] Member FDIC COMMERCIAL SECURITY AGREEMENT
============================================================================================================= PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS - ------------------------------------------------------------------------------------------------------------- $5,000,000.00 12-22-1999 12-20-2000 155 ============================================================================================================= References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. ============================================================================================================= BORROWER: MICRO GENERAL CORPORATION LENDER: IMPERIAL BANK 2510 N. RED HILL AVENUE, SUITE 230 FINANCIAL SERVICES GROUP SANTA ANA, CA 92705 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS, CA 92012-9762 =============================================================================================================
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN MICRO GENERAL CORPORATION (REFERRED TO BELOW AS "GRANTOR"); AND IMPERIAL BANK (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 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 Untied States of America. AGREEMENT. The word "Agreement" means this 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 PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR. 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, 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 word "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 any statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable (INITIAL HERE ______ ) LENDER. The word "Lender" means Imperial Bank, its successors and assigns. NOTE. The word "Note" means the note or credit agreement dated December 22, 1999, in the principal amount of $5,000,000.00 from MICRO GENERAL CORPORATION 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. RIGHT OF SETOFF. Grantor hereby grants Lender a contractual 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 and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all Indebtedness against any and all such accounts. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: ORGANIZATION. Grantor is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware. AUTHORIZATION. The execution, delivery, and performance of this Agreement by Grantor have been duly authorized by all necessary action by Grantor 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 Grantor or (b) any law, governmental regulation, court decree, or order applicable to Grantor. PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are reasonably requested by Lender to perfect and continue Lender's security 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 reasonable 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 LENDER. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor 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 paper, or general intangibles, the Collateral is enforceable 20 12-22-1999 COMMERCIAL SECURITY AGREEMENT Page 2 (Continued) ================================================================================ 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. 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 locations 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 the prior written consent of Lender, not to be unreasonably withheld. 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 not to be reasonably withheld. 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. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may reasonably 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 ordinary wear and tear excepted. 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 event 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 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, 42 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 waste" 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 thirty (30) 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. In no event shall the insurance be in an amount less than the amount agreed upon in the Agreement to Provide Insurance. 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. Until default, Grantor shall 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 21 12-22-1999 COMMERCIAL SECURITY AGREEMENT PAGE 3 (CONTINUED) ================================================================================ security interest in such Collateral. 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 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 or 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, material obligation, covenant or condition contained in this Agreement or any other Related Documents or in any other agreement between Lender and Grantor. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. 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 judicial proceedings, 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 GUARANTOR. Any of the preceding events occurs with respect to any Guarantor 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 guaranty 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 reasonably and in good faith believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, reasonably and in good faith, deems itself insecure. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Grantor has not been given a prior notice of a breach of the same provision of this Agreement, it may be cured (and no Event of Default will have occurred) if Grantor, after Lender sends written notice demanding cure of such default, (a) cures the default within ten (10) days; or (b), if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's reasonable 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. 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 and 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 the Collateral 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 reasonable expenses relating to the disposition of the Collateral, including without limitation 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 reasonable 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 to 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 Los Angeles County, the State of California. Lender and Grantor 22 12-22-1999 COMMERCIAL SECURITY AGREEMENT PAGE 4 (CONTINUED) ================================================================================ 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 ______) 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 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 persons signing below is responsible for ALL obligations in this Agreement. NOTICE. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), 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 will 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 circumstance, 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 of Lender's rights or of any 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 DECEMBER 22, 1999. GRANTOR: MICRO GENERAL CORPORATION X /s/ [Signature Illegible] X /s/ [Signature Illegible] ------------------------------------ ------------------------------------ Authorized Officer Authorized Officer ================================================================================ 23 CORPORATE RESOLUTION TO GUARANTEE
- ------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $5,000,000.00 12-22-1999 12-20-2000 155 - ------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------ BORROWER: MICRO GENERAL CORPORATION LENDER: IMPERIAL BANK 2510 N. RED HILL AVENUE, SUITE 230 FINANCIAL SERVICES GROUP SANTA ANA, CA 92705 9777 WILSHIRE BLVD., 4TH FLOOR BEVERLY HILLS, CA 90212-9762 GUARANTOR: FIDELITY NATIONAL FINANCIAL, INC. 17911 VON KARMAN AVENUE, SUITE 300 IRVINE, CA 92614
================================================================================ I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF FIDELITY NATIONAL FINANCIAL, INC. (THE "CORPORATION"), HEREBY CERTIFY THAT the Corporation is organized and existing under and by virtue of the laws of the State of Delaware with its principal office at 17911 VON KARMAN AVENUE, SUITE 300, IRVINE, CA 92614. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held on ____________, at which a quorum was present and voting, or by other duly authorized corporate action in lieu of a meeting, the following resolutions were adopted: BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below:
NAME POSITION ACTUAL SIGNATURE - ---- -------- ----------------- ALAN L. STINSON EVP/CFO X /s/ ALAN L. STINSON ---------------------------
acting for and on behalf of the Corporation and as its act and deed be, and he or she hereby is, authorized and empowered: GUARANTY. To guarantee or act as surety for loans or other financial accommodations to MICRO GENERAL CORPORATION from Imperial Bank ("Lender") on such guarantee or surety terms as may be agreed upon between the officers or employees of this Corporation and Lender and in such sum or sums of money as in his or her judgment should be guaranteed or assured, not exceeding, however, at any one time the amount of FIVE MILLION & 00/100 DOLLARS ($5,000,000.00), in addition to such sum or sums of money as may be currently guaranteed by the Corporation to Lender (the "Guaranty"). GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender, as security for the Guaranty, 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. The provisions of these Resolutions authorizing or relating to the pledge, mortgage, transfer, endorsement, hypothecation, granting of a security interest in, or in any way encumbering, the assets of the Corporation shall include, without limitation, doing so in order to lend collateral security for the indebtedness, now or hereafter existing, and of any nature whatsoever, of MICRO GENERAL CORPORATION to Lender. The Corporation has considered the value to itself of lending collateral in support of such indebtedness, and the Corporation represents to Lender that the Corporation is benefited by doing so. 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 required 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 Lender may deem necessary or proper in connection with or pertaining to the giving of the liens and encumbrances. FURTHER ACTS. To do and perform such other acts and things and to execute and deliver such other documents and agreements, INCLUDING AGREEMENTS WAIVING THE RIGHT TO A TRAIL BY JURY, as he or she may in his or her discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (a) change in the name of the Corporation, (b) change in the assumed business name(s) of the Corporation, (c) change in the management of the Corporation, (d) change in the authorized signer(s), (e) conversion of the Corporation to a new or different type of business entity, or (f) change in any other aspect of the Corporation that directly or indirectly relates to any agreements between the Corporation and Lender. No change in the name of the Corporation will take effect until after Lender has been notified. 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 his or her 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 officer, employee, or agent named above is duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupies the position set opposite the name; 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. IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND ON DECEMBER 22, 1999 AND ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE SIGNATURES. CERTIFIED TO AND ATTESTED BY: X ------------------------------------- X /s/ [Signature Illegible] ------------------------------------- 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. ================================================================================ 24 EXHIBIT 10.30 LIBOR ADDENDUM IMPERIAL BANK TO NOTE This Libor Addendum ("Addendum") is dated as of DECEMBER 22, 1999, and is by and between MICRO GENERAL CORPORATION ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and supplements the NOTE to which it is attached (the "Note") and forms a part of and is incorporated into the Note. In the event of any inconsistency between the terms herein and the terms of the Note, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meanings set forth in the Note. 1. ADVANCES. 1.1 Prime Loans. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to Bank's Prime Rate shall be referred to herein as "Prime Loans" and each such advance shall be a "Prime Loan." Each Prime Loan shall bear interest at an annual rate equal to the sum of 00.00% plus the Bank's Prime Rate. "Prime Rate," shall mean the rate of interest publicly announced by Bank from time to time in Inglewood, California, as its prime rate for lending. The Prime Rate is not intended to be the lowest rate of interest charged by Bank in connection with extensions of credit to borrowers. 1.2 Libor Loans. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to the Libor Rate shall be referred to herein as "Libor Loans" and each such advance shall be a "Libor Loan." Each Libor Loan shall bear interest at the Libor Rate, as defined below. A Libor Loan shall be in the minimum amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) or such greater amount which is an integral multiple of FIFTY THOUSAND DOLLARS ($50,000.00). No Libor Loan shall be made after the last Business Day that is at least three (3) months prior to the Maturity Date described in the Note. 2. INTEREST ON LIBOR LOANS. 2.1 Rate of Interest. Each Libor Loan shall bear interest on the unpaid principal amount thereof from the Loan Date through the date paid (whether by acceleration or otherwise) at a rate equal to the sum of 1.40 % per annum plus the Libor Rate for the interest Period. (a) "Loan Date" shall mean the date on which (i) a Libor Loan is made, a Libor Loan is continued, or a Prime Loan is converted to a Libor Loan. (b) "Interest Period" share mean a period of UP TO 270 DAYS commencing on the applicable Loan Date, as selected by Borrower pursuant to Section 2.2; provided, however, that Borrower may not select an Interest Period that would otherwise extend beyond the Maturity Date of the Loan. Borrower may also select a twelve (12) month Interest Period if and when Bank notifies Borrower that such Interest Period is available, as determined by Bank in its sole discretion. During a Libor Interest Period, interest shall be payable on the last day of the Interest Period, provided that for any Interest Period longer than 3 months, interest shall be payable quarterly and on the last day of the Interest Period. (c) "Libor Rate" shall mean, for the applicable Interest Period for a Libor Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the Libor Base Rate for such Interest Period divided by (ii) 1.00 minus the Reserve Requirement Rate (expressed as a decimal fraction) for such Interest Period. (d) "Libor Base Rate" shall mean with respect to any Interest Period, the rate equal to the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of: (i) the offered rates per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears at 11:00 a.m., London time, on the Reuters Screen LIBOR Page on the Business Day that is two (2) Business Days before the first day of such Interest Period, in each case if at least four (4) such offered rates appear on such page, or Page 1 25 (ii) if clause (i) is inapplicable, (x) the offered rate per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears as of 11:00 a.m., London time on the Telerate Monitor on Telerate Screen 3750 on the Business Day which is two (2) Business Days before the first day of such Interest Period; or (y) if clause (x) above is inapplicable, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interest rates per annum offered by at least three (3) prime banks selected by Bank at approximately 11:00 a.m. London time, on the Business Day which is two (2) Business Days before such date for deposits in U.S. Dollars to prime banks in the London interbank market, in each case for a period equal to such Interest Period in an amount equal to the amount to which the Libor Rate applies. (e) "Business Day" means any day on which Bank is open for business in the State of California. (f) "Reuters Screen LIBOR Page" means the display designated as page LIBOR on the Reuters Monitor Money Rates Service or such other page as may replace the LIBOR page on that service for the purpose of displaying London interbank offered rates of major banks. (g) "Reserve Requirement Rate" means, for any Interest Period, the aggregate of the rates, effective as of the Business Day which is two (2) Business Days before the first day of the Interest Period, at which: (i) reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System; and (ii) any additional reserves are required to be maintained by Bank by reason of any Regulatory Change against (x) any category of liabilities which includes deposits by reference to which the Libor Rate is to be determined as provided in the definition of "Libor Base Rate;" or (y) any category of extensions of credit or other assets which include Libor Loans. (h) "Regulatory Change" means, with respect to Bank, any change on or after the date of the Note and this Addendum in any Governmental Regulation, including the introduction of any new Governmental Regulation or the rescission of any existing Governmental Regulation. (i) "Governmental Regulation" means any (i) United States Federal, state or foreign law or regulation (including without limitation Regulation D); and (ii) the adoption or making of any interpretation, application, directive or request applying to a class of lenders, including Bank, of or under any United States Federal, state, or any foreign law or regulation (whether or not having the force of law) by any court or by any governmental, central banking, monetary or taxing authority charged with the interpretation or administration of such law or regulation. 2.2 Determination of Interest Rates. Subject to the terms and conditions of the Note and this Addendum, Borrower, at its option, may request an advance in the form of a Libor Loan, a continuation of a Libor Loan, or a conversion of a Prime Loan into a Libor Loan, only upon delivery to Bank of an irrevocable written notice received by Bank at least three (3) Business Days prior to the requested Loan Date, specifying (i) the principal amount of such Libor Loan, (ii) the requested Loan Date, and (iii) the selected Interest Period. Upon receiving such notice, Bank shall determine (which determination shall be in accordance with Section 2.1 and shall, absent manifest error, be final, conclusive and binding upon all parties hereto) the Libor Rate applicable to such Libor Loan two (2) Business Days prior to the Loan Date, and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower. If Borrower shall fail to notify Bank of its selected Interest Period for a Libor Loan (including the continuation of an existing Libor Loan or the conversion of a Prime Loan into a Libor Loan), the Borrower shall be deemed to have selected at) Interest Period of three (3) months. 2.3 Computation of Interest and Fees. All computations of interest and fees payable pursuant to the Note shall be calculated oil the basis of a three hundred sixty (360) day year for the actual number of days elapsed (less the date of repayment). 2.4 Recordation by Bank. Bank is hereby authorized to record the Loan Date, the applicable Interest Period, the principal amount, and the interest rate of each Libor Loan made (or continued or converted) by Bank, and the date and amount of each payment or prepayment of principal thereof, in Bank records. Any such recordation shall constitute prima facie evidence of the accuracy of the information recorded; provided that the failure to make any such recordation shall not in any way affect the Borrower's obligations hereunder. 3. CONVERSION TO PRIME LOANS. Page 2 26 3.1 Election by Borrower. Subject to all the terms and conditions of this Addendum, Borrower may elect from time to time to convert a Libor Loan to a Prime Loan by giving Bank at least three (3) Business Days' prior irrevocable notice of such election, and any such conversion of a Libor Loan shall be made on the last day of the Interest Period with respect thereto. 3.2 Failure of Notice by Borrower. If Borrower otherwise fails to give notice specifying its requests with respect to any Libor Loans that are scheduled to become due, such failure shall be deemed, in the absence of any notice from Borrower to the contrary, to be notice of a requested advance in the form of a Prime Loan in a principal amount equal to the amount of said Libor Loan. 4. PREPAYMENTS. 4.1 Voluntary Prepayment by Borrower. Subject to the terms and conditions of the Note and this Addendum, Borrower may, upon at least three (3) Business Days' irrevocable notice to Bank as provided herein, at any time and from time to time on any Business Day prepay any Prime Loan or Libor Loan in whole or in part, without penalty or premium, other than customary actual "Breakage Fees" and "Prepayment Costs" as defined below, resulting from prepayment of any Libor Loan prior to the expiration of the Interest Period relating thereto. The notice of prepayment shall specify the date and amount of the prepayment, and the Loan to which the prepayment applies. Each partial prepayment of a Libor Loan shall be in an amount not less than FIFTY THOUSAND DOLLARS ($50,000.00) FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) or such greater amount which is an integral multiple of FIFTY THOUSAND DOLLARS ($50,000.00); provided that unless a Libor Loan is prepaid in full, no prepayment shall be made if, after giving effect to such prepayment, the aggregate principal amount of Libor Loans having the same Interest Period shall be less than FIVE HUNDRED THOUSAND DOLLARS ($500,000.00). Notice of prepayment having been delivered as aforesaid, the principal amount of the prepayment specified in such notice shall become due and payable on the prepayment date set forth in such notice. All payments of principal under this Section 4 shall be accompanied by accrued but unpaid interest on the amount being prepaid through the date of such prepayment. 4.2 Breakage Fees. If for any reason (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or acceleration), Bank receives all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan, Borrower shall immediately notify Borrower's account officer at Bank and, on demand by Bank, pay Bank the Breakage Fees, defined as the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank (without regard to whether Bank actually so invests said funds) by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank's determination as to such amount shall be conclusive and final, absent manifest error. 4.3 Prepayment Costs. Borrower shall pay to Bank, upon the demand of Bank, such other amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any loss, costs or expense incurred by it as a result of any prepayment by Borrower (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or prepayment due to acceleration) of all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan (including without limitation any failure by Borrower to borrow a Libor Loan on the Loan Date for such borrowing specified in the relevant notice of borrowing hereunder). Such costs shall include, without limitation, any interest or fees payable by Bank to lenders of funds obtained by it in order to make or maintain its loans based on the London interbank eurodollar market. Bank's determination as to such costs shall be conclusive and final, absent manifest error. 5. REMEDIES UPON EVENTS OF DEFAULT. 5.1 Conversion to Prime Loans. If any Event of Default has occurred and is continuing under the Note or this Addendum, then in addition to all other remedies available to Bank under the Note, at the option of Bank and without demand or notice, all Libor Loans then outstanding shall be automatically converted to Prime Loans on the last day of each respective Interest Period for each Libor Loan. 5.2 Indemnity. Borrower agrees to pay and indemnify Bank for, and to hold Bank harmless from, any and all cost, loss or expense (including without limitation any such cost, loss or expense arising from interest or fees payable by Bank to lenders of funds obtained by it in order to maintain its Libor Loans hereunder, or in its reemployment of funds obtained in connection with the Page 3 27 making or maintaining of Libor Loans) which Bank may sustain or incur as a consequence of any default by Borrower in connection with or related to: (a) payment of the principal amount of or interest on Libor Loans, (b) making a borrowing or conversion of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or (c) making a prepayment of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or any prepayment (whether optional or mandatory) of any Libor Loan prior to the end of the applicable Interest Period for such Loan. 6. ADDITIONAL PROVISIONS REGARDING LIBOR LOANS. 6.1 Libor Rate Taxes. All payments of principal, interest, fees, costs, expenses and all other amounts payable by Borrower pursuant to the Note and this Addendum shall be made free and clear of and without reduction by reason of all present and future income, stamp and other taxes or other charges whatsoever imposed, assessed, levied or collected by any national government or any political subdivision or taxing authority thereof or any organization of which it is a member (excluding (i) any taxes imposed on or measured by the overall net income or gross receipts of Bank by any such entity, and (ii) any taxes which would have been imposed even if no provisions for Libor Loans had appeared in this Addendum) (collectively, "Libor Taxes"). If any Libor Taxes are required to be withheld from any amounts payable to Bank, Borrower shall pay such additional amounts as may be necessary so as to yield to Bank a net amount equal to the total amount of the payments provided for in this Addendum or under the Note which Bank would have received if such amounts had not been subject to Libor Taxes. If any Libor Taxes are payable directly by Borrower, they shall be paid by Borrower prior to the date on which penalties attach for failure to timely pay such Libor Taxes. Within forty five (45) days after the date on which payment of any such Libor Taxes is due pursuant to applicable law, Borrower will furnish Bank the original receipt for the full payment of such Libor Taxes or, if such is not available, evidence of such payment satisfactory in form and substance to Bank. Borrower shall indemnify and hold Bank harmless against, and will reimburse to Bank, upon demand, any incremental taxes, interest or penalties that may become payable by Bank as a result of any failure by Borrower to pay any Libor Taxes when due. 6.2 Inability to Determine Fair Interest Rate. If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the Libor Loans for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, (ii) the Libor Rate does not accurately reflect the cost to Bank of lending the Libor Loan, or (iii) by reason of any changes arising after the date of the Note affecting the London interbank eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in Sections 2.1 and 2.2 above, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate applicable to Libor Loans, or until such time as Bank notifies Borrower that the circumstances giving rise to Bank's notice no longer exist. While such circumstances continue to exist, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.3 Illegality or Impracticability. If (i) due to any Governmental Regulation it shall become unlawful for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, or (ii) due to any contingency occurring after the date of the Note which has a material adverse effect on the London interbank eurodollar market, it has become impracticable for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, and in such event, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.4 Governmental Regulations; Increased Costs. Borrower shall pay to Bank, within 15 days after demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any increased costs incurred by Bank that Bank determines are attributable to its making or maintaining of any Libor Loans to Borrower (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (a) imposes a new tax or changes the basis of taxation of any amounts payable to Bank under the Note or this Addendum in respect of any Libor Loans (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which such Bank has its principal office); or Page 4 28 (b) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits or other liabilities with or for the account of Bank (including any Libor Loans or any deposits referred to in the definition of Libor Base Rate); or (c) imposes any other condition affecting the Note (or any of such extensions of credit or liabilities); or (d) imposes or modifies a Governmental Regulation regarding capital adequacy which has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank ("Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material. Bank will notify Borrower of any event occurring after the date of the Note which will entitle Bank to Additional Costs pursuant to this Section 6.4 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for Additional Costs under this Section 6.4. Determinations and allocations by Bank for purposes of this Section 6.4 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Libor Loans or of making or maintaining Libor Loans or on amounts receivable by it in respect of Libor Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive and final, absent manifest error. This Addendum is executed as of the date first written above. BORROWER BANK MICRO GENERAL CORPORATION, IMPERIAL BANK, a DELAWARE CORPORATION a California banking corporation By By --------------------------------- ------------------------------------- Its Its -------------------------------- ------------------------------------ By --------------------------------- Its -------------------------------- Page 5 EX-21 7 SUBSIDIARIES 1 EXHIBIT 21 MICRO GENERAL CORPORATION LIST OF SUBSIDIARIES 1. ACS Systems, Inc. 2. LDExchange.com, Inc. 3. Interactive Associates, Inc. 38 EX-23.1 8 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Micro General Corporation: We consent to incorporation by reference in the registration statements (no. 2-85485, 2-94290, 333-22240, 333-64289 and 333-95913) on Form S-8 of Micro General Corporation of our report dated March 28, 2000, relating to the consolidated balance sheets of Micro General Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, and the related schedule, which report appears in the December 31, 1999 annual report on Form 10-K of Micro General Corporation. KPMG LLP Los Angeles, California March 28, 2000 39 EX-27 9 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,400,874 0 8,678,333 2,265,601 438,728 9,846,934 8,129,842 1,090,984 26,843,114 6,965,067 7,246,312 0 0 626,782 25,301,745 26,843,114 95,086,851 95,086,851 76,540,790 23,733,037 0 0 1,913,274 (7,142,439) 4,000 (7,146,439) 0 0 0 (7,146,439) (0.92) (0.92)
-----END PRIVACY-ENHANCED MESSAGE-----