-----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, P/70ifXFqil4P6HfgaV2BfQaKM2LPXt/D3kaYS4VLYRaDzuRC29C3z1mPi1ITLdi Dywcmr4xPJYhyCSc3dWUdA== 0001095811-01-002048.txt : 20010409 0001095811-01-002048.hdr.sgml : 20010409 ACCESSION NUMBER: 0001095811-01-002048 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO GENERAL CORP CENTRAL INDEX KEY: 0000067383 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 952621545 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-08358 FILM NUMBER: 1591010 BUSINESS ADDRESS: STREET 1: 3916 STATE STREET STREET 2: SUITE 330 CITY: SANTA BARBARA STATE: CA ZIP: 93105 BUSINESS PHONE: 8055631566 MAIL ADDRESS: STREET 1: 3916 STATE STREET STREET 2: SUITE 300 CITY: SANTA BARBARA STATE: CA ZIP: 93105 FORMER COMPANY: FORMER CONFORMED NAME: MODULEARN INC DATE OF NAME CHANGE: 19810813 10-K405 1 a68920e10-k405.txt FORM 10-K405 PERIOD ENDED DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-8358 MICRO GENERAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2621545 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2510 RED HILL AVENUE, SUITE 200 92705 SANTA ANA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (949) 622-4444 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $.05 PAR VALUE NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] As of March 15, 2001, 13,267,581 shares of common stock ($.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 $34,314,000. LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV herein on page number 39. 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, 2000, to be filed within 120 days after the close of the fiscal year that is the subject of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS FORM 10-K
PAGE NO. ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 8 Item 6. Selected Financial Data..................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 15 Item 8. Financial Statements and Supplementary Data................. 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 39 PART III Item 10. Directors and Executive Officers of the Registrant.......... 39 Item 11. Executive Compensation...................................... 39 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 39 Item 13. Certain Relationships and Related Transactions.............. 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 39
i 3 PART I ITEM 1. BUSINESS Micro General Corporation ("Micro General" or "the Company") is a provider of production and workflow software systems to the title and real estate industries. The Company also provides managed application services, application development and integration, network, data and infrastructure management and information technology outsourcing. Historically, the Company's operations consisted of the design, manufacture and sale of computerized postal and shipping systems. With the acquisition of ACS Systems, Inc. ("ACS") in mid-1998, the Company shifted its 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 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, 2000, ACS was formally merged into Micro General. FNFI owned 65.7% of the Company's outstanding common stock at December 31, 2000. On November 17, 1998, the Company completed the acquisition of LDExchange.com, Inc. ("LDExchange"), an emerging multinational carrier focused primarily on the international long distance market. LDExchange is a facilities-based, wholesale long distance carrier providing low cost international telecommunication services primarily to U.S. based long distance carriers. In 2000, LDExchange obtained the necessary state certifications to begin offering domestic long distance services across the country. In addition, the telecommunication assets and customers of ACS were transferred into LDExchange and have become an integral part of the LDExchange telecommunication product offerings. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General restricted common stock (1,000,000 shares). SERVICES The Company offers its customers a portfolio of related services within the broad categories of professional services, managed application services, information technology and telecommunications. FNFI represented 60% and 29% of total Company revenues in 2000 and 1999, respectively. Professional Services These services include systems development, integration, telephony solutions, business process management, consulting and enterprise software solutions. Managed Application Services Net Global Solutions ("NGS") is a web-based platform designed to substantially increase the efficiency of the title production process. This application will permit data retrieval/file access from remote locations and allow seamless workflow among title brands and real estate related subsidiaries. Currently in the final stages of development, it is slated to replace older legacy systems supporting both the FNFI and Chicago Title Corporation ("Chicago Title") operations, acquired by FNFI in March 2000. It will also be marketed to other title underwriters and independent title offices across the United States. SIMON is the legacy desktop title and escrow application owned and operated by the Company and is currently used in approximately 450 FNFI offices and by approximately 200 other escrow and title agencies. The implementation of the NGS software system will replace the SIMON application in the Fidelity offices over the next 18 months. 1 4 TEAM is the legacy Chicago Title VAX-based system utilized in over 650 Chicago Title offices and is currently being supported and maintained by the Company's personnel. The implementation of the Company's NGS software system is anticipated to replace the TEAM system over the next 18 months. Information Technology These services include voice and data network design, hardware and software systems, implementation and management and desktop support services. Under construction is a Virtual Private Network ("VPN") that will link approximately 1,100 FNFI and Chicago Title offices and provide the gateway to deploy NGS while providing cost savings through bundled services. Telecommunications LDExchange is a provider of both retail domestic long distance services and wholesale international long distance call completion services. In 2000, the Company had total telecommunications revenues of $44.3 million. LDExchange is certified to provide long distance services nationwide and has customers in 32 states. During the fiscal year ended December 31, 2000, domestic telecommunications revenue was approximately 7% of the Company's total telecommunications revenues. Wholesale international long distance call completion services accounted for the remaining 93% of the Company's total telecommunication revenues. These services are provided primarily to U.S.-based telecommunications companies offering their services to customers whose calls originate in the U.S. and terminate in foreign countries. LDExchange obtains the majority of its call completion services through purchase agreements with other international telecommunications companies; however, the Company does have direct purchase arrangements with partners in four foreign countries. LD Exchange leases satellite facilities in order to transport long distance calls from its New York and California telecommunications centers to its partners' foreign country locations. LDExchange has one customer that represents a significant portion of its revenues. In 2000, this customer was 21% of LDExchange's total revenues (See Risk Factors -- Customer Concentration). REALEC TECHNOLOGIES, INC. On October 8, 1998, the Company announced the creation of RealEC, one of the largest real estate electronic commerce networks in the nation. RealEC commenced operations in mid-1999 and was a 50% owned joint venture with Stewart Mortgage Information, a subsidiary of Stewart Information Services Corporation (NYSE:STC). RealEC provides a standardized, electronic platform which lenders and realtors can utilize to order and receive products and services from multiple vendors, such as credit, flood, appraisal, title and closing. This open, eCommerce network currently gives lenders and realtors access to over 2,000 vendors located across the United States. On May 19, 2000, the Company created TXMNet, Inc. and invested its 50% ownership of RealEC into the new entity along with certain other intellectual property in exchange for 6,650,000 shares of convertible, non-voting preferred stock. The Company's investment in TXMNet was $1,660,893, which was the book value of its 50% ownership in RealEC that was part of the assets contributed by the Company into TXMNet, Inc. On December 31, 2000, Stewart Mortgage Information exchanged its 50% ownership position in RealEC for 2,935,000 shares of convertible non-voting preferred stock in TXMNet, Inc. TXMNet, Inc. changed its name to RealEC Technologies, Inc. on February 13, 2001. The Company has accounted for the approximately $1.3 million advanced to TXMNet in 2000 using the modified equity accounting method, and had, as of December 31, 2000, fully reserved this receivable. The reserve will be reversed at such time that RealEC Technologies has sufficient funding to repay the amounts advanced to it by the Company and to conduct its operations for at least the next year. RealEC Technologies has also retained an investment banker to raise $4 - $8 million which is expected to be completed in the second quarter of 2001. As of December 31, 2000, RealEC Technologies had 10,835,000 shares outstanding. On a fully diluted basis, the Company has a 62% ownership in RealEC Technologies, Stewart Title Corporation has a 27% ownership, and the remaining 11% ownership is by other investors. 2 5 ESCROW.COM On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. Escrow.com offers online escrow-related services designed to provide buyers and sellers with a safe, secure and easy to use system for managing payment for and delivery of products and services purchased via the Internet. As an internet transaction services provider, escrow.com provides for the secure transmission of funds between a buyer and seller by placing the funds in escrow, confirms and verifies the receipt of merchandise by the buyer, and releases the funds from escrow to the seller. While escrow.com could enable any Internet buy/sell transaction, its primary focus will be in the business-to-business Internet marketplace. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time that escrow.com has sufficient funding in place to reasonably ensure the payment of the note. While the Company has no equity interest in escrow.com as of December 31, 2000, the 15.0 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. Escrow.com is incurring substantial losses and may need to raise additional funds in order to continue its operations. The Company's potential ownership in escrow.com may be substantially diluted if escrow.com issues additional shares to raise the necessary capital. As previously described, the Company has warrants that, upon their exercise, will give the Company substantial ownership in escrow.com. In April 2000, escrow.com completed a private placement in which it raised gross proceeds of $30.0 million. As an inducement to invest, the Company assigned to two of the investors 250,000 of its 15.0 million warrants in escrow.com. As a result of this funding, escrow.com has 10,541,813 shares outstanding as of December 31, 2000. Although escrow.com has raised additional capital, those funds are not to be used for repayment of the $4.5 million note receivable discussed above. Therefore, the note will continue to be fully reserved until such time that escrow.com has sufficient funding in place to reasonably ensure payment of the note. Assuming exercise of the warrants, the Company would have a 58% ownership in escrow.com. ACQUISITIONS AND STRATEGIC ALLIANCES The Company has made certain acquisitions and entered into strategic alliances in an effort to gain a competitive advantage or to obtain a new or expanded presence in targeted markets. The Company believes that the consolidation and convergence of the computing and software, electronic commerce and telecommunication industries will continue. Therefore, the Company expects that its strategy to make acquisitions and/or to enter into strategic alliances will continue in order for the Company to compete effectively. On March 22, 1999, the Company acquired Interactive Associates, Inc. ("Interactive"), a privately held distributor of computer telephony hardware and services. This acquisition provided for the purchase of 100% of the common stock of Interactive in exchange for 50,000 shares of Micro General common stock, subject to certain conditions, including an earn out provision for up to an additional 50,000 shares. In June 2000, an additional 42,354 shares of Micro General common stock were issued under the earnout provisions of the Interactive acquisition agreement. These shares were valued at $614,333. In December 2000, an additional 7,646 shares of Micro General common stock were issued under the same earnout provisions valued at $49,225. Interactive's business activities have been merged with those of the Company. This acquisition has been accounted for using the purchase method. The financial position and results of operations of Interactive are not material to the Company. For additional information related to the Company's operating segments, see note 8 of notes to consolidated financial statements. 3 6 REGULATION Various aspects of the Company's business are subject to federal, state and foreign regulation, noncompliance with which, depending on the nature of the noncompliance, could result in the suspension or revocation of any license or registration at issue, civil fines or criminal penalties. The Company has not experienced material difficulties in complying with the various laws and regulations affecting its business (See Risk Factors -- Regulation). COMPETITION The Company experiences intense competition in the information technology and telecommunications industries from large multi-national corporations, as well as from niche-oriented or geographically focused providers. Technology, telecommunications and their application within the business enterprise are in a rapid and continuing state of change as new technologies, products and services continue to be developed, introduced and implemented. The Company believes that its ability to compete effectively will depend upon its ability to develop and market products and services on a timely and cost effective basis that enable it to meet the changing needs of its customers. Another key element to the Company's competitiveness is its ability to finance and acquire the resources necessary to offer such products and service (See Risk Factors -- Competition). SIGNIFICANCE OF FIDELITY NATIONAL FINANCIAL, INC. Approximately 60% of the Company's total revenue in 2000 was attributable to FNFI and its affiliates. During 1999 and 1998, 29% and 66%, respectively, of the Company's revenue was derived from multiple servicing arrangements with FNFI and its subsidiaries. The Company provides substantially all of the information technology and telecommunication services for FNFI and its subsidiaries. The loss of FNFI as a customer of the Company would have a material adverse effect on the Company. Information technology and telecommunication services are provided pursuant to various agreements between the Company and FNFI. The service agreements between the Company and FNFI specify the terms, conditions and scope of products and services to be provided by the Company to FNFI. The contracts are evaluated, modified and renewed on a regular basis. The relationship between the Company and FNFI should not be considered arm's length. The Company has recently signed a new contract with FNFI to continue the development work for new title and escrow production systems and to continue the expansion of FNFI's technology infrastructure. In addition, after the closing of the acquisition of Chicago Title by FNFI on March 20, 2000, the Company hired approximately 150 former Chicago Title employees. These information technology support personnel expanded the Company's commitment to supporting the combined FNFI/Chicago Title technology and telecommunications requirements. This new business from FNFI has substantially expanded revenues derived through the Company's products and services. The Company has historically relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI, as a source of funds via available financing arrangements, and as a guarantor of certain of the Company's lending arrangements. However, during 2000, the Company did not rely on FNFI as a source of capital and obtained outside financing without a corporate guarantee from FNFI. See note 7 of notes to consolidated financial statements. EMPLOYEES As of March 15, 2001, the Company has 421 full-time employees of which 309 are employed in offices in California, 92 in Illinois, 13 in Florida and 7 located throughout the United States. The Company believes that relations with its employees are generally good. 4 7 RISK FACTORS Technological Change Rapid technological change, characterized by the increased processing power of computers, product obsolescence, evolving industry standards, the proliferation of networks and the rapid growth in the usage of the Internet and intranets are all challenges faced by the Company. The Company must react to these changes by utilizing these new technologies to develop new products and services as its existing products and services become obsolete. There can be no assurance that the Company will be successful in adapting to continued rapid technological change, will be able to develop new products and services, or will develop new products and services that are both price and feature competitive with those products and services that may be developed by its competitors. In addition, there can be no assurance that the Company will continue to be successful in attracting and retaining key personnel with the technological skills and expertise necessary to develop new products and services in the future. The successful implementation of the Company's new NGS software system could be impacted by certain factors. NGS is a feature rich, complex system that requires the integration of various software platforms into a new web-based software model that will be managed out of a data center that is currently under construction, and the connectivity of over 1,100 Fidelity and Chicago Title locations via the network of a major telecommunications company. Due to the reliance by the Company on these hardware, software and network vendors, certain factors may arise that are specific to these vendors which are beyond the Company's control and that could have an impact on the deployment and operation of NGS. In addition, the Company will be reliant upon these vendors for maintenance, support and enhancements to their hardware, software and network services in order for the Company to successfully operate and maintain NGS. There can be no assurance that NGS will not be impacted by factors that may arise with these vendors that are beyond the Company's