-----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, TfFgr0ZoNg82Z6RX+mRCowHeQl+AY/FnXylIgGYZW5dOMxF0xjrdOEvnQC5jqeLS AZNzepAHXB+rkS8KVfG0DQ== 0000892569-99-001011.txt : 19990416 0000892569-99-001011.hdr.sgml : 19990416 ACCESSION NUMBER: 0000892569-99-001011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO GENERAL CORP CENTRAL INDEX KEY: 0000067383 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 952621545 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08358 FILM NUMBER: 99594911 BUSINESS ADDRESS: STREET 1: 2510 N. REDHILL STREET 2: SUITE 230 CITY: SANTA ANA STATE: CA ZIP: 92705 BUSINESS PHONE: 9496224444 MAIL ADDRESS: STREET 1: 14711 BENTLEY CIRCLE CITY: TUSTIN STATE: CA ZIP: 927807226 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-K 1 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1998 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-8358 MICRO GENERAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2621545 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2510 RED HILL AVENUE, SUITE 200 92705 (949) 622-4444 SANTA ANA, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK, $.05 PAR VALUE NASDAQ OTC BULLETIN BOARD Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ ] As of April 13, 1999, 7,596,000 shares of common stock ($.05 par value) were outstanding, and the aggregate market value of the shares of the common stock held by non-affiliates of the registrant was $3,396,000. LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV herein on page number 34. The information in Part III hereof is incorporated herein by reference to the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended December 31, 1998, to be filed within 120 days after the close of the fiscal year that is the subject of this Report. ================================================================================ 2 TABLE OF CONTENTS FORM 10-K
PAGE NO. -------- PART I Item 1. Business............................................................. 1 Item 2. Properties........................................................... 4 Item 3. Legal Proceedings.................................................... 4 Item 4. Submission of Matters to a Vote of Security Holders.................. 4 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.............................................. 5 Item 6. Selected Financial Data.............................................. 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 7 Item 7A. Quantitave and Qualitative Disclosure About Market Risk.............. 10 Item 8. Financial Statements and Supplementary Data.......................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 33 PART III Item 10. Directors and Executive Officers of the Registrant................... 33 Item 11. Executive Compensation............................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................................... 33 Item 13. Certain Relationships and Related Transactions....................... 33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................................... 33
3 PART I ITEM 1. BUSINESS Historically, the operations of Micro General Corporation ("Micro General" or "the Company") consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations are currently performed through the Company's postage meter and scale division. Following the acquisition of ACS Systems, Inc. ("ACS"), which is described below, the Company shifted its primary focus to information technology and telecommunication services. On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI") completed the merger of Micro General with ACS, a wholly-owned subsidiary of FNFI. As a result of the merger, all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General common stock. The transaction was appraised at $1.3 million. Following the merger of Micro General and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an undiluted basis. The transaction has been accounted for as a reverse merger, i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General as the legal surviving entity and ACS as the surviving entity for accounting purposes. At December 31, 1998, FNFI owned 70.6% of the outstanding common stock of the Company. ACS was founded in 1985 as a software company specializing in products for the real estate industry, in particular, escrow software. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. ACS, through its various divisions, is currently a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. ACS offers a full range of information technology services, including voice and data network design, implementation and management. ACS also provides services in the areas of application development, real estate industry applications, electronic commerce ("eCommerce"), Year 2000 remediation and consulting services and telecommunications. ACS also offers certain of these products and services to non-affiliated companies. During 1998, 1997, and 1996, 66%, 89% and 86%, respectively, of the revenue generated by ACS was derived from multiple servicing arrangements with FNFI and its subsidiaries. In addition, as a result of the acquisition of LDExchange.com, Inc. ("LDExchange"), which closed on November 17, 1998, the Company has been able to enter the international telecommunications market, which complements the range of services offered by ACS. LDExchange is an emerging multinational carrier focused primarily on the international long distance market. LDExchange offers reliable, low cost switched voice services on a wholesale basis, primarily to U.S. based long distance carriers. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Company common stock (1,000,000 shares). SERVICES The Company offers its customers a portfolio of related services within the broad categories of systems and technology services, business process management, electronic business and telecommunications. The Company provides its clients with a wide range of value-added products and services within each of the categories, and will continue to respond to market needs and opportunities. ACS - Systems and Technology Services Encompasses systems development, integration, telephony solutions, including PBX, key systems and computer telephony integration, and management. Also included are desktop services, Year 2000 remediation and consulting and enterprise software solutions. - Business Process Management The Company may manage an entire business process within a client enterprise. 1 4 - Electronic Business Services offered include interactive marketing and payment services, Internet and online services, electronic commerce, electronic data interchange, and the design, development, implementation and operation of Internet websites, corporate intranets and extranets. As part of the Company's electronic business services, the Company has created RealEC, the largest real estate electronic commerce network in the nation. RealEC is a nationwide multi-vendor network that will provide real estate and lender customers the ability to select products and services necessary to close their transactions, while at the same time giving them access to over 6,000 issuing locations for title insurance across the United States. RealEC is a joint venture developed by the Company and Stewart Mortgage Information, a subsidiary of Stewart Information Services Corporation (NYSE:STC). The RealEC network integrates each company's existing systems to provide leading edge software, ultimately connecting all parties involved with real estate transactions. RealEC will interface with loan origination software systems, window-based ordering systems, third party networks, real estate office systems and the Internet. RealEC will also offer on-line access to documents related to real estate transactions and link with back-end title insurance and escrow production systems. ACS AND LDEXCHANGE - Telecommunications The Company offers a full range of telecommunication services, including digital subscriber lines, frame relay, domestic and international long distance. ACQUISITIONS AND STRATEGIC ALLIANCES The Company has made certain acquisitions and entered into strategic alliances in an effort to gain a competitive advantage or obtain a new or expanded presence in targeted markets. The Company believes that the consolidation and convergence of the computing and software, electronic commerce and telecommunication industries will continue. Therefore, the Company expects that its strategy to make acquisitions and/or to enter into strategic alliances will continue in order for the Company to compete effectively. REGULATION Various aspects of the Company's business are subject to Federal, state and foreign regulation, noncompliance with which, depending on the nature of the noncompliance, could result in the suspension or revocation of any license or registration at issue, civil fines or criminal penalties. The Company has not experienced material difficulties in complying with the various laws and regulations affecting its business. COMPETITION The Company experiences intense competition in the information technology and telecommunications industries from large multi-national corporations, as well as from niche-oriented or geographically focused providers. Technology, telecommunications and their application within the business enterprise are in a rapid and continuing state of change as new technologies, products and services continue to be developed, introduced and implemented. The Company believes that its ability to compete effectively will depend upon its ability to develop and market products and services on a timely and cost effective basis that enable it to meet the changing needs of its customers. Another key element to the Company's competitiveness is its ability to finance and acquire the resources necessary to offer such products and services. SIGNIFICANCE OF FIDELITY NATIONAL FINANCIAL, INC. Approximately 66% of the Company's total revenue in 1998 was attributable to FNFI and its affiliates. During 1997 and 1996, 89% and 86%, respectively, of the Company's revenue was derived from multiple servicing arrangements with FNFI and its subsidiaries. The Company, through ACS, provides substantially all of the 2 5 information technology and telecommunications services for FNFI and its subsidiaries. The loss of FNFI as a customer of the Company would have a material adverse effect on the Company. Information technology and telecommunication services are provided pursuant to various agreements between the Company and FNFI. The various service agreements between the Company and FNFI specify the terms, conditions and scope of products and services to be provided by the Company to FNFI. The length of the contracts are generally one to three years, and are evaluated, modified and renewed on a regular basis. The Company believes that the negotiated terms of its contracts with Fidelity National Financial, Inc. are similar to third party rates and conditions; however, the relationship between the Company and FNFI should not be considered arm's length. The Company relies on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI and as a source of funds via available financing arrangements. EMPLOYEES As of March 31, 1999, the Company employed approximately 225 persons. The Company believes that its relations with employees are generally good. YEAR 2000 ISSUES Information technology is an integral part of the Company's business. The Company also recognizes the critical nature of and the technological challenges associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from computer programs and computer hardware that utilize only two digits to identify a year in the date field, rather than four digits. If such programs or hardware are not modified or upgraded, information systems could fail, lock up, or in general fail to perform according to normal expectations. The Company has implemented a program and committed both personnel and other resources to determine the extent of potential Y2K issues. Included within the scope of this program are systems used in servicing customer obligations, information technology products and services, telecommunications services, the postage meter and scale division, financial management, human resources, payroll and infrastructure. In addition to a review of internal systems, the Company has initiated formal communications with third parties with which it does business in order to determine whether or not they are Y2K compliant and the extent to which the Company may be vulnerable to third parties' failure to become Y2K compliant. The Company is in the process of identifying Y2K compliant issues in its systems, equipment and processes. The Company is making changes to such systems, updating or replacing such equipment, and modifying such processes to make them Y2K compliant. The Company has developed a four phase program to become Y2K compliant. Phase I is, "Plan Preparation and Identification of the Problem." This is an ongoing phase that will continue into the year 2000 itself. Phase II is, "Plan Execution and Remediation." Phase III is, "Testing." Phase IV is, "Maintaining Y2K Compliance." The Company anticipates that its systems processes will be substantially Y2K compliant by July 1999. The status of the Y2K compliance program is monitored by senior management of the Company and the Company's Board of Directors. The costs of the Y2K related efforts incurred to date have not been material, and the estimate of remaining costs to be incurred is not considered to be material. Due to the complexities of estimating the cost of modifying applications to become Y2K compliant and the difficulties in assessing third parties' ability to become Y2K compliant, estimates may be subject to change. Management of the Company believes that its electronic data processing and information systems will be Y2K compliant; however, there can be no assurance that all of the Company's systems will be Y2K compliant, that the costs to be Y2K compliant will not exceed management's current expectations, or that the failure of such systems to be Y2K compliant will not have a material adverse effect on the Company's business. The Company believes that functions currently performed with the assistance of electronic data processing equipment could be performed manually or outsourced if certain systems were determined not to be Y2K compliant on or after January 1, 2000. The Company has not yet completed a contingency plan in the event that any systems are not Y2K compliant, but will do so once the Phase III process of its compliance program is begun. We expect this contingency plan to be complete by July 1999. 3 6 This entire section, "Year 2000 Issues", is hereby designated a "Year 2000 Readiness Disclosure", as defined in the Year 2000 Information and Readiness Disclosure Act. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Company wishes to caution readers that the forward-looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements made by or on behalf of the Company. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Company's actual results to differ materially from those expressed in any such forward-looking statements. The factors that could cause the Company's results to differ materially include, but are not limited to, general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms, and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. ITEM 2. PROPERTIES The Company's principal offices are located in Santa Ana, California, in two facilities providing an aggregate of approximately 28,400 square feet of office space, 22,000 square feet are leased through August 2000, with the remaining 6,400 square feet leased through October 2007. The Santa Ana property is sub-leased from Fidelity National Financial, Inc. The remaining office space consists of approximately 7,100 square feet of office space located in Tustin, California, is leased through December 2000; approximately 8,600 square feet of office space located in Tustin, California, is leased through July 2000 and a 5,000 square foot research and development facility, located in Oxford, Connecticut, is leased through March 2001. The Company also leases certain smaller spaces and additional space as needed. The Company believes that the material terms of its leases are commercially reasonable terms typically found in each of the respective areas in which the Company leases space. The Company believes that its facilities are adequate to support its current needs and that additional facilities will be available at competitive rates as needed. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of 1998. 4 7 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET AND PRICES On January 14, 1997, the Company elected to have its common stock delisted from the NASDAQ SmallCap Market. The stock is now listed on the OTC Bulletin Board. The following table sets forth the range of high and low closing bid quotations per share of the Company's common stock for the fiscal quarters indicated.
BID PRICE HIGH LOW Year Ended December 31, 1998 First Quarter $ 2.94 $ 1.63 Second Quarter 6.06 2.50 Third Quarter 5.75 3.50 Fourth Quarter 5.00 2.50 Year Ended December 31, 1997 First Quarter $ 1.88 $ 1.13 Second Quarter 1.38 1.00 Third Quarter 1.50 1.13 Fourth Quarter 3.00 1.38
On April 13, 1999, the last reported sale price of common stock was $4.69 per share. As of April 13, 1999, the Company had approximately 580 stockholders of record. DIVIDEND POLICY AND RESTRICTIONS ON DIVIDEND PAYMENTS The Company intends to continue its policy of retaining all earnings for reinvestment in the business operations of the Company. Under Delaware law, the Company's Board of Directors may declare and pay dividends on its outstanding shares in cash or property only out of the unreserved and unrestricted earned surplus. The Company has an accumulated deficiency of $6,150,353, as of December 31, 1998 and accordingly, Delaware law prohibits the Company from paying cash dividends except to the extent that the Company has net profits in any fiscal year or the preceding fiscal year. There were no accumulated dividends as of December 31, 1998. 5 8 ITEM 6. SELECTED FINANCIAL DATA The historical operating results data, per share data and balance sheet data set forth below are derived from the historical financial statements of the Company, certain of which have been restated to reflect the ACS Systems, Inc. acquisition and the related reverse merger accounting treatment (See note 1 of notes to consolidated financial statements). The balance sheet data includes the accounts of ACS, the postage scale and meter division and LDExchange as of December 31, 1998; and only the accounts of ACS as of December 31, 1997, 1996, 1995 and 1994. Operating results and per share data for the year ended December 31, 1998 include the results of operations for ACS for the year ended December 31, 1998, the results of operations for the postage scale and meter division for the period May 14, 1998 through December 31, 1998 and the results of operations for LDExchange for the period November 17, 1998 through December 31, 1998. Operating results and per share data for the years ended December 31, 1997, 1996, 1995 and 1994, include only the results of operations of ACS for the years then ended. Consolidated balance sheets at December 31, 1998 and 1997 and consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996, together with the related notes and the report of KPMG LLP, independent certified public accountants, are included elsewhere herein and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (RESTATED) (RESTATED) (RESTATED) (RESTATED) OPERATING RESULTS DATA: Hardware and software sales and maintenance revenues $ 16,248,425 $ 10,232,371 $ 6,422,557 $ 4,302,056 $ 994,830 Telecommunication service 9,834,555 862,814 -- -- -- revenues Service and license revenues 7,933,084 2,728,449 449,043 301,043 69,555 ------------ ------------ ------------ ------------ ------------ Total revenues 34,016,064 13,823,634 6,871,600 4,603,099 1,064,385 ------------ ------------ ------------ ------------ ------------ Hardware and software cost of sales 15,893,689 8,452,283 5,323,851 3,893,813 271,476 Telecommunication service cost of sales 8,652,054 587,905 -- -- -- Service and license cost of sales 3,421,741 1,279,557 525,253 272,476 18,851 ------------ ------------ ------------ ------------ ------------ Total cost of sales 27,967,484 10,319,745 5,849,104 4,166,289 290,327 ------------ ------------ ------------ ------------ ------------ Gross profit 6,048,580 3,503,889 1,022,496 436,810 774,058 OPERATING EXPENSES: Selling, general and administrative expenses 9,142,574 2,984,812 1,513,319 1,041,572 704,508 Amortization of cost in excess of net assets acquired and capitalized software development costs 1,083,621 808,274 638,462 -- -- ------------ ------------ ------------ ------------ ------------ Total operating expenses 10,226,195 3,793,086 2,151,781 1,041,572 704,508 ------------ ------------ ------------ ------------ ------------ Operating earnings (loss) (4,177,615) (289,197) (1,129,285) (604,762) 69,550 Interest income (expense) (666,788) 15,130 6,675 -- (98) ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes (4,844,403) (274,067) (1,122,610) (604,762) 69,452 Income tax expense (benefit) 2,400 (64,126) (417,747) -- -- ------------ ------------ ------------ ------------ ------------ Net earnings (loss) $ (4,846,803) $ (209,941) $ (704,863) $ (604,762) $ 69,452 ============ ============ ============ ============ ============ PER SHARE DATA: Earnings (loss) per share - basic and diluted $ (.81) $ (.05) $ (.15) $ (.13) $ .02 Number of shares used in per share computations - basic and diluted 5,954,000 4,597,000 4,597,000 4,597,000 4,597,000 Dividends $ -- $ -- $ -- $ -- $ -- BALANCE SHEET DATA: Cash and cash equivalents $ 914,796 830,784 $ -- $ 576,780 $ 259,496 Total assets 23,080,061 9,864,129 7,168,200 3,773,366 4,129,525 Amounts and notes payable to affiliates 16,729,411 5,431,417 3,741,380 -- -- Total liabilities 22,495,473 7,732,738 4,828,868 777,433 711,542 Stockholders' equity 584,588 2,131,391 2,341,332 2,995,933 3,417,983
6 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition and results of operations of the Company. The discussion and analysis below includes the results of operations of ACS Systems, Inc. for each of the years ended December 31, 1998, 1997 and 1996, as the acquisition of ACS Systems, Inc. has been accounted for as a reverse merger. The results of operations for the year ended December 31, 1998 include the results of operations of ACS for the year ended December 31, 1998, the results of operations of the postage meter and scale division for the period from May 14, 1998 through December 31, 1998 and the results of operations of LDExchange for the period November 17, 1998 through December 31, 1998. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere HEREIN. OVERVIEW During the years ended December 31, 1997 and 1996, the Company's operations consisted of the operations of ACS Systems, Inc., formerly a wholly-owned subsidiary FNFI. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. During 1998, 1997 and 1996, 66%, 89% and 86%, respectively, of the revenue generated by ACS was derived from multiple servicing arrangements with FNFI and its subsidiaries. ACS, through its various divisions, is a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. ACS offers a full range of information technology services, including voice and data network design, implementation and management. ACS also provides services in the areas of application development, real estate industry applications, electronic commerce ("eCommerce") and Year 2000 remediation and consulting services and telecommunications. Following the reverse merger with Micro General Corporation in May 1998 and the acquisition of LDExchange in November 1998, the Company added a postage meter and scale division and a multinational carrier focused primarily on the international long distance market. The Company's primary focus is information technology and telecommunication services. ACS remained the primary business unit during 1998. COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenue Revenues increased $20.2 million, or 146%, to $34.0 million in 1998 from $13.8 million in 1997, primarily as a result of continued growth in products and services provided to FNFI, including an increase in telecommunication services provided by ACS, the acquisition of the postage scale and meter division and the acquisition of LDExchange. See note 9. FNFI, as the result of favorable market conditions, continued expansion and a commitment to implement state of the art technology, increased the installation and upgrade of its various information technology systems using ACS as its primary vendor during 1997 that continued through 1998. See note 9 to the consolidated financial statements regarding segment information. The increased utilization of ACS by FNFI led to an increase in all forms of revenue. During 1997 and 1998, ACS was able to increase the level of products and services provided to non-affiliates, introduced new products and services and provided telecommunication services. Gross Profit Gross profit increased $2.5 million, or 73%, to $6.0 million, representing a gross profit margin of 18%, in 1998 from $3.5 million, a gross profit margin of 25%, in 1997. The increase in absolute dollars is consistent with the increase in revenues. Gross profit margin as a percentage has decreased in 1998 compared to 1997 primarily as a result of the addition of the new segments. See Comparison of Years Ended December 31, 1997 and 1996. The postage meter and scale division and LDExchange segments represent lower margin businesses than the information technology and telecommunication businesses of ACS. 7 10 Expenses Generally, selling, general and administrative expenses ("S,G & A") trend consistently with revenues. S,G & A expenses increased $6.2 million, or 206%, to $9.1 million in 1998 from $3.0 million in 1997. The increase is primarily a result of the growth of ACS, which occurred in response to the increased demand for its products and services; the acquisition of the postage scale and meter division and the acquisition of LDExchange. The expansion in the amount of products and services provided to FNFI required additional personnel and S,G & A in order to meet the demand and provide an adequate level of service and support. As ACS began to offer additional information technology services and telecommunication services, additional personnel were required and S,G & A related to the new offerings was incurred. The acquisition of the postage scale and meter division and the acquisition of LDExchange also resulted in the addition of personnel and S,G & A related to the operation of these new segments. The amortization of cost in excess of net assets acquired and capitalized software development costs is a function of the characteristics of the intangible assets recorded during a particular period and the estimated useful life of the intangible assets. Fluctuations in the amortization of cost in excess of net assets acquired and capitalized software result from the amount, mix and characteristics of the intangible assets recorded as well as the circumstances surrounding the Company's estimate of the appropriate useful life. Interest income (expense), net, is related to the use of the Company's available working capital, which is in the form of available cash and lines of credit. The year over year fluctuation in interest income (expense) can be attributed to the increase in average borrowings outstanding during 1998 compared to prior years. Income tax expense (benefit) is recorded based on the amounts that the Company estimates, based on the Company's taxation structure, will be due to Federal and state taxation authorities. During 1997 and 1996, ACS was included in the FNFI consolidated tax returns and income tax expense (benefit) was calculated as such. During 1998, ACS was included in the Micro General consolidated group, which pays only minimum taxes based on current operating results due to the fact that Micro General has not historically generated earnings. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 Revenue Revenues increased $6.9 million, or 101%, to $13.8 million in 1997 from $6.9 million in 1996, primarily as a result of the additional products and services provided to FNFI. FNFI, as the result of favorable market conditions, continued expansion and a commitment to implement state of the art technology, increased the installation and upgrade of its various information technology systems using ACS as its primary vendor. The increased utilization of ACS by FNFI led to an increase in all forms of revenue. In addition, during 1997, ACS was able to increase the level of products and services provided to non-affiliates, introduced new products and services and began providing telecommunication services. Gross Profit Gross profit increased $2.5 million, or 243%, to $3.5 million, representing a gross profit margin of 25%, in 1997 from $1.0 million, a gross profit margin of 15%, in 1996. The increase in gross profit, both in dollars and percentage, is consistent with the increase in revenues primarily as a function of the negotiation of more favorable terms with FNFI, increased efficiencies and economies of scale. The Company believes that the renegotiated terms are similar to third party rates and conditions, however, the relationship between the Company and FNFI should not be considered arm's length. Expenses Generally, selling, general and administrative expenses trend consistently with revenues. S,G & A increased $1.5 million, or 97%, to $3.0 million in 1997 from $1.5 million in 1996, primarily as a result of the growth of the Company which occurred in response to the increased demand for its products and services. The expansion in the amount of products and services provided to FNFI required additional personnel and S,G & A in order to meet the demand and provide an adequate level of service and support. In addition, as the Company began to offer additional 8 11 information technology services and telecommunication services additional personnel were required and S,G & A related to the new offerings was incurred. The amortization of cost in excess of net assets acquired and capitalized software development costs is a function of the characteristics of the intangible assets recorded during a particular period and the estimated useful life of the intangible assets. Fluctuations in the amortization of cost in excess of net assets acquired and capitalized software result from the amount mix and characteristics of the intangible assets recorded as well as the circumstances surrounding the Company's estimate of the appropriate useful life. Interest income (expense), net, is related to the use of the Company's available working capital, which is in the form of available cash and lines of credit, and was comparable year over year. Income tax expense (benefit) is recorded based on the amounts that the Company estimates, based on the Company's taxation structure, will be due to federal and state taxation authorities. During 1997 and 1996, ACS was included in the FNFI consolidated tax returns and income tax expense (benefit) was calculated as such. LIQUIDITY AND CAPITAL RESOURCES The Company's current cash requirements include debt service, personnel and other operating expenses, capital expenditures and capital for acquisitions and expansion. The Company believes that all anticipated cash requirements will be met from internally generated funds, future lines of credit and additional availability from lines of credit from affiliates. Internally generated funds fluctuate in a pattern generally consistent with revenues. Since the Company has repositioned itself as a result of the merger with ACS Systems, Inc. and the acquisition of LDExchange, the revenue, and therefore, cash flow base has stabilized, particularly as a result of the amount of revenues generated by affiliates. The Company believes that as a result of its current revenue base and the anticipated availability of funds in the form of additional lines of credit from affiliates and non-affiliates, all cash requirements will be met for at least the next twelve months. The Company relies on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI and as a source of funds via available financing arrangements. The Company has suffered losses and negative cash flows from operations for each of the years in the three-year period ended December 31, 1998. In addition, the Company has an accumulated deficiency and a significant amount of outstanding debt as of December 31, 1998. As of March 31, 1999, FNFI has represented that it has the ability and intent to provide the Company with the cash necessary to continue as a going concern for a period of at least twelve months following December 31, 1998. The Company must comply with certain affirmative and negative covenants related to its outstanding debt and notes payable. The Company was in compliance with or received waivers related to these covenants at December 31, 1998. SEASONALITY AND INFLATION The effects of seasonality and inflation on consolidated operating results have, historically, been insignificant. RECENT DEVELOPMENTS The Company and FNFI completed the merger of Micro General Corporation with ACS Systems, Inc., a wholly-owned subsidiary of FNFI on May 14, 1998. As a result of the merger, all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General Corporation common stock. The transaction was valued at $1.3 million. Following the merger of Micro General Corporation and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an undiluted basis. The transaction has been treated as a reverse merger, i.e., Micro General Corporation has been acquired by Fidelity National Financial, Inc. as a majority-owned subsidiary through a merger with and into ACS Systems, Inc., with Micro General Corporation as the surviving entity. As of December 31, 1998, FNFI owned 70.6% of the outstanding common stock of the Company. 9 12 On October 8, 1998, the Company in conjunction with FNFI, announced the creation of RealEC, the largest real estate electronic commerce network in the nation. RealEC is a nationwide multi-vendor network that will provide real estate and lender customers the ability to select products and services necessary to close their transactions, while at the same time giving them access to over 6,000 issuing locations for title insurance across the United States. RealEC is a joint venture developed by the Company and Stewart Mortgage Information, a subsidiary of Stewart Information Services Corporation (NYSE:STC). The RealEC network integrate each company's existing systems to provide leading edge software, ultimately connecting all parties involved the real estate transactions. RealEC will interface with loan origination software systems, window-based ordering systems, third party networks, real estate office systems and the Internet. RealEC will also offer on-line access to documents related to real estate transactions and link with back-end title insurance and escrow production systems. The Company completed the acquisition of LDExchange on November 17, 1998. As a result of the LDExchange acquisition the Company has been able to enter the international telecommunications and Internet telephony markets, which complements the range of services offered by ACS. LDExchange is an emerging multinational carrier focused primarily on the international long distance market. LDExchange offers reliable, low cost switched voice services on a wholesale basis, primarily to U.S. based long distance carriers. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Company common stock (1,000,000 shares). On March 22, 1999, the Company announced the acquisition of 100% of the outstanding common stock of Interactive Associates, Inc., a privately held distributor of computer telephony hardware and services. The purchase price for Interactive Associates, Inc. was 100,000 shares of Company common stock, subject to certain conditions. The closing price of the Company common stock on March 22, 1999, according to the NASDAQ Bulletin Board was $3.88. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", was issued by the FASB in March 1998. SOP 98-1 requires that certain costs related to the development or purchase of internal use software be capitalized and amortized over the estimated useful life of the software. The provisions of SOP 98-1 are effective for fiscal years beginning after December 15, 1998. The Company does not expect that the adoption of SOP 98-1 will have a material impact on its financial position or results of operations. SOP 98-5, "Reporting on the Costs of Start-up Activities", was issued in April 1998. SOP 98-5 provides guidance on the financial reporting of start-up and organization costs and requires that these costs be expensed as incurred. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998. The Company does not expect that the adoption of SOP 98-5 will have a material impact on its financial position or results of operations. ITEM 7A. QUANTITAVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's consolidated balance sheets include liabilities whose fair values are subject to market risks. The following sections address the significant market risks associated with the Company's financial activities as of year end 1998. Interest Rate Risk The Company's borrowings are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. 10 13 Caution should be used in evaluating the Company's overall market risk from the information below, since actual results could differ materially because the information was developed using estimates and assumptions as described below. See note 7 of notes to consolidated financial statements. The fair value of the Company's notes payable approximate their carrying value at December 31, 1998 as the interest rates paid approximate market value. The hypothetical effects of changes in market rates or prices on the fair values of financial instruments would be an increase (decrease) of the fair value approximately $750,000, if interest rates increased (decreased) 100 basis points. 11 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MICRO GENERAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL INFORMATION
PAGE NO. -------- Independent Auditors' Report............................................................. 13 Consolidated Balance Sheets as of December 31, 1998 and 1997 (Restated).................. 14 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated)................................................ 15 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated)....................... 16 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated).......................................... 17 Notes to Consolidated Financial Statements............................................... 18 Schedule II - Valuation and Qualifying Accounts and Reserves.............................
All other schedules are omitted because the required information is not applicable or the information is presented in the consolidated financial statements or notes thereto. 12 15 INDEPENDENT AUDITORS' REPORT The Board of Directors Micro General Corporation: We have audited the consolidated financial statements of Micro General Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in notes 1, 5, 6, 7 and 8 to the consolidated financial statements, the Company's financial position, results of operations and cash flows are materially affected by and are dependent on certain transactions and agreements with Fidelity National Financial, Inc. (FNFI), the Company's majority owner, and FNFI's subsidiaries. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Micro General Corporation and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Los Angeles, California March 31, 1999 13 16 MICRO GENERAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
ASSETS 1998 1997 ------------ ------------ (Restated) Current assets: Cash and cash equivalents $ 914,796 830,784 Trade accounts receivable, less allowance for doubtful accounts of $485,936 in 1998 and $321,844 in 1997 1,835,968 183,340 Trade accounts receivable due from affiliates 4,350,790 4,234,765 Inventories 785,204 505,949 Prepaid expenses and other assets 359,884 119,432 ------------ ------------ Total current assets 8,246,642 5,874,270 Notes receivable 29,850 31,776 Property and equipment, net 3,321,005 704,504 Capitalized software development costs, less accumulated amortization of $2,794,275 in 1998 and $2,065,596 in 1997 1,505,719 2,170,072 Cost in excess of net assets acquired, less accumulated amortization of $872,996 in 1998 and $350,546 in 1997 9,976,845 1,083,507 ------------ ------------ $ 23,080,061 9,864,129 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 4,916,314 1,243,975 Income and other taxes payable 138,647 -- Deferred tax liabilities 361,726 361,726 Deferred revenue 349,375 -- Amounts due to affiliates -- 695,620 ------------ ------------ Total current liabilities 5,766,062 2,301,321 Amounts and notes payable to affiliates 16,729,411 5,431,417 ------------ ------------ Total liabilities 22,495,473 7,732,738 ------------ ------------ Commitments and contingencies (note 5) Subsequent events (note 12) Stockholders' equity: Preferred stock, $.05 par value. Authorized 1,000,000 shares; none issued and outstanding -- -- Common stock, $.05 par value. Authorized 20,000,000 shares; issued and outstanding 7,546,666 and 6,546,666 shares at December 31, 1998 and 1997, respectively 377,333 327,333 Additional paid-in capital 6,357,608 3,107,608 Accumulated deficiency (6,150,353) (1,303,550) ------------ ------------ Total stockholders' equity 584,588 2,131,391 ------------ ------------ $ 23,080,061 9,864,129 ============ ============
See accompanying notes to consolidated financial statements. 14 17 MICRO GENERAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ (Restated) (Restated) Hardware and software sales and maintenance revenues $ 16,248,425 10,232,371 6,422,557 Telecommunication service revenues 9,834,555 862,814 -- Service and license revenues 7,933,084 2,728,449 449,043 ------------ ------------ ------------ Total revenues (note 6) 34,016,064 13,823,634 6,871,600 ------------ ------------ ------------ Hardware, software and maintenance cost of sales 15,893,689 8,452,283 5,323,851 Telecommunication service cost of sales 8,652,054 587,905 -- Service and license cost of sales 3,421,741 1,279,557 525,253 ------------ ------------ ------------ Total cost of sales 27,967,484 10,319,745 5,849,104 ------------ ------------ ------------ Gross profit 6,048,580 3,503,889 1,022,496 ------------ ------------ ------------ Operating expenses: Selling, general and administrative expenses 9,142,574 2,984,812 1,513,319 Amortization of cost in excess of net assets acquired and capitalized software development costs 1,083,621 808,274 638,462 ------------ ------------ ------------ Total operating expenses 10,226,195 3,793,086 2,151,781 ------------ ------------ ------------ Operating loss (4,177,615) (289,197) (1,129,285) Interest income (expense), net (666,788) 15,130 6,675 ------------ ------------ ------------ Loss before income taxes (4,844,403) (274,067) (1,122,610) Income tax expense (benefit) 2,400 (64,126) (417,747) ------------ ------------ ------------ Net loss $ (4,846,803) (209,941) (704,863) ============ ============ ============ Loss per share - basic and diluted $ (.81) (.05) (.15) ============ ============ ============ Number of shares used in per share computations - basic and diluted 5,954,000 4,597,000 4,597,000 ============ ============ ============
See accompanying notes to consolidated financial statements. 15 18 MICRO GENERAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1998, 1997 and 1996
COMMON STOCK ADDITIONAL TOTAL ------------------------ PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIENCY EQUITY ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 (Restated) 6,546,666 $ 327,333 3,107,608 (388,746) 3,046,195 Net loss -- -- -- (704,863) (704,863) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 (Restated) 6,546,666 327,333 3,107,608 (1,093,609) 2,341,332 Net loss -- -- -- (209,941) (209,941) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 (Restated) 6,546,666 327,333 3,107,608 (1,303,550) 2,131,391 Equity issued in connection with merger (note 1) -- -- 1,300,000 -- 1,300,000 Shares issued to acquire LDExchange.com, Inc. 1,000,000 50,000 1,950,000 -- 2,000,000 Net loss -- -- -- (4,846,803) (4,846,803) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 7,546,666 $ 377,333 6,357,608 (6,150,353) 584,588 ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 16 19 MICRO GENERAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------- ----------- ----------- (Restated) (Restated) Cash flows from operating activities: Net loss $(4,846,803) (209,941) (704,863) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,423,959 812,262 642,057 Changes in assets and liabilities: Trade accounts receivable (215,770) (536,017) 307,204 Inventories 90,745 (288,559) 2,326 Prepaid expenses and other assets (157,452) (66,936) (28,357) Accounts payable and accrued expenses 261,802 158,468 308,055 Income and other tax payable 85,739 -- -- Deferred revenue 329,789 -- -- Amounts due from affiliates (116,025) (81,872) (1,683,748) ----------- ----------- ----------- Net cash used in operating activities (3,144,016) (212,595) (1,157,326) ----------- ----------- ----------- Cash flows from investing activities: Acquisition of LDExchange.com, Inc. 717,000 -- -- Merger of Micro General and ACS 403,175 -- -- Purchase of property and equipment (2,768,119) (702,404) -- Decrease (increase) in notes receivable 1,926 (29,776) (2,000) Capitalization of software development costs (64,326) (610,098) (410,663) ----------- ----------- ----------- Net cash used in investing activities (1,710,344) (1,342,278) (412,663) ----------- ----------- ----------- Cash flows from financing activities - net increase in borrowings from affiliates 4,938,372 2,385,657 993,209 ----------- ----------- ----------- Net cash provided by financing activities 4,938,372 2,385,657 993,209 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 84,012 830,784 (576,780) Cash and cash equivalents at beginning of year 830,784 -- 576,780 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 914,796 830,784 -- =========== =========== ===========
See accompanying notes to consolidated financial statements. 17 20 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS Historically, the operations of Micro General Corporation ("Micro General") consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations are currently performed through the Company's postage meter and scale division. Following the acquisition of ACS Systems, Inc. ("ACS"), which is described below, Micro General (together with ACS, the "Company") shifted its primary focus to information technology and telecommunication services. On May 14, 1998, the Company and Fidelity National Financial, Inc. ("FNFI") completed the merger of Micro General with ACS, a wholly owned subsidiary of FNFI. As a result of the merger, all of the outstanding shares of ACS were exchanged for 4.6 million shares of Micro General common stock. The transaction was appraised at $1.3 million. Following the merger of Micro General and ACS, FNFI owned approximately 81.4% of the common stock of the Company on an undiluted basis. The transaction has been treated as a reverse merger, i.e., Micro General has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with Micro General as the surviving legal entity and ACS as the surviving entity for accounting purposes. As a result, the consolidated financial statements of Micro General previously issued prior to the year ended December 31, 1998 have been restated to reflect only the balance sheets, operations and cash flows of ACS prior to the merger with Micro General and to reflect ACS as the acquiror for accounting purposes. The cost of $1.3 million was allocated to the fair value of the assets acquired and liabilities assumed relating to Micro General. The results of Micro General have been included in the Company's results of operations since the merger on May 14, 1998. At December 31, 1998, FNFI owned 70.6% of the outstanding common stock of the Company (see note 11). ACS was founded in 1985 as a software development company specializing in products for the real estate industry, in particular, escrow software. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. ACS is a full-service enterprise solutions provider that offers total voice, data and systems integration solutions for small and medium sized businesses, primarily in the real estate sector. The Company generated 66%, 89% and 86% of its revenue during the years ended December 31, 1998, 1997 and 1996, respectively, from multiple servicing arrangements with FNFI and its subsidiaries. In addition, as a result of the acquisition of LDExchange.com, Inc. ("LDExchange"), which closed on November 17, 1998, the Company has been able to enter the international telecommunications and Internet telephony markets, which complements the range of services offered by ACS. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Company common stock (1,000,000 shares). The acquisition was accounted for as a purchase and 18 (Continue) 21 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) the results of operations of LDExchange have been included in the Company's results of operations since November 17, 1998. (see note 11). (b) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on deposit with banks with original maturities of three months or less. (c) ACCOUNTS RECEIVABLE The carrying amounts reported in the consolidated balance sheets for accounts receivable approximate their fair value. (d) INVENTORIES Inventories are stated at the lower of cost or market (net realizable value) under the first-in, first-out method of accounting for inventories. (e) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over estimated useful lives which range from three to seven years. Amortization of leasehold improvements is charged to expense on a straight-line basis over the shorter of the estimated useful lives of the assets or the term of the underlying lease. (f) CAPITALIZED SOFTWARE DEVELOPMENT COSTS Software development costs incurred after the establishment of technological feasibility are capitalized and later amortized using the greater of the straight-line method or based on the estimated revenue distribution over the remaining estimated economic life of the products. Such policy results in the Company amortizing its capitalized software development costs over an estimated economic life of three to seven years. During 1998 and 1997, the Company capitalized software development costs of $64,326 and $610,098, respectively. During 1998 and 1997, the Company amortized software development costs of $728,679 and $712,672, respectively. The Company periodically assesses the recoverability of the cost of its capitalized software development costs based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of capitalized software development costs has occurred at December 31, 1998. (g) COST IN EXCESS OF NET ASSETS ACQUIRED Cost in excess of net assets acquired is the excess of the purchase price paid over the fair value of the net assets of the acquired company at the date of acquisition. Cost in excess of net assets acquired is amortized on a straight-line basis over 5 to 15 years. The Company periodically assesses the recoverability of its cost in excess of net assets acquired based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of cost in excess of net assets acquired has occurred at December 31, 1998 (see note 11). 19 (Continue) 22 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) (h) REVENUE RECOGNITION The Company has adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," for the years ended December 31, 1998, 1997 and 1996. Under SOP 97-2, if a software sales arrangement does not require significant modification or customization of the software, revenue from the sale of the software is recognized when evidence of an arrangement exists, the fee is fixed and determinable, the license agreement has been delivered and collection of any resulting receivable is probable. As a result of certain issues raised in applying SOP 97-2, in March 1998, the AICPA issued an SOP which delayed for one year the effective date of certain provisions of SOP 97-2 with respect to what constitutes vendor-specific objective evidence of fair value of the delivered software element in certain multiple-element arrangements that include service elements entered into by entities that never sell the software elements separately. In December 1998, the AICPA issued SOP 98-9, which amends paragraphs of SOP 97-2 to require recognition of revenue using the residual method under certain circumstances, and is effective for fiscal years beginning after March 15, 1999. The Company does not expect the adoption of this SOP to have a material impact on the Company's consolidated financial statements. Revenue from the sales of hardware and other products is recognized when delivery has occurred, the fee is fixed and determinable and collection of any resulting receivable is probable. Revenue from maintenance, servicing and consulting is recognized as the related services are performed. (i) INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. ("Statement") 109, "Accounting for Income Taxes." Statement 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. (j) MANAGEMENT ESTIMATES The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 20 (Continue) 23 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) (k) EARNINGS PER SHARE Basic earnings per share is based on the weighted-average number of shares outstanding and excludes any dilutive effects of options and convertible securities. Diluted earnings per share gives effect to assumed conversions of potentially dilutive securities. Shares used in the earnings per share calculations for 1998 are the weighted-average shares of Micro General outstanding during 1998, assuming the shares issued in connection with the merger of ACS and Micro General were outstanding since January 1, 1998. Shares used in the earnings per share calculations for 1997 and 1996 represent the shares issued to FNFI in connection with the merger of ACS and Micro General. All outstanding options and warrants (see notes 7 and 10) have been excluded from the calculations of diluted loss per share as their inclusion would be antidilutive. (l) OTHER COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement 130, "Reporting Comprehensive Income," which established new rules for the reporting and display of comprehensive income and its components. However, the adoption of Statement 130 had no impact on the Company's consolidated financial statements as comprehensive income is comprised only of net loss. (2) INVENTORIES A summary of inventories follows:
1998 1997 -------- -------- Computer equipment $482,106 403,519 Telecommunications equipment 303,098 102,430 -------- -------- $785,204 505,949 ======== ========
21 (Continue) 24 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) (3) INCOME TAXES The income tax provision (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996 -------- -------- -------- Current: Federal $ -- (16,528) (263,950) State 2,400 (2,833) (77,326) -------- -------- -------- 2,400 (19,361) (341,276) -------- -------- -------- Deferred: Federal -- (33,740) (59,144) State -- (11,025) (17,327) -------- -------- -------- -- (44,765) (76,471) -------- -------- -------- $ 2,400 (64,126) (417,747) ======== ======== ========
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:
1998 1997 1996 ----------- ----------- ----------- Computed "expected" tax benefit $(1,647,097) (93,183) (381,687) State taxes, net of Federal income tax benefit (62,681) (9,008) (61,524) Amortization of cost in excess of net assets 177,633 33,461 33,459 acquired Nondeductible expenses 29,505 4,604 (7,995) Net operating loss utilized by affiliated group 781,366 -- -- Valuation allowance 723,674 -- -- ----------- ----------- ----------- $ 2,400 (64,126) (417,747) =========== =========== ===========
22 (Continue) 25 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) The deferred tax assets and liabilities at December 31, 1998 consist of the following:
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 =========== ===========
The deferred tax assets and liabilities at December 31, 1997 consist of the following:
DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES -------- -------- Book over tax provision for bad debts $171,775 -- Acquired assets adjustment to fair value -- 533,501 -------- -------- $171,775 533,501 ======== ========
Statement 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has established a valuation allowance of $2,636,964 principally associated with net operating loss carryforwards and other deferred tax assets recorded from acquisitions and an additional allowance of $875,276 to cover the majority of the other deferred tax assets. Any tax benefits subsequently recognized for deferred tax assets related to these acquisitions will be allocated to goodwill. ACS was included as an affiliate in the consolidated income tax returns of FNFI through mid-November 1998. Prior to May 1998, ACS paid taxes or received such tax benefits as it contributed to the consolidated tax position of FNFI. Micro General was included as an affiliate in the consolidated income tax returns of FNFI from May 14, 1998 through mid-November 1998. FNFI utilized approximately $2,298,000 of losses generated by the Company during this period for which Micro General will not be reimbursed by FNFI. The Company has available Federal and state net operating loss carryforwards of $6,125,199 expiring in years 2001 through 2019, and $1,770,534 expiring in years 2000 through 2004, respectively. 23 (Continue) 26 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) (4) PROPERTY AND EQUIPMENT A summary of property and equipment follows:
1998 1997 ---------- ---------- Telecommunications equipment $1,557,150 695,620 Computer equipment 1,158,642 67,840 Furniture and fixtures 605,864 28,005 Office equipment 59,571 19,209 Leasehold improvements 232,956 14,390 ---------- ---------- 3,614,183 825,064 Less accumulated depreciation and amortization 293,178 120,560 ---------- ---------- $3,321,005 704,504 ========== ==========
(5) COMMITMENTS AND CONTINGENCIES (a) LEASE COMMITMENTS The Company leases facilities and equipment under various operating leases. Future minimum noncancelable lease commitments, due primarily to affiliates, are as follows:
Year ending December 31: 1999 $1,198,426 2000 745,716 2001 657,552 2002 630,355 2003 595,716 Thereafter 2,190,883 ---------- Total minimum lease payments $6,018,648 ==========
Rent expense was $913,059, $238,721 and $128,179 for the years ended December 31, 1998, 1997 and 1996, respectively. Included in rent expense for 1998, 1997 and 1996 was $721,515, $235,316 and $128,179, respectively, paid to affiliates. (b) LITIGATION The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of the management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 24 (Continue) 27 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) (6) RELATED PARTY TRANSACTIONS As described in note 1, the Company's primary source of revenue is fees resulting from sales and services to affiliated companies. Revenues generated from sales and services to affiliates for the years ended December 31, 1998, 1997 and 1996 were $22,480,042, $12,356,444 and $5,932,524, respectively. The amounts due to affiliates at December 31, 1997, classified as current liabilities, relate mainly to an arrangement with a subsidiary of FNFI, whereby the personnel costs of the Company were funded by this subsidiary of FNFI. The Company reimbursed FNFI from time to time as funds became available. No interest was charged to the Company in this arrangement. The Company utilizes funds available under the Convertible Note Purchase Agreement, described below, to currently fund its operations. In addition, the Company has long-term amounts and notes payable to affiliates amounting to $16,729,411 and $5,431,417 at December 31, 1998 and 1997, respectively (see note 7). The Company also leases facilities from FNFI subsidiaries (see note 5). (7) NOTES PAYABLE On August 1, 1996, Micro General entered into a $3 million financing agreement which provided additional funding, primarily for the retirement of bank debt, operations and to fund Micro General's development of a series of high level security postage meters designed to comply with the new United States Postal Service proposed regulations. Two 9.5%, five-year convertible notes were issued, one in the amount of $1 million and one in the amount of $2 million, and are held respectively by Cal West Service Corporation ("Cal West"), a subsidiary of FNFI, which owned 38% of the outstanding Micro General common stock when the Cal West note was issued and Dito Caree L.P. Holding ("Dito Caree"), which owned 5% of the outstanding common stock of Micro General when the Dito Caree note was issued. Repayment of the notes was on an interest-only basis for the first two years, with principal and interest payments for the remaining three years of the term. The debt, secured by the assets of Micro General, is convertible into 1,344,438 shares of the Company's common stock at prices ranging from $2.00 to $2.50 per share. At December 31, 1998, there was $3,000,000 outstanding on these notes. The Company is subject to certain restrictive covenants, both financial and operational, related to these notes. As of December 31, 1998, the Company was not in compliance with certain of these covenants and obtained waivers for these covenants through December 31, 1999. On November 25, 1997, Micro General entered into a $600,000 financing agreement, which provided additional funding to be used by Micro General for operating cash flow purposes. Two 9.0% notes were issued in the amount of $200,000 and $400,000, held by Cal West and Dito Caree, respectively. Interest on the two notes is to be paid quarterly. The Company had the right to prepay all or a portion of the interest and principal due on the notes at any time prior to the original due date of May 31, 1998. The amount payable under the note payable to Dito Caree was refinanced in connection with the Convertible Note Purchase Agreement discussed below. 25 (Continue) 28 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) In conjunction with these short-term notes, Micro General issued to the note holders, two detachable warrant certificates, one in the amount of 50,000 shares to Cal West and one in the amount of 100,000 shares to Dito Caree, giving the note holders the right to purchase 150,000 shares of the Company's common stock at $1.50 per share. The warrants can be exercised at any time between November 25, 1997 and November 25, 2002. No warrants have been exercised by the holders. The outstanding amount on this note at December 31, 1998 was $200,000 and the Company was not in compliance with certain restrictive financial covenants related to this debt. The Company obtained waivers for these covenants through December 31, 1999, and the due date on the note was extended through 1999. Micro General entered into a third financing agreement to provide additional funding to be used by Micro General for operational cash flow purposes. On April 8, 1998, two 9.0% notes were issued, one in the amount of $250,000 and one in the amount of $500,000, held by Cal West Service Corporation and Dito Caree, respectively. Interest on the notes is to be paid quarterly. Micro General had the right to prepay all or a portion of the interest and principal due on the notes at any time prior to the due date of October 31, 1998. The amount payable under the note payable to Dito Caree was refinanced in connection with the Convertible Note Purchase Agreement discussed below. In conjunction with the notes, Micro General issued to the note holders, two detachable warrant certificates, one in the amount of 62,500 shares to Cal West and one in the amount of 125,000 shares to Dito Caree, giving the note holders the right to purchase 187,500 shares of the Company's common stock at $1.50 per share. The warrants can be exercised at any time between April 8, 1998 and April 8, 2003. No warrants have been exercised by the respective holders. The amount outstanding at December 31, 1998 was $250,000 and the Company was not in compliance with certain restrictive financial covenants related to this debt. The Company obtained waivers for these covenants through December 31, 1999, and the due date on the note was extended through 1999. On October 27, 1998, the Company entered into a $15 million Convertible Note Purchase Agreement with FNFI, which replaced a $5 million financing agreement between the Company and a subsidiary of FNFI dated May 14, 1998, entered into in connection with the merger with ACS. Two 10.0%, five-year convertible notes were issued, one in the amount of $14.1 million and one in the amount of $900,000, held by Cal West and Dito Caree, respectively. Interest on these notes is to be paid quarterly. The entire unpaid balance of the notes, including principal and accrued but unpaid interest, is due and payable on October 27, 2003. The note holders have the right to convert all or a portion of the principal to be repaid on the payment date into shares of the Company's common stock at the conversion price. The debt is secured by the assets of the Company and can be converted into 3,133,333 shares of the Company's $.05 par value common stock at a price of $4.50 per share. The note holders retain the right to acquire shares until note maturity on October 27, 2003. At December 31, 1998, there was $13,279,411 outstanding on these notes. The Company is subject to certain restrictive covenants, both financial and operational, related to these notes. The Company was in compliance with these covenants as of December 31, 1998. 26 (Continue) 29 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) The carrying value of notes payable to affiliates approximates fair value at December 31, 1998 due to the fact that the interest rates paid on the notes payable to affiliates approximate market rates. Principal maturities of the notes payable and long-term debt at December 31, 1998 are as follows: 1999 $ -- 2000 3,450,000 2001 -- 2002 -- 2003 13,279,411 ----------- $16,729,411 ===========
(8) LIQUIDITY AND GOING CONCERN The Company has suffered losses and negative cash flows from operations for each of the years in the three-year period ended December 31, 1998. In addition, the Company has an accumulated deficiency and a significant amount of outstanding debt as of December 31, 1998. As a result, substantial doubt exists about the Company's ability to continue as a going concern for a reasonable period of time following the December 31, 1998 balance sheet date. However, as of March 31, 1999, FNFI has represented that it has the ability and intent to provide the Company with cash necessary to continue as a going concern for a period of at least twelve months following December 31, 1998. Given this representation, management believes that the Company will be able to continue as a going concern for a reasonable period following December 31, 1998. Management has plans to expand the Company's business relationships with unaffiliated third parties and take other measures to ultimately generate cash flows sufficient to support its operations. (9) SEGMENT INFORMATION The Company's consolidated financial statements as of and for the year ended December 31, 1998 include three reportable segments. Prior to 1998, the Company consisted only of ACS.
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) ============ ============ ============ ============
27 (Continue) 30 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) 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 sales and support division and a telecommunication division, which provides comprehensive data network systems support, including selling computer hardware and software products and developing integrated title and escrow computer applications for the title and real estate related industries. Also provides telecommunications hardware and long-distance reselling, technical and consulting services, and internet access and services. All sales to affiliated companies are from this division (see note 6). - LDEXCHANGE: International telecommunication services which provides access to the international long-distance market for the rapidly growing wholesale telecommunication service sector. LDExchange had sales of $4,978,380 to one non-affiliated customer. - MICRO GENERAL: Corporate and the postage meter and scale division, which develops, manufactures and markets computerized equipment for shipping, mailing and operations, with products ranging from low-cost mechanical and electronic postal scales for personal and office use, to complete systems for high-volume processing of parcels shipped by UPS and other carriers. The vast majority of expenditures for additions to long-lived assets, as well as depreciation and amortization, pertain to ACS. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There were no intersegment sales or transfers during the year ended December 31, 1998. (10) EMPLOYEE BENEFIT PLANS Employee benefits include an employee stock purchase plan, three stock option plans and a 401(k) plan. In 1998, the Company's Board of Directors approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, there are 800,000 shares of the Company's common stock available for purchase at current market prices by Company employees who meet certain vesting requirements. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. There have been no stock purchases by the ESPP as of December 31, 1998. 28 (Continue) 31 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) In 1987, stockholders also approved the adoption of a Stock Option Plan ("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may grant stock options to certain key employees and nonemployee directors or officers. The number of shares issuable under the 1987 Option Plan is 220,000 shares of common stock at not less than fair market value on the date of grant. All options granted become exercisable at the discretion of the Board of Directors and expire five years from the date of grant. Options that lapse or are canceled prior to exercise are added to the shares authorized for future grants. The 1987 Option Plan expired in 1991, but was renewed by stockholders in 1993. There were no remaining shares available for grant at December 31, 1998 under the 1987 Option Plan. In 1995, stockholders approved the adoption of the 1995 Stock Option Plan ("1995 Option Plan"). The number of shares reserved for issuance under the 1995 Option Plan is 132,000 shares of common stock. All 132,000 shares were available for grant at December 31, 1998 under the 1995 Option Plan. During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,500,000 shares of common stock, plus an additional 300,000 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1998 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, nonemployee directors and officers, consultants and other service providers. The Board of Directors, or a committee consisting of two or more members of the Board of Directors, will administer the 1998 Plan (the "Administrator"). The Administrator will have the full power and authority to interpret the 1998 Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to, grants under the 1998 Plan, and adopt, amend and rescind rules relating to the 1998 Plan. The term of options may not exceed 10 years from the date of grant (5 years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Administrator. The maximum number of shares for which options may be granted to any one person during any one calendar year under the 1998 Plan is 1,500,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 1,500,000. The aggregate fair market value of the common stock (determined as of the date of grant) with respect to incentive stock options 29 (Continue) 32 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) granted under the 1998 Plan or any other stock option plan of the Company that become exercisable for the first time by any optionee during any calendar year may not exceed $100,000. Prior to 1998, the Company's stock option activity was immaterial. A summary of the Company's stock option activity and related information for the year ended December 31, 1998 is as follows:
WEIGHTED- AVERAGE NUMBER OF EXERCISE SHARES PRICE ------ ----- Beginning outstanding at December 31, 1997 227,166 $1.93 Granted 1,226,250 4.80 Exercised -- -- Canceled (14,500) 1.86 --------- Stock options outstanding at December 31, 1998 1,438,916 4.35 ========= ===== Stock options exercisable at December 31, 1998 985,750 $4.28 ========= =====
The weighted-average remaining contractual life of the options outstanding at December 31, 1998 is 9.01 years. The following table sets forth options outstanding and exercisable by price range at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------- ----------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE PRICES 12/31/98 LIFE PRICE 12/31/98 PRICE ------------- ----------- ----------- --------- ----------- ----------- $1.25 - $3.50 242,666 5.18 $ 2.13 186,992 $ 2.10 $4.75 - $4.75 200,000 9.61 4.75 200,000 4.75 $4.81 - $4.81 996,250 9.82 4.81 598,758 4.81 --------- --------- $1.25 - $4.81 1,438,916 9.01 4.35 985,750 4.28 ========= ===== ======= ========= ========
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"), and related Interpretations in accounting for its employee stock options. As discussed below, in management's opinion, the alternative fair value accounting provided for 30 (Continue) 33 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) under Statement 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net earnings and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions. The risk-free interest rate used in the calculation is the rate on the date the options were granted. The risk-free interest rate used for options granted during 1998 was 5.7%. A volatility factor for the expected market price of the common stock of 50% was used for options granted in 1998. No dividends are paid by the Company; as a result, its expected dividend yield is 0.0%. A weighted-average expected life of seven years was used in all years as the Company has little history of options being exercised. The impact of applying the provisions of Statement 123 on the consolidated results of operations is not material for the year ended December 31, 1998. The Company also offers a 401(k) profit sharing plan, a qualified voluntary contributory savings plan, available to substantially all employees. Eligible employees may contribute up to 15% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company may elect to make matching contributions. The Company has historically not made matching contributions. (11) ACQUISITIONS As discussed in note 1, Micro General and ACS merged in May 1998 and LDExchange was acquired in November 1998. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Micro General/ACS merger were as follows: 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) -----------
31 (Continue) 34 MICRO GENERAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of December 31, 1998 and 1997 (Restated) and for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated) 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)
(12) SUBSEQUENT EVENTS In March 1999, the Company acquired Interactive Associates, Inc., a privately held distributor of computer telephony hardware and services. This acquisition provides for the purchase of 100% of the common stock of Interactive Associates, Inc. in exchange for 100,000 shares of Micro General common stock, subject to certain conditions. The closing price of the Company common stock on March 22, 1999, according to the NASDAQ Bulletin Board, was $3.88. This acquisition will be accounted for using the purchase method. In March 1999, the postage meter and scale division ceased operations. 32 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. THROUGH 13. Within 120 days after the close of its fiscal year, the Company intends to file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended, which will include the election of directors, the report of compensation committee on annual compensation, certain relationships and related transactions and other business. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS. The following is a list of the Consolidated Financial Statements of Micro General Corporation and its subsidiaries included in Item 8 of Part II. Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 1998 and 1997 (Restated). Consolidated Statements of Operations for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated). Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated) Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 (Restated) and 1996 (Restated) Notes to Consolidated Financial Statements. (a)(2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial statement schedules filed as part of this annual report on Form 10-K. Schedule II: Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) The following exhibits are incorporated by reference or are set forth on pages to this Form 10-K:
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.
33 36
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.2 Bylaws of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987, incorporated by reference to Exhibit 10.1 from the Company's Annual Report on Form 10-K for the year 1984; Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987, incorporated by reference to Exhibit 10 from the Company's Annual Report on Form 10-K for the year ended December 28, 1986. 10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, incorporated by reference from Form S-8, registration number 333-64289. 10.18 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.19 Convertible Note Purchase Agreement between Micro General Corporation and Dito Caree L.P. dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20 Loan Agreement and Agreement to issue Detachable Warrants between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated November 25, 1997, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems, Inc., a California Corporation, a Delaware corporation, Micro General Corporation, a Delaware corporation and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.23 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated October 27, 1998. 10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and among Micro General Corporation, a California corporation, LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and Europa Telecommunications, incorporated by reference from the Company's report on Form 8-K dated as of November 23, 1998. 10.25 Inducement Agreement and Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes, by and between John Snedegar, Cal West Service Corporation and Micro General Corporation, dated March 30, 1999. 21 List of Subsidiaries 23.1 Consent of KPMG LLP 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the fourth quarter of 1998 as follows: Current report on Form 8-K dated November 17, 1998, related to the acquisition of LDExchange.com, Inc. 34 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICRO GENERAL CORPORATION, A DELAWARE CORPORATION Date: April 14, 1999 By: /s/ John Snedegar --------------------- --------------------------------- John Snedegar Chief Executive Officer President (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Patrick F. Stone Chairman of the Board April 14, 1999 - ----------------------------------- Patrick F. Stone /s/ William P. Foley Director April 14, 1999 - ----------------------------------- William P. Foley /s/ Carl A. Strunk Director April 14, 1999 - ----------------------------------- Carl A. Strunk /s/ Richard H. Pickup Director April 14, 1999 - ----------------------------------- Richard H. Pickup Director April __, 1999 - ----------------------------------- George E. Olenik /s/ John Snedegar Director April 14, 1999 - ----------------------------------- John Snedegar /s/ David N. Kenneally Chief Accounting Officer April 14, 1999 - ----------------------------------- David N. Kenneally
38 SCHEDULE II MICRO GENERAL CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years Ended December 31, 1998, 1997 and 1996
Years Ended December 31, ------------------------------------------------------------ Additions Balance at Charged to Amounts Beginning Costs and Written-off Balance at Classification of Period Expenses Period End of ------------ ------------ ----------- -------------- Year ended December 31, 1998: Allowance for doubtful accounts $ 321,844 $ 247,437 $ 83,345 $ 485,936 Year ended December 31, 1997: Allowance for doubtful accounts 314,419 63,683 56,258 321,844 Year ended December 31, 1996: Allowance for doubtful accounts 235,157 134,428 55,166 314,419
39 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. 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987, incorporated by reference to Exhibit 10.1 from the Company's Annual Report on Form 10-K for the year 1984; Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987, incorporated by reference to Exhibit 10 from the Company's Annual Report on Form 10-K for the year ended December 28, 1986. 10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, incorporated by reference from Form S-8, registration number 333-64289. 10.18 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.19 Convertible Note Purchase Agreement between Micro General Corporation and Dito Caree L.P. dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20 Loan Agreement and Agreement to issue Detachable Warrants between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated November 25, 1997, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems, Inc., a California Corporation, a Delaware corporation, Micro General Corporation, a Delaware corporation and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.23 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated October 27, 1998. 10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and among Micro General Corporation, a California corporation, LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and Europa Telecommunications, incorporated by reference from the Company's report on Form 8-K dated as of November 23, 1998. 10.25 Inducement Agreement and Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes, by and between John Snedegar, Cal West Service Corporation and Micro General Corporation, dated March 30, 1999. 21 List of Subsidiaries 23.1 Consent of KPMG LLP 27 Financial Data Schedule
EX-10.23 2 CONVERTIBLE NOTE PURCHASE AGREEMENT 1 EXHIBIT 10.23 ================================================================================ CONVERTIBLE NOTE PURCHASE AGREEMENT by and between MICRO GENERAL CORPORATION, a Delaware corporation, and CALWEST SERVICE CORPORATION, a California corporation Dated as of October 27, 1998 CONVERTIBLE NOTE DUE OCTOBER 27, 2003 ================================================================================ 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 - Covenants of the Company...................................................... 7 Section 301. Payment of Principal and Interest........................................ 7 Section 302. Corporate Existence...................................................... 7 Section 303. Payment of Taxes and Other Claims........................................ 7 Section 304. Dividends/Compensation................................................... 7 Section 305. Corporate Existence; Foreign Qualification............................... 7 Section 306. Books, Records and Inspections........................................... 7 Section 307. Compliance with Laws..................................................... 7 Section 308. Maintenance of Permits................................................... 7 Section 309. Capital Expenditures/Debt................................................ 7 Article IV - Representations and Warranties................................................. 8 Section 401. Customer Contracts....................................................... 8 Section 402. Board of Directors....................................................... 9 Section 403. Organization, Etc........................................................ 9 Section 404. Capital Stock; Stock Options............................................. 9 Section 405. Corporate Authority...................................................... 9 Section 406. Notes and Accounts Receivable............................................ 9 Section 407. Actions, Suits, Etc...................................................... 10 Section 408. Material Contracts....................................................... 10 Section 409. Absence of Undisclosed Liabilities....................................... 11 Section 410. Accuracy of Information.................................................. 11 Section 411. Real Estate Leases....................................................... 11 Section 412. Personal Property Leases................................................. 11 Section 413. Intellectual Property.................................................... 11
- i - 3 Section 414. Trade Secrets............................................................ 12 Section 415. Software and Information Systems......................................... 12 Section 416. Insurance................................................................ 12 Article V - Defaults; Remedies.............................................................. 13 Section 501. Events of Default........................................................ 13 Section 502. Acceleration of Maturity, Rescission and Annulment; Other Remedies................................................................... 14 Section 503. Collection of Indebtedness and Suits for Enforcement..................... 15 Section 504. Lender May File Proofs of Claim.......................................... 15 Section 505. Application of Money Collected........................................... 16 Section 506. Rights and Remedies Cumulative........................................... 16 Section 507. Delay or Omission Not Waiver............................................. 16 Section 508. Waiver of Stay or Extension Laws......................................... 16 Article VI - Reports by Company............................................................. 17 Section 601. Annual Statement......................................................... 17 Section 602. Reports by Company....................................................... 17 Section 603. Quarterly Financial Reports.............................................. 17 Article VII - Consolidation, Merger, Conveyance, Transfer , Sale or Lease................... 17 Section 701. Company May Consolidate. etc., on Certain Terms.......................... 17 Section 702. Right of First Refusal of Lenders........................................ 18 Article VIII - Redemption of Note by the Company............................................ 18 Section 801. Right to Redeem.......................................................... 18 Section 802. Notice of Redemption..................................................... 18 Article IX - Right to Convert Note and/or Right to Purchase Stock........................... 19 Section 901. Rights Granted........................................................... 19 Section 902. Anti-Dilution Rights of Lender........................................... 19 Section 903. Manner of Exercise of Conversion Privilege............................... 20 Section 904. Notice to Lender Prior to Certain Corporate Actions...................... 20 Section 905. Reservation of Shares of Common Stock.................................... 21 Section 906. Taxes Upon Conversion.................................................... 21 Section 907. Covenants as to Common Stock............................................. 21 Section 908. Piggyback Registration Rights............................................ 21 Article X - Conditions Precedent............................................................ 22 Section 1001. Conditions Precedent.................................................... 22
- ii - 4 CONVERTIBLE NOTE PURCHASE AGREEMENT This CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is made and effective as of October 27, 1998, by and between MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 2510 Redhill Avenue, Santa Ana, California 92705, and CALWEST SERVICE CORPORATION, a California corporation ("Lender"). RECITALS WHEREAS, Lender has agreed to make a series of loans to the Company; and WHEREAS, in order to evidence its agreement to repay said loans, the Company has duly authorized the issuance of two (2) separate convertible promissory notes, one in the principal amount of $900,000.00 and one in the principal amount of $14,100,000.00, and each of which permits the Lender to convert said note into a certain number of shares of the Company's common capital stock or to purchase a certain number of shares of the Company's common capital stock, and in connection therewith, the parties have authorized the execution and delivery of two (2) separate purchase agreements substantially in the form hereof, and WHEREAS, as contemplated hereinabove, the Company has, contemporaneously herewith, issued its convertible promissory note (the "Note") in the original principal amount of $14,100,000.00, and the Lender has agreed to purchase said Note; and WHEREAS, in order to set forth the terms and conditions upon which the Note is to be issued by the Company and purchased by the Lender, the Company and Lender have duly authorized the execution and delivery of this Agreement; and WHEREAS, as an inducement to Lender to purchase the Note, whether or not the Company borrows the full amount of the Note, the Company has agreed to give Lender the right, but not the obligation, throughout the five (5) year term of the Note, to either convert all or a portion of the principal of the Note into, or to purchase directly from the Company, an aggregate of 3,133,333 shares of the Company's common stock five cent ($.05) par value common capital stock (the "Common Stock"), at $4.50 per share; WHEREAS, Lender has previously made loans to the Company on November 25, 1997 in the amount of $200,000 and on April 8, 1998 in the amount of $250,000 and now desires to forgive said loans and replace them with this Agreement and Note it being understood that detachable warrants arising out of the November 25, 1997 loan and the April 8, 1998 loan will continue as obligations of the Company, it being understood that the Convertible Note Purchase Agreement and Promissory Note of August 1, 1996 remain in full force and effect; NOW, THEREFORE, for and in consideration of the premises and the mutual agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 5 ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (3) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. "Administrative Agent" means CalWest Service Corporation, a California corporation, which shall act as agent for the Lenders. "Agreement" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of the board of directors of the Company. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in the City of Los Angeles, California are authorized or required to close. "Common Stock" means the five cent ($.05) par value Common Stock of the Company as the same exists at the date of the execution of this Agreement or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided, however, that if at any time there shall be more than one such resulting class, the share of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. - 2 - 6 "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to applicable provisions of this Agreement, and thereafter "Company" shall mean such successor corporation. "Conversion Notice" has the meaning specified in Sections 202 and 903 hereof. "Conversion Price" has the meaning specified in Section 901 hereof. "Corporation" includes corporations, associations, companies and business trusts. "Dollars" and "$" means the lawful money of the United States of America. "Event of Default" has the meaning specified in Section 501 hereof. "Executive Employee" means any employee of the Company who holds the title of Vice President or above. "Indebtedness" means money borrowed. "Lender," when used in the singular, means Dito Caree L.P.; and "Lenders," when used in the plural, means collectively Dito Caree L.P. and CalWest Service Corporation. "Interest Payment Date" has the meaning specified in Section 203 hereof. "Note," when used in the singular, means the Note executed by the Company and delivered to the Lender under this Agreement as specified in the recitals hereof; and "Notes," when used in the plural, means collectively the two Notes executed by the Company and delivered to the Lenders under this Agreement as specified in the recitals hereof. "Note Rate" has the meaning specified in Section 203 hereof. "Notice of Redemption" has the meaning specified in Section 802 hereof. "Officer's Certificate" means a certificate signed by the President of the Company and delivered to Lender describing with particularity the use of proceeds of an advance on the Note, representing that there are no defaults under this Agreement or the Note, or relating to such other matters as may be required hereunder. "Payment Date" shall mean an Interest Payment Date or a Principal Payment Date. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. - 3 - 7 "Principal Payment Date" means any date on which a payment of principal and interest on the Note shall be due. "Redemption Date" has the meaning specified in Section 802 hereof. "Subsidiary" means any corporation more than fifty percent (50%) of the outstanding voting stock of which is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, the term "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Vice President," when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." SECTION 102. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 103. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement by either party shall bind its successors and assigns, whether so expressed or not. Any act or proceeding by any provision of this Agreement authorized or required to be done or performed by any board, committee or officer of either party shall and may be done and performed with like force and effect by the board, committee or officer of any corporation that shall at the time be the lawful sole successor of either party. SECTION 104. SEVERABILITY CLAUSE. In case any provision in this Agreement or in the Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 105. BENEFITS OF AGREEMENT. Nothing in this Agreement or in the Note, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder any benefit or any legal or equitable right, remedy or claim under this Agreement. SECTION 106. GOVERNING LAW. Each of this Agreement and the Note shall be governed by and construed in accordance with the laws of the State of California. SECTION 107. LEGAL HOLIDAYS. In any case where the date of maturity of or interest on or principal of the Note or the date fixed for redemption or for purchase of the Note or the last day on which Lender has the right to convert the Note shall not be a Business Day then (notwithstanding any other provision of this Agreement or of the Note) payment of such interest, premium or principal or conversion of the Note need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption or for purchase or the last day for conversion, and interest shall accrue for the period - 4 - 8 from and after such date of maturity or date fixed for redemption or for purchase or last day for conversion to such next succeeding Business Day. SECTION 108. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, including facsimile counterparts, each of which shall be an original, but all of which counterparts shall together constitute one and the same instrument. SECTION 109. ATTORNEYS' FEES. Should suit be filed seeking enforcement or interpretation of this Agreement and/or the Note, the prevailing party in any such action shall be entitled to receive in addition to any other sums awarded to such party, attorneys' fees and all other costs of collection actually incurred in such action. SECTION 110. NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, overnight courier, or by facsimile, addressed to the parties as set forth herein. Any such notice shall be deemed received upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice, (b) if mailed, four (4) business days after the date of posting by the United States post office, (c) if given by overnight courier, upon receipt by the person to receive such notice, or (d) if sent by facsimile, when sent. To the Company: Micro General Corporation 2510 Redhill Avenue Santa Ana, California 92705 Attn: President Facsimile: 949/477-6802 To Lender: CalWest Service Corporation 17911 Von Karman Avenue, Suite 300 Irvine, California 92614 Attn: Secretary Facsimile: 949/622-4104 Any notice, request, demand, direction or other communication sent by telecopy must be confirmed within forty-eight (48) hours by letter mailed or delivered in accordance with the foregoing. Notice of change of address shall be given by written notice in the manner detailed in this Section 110. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. - 5 - 9 ARTICLE II THE NOTE SECTION 201. FORM GENERALLY. The Note shall be in substantially the form set forth on Exhibit "A" attached hereto, but with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Agreement, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with applicable securities laws. SECTION 202. CONVERSION NOTICE. A Conversion Notice, substantially in the form of Exhibit "B" attached hereto, shall be attached to the Note and shall be used by Lender to exercise the right to convert the Note into Common Stock. SECTION 203. DESIGNATION, AMOUNT AND ISSUANCE OF THE NOTE. (a) The Note shall be designated as a "convertible note" of the Company, and shall be one of two (2) such "convertible notes," to-wit, the Notes that are the subject of this Agreement, one in the face amount of Nine Hundred Thousand Dollars ($900,000.00) and the other in the face amount of Fourteen Million One Dollars ($14,100,000.00); provided, however, that following the repayment of $7,816,000.00 in short term borrowing owed to CalWest Service Corporation further disbursements of principal under the Note shall be limited to no more than $250,000.00 per disbursement during the term of the Note to be approved by Lender upon each disbursement request, and Lender shall have no obligation to make any disbursement under the Note until it shall have received an Officer's Certificate with respect to each such disbursement in compliance with the requirements of Section 1001(a) hereof. (b) The Note shall be dated the date of its issue and shall bear simple interest from the date thereof at the rate of ten percent (10%) per annum (the "Note Rate"), and shall be payable as follows: Accrued interest only on the principal amount of the Note shall be payable quarterly in arrears during the first five (5) years of the term thereof commencing October 27, 1998 (each, an "Interest Payment Date"). The entire unpaid balance of the Note, including principal and accrued but unpaid interest, shall be due and payable on October 27, 2003. SECTION 204. EXECUTION OF THE NOTE. The Note shall be executed on behalf of the Company by its President or one of its Vice Presidents, under its corporate seal reproduced thereon, and by its Secretary, one of its Assistant Secretaries, its Chief Financial Officer, or any Assistant Treasurer. - 6 - 10 ARTICLE III COVENANTS OF THE COMPANY For so long as this Agreement shall remain in effect, the Company covenants that: SECTION 301. PAYMENT OF PRINCIPAL AND INTEREST. It will duly and punctually pay the principal of and interest on the Note at the place, at the respective times and in the manner provided in the Note; and each installment of principal and/or interest on the Note shall be paid by mailing checks or wire transferring funds for the amount due to Lender in a manner reasonably calculated to cause such funds to be received on or prior to a Payment Date. SECTION 302. CORPORATE EXISTENCE. Subject to Article VII hereof, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 303. PAYMENT OF TAXES AND OTHER CLAIMS. The Company has paid and will in the future pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or property of the Company, and (b) all lawful claims against the Company for labor, materials and supplies which in the case of either clause (a) or (b) of this Section 303, if unpaid, might by law become a lien upon its property; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 304. DIVIDENDS/COMPENSATION. It shall not (a) declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of its capital stock (now or hereafter outstanding) of the Company or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Company, or apply any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of any shares of any class of capital stock (now or hereafter outstanding) of the Company or any option, warrant or other right to acquire shares of the Company's capital stock, or (b) make any deposit for any of the foregoing purposes. No additional salary, bonus or other cash or non-cash compensation shall be paid to any of the Company's Executive Employees in an amount greater than the amount set forth in any existing employment contracts with such individuals, or, in the case of "at-will" Executive Employees, any increase in the compensation paid for such Executive Employees shall require the prior written approval of the Company's Board of Directors and the Administrative Agent, which approval will not be unreasonably withheld. No non-cash compensation shall be paid to any employees of the Company without the prior written approval of the Company's Board of Directors and the Administrative Agent, which approval will not be unreasonably withheld. - 7 - 11 SECTION 305. CORPORATE EXISTENCE; FOREIGN QUALIFICATION. It will do and cause to be done at all times all things necessary to (a) maintain and preserve the corporate existence of the Company (b) be duly qualified to do business and in good standing as foreign corporations in each jurisdiction where the nature of its business makes such qualification necessary, and (c) comply with all contractual obligations and requirements of law binding upon it. SECTION 306. BOOKS, RECORDS AND INSPECTIONS. It shall: (a) maintain, and cause each of its Subsidiaries, if any, to maintain complete and accurate books and records; (b) permit, and cause each of its Subsidiaries, if any, to permit access at reasonable times by Lender to its books and records; (c) permit, and cause each of its Subsidiaries, if any, to permit Lender to inspect at reasonable times its properties and operations; and (d) permit, and cause each of its Subsidiaries, if any, to permit Lender to discuss its business, operations and financial condition with its officers and employees or with its outside auditors. SECTION 307. COMPLIANCE WITH LAWS. It shall comply with all federal, state and local laws, rules and regulations related to its businesses; SECTION 308. MAINTENANCE OF PERMITS. It shall maintain all permits, licenses and consents as may be required for the conduct of its business by any state, federal or local government agency or instrumentality. SECTION 309. CAPITAL EXPENDITURES/DEBT. It shall not, without the express prior written consent of Lender, (a) make any capital expenditures not made with the proceeds of the sale of the Note, and the use of all proceeds for capital expenditures shall be substantially as described in the Officer's Certificate applicable thereto, or (b) other than the Note or any other "convertible note" as referenced in Section 203(a) hereof, incur any new Indebtedness, liability or obligation to any third party. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants as follows to Lender: SECTION 401. CUSTOMER CONTRACTS. The Company represents and warrants to Lender that, as of the date hereof, to its knowledge all contracts and agreements between it and purchasers of its goods and services (whether payable in cash or in kind) are valid and in full force and effect, all - 8 - 12 amounts due and owing to the Company thereunder have been paid, no default exists either on the part of the Company or of any other party to any such contract and that the list of such contracts appearing on Schedule 401 attached hereto is true, accurate and complete; SECTION 402. BOARD OF DIRECTORS. As of the date hereof, the list of Directors making up its Board of Directors set forth on Schedule 402 attached hereto is true, accurate and complete, and all such Directors have been duly elected by valid shareholder action in the manner required by the Certificate of Incorporation and/or the Bylaws of the Company; SECTION 403. ORGANIZATION, ETC. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has no active Subsidiaries at the date hereof. The company has corporate power to own or lease its properties and to carry on its business as and in the places where such properties are now owned, leased or operated, and its business is now conducted, and the Company has complied in all material respects with all material federal, state and local laws with respect to the operation and the conduct of its business. Copies of the Certificate of Incorporation and all amendments thereto, bylaws as amended and currently in force, stock records and corporate minutes and records of the Company heretofore made available to Lender are complete and correct at the date hereof; SECTION 404. CAPITAL STOCK; STOCK OPTIONS. (a) The Company has authorized capital stock consisting of 10,000,000 shares of Common Stock, five cent ($.05) par value, of which 6,910,452 shares are issued and outstanding as of October 27, 1998, and 1,000,000 shares of Preferred Stock, five cent ($.05) par value, none of which are issued or outstanding. All of the issued and outstanding shares of Common Stock are duly authorized and validly issued, fully-paid and nonassessable, were offered, issued and sold in accordance with applicable federal and state securities laws, and there are no preemptive rights in respect thereof. There are no other classes of stock of the Company other than the Common Stock and Preferred Stock. (b) There are no outstanding options, warrants, rights, calls, commitments, conversion rights, plans or other agreements or instruments of any character providing for the purchase or other acquisition by the holders thereof or issuance of any company securities of any description, except as set forth on Schedule 404(b) attached hereto. SECTION 405. CORPORATE AUTHORITY. The Company has full legal right and corporate power and authority, without the consent of any other person, to make, execute, deliver and perform this Agreement and the transactions contemplated hereby, and the execution, delivery and performance of this Agreement by the Company has been duly authorized by all necessary corporate action of the Company. SECTION 406. NOTES AND ACCOUNTS RECEIVABLE. To its knowledge, all notes receivable and accounts receivable are valid obligations of the respective makers thereof, are as set forth on - 9 - 13 Schedule 406 attached hereto; except as disclosed in such Schedule 406, are not subject to any valid offset or counterclaim; and are not subject to any assignment, claim, lien or security interest. SECTION 407. ACTIONS, SUITS, ETC. There are no actions, suits, claims, complaints, charges, hearings, investigations, arbitrations (or other dispute resolution proceedings) or other proceedings pending or, to its knowledge, threatened against, by or affecting the Company in any court or panel or before any arbitrator or governmental agency, domestic or foreign, other than (a) actions related to garnishments of employee wages, or (b) routine matters covered by insurance. The Company has not been charged with, and to its knowledge is not under investigation with respect to, any charge concerning any violation of any provision of any federal, state or other applicable law or administrative regulation with respect to its business. There are no judgments unsatisfied against the Company and no consent decrees to which the Company is subject. The Company is not involved in or threatened with any labor dispute which could have a material adverse effect on the business and operations of the Company. SECTION 408. MATERIAL CONTRACTS. Schedule 408 attached hereto sets forth an accurate, correct and complete list of all instruments, commitments, agreements, arrangements and understandings related to its business to which the Company is a party or bound, or pursuant to which the Company is a beneficiary, meeting any of the descriptions set forth below (the "Material Contracts"): (a) Real estate leases, personal property leases, licenses of intellectual property, technical information or software, employment contracts and benefit plans; (b) Any contract for capital expenditures or for the purchase of goods or services in excess of $5,000; (c) Any instrument evidencing indebtedness (other than routine purchase orders), any liability for borrowed money, any obligation for the deferred payment of the purchase price for property in excess of $5,000 (excluding normal trade payables), or any instrument guaranteeing any indebtedness, obligation or liability; (d) Any advertising contract not terminable without payment or penalty on thirty (30) days (or less) notice; (e) Any license or royalty agreement; (f) Any contract for the purchase or sale of any assets in excess of $5,000 other than in the ordinary course of business or granting an option or preferential rights to purchase or sell any assets in excess of $5,000; (g) Any contract containing covenants not to compete in any line of business or with any person in any geographical area; - 10 - 14 (h) Any contract relating to the acquisition of a business or the equity of any other person; (i) Any other contract, commitment, agreement, arrangement or understanding related to its business which provides for payment or performance by any party thereto having an aggregate value of $5,000 or more, and is not terminable without payment or penalty on thirty (30) days (or less) notice. Accurate, correct and complete copies of each such contract have been made available to Lender. Each contract is in full force and effect and is valid, binding and enforceable as to the Company in accordance with its terms. The Company and, to the Company's knowledge, each other party has complied in all material respects with all material commitments and obligations on its part to be performed or observed under each such contract. The Company has not received any written or, to its knowledge, other notice of a default, offset or counterclaim under any contract, or any other written or, to its knowledge, other communication calling upon the Company to comply with any provision of any contract or asserting noncompliance by the Company. SECTION 409. ABSENCE OF UNDISCLOSED LIABILITIES. To its knowledge, the Company does not have any indebtedness, liability or obligation of any nature, whether absolute, accrued, contingent or otherwise, related to or arising from the operation of its business or the ownership, possession or use of any assets, except as set forth on Schedule 409 attached hereto. SECTION 410. ACCURACY OF INFORMATION. None of the information furnished by the Company to Lender in writing shall contain any untrue statement of a material fact or shall omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of circumstances under which they were made, not misleading. SECTION 411. REAL ESTATE LEASES. Schedule 411 attached hereto sets forth an accurate, correct and complete list of all real estate which is leased or subleased by the Company, including identification of the lease or sublease, street address, and list of material contracts, agreements, leases, subleases, options and commitments, oral or written, affecting such real estate or any interest therein to which the Company is a party or by which the Company is bound (the "Real Estate Leases"). The Company has made available to Lender accurate, correct and complete copies of each Real Estate Lease and no default exists under any Real Estate Lease. SECTION 412. PERSONAL PROPERTY LEASES. Schedule 412 attached hereto contains an accurate, correct and complete list of each lease of personal property used in the business which provides for annual lease payments in excess of $5,000 (the "Personal Property Leases"). The Company has made available to Lender accurate, correct and complete copies of each Personal Property Lease and no default exists under any Personal Property Lease. SECTION 413. INTELLECTUAL PROPERTY. Schedule 413 attached hereto contains an accurate, correct and complete list and summary description of all patents, trademarks, trademark rights, trade names, trade styles, trade dress, service marks, copyrights and applications for any of the foregoing - 11 - 15 utilized by the business (the "Intellectual Property"). During the preceding five (5) years, the Company has not been known by or done business under any name other than Micro General Corporation. Schedule 413 contains an accurate, correct and complete list and summary description of all licenses and other agreements relating to any Intellectual Property. Except as set forth on Schedule 413, with respect to the Intellectual Property, (a) the Company is the sole and exclusive owner and, to the knowledge of the company, has the sole and exclusive right to use the Intellectual Property; (b) no action, suit, proceeding or investigation is pending or, to the Company's knowledge, threatened; (c) to the knowledge of the Company, none of the Intellectual Property interferes with, infringes upon, conflicts with or otherwise violates the rights of others or is being interfered with or infringed upon by others, and none is subject to any outstanding order, decree, judgment, stipulation or charge; (d) there are no royalty, commission or similar arrangements, and no licenses, sublicenses or agreements, pertaining to any of the Intellectual Property; (e) the Company has not agreed to indemnify any person for or against any infringement of or by the Intellectual Property; and (f) the Intellectual Property constitutes all such assets, properties and rights which are used in or necessary for the conduct of its business. To the knowledge of the Company, the operation of its business by the Company after the date hereof, in the manner and geographic areas in which its business is currently conducted by the Company or is to be conducted as a result of its plans to expand its business into other geographic areas, will not interfere with or infringe upon any currently issued United States Letters Patent or trademarks currently registered in the Primary Register of the United States Patent and Trademark Office. The Company is not subject to any judgment, order, writ, injunction or decree of any court or any federal, state, local or other governmental agency or instrumentality, domestic or foreign, or any arbitrator, and has not entered into or is not a party to any contract which restricts or impairs the use of any Intellectual Property. SECTION 414. TRADE SECRETS. Schedule 414 attached hereto contains an accurate, correct and complete list and summary description of all information in the nature of proprietary information, including databases, compilations of information, copyrightable material and technical information, if any, relating to its business "Technical Information"). The Company has the right to use the Technical Information by virtue of ownership or by virtue of the license agreements identified in Schedule 414. The Company has no knowledge of any violation of any trade secret rights or copyrights with respect to such Technical Information. SECTION 415. SOFTWARE AND INFORMATION SYSTEMS. The Company has the right to use all electronic data processing systems, information systems, hardware, computer software programs, indexes, program specifications, charts, procedures, source codes, input data, routines, data bases and report layouts and formats, record file layouts, diagrams, functional specifications and narrative descriptions, flow charts and other related material (if any) used in and reasonably necessary for the conduct of its business (collectively the "Software"). Schedule 415 attached hereto contains an accurate, correct and complete summary description of all Software (other than non-proprietary commercially available Software). SECTION 416. INSURANCE. Set forth on Schedule 416 attached hereto is a true, accurate and complete list of all policies of insurance currently in force in which the Company is named as insured, loss payee, or additional insured, premiums on all of such policies have been paid, and - 12 - 16 copies of all policies have been delivered to Lender at the date hereof, and Lender has been named as loss payee or additional insured on all such policies on which such coverage is available. ARTICLE V DEFAULTS; REMEDIES SECTION 501. EVENTS OF DEFAULT. "Event of Default," wherever used herein with respect to the Note, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) BY THE COMPANY. (1) default in the payment of any installment of principal and/or interest on the Note as and when it becomes due and payable, whether by virtue of the terms of the Note as to payments of principal and/or interest, at maturity, in connection with any redemption, or otherwise and the passage of seven (7) days following written notice thereof to the Company; or (2) default in the performance, or breach, of any material covenant, representation or warranty of the Company in this Agreement and the passage of thirty (30) days following written notice thereof to the Company, or, if such default cannot be cured within such thirty (30) days, commencement of the cure of such default within such thirty (30) days and diligent prosecution of such cure to completion; or (3) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of all or substantially all of its property, or ordering the winding up or liquidation of its affairs, and-the continuance of any such decree or order for relief or for any such other decree or order unstayed and in effect for a period of 45 consecutive days; (4) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, other consent by it to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the company or of all or - 13 - 17 substantially all of its property, or the making by it of a general assignment for the benefit of creditors; or (5) until all sums due under the Note have been repaid, or any increase by the Company of the number of members of its Board of Directors to a number greater than the number who hold office at the time of execution of the Note, or any change in the actual members of the Company's Board of Directors, without the prior written consent of the Lender; or (6) the failure of the Company to provide any information or report to Lender required to be provided pursuant to Article VI hereof and the passage of thirty (30) days following written notice thereof to the Company, or, if such default cannot be cured within such thirty (30) days, commencement of the cure of such default within such thirty (30) days and diligent prosecution of such cure to completion. (b) BY THE LENDER. The failure of the Lender to fund pursuant to Section 203(a) hereof in the event that a proper Officer's Certificate pursuant to Section 1001(a) is received and the Company is in compliance with all covenants of this Agreement and the Note. SECTION 502. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT; OTHER REMEDIES. (a) LENDER'S REMEDIES. (i) Upon the occurrence of an Event of Default under any event described in Section 501(a) (other than an Event of Default described in Sections 501(a)(4) and 501(a)(5) hereof), then in every such case Lenders may declare the principal amounts of the Notes to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amounts shall become immediately due and payable. The Company specifically acknowledges and agrees that the occurrence of any Event of Default under any event described in Section 501(a) hereof will automatically cause all existing Notes to be in default, and all Events of Default under all Notes must be cured before any one Event of Default shall be deemed cured. (ii) At any time after such a declaration of acceleration with respect to the Note has been made and before a judgment or decree for payment of the money due has been obtained by Lender as hereinafter in this Article provided, Lender may, by written notice to the Company, rescind and annul such declaration and its consequences if, (1) the Company has paid to Lender a sum sufficient to pay (A) all overdue interest on the Note, (B) the principal on the Note which has become due otherwise than by such declaration of acceleration and interest thereon at the Note Rate, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the Note Rate, and (D) all sums paid or advanced by Lender hereunder and the actual compensation, expenses, disbursements and advances of Lender, its agents and counsel; and (2) all Events of Default with respect to the Note, other than the nonpayment of the principal of the Note which has become due solely by such declaration of acceleration, have been cured or waived by Lender. No such rescission shall affect any subsequent default or impair any right consequent thereon. In the case of any Event of Default described in Section 501(a)(4) or 501(a)(5), all unpaid principal of and accrued interest - 14 - 18 on the Note shall be due and payable immediately without any declaration or other act on the part of Lender. (iii) Obligations of this Note are secured by the Security Agreement dated August 1, 1996. (b) THE COMPANY'S REMEDIES. Upon the occurrence of an Event of Default as described in Section 501(b) hereof, then the option amount referred to in Section 901 hereof shall be limited to a number equal in value to the amount already funded. SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT. (a) The Company covenants that if default is made in the payment of any principal and/or interest on the Note when such principal and/or interest becomes due and payable, whether at a time specified in the Note, at maturity of the Note or in connection with any redemption or otherwise, the Company will, upon demand of Lender, pay to it the whole amount then due and payable on the Note for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and-on any overdue interest, at the Note Rate, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of Lender, its agents and counsel, it being understood that as to the Lenders, any payments will be applied on a pro rata basis among the Lenders based on each Lender's respective Note amount. If the Company fails to pay such amounts forthwith upon such demand, Lender may prosecute a proceeding to judgment or final decree and may enforce the same against the Company or any other obligor on the Note and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or of any other obligor on the Note, wherever situated, it being understood that any monies collected shall be applied on a pro rata basis among the Lenders based on each Lender's respective Note. In addition, Lender may give notice to customers of the Company that all payments under contracts listed on Schedule 401 shall, until further notice, be paid directly to Lender, and the Company consents to each such notice. (b) If an Event of Default with respect to the Note occurs, Lender may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as it shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Agreement or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. LENDER MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or of any other obligor on the Note or the property of the Company or of such other obligor or their creditors, Lender (irrespective of whether the principal of the Note shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether it shall have made any demand on the Company for the - 15 - 19 payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Note and to file such other papers and documents as may be necessary or advisable in order to have the claims of Lender (including any claim to the right to own Common Stock or for the reasonable compensation, expenses, disbursements and advances of Lender, its agents and counsel) allowed in such judicial proceeding, and (b) to collect and receive any monies or other property payable or deliverable on any such claims. SECTION 505. APPLICATION OF MONEY COLLECTED. Any money collected by Lender pursuant to this Article V shall be applied in the following order, at the date or dates fixed by Lender and, in case of the distribution of such money on account of principal or interest, upon presentation of the Note and the notation thereon of the payment if only partially said and upon surrender thereof if fully paid: First: To the costs and expenses of Lender in collecting sums due it hereunder; Second: To the payment of the amounts then due and unpaid first for interest on and then for principal of all outstanding Notes, applied on a pro rata basis among the Lenders based on each Lender's respective Note; and Third: To the payment of the remainder, if any, to the Company or any other Person lawfully entitled thereto. SECTION 506. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to Lender is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 507. DELAY OR OMISSION NOT WAIVER. No delay or omission of Lender to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default. Every right and remedy given by this Article V or by law may be exercised from time to time, and as often as may be deemed expedient by Lender. SECTION 508. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Agreement; and the Company (to the extent that it may lawfully do so) hereby expressly waives all - 16 - 20 benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to Lender, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI REPORTS BY COMPANY SECTION 601. ANNUAL STATEMENT. The Company will deliver to Lender, within 30 days after the end of each fiscal year of the Company, an Officer's Certificate stating that to the best of such officer's knowledge, the Company has fulfilled all its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation and such default is continuing, specifying each such default of which such officer has knowledge, and the nature and status thereof. SECTION 602. REPORTS BY COMPANY. The Company shall file with Lender, such information, documents and other reports, and such summaries thereof, as Lender shall request, immediately upon request, but without request the Company shall deliver to Lender audited financial statements of the Company prepared by independent certified public accountants ("Accountants") within ninety (90) days of the end of each Company fiscal year. SECTION 603. QUARTERLY FINANCIAL REPORTS. Throughout the term of this Agreement and for so long as any amount remains unpaid under the Note, the Company shall furnish Lender with copies of its quarterly financial reports no later than forty-five (45) days following the end of the subject fiscal quarter. ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, SALE OR LEASE SECTION 701. COMPANY MAY CONSOLIDATE. ETC., ON CERTAIN TERMS. The Company shall not consolidate with or merge into any other corporation or convey, transfer, sell or lease its properties and assets as, or substantially as, an entirety to any Person, issue any capital stock (including Common Stock) of the Company unless (a) prior to such transaction Lender has released in writing its Right of First Refusal as required by Section 702 hereof, and (b) upon any such consolidation, merger, sale, conveyance or exchange of or by the Company, (i) the Company is the continuing corporation and the Company's Common Stock outstanding immediately prior to the merger is not exchanged for securities, cash or other property of another corporation, (ii) there is an exchange of the Note for other securities in connection with such transaction, or (iii) the due and punctual payment of the principal of and interest on, the Note, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Agreement to be performed by the Company, are expressly assumed by a note supplemental to the Note by the -17- 21 corporation formed by such consolidation, or whose securities, cash or other property will immediately after the merger be owned, by virtue of the merger, by the holders of Common Stock of the Company immediately prior to the merger, or by the corporation that shall have acquired such property or securities. Furthermore, the Company shall not consolidate with or merge into any other corporation or convey, transfer, sell or lease its properties and assets as, or substantially as, an entirety to any Person, or enter into any statutory exchange of securities with another corporation, unless the Right of First Refusal has been released and unless immediately after giving effect to such transaction no Event of Default shall have occurred and be continuing, and the Company shall have delivered to Lender an Officer's Certificate stating that such transaction and such supplemental agreement comply with this Agreement. SECTION 702. RIGHT OF FIRST REFUSAL OF LENDERS. For so long as any amounts due under the Note shall be outstanding, Lenders shall have and retain the first option to purchase any and all assets of the Company and any and all capital stock (including Common Stock) of the Company, upon the same terms and subject to the same conditions as may be offered to the Company by a third party for such assets or capital stock; provided, however, that any non-cash consideration offered for any such assets or capital stock shall be given its then current market value in cash and Lenders shall have the opportunity to pay the amount of such cash in lieu of any non-cash consideration offered by a prospective owner of any assets or capital stock on a pro rata basis as to the Lenders' exercise of that right. Immediately upon receipt of any offer to purchase any assets or capital stock, or upon determining that the Company desires to sell any assets or capital stock, the Company shall immediately notify Lenders of the assets and/or capital stock proposed to be bought and sold, and of the terms of such proposed purchase and sale. Within twenty (20) days of being so notified, Lenders shall notify either the Company and/or the owner of the capital stock in question that they (or any one of them) will exercise the right of first refusal granted herein ("Right of First Refusal"), or, in the alternative, that they (or any one of them) thereby release such Right of First Refusal and consents to the sale of the assets or capital stock on the terms described. Any change in such terms shall give each Lender the right to once again exercise or release its Right of First Refusal within an additional time period identical to that specified above. ARTICLE VIII REDEMPTION OF NOTE BY THE COMPANY SECTION 801. RIGHT TO REDEEM. The Company may, at its option, redeem all or, from time to time, any part of the Note, on any date prior to maturity, in the manner specified in this Article VIII, at the original principal amount thereof, plus accrued and unpaid interest, if any, to the date fixed for redemption, but no such redemption shall in any way impair the right of Lender to convert the Note into shares of Common Stock as specified in this Agreement or in the Right of First Refusal granted hereunder. SECTION 802. NOTICE OF REDEMPTION. -18- 22 (a) In case the Company shall desire to exercise its right to redeem all or any part of the Note pursuant to Section 801 hereof, it shall fix a date for redemption (a "Redemption Date"), shall notify Lenders in writing of such date, and shall mail or cause to be mailed a notice of such redemption (a "Notice of Redemption") at least ten (10) and not more than thirty (30) days prior to the date fixed for redemption to Lenders at their principal executive offices. Such mailing shall be by first class mail. The Company agrees to exercise said right of redemption on an equitable and pro rata basis among the Lenders. (b) The Notice of Redemption shall specify the principal amount of the Note to be redeemed, the Redemption Date for the Note, and the Redemption Price at which the Note is to be redeemed, and shall state that payment of the Redemption Price of the Note or portions thereof to be redeemed will be made on surrender of the Note to be redeemed, that interest accrued to such Redemption Date will be paid as specified in such notice, and that from and after such date interest thereon will cease to accrue. In the event of full redemption of the Note, such Notice of Redemption shall also state that the right to convert the Note or portion thereof into Common Stock will expire at the close of business on October 27, 2003. (c) On or prior to each Redemption Date specified in each Notice of Redemption given as provided in this Section 802, the Company will pay to Lender an amount of money sufficient to redeem on such Redemption Date the Note or portion thereof so called for redemption at the appropriate Redemption Price, together with accrued interest to the Redemption Date. (d) If the Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the date fixed for redemption at the Note Rate and the Note shall remain convertible into Common Stock until October 27, 2003, or until all amounts due under the Note have been repaid in full. ARTICLE IX RIGHT TO CONVERT NOTE AND/OR RIGHT TO PURCHASE STOCK SECTION 901. RIGHTS GRANTED. Subject to and upon compliance with the provisions of this Article IX, and specifically Section 902 hereof, Lender shall have the right, at its option, at any time or from time to time on or prior to the close of business on October 27, 2003, to convert the principal amount of the Note up to a value of $14,100,000.00 into, an aggregate of 3,133,333 shares of Common Stock at a price of $4.50 per share (the "Conversion Price"), or to pay in cash in an amount up to $14,100,000.00.. SECTION 902. ANTI-DILUTION RIGHTS OF LENDER. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the conversion privilege set forth in Section 901 hereof, but will at all times in good faith carry out the provisions and intent of Section 901 and take all such action as may be necessary or appropriate to protect against impairment of the rights of Lender to convert the Note into, or to purchase, Common Stock. In the event that, at any time prior to full exercise by Lender of its right to purchase such Common -19- 23 Stock, the Company shall sell or otherwise transfer any Common Stock, the Company undertakes and agrees to make any adjustments that may be necessary to permit Lender to purchase an equal number of shares of the Common Stock for a per share price equal to the per share price paid by such other purchaser or transferee, including, if necessary, refunding to Lender any sums necessary to cause Lender to receive the benefit of this Section 902, such benefit to survive the repayment of the Note and to be applicable with respect to issuances of Common Stock until October 27, 1998. Nothing in this Section 902 shall be interpreted to permit or require any increase in the consideration to be paid by Lender in exchange for 200,000 shares of the Common Stock. SECTION 903. MANNER OF EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, Lender shall surrender the Note, duly endorsed or assigned to the Company or in blank, at the office of the Company, together with the Conversion Notice duly executed, that Lender elects to convert the Note or the portion thereof specified in said Conversion Notice or, alternatively, that Lender will purchase such Common Stock. Such Conversion Notice shall also state the name or names, together with the address or addresses in which the certificate or certificates for shares of Common Stock which shall be issuable in such conversion or purchase shall be issued as promptly as practicable after the surrender of the Note and the receipt of such Conversion Notice, the Company shall issue and deliver to Lender, or on Lender's written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of the Note or portion thereof in accordance with the provisions of this Article IX. In case the Note shall be surrendered for partial conversion, the Company shall execute and deliver to or upon the order of Lender, at the expense of the Company, a new note or notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the Note shall have been surrendered and such Conversion Notice received by the Company as aforesaid, and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion or purchase shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date. SECTION 904. NOTICE TO LENDER PRIOR TO CERTAIN CORPORATE ACTIONS. In case: (a) the Company shall authorize the granting to the holders of its Common Stock generally of rights, warrants or options to subscribe for or purchase any shares of stock of any class or of any other rights; or (b) there shall be any reorganization or reclassification of the Common Stock (other than a change in the par value of the Common Stock), or any permissible consolidation or merger to which the Company is a party, or any permissible conveyance, transfer, sale or lease of the Company's properties and assets as, or substantially as, an entity; or (c) there shall be a voluntary or in-voluntary dissolution, liquidation or winding-up of the Company; -20- 24 then the Company shall cause to be given to Lender, in the manner provided in Section 110 hereof, and with respect to the events described in subsections (a), (b) and (c) of this Section 904, as promptly as possible, but in any event at least twenty (20) days prior to the applicable date hereinafter specified, a notice stating (i) the date on which the Company expects to file a Registration Statement covering the Common Stock, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding-up is expected to become effective or occur, and, if applicable, the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding-up, subject to compliance with the Right of First Refusal required by Section 702 hereof. SECTION 905. RESERVATION OF SHARES OF COMMON STOCK. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of effecting conversion of the Note, the full number of shares of Common Stock deliverable upon the conversion of the Note. SECTION 906. TAXES UPON CONVERSION. The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Note pursuant hereto. SECTION 907. COVENANTS AS TO COMMON STOCK. The Company covenants that all shares of Common Stock which may be delivered upon conversion of the Note will, upon delivery, be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. SECTION 908. PIGGYBACK REGISTRATION RIGHTS. If the Company shall determine to register any of its securities, either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration on any registration form that does not permit secondary sales, the Company will promptly give to Lender written notice thereof and use its best efforts to include in such registration (and any related qualification under applicable Blue Sky laws or other compliance), and any underwriting involved therein, Common Stock specified in a written request made by Lender within twenty (20) days after the written notice of the Company provided for above is given. Such written request may specify all or a part of Lender's Common Stock. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the company shall so advise as a part of the written notice given as required above. In such event the right of Lender to registration shall be conditioned upon Lender's participation in such underwriting and the inclusion of its Common Stock in the underwriting. Lender shall enter with the Company into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding the above, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, the representative may exclude Lender's Common Stock from, or limit the number of shares of Lender's Common Stock to be included in, the registration and underwriting. The number of shares of -21- 25 securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account, then to Lender to the extent of securities it has elected to sell for its own account, and thereafter to all other owners of Common Stock with the right to participate in such registration and underwriting pro rata in proportion to the percentage of all outstanding Common Stock owned by each such Person immediately prior to commencement of such registration and underwriting. If any Person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Common Stock or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the number of shares of Common Stock to be included in such registration is increased during the period of such registration, the Company shall offer first to Lender and then, if additional shares may be sold in the registration to all other Persons who have retained the right to include securities in the registration, the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the Persons requesting additional inclusion pro rata in proportion to the percentage that each Person's Common Stock represents of the total amount of Common Stock owned by all such Persons prior to commencement of such registration and underwriting. ARTICLE X CONDITIONS PRECEDENT SECTION 1001. CONDITIONS PRECEDENT. The obligation of Lender to purchase the Note(s) and to make all individual disbursements thereunder is expressly conditioned upon the following: (a) The Lender's receipt from the Company, in each instance, of an Officer's Certificate signed by its President satisfactory to Lender in which such President represents and warrants to Lender on behalf of the Company that (1) use of the proceeds from any disbursement of principal of the Note shall be dedicated to such corporate uses as the Company's Board of Directors may deem proper; and (2) there are no defaults under this Agreement or the Note. (b) The Lender's receipt of a Certificate of Good Standing certified by the Secretary of State of the State of Delaware as to the corporate status of the Company; and -22- 26 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, and their respective seals to be hereunto fixed and attested, all as of the day and year first above written. MICRO GENERAL CORPORATION (the "Company") By: _____________________________________ Name:____________________________________ Title:___________________________________ CALWEST SERVICE CORPORATION ("Lender") By: _____________________________________ Name:____________________________________ Title:___________________________________ -23- 27 EXHIBIT "A" MICRO GENERAL CORPORATION CONVERTIBLE NOTE (MULTIPLE ADVANCES) $14,100,000.00 Irvine, California October 27, 1998 MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor corporation or corporations under the Agreement hereinafter referred to), for value received, hereby promises to pay to Fidelity National Financial, Inc., at its office at 17911 Von Karman Avenue, Suite 300, Irvine, California 92614 ("Lender"), or order, principal sum of Fourteen Million One Hundred Thousand Dollars ($14,100,000.00), or so much thereof as shall have been disbursed by Lender and which at that time remains unpaid, together with simple interest thereon from the date hereof at the rate of ten percent (10%) per annum, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, payable as follows: Accrued interest only on the principal amount hereof shall be payable quarterly in arrears during the first five (5) years of the term hereof commencing October 27, 1998. Thereafter, on October 27, 2003 the entire unpaid balance of this Note, including principal and accrued but unpaid interest, shall be due and payable. This Note may be prepaid in whole or in part at any time with the prior written consent of Lender so long as the Company gives ten (10) days' prior written notice to Lender of the Company's intent to prepay this Note or any portion hereof. Such notice shall state the proposed payment date (the "Payment Date") and the principal amount to be repaid. At any time during the term hereof, the Lender may, but shall not be obligated to, elect to convert all or any portion of the principal to be repaid on the Payment Date into shares of the Company's common stock (the "Common Stock") at the "Conversion Price" (as that term is defined in the Agreement hereinafter referred to) then in effect by delivering to the Company, to the attention of its President, written notice of its election to exercise its conversion rights as set forth herein. Notwithstanding anything contained herein to the contrary, and notwithstanding the Company's payment of this Note in whole or in part, the Lender shall retain the right to convert the then-outstanding principal balance hereof into the subject shares of Common Stock throughout the five (5) year term of this Note at the Conversion Price. Any partial prepayments made hereunder shall be applied to installments due hereunder in inverse order of maturity. This Note is duly authorized and issued by the Company, is designated as set forth on the face hereof, and is limited to the aggregate principal amount of $14,100,000.00 issued under and pursuant to that certain Convertible Note Purchase Agreement, dated as of October 27, 1998 (herein called the "Agreement"), duly executed and delivered by the Company and Lender, to which Agreement reference is hereby made for a further description of the rights, limitation of rights, obligations, and -24- 28 duties thereunder of the Company and Lender. In case an Event of Default shall have occurred under this Note or under the Agreement (as the term "Event of Default" is defined in said Agreement), the principal balance hereof and all accrued but unpaid interest thereon may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Agreement. Reference is hereby made to the further provisions of the Agreement, including, without limitation, provisions giving the Lender of this Note the right to convert this Note into Common Stock on the terms and subject to the limitations more fully specified in the Agreement. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used in this Note and not otherwise defined still have the meanings assigned to such terms in the Agreement. IN WITNESS WHEREOF, the Company has caused this instrument to be signed manually or by facsimile by its duly authorized officers. Dated: _______________________ MICRO GENERAL CORPORATION (the "Company") By: _____________________________________ Name:____________________________________ Title:___________________________________ -25- 29 EXHIBIT "B" CONVERSION NOTICE To: Micro General Corporation 2510 Redhill Avenue Santa Ana, California 92705 The undersigned, as the owner of that certain Convertible Promissory Note dated October 27, 1998 (the "Note"), hereby irrevocably exercises the option to convert the Note, or that portion of the Note designed herein below, into _____________ shares of Common Stock of Micro General Corporation at a price of $_______ per share, in accordance with the terms of that certain Convertible Note Purchase Agreement between the undersigned and Micro General Corporation as referenced in the Note, and directs that the shares issuable and deliverable upon the conversion be issued and delivered to the holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a person other than the undersigned, the undersigned has herein below named the transferee to whom the new Note should be issued. Dated: _____________________________ _______________________________________ Signature(s) By: ___________________________________ Name:__________________________________ Title:_________________________________ 30 MICRO GENERAL CORPORATION CONVERTIBLE NOTE (MULTIPLE ADVANCES) $14,100,000.00 Irvine, California October 27, 1998 MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor corporation or corporations under the Agreement hereinafter referred to), for value received, hereby promises to pay to Fidelity National Financial, Inc., at its office at 17911 Von Karman Avenue, Suite 300, Irvine, California 92614 ("Lender"), or order, principal sum of Fourteen Million One Hundred Thousand Dollars ($14,100,000.00), or so much thereof as shall have been disbursed by Lender and which at that time remains unpaid, together with simple interest thereon from the date hereof at the rate of ten percent (10%) per annum, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, payable as follows: Accrued interest only on the principal amount hereof shall be payable quarterly in arrears during the first five (5) years of the term hereof commencing October 27, 1998. Thereafter, on October 27, 2003 the entire unpaid balance of this Note, including principal and accrued but unpaid interest, shall be due and payable. This Note may be prepaid in whole or in part at any time with the prior written consent of Lender so long as the Company gives ten (10) days' prior written notice to Lender of the Company's intent to prepay this Note or any portion hereof. Such notice shall state the proposed payment date (the "Payment Date") and the principal amount to be repaid. At any time during the term hereof, the Lender may, but shall not be obligated to, elect to convert all or any portion of the principal to be repaid on the Payment Date into shares of the Company's common stock (the "Common Stock") at the "Conversion Price" (as that term is defined in the Agreement hereinafter referred to) then in effect by delivering to the Company, to the attention of its President, written notice of its election to exercise its conversion rights as set forth herein. Notwithstanding anything contained herein to the contrary, and notwithstanding the Company's payment of this Note in whole or in part, the Lender shall retain the right to convert the then-outstanding principal balance hereof into the subject shares of Common Stock throughout the five (5) year term of this Note at the Conversion Price. Any partial prepayments made hereunder shall be applied to installments due hereunder in inverse order of maturity. This Note is duly authorized and issued by the Company, is designated as set forth on the face hereof, and is limited to the aggregate principal amount of $14,100,000.00 issued under and pursuant to that certain Convertible Note Purchase Agreement, dated as of October 27, 1998 (herein called the "Agreement"), duly executed and delivered by the Company and Lender, to which Agreement reference is hereby made for a further description of the rights, limitation of rights, obligations, and duties thereunder of the Company and Lender. In case an Event of Default shall have occurred under 31 this Note or under the Agreement (as the term "Event of Default" is defined in said Agreement), the principal balance hereof and all accrued but unpaid interest thereon may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Agreement. Reference is hereby made to the further provisions of the Agreement, including, without limitation, provisions giving the Lender of this Note the right to convert this Note into Common Stock on the terms and subject to the limitations more fully specified in the Agreement. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used in this Note and not otherwise defined still have the meanings assigned to such terms in the Agreement. IN WITNESS WHEREOF, the Company has caused this instrument to be signed manually or by facsimile by its duly authorized officers. Dated: October 27, 1998 MICRO GENERAL CORPORATION (the "Company") By: /s/ Jeff Sanderson Name: Jeff Sanderson Title: Executive Vice President - 2 - 32 ================================================================================ CONVERTIBLE NOTE PURCHASE AGREEMENT by and between MICRO GENERAL CORPORATION, a Delaware corporation, and DITO CAREE L.P., a Nevada limited partnership Dated as of October 27, 1998 CONVERTIBLE NOTE DUE OCTOBER 27, 2003 ================================================================================ 33 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.............................................................................................5 Section 201. Form Generally................................................................................5 Section 202. Conversion Notice.............................................................................6 Section 203. Designation, Amount and Issuance of the Note..................................................6 Section 204. Execution of the Note.........................................................................6 Article III - Covenants of the Company............................................................................6 Section 301. Payment of Principal and Interest.............................................................6 Section 302. Corporate Existence...........................................................................7 Section 303. Payment of Taxes and Other Claims.............................................................7 Section 304. Dividends/Compensation........................................................................7 Section 305. Corporate Existence; Foreign Qualification....................................................7 Section 306. Books, Records and Inspections................................................................7 Section 307. Compliance with Laws..........................................................................8 Section 308. Maintenance of Permits........................................................................8 Section 309. Capital Expenditures/Debt.....................................................................8 Article IV - Representations and Warranties.......................................................................8 Section 401. Customer Contracts............................................................................8 Section 402. Board of Directors............................................................................8 Section 403. Organization, Etc.............................................................................8 Section 404. Capital Stock; Stock Options..................................................................9 Section 405. Corporate Authority...........................................................................9 Section 406. Notes and Accounts Receivable.................................................................9 Section 407. Actions, Suits, Etc...........................................................................9 Section 408. Material Contracts...........................................................................10 Section 409. Absence of Undisclosed Liabilities...........................................................11 Section 410. Accuracy of Information......................................................................11 Section 411. Real Estate Leases...........................................................................11 Section 412. Personal Property Leases.....................................................................11 Section 413. Intellectual Property........................................................................11
- i - 34 Section 414. Trade Secrets................................................................................12 Section 415. Software and Information Systems.............................................................12 Section 416. Insurance....................................................................................12 Article V - Defaults; Remedies...................................................................................12 Section 501. Events of Default............................................................................12 Section 502. Acceleration of Maturity, Rescission and Annulment; Other Remedies.....................................................................................14 Section 503. Collection of Indebtedness and Suits for Enforcement.........................................14 Section 504. Lender May File Proofs of Claim..............................................................15 Section 505. Application of Money Collected...............................................................15 Section 506. Rights and Remedies Cumulative...............................................................16 Section 507. Delay or Omission Not Waiver.................................................................16 Section 508. Waiver of Stay or Extension Laws.............................................................16 Article VI - Reports by Company..................................................................................16 Section 601. Annual Statement.............................................................................16 Section 602. Reports by Company...........................................................................16 Section 603. Quarterly Financial Reports..................................................................17 Article VII - Consolidation, Merger, Conveyance, Transfer , Sale or Lease........................................17 Section 701. Company May Consolidate. etc., on Certain Terms..............................................17 Section 702. Right of First Refusal of Lenders............................................................17 Article VIII - Redemption of Note by the Company.................................................................18 Section 801. Right to Redeem..............................................................................18 Section 802. Notice of Redemption.........................................................................18 Article IX - Right to Convert Note and/or Right to Purchase Stock................................................19 Section 901. Rights Granted...............................................................................19 Section 902. Anti-Dilution Rights of Lender...............................................................19 Section 903. Manner of Exercise of Conversion Privilege...................................................19 Section 904. Notice to Lender Prior to Certain Corporate Actions..........................................20 Section 905. Reservation of Shares of Common Stock........................................................20 Section 906. Taxes Upon Conversion........................................................................21 Section 907. Covenants as to Common Stock.................................................................21 Section 908. Piggyback Registration Rights................................................................21 Article X - Conditions Precedent.................................................................................21 Section 1001. Conditions Precedent........................................................................21
- ii - 35 CONVERTIBLE NOTE PURCHASE AGREEMENT This CONVERTIBLE NOTE PURCHASE AGREEMENT (the "Agreement") is made and effective as of October 27, 1998, by and between MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 2510 Redhill Avenue, Santa Ana, California 92705, and DITO CAREE, L.P., a Nevada limited partnership ("Lender"). RECITALS WHEREAS, Lender has agreed to make a series of loans to the Company; and WHEREAS, in order to evidence its agreement to repay said loans, the Company has duly authorized the issuance of two (2) separate convertible promissory notes, one in the principal amount of $900,000.00 and one in the principal amount of $14,100,000.00, and each of which permits the Lender to convert said note into a certain number of shares of the Company's common capital stock or to purchase a certain number of shares of the Company's common capital stock, and in connection therewith, the parties have authorized the execution and delivery of two (2) separate purchase agreements substantially in the form hereof, and WHEREAS, as contemplated hereinabove, the Company has, contemporaneously herewith, issued its convertible promissory note (the "Note") in the original principal amount of $900,000.00, and the Lender has agreed to purchase said Note; and WHEREAS, in order to set forth the terms and conditions upon which the Note is to be issued by the Company and purchased by the Lender, the Company and Lender have duly authorized the execution and delivery of this Agreement; and WHEREAS, as an inducement to Lender to purchase the Note, whether or not the Company borrows the full amount of the Note, the Company has agreed to give Lender the right, but not the obligation, throughout the five (5) year term of the Note, to either convert all or a portion of the principal of the Note into, or to purchase directly from the Company, an aggregate of 200,000 shares of the Company's common stock five cent ($.05) par value common capital stock (the "Common Stock"), at $4.50 per share; WHEREAS, Lender has previously made loans to the Company on November 25, 1997 in the amount of $400,000 and on April 8, 1998 in the amount of $500,000 and now desires to forgive said loans and replace them with this Agreement and Note it being understood that detachable warrants arising out of the November 25, 1997 loan and the April 8, 1998 loan will continue as obligations of the Company, it being understood that the Convertible Note Purchase Agreement and Promissory Note of August 1, 1996 remain in full force and effect; NOW, THEREFORE, for and in consideration of the premises and the mutual agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 36 ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (3) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. "Administrative Agent" means CalWest Service Corporation, a California corporation, which shall act as agent for the Lenders. "Agreement" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of the board of directors of the Company. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in the City of Los Angeles, California are authorized or required to close. "Common Stock" means the five cent ($.05) par value Common Stock of the Company as the same exists at the date of the execution of this Agreement or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; provided, however, that if at any time there shall be more than one such resulting class, the share of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. - 2 - 37 "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to applicable provisions of this Agreement, and thereafter "Company" shall mean such successor corporation. "Conversion Notice" has the meaning specified in Sections 202 and 903 hereof. "Conversion Price" has the meaning specified in Section 901 hereof. "Corporation" includes corporations, associations, companies and business trusts. "Dollars" and "$" means the lawful money of the United States of America. "Event of Default" has the meaning specified in Section 501 hereof. "Executive Employee" means any employee of the Company who holds the title of Vice President or above. "Indebtedness" means money borrowed. "Lender," when used in the singular, means Dito Caree L.P.; and "Lenders," when used in the plural, means collectively Dito Caree L.P. and CalWest Service Corporation. "Interest Payment Date" has the meaning specified in Section 203 hereof. "Note," when used in the singular, means the Note executed by the Company and delivered to the Lender under this Agreement as specified in the recitals hereof; and "Notes," when used in the plural, means collectively the two Notes executed by the Company and delivered to the Lenders under this Agreement as specified in the recitals hereof. "Note Rate" has the meaning specified in Section 203 hereof. "Notice of Redemption" has the meaning specified in Section 802 hereof. "Officer's Certificate" means a certificate signed by the President of the Company and delivered to Lender describing with particularity the use of proceeds of an advance on the Note, representing that there are no defaults under this Agreement or the Note, or relating to such other matters as may be required hereunder. "Payment Date" shall mean an Interest Payment Date or a Principal Payment Date. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. - 3 - 38 "Principal Payment Date" means any date on which a payment of principal and interest on the Note shall be due. "Redemption Date" has the meaning specified in Section 802 hereof. "Subsidiary" means any corporation more than fifty percent (50%) of the outstanding voting stock of which is at the time owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, the term "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Vice President," when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." SECTION 102. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 103. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement by either party shall bind its successors and assigns, whether so expressed or not. Any act or proceeding by any provision of this Agreement authorized or required to be done or performed by any board, committee or officer of either party shall and may be done and performed with like force and effect by the board, committee or officer of any corporation that shall at the time be the lawful sole successor of either party. SECTION 104. SEVERABILITY CLAUSE. In case any provision in this Agreement or in the Note shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 105. BENEFITS OF AGREEMENT. Nothing in this Agreement or in the Note, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder any benefit or any legal or equitable right, remedy or claim under this Agreement. SECTION 106. GOVERNING LAW. Each of this Agreement and the Note shall be governed by and construed in accordance with the laws of the State of California. SECTION 107. LEGAL HOLIDAYS. In any case where the date of maturity of or interest on or principal of the Note or the date fixed for redemption or for purchase of the Note or the last day on which Lender has the right to convert the Note shall not be a Business Day then (notwithstanding any other provision of this Agreement or of the Note) payment of such interest, premium or principal or conversion of the Note need not be made on such date but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption or for purchase or the last day for conversion, and interest shall accrue for the period - 4 - 39 from and after such date of maturity or date fixed for redemption or for purchase or last day for conversion to such next succeeding Business Day. SECTION 108. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, including facsimile counterparts, each of which shall be an original, but all of which counterparts shall together constitute one and the same instrument. SECTION 109. ATTORNEYS' FEES. Should suit be filed seeking enforcement or interpretation of this Agreement and/or the Note, the prevailing party in any such action shall be entitled to receive in addition to any other sums awarded to such party, attorneys' fees and all other costs of collection actually incurred in such action. SECTION 110. NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, overnight courier, or by facsimile, addressed to the parties as set forth herein. Any such notice shall be deemed received upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice, (b) if mailed, four (4) business days after the date of posting by the United States post office, (c) if given by overnight courier, upon receipt by the person to receive such notice, or (d) if sent by facsimile, when sent. To the Company: Micro General Corporation 2510 Redhill Avenue Santa Ana, California 92705 Attn: President Facsimile: 949/477-6802 To Lender: Dito Caree L.P. 3735 Howard Hughes Parkway, Suite 200 Las Vegas, Nevada 89109 Any notice, request, demand, direction or other communication sent by telecopy must be confirmed within forty-eight (48) hours by letter mailed or delivered in accordance with the foregoing. Notice of change of address shall be given by written notice in the manner detailed in this Section 110. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. ARTICLE II THE NOTE SECTION 201. FORM GENERALLY. The Note shall be in substantially the form set forth on Exhibit "A" attached hereto, but with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Agreement, and may have such letters, numbers or - 5 - 40 other marks of identification and such legends or endorsements placed thereon as may be required to comply with applicable securities laws. SECTION 202. CONVERSION NOTICE. A Conversion Notice, substantially in the form of Exhibit "B" attached hereto, shall be attached to the Note and shall be used by Lender to exercise the right to convert the Note into Common Stock. SECTION 203. DESIGNATION, AMOUNT AND ISSUANCE OF THE NOTE. (a) The Note shall be designated as a "convertible note" of the Company, and shall be one of two (2) such "convertible notes," to-wit, the Notes that are the subject of this Agreement, one in the face amount of Nine Hundred Thousand Dollars ($900,000.00) and the other in the face amount of Fourteen Million One Dollars ($14,100,000.00); provided, however, that following the repayment of $7,816,000 in short term borrowings owed to CalWest Service Corporation further disbursements of principal under the Note shall be limited to no more than $250,000.00 per disbursement during the term of the Note to be approved by Lender upon each disbursement request, and Lender shall have no obligation to make any disbursement under the Note until it shall have received an Officer's Certificate with respect to each such disbursement in compliance with the requirements of Section 1001(a) hereof. (b) The Note shall be dated the date of its issue and shall bear simple interest from the date thereof at the rate of ten percent (10%) per annum (the "Note Rate"), and shall be payable as follows: Accrued interest only on the principal amount of the Note shall be payable quarterly in arrears during the first five (5) years of the term thereof commencing October 27, 1998 (each, an "Interest Payment Date"). The entire unpaid balance of the Note, including principal and any accrued but unpaid interest, shall be due and payable on October 27, 2003. SECTION 204. EXECUTION OF THE NOTE. The Note shall be executed on behalf of the Company by its President or one of its Vice Presidents, under its corporate seal reproduced thereon. ARTICLE III COVENANTS OF THE COMPANY For so long as this Agreement shall remain in effect, the Company covenants that: SECTION 301. PAYMENT OF PRINCIPAL AND INTEREST. It will duly and punctually pay the principal of and interest on the Note at the place, at the respective times and in the manner provided in the Note; and each installment of principal and/or interest on the Note shall be paid by mailing checks or wire transferring funds for the amount due to Lender in a manner reasonably calculated to cause such funds to be received on or prior to a Payment Date. - 6 - 41 SECTION 302. CORPORATE EXISTENCE. Subject to Article VII hereof, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 303. PAYMENT OF TAXES AND OTHER CLAIMS. The Company has paid and will in the future pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or property of the Company, and (b) all lawful claims against the Company for labor, materials and supplies which in the case of either clause (a) or (b) of this Section 303, if unpaid, might by law become a lien upon its property; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 304. DIVIDENDS/COMPENSATION. It shall not (a) declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of its capital stock (now or hereafter outstanding) of the Company or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Company, or apply any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of any shares of any class of capital stock (now or hereafter outstanding) of the Company or any option, warrant or other right to acquire shares of the Company's capital stock, or (b) make any deposit for any of the foregoing purposes. No additional salary, bonus or other cash or non-cash compensation shall be paid to any of the Company's Executive Employees in an amount greater than the amount set forth in any existing employment contracts with such individuals, or, in the case of "at-will" Executive Employees, any increase in the compensation paid for such Executive Employees shall require the prior written approval of the Company's Board of Directors and the Administrative Agent, which approval will not be unreasonably withheld. No non-cash compensation shall be paid to any employees of the Company without the prior written approval of the Company's Board of Directors and the Administrative Agent, which approval will not be unreasonably withheld. SECTION 305. CORPORATE EXISTENCE; FOREIGN QUALIFICATION. It will do and cause to be done at all times all things necessary to (a) maintain and preserve the corporate existence of the Company (b) be duly qualified to do business and in good standing as foreign corporations in each jurisdiction where the nature of its business makes such qualification necessary, and (c) comply with all contractual obligations and requirements of law binding upon it. SECTION 306. BOOKS, RECORDS AND INSPECTIONS. It shall: (a) maintain, and cause each of its Subsidiaries, if any, to maintain complete and accurate books and records; - 7 - 42 (b) permit, and cause each of its Subsidiaries, if any, to permit access at reasonable times by Lender to its books and records; (c) permit, and cause each of its Subsidiaries, if any, to permit Lender to inspect at reasonable times its properties and operations; and (d) permit, and cause each of its Subsidiaries, if any, to permit Lender to discuss its business, operations and financial condition with its officers and employees or with its outside auditors. SECTION 307. COMPLIANCE WITH LAWS. It shall comply with all federal, state and local laws, rules and regulations related to its businesses; SECTION 308. MAINTENANCE OF PERMITS. It shall maintain all permits, licenses and consents as may be required for the conduct of its business by any state, federal or local government agency or instrumentality. SECTION 309. CAPITAL EXPENDITURES/DEBT. It shall not, without the express prior written consent of Lender, (a) make any capital expenditures not made with the proceeds of the sale of the Note, and the use of all proceeds for capital expenditures shall be substantially as described in the Officer's Certificate applicable thereto, or (b) other than the Note or any other "convertible note" as referenced in Section 203(a) hereof, incur any new Indebtedness, liability or obligation to any third party. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants as follows to Lender: SECTION 401. CUSTOMER CONTRACTS. The Company represents and warrants to Lender that, as of the date hereof, to its knowledge all contracts and agreements between it and purchasers of its goods and services (whether payable in cash or in kind) are valid and in full force and effect, all amounts due and owing to the Company thereunder have been paid, no default exists either on the part of the Company or of any other party to any such contract and that the list of such contracts appearing on Schedule 401 attached hereto is true, accurate and complete; SECTION 402. BOARD OF DIRECTORS. As of the date hereof, the list of Directors making up its Board of Directors set forth on Schedule 402 attached hereto is true, accurate and complete, and all such Directors have been duly elected by valid shareholder action in the manner required by the Certificate of Incorporation and/or the Bylaws of the Company; SECTION 403. ORGANIZATION, ETC. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has no active Subsidiaries - 8 - 43 at the date hereof. The company has corporate power to own or lease its properties and to carry on its business as and in the places where such properties are now owned, leased or operated, and its business is now conducted, and the Company has complied in all material respects with all material federal, state and local laws with respect to the operation and the conduct of its business. Copies of the Certificate of Incorporation and all amendments thereto, bylaws as amended and currently in force, stock records and corporate minutes and records of the Company heretofore made available to Lender are complete and correct at the date hereof; SECTION 404. CAPITAL STOCK; STOCK OPTIONS. (a) The Company has authorized capital stock consisting of 10,000,000 shares of Common Stock, five cent ($.05) par value, of which 6,910,452 shares are issued and outstanding as of October 27, 1998, and 1,000,000 shares of Preferred Stock, five cent ($.05) par value, none of which are issued or outstanding. All of the issued and outstanding shares of Common Stock are duly authorized and validly issued, fully-paid and nonassessable, were offered, issued and sold in accordance with applicable federal and state securities laws, and there are no preemptive rights in respect thereof. There are no other classes of stock of the Company other than the Common Stock and Preferred Stock. (b) There are no outstanding options, warrants, rights, calls, commitments, conversion rights, plans or other agreements or instruments of any character providing for the purchase or other acquisition by the holders thereof or issuance of any company securities of any description, except as set forth on Schedule 404(b) attached hereto. SECTION 405. CORPORATE AUTHORITY. The Company has full legal right and corporate power and authority, without the consent of any other person, to make, execute, deliver and perform this Agreement and the transactions contemplated hereby, and the execution, delivery and performance of this Agreement by the Company has been duly authorized by all necessary corporate action of the Company. SECTION 406. NOTES AND ACCOUNTS RECEIVABLE. To its knowledge, all notes receivable and accounts receivable are valid obligations of the respective makers thereof, are as set forth on Schedule 406 attached hereto; except as disclosed in such Schedule 406, are not subject to any valid offset or counterclaim; and are not subject to any assignment, claim, lien or security interest. SECTION 407. ACTIONS, SUITS, ETC. There are no actions, suits, claims, complaints, charges, hearings, investigations, arbitrations (or other dispute resolution proceedings) or other proceedings pending or, to its knowledge, threatened against, by or affecting the Company in any court or panel or before any arbitrator or governmental agency, domestic or foreign, other than (a) actions related to garnishments of employee wages, or (b) routine matters covered by insurance. The Company has not been charged with, and to its knowledge is not under investigation with respect to, any charge concerning any violation of any provision of any federal, state or other applicable law or administrative regulation with respect to its business. There are no judgments unsatisfied against the Company and no consent decrees to which the Company is subject. The Company is not involved - 9 - 44 in or threatened with any labor dispute which could have a material adverse effect on the business and operations of the Company. SECTION 408. MATERIAL CONTRACTS. Schedule 408 attached hereto sets forth an accurate, correct and complete list of all instruments, commitments, agreements, arrangements and understandings related to its business to which the Company is a party or bound, or pursuant to which the Company is a beneficiary, meeting any of the descriptions set forth below (the "Material Contracts"): (a) Real estate leases, personal property leases, licenses of intellectual property, technical information or software, employment contracts and benefit plans; (b) Any contract for capital expenditures or for the purchase of goods or services in excess of $5,000; (c) Any instrument evidencing indebtedness (other than routine purchase orders), any liability for borrowed money, any obligation for the deferred payment of the purchase price for property in excess of $5,000 (excluding normal trade payables), or any instrument guaranteeing any indebtedness, obligation or liability; (d) Any advertising contract not terminable without payment or penalty on thirty (30) days (or less) notice; (e) Any license or royalty agreement; (f) Any contract for the purchase or sale of any assets in excess of $5,000 other than in the ordinary course of business or granting an option or preferential rights to purchase or sell any assets in excess of $5,000; (g) Any contract containing covenants not to compete in any line of business or with any person in any geographical area; (h) Any contract relating to the acquisition of a business or the equity of any other person; (i) Any other contract, commitment, agreement, arrangement or understanding related to its business which provides for payment or performance by any party thereto having an aggregate value of $5,000 or more, and is not terminable without payment or penalty on thirty (30) days (or less) notice. Accurate, correct and complete copies of each such contract have been made available to Lender. Each contract is in full force and effect and is valid, binding and enforceable as to the Company in accordance with its terms. The Company and, to the Company's knowledge, each other party has complied in all material respects with all material commitments and obligations on its part to be performed or observed under each such contract. The Company has not received any written or, to - 10 - 45 its knowledge, other notice of a default, offset or counterclaim under any contract, or any other written or, to its knowledge, other communication calling upon the Company to comply with any provision of any contract or asserting noncompliance by the Company. SECTION 409. ABSENCE OF UNDISCLOSED LIABILITIES. To its knowledge, the Company does not have any indebtedness, liability or obligation of any nature, whether absolute, accrued, contingent or otherwise, related to or arising from the operation of its business or the ownership, possession or use of any assets, except as set forth on Schedule 409 attached hereto. SECTION 410. ACCURACY OF INFORMATION. None of the information furnished by the Company to Lender in writing shall contain any untrue statement of a material fact or shall omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of circumstances under which they were made, not misleading. SECTION 411. REAL ESTATE LEASES. Schedule 411 attached hereto sets forth an accurate, correct and complete list of all real estate which is leased or subleased by the Company, including identification of the lease or sublease, street address, and list of material contracts, agreements, leases, subleases, options and commitments, oral or written, affecting such real estate or any interest therein to which the Company is a party or by which the Company is bound (the "Real Estate Leases"). The Company has made available to Lender accurate, correct and complete copies of each Real Estate Lease and no default exists under any Real Estate Lease. SECTION 412. PERSONAL PROPERTY LEASES. Schedule 412 attached hereto contains an accurate, correct and complete list of each lease of personal property used in the business which provides for annual lease payments in excess of $5,000 (the "Personal Property Leases"). The Company has made available to Lender accurate, correct and complete copies of each Personal Property Lease and no default exists under any Personal Property Lease. SECTION 413. INTELLECTUAL PROPERTY. Schedule 413 attached hereto contains an accurate, correct and complete list and summary description of all patents, trademarks, trademark rights, trade names, trade styles, trade dress, service marks, copyrights and applications for any of the foregoing utilized by the business (the "Intellectual Property"). During the preceding five (5) years, the Company has not been known by or done business under any name other than Micro General Corporation. Schedule 413 contains an accurate, correct and complete list and summary description of all licenses and other agreements relating to any Intellectual Property. Except as set forth on Schedule 413, with respect to the Intellectual Property, (a) the Company is the sole and exclusive owner and, to the knowledge of the company, has the sole and exclusive right to use the Intellectual Property; (b) no action, suit, proceeding or investigation is pending or, to the Company's knowledge, threatened; (c) to the knowledge of the Company, none of the Intellectual Property interferes with, infringes upon, conflicts with or otherwise violates the rights of others or is being interfered with or infringed upon by others, and none is subject to any outstanding order, decree, judgment, stipulation or charge; (d) there are no royalty, commission or similar arrangements, and no licenses, sublicenses or agreements, pertaining to any of the Intellectual Property; (e) the Company has not agreed to indemnify any person for or against any infringement of or by the Intellectual Property; and (f) the - 11 - 46 Intellectual Property constitutes all such assets, properties and rights which are used in or necessary for the conduct of its business. To the knowledge of the Company, the operation of its business by the Company after the date hereof, in the manner and geographic areas in which its business is currently conducted by the Company or is to be conducted as a result of its plans to expand its business into other geographic areas, will not interfere with or infringe upon any currently issued United States Letters Patent or trademarks currently registered in the Primary Register of the United States Patent and Trademark Office. The Company is not subject to any judgment, order, writ, injunction or decree of any court or any federal, state, local or other governmental agency or instrumentality, domestic or foreign, or any arbitrator, and has not entered into or is not a party to any contract which restricts or impairs the use of any Intellectual Property. SECTION 414. TRADE SECRETS. Schedule 414 attached hereto contains an accurate, correct and complete list and summary description of all information in the nature of proprietary information, including databases, compilations of information, copyrightable material and technical information, if any, relating to its business "Technical Information"). The Company has the right to use the Technical Information by virtue of ownership or by virtue of the license agreements identified in Schedule 414. The Company has no knowledge of any violation of any trade secret rights or copyrights with respect to such Technical Information. SECTION 415. SOFTWARE AND INFORMATION SYSTEMS. The Company has the right to use all electronic data processing systems, information systems, hardware, computer software programs, indexes, program specifications, charts, procedures, source codes, input data, routines, data bases and report layouts and formats, record file layouts, diagrams, functional specifications and narrative descriptions, flow charts and other related material (if any) used in and reasonably necessary for the conduct of its business (collectively the "Software"). Schedule 415 attached hereto contains an accurate, correct and complete summary description of all Software (other than non-proprietary commercially available Software). SECTION 416. INSURANCE. Set forth on Schedule 416 attached hereto is a true, accurate and complete list of all policies of insurance currently in force in which the Company is named as insured, loss payee, or additional insured, premiums on all of such policies have been paid, and copies of all policies have been delivered to Lender at the date hereof, and Lender has been named as loss payee or additional insured on all such policies on which such coverage is available. ARTICLE V DEFAULTS; REMEDIES SECTION 501. EVENTS OF DEFAULT. "Event of Default," wherever used herein with respect to the Note, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): - 12 - 47 (a) BY THE COMPANY. (1) default in the payment of any installment of principal and/or interest on the Note as and when it becomes due and payable, whether by virtue of the terms of the Note as to payments of principal and/or interest, at maturity, in connection with any redemption, or otherwise and the passage of seven (7) days following written notice thereof to the Company; or (2) default in the performance, or breach, of any material covenant, representation or warranty of the Company in this Agreement and the passage of thirty (30) days following written notice thereof to the Company, or, if such default cannot be cured within such thirty (30) days, commencement of the cure of such default within such thirty (30) days and diligent prosecution of such cure to completion; or (3) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of all or substantially all of its property, or ordering the winding up or liquidation of its affairs, and-the continuance of any such decree or order for relief or for any such other decree or order unstayed and in effect for a period of 45 consecutive days; (4) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, other consent by it to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the company or of all or substantially all of its property, or the making by it of a general assignment for the benefit of creditors; or (5) until all sums due under the Note have been repaid, or any increase by the Company of the number of members of its Board of Directors to a number greater than the number who hold office at the time of execution of the Note, or any change in the actual members of the Company's Board of Directors, without the prior written consent of the Lender; or (6) the failure of the Company to provide any information or report to Lender required to be provided pursuant to Article VI hereof and the passage of thirty (30) days following written notice thereof to the Company, or, if such default cannot be cured within such thirty (30) days, commencement of the cure of such default within such thirty (30) days and diligent prosecution of such cure to completion. - 13 - 48 (b) BY THE LENDER. The failure of the Lender to fund pursuant to Section 203(a) hereof in the event that a proper Officer's Certificate pursuant to Section 1001(a) is received and the Company is in compliance with all covenants of this Agreement and the Note. SECTION 502. ACCELERATION OF MATURITY, RESCISSION AND ANNULMENT; OTHER REMEDIES. (a) LENDER'S REMEDIES. (i) Upon the occurrence of an Event of Default under any event described in Section 501(a) (other than an Event of Default described in Sections 501(a)(4) and 501(a)(5) hereof), then in every such case Lenders may declare the principal amounts of the Notes to be due and payable immediately, by a notice in writing to the Company and upon any such declaration such principal amounts shall become immediately due and payable. The Company specifically acknowledges and agrees that the occurrence of any Event of Default under any event described in Section 501(a) hereof will automatically cause all existing Notes to be in default, and all Events of Default under all Notes must be cured before any one Event of Default shall be deemed cured. (ii) At any time after such a declaration of acceleration with respect to the Note has been made and before a judgment or decree for payment of the money due has been obtained by Lender as hereinafter in this Article provided, Lender may, by written notice to the Company, rescind and annul such declaration and its consequences if, (1) the Company has paid to Lender a sum sufficient to pay (A) all overdue interest on the Note, (B) the principal on the Note which has become due otherwise than by such declaration of acceleration and interest thereon at the Note Rate, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the Note Rate, and (D) all sums paid or advanced by Lender hereunder and the actual compensation, expenses, disbursements and advances of Lender, its agents and counsel; and (2) all Events of Default with respect to the Note, other than the nonpayment of the principal of the Note which has become due solely by such declaration of acceleration, have been cured or waived by Lender. No such rescission shall affect any subsequent default or impair any right consequent thereon. In the case of any Event of Default described in Section 501(a)(4) or 501(a)(5), all unpaid principal of and accrued interest on the Note shall be due and payable immediately without any declaration or other act on the part of Lender. (iii) Obligations of this Note are secured by the Security Agreement dated August 1, 1996. (b) THE COMPANY'S REMEDIES. Upon the occurrence of an Event of Default as described in Section 501(b) hereof, then the option amount referred to in Section 901 hereof shall be limited to a number equal in value to the amount already funded. SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT. (a) The Company covenants that if default is made in the payment of any principal and/or interest on the Note when such principal and/or interest becomes due and payable, whether - 14 - 49 at a time specified in the Note, at maturity of the Note or in connection with any redemption or otherwise, the Company will, upon demand of Lender, pay to it the whole amount then due and payable on the Note for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and-on any overdue interest, at the Note Rate, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of Lender, its agents and counsel, it being understood that as to the Lenders, any payments will be applied on a pro rata basis among the Lenders based on each Lender's respective Note amount. If the Company fails to pay such amounts forthwith upon such demand, Lender may prosecute a proceeding to judgment or final decree and may enforce the same against the Company or any other obligor on the Note and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or of any other obligor on the Note, wherever situated, it being understood that any monies collected shall be applied on a pro rata basis among the Lenders based on each Lender's respective Note. In addition, Lender may give notice to customers of the Company that all payments under contracts listed on Schedule 401 shall, until further notice, be paid directly to Lender, and the Company consents to each such notice. (b) If an Event of Default with respect to the Note occurs, Lender may in its discretion proceed to protect and enforce its rights by such appropriate judicial proceedings as it shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Agreement or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. LENDER MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or of any other obligor on the Note or the property of the Company or of such other obligor or their creditors, Lender (irrespective of whether the principal of the Note shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether it shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Note and to file such other papers and documents as may be necessary or advisable in order to have the claims of Lender (including any claim to the right to own Common Stock or for the reasonable compensation, expenses, disbursements and advances of Lender, its agents and counsel) allowed in such judicial proceeding, and (b) to collect and receive any monies or other property payable or deliverable on any such claims. SECTION 505. APPLICATION OF MONEY COLLECTED. Any money collected by Lender pursuant to this Article V shall be applied in the following order, at the date or dates fixed by Lender and, in case of the distribution of such money on account of principal or interest, upon presentation of the - 15 - 50 Note and the notation thereon of the payment if only partially said and upon surrender thereof if fully paid: First: To the costs and expenses of Lender in collecting sums due it hereunder; Second: To the payment of the amounts then due and unpaid first for interest on and then for principal of all outstanding Notes, applied on a pro rata basis among the Lenders based on each Lender's respective Note; and Third: To the payment of the remainder, if any, to the Company or any other Person lawfully entitled thereto. SECTION 506. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to Lender is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 507. DELAY OR OMISSION NOT WAIVER. No delay or omission of Lender to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default. Every right and remedy given by this Article V or by law may be exercised from time to time, and as often as may be deemed expedient by Lender. SECTION 508. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Agreement; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to Lender, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI REPORTS BY COMPANY SECTION 601. ANNUAL STATEMENT. The Company will deliver to Lender, within 30 days after the end of each fiscal year of the Company, an Officer's Certificate stating that to the best of such officer's knowledge, the Company has fulfilled all its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation and such default is continuing, specifying each such default of which such officer has knowledge, and the nature and status thereof. - 16 - 51 SECTION 602. REPORTS BY COMPANY. The Company shall file with Lender, such information, documents and other reports, and such summaries thereof, as Lender shall request, immediately upon request, but without request the Company shall deliver to Lender audited financial statements of the Company prepared by independent certified public accountants ("Accountants") within ninety (90) days of the end of each Company fiscal year. SECTION 603. QUARTERLY FINANCIAL REPORTS. Throughout the term of this Agreement and for so long as any amount remains unpaid under the Note, the Company shall furnish Lender with copies of its quarterly financial reports no later than forty-five (45) days following the end of the subject fiscal quarter. ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER, SALE OR LEASE SECTION 701. COMPANY MAY CONSOLIDATE. ETC., ON CERTAIN TERMS. The Company shall not consolidate with or merge into any other corporation or convey, transfer, sell or lease its properties and assets as, or substantially as, an entirety to any Person, issue any capital stock (including Common Stock) of the Company unless (a) prior to such transaction Lender has released in writing its Right of First Refusal as required by Section 702 hereof, and (b) upon any such consolidation, merger, sale, conveyance or exchange of or by the Company, (i) the Company is the continuing corporation and the Company's Common Stock outstanding immediately prior to the merger is not exchanged for securities, cash or other property of another corporation, (ii) there is an exchange of the Note for other securities in connection with such transaction, or (iii) the due and punctual payment of the principal of and interest on, the Note, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Agreement to be performed by the Company, are expressly assumed by a note supplemental to the Note by the corporation formed by such consolidation, or whose securities, cash or other property will immediately after the merger be owned, by virtue of the merger, by the holders of Common Stock of the Company immediately prior to the merger, or by the corporation that shall have acquired such property or securities. Furthermore, the Company shall not consolidate with or merge into any other corporation or convey, transfer, sell or lease its properties and assets as, or substantially as, an entirety to any Person, or enter into any statutory exchange of securities with another corporation, unless the Right of First Refusal has been released and unless immediately after giving effect to such transaction no Event of Default shall have occurred and be continuing, and the Company shall have delivered to Lender an Officer's Certificate stating that such transaction and such supplemental agreement comply with this Agreement. SECTION 702. RIGHT OF FIRST REFUSAL OF LENDERS. For so long as any amounts due under the Note shall be outstanding, Lenders shall have and retain the first option to purchase any and all assets of the Company and any and all capital stock (including Common Stock) of the Company, upon the same terms and subject to the same conditions as may be offered to the Company by a third party for such assets or capital stock; provided, however, that any non-cash consideration offered for any - 17 - 52 such assets or capital stock shall be given its then current market value in cash and Lenders shall have the opportunity to pay the amount of such cash in lieu of any non-cash consideration offered by a prospective owner of any assets or capital stock on a pro rata basis as to the Lenders' exercise of that right. Immediately upon receipt of any offer to purchase any assets or capital stock, or upon determining that the Company desires to sell any assets or capital stock, the Company shall immediately notify Lenders of the assets and/or capital stock proposed to be bought and sold, and of the terms of such proposed purchase and sale. Within twenty (20) days of being so notified, Lenders shall notify either the Company and/or the owner of the capital stock in question that they (or any one of them) will exercise the right of first refusal granted herein ("Right of First Refusal"), or, in the alternative, that they (or any one of them) thereby release such Right of First Refusal and consents to the sale of the assets or capital stock on the terms described. Any change in such terms shall give each Lender the right to once again exercise or release its Right of First Refusal within an additional time period identical to that specified above. ARTICLE VIII REDEMPTION OF NOTE BY THE COMPANY SECTION 801. RIGHT TO REDEEM. The Company may, at its option, redeem all or, from time to time, any part of the Note, on any date prior to maturity, in the manner specified in this Article VIII, at the original principal amount thereof, plus accrued and unpaid interest, if any, to the date fixed for redemption, but no such redemption shall in any way impair the right of Lender to convert the Note into shares of Common Stock as specified in this Agreement or in the Right of First Refusal granted hereunder. SECTION 802. NOTICE OF REDEMPTION. (a) In case the Company shall desire to exercise its right to redeem all or any part of the Note pursuant to Section 801 hereof, it shall fix a date for redemption (a "Redemption Date"), shall notify Lenders in writing of such date, and shall mail or cause to be mailed a notice of such redemption (a "Notice of Redemption") at least ten (10) and not more than thirty (30) days prior to the date fixed for redemption to Lenders at their principal executive offices. Such mailing shall be by first class mail. The Company agrees to exercise said right of redemption on an equitable and pro rata basis among the Lenders. (b) The Notice of Redemption shall specify the principal amount of the Note to be redeemed, the Redemption Date for the Note, and the Redemption Price at which the Note is to be redeemed, and shall state that payment of the Redemption Price of the Note or portions thereof to be redeemed will be made on surrender of the Note to be redeemed, that interest accrued to such Redemption Date will be paid as specified in such notice, and that from and after such date interest thereon will cease to accrue. In the event of full redemption of the Note, such Notice of Redemption shall also state that the right to convert the Note or portion thereof into Common Stock will expire at the close of business on October 27, 2003. - 18 - 53 (c) On or prior to each Redemption Date specified in each Notice of Redemption given as provided in this Section 802, the Company will pay to Lender an amount of money sufficient to redeem on such Redemption Date the Note or portion thereof so called for redemption at the appropriate Redemption Price, together with accrued interest to the Redemption Date. (d) If the Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the date fixed for redemption at the Note Rate and the Note shall remain convertible into Common Stock until October 27, 2003, or until all amounts due under the Note have been repaid in full. ARTICLE IX RIGHT TO CONVERT NOTE AND/OR RIGHT TO PURCHASE STOCK SECTION 901. RIGHTS GRANTED. Subject to and upon compliance with the provisions of this Article IX, and specifically Section 902 hereof, Lender shall have the right, at its option, at any time or from time to time on or prior to the close of business on October 27, 2003, to convert the principal amount of the Note up to a value of $900,000.00 into, an aggregate of 200,000 shares of Common Stock at a price of $4.50 per share (the "Conversion Price")or to pay in cash in an amount up to $900,000.00. SECTION 902. ANTI-DILUTION RIGHTS OF LENDER. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the conversion privilege set forth in Section 901 hereof, but will at all times in good faith carry out the provisions and intent of Section 901 and take all such action as may be necessary or appropriate to protect against impairment of the rights of Lender to convert the Note into, or to purchase, Common Stock. In the event that, at any time prior to full exercise by Lender of its right to purchase such Common Stock, the Company shall sell or otherwise transfer any Common Stock, the Company undertakes and agrees to make any adjustments that may be necessary to permit Lender to purchase an equal number of shares of the Common Stock for a per share price equal to the per share price paid by such other purchaser or transferee, including, if necessary, refunding to Lender any sums necessary to cause Lender to receive the benefit of this Section 902, such benefit to survive the repayment of the Note and to be applicable with respect to issuances of Common Stock until October 27, 1998. Nothing in this Section 902 shall be interpreted to permit or require any increase in the consideration to be paid by Lender in exchange for 200,000 shares of the Common Stock. SECTION 903. MANNER OF EXERCISE OF CONVERSION PRIVILEGE. In order to exercise the conversion privilege, Lender shall surrender the Note, duly endorsed or assigned to the Company or in blank, at the office of the Company, together with the Conversion Notice duly executed, that Lender elects to convert the Note or the portion thereof specified in said Conversion Notice or, alternatively, that Lender will purchase such Common Stock. Such Conversion Notice shall also state the name or names, together with the address or addresses in which the certificate or certificates for shares of Common Stock which shall be issuable in such conversion or purchase shall be issued - 19 - 54 as promptly as practicable after the surrender of the Note and the receipt of such Conversion Notice, the Company shall issue and deliver to Lender, or on Lender's written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of the Note or portion thereof in accordance with the provisions of this Article IX. In case the Note shall be surrendered for partial conversion, the Company shall execute and deliver to or upon the order of Lender, at the expense of the Company, a new note or notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the Note shall have been surrendered and such Conversion Notice received by the Company as aforesaid, and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion or purchase shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date. SECTION 904. NOTICE TO LENDER PRIOR TO CERTAIN CORPORATE ACTIONS. In case: (a) the Company shall authorize the granting to the holders of its Common Stock generally of rights, warrants or options to subscribe for or purchase any shares of stock of any class or of any other rights; or (b) there shall be any reorganization or reclassification of the Common Stock (other than a change in the par value of the Common Stock), or any permissible consolidation or merger to which the Company is a party, or any permissible conveyance, transfer, sale or lease of the Company's properties and assets as, or substantially as, an entity; or (c) there shall be a voluntary or in-voluntary dissolution, liquidation or winding-up of the Company; then the Company shall cause to be given to Lender, in the manner provided in Section 110 hereof, and with respect to the events described in subsections (a), (b) and (c) of this Section 904, as promptly as possible, but in any event at least twenty (20) days prior to the applicable date hereinafter specified, a notice stating (i) the date on which the Company expects to file a Registration Statement covering the Common Stock, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding-up is expected to become effective or occur, and, if applicable, the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation, or winding-up, subject to compliance with the Right of First Refusal required by Section 702 hereof. SECTION 905. RESERVATION OF SHARES OF COMMON STOCK. The Company covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock, for the purpose of effecting conversion of the Note, the full number of shares of Common Stock deliverable upon the conversion of the Note. - 20 - 55 SECTION 906. TAXES UPON CONVERSION. The Company will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Note pursuant hereto. SECTION 907. COVENANTS AS TO COMMON STOCK. The Company covenants that all shares of Common Stock which may be delivered upon conversion of the Note will, upon delivery, be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. SECTION 908. PIGGYBACK REGISTRATION RIGHTS. If the Company shall determine to register any of its securities, either for its own account or for the account of a security holder or holders, other than a registration relating solely to employee benefit plans, or a registration on any registration form that does not permit secondary sales, the Company will promptly give to Lender written notice thereof and use its best efforts to include in such registration (and any related qualification under applicable Blue Sky laws or other compliance), and any underwriting involved therein, Common Stock specified in a written request made by Lender within twenty (20) days after the written notice of the Company provided for above is given. Such written request may specify all or a part of Lender's Common Stock. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the company shall so advise as a part of the written notice given as required above. In such event the right of Lender to registration shall be conditioned upon Lender's participation in such underwriting and the inclusion of its Common Stock in the underwriting. Lender shall enter with the Company into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding the above, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, the representative may exclude Lender's Common Stock from, or limit the number of shares of Lender's Common Stock to be included in, the registration and underwriting. The number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account, then to Lender to the extent of securities it has elected to sell for its own account, and thereafter to all other owners of Common Stock with the right to participate in such registration and underwriting pro rata in proportion to the percentage of all outstanding Common Stock owned by each such Person immediately prior to commencement of such registration and underwriting. If any Person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Common Stock or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the number of shares of Common Stock to be included in such registration is increased during the period of such registration, the Company shall offer first to Lender and then, if additional shares may be sold in the registration to all other Persons who have retained the right to include securities in the registration, the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the Persons requesting additional inclusion pro rata in proportion to the percentage that each Person's Common Stock represents of the total amount of Common Stock owned by all such Persons prior to commencement of such registration and underwriting. - 21 - 56 ARTICLE X CONDITIONS PRECEDENT SECTION 1001. CONDITIONS PRECEDENT. The obligation of Lender to purchase the Note(s) and to make all individual disbursements thereunder is expressly conditioned upon the following: (a) The Lender's receipt from the Company, in each instance, of an Officer's Certificate signed by its President satisfactory to Lender in which such President represents and warrants to Lender on behalf of the Company that (1) use of the proceeds from any disbursement of principal of the Note is shall be dedicated to such corporate uses as the Company's Board of Directors may deem proper; and (2) there are no defaults under this Agreement or the Note; and. (b) The Lender's receipt of a Certificate of Good Standing certified by the Secretary of State of the State of Delaware as to the corporate status of the Company. - 22 - 57 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, and their respective seals to be hereunto fixed and attested, all as of the day and year first above written. MICRO GENERAL CORPORATION (the "Company") By: ________________________________ Name:_______________________________ Title:______________________________ DITO CAREE L.P. ("Lender") By: ________________________________ Name:_______________________________ Title:______________________________ - 23 - 58 EXHIBIT "A" MICRO GENERAL CORPORATION CONVERTIBLE NOTE (MULTIPLE ADVANCES) $900,000.00 Irvine, California October 27, 1998 MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor corporation or corporations under the Agreement hereinafter referred to), for value received, hereby promises to pay to Dito Caree L.P., a Nevada limited partnership, at its office at 3735 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada 89109 ("Lender"), or order, principal sum of Nine Hundred Thousand Dollars ($900,000.00), or so much thereof as shall have been disbursed by Lender and which at that time remains unpaid, together with simple interest thereon from the date hereof at the rate of ten percent (10%) per annum, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, payable as follows: Accrued interest only on the principal amount hereof shall be payable quarterly in arrears during the first five (5) years of the term hereof commencing October 27, 1998. Thereafter, on October 27, 2003 the entire unpaid balance of this Note, including principal and accrued but unpaid interest, shall be due and payable. This Note may be prepaid in whole or in part at any time with the prior written consent of Lender so long as the Company gives ten (10) days' prior written notice to Lender of the Company's intent to prepay this Note or any portion hereof. Such notice shall state the proposed payment date (the "Payment Date") and the principal amount to be repaid. At any time during the term hereof, the Lender may, but shall not be obligated to, elect to convert all or any portion of the principal to be repaid on the Payment Date into shares of the Company's common stock (the "Common Stock") at the "Conversion Price" (as that term is defined in the Agreement hereinafter referred to) then in effect by delivering to the Company, to the attention of its President, written notice of its election to exercise its conversion rights as set forth herein. Notwithstanding anything contained herein to the contrary, and notwithstanding the Company's payment of this Note in whole or in part, the Lender shall retain the right to convert the then-outstanding principal balance hereof into the subject shares of Common Stock throughout the five (5) year term of this Note at the Conversion Price. Any partial prepayments made hereunder shall be applied to installments due hereunder in inverse order of maturity. This Note is duly authorized and issued by the Company, is designated as set forth on the face hereof, and is limited to the aggregate principal amount of $900,000.00 issued under and pursuant to that certain Convertible Note Purchase Agreement, dated as of October 27, 1998 (herein called the "Agreement"), duly executed and delivered by the Company and Lender, to which Agreement reference is hereby made for a further description of the rights, limitation of rights, obligations, and - 24 - 59 duties thereunder of the Company and Lender. In case an Event of Default shall have occurred under this Note or under the Agreement (as the term "Event of Default" is defined in said Agreement), the principal balance hereof and all accrued but unpaid interest thereon may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Agreement. Reference is hereby made to the further provisions of the Agreement, including, without limitation, provisions giving the Lender of this Note the right to convert this Note into Common Stock on the terms and subject to the limitations more fully specified in the Agreement. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used in this Note and not otherwise defined still have the meanings assigned to such terms in the Agreement. IN WITNESS WHEREOF, the Company has caused this instrument to be signed manually or by facsimile by its duly authorized officers. Dated: _______________________ MICRO GENERAL CORPORATION (the "Company") By: ________________________________ Name:_______________________________ Title:______________________________ - 25 - 60 EXHIBIT "B" CONVERSION NOTICE To: Micro General Corporation 2510 Redhill Avenue Santa Ana, California 92705 The undersigned, as the owner of that certain Convertible Promissory Note dated October 27, 1998 (the "Note"), hereby irrevocably exercises the option to convert the Note, or that portion of the Note designed herein below, into _____________ shares of Common Stock of Micro General Corporation at a price of $_______ per share, in accordance with the terms of that certain Convertible Note Purchase Agreement between the undersigned and Micro General Corporation as referenced in the Note, and directs that the shares issuable and deliverable upon the conversion be issued and delivered to the holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a person other than the undersigned, the undersigned has herein below named the transferee to whom the new Note should be issued. Dated: _____________________________ ____________________________________ Signature(s) By: ________________________________ Name:_______________________________ Title:______________________________ 61 MICRO GENERAL CORPORATION CONVERTIBLE NOTE (MULTIPLE ADVANCES) $900,000.00 Irvine, California October 27, 1998 MICRO GENERAL CORPORATION, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor corporation or corporations under the Agreement hereinafter referred to), for value received, hereby promises to pay to Dito Caree L.P., a Nevada limited partnership, at its office at 3735 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada 89109 ("Lender"), or order, principal sum of Nine Hundred Thousand Dollars ($900,000.00), or so much thereof as shall have been disbursed by Lender and which at that time remains unpaid, together with simple interest thereon from the date hereof at the rate of ten percent (10%) per annum, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, payable as follows: Accrued interest only on the principal amount hereof shall be payable quarterly in arrears during the first five (5) years of the term hereof commencing October 27, 1998. Thereafter, on October 27, 2003 the entire unpaid balance of this Note, including principal and accrued but unpaid interest, shall be due and payable. This Note may be prepaid in whole or in part at any time with the prior written consent of Lender so long as the Company gives ten (10) days' prior written notice to Lender of the Company's intent to prepay this Note or any portion hereof. Such notice shall state the proposed payment date (the "Payment Date") and the principal amount to be repaid. At any time during the term hereof, the Lender may, but shall not be obligated to, elect to convert all or any portion of the principal to be repaid on the Payment Date into shares of the Company's common stock (the "Common Stock") at the "Conversion Price" (as that term is defined in the Agreement hereinafter referred to) then in effect by delivering to the Company, to the attention of its President, written notice of its election to exercise its conversion rights as set forth herein. Notwithstanding anything contained herein to the contrary, and notwithstanding the Company's payment of this Note in whole or in part, the Lender shall retain the right to convert the then-outstanding principal balance hereof into the subject shares of Common Stock throughout the five (5) year term of this Note at the Conversion Price. Any partial prepayments made hereunder shall be applied to installments due hereunder in inverse order of maturity. This Note is duly authorized and issued by the Company, is designated as set forth on the face hereof, and is limited to the aggregate principal amount of $900,000.00 issued under and pursuant to that certain Convertible Note Purchase Agreement, dated as of October 27, 1998 (herein called the "Agreement"), duly executed and delivered by the Company and Lender, to which Agreement reference is hereby made for a further description of the rights, limitation of rights, obligations, and duties thereunder of the Company and Lender. In case an Event of Default shall have occurred under 62 this Note or under the Agreement (as the term "Event of Default" is defined in said Agreement), the principal balance hereof and all accrued but unpaid interest thereon may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Agreement. Reference is hereby made to the further provisions of the Agreement, including, without limitation, provisions giving the Lender of this Note the right to convert this Note into Common Stock on the terms and subject to the limitations more fully specified in the Agreement. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used in this Note and not otherwise defined still have the meanings assigned to such terms in the Agreement. IN WITNESS WHEREOF, the Company has caused this instrument to be signed manually or by facsimile by its duly authorized officers. Dated: October 27, 1998 MICRO GENERAL CORPORATION (the "Company") By: /s/ Jeff Sanderson --------------------------------- Name: Jeff Sanderson ------------------------------- Title: Executive Vice President ------------------------------ - 2 - EX-10.25 3 INDUCEMENT AGREEMENT 1 EXHIBIT 10.25 INDUCEMENT AGREEMENT THIS INDUCEMENT AGREEMENT ("Agreement") dated March 30 , 1999 and is entered into by and between JOHN SNEDEGAR ("Snedegar"), CAL WEST SERVICE CORPORATION, a California corporation ("Cal West"), and MICRO GENERAL CORPORATION, a Delaware corporation ("MGC"). Whereas, Snedegar has significant expertise in the telecommunications industry; and Whereas, the major shareholders of MGC, a computer and telecommunications company, desire to utilize Snedegar's expertise to grow MGC by strategic acquisitions; and Whereas, Snedegar is willing to provide his expertise to MGC's management; Now, therefore, it is agreed as follows: 1. Snedegar has agreed to provide advice and counsel on strategic acquisitions for MGC for a period of two years from August 11, 1998 and has been providing such advice and counsel since August 11, 1998. 2. As compensation for the services Mr. Snedegar renders to MGC, MGC, agrees to issue certain convertible debt and warrants of MGC to Snedegar; one half on March 31, 1999 and one half on January 1, 2000 consisting of: 100,000 warrants having an exercise price of $1.50 per warrant; and $500,000 of face indebtedness of convertible debt of MGC with an average conversion price of $2.25. Said issuance shall occur in two equal parts, half on March 31, 1999 and half on January 1, 2000. In the event that Snedegar's consulting relationship with MGC terminates for any reason whatsoever prior to January 1, 2000, the convertible debt and warrants which are not vested will vest on January 1, 2000. CalWest agrees to transfer all rights granted to it in the above listed warrants and convertible debt back to MGC over the period described above with the understanding that CalWest will be repaid by MGC as said transfers to Snedegar occur pursuant to the Convertible Note Purchase Agreement and ancillary documents and the Loan Agreement and Agreement to Issue Detachable Warrants and ancillary documents relative to the convertible debt and warrants. 1 2 3. Snedegar will be and at all times during the term of this Agreement shall remain an independent contractor. As such, Snedegar shall have sole control over the manner and means of performing the services outlined in Paragraph 1 above. Nothing in this Agreement or in any subsequent modifications hereto shall be interpreted to create any relationship of employer/ employee, principal/agent, partnership or joint venture. Snedegar shall have no power to obligate, commit or legally bind the other parties in any manner whatsoever, and the other parties shall have no liability to Mr. Snedegar or to others for any acts or omissions of Snedegar. It is acknowledged and agreed that Snedegar has numerous business commitments and he shall not be obligated to devote any particular amount of time to the performance of his services hereunder. 4. In the event of any dispute or claim regarding any provision of this Agreement, or any aspect of Snedegar's independent contractor relationship or the cessation of that relationship, the parties agree to submit the dispute or claim to binding arbitration in Orange County, California before an experienced arbitrator licensed to practice law in California and selected in accordance with the rules and procedures of the American Arbitration Association as the exclusive remedy for any such dispute or claim. 5. No provision of this Agreement shall be construed against any party merely because that party or its/his/her attorney drafted or revised the provision in question. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other provisions shall remain fully valid and enforceable. 6. This Agreement and the Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes of MGC (the "Transfer Agreement"), by and between the parties hereto together constitute the sole and entire agreement and understanding of the parties relating to the subject matter hereof and thereof. This Agreement, together with the Transfer Agreement, supersede and automatically cancel any and all prior discussions, negotiations, commitments and understandings between the parties, whether oral, written, or otherwise, relating to the subject matter hereof and thereof. This Agreement shall not be modified, amended, changed or supplemented in any way except by a written document signed by all parties to this Agreement. This Agreement may be executed in separate counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one and the same Agreement. 2 3 IN WITNESS WHEREOF, the parties have executed this Agreement on the dates written below, opposite their name. Date: March 30, 1999 /s/ John Snedegar ------------------------------------ JOHN SNEDEGAR CAL WEST SERVICE CORPORATION, a California corporation Date: April 2, 1999 By: /s/ M'Liss Jones Kane ------------------------------------ Secretary MICRO GENERAL CORPORATION, a Delaware corporation Date: April 2, 1999 By: /s/ Patrick F. Stone ------------------------------------ Chief Executive Officer 3 4 AGREEMENT TO TRANSFER AND REISSUE DETACHABLE WARRANTS AND CONVERTIBLE NOTES OF MICRO GENERAL CORPORATION, A DELAWARE CORPORATION (BY AND BETWEEN CALWEST SERVICE CORPORATION, A CALIFORNIA CORPORATION, MICRO GENERAL CORPORATION, A DELAWARE CORPORATION, AND JOHN SNEDEGAR, AN INDIVIDUAL) THIS AGREEMENT is made, entered into and is effective as of March 30, 1999 (this "Agreement"), by and between CALWEST SERVICE CORPORATION, A CALIFORNIA CORPORATION ("CalWest"), and an affiliate of Fidelity National Financial, Inc., a Delaware corporation and major stockholder of Micro General Corporation, a Delaware corporation ("MGC"), MGC and JOHN SNEDEGAR, AN INDIVIDUAL ("Snedegar"), and is made with reference to the following facts: A. Simultaneously with the execution of this Agreement, Snedegar has entered into an agreement with respect to Snedegar providing consulting services to and for the benefit of MGC (the "Inducement Agreement"), and, in partial consideration for the services to be rendered by Snedegar now and in the future under the terms of such consulting arrangement, CalWest, as lender and shareholder of MGC, has agreed to convey to MGC those certain rights and interests as provided hereinbelow with the understanding that as said rights and interests are to be reissued to Snedegar pursuant to the Inducement Agreement. MGC will simultaneously repay CalWest for its conveyance to MGC. In consideration for such conveyance by CalWest and reissuance by MGC, Snedegar agrees that he will faithfully perform those obligations as provided under the terms of his consulting arrangement with MGC. B. CalWest is currently the holder of certain rights and interests under Detachable Warrants issued by MGC in favor of CalWest and is further the lender and the holder of certain rights under Convertible Promissory Notes issued by MGC. In consideration for the services provided and to be provided by Snedegar to MGC, CalWest shall, subject to the terms provided herein, transfer back to MGC and MGC shall reissue to Snedegar over a period as follows: the first half (1/2) issued on March 31, 1999 and the second half (1/2) issued on January 1, 2000 or earlier as described in section 2 of the Inducement Agreement granting to Snedegar the right to exercise such Warrants and receive upon exercise up to 100,000 shares of MGC common stock at a warrant exercise price of $1.50 per share of MGC common stock; and, further in two parts over the period described above, interests in Convertible Promissory Notes issued by MGC granting to Snedegar, as the holder of said Promissory Notes, in a total face indebtedness of $500,000, the right to convert $300,000 of indebtedness into MGC common stock at a conversion price of $2.25 per share of MGC common stock, $100,000 of indebtedness into MGC common stock at a conversion price of $2.00 1 5 per share of MGC common stock, and $100,000 of indebtedness into MGC common stock at a conversion price of $2.50 per share of MGC common stock. MGC agrees to repay CalWest over the above described period for the interests which CalWest is transferring to back to MGC to be reissued to Snedegar. NOW, THEREFORE, the parties agree as follows: 1. Assignment of Detachable Warrants. CalWest, as the owner and holder of a Detachable Warrant Certificate dated November 25, 1997, entitling the holder thereof to acquire up to 50,000 shares of the common stock of MGC at a warrant exercise price of $1.50 per share, and, as the holder of a Detachable Warrant Certificate dated April 8, 1998, permitting the holder thereof to acquire up to 62,500 shares at an exercise price of $1.50 per share, does hereby agree to convey unto MGC rights under said Warrants to acquire up to 100,000 shares of MGC at an exercise price of $1.50 per share. Said conveyance of said rights under such 100,000 Warrants shall be effected one half on March 31, 1999 and one half on January 1, 2000 and MGC will reissue Warrants, in the name of Snedegar representing rights to exercise Warrants for up to 50,000 shares on March 31, 1999 and up to 50,000 shares on January 1, 2000, subject to such reissuance of warrants being subject to all terms and conditions of the Detachable Warrant Certificates issued November 25, 1997 and April 8, 1998. Snedegar acknowledges that such assignment shall be effective in accordance with the provisions of Section 2 of the Detachable Warrant Certificates and shall include the providing of notice under the provisions of Section 2(c) to MGC and an acknowledgment by Snedegar that such acquisition of warrants by Snedegar shall be for his personal investment purposes and shall be held as an investment by Snedegar without a view to further transfer or assign any interests so acquired and may require submission of a written opinion by counsel that such transfer to Snedegar shall not be violative of any federal or state securities act or securities law. 2. Transfer of Interests Under Convertible Promissory Notes. Over the aforementioned period, CalWest does hereby assign and transfer to MGC interests under Convertible Promissory Notes held by CalWest issued by CalWest and dated July 24, 1996, November 25, 1997 and April 8, 1998 representing the transfer of a portion of the indebtedness held by CalWest under Convertible Promissory Notes issued by MGC, which interests transferred shall represent a transfer of $300,000 of MGC indebtedness as represented by such Promissory Notes notes which shall be subject to conversion to common stock of MGC at a conversion price of $2.25 per share ($150,000 of MGC indebtedness on March 31, 1999 and $150,000 of MGC indebtedness on January 1, 2000), a further transfer of $100,000 of such Promissory Notes convertible to common stock of MGC at a conversion price of $2.00 per share ($50,000 of such Promissory Notes on March 31, 1999 and $50,000 of MGC promissory notes on January 1, 2000), and an additional $100,000 of indebtedness under such Promissory Notes of MGC convertible to common stock of MGC at a conversion price of $2.50 per share ($50,000 of MGC promissory notes on March 31, 1999 and $50,000 of MGC promissory notes on January 1, 2000). MGC will reissue convertible promissory notes in said amounts registered in the name of Snedegar convertible at the prices indicated hereinabove. 2 6 3. Rights Subject to Terms of Warrants and Convertible Notes. Snedegar does hereby represent to and for the benefit of CalWest, MGC and Dito Caree L.P. Holding, a Nevada limited partnership ("Caree") (an entity who had participated in the loan and warrant agreements together with CalWest), that Snedegar has read and reviewed all terms and provisions of the loan agreements and agreements between CalWest and MGC to issue Detachable Warrants, as dated July 24, 1996, November 25, 1997 and April 8, 1998, and Snedegar acknowledges that he shall be bound by all of the terms and conditions thereof as a holder of Detachable Warrants and Convertible Promissory Notes, including, but not limited to, all terms and provisions of a Memorandum of Understanding dated November 25, 1997 and April 8, 1998 by and between CalWest and Caree concerning "equalization of rights" upon the event of any defaults which shall result in enforcement rights by holders of notes or debentures as against MGC, and Snedegar does further agree to be bound by and agree to appoint CalWest as custodian in connection with the holding and filing of security agreements and UCC Financing Statements under the terms and provisions of the Convertible Promissory Notes and the Detachable Warrants, together with rights under the loan agreement pursuant to which such Promissory Notes and Detachable Warrants were issued. MGC does further acknowledge that Snedegar shall be entitled to such benefits as CalWest had in its capacity as a lender under the General Assignment and Security Agreements executed and entered into by MGC in favor of CalWest and Caree, and as further evidenced by UCC-1 filings in favor of CalWest, as an agent for "lenders," under the terms of the Loan Agreement and Agreements to Issue Detachable Warrants dated July 24, 1996, November 25, 1997 and April 8, 1998 and all rights under the aforementioned agreements relating to the Detachable Warrants and Convertible Promissory Notes, including, without limitation, all piggyback registration rights. 4. CalWest Service Corporation. CalWest does represent to and for the benefit of MGC and Snedegar that: A. CalWest is the absolute owner of the Detachable Warrants and Promissory Notes which are being conveyed to MGC and then reissued by MGC to Snedegar under the terms of this Agreement, free and clear of any liens, pledges, security interests or other encumbrances of any nature whatsoever. B. CalWest has both the power and authority to effect the assignments as contemplated under the terms of this Agreement and does hold all requisite corporate authorization and authority to make such assignment and transfer, and effecting such assignments does not require the consent of, or notice to, any third party. C. CalWest is not aware of any event, condition or circumstance which would prevent or prohibit the assignment being made and effected to Snedegar hereunder. Except as herein expressly provided, CalWest is making no other representation or warranty concerning the interests to be assigned hereunder, and the assignments are made without recourse. 3 7 5. Acknowledgment by Snedegar. Snedegar does hereby acknowledge to and for the benefit of CalWest, MGC, and Caree that: A. Snedegar has made his own independent evaluation concerning the interests being acquired and is relying upon no representations, express or implied, by CalWest or any other party concerning the value of the Convertible Promissory Notes or Warrants being issued herein and recognizes that such issuance is without recourse as to CalWest or any other party (excepting the enforcement of those rights which exist under the terms of the Convertible Promissory Notes and Detachable Warrants as against MGC) and CalWest's obligation hereunder. B. Snedegar has made his own independent evaluation of MGC, the value of MGC and its ability to perform under the terms and provisions of the Convertible Promissory Notes and Detachable Warrants and is not relying in any respect upon any representations of CalWest concerning the values of the interests as issued to Snedegar. C. Snedegar is accepting the interests under the Detachable Warrants and the Convertible Notes for his own personal purposes and investment and has no current intention to further assign or transfer such interests nor in any respect act as an underwriter of any rights or interests acquired under the Loan Agreement or the Detachable Warrants and acknowledges that the Detachable Warrants and any right to stock under the terms of the Convertible Notes represents interests being acquired in securities which are not registered under the Securities Act of 1933, as amended, nor under any applicable state securities laws, and, therefore, any rights to subsequently assign, transfer or pledge any interests in securities acquired under the terms of this Agreement shall require compliance with applicable federal and state securities laws and further transfer or assignment of any interests acquired may, if necessary, require receipt by MGC of an opinion of counsel reasonably satisfactory to MGC that registration is not required and/or that such transfer is in conformity with applicable federal and state securities laws or an exemption thereunder. D. Snedegar acknowledges that he shall be entitled to receipt of all rights under the terms of the Loan Agreement and debentures as it relates to the interests acquired, including, without limitation, piggyback registration rights and security interests, and acknowledges that any such rights shall be subject to his performance of the terms and provisions of the Loan Agreement as an assignee and successor to CalWest. 6. Acknowledgment of Cooperation. CalWest and Snedegar agree that they shall, from and after the date of this Agreement, reasonably cooperate doing any and all acts necessary or convenient to effect a conveyance and issuance of the interests under the Detachable Warrants and convertible promissory notes from CalWest to MGC and from MGC to Snedegar, including, without limitation, providing appropriate notices and transfer and issuance documents to Snedegar. 7. Notices. Any notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, overnight courier (with all costs prepaid) or by facsimile, addressed 4 8 to the parties as set forth herein. Any such notice shall be deemed received upon the earlier of (a) if personally delivered, the date of delivery to the address of the person to receive such notice, (b) if mailed, four (4) business days after the date of posting by the United States post office, (c) if given by overnight courier, upon receipt by the person to receive such notice, or (d) if sent by facsimile, when sent. To Snedegar: ___________________________ ___________________________ ___________________________ Attn:______________________ Facsimile:_________________ To CalWest: CalWest Service Corporation 17911 Von Karman Avenue Suite 300 Irvine, California 92614 Facsimile: (949) 622-4104 To MGC: ___________________________ ___________________________ ___________________________ Attn:______________________ Facsimile:_________________ Any notice, request, demand, direction or other communication sent by facsimile must be confirmed within forty-eight (48) hours by letter mailed or delivered in accordance with the foregoing. Notice of change of address shall be given by written notice in the manner detailed in this Section 7. Rejection or other refusal to accept or the inability to deliver because of a changed address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent. 8. Miscellaneous. A. Rights under the terms of this Agreement given to Snedegar as an individual, subject to transfer in compliance with applicable securities laws, shall not be subject to assignment or transfer without the written consent of CalWest having first been had and obtained. This Agreement shall inure to the benefit of and be binding upon the heirs, estate and personal representatives of Snedegar. Any attempt at assignment without compliance of this provision shall be null and void and of no force or effect. 5 9 B. The provisions of this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of California. MICRO GENERAL CORPORATION, CALWEST SERVICE CORPORATION, A DELAWARE CORPORATION CALIFORNIA CORPORATION By: /s/ Patrick F. Stone By: /s/ M'Liss Jones Kane ------------------------------- --------------------------------- Name: Patrick F. Stone Name: M'Liss Jones Kane Title:Chief Executive Officer Title: Secretary /s/ John Snedegar --------------------------------- JOHN SNEDEGAR, AN INDIVIDUAL 6 EX-21 4 LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF MICRO GENERAL CORPORATION 1. ACS Systems, Inc. 2. LDExchange.com, Inc. 3. Interactive Associates, Inc. 17 EX-23.1 5 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' REPORT The Board of Directors Micro General Corporation: We consent to incorporation by reference in the registration statements (No. 2-85485, 2-92490, 333-22240 and 333-64289) on Form S-8 of Micro General Corporation of our report dated March 31, 1999, relating to the consolidated balance sheets of Micro General Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, and the related schedule, which report appears in the December 31, 1998 annual report on Form 10-K of Micro General Corporation. KPMG LLP Los Angeles, California April 14, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 914,796 0 6,672,694 485,936 785,204 8,246,642 3,614,183 293,178 23,080,061 5,766,062 16,729,411 0 0 377,333 207,255 23,080,061 34,016,064 34,016,064 27,967,484 10,226,195 0 0 666,788 (4,844,403) 2,400 (4,846,803) 0 0 0 4,846,803 (.81) (.81)
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