control. Also, the Company must successfully complete the build-out of its data center, complete the initial version of the NGS software and successfully deploy the software. There can be no assurance that the Company will be successful in these efforts, or that the customers will be satisfied with the NGS features, levels of support, ease of use, etc. These issues may have a substantial impact on the timing and amounts of revenue that the Company will ultimately derive from the NGS software system. Customer Concentration As discussed in Item 1. Business -- Significance of FNFI and its affiliates provided approximately 60% of the Company's revenue in 2000. Various service agreements and arrangements exist between the Company and FNFI and generally have a length of one to three years. FNFI continues to be the Company's major customer and the loss of FNFI as a customer would have a material adverse effect on the Company. In addition, LDExchange has one customer that represents 21% of total 2000 LDExchange revenue. This customer does not have a minimum usage commitment with the Company and can terminate its usage of the Company's services at any time. There is no guarantee that the Company can continue to offer competitive pricing to the customer, or that the customer may not elect to move its business to another telecommunications carrier. The Company's revenues and profits could be materially impacted by the loss of this customer. Competition The Company experiences intense competition in the information technology and telecommunications industries. Technology, telecommunications and their application within the business enterprise are in a rapid and continuing state of change as new technologies, products and services continue to be developed, introduced and implemented. Competitors include large, well-financed multinational corporations as well as niche-oriented or geographically focused providers. The Company believes that its ability to effectively compete in these industries will depend on its ability to develop and market new products on a timely and cost effective basis that enables it to continue to meet the needs of and retain its existing customers and to develop new customers. There can be no assurance that management will be able to successfully continue to develop 5 8 such products and services, or will be able to successfully market such products and services as they are developed. International Telecommunications The international telecommunications market is constantly changing as new long distance resellers emerge and existing providers respond to fluctuating costs and competitive pressures. The Company primarily engages in the resale of international capacity and must quickly respond to changes in costs through pricing adjustments and routing decisions. As a wholesale provider of international terminations, the business operates on narrow margins, and any failure on the Company's part to not respond quickly to changing prices and call routing alternatives could result in substantial losses. There can be no assurance that the Company will be able to continue to monitor and quickly adapt to these conditions. In addition, the Company is highly dependent on its foreign partners in the four countries to which traffic is routed directly. The Company may have limited recourse if its foreign partners do not perform under their contractual arrangements, and the Company may be burdened with satellite lease obligations of up to 12 months if a foreign partner is unable to fulfill its obligations. LDExchange has suffered losses since it's acquisition by the Company in 1998. This is not unique to LDExchange as many of its competitors have also experienced a similar difficult operating environment over the past two years. Gross margins have eroded due to increased competition and substantial price discounting in many foreign countries. Many of the Company's competitors have been acquired or have gone out of business. One of the Company's main challenges is managing credit risk due to the high incidence of its customers ceasing their operations. In addition, the Company has been unable to recover certain of its equipment that is located in various foreign countries. The Company believes that its present reserves are adequate but there can be no assurance that the Company will be successful in managing LDExchange through the current difficult environment. Regulation The Company's interstate and international telecommunication service offerings generally are subject to the regulatory jurisdiction of the FCC, state Public Utility Commissions ("PUCs") and foreign national authorities. Certain states have laws and regulations which include prior certification, notification, registration and/or tariff requirements. The Company believes it has made the filings with the FCC and the appropriate state PUCs, and has taken the actions it believes are necessary to engage in the interstate telecommunications services it currently provides. However, should the FCC or any state PUC determine to revoke the Company's authority to provide telecommunications services in that jurisdiction, it may have a material negative impact on the Company's telecommunications revenues. As the international telecommunications markets have become deregulated, service providers have developed alternative arrangements to reduce their terminating costs. The Company utilizes resale arrangements which provide multiple options for routing traffic to the destination country. The Company purchased capacity from 83 vendors in 2000. A substantial portion of this capacity is obtained through variable, per-minute short-term purchase arrangements. This leaves the Company exposed to the negative impact of unanticipated price increases and service cancellations. In addition, the Company has partners in four foreign countries with which it has arrangements to terminate telecommunications traffic directly to the partners switching facilities in that country via satellite transmission facilities which the Company leases. The FCC or foreign regulatory agencies may take the view that certain of the Company's partners terminating arrangements do not comply with current rules and policies. The Company is seeking to increase the amount of revenue derived through direct partnering arrangements. As this revenue source becomes a significant portion of the Company's overall revenue, the loss of such arrangements, whether as a result of regulatory actions, or otherwise, could have a material adverse effect on the Company's business, operating results and financial condition. 6 9 Need For Additional Capital to Finance Growth and Capital Requirements The Company until recently has a history of losses and has relied on FNFI as the primary source of capital to fund its operations. A key element in the Company's growth and competitiveness will be its ability to either finance the development of new products and services, or to have capital sufficient to acquire the necessary products and services. The Company believes that it can meet all anticipated cash requirements from internally generated funds, from existing lines of credit and from potential offerings of its shares; however, there can be no assurance that unanticipated events could not result in substantial additional funds being required to continue the Company's operations. In the event that the Company does require additional capital, there is no assurance that FNFI will make those funds available, that additional borrowing arrangements from non-affiliated parties will be available or that the Company can successfully issue its shares into the capital markets in order to raise additional equity. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Company cautions readers that the forward-looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements made by or on behalf of the Company. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Company's actual results to differ materially from those expressed in any such forward-looking statements. The factors that could cause the Company's results to differ materially include, but are not limited to, general economic and business conditions; the impact of competitive products and pricing; rapidly changing technology; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms, and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. ITEM 2. PROPERTIES The Company's principal offices are located in Santa Ana, California and Chicago, Illinois. The Santa Ana facility provides an aggregate of approximately 36,600 square feet of office space leased through June 2007 and is sub-leased from FNFI. Two Chicago, Illinois facilities provide 34,600 square feet with 11,400 square feet leased through July 2001 and 23,200 square feel leased through July 2004. Additional space consists of approximately 8,600 square feet of office and warehouse space located in Tustin, California leased through February 2001, 2,270 square feet of office space in Ft. Lauderdale, Florida leased through November 2001, 2,000 square feet of office space in San Diego, California leased through March 2002 and 1,100 square feet of telecommunications switching space located in Los Angeles, California leased through January 2003. The Company believes that the material terms of its leases are commercially reasonable terms typically found in each of the respective areas in which the Company leases space. The Company believes that its facilities are adequate to support its current needs and that additional facilities will be available at competitive rates as needed. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders in the fourth quarter of 2000. 7 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET AND PRICES The Company is listed on the NASDAQ National Market System, moving from the NASDAQ OTC Bulletin Board in April 2000. 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, 2000 First Quarter............................................ $43.50 $15.25 Second Quarter........................................... 27.00 9.25 Third Quarter............................................ 15.75 9.63 Fourth Quarter........................................... 11.50 5.00 Year Ended December 31, 1999 First Quarter............................................ $ 4.63 $ 3.31 Second Quarter........................................... 4.63 3.25 Third Quarter............................................ 4.97 2.88 Fourth Quarter........................................... 18.00 4.25
On March 15, 2001, the last reported sale price of common stock was $8.13 per share. As of March 15, 2001, the Company had approximately 2,064 stockholders of record. DIVIDEND POLICY AND RESTRICTIONS ON DIVIDEND PAYMENTS The Company intends to continue its policy of retaining all earnings for reinvestment in the business operations of the Company. Under Delaware law, the Company's Board of Directors may declare and pay dividends on its outstanding shares in cash or property only out of the unreserved and unrestricted earned surplus. Delaware law prohibits the Company from paying cash dividends except to the extent that the Company has net profits in any fiscal year or the preceding fiscal year. There were no accumulated dividends as of December 31, 2000. 8 11 ITEM 6. SELECTED FINANCIAL DATA The historical operating results data, per share data and balance sheet data set forth below are derived from the historical financial statements of the Company, certain of which have been restated to reflect the ACS Systems, Inc. acquisition and the related reverse merger accounting treatment (See note 1 of notes to consolidated financial statements). The balance sheet data includes the accounts of ACS and LDExchange as of December 31, 2000, 1999 and 1998; and only the accounts of ACS as of December 31, 1997 and 1996. Operating results and per share data for the years ended December 31, 2000 and December 31, 1999 include the results of operations for ACS and LDExchange for the entire year and the results of operations of the postage meter and scale division for a short period in early 1999 until the operations were ceased. Operating results and per share data for the year ended December 31, 1998 include the results of operations for ACS for the year ended December 31, 1998, the results of operations for the postage scale and meter division for the period May 14, 1998 through December 31, 1998 and the results of operations for LDExchange for the period November 17, 1998 through December 31, 1998. Operating results and per share data for the years ended December 31, 1997 and 1996, include only the results of operations of ACS for the years then ended. Consolidated balance sheets at December 31, 2000 and 1999 and consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998, 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, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- OPERATING RESULTS DATA: Hardware, software and maintenance revenues............................... $14,566,478 $15,506,386 $16,248,425 $10,232,371 $ 6,422,557 Service and consulting revenues.......... 54,397,481 14,286,972 7,933,084 2,728,449 449,043 Telecommunication service revenues....... 44,277,645 65,293,493 9,834,555 862,814 -- ----------- ----------- ----------- ----------- ----------- Total revenues................. 113,241,604 95,086,851 34,016,064 13,823,634 6,871,600 ----------- ----------- ----------- ----------- ----------- Hardware, software and maintenance cost of sales............................... 6,879,179 14,029,205 15,893,689 8,452,283 5,323,851 Service and consulting cost of sales..... 34,859,301 4,744,703 4,157,756 1,941,502 1,163,715 Telecommunication service cost of sales.................................. 46,214,903 59,007,262 8,670,138 587,905 -- ----------- ----------- ----------- ----------- ----------- Total cost of sales............ 87,953,383 77,781,170 28,721,583 10,981,690 6,487,566 ----------- ----------- ----------- ----------- ----------- Gross profit................... 25,288,221 17,305,681 5,294,481 2,841,944 384,034 Selling, general and administrative...... 19,140,008 20,035,755 8,949,646 2,984,812 1,513,319 ----------- ----------- ----------- ----------- ----------- Operating income (loss)........ 6,148,213 (2,730,074) (3,655,165) (142,868) (1,129,285) ----------- ----------- ----------- ----------- ----------- Amortization of goodwill................. (2,459,526) (2,456,902) (522,450) (146,329) -- Joint venture loss....................... (578,045) (42,189) -- -- -- Interest income (expense), net........... (1,090,679) (1,913,274) (666,788) 15,130 6,675 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes........................ 2,019,963 (7,142,439) (4,844,403) (274,067) (1,122,610) Income tax expense (benefit)............. 26,618 4,000 2,400 (64,126) (417,747) ----------- ----------- ----------- ----------- ----------- Net income (loss).............. $ 1,993,345 $(7,146,439) $(4,846,803) $ (209,941) $ (704,863) =========== =========== =========== =========== =========== PER SHARE DATA: Income (loss) per share-basic............ $ .15 $ (.92) $ (.81) $ (.05) $ (.15) Income (loss) per share-diluted.......... $ .14 $ (.92) $ (.81) $ (.05) $ (.15) Number of shares used in per share computations-basic..................... 13,003,483 7,806,660 5,954,000 4,597,000 4,597,000 Number of shares used in per share computations-diluted................... 14,577,665 7,806,660 5,954,000 4,597,000 4,597,000 BALANCE SHEET DATA: Cash and cash equivalents................ $ 5,337,533 $ 1,400,874 $ 914,796 $ 830,784 $ -- Total assets............................. 51,399,549 26,843,114 23,080,061 9,864,129 7,168,200 Amounts and notes payable to affiliates............................. 5,265,408 5,265,408 16,729,411 5,431,417 3,741,380 Total liabilities........................ 33,232,437 14,211,379 22,495,473 7,732,738 4,828,868 Stockholders' equity..................... 18,167,112 12,631,735 584,588 2,131,391 2,341,332
9 12 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
QUARTER ENDED ----------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------- ----------- ------------- ------------ 2000 Revenue............................... $20,539,414 $29,456,423 $28,464,875 $34,780,892 Gross Profit.......................... 3,213,175 5,735,134 6,774,776 9,565,136 Earnings (loss) before income taxes... (1,615,384) 8,197 1,132,092 2,495,058 Net earnings (loss) - basic........... (1,615,384) 8,197 1,132,092 2,468,440 Net earnings (loss) - diluted......... (1,615,384) 8,197 1,132,092 2,468,440 Earnings (loss) per share - basic..... (.13) (.00) .09 .19 Earnings (loss) per share - diluted... (.13) (.00) .08 .18 1999 Revenue............................... $19,312,475 $24,906,487 $27,852,994 $23,014,895 Gross Profit.......................... 2,804,146 3,035,435 4,366,986 7,099,114 Loss before income taxes.............. (1,408,433) (2,183,763) (818,249) (2,731,994) Net loss - basic...................... (1,409,233) (2,186,963) (818,249) (2,731,994) Net loss - diluted.................... (1,409,233) (2,186,963) (818,249) (2,731,994) Loss per share - basic................ (.19) (.29) (.11) (.33) Loss per share - diluted.............. (.19) (.29) (.11) (.33) Gross Profit reported 2000............ $ 4,105,763 $ 6,809,048 $ 8,241,158 $10,723,310 Gross Profit updated 2000............. 3,213,175 5,735,134 6,774,776 9,565,136 Variances(1)........................ (892,588) (1,073,914) (1,466,382) (1,158,174) Gross Profit reported 1999............ $ 3,023,142 $ 3,285,932 $ 4,658,894 $ 7,578,093 Gross Profit updated 1999............. 2,804,146 3,035,435 4,366,986 7,099,114 Variances(1)........................ $ (218,996) $ (250,497) $ (291,908) $ (478,979)
- --------------- (1) Note: Changes in gross profit are due to reclass of depreciation and amortization expense to cost of sales from selling, general and administrative expenses. 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, 2000, 1999 and 1998, as the acquisition of ACS Systems, Inc. has been accounted for as a reverse merger. The 2000 and 1999 results of operations also include the results of LDExchange for the entire year and the results of operations of the postage meter and scale division for a short period in early 1999. The results of operations for the year ended December 31, 1998, include, in addition to the ACS results of operations for the entire year, the results of operations of the postage meter and scale division for the period from May 14, 1998 through December 31, 1998 and the results of operations of LDExchange for the period November 17, 1998 through December 31, 1998. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere herein. OVERVIEW During the year ended December 31, 1997 the Company's operations consisted of the operations of ACS Systems, Inc., formerly a wholly-owned subsidiary of FNFI. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described in note 1 of the notes to consolidated financial statements. During 2000, 1999 and 1998, 60%, 29%, and 66%, respectively, of the total Company's revenue was derived from multiple servicing arrangements between FNFI and its subsidiaries and ACS. 10 13 The reverse merger with Micro General Corporation in May 1998, added a postage meter and scale division, which was de-emphasized as a product concurrent with the ACS merger. The acquisition of LDExchange in November 1998 added to the Company's revenues a multinational telecommunications carrier focused primarily on the international long distance market. ACS remained the primary business unit during 2000, however, subsequent to year end, ACS was merged into Micro General and no longer operates as a separate subsidiary. The Company's primary operations are focused on providing production and workflow software systems to the title and real estate industries. The Company also provides managed application services, application development and integration, network, data and infrastructure management and information technology outsourcing. It also derives revenue from consulting services and telecommunication services. COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999 Revenue Revenues increased $18.1 million, or 19%, to $113.2 million from $95.1 million in 1999. While telecommunication services revenue declined $21.0 million, service and consulting revenue climbed $40.1 million to $54.4 million from $14.3 million. The increase in service and consulting revenues can be attributed to the additional business that has been directed to the Company by FNFI as a result of its Chicago Title acquisition and the substantial NGS development effort that began in the last half of 2000. In April 2000, the Company hired approximately 150 former Chicago Title information technology employees, and at the same time entered into an agreement to provide information technology services to FNFI/Chicago Title. Hardware, software and maintenance revenue fell $940,000 to $14.6 million from $15.5 million in the prior year. In 2000, FNFI continued to utilize the Company's technological expertise and expanded its commitment to state of the art technology and processes and remains a major source of the Company's revenue (See notes 1(a) and 6 to notes to consolidated financial statements). The decrease in telecommunication services revenues in the Company's subsidiary LDExchange resulted from the loss of several international telecommunication services arrangements combined with the decision to decrease the amount of certain low margin international traffic. Gross Profit Gross profit increased by $8.0 million to $25.3 million, or 46%, from $17.3 million and represents a gross profit margin of 22%. This compares to a gross profit margin of 18% in 1999. Gross profit in hardware, software, and maintenance revenues increased significantly from 2000 compared with 1999 primarily due to a reduction in lower margin hardware, software sales coupled with a substantial increase in higher margin maintenance contract revenue. The increase in total gross profit and gross profit margin as a percentage of revenue resulted from an increase in the number of maintenance contracts with FNFI, an increase in higher margin services and consulting due to NGS development work, and a decrease in lower margin telecommunication service revenues. Service and consulting revenues contributed approximately $19.5 million in gross profit due primarily to the development of the NGS project. These activities offset the negative gross margin generated by the telecommunication services. This resulted from the continued narrowing of profit margins in the international telecommunications market combined with the Company's expensing of certain equipment and other related costs associated with the non-recovery of these assets in various foreign countries. Expenses Selling, general and administrative expenses ("SG&A") remained essentially flat at $19.1 million from $20 million in 1999 despite the increase in revenue. SG&A expenses generally trend consistently with revenues. However, the 150 employees that were hired in April 2000 to support Chicago Title were all revenue producing personnel. Since this substantial increase in personnel expense is reflected in cost of sales and did not increase SG&A expenses, the 2000 results show that SG&A expenses were 17% of total revenues while SG&A expenses in 1999 were 21% of total revenues. Total employee count increased by 176 when comparing December 31, 2000 with December 31, 1999. 11 14 The amortization of goodwill 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 goodwill 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 working capital, which is in the form of available cash and lines of credit. The decrease in interest expense to $1.1 million, or $822,000 from $1.9 million can be attributed to FNFI's conversion of $18 million of debt to equity on December 15, 1999. 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. Historically, the Company has paid only minimum taxes based on operating results due to the fact that Micro General has not historically generated taxable earnings. The Company has a net operating loss carryforward of $10.2 million (see note 3 in notes to consolidated financial statements). COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Revenue Revenues increased $61.1 million, or 180%, to $95.1 million in 1999 from $34.0 million in 1998. ACS contributed $8.6 million of the increase while LDExchange contributed $52.4 million of the increase. The LDExchange revenue growth resulted from its acquisition on November 17, 1998, which produced a full year of LDExchange operations in 1999 as compared to one and one-half months of results in 1998. ACS experienced growth in all forms of revenue during 1999. FNFI is ACS's major source of revenue. See notes 1(a) and 6 to notes to consolidated financial statements. In 1999, FNFI continued to utilize ACS's technological expertise and expanded its commitment to state of the art technology and processes, and continued to increase the installation and upgrade of its various information technology systems, with ACS as the primary vendor. During 1999, the Company was also able to increase the level of products and services provided to non-affiliates, primarily in telecommunications services. Gross Profit Gross profit increased $12.0 million, or 227%, to $17.3 million, representing a gross profit margin of 18%, in 1999, from $5.3 million and a gross profit margin of 16% in 1998. The increase in total gross profit and gross profit margin as a percentage of revenue results from the substantial increase in total revenues. There was a substantial increase in gross profits on hardware, software and maintenance sales, as gross profit as a percentage of revenue increased to 10% in 1999 from 2% in 1998. This results from the transition in 1999 from the low margin postage meter and scale business and into the technology hardware and software business. Offsetting this improvement was the additional $52.4 million of LDExchange international telecommunications revenue in 1999, which revenue has substantially lower margins than the ACS products and service revenues. Expenses Selling, general and administrative expenses ("S,G&A") increased $11.1 million, or 124%, to $20.0 million in 1999 from $8.9 million in 1998. The LDExchange business is not labor intensive, as such, significant growth in the LDExchange telecommunications revenues does not require a corresponding significant increase in personnel. The ACS SG&A expenses generally trend consistently with revenues. This is because increases in product and service revenues cause a corresponding increase in personnel expenses. This is reflected in the fact that SG&A expenses in 1999 were 21% of total revenues while SG&A expenses in 1998 were 26% of total revenues. Total employee count was increased by 20 when comparing December 31, 1999 with December 31, 1998. The amortization of goodwill 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 goodwill result from the amount, mix and characteristics of the intangible assets recorded as well as the 12 15 circumstances surrounding the Company's estimate of the appropriate useful life. The substantial increase in amortization in 1999 is due to the goodwill created in the Micro General and ACS merger on May 14, 1998, which resulted in approximately seven and one-half months of amortization in 1998 versus 12 months of amortization in 1999, and also the goodwill from the LDExchange acquisition on November 17, 1998, which resulted in approximately one and one-half months amortization in 1998 versus twelve months amortization in 1999. Interest income (expense), net, is related to the use of the Company's available working capital, which is in the form of available cash and lines of credit. The year over year fluctuation in interest income (expense) can be attributed to the increase in average borrowings outstanding during 1999 compared to previous years. In 1999, interest expense was $1.9 million, an increase of $1.2 million or 187% over the interest expense of $667,000 in 1998. The increase in 1999 is related to debt assumed in the Micro General/ACS merger on May 14, 1998 and also to borrowings under the $15 million convertible note that the Company entered into on October 27, 1998. While notes and leases payable decreased from $16.7 million at December 31, 1998 to $5.3 million at December 31, 1999, there were an additional $18 million in notes that were outstanding for most of 1999 which were converted into shares of the Company's common stock on December 15, 1999. Income tax expense (benefit) is recorded based on the amounts that the Company estimates, based on the Company's taxation structure, will be due to federal and state taxation authorities. During 1997, ACS was included in the FNFI consolidated tax returns and income tax expense (benefit) was calculated as such. During 1999 and 1998, ACS was included in the Micro General consolidated group, which pays only minimum taxes based on current operating results due to the fact that Micro General has not historically generated earnings. LIQUIDITY AND CAPITAL RESOURCES The Company's current cash requirements include debt service, personnel and other operating expenses, capital expenditures and capital for acquisitions and expansion. Internally generated funds fluctuate in a pattern generally consistent with revenues. Since the Company has repositioned itself as a result of the merger with ACS Systems, Inc. and the acquisition of LDExchange, the revenue, and therefore, cash flow base has stabilized. In addition, in the year ended December 31, 2000, the Company reported a profit of $2 million as opposed to a loss of $7.1 million in the previous year. The Company believes that as a result of its current revenue base, improved profitability, increased margins and the anticipated availability of funds in the form of existing lines of credit, all cash requirements will be met for at least the next twelve months. The Company experienced positive cash flow from operations for the first time since its merger with ACS. The Company had historically suffered losses and negative cash flows from operations, and had relied on FNFI as the primary source of capital to fund its operations in the form of revenues generated by the Company related to products and services provided to FNFI. FNFI had also been a source of funds via available financing arrangements and is a guarantor of certain of the Company's lending arrangements. In December 1999, three significant transactions occurred that substantially improved both the Company's liquidity and its capital resources. First, on December 15, 1999, $18.0 million of the Company's debt was converted into common stock pursuant to a conversion election contained in the notes and exercised by the note holders. The conversion of this debt caused an improvement from a negative stockholders' equity to $12.6 million in stockholders' equity at December 31, 1999. The conversion of this debt also substantially reduced the Company's debt service requirements in 2000. Second, also on December 15, 1999, the Company entered into a new $5.3 million five-year convertible note with FNFI. During 1999, the Company had exceeded the borrowings available under the FNFI note agreement. With the conversion of the $18.0 million of notes on December 15, 1999, the Company's borrowing arrangements no longer existed. The Company negotiated this new note to address the amounts borrowed in excess of the note limit. There are no other borrowings available or contemplated between the Company and FNFI. Also, on December 22, 1999, the Company entered into a one-year $5.0 million revolving line of credit with Imperial Bank guaranteed by FNFI. As of December 31, 2000 the Company has borrowed $2.5 million under this line of credit. The Imperial Bank revolving line of credit has been extended through July 1, 2001. In addition, the Company has 13 16 entered into a number of note financing arrangements with IBM Global Credit totaling $4.2 million as of December 31, 2000 which provided funding for the hardware and software requirements for the Company's new data center. The Company has also secured a $1.3 million note from GE Capital in the first quarter 2001. The Company must comply with certain affirmative and negative covenants related to its outstanding debt and notes payable. The Company was in compliance with these covenants at December 31, 2000. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was effective for all fiscal quarters for fiscal years beginning after June 15, 1999. In August 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133" ("SFAS 137"), which defers the effective date of SFAS 133 to all fiscal quarters for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133". SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. The application of these statements did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and in March 2000, the SEC staff issued Staff Accounting Bulletin No. 101A "Implementation Issues related to SAB 101." In addition, in October 2000, the SEC staff issued a document containing answers to certain frequently asked questions ("FAQ") which further clarified certain accounting issues addressed in the bulletins relating to revenue recognition. These bulletins summarize certain of the staff's views about applying generally accepted accounting principles to revenue recognition in financial statements. The staff is providing this guidance due, in part, to the large number of revenue recognition issues that registrants encounter. The provisions of these pronouncements were effective commencing in the fourth quarter of 2000. The implementation of these bulletins did not have any impact on the Company's financial condition or results of operations. In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies the definition of an employee for purposes of applying Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. SEASONALITY AND INFLATION The effects of seasonality and inflation on consolidated operating results have, historically, been insignificant. RECENT DEVELOPMENTS On May 5, 2000, the Company agreed to sell its LDExchange subsidiary. The Company had received all of the necessary regulatory approvals and had complied with all conditions to the purchase agreement but the purchaser was unable to complete the purchase. On December 20, 2000, the Company agreed to terminate the purchase agreement and the purchaser paid $1,050,000 to the Company for agreeing to terminate the purchase agreement and in compensation for expenses made in connection with the expected transaction. In connection 14 17 with the termination, the Company wrote off approximately $640,000 of prepaid expenses and capital equipment in foreign locations in which the Company no longer does business, and which equipment was purchased for the benefit of the potential acquirer and is no longer recoverable. Additionally, the Company absorbed other expenses incurred solely for the benefit of the acquirer in connection with these activities. Since the merger in May 1998 between ACS and Micro General, ACS had continued to operate as a wholly owned subsidiary. On December 31, 2000, ACS was merged into the Company and no longer operates as a subsidiary company or reports as an independent company. The Company accounts for its interest in RealEC Technologies using the modified equity accounting method, which on December 31, 2000, caused the Company to reserve a $1.3 million advance to RealEC Technologies, which was the entire amount owed to the Company at that date. The Company has continued to advance funds to RealEC Technologies and through March 15, 2001 had advanced an additional $1.2 million, which has been reserved in the Company's first quarter 2001 financial results. RealEC Technologies has retained an investment banker to raise $4 - $8 million. This is expected to be sufficient to repay funds advanced by Micro General and also to fund Real EC Technologies until its operations become profitable. When RealEC Technologies has successfully completed this funding and the advances have been repaid to Micro General, the Company will be able to recognize a substantial benefit by eliminating the reserve against these advances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's consolidated balance sheets include liabilities whose fair values are subject to market risks. The following sections address the significant market risks associated with the Company's financial activities as of year end 2000. Market Risk Exposures The following discussion about our market risk disclosures contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. We are exposed to market risk related to changes in interest rates. We do not have derivative financial instruments for hedging, speculative or trading purposes. Interest Rate Risk The Company's borrowings are subject to interest rate risk. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. Caution should be used in evaluating the Company's overall market risk from the information below. 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, 2000 as the interest rates paid approximate the market value of borrowings of a similar nature. The hypothetical effects of changes in market rates or prices on the fair values of financial instruments, which relate to the Company's line of credit, would be an increase (decrease) of the fair value approximately $25,000, if interest rates increased (decreased) 100 basis points. 15 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MICRO GENERAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL INFORMATION
PAGE NO. ---- Independent Auditors' Report................................ 17 Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................... 18 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.......................... 19 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.............. 20 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......................... 21 Notes to Consolidated Financial Statements.................. 22 Schedule II -- Valuation and Qualifying Accounts and Reserves.................................................. 43
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. 16 19 INDEPENDENT AUDITORS' REPORT Board of Directors Micro General Corporation: We have audited the consolidated financial statements of Micro General Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 February 13, 2001 17 20 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 ASSETS
2000 1999 ------------ ------------ Current assets: Cash and cash equivalents................................. $ 5,337,553 $ 1,400,874 Trade accounts receivable, less allowance for doubtful accounts of $1,394,555 in 2000 and $2,265,601 in 1999... 2,853,971 3,391,824 Trade accounts receivable due from affiliates............. 14,033,919 3,020,908 Inventories............................................... -- 438,728 Prepaid expenses and other assets......................... 3,276,205 1,594,600 ------------ ------------ Total current assets............................... 25,501,648 9,846,934 Property and equipment, net................................. 17,462,272 7,038,858 Capitalized software development costs, less accumulated amortization of $4,288,535 in 2000 and $3,540,854 in 1999...................................................... -- 747,680 Goodwill, less accumulated amortization of $5,789,224 in 2000 and $3,329,898 in 1999............................... 6,774,736 8,570,704 Investments................................................. 1,660,893 638,938 ------------ ------------ $ 51,399,549 $ 26,843,114 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................... $ 15,038,673 $ 5,796,031 Income and other taxes payable............................ 1,311,966 252,545 Deferred tax liabilities.................................. 361,726 361,726 Deferred revenue.......................................... 612,955 167,000 Other current liabilities................................. 374,315 -- Current portion of notes payable.......................... 4,804,734 -- Current portion of capital leases with affiliate.......... 406,550 387,765 ------------ ------------ Total current liabilities.......................... 22,910,919 6,965,067 Capital leases with affiliate............................... 1,407,257 1,834,837 Deferred revenue............................................ 1,569,478 -- Notes payable............................................... 1,933,308 -- Amounts and notes payable to affiliates..................... 5,265,408 5,265,408 Other long term liabilities................................. 146,067 146,067 ------------ ------------ Total liabilities.................................. 33,232,437 14,211,379 ------------ ------------ Commitments and contingencies............................... Subsequent events........................................... Stockholders' equity: Preferred stock, $.05 par value. Authorized 1,000,000 shares; none issued and outstanding..................... -- -- Common stock, $.05 par value. Authorized 20,000,000 shares; issued and outstanding 13,222,553 and 12,535,638 shares at December 31, 2000 and 1999, respectively...... 661,128 626,782 Additional paid-in capital................................ 28,809,431 25,301,745 Accumulated deficiency.................................... (11,303,447) (13,296,792) ------------ ------------ Total stockholders' equity......................... 18,167,112 12,631,735 ------------ ------------ $ 51,399,549 $ 26,843,114 ============ ============
See accompanying notes to consolidated financial statements. 18 21 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 ------------ ----------- ----------- Hardware, software and maintenance revenues........ $ 14,566,478 $15,506,386 $16,248,425 Service and consulting revenues.................... 54,397,481 14,286,972 7,933,084 Telecommunication service revenues................. 44,277,645 65,293,493 9,834,555 ------------ ----------- ----------- Total revenues (related party revenues, see note 6)............................ 113,241,604 95,086,851 34,016,064 ------------ ----------- ----------- Hardware, software and maintenance cost of sales... 6,879,179 14,029,205 15,893,689 Service and consulting cost of sales............... 34,859,301 4,744,703 4,157,756 Telecommunication service cost of sales............ 46,214,903 59,007,262 8,670,138 ------------ ----------- ----------- Total cost of sales...................... 87,953,383 77,781,170 28,721,583 ------------ ----------- ----------- Gross profit............................. 25,288,221 17,305,681 5,294,481 ------------ ----------- ----------- Selling, general and administrative.............. 19,140,008 20,035,755 8,949,646 ------------ ----------- ----------- Operating income (loss)....................... 6,148,213 (2,730,074) (3,655,165) Amortization of goodwill......................... (2,459,526) (2,456,902) (522,450) Joint venture loss............................... (578,045) (42,189) -- Interest income (expense), net................... (1,090,679) (1,913,274) (666,788) ------------ ----------- ----------- Income (loss) before income taxes............. 2,019,963 (7,142,439) (4,844,403) Income tax expense................................. 26,618 4,000 2,400 ------------ ----------- ----------- Net income (loss)........................ $ 1,993,345 $(7,146,439) $(4,846,803) ============ =========== =========== Income (loss) per share -- basic................... $ .15 $ (.92) $ (.81) ============ =========== =========== Income (loss) per share -- diluted................. $ .14 $ (.92) $ (.81) ============ =========== =========== Number of shares used in per share computations Basic............................................ 13,003,483 7,806,660 5,954,000 ============ =========== =========== Diluted.......................................... 14,577,665 7,806,660 5,954,000 ============ =========== ===========
See accompanying notes to consolidated financial statements. 19 22 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
COMMON STOCK ADDITIONAL TOTAL --------------------- PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIENCY EQUITY ---------- -------- ----------- ------------ ------------- BALANCE AT DECEMBER 31, 1997 (RESTATED)...................... 6,546,666 $327,333 $ 3,107,608 $ (1,303,550) $ 2,131,391 Equity issued in connection with merger (note 1)................. -- -- 1,300,000 -- 1,300,000 Shares issued to acquire LDExchange.com, Inc............. 1,000,000 50,000 1,950,000 -- 2,000,000 Net loss.......................... -- -- -- (4,846,803) (4,846,803) ---------- -------- ----------- ------------ ----------- BALANCE AT DECEMBER 31, 1998...... 7,546,666 377,333 6,357,608 (6,150,353) 584,588 Note conversion................... 4,677,771 233,889 18,046,111 -- 18,280,000 Acquisition of Interactive Associates...................... 50,000 2,500 191,500 -- 194,000 Shares issued in connection with employee stock purchase plan.... 50,000 2,500 117,766 -- 120,266 Stock options exercised........... 211,201 10,560 588,760 -- 599,320 Net loss.......................... -- -- -- (7,146,439) (7,146,439) ---------- -------- ----------- ------------ ----------- BALANCE AT DECEMBER 31, 1999...... 12,535,638 626,782 25,301,745 (13,296,792) 12,631,735 Stock options exercised........... 577,477 28,875 2,095,832 -- 2,124,707 Warrants exercised................ 48,529 2,426 -- -- 2,426 Contributions in connection with the employee stock purchase plan............................ -- -- 288,416 -- 288,416 Earnout payment to Interactive Associates, Inc. for common stock........................... 50,000 2,500 661,058 -- 663,558 Stock issuance in exchange for software purchase............... 10,909 545 104,455 -- 105,000 Compensation expense related to options issued to non-employees................... -- -- 357,925 -- 357,925 Net income........................ -- -- -- 1,993,345 1,993,345 ---------- -------- ----------- ------------ ----------- BALANCE AT DECEMBER 31, 2000...... 13,222,553 $661,128 $28,809,431 $(11,303,447) $18,167,112 ========== ======== =========== ============ ===========
See accompanying notes to consolidated financial statements. 20 23 MICRO GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,993,345 $(7,146,439) $(4,846,803) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 6,205,518 4,311,690 1,423,959 Loss on disposal of property and equipment.............. 621,293 -- -- Provision for doubtful accounts......................... 1,554,265 2,258,585 247,437 Losses in joint venture................................. 578,045 42,189 -- Exercise of warrants.................................... 2,426 -- -- Compensation expense -- options granted................. 357,925 -- -- Changes in assets and liabilities: Trade accounts receivable............................... (1,016,412) (3,789,514) (463,207) Inventories............................................. 438,728 158,763 90,745 Prepaid expenses and other assets....................... (1,681,605) (1,234,716) (157,452) Accounts payable and accrued expenses................... 9,616,957 429,717 261,802 Income and other taxes payable.......................... 1,059,421 113,898 85,739 Deferred revenue........................................ 2,054,384 (182,375) 329,789 Other long term liabilities............................. (38,951) 146,067 -- Amounts due from affiliates............................. (11,013,011) 1,329,882 (116,025) ------------ ----------- ----------- Net cash provided by (used in) operating activities........................................ 10,732,328 (3,562,253) (3,144,016) ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition............................................... -- (176,341) -- Joint venture in RealEC................................... (1,450,000) (681,127) -- Purchase of software...................................... (45,000) -- -- Acquisition of LDExchange.com, Inc........................ -- -- 717,000 Merger of Micro General and ACS........................... -- -- 403,175 Purchase of property and equipment........................ (9,491,756) (2,659,634) (2,768,119) Decrease (increase) in notes receivable................... -- 29,850 1,926 Capitalization of software development costs.............. -- -- (64,326) ------------ ----------- ----------- Net cash used in investing activities............... (10,986,756) (3,487,252) (1,710,344) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in borrowings from affiliates................ -- 6,815,997 4,938,372 Capital lease obligations................................. (408,795) -- -- Stock purchase plan....................................... 288,416 -- -- Net pay down on notes payable............................. (313,221) -- -- Net borrowing on the line of credit....................... 2,500,000 -- -- Exercise of stock options................................. 2,124,707 719,586 -- ------------ ----------- ----------- Net cash provided by financing activities........... 4,191,107 7,535,583 4,938,372 ------------ ----------- ----------- Net increase in cash and cash equivalents........... 3,936,679 486,078 84,012 Cash and cash equivalents at beginning of year.............. 1,400,874 914,796 830,784 ------------ ----------- ----------- Cash and cash equivalents at end of year.................... $ 5,337,553 $ 1,400,874 $ 914,796 ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.................................................. 893,219 -- 103,050 Income taxes.............................................. -- 4,000 2,400 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Investment in RealEC Technologies......................... 1,615,893 -- -- Acquisition of Interactive Associates for stock........... -- 194,000 -- Earnout paid to Interactive Associates, Inc. principals with common stock....................................... 663,558 -- -- Acquisition of LDExchange for stock....................... -- -- 2,000,000 Conversion of long-term debt to common stock.............. -- 18,280,000 -- Assets acquired through capital lease..................... -- 2,222,602 -- Note financing of hardware/software....................... 4,551,263 -- --
See accompanying notes to consolidated financial statements. 21 24 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Historically, the operations of Micro General Corporation and subsidiaries ("the Company") consisted of the design, manufacture and sale of computerized parcel shipping systems, postal scales and piece-count scales. These operations were performed through the Company's postage meter and scale division. Following the acquisition of ACS Systems, Inc. ("ACS") in mid-1998, which is described below, 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 the Company 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 the Company's common stock. The transaction was appraised at $1.3 million. Following the merger of the Company 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., the Company has been acquired by FNFI as a majority-owned subsidiary through a merger with ACS, with the Company as the surviving legal entity and ACS as the surviving entity for accounting purposes. As a result, the consolidated financial statements of the Company 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 the Company and to reflect ACS as the acquirer for accounting purposes. The cost of $1.3 million was allocated to the fair value of the assets acquired and liabilities assumed relating to the Company. The results of the Company have been included in the Company's results of operations since the merger on May 14, 1998. At December 31, 2000, FNFI owned 65.7% of the outstanding common stock of the Company (see note 10). ACS was founded in 1985 as a software development company specializing in products for the real estate industry, in particular, escrow software. ACS was acquired by FNFI in April 1994, and was subsequently merged with the Company as described above. The Company is a provider of production and workflow software systems to the title and real estate industries. The Company also provides managed application services, application development and integration, network, data and infrastructure management and information technology outsourcing. The Company generated 60%, 29% and 66% of its revenue during the years ended December 31, 2000, 1999 and 1998, respectively, from multiple servicing arrangements with FNFI and its subsidiaries. In addition, LDExchange has one customer that represents 21% of LDExchange's total revenue (8% of the Company's total revenues). In addition, as a result of the acquisition of LDExchange.com, Inc. ("LDExchange"), which closed on November 17, 1998, the Company has been able to enter the international telecommunications and Internet telephony markets, which complemented the range of services offered by ACS. The LDExchange purchase price was $3.1 million, payable $1.1 million in cash and $2.0 million in Micro General restricted common stock (1,000,000 shares). The acquisition was accounted for as a purchase and the results of operations of LDExchange have been included in the Company's results of operations since November 17, 1998 (see note 10). (b) Principles of Consolidation The accompanying financial statements include the consolidated accounts of the Company and its wholly owned subsidiaries: All significant intercompany transactions and balances have been eliminated in consolidation. 22 25 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (c) Cash and Cash Equivalents Cash and cash equivalents include cash on deposit with banks with original maturities of three months or less. (d) Accounts Receivable The carrying amounts reported in the consolidated balance sheets for accounts receivable approximate their fair value. (e) Inventories Inventories are stated at the lower of cost or market (net realizable value) under the first-in, first-out method of accounting for inventories. (f) Property and Equipment Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over estimated useful lives which range from three to seven years. Amortization of leasehold improvements is charged to expense on a straight-line basis over the shorter of the estimated useful lives of the assets or the term of the underlying lease. (g) Capitalized Software Development Costs Software development costs incurred after the establishment of technological feasibility are capitalized and later amortized using the greater of the straight-line method or based on the estimated revenue distribution over the remaining estimated economic life of the products. Such policy results in the Company amortizing its capitalized software development costs over an estimated economic life of three to seven years. During 2000 and 1999, the Company amortized software development costs of $747,680 and $746,579, 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. Capitalized software development costs were fully amortized as of December 31, 2000. (h) Goodwill Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired company at the date of acquisition. Cost in excess of net assets acquired is amortized on a straight-line basis over 5 years. The Company periodically assesses the recoverability of its cost in excess of net assets acquired based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of cost in excess of net assets acquired has occurred at December 31, 2000 (see note 10). (i) Capital Lease Obligations All capital lease obligations are with affiliates and are recorded at the present value of the minimum lease payments at the beginning of the lease terms. The monthly payments under the leases are allocated between a reduction of the obligation and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the obligation. 23 26 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (j) Revenue Recognition The Company has adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," for the years ended December 31, 2000, 1999 and 1998. 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. Revenue from the sales of hardware and other products is recognized when delivery has occurred, the fee is fixed and determinable and collection of any resulting receivable is probable. Revenue from maintenance, servicing and consulting is recognized as the related services are performed. (k) Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. ("Statement") 109, "Accounting for Income Taxes." Statement 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. (l) Management Estimates The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Earnings Per Share Basic earnings per share is based on the weighted-average number of shares outstanding and excludes any dilutive effects of options and convertible securities. Diluted earnings per share gives effect to assumed conversions of potentially dilutive securities. Shares used in the earnings per share calculations for 1998 are the weighted-average shares of Micro General outstanding during 1998, assuming the shares issued in connection with the merger of ACS and Micro General were outstanding since January 1, 1998. 24 27 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 The schedule below summarizes the elements included in the calculation of basic and diluted earnings (loss) per common share for the years ended December 31, 2000, 1999, 1998. For the years ended December 31, 1999 and 1998, all dilutive securities were excluded from the calculations of diluted loss per share, as their effect would have been antidilutive.
YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Net income (loss)........................... $ 1,993,345 $(7,146,439) $(4,846,803) Weighted average shares outstanding: Weighted average shares outstanding - basic.................... 13,003,483 7,806,660 5,954,000 Dilutive securities....................... 1,574,182 0 0 ----------- ----------- ----------- Weighted average shares outstanding - diluted.................. 14,577,665 7,806,660 5,954,000 =========== =========== =========== Earnings (loss) per common share: Basic..................................... $ .15 $ (.92) $ (.81) =========== =========== =========== Diluted................................... $ .14 $ (.92) $ (.81) =========== =========== ===========
(n) Reclassifications Certain prior year's amounts have been reclassified to conform to current year presentation. (o) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was effective for all fiscal quarters for fiscal years beginning after June 15, 1999. In August 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133" ("SFAS 137"), which defers the effective date of SFAS 133 to all fiscal quarters for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133". SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. The application of these statements did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and in March 2000, the SEC staff issued Staff Accounting Bulletin No. 101A "Implementation Issues related to SAB 101." In addition, in October 2000, the SEC staff issued a document containing answers to certain frequently asked questions ("FAQ") which further clarified certain accounting issues addressed in the bulletins relating to revenue recognition. These bulletins summarize certain of the staff's views about applying generally accepted accounting principles to revenue recognition in financial statements. The staff is providing this guidance due, in part, to the large number of revenue recognition issues that registrants encounter. The provisions of these pronouncements were effective commencing in the fourth quarter of 2000. The implementation of these bulletins did not have a material impact on the Company's financial condition or results of operations. In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies 25 28 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 the definition of an employee for purposes of applying Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. (2) INVENTORIES A summary of inventories, net, follows:
2000 1999 -------- -------- Computer equipment..................................... $ -- $313,221 Telecommunications equipment........................... -- 125,507 -------- -------- $ -- $438,728 ======== ========
As of 12/31/2000, the Company had $311,689 of inventory which was fully reserved. (3) INCOME TAXES The income tax provision (benefit) for the years ended December 31, 2000, 1999 and 1998 consists of the following:
2000 1999 1998 ------- ------ ------ Current: Federal............................................... $ -- $ -- $ -- State................................................. 26,618 4,000 2,400 ------- ------ ------ 26,618 4,000 2,400 ------- ------ ------ Deferred: Federal............................................... -- -- -- State................................................. -- -- -- ------- ------ ------ -- -- -- ------- ------ ------ $26,618 $4,000 $2,400 ======= ====== ======
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:
2000 1999 1998 ----------- ----------- ----------- Computed "expected" tax expense (benefit)... $ 677,740 $(2,429,789) $(1,647,097) State taxes, net of Federal income tax benefit................................... 123,754 (277,273) (62,681) Amortization of cost in excess of net assets acquired.................................. 828,690 835,347 177,633 Nondeductible expenses...................... 8,343 21,126 29,505 Net operating loss utilized by affiliated group..................................... 274,107 260,304 781,366 Valuation allowance......................... (1,886,016) 1,594,285 723,674 ----------- ----------- ----------- $ 26,618 $ 4,000 $ 2,400 =========== =========== ===========
26 29 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 The deferred tax assets and liabilities at December 31, 2000 consist of the following:
DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- Deferred Tax Assets: Net operating loss carryover.................... $ 3,522,276 $ 2,165,073 Reserve for notes receivable.................... 1,773,258 1,792,548 Book over tax provision for bad debts........... 1,051,033 902,489 Reserves and accruals not recognized for income tax purposes................................. 850,357 394,002 Other assets.................................... 223,416 111,536 ----------- ----------- 7,420,340 5,365,648 Less: Valuation allowance....................... (3,220,512) (5,106,525) ----------- ----------- Total deferred tax assets............... 4,199,828 259,123 Deferred Tax Liabilities Stock option exercises.......................... 4,536,534 412,192 Other Liabilities............................... 25,010 -- Acquired assets adjustment to fair value........ -- 208,657 ----------- ----------- Total deferred tax liabilities.......... 4,561,554 620,849 ----------- ----------- Net deferred tax liability...................... $ (361,726) $ (361,726) =========== ===========
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. For tax years 2000 and 1999, the Company has established a valuation allowance of $3,220,512 and $1,956,416, respectively, principally associated with net operating loss carryforwards and other deferred assets recorded from acquisitions and in 1999 an additional allowance of $3,150,109 to cover the majority of the other deferred tax assets. Any tax benefits subsequently recognized for deferred tax assets related to these acquisitions will be allocated to goodwill. The Company has available for 2000 and 1999, federal net operating loss carryforwards of $10,154,059 and $6,146,828, respectively, expiring in years 2001 to 2020. The Company also has available for 2000 and 1999, state net operating loss carryforwards of $1,292,998 and $1,288,090, respectively, expiring in years 2001 to 2005. 27 30 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (4) PROPERTY AND EQUIPMENT A summary of property and equipment follows:
2000 1999 ----------- ---------- Telecommunications equipment....................... $ 6,260,497 $4,963,018 Computer equipment................................. 11,205,427 810,525 Furniture and fixtures............................. 1,988,816 1,704,635 Office equipment................................... 202,176 197,673 Leasehold improvements............................. 736,018 453,991 Construction in progress........................... 442,509 -- ----------- ---------- 20,825,443 8,129,842 Less accumulated depreciation and amortization..... 3,373,171 1,090,984 ----------- ---------- $17,462,272 $7,038,858 =========== ==========
(5) COMMITMENTS AND CONTINGENCIES (a) Lease Commitments The Company leases facilities and equipment under various leases. Future minimum noncancelable operating and Capital lease commitments, due primarily to affiliates, are as follows:
OPERATING CAPITAL LEASES LEASES ---------- --------- Year ending December 31: 2001................................................. $ 649,241 588,696 2002................................................. 633,189 588,696 2003................................................. 603,049 588,696 2004................................................. 600,661 445,992 2005................................................. 600,661 28,910 Thereafter........................................... 898,680 -- ---------- --------- Total minimum lease payments........................... $3,985,481 2,240,990 Less amount representing interest...................... 427,183 --------- Present value of net minimum capital lease payments............................... 1,813,807 Less current portion................................... 406,550 --------- Capital lease obligations, excluding current portion.................................... 1,407,257 =========
Rent expense was $1,884,884, $1,365,634 and $913,059 for the years ended December 31, 2000, 1999 and 1998, respectively. Included in rent expense for 2000, 1999 and 1998 was $1,136,647, $972,332 and $721,515, respectively, paid to affiliates. (b) Litigation The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 28 31 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (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, 2000, 1999 and 1998 are presented in the following table:
2000 1999 1998 ----------- ----------- ----------- Hardware, software and maintenance.......... $13,264,062 $14,549,748 $15,246,008 Service and consulting...................... 52,744,563 12,460,406 6,673,754 Telecommunication service................... 2,484,482 3,719,804 560,280 ----------- ----------- ----------- Total affiliated revenues......... $68,493,107 $30,729,958 $22,480,042 =========== =========== ===========
In 1999 and 1998, the Company utilized funds available under the former Convertible Note Purchase Agreement described below to fund its operations. In addition, the Company has long-term amounts and notes payable to affiliates amounting to $5,265,408 at both December 31, 2000 and 1999 (see note 7). The Company also has capital leases payable to affiliates of $1,813,807 and $2,222,602 at December 31, 2000 and 1999, respectively. On October 1, 1999, Micro General entered into an Intellectual Property Transfer Agreement that provided the financing to launch escrow.com as a new company. Under the agreement, the Company sold the escrow.com name and trademark, the escrow.com internet URL, a license for the Micro General proprietary escrow trust accounting software, the Company's computer services provider business unit and approximately $535,000 of related computer equipment. Under the terms of the Intellectual Property Transfer Agreement, the Company received from escrow.com a $4.5 million note with a term of seven years and an accrued interest rate of three percent. The Company also received a warrant giving the Company the right to purchase 15.0 million shares of escrow.com common stock at a price of $0.40 per share. Because of the start-up nature of escrow.com, the Company has fully reserved the $4.5 million note receivable on its consolidated balance sheet. The gain on the sale of assets will be realized at such time that escrow.com has sufficient funding in place to reasonably ensure the payment of the note. In April 2000, escrow.com completed a private placement in which it raised gross proceeds of $30.0 million. As an inducement to invest, the company assigned two of the investors 250,000 of its 15.0 million warrants in escrow.com. As a result of this funding, escrow.com has 10,541,813 shares outstanding as of December 31, 2000. While the Company has no equity interest in escrow.com as of December 31, 2000, the 14.75 million warrants give the Company the opportunity to acquire a substantial interest in escrow.com. Escrow.com is incurring substantial losses and may need to raise additional funds in order to continue its operations. Although escrow.com has raised additional capital, those funds are not to be used for repayment of the $4.5 million note receivable discussed above. Therefore, the note will continue to be fully reserved until such time that escrow.com has sufficient funding in place to reasonably ensure payment of the note. The Company's potential ownership in escrow.com may be substantially diluted if escrow.com issues additional shares to raise the necessary capital. Assuming exercise of the warrants, the Company would have a 58% ownership in escrow.com. On October 8, 1998, the Company formed RealEC. RealEC commenced operations in mid-1999 and was a 50% owned joint venture with Stewart Mortgage Information, a subsidiary of Stewart Information Services Corporation (NYSE:STC). 29 32 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 On May 19, 2000, the Company created TXMNet, Inc. and transferred its 50% ownership of RealEC into the new entity along with certain other intellectual property in exchange for 6,650,000 shares of convertible, non-voting preferred stock. On December 31, 2000, Stewart Mortgage Information exchanged its 50% ownership position in RealEC for 2,935,000 shares of convertible non-voting preferred stock in TXMNet, Inc. TXMNet, Inc. changed its name to RealEC Technologies, Inc. in February 2001. The Company has accounted for the approximately $1.3 million advanced in 2000 using the modified equity accounting method, and had, as of December 31, 2000, fully reserved this receivable. The reserve will be reversed at such time that RealEC Technologies has sufficient funding to repay all amounts advanced to it by the Company and to conduct its operations without financial support from the Company. As of December 31, 2000, RealEC Technologies had 10,835,000 shares outstanding. On a fully diluted basis, the Company has a 62% ownership in RealEC Technologies, Stewart Title Corporation has a 27% ownership, and the remaining 11% ownership is by other investors. (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 issued, respectively, to Cal West Service Corporation ("Cal West"), a subsidiary of FNFI, which owned 38% of the outstanding Micro General common stock when the Cal West note was issued and Dito Caree L.P. Holding ("Dito Caree"), which owned 5% of the outstanding common stock of Micro General when the Dito Caree note was issued. Repayment of the notes was on an interest-only basis for the first two years, with principal and interest payments for the remaining three years of the term. The debt, secured by the assets of Micro General, was convertible into 1,344,438 shares of the Company's common stock at prices ranging from $2.00 to $2.50 per share. At December 31, 1998, there was $3,000,000 outstanding on these notes. These notes were converted to common stock on December 15, 1999. On November 25, 1997, Micro General entered into a $600,000 financing agreement, which provided additional funding to be used by Micro General for operating cash flow purposes. Two 9.0% notes were issued in the amount of $200,000 and $400,000, to Cal West and Dito Caree, respectively. Interest on the two notes was to be paid quarterly. The Company had the right to prepay all or a portion of the interest and principal due on the notes at any time prior to the original due date of May 31, 1998. The amount payable under the note payable to Dito Caree was refinanced in connection with the Convertible Note Purchase Agreement discussed below. In conjunction with these short-term notes, Micro General issued to the note holders, two detachable warrant certificates, one in the amount of 50,000 shares to Cal West and one in the amount of 100,000 shares to Dito Caree, giving the note holders the right to purchase 150,000 shares of the Company's common stock at $1.50 per share. The warrants can be exercised at any time between November 25, 1997 and November 25, 2002. No warrants have been exercised by the holders. The outstanding amount on this note at December 31, 1998 was $2,000,000. This note was converted into equity in 1999 as described below. 30 33 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Micro General entered into a third financing agreement to provide additional funding to be used by Micro General for operational cash flow purposes. On April 8, 1998, two 9.0% notes were issued, one in the amount of $250,000 and one in the amount of $500,000, to Cal West Service Corporation and Dito Caree, respectively. Interest on the notes was to be paid quarterly. Micro General had the right to prepay all or a portion of the interest and principal due on the notes at any time prior to the due date of October 31, 1998. The amount payable under the note payable to Dito Caree was refinanced in connection with the Convertible Note Purchase Agreement discussed below. In conjunction with the notes, Micro General issued to the note holders, two detachable warrant certificates, one in the amount of 62,500 shares to Cal West and one in the amount of 125,000 shares to Dito Caree, giving the note holders the right to purchase 187,500 shares of the Company's common stock at $1.50 per share. The warrants can be exercised at any time between April 8, 1998 and April 8, 2003. The amount outstanding at December 31, 1998 was $250,000. These notes were converted into equity in 1999 as described below. On October 27, 1998, the Company entered into a $15 million Convertible Note Purchase Agreement with FNFI, which replaced a $5 million financing agreement between the Company and a subsidiary of FNFI dated May 14, 1998, entered into in connection with the merger with ACS. Two 10.0%, five-year convertible notes were issued, one in the amount of $14.1 million and one in the amount of $900,000, held by Cal West and Dito Caree, respectively. Interest on these notes was to be paid quarterly. The entire unpaid balance of the notes, including principal and accrued but unpaid interest, was due and payable on October 27, 2003. The note holders had the right to convert all or a portion of the principal to be repaid on the payment date into shares of the Company's common stock at the conversion price. The debt was secured by the assets of the Company and was convertible into 3,133,333 shares of the Company's $.05 par value common stock at a price of $4.50 per share. The note holders retained the right to acquire shares until note maturity on October 27, 2003. On December 15, 1999 the holders of $18.0 million of the Company's convertible debt, which was the entire amount of the Company's convertible debt outstanding on that date, exercised their conversion rights and exchanged the debt for newly issued shares of the Company's common stock. There were 4,677,771 shares of common stock issued at an average conversion price of approximately $3.85 per share. Also on December 15, 1999, the Company entered into with FNFI a new $5,265,000 five-year convertible note purchase agreement having an accrued interest rate of ten percent, payable quarterly. During 1999, the Company had exceeded the borrowings available under its notes payable. With conversion of these notes on December 15, 1999, the Company's borrowing arrangements no longer existed. The Company negotiated this new note to address the amounts borrowed in excess of the note limits. The new note is convertible into common shares of the Company at a rate of $10.00 per share at any time during the five-year term. FNFI also received warrants to purchase 250,000 shares of the Company's common stock at a price of $10.00 per share. In 1999, the Company recognized a $280,000 expense in regard to these warrants. On December 22, 1999, the Company entered into a one-year $5.0 million revolving line of credit with Imperial Bank, guaranteed by FNFI. The interest rate under the credit line will be, at the Company's election, either the Imperial Bank Prime Rate or 1.4 percentage points over LIBOR. At December 31, 2000, the Company had $2.5 million borrowed under this line of credit and was not in default of any of the Imperial loan covenants. 31 34 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Between June 9, 2000 and October 30, 2000, the Company entered into four equipment note financing arrangements with IBM Credit Corporation. Financing rates range from 7.437% to 11.30% and terms are 12 months to 36 months. Equipment financed includes both software and hardware purchases. Notes payable as of December 31, 2000 consists of the following:
DECEMBER 31, ------------------------- 2000 1999 ----------- ---------- IBM Credit Corporation financing agreement (9.37% at June 9, 2000), three years.................... $ 1,292,675 $ -- IBM Credit Corporation financing agreement (11.30% at July 31, 2000), one year with first six zero payments......................................... 526,425 -- IBM Credit Corporation financing agreement (9.621% at September 28, 2000), three years.............. 697,328 -- IBM Credit Corporation financing agreement (7.437% at October 30, 2000), two years.................. 1,721,614 -- Imperial Bank, line of credit draw (8.18125% annual), 90 days due February 2001............... 1,000,000 -- Imperial Bank, line of credit draw (8.15063% annual), 90 days due February 2001............... 1,500,000 -- Affiliate five-year convertible note (10% annual interest paid quarterly), due November 2004...... 5,265,408 5,265,408 ----------- ---------- $12,003,450 $5,265,408 =========== ==========
The carrying value of notes payable to affiliates approximates fair value at December 31, 2000 due to the fact that the interest rates paid on the notes payable to affiliates approximate market rates for similar notes. Principal maturities of the notes payable and long-term debt at December 31, 2000 are as follows: 2001.................................................... $ 4,804,734 2002.................................................... 1,469,612 2003.................................................... 463,696 2004.................................................... 5,265,408 2005.................................................... -- ----------- $12,003,450 ===========
(8) SEGMENT INFORMATION The Company's Consolidated Financial Statements as of December 31, 2000 and 1999 and for the years ended December 31, 2000 and 1999 include three reportable segments. Prior to 1998, the Company consisted only of ACS. 32 35 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 As of and for the year ended December 31, 2000:
INTRA-COMPANY ACS LDEXCHANGE CORPORATE ELIMINATIONS TOTAL ----------- ----------- ----------- ------------- ------------ Total revenues................. $68,963,960 $44,277,644 $ -- $113,241,604 Operating income (loss)........ 15,163,463 (6,980,327) (2,034,923) 6,148,213 Joint venture loss............. -- -- (578,045) (578,045) Interest expense, net.......... (847,124) (198,648) (44,907) (1,090,679) Income (loss) before income taxes........................ 14,001,508 (7,178,975) (4,802,570) 2,019,963 Depreciation and amortization................. 1,984,176 2,076,647 2,144,695 6,205,518 Total assets................... $39,173,714 $ 9,781,842 $15,547,348 $(13,103,355) $ 51,399,549
As of and for the year ended December 31, 1999:
INTRA-COMPANY ACS LDEXCHANGE CORPORATE ELIMINATIONS TOTAL ----------- ----------- ----------- ------------- ----------- Total revenues................... $34,489,244 $59,610,796 $ 986,811 $95,086,851 Operating income (loss).......... 1,037,828 (2,472,140) (1,295,762) (2,730,074) Joint venture loss............... (42,189) -- -- (42,189) Interest expense, net............ (1,247,512) (274,590) (391,172) (1,913,274) Income (loss) before income taxes.......................... (544,502) (2,746,730) (3,851,207) (7,142,439) Depreciation and amortization.... 1,705,304 371,122 2,235,264 4,311,690 Total assets..................... $ 6,147,902 $ 8,745,402 $17,389,256 $(5,439,446) $26,843,114
The activities of the three reportable segments include the following: - ACS: A provider of production and workflow software systems to the title and real estate industries, and also provides managed application services, application development and integration, network, data and infrastructure management and information technology outsourcing. In 2000, $66.0 million and in 1999, $27.0 million of the ACS revenues were derived from FNFI. Also provides telecommunications hardware, technical and consulting services, and Internet access and services. - LDExchange: A provider of both retail domestic long distance and wholesale international long distance call completion services. LDExchange had sales of $44.3 million in 2000 and $59.6 million in 1999. In 2000, $9.1 million and in 1999, $25.0 million of the LDExchange revenues were derived from one customer. On May 5, 2000, the Company agreed to sell its LDExchange subsidiary. The Company had received all of the necessary regulatory approvals and had complied with all conditions to the purchase agreement but the purchaser was unable to complete the purchase. On December 20, 2000, the Company agreed to terminate the purchase agreement and the purchaser paid $1,050,000 to the Company for agreeing to terminate the purchase agreement and in compensation for expenses made in connection with the expected transaction. In connection with the termination, the Company wrote off approximately $640,000 of prepaid expenses and capital equipment in foreign locations in which the Company no longer does business, and which equipment was purchased for the benefit of the potential acquirer and is no longer recoverable. Additionally, the Company absorbed other expenses incurred solely for the benefit of the acquirer in connection with these activities. - Corporate: Corporate and the postage meter and scale division, which was deemphasized as a product concurrent with the ACS merger. 33 36 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There were no intersegment sales during the years ended December 31, 2000 and 1999. In 2000, the ACS long-distance telecommunications business was transferred to LDExchange. (9) EMPLOYEE BENEFIT PLANS Employee benefits include an employee stock purchase plan, four stock option plans and a 401(k) plan. In 1998, the Company's Board of Directors approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP, there are 800,000 shares of the Company's common stock available for purchase at current market prices by Company employees who meet certain vesting requirements. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. In 1987, stockholders also approved the adoption of a Stock Option Plan ("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may grant stock options to certain key employees and nonemployee directors or officers. The number of shares issuable under the 1987 Option Plan is 220,000 shares of common stock at not less than fair market value on the date of grant. All options granted become exercisable at the discretion of the Board of Directors and expire five years from the date of grant. Options that lapse or are canceled prior to exercise are added to the shares authorized for future grants. The 1987 Option Plan expired in 1991, but was renewed by stockholders in 1993. There were no remaining shares available for grant at December 31, 2000 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, 2000 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 34 37 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 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 granted under the 1998 Plan or any other stock option plan of the Company that become exercisable for the first time by any optionee during any calendar year may not exceed $100,000. At December 31, 2000, 995,663 shares were available for grant under the 1998 Option Plan. In 2000, no shares were issued under the Plan. In 1999, the Board of Directors approved the adoption of the 1999 Stock Incentive Plan ("1999 Plan"). The 1999 Plan authorizes up to 2,000,000 shares of common stock for issuance under the terms of the 1999 Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1999 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, nonemployee directors and officers, consultants and other service providers. The 1999 Plan will be administered by the Board of Directors or a committee consisting of two or more members of the Board of Directors (the "Administrator"). The Administrator will have the full power and authority to interpret the 1999 Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to grants under the 1999 Plan, and adopt, amend and rescind rules relating to the 1999 Plan. The term of options may not exceed 10 years from the date of grant (5 years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Administrator. The maximum number of shares for which options may be granted to any one person during any one calendar year under the 1999 Plan is 500,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 2,000,000. At December 31, 2000, 127,116 shares were available for grant under the 1999 Option Plan. 35 38 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 A summary of the Company's stock option activity and related information for the years ended December 31, 2000 and 1999 is as follows.
2000 1999 ---------------------- ---------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE --------- --------- --------- --------- Outstanding at beginning of year....... 3,463,096 $ 4.29 1,438,916 $4.35 Granted.............................. 843,000 12.92 2,628,050 4.00 Exercised............................ (577,477) 3.70 (211,201) 2.79 Canceled............................. (282,472) 7.54 (392,669) 4.55 --------- ------ --------- ----- Outstanding at end of year............. 3,446,147 6.40 3,463,096 4.25 ========= ====== ========= ===== Options exercisable at year-end........ 2,406,656 $ 5.30 2,241,143 $4.10 ========= ====== ========= =====
The following table sets forth options outstanding and exercisable by price range at December 31, 2000:
OPTIONS OUTSTANDING - ------------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ----------------------- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES 12/31/00 LIFE PRICE 12/31/00 PRICE - --------------- ----------- ----------- --------- ----------- --------- $ 1.31 - $ 3.63 942,644 8.27 $ 3.48 854,983 $ 3.48 $ 3.88 - $ 4.88 1,641,003 8.37 4.79 1,309,003 4.79 $ 7.88 - $15.56 744,000 9.34 11.84 241,003 14.37 $17.00 - $30.38 118,500 9.14 17.92 1,667 26.25 - --------------- --------- ---- ------ --------- ------ $ 1.31 - $30.38 3,446,147 8.58 $ 6.40 2,406,656 $ 5.30 =============== ========= ==== ====== ========= ======
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"), and related Interpretations in accounting for its employee stock options. As discussed below, in management's opinion, the alternative fair value accounting provided for under Statement 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma information regarding net earnings and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions. The risk-free interest rate used in the calculation is the rate on the date the options were granted. The risk-free interest rate used for options granted during 2000, 36 39 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 1999 and 1998 was 6.5%, 6.35% and 5.7%, respectively. Volatility factors for the expected market price of the common stock of 56%, 53.2% and 50% were used for options granted in 2000, 1999 and 1998, respectively. No dividends are paid by the Company; as a result, its expected dividend yield is 0.0%. A weighted-average expected life of 8.58 years was used in all years for 2000, 9.32 years for 1999, and 7 years for 1998. The Company applies APB Opinion 25 in accounting for its plans, and accordingly, no compensation cost has been recognized for its employee stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings for 2000 would have been reduced and the Company's 1999 net loss would have been increased to the proforma amounts indicated below:
2000 1999 ---------- ------------ Net income (loss): As reported..................................... $1,993,345 $ (7,146,439) Pro forma....................................... (148,099) (10,320,344)
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 has elected to make matching contributions starting in 2001 dependent upon the level of employee contribution. (10) ACQUISITIONS As discussed in note 1, Micro General and ACS merged in May 1998 and LDExchange was acquired in November 1998. The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Micro General/ACS merger were as follows: Tangible assets acquired at fair value...................... $ 305,000 Cost in excess of net assets acquired....................... 5,709,000 Liabilities assumed at fair value........................... (4,717,000) ----------- Total purchase price.............................. $ 1,297,000 ===========
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the LDExchange acquisition were as follows: Tangible assets acquired at fair value...................... $ 1,592,000 Cost in excess of net assets acquired....................... 3,707,000 Liabilities assumed at fair value........................... (2,199,000) ----------- Total purchase price.............................. $ 3,100,000 ===========
Selected unaudited pro forma combined results of operations for the year ended December 31, 1998 assuming the Micro General/ACS merger and LDExchange acquisitions occurred on January 1, 1998, are presented as follows:
YEAR ENDED DECEMBER 31, 1998 ------------ Total revenue............................................... $60,565,000 Net loss.................................................... (5,225,549) Loss per share -- basic and diluted......................... (.69)
37 40 MICRO GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 2000 AND 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 On March 22, 1999, the Company acquired Interactive Associates, Inc., a privately held distributor of computer telephony hardware and services. This acquisition provided for the purchase of 100% of the common stock of Interactive Associates, Inc. in exchange for 50,000 shares of Micro General common stock, subject to certain conditions, including an earn out provision for up to an additional 50,000 shares. The closing price of the Company common stock on March 22, 1999, according to the NASDAQ Bulletin Board, was $3.88. This acquisition was accounted for using the purchase method. The financial position and results of operation of Interactive are not material to the Company. All 50,000 shares in the earnout provision were earned and recorded in 2000. (11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
QUARTER ENDED ----------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------- ----------- ------------- ------------ 2000 Revenue............................... $20,539,414 $29,456,423 $28,464,875 $34,780,892 Gross Profit.......................... 3,213,175 5,735,134 6,774,776 9,565,136 Earnings (loss) before income taxes... (1,615,384) 8,197 1,132,092 2,495,058 Net earnings (loss) - basic........... (1,615,384) 8,197 1,132,092 2,468,440 Net earnings (loss) - diluted......... (1,615,384) 8,197 1,132,092 2,468,440 Earnings (loss) per share - basic..... (.13) (.00) .09 .19 Earnings (loss) per share - diluted... (.13) (.00) .08 .18 1999 Revenue............................... $19,312,475 $24,906,487 $27,852,994 $23,014,895 Gross Profit.......................... 2,804,146 3,035,435 4,366,986 7,099,114 Loss before income taxes.............. (1,408,433) (2,183,763) (818,249) (2,731,994) Net loss - basic...................... (1,409,233) (2,186,963) (818,249) (2,731,994) Net loss - diluted.................... (1,409,233) (2,186,963) (818,249) (2,731,994) Loss per share - basic................ (.19) (.29) (.11) (.33) Loss per share - diluted.............. (.19) (.29) (.11) (.33) Gross Profit reported 2000............ $ 4,105,763 $ 6,809,048 $ 8,241,158 $10,723,310 Gross Profit updated 2000............. 3,213,175 5,735,134 6,774,776 9,565,136 Variances(1)........................ (892,588) (1,073,914) (1,466,382) (1,158,174) Gross Profit reported 1999............ $ 3,023,142 $ 3,285,932 $ 4,658,894 $ 7,578,093 Gross Profit updated 1999............. 2,804,146 3,035,435 4,366,986 7,099,114 Variances(1)........................ $ (218,996) $ (250,497) $ (291,908) $ (478,979)
- --------------- (1) Note: Changes in gross profit are due to reclass of depreciation and amortization expense to cost of sales from selling, general and administrative expenses. 38 41 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, 2000 and 1999. Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules. The following is a list of financial statement schedules filed as part of this annual report on Form 10-K. Schedule II: Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) The following exhibits are incorporated by reference or are set forth on pages to this Form 10-K:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Articles of Incorporation of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 3.11 Restated Articles of Incorporation of the Company -- Article Fourth of the Certificate of Incorporation, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3.2 Bylaws of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 10 Material Contracts 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987, incorporated by reference to Exhibit 10.1 from the Company's Annual Report on Form 10-K for the year 1984; Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987, incorporated by reference to Exhibit 10 from the Company's Annual Report on Form 10-K for the year ended December 28, 1986. 10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, incorporated by reference from Form S-8, registration number 333-64289.
39 42
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1.2 1999 Stock Incentive Plan incorporated by reference from Form S-8, registration number 333-95913. 10.18 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.19 Convertible Note Purchase Agreement between Micro General Corporation and Dito Caree L.P. dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20 Loan Agreement and Agreement to issue Detachable Warrants between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated November 25, 1997, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems, Inc., a California Corporation, a Delaware corporation, Micro General Corporation, a Delaware corporation and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.23 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated October 27, 1998, incorporated by reference from the Company's report on Form 10-K for the year ended December 1998. 10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and among Micro General Corporation, a California corporation, LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and Europa Telecommunications, incorporated by reference from the Company's report on Form 8-K dated as of November 23, 1998. 10.25 Inducement Agreement and Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes, by and between John Snedegar, Cal West Service Corporation and Micro General Corporation, dated March 30, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998. 10.26 Employment Agreement effective as of April 15, 1999 between Micro General Corporation and John Snedegar, the President and Chief Executive Officer of the Corporation, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.27 Intellectual Property Transfer, Right of First Refusal, and Warrant Purchase Agreement by and between Micro General Corporation and escrow.com, Inc. dated October 1, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.28 Promissory Note payable to Micro General Corporation from escrow.com, Inc. in the amount of $4,500,000 dated October 1, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.29 Convertible Note Purchase Agreement by and between Micro General Corporation and Cal West Service Corporation dated as of December 15, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.30 Credit Agreement and Promissory Note in an amount not to exceed $5,000,000 by and between Micro General Corporation and Imperial Bank entered into on December 22, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.31 Stock Purchase Agreement, dated as of May 3, 2000, entered into by and among North Star Telecom, LLC, a California limited liability company, Micro General Corporation, a Delaware corporation, and ACS Systems, Inc., a Delaware corporation.
40 43
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.32 Management Agreement, dated as of May 4, 2000, entered into by and among North Star Telecom, LLC, Micro General Corporation, LD Exchange.com, Inc. and ACS Systems, Inc. 10.33 Asset Transfer, Right of First Refusal and Stock Purchase Agreement entered into as of May 19, 2000, by and between Micro General Corporation and TXMNet, Inc. 10.34 Mutual Release and Settlement Agreement, dated as of December 28, 2000, is entered into by and among North Star Enterprises, LLC, North Star Telecom, LLC, and all subsidiaries and entities owned by and/or related to either of said North Star companies, Micro General Corporation, LD Exchange.com, Inc. and ACS Systems, Inc. 21 List of Subsidiaries 23.1 Independent auditor's consent.
(b) Reports on Form 8-K. The Company filed reports on Form 8-K during the fourth quarter of 2000 as follows: None 41 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICRO GENERAL CORPORATION, a Delaware Corporation By: /s/ JOHN SNEDEGAR ------------------------------------ John Snedegar Chief Executive Officer, President (Principal Executive Officer) Date: March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ PATRICK F. STONE Co-Chairman of the Board March 28, 2001 - ------------------------------------- Patrick F. Stone /s/ WILLIAM P. FOLEY Co-Chairman of the Board March 28, 2001 - ------------------------------------- William P. Foley /s/ CARL A. STRUNK Director March 28, 2001 - ------------------------------------- Carl A. Strunk /s/ RICHARD H. PICKUP Director March 28, 2001 - ------------------------------------- Richard H. Pickup /s/ JOHN SNEDEGAR Director March 28, 2001 - ------------------------------------- John Snedegar /s/ DWAYNE WALKER Director March 28, 2001 - ------------------------------------- Dwayne Walker /s/ BRADLEY INMAN Director March 28, 2001 - ------------------------------------- Bradley Inman /s/ JOHN MC GRAW Director March 28, 2001 - ------------------------------------- John McGraw /s/ DALE W. CHRISTENSEN Chief Financial Officer March 28, 2001 - ------------------------------------- (Principal Financial and Dale W. Christensen Accounting Officer)
42 45 SCHEDULE II MICRO GENERAL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
YEARS ENDED DECEMBER 31, ----------------------------------------------------- ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND AMOUNTS BALANCE AT CLASSIFICATION OF PERIOD EXPENSES WRITTEN-OFF END OF -------------- ---------- ---------- ----------- ---------- Year ended December 31, 2000: Allowance for doubtful accounts......... $2,265,601 $1,554,365 $2,425,411 $1,394,555 Year ended December 31, 1999: Allowance for doubtful accounts......... $ 485,936 $2,258,585 $ 478,920 $2,265,601 Year ended December 31, 1998: Allowance for doubtful accounts......... 321,844 247,437 83,345 485,936
43 46 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Articles of Incorporation of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 3.11 Restated Articles of Incorporation of the Company -- Article Fourth of the Certificate of Incorporation, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3.2 Bylaws of the Company, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 25, 1988, as amended. 10 Material Contracts 10.1 Incentive Stock Option Plan and form of Incentive Stock Option Agreement in use prior to 1987, incorporated by reference to Exhibit 10.1 from the Company's Annual Report on Form 10-K for the year 1984; Option Plan and form of Incentive Stock Option Agreement in use commencing in 1987, incorporated by reference to Exhibit 10 from the Company's Annual Report on Form 10-K for the year ended December 28, 1986. 10.1.1 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan, incorporated by reference from Form S-8, registration number 333-64289. 10.1.2 1999 Stock Incentive Plan incorporated by reference from Form S-8, registration number 333-95913. 10.18 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.19 Convertible Note Purchase Agreement between Micro General Corporation and Dito Caree L.P. dated August 1, 1996, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20 Loan Agreement and Agreement to issue Detachable Warrants between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated November 25, 1997, incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.22 Agreement and Plan of Reorganization dated as of May 14, 1998, among ACS Systems, Inc., Micro General Corporation, ACS Merger, Inc. and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.22.1 Agreement of Merger dated May 14, 1998 by and among ACS Systems, Inc., a California Corporation, a Delaware corporation, Micro General Corporation, a Delaware corporation and Fidelity National Financial, Inc., a Delaware corporation, incorporated by reference from the Company's report on Form 8-K dated as of May 14, 1998. 10.23 Convertible Note Purchase Agreement between Micro General Corporation and Cal West Service Corporation and Dito Caree L.P. Holding dated October 27, 1998, incorporated by reference from the Company's report on Form 10-K for the year ended December 1998. 10.24 Agreement and Plan of Reorganization dated November 17, 1998 by and among Micro General Corporation, a California corporation, LDExchange.com, Inc. Joseph L. Putegnant, III, Carolyn Hallinan and Europa Telecommunications, incorporated by reference from the Company's report on Form 8-K dated as of November 23, 1998. 10.25 Inducement Agreement and Agreement to Transfer and Reissue Detachable Warrants and Convertible Notes, by and between John Snedegar, Cal West Service Corporation and Micro General Corporation, dated March 30, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998.
44 47
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.26 Employment Agreement effective as of April 15, 1999 between Micro General Corporation and John Snedegar, the President and Chief Executive Officer of the Corporation, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.27 Intellectual Property Transfer, Right of First Refusal, and Warrant Purchase Agreement by and between Micro General Corporation and escrow.com, Inc. dated October 1, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.28 Promissory Note payable to Micro General Corporation from escrow.com, Inc. in the amount of $4,500,000 dated October 1, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.29 Convertible Note Purchase Agreement by and between Micro General Corporation and Cal West Service Corporation dated as of December 15, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.30 Credit Agreement and Promissory Note in an amount not to exceed $5,000,000 by and between Micro General Corporation and Imperial Bank entered into on December 22, 1999, incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1999. 10.31 Stock Purchase Agreement, dated as of May 3, 2000, entered into by and among North Star Telecom, LLC, a California limited liability company, Micro General Corporation, a Delaware corporation, and ACS Systems, Inc., a Delaware corporation. 10.32 Management Agreement, dated as of May 4, 2000, entered into by and among North Star Telecom, LLC, Micro General Corporation, LD Exchange.com, Inc. and ACS Systems, Inc. 10.33 Asset Transfer, Right of First Refusal and Stock Purchase Agreement entered into as of May 19, 2000, by and between Micro General Corporation and TXMNet, Inc. 10.34 Mutual Release and Settlement Agreement, dated as of December 28, 2000, is entered into by and among North Star Enterprises, LLC, North Star Telecom, LLC, and all subsidiaries and entities owned by and/or related to either of said North Star companies, Micro General Corporation, LD Exchange.com, Inc. and ACS Systems, Inc. 21 List of Subsidiaries 23.1 Independent auditor's consent.
45 EX-10.31 2 a68920ex10-31.txt EXHIBIT 10.31 1 EXHIBIT 10.31 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of May 3, 2000 (the "Effective Date"), is entered into by and among North Star Telecom, LLC, a California limited liability company (the "Purchaser"), Micro General Corporation, a Delaware corporation (the "Seller"), and ACS Systems, Inc., a Delaware corporation ("ACS"). This Agreement contemplates a transaction in which the Purchaser will purchase for cash and notes all of the issued and outstanding capital stock of LD Exchange.com, Inc., a Delaware corporation ("LDX") from the Seller, as well as certain assets of ACS. In consideration of the mutual Agreements contained herein and for other good and valuable consideration, the value, receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. TERMS AND CONDITIONS Section 1. Definitions. For purposes of this Agreement, the following terms have the meanings set forth below. "ACS Telecom" means that portion of the business activity (and related assets) of ACS associated with the provision of telecommunications and Internet-based services. "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended. "Agreement" means this Stock Purchase Agreement, as the same may be amended from time to time in accordance with the terms hereof, including the Disclosure Schedules attached hereto and incorporated by reference herein. "Closing" has the meaning set forth in Section 3.1. "Closing Date" has the meaning set forth in Section 3.2. "Code" means the Internal Revenue Code of 1986, as amended. "Confidential Information" means any information, in whatever form or medium, which is disclosed to a party pursuant to or in connection with this Agreement (whether disclosed orally or in writing) and which is marked as confidential or proprietary or which the receiving party knows or has reason to know is confidential or proprietary. Confidential Information includes, but is not limited to, methods of doing business, business plans and projections, marketing strategies, concepts, and methods, sales goals, customer and vendor lists, price and cost lists, financial data, technical information, employee information, customer, vendor and partner information, and legal and regulatory data. Confidential Information does not include any information (i) which is generally publicly known or publicly available, (ii) which can be shown by documentary evidence to have been known to the receiving party prior to its disclosure by the disclosing party (iii) received by the receiving party from a third party not under an obligation of confidentiality to the disclosing party, (iv) independently developed by the receiving Party without use of the disclosing party's Information, (v) approved by the disclosing party for disclosure, or (vi) required to be disclosed pursuant to a requirement of a governmental agency or law so long as the party required to disclose such Confidential -1- 2 Information provides the owner of the Confidential Information with notice of such requirement prior to any such disclosure. "Contracts" means, collectively, all contracts, Agreements, commitments, leases, licenses, instruments, bids and proposals to which LDX is a party as of the Closing Date, including, without limitation, all unfilled orders outstanding as of the Closing Date for the purchase of goods or services by LDX and all unfilled orders outstanding as of the Closing Date for the sale of goods or services by LDX. Contracts shall also mean, collectively, all contracts, Agreements, commitments, leases, licenses, instruments, bids and proposals to which ACS, in conjunction with ACS Telecom, is a party as of the Closing Date. As to Contracts involving the purchase or sale of telecommunication services by LDX, Contracts refers specifically to those relationships in which a direct traffic connection is or was established between LDX and the contracting party as of the Effective Date or during a period one (1) year prior thereto. As to transactions involving the retail sale of telecommunications services by ACS Telecom or LDX , the term Contract is limited to those customers whose purchases from ACS Telecom or LDX aggregated at least Ten Thousand Dollars ($10,000") during the twelve (12) months preceding the Effective Date. "Disclosure Schedules" means, collectively, the various Schedules referred to in this Agreement. "Employee Benefit Plan" means an Employee Pension Benefit Plan or an Employee Welfare Benefit Plan, as defined in Section 3(2) of ERISA. "Environmental Laws" means any Law with respect to the preservation of the environment or the promotion of worker health and safety, including any Law relating to hazardous materials, drinking water, surface water, groundwater, wetlands, landfills, open dumps, storage tanks, underground storage tanks, solid waste, waste water, storm water run-off, noises, odors, air emissions, waste emissions or wells. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Financial Statements" has the meaning set forth in Section 4.5(a). "GAAP" means United States generally accepted accounting principles, as in effect as of the date of this Agreement. "Governmental Entity" means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. "Intellectual Property" means, collectively, patents, patent disclosures, trademarks, service marks, trade dress, logos, trade names and copyrights, and all registrations, applications, re-issuances, continuations, continuations-in-part, revisions, extensions, reexaminations and associated good will with respect to each of the foregoing, computer software (including source and object codes), computer programs, computer data bases and related documentation and materials, data, documentation, trade secrets, confidential business information (including ideas, formulas, compositions, inventions, know-how, manufacturing and production processes and techniques, research and development information, drawings, designs, plans, proposals and technical data, financial, marketing and business data and pricing and cost information) and other intellectual property rights (in whatever form or medium). "IRS" means the Internal Revenue Service of the Department of the Treasury. "Law" means any constitutional provision, statute, law, rule, regulation, Permit, decree, injunction, judgment, order, ruling, determination, finding or writ of any Governmental Entity. "LDX Shares" means, collectively, all of the issued and outstanding capital stock, of LDX. -2- 3 "Lien" means any mortgage, pledge, security interest, charge, claim or other encumbrance, other than (a) mechanics', materialmans' and similar liens with respect to amounts not yet due and payable, (b) liens for Taxes not yet due and payable and (c) liens securing rental payments under capital lease arrangements. "PBGC" means the Pension Benefit Guaranty Corporation. "Permit" means any license, permit, franchise, certificate of authority or order, or any waiver of the foregoing, issued by any Governmental Entity. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity. "Prohibited Transactions" has the meaning set forth in Section 406 of ERISA and Section 4975 of the Code. "Purchaser's Knowledge" means information known, or which would have been known after due investigation by the Purchaser or its officers or managers. "Reportable Event" has the meaning set forth in Section 4043 of ERISA. "Seller's Group" means those affiliated entities with which the Seller files consolidated income tax returns. "Seller's Knowledge" means information known, or which would have been known after due investigation by the Seller, LDX, or ACS or their respective officers or managers. "Tax" means any federal, state, local or foreign income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other tax, fee, assessment or charge, including any interest, penalty or addition thereto. "Tax Package" has the meaning set forth in Section 6.3. "Tax Return" shall mean all federal, state, local or foreign tax returns, tax reports, and declarations of estimated tax, including without limitation consolidated federal income tax returns of Seller's Group. Other terms may be defined elsewhere in the text of this Agreement and, unless otherwise indicated, shall have such meaning indicated throughout this Agreement. Section 2. Basic Transaction. 2.1 Purchase and Sale of LDX Shares. On the terms and subject to the conditions set forth in this Agreement, at the Closing the Purchaser will purchase from the Seller and ACS, and the Seller will sell, transfer, assign, convey and deliver to the Purchaser, all of the Seller's right, title and interest in and to the LDX Shares and all of the Seller's and ACS's right, title and interest in and to the assets of ACS Telecom for a purchase price of Fifteen Million Dollars ($15,000,000)(the "Purchase Price") which shall be paid as follows: One Million Dollars ($1,000,000) in cash delivered into escrow (maintained by a mutually-acceptable escrow agent) upon the execution of this Agreement to be released to the Seller at Closing; Eleven Million Dollars ($11,000,000) in cash delivered to the Seller at Closing; and Three Million Dollars ($3,000,000) in the form of two (2) promissory notes to be delivered to the Seller at Closing, the first in the amount of Two Million Dollars ($2,000,000) and due on the first anniversary of Closing, and the second the in the amount of One Million Dollars ($1,000,000) and due on the second anniversary of Closing (the "Notes"), with interest set at five percent (5%) per annum and with performance secured in a manner -3- 4 reasonably acceptable to the Seller (e.g., personal guarantee, performance bond). The Notes shall be substantially in the form of Exhibit A. 2.2. Purchase Price Adjustment. All or substantially all of the nine (9) international sites listed below shall be materially operational and generating revenues on a consistent basis as of Closing. In the event that all nine (9) of the listed sites are not materially operational and generating revenues on a consistent basis as of Closing, the cash portion of the Purchase Price to be delivered to the Seller at Closing shall be reduced as follows:
Site Purchase Price Reduction Sri Lanka 1 $375,000 Sri Lanka 2 $750,000 Nigeria 1 $800,000 Nigeria 2 $400,000 Ghana $500,000 Viet Nam 1 $1,500,000 Viet Nam 2 $500,000 Cambodia $500,000 Senegal $500,000
Section 3. Closing and Closing Date. 3.1 Closing. The consummation of the transactions contemplated by this Agreement (the "Closing") will take place at the law offices of Stradling Yocca Carlson & Rauth, A Professional Corporation, 660 Newport Center Drive, Newport Beach, California, on the Sixtieth (60th) day following the Effective Date, provided that the Seller has satisfied the conditions to Closing set forth in Section 9.1 and the Purchaser has satisfied the conditions to Closing set forth in Section 9.2, or at such other place or on such other date as the Purchaser and the Seller may mutually agree; provided, however, that in the event that the Seller and ACS do not file for all licenses, Permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities as are required to permit the Seller to transfer the LDX Shares to the Purchaser and to permit ACS to transfer the Permits and all letters of agency held by it to LDX within seven (7) days following the Effective Date (allocating two (2) of the seven (7) days for review of such filings by Purchaser's counsel), then the Closing Date shall be postponed on a day-for-day basis for the extent of such delay. 3.2 Closing Date. The date on which the Closing actually takes place is referred to in this Agreement as the Closing Date. The Closing will be deemed for all purposes under this Agreement to have occurred as of 12:01 P.M., California time, on the Closing Date. 3.3 Deliveries at the Closing. At the Closing, (a) the Seller will deliver to the Purchaser the various certificates, instruments and documents referred to in Section 9.1, (b) the Purchaser will deliver to the Seller the various certificates, instruments and documents referred to in Section 9.2, (c) the Seller will deliver to the Purchaser stock certificates representing all of the issued and outstanding LDX Shares, endorsed in blank or accompanied by duly executed assignment documents, and (d) the Purchaser will deliver to the Seller the Purchase Price as specified in Section 2.1. Section 4. Representations and Warranties of the Seller. The Seller represents and warrants to the Purchaser that the statements contained in this Section 4 are correct and complete as of the Closing Date: -4- 5 4.1 Organization. LDX is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. LDX is duly qualified to conduct business and in good standing under the laws of each of the Fifty (50) states of the United States except Alaska and the Seller has delivered to the Purchaser documentary evidence of such qualifications. LDX is duly qualified to conduct business and in good standing in all other jurisdictions where such qualification is required, except where failure to do so will not have a material adverse effect on the business of LDX. LDX has full corporate power and authority and all Permits and authorizations necessary to carry on the businesses in which it is engaged and in which it presently proposes to engage and to own and use the properties owned and used by it. LDX has full corporate power and authority and all Permits and authorizations necessary to carry on the activities of ACS Telecom and to own and use the properties associated with ACS Telecom. 4.2 Authorization of Transaction. The Seller and ACS each has the capacity and authority to execute and deliver this Agreement and to perform its respective obligations hereunder and thereunder. This Agreement constitutes the valid and legally binding obligation of each of the Seller and ACS, enforceable in accordance with its respective terms and conditions. Attached as Exhibit B are duly executed resolutions of the Boards of Directors of the Seller and ACS authorizing the execution and delivery of this Agreement and approving the Seller's and ACS's performance of the transactions contemplated hereby. 4.3 Noncontravention; Consents. (a) Neither the execution and delivery of this Agreement by the Seller and ACS, nor the consummation by LDX , the Seller and ACS of the transactions contemplated hereby or thereby, will violate any provision of the charter or bylaws of LDX, the Seller or ACS, or, to the best of the Seller's Knowledge, any Law to which LDX, the Seller or ACS is subject. Except as set forth on Schedule 4.3(a), neither the execution and delivery of this Agreement by the Seller or ACS, nor the consummation by LDX, the Seller, or ACS of the transactions contemplated hereby or thereby, will constitute a material violation of, be in conflict with, constitute or create a default under, cause the termination, suspension, acceleration, impairment or adverse modification of, or result in the creation or imposition of any Lien upon any property of LDX, the Seller or ACS pursuant to, any Agreement or commitment to which LDX, the Seller or ACS is a party or by which LDX, the Seller, ACS or any of their respective properties (including the LDX Shares) is bound or to which LDX, the Seller, ACS or any of such properties is subject. (b) Except as set forth on Schedule 4.3(b), LDX, the Seller and ACS have given all required notices and obtained all licenses, Permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and parties to contracts of the Seller, LDX and ACS as are required in order to enable the Seller and ACS to perform their respective obligations under this Agreement, including, without limitation, all consents and approvals required to permit the Seller to transfer the LDX Shares to the Purchaser, and to permit ACS to transfer the Permits and all letters of agency held by it to LDX. No Contract relating to LDX has been amended to increase the amount payable by it thereunder or otherwise modify the terms thereof in order to obtain any such consent, approval or authorization. Schedule 4.3(b) contains a true and complete list of (i) all Persons to whom notices must be given or from whom licenses, Permits, consents, approvals, authorizations, qualifications and orders must be obtained and (ii) all of the notices given and the licenses, Permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and parties to contracts of the Seller, LDX and ACS obtained by the Seller, LDX and ACS to enable the Seller and ACS to perform their respective obligations under this Agreement. 4.4 Capitalization. Schedule 4.4 sets forth for LDX (a) the number of shares of authorized capital stock of each class of capital stock, (b) the number of issued and outstanding shares of each class of capital stock, (c) the number of shares of its capital stock held in treasury, (d) the names of its directors and elected officers, and (e) the owners of capital stock. The Seller has delivered to the Purchaser correct and complete copies of the charter and bylaws of LDX as amended to date, the former as certified by the Secretary of State of the State of Delaware within thirty (30) days prior to Closing. The LDX Shares have -5- 6 been duly authorized and are validly issued, fully paid and nonassessable. Except as set forth on Schedule 4.4, the Seller holds of record and owns beneficially all of the LDX Shares, free and clear of any restrictions on transfer (other than restrictions under the Securities Act of 1933, as amended, and applicable state securities laws), Taxes, Liens, options, warrants, purchase rights, contracts, commitments, equities, claims or demands. Except as set forth on Schedule 4.4, there are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could require the Seller to sell, transfer or otherwise dispose of any capital stock of LDX or that could require LDX to issue, sell or otherwise cause to become outstanding any of its capital stock. There are no outstanding stock appreciation, phantom stock, profit participation or similar rights with respect to LDX Shares. There are no voting trusts, proxies or other Agreements or understandings with respect to the voting of any capital stock of LDX. LDX is not in default under or in violation of any provision of its charter or bylaws. Except as set forth on Schedule 4.4, LDX does not control directly or indirectly, or have any direct or indirect equity participation in, any Person. 4.5 Financial Statements. Set forth as Schedule 4.5 are correct and complete copies of the unaudited balance sheets of LDX as of December 31, 1997, 1998 and 1999 and the related statements of income and cash flow for the years then ended (the "Financial Statements"). Set forth as Schedule 4.5 are correct and complete copies of those portions of the audited consolidated financial statements which relate to LDX and ACS in conjunction with ACS Telecom as of December 31, 1998 and 1999 (the "Consolidated Financial Statements"). The Consolidated Financial Statements reflect data for LDX and ACS in conjunction with ACS Telecom separately through October 1999; thereafter, all data relating to ACS Telecom is included in reports relating to LDX. The Financial Statements and the Consolidated Financial Statements were prepared consistent with past accounting practices and present fairly the financial condition and the results of operations of LDX as of the dates and for the periods indicated therein. In accordance with GAAP and except as set forth in Schedule 4.6, the balance sheet of LDX contains adequate provisions for doubtful accounts receivable and all other pertinent contingencies, discloses any debt due to LDX or ACS in conjunction with ACS Telecom from any of its officers, directors or Affiliates, fully reflects or provides for any liabilities or obligations (whether fixed, accrued, actual, absolute or contingent), except those incurred in the ordinary course subsequent to the date of the balance sheet and which have been fully disclosed on Schedule 4.6. The Seller has delivered the copies of the Financial Statements and the Consolidated Financial Statements attached hereto as Schedule 4.5 to the Purchaser prior to the Effective Date. The books of account and records of LDX and ACS in conjunction with ACS Telecom are true and correct, have been maintained in accordance with GAAP and accurately and fairly reflect all of the properties, assets, liabilities and transactions of LDX and ACS in conjunction with ACS Telecom. 4.6 Undisclosed Liabilities. (a) Except as set forth on Schedule 4.6, LDX has no liabilities or obligations (whether known or unknown, absolute or contingent, liquidated or unliquidated, or due or to become due), which exceed, individually or in the aggregate, Ten Thousand Dollars ($10,000), except for liabilities and obligations that have arisen since December 31, 1999 in the ordinary course of the operation of LDX (none of which results from, arises out of, relates to, is the nature of or was caused by any breach of contract, breach of warranty, tort, infringement or violation of Law). (b) Set forth on Schedule 4.6 is a true and complete list of all accounts payable of LDX and ACS Telecom as of the Effective Date and as of Closing. 4.7 Events Subsequent to Most Recent Fiscal Year End. (a) Since December 31, 1999, there has not been any material adverse change in the business, financial condition, operations, results of operations or future prospects of LDX. -6- 7 (b) Except as set forth in Schedule 4.7, no monies have been paid or assets transferred by LDX to, at the direction of or for the benefit of an Affiliate of LDX other than as part of a commercially reasonable transaction. 4.8 Tax Matters. Except as set forth in Schedule 4.8: (a) all Tax Returns that are required to be filed by or with respect to LDX or ACS Telecom have been duly filed, or, where not so filed, are subject to an extended due date pursuant to an extension that has been obtained therefor, and are listed on Schedule 4.8, (b) all such Tax Returns are true, complete and correct, and have been made available to the Purchaser prior to the Effective Date, (c) all Taxes due and payable by LDX have been paid in full, and all Taxes due and payable by ACS in conjunction with ACS Telecom have been paid in full, (d) none of the Tax Returns referred to in clause (a) has been examined by the IRS or the appropriate state, local or foreign taxing authority, (e) all deficiencies asserted or assessments made as a result of such examinations have been paid in full, (f) no issues that have been raised by the relevant taxing authority in connection with the examination of any of the Tax Returns referred to in clause (a) are currently pending, (g) no waivers of statutes of limitation have been given by or requested with respect to any Taxes of LDX or Taxes of ACS in conjunction with ACS Telecom, (h) to the Seller's Knowledge, there is no claim or assessment threatened against LDX or ACS in conjunction with ACS Telecom, (i) LDX has withheld and timely paid to the appropriate taxing authority the required amounts in compliance with all tax withholding provisions of applicable Law (including, without limitation, income, social security and employment tax withholding), and (j) neither LDX nor ACS in conjunction with ACS Telecom has made any payments, or is a party to any Agreement that could obligate it to make any payments, that would not be deductible, in whole or in part, under Section 280G or 162(m) of the Code. -7- 8 4.9 Contracts. (a) Schedule 4.9 contains a true and complete list of all Contracts. Other than as specifically noted on Schedule 4.9, neither LDX nor ACS in conjunction with ACS Telecom is a party to or otherwise bound by any written or oral (i) mortgage, indenture, note, installment obligation or other instrument relating to the borrowing of money, (ii) guarantee of any obligation, (iii) letter of credit, bond or other indemnity (including letters of credit, bonds or other indemnities as to which LDX or ACS in conjunction with ACS Telecom is the beneficiary but excluding endorsements of instruments for collection in the ordinary course of the operation of LDX or ACS in conjunction with ACS Telecom, (iv) currency or interest rate swap, collar or hedge Agreement, (v) Agreement for the sale or lease by LDX or ACS in conjunction with ACS Telecom to any Person of any material amount of its assets other than the retirement or other disposition of assets no longer useful to LDX or ACS in conjunction with ACS Telecom in the ordinary course of its operation, (vi) Agreement requiring the payment by LDX or ACS in conjunction with ACS Telecom of more than Ten Thousand Dollars ($10,000) in any 12-month period for the purchase or lease of any machinery, equipment or other capital assets, (vii) Agreement providing for the lease or sublease by LDX (as lessor, sublessor, lessee or sublessee) or ACS in conjunction with ACS Telecom of any real estate, (viii) collective bargaining Agreement, employment, severance or consulting Agreement or Agreement providing for severance payments or other additional rights or benefits (whether or not optional) in the event of the sale of LDX or ACS Telecom, (ix) joint venture Agreement, (x) teaming Agreement, (xi) contract with a Governmental Entity (xii) Agreement requiring the payment to LDX or ACS in conjunction with ACS Telecom by any other Person of more than Ten Thousand Dollars ($10,000) in any 12-month period for the purchase of goods or services, (xiii) Agreement requiring the payment by LDX or ACS in conjunction with ACS Telecom to any Person of more than Ten Thousand Dollars ($10,000) in any 12-month period for the purchase of goods or services; (xiv) license or sublicense Agreement with respect to any item of Intellectual Property (whether as licensor, licensee, sublicensor or sublicensee) or (xv) Agreement imposing non-competition or exclusive dealing obligations on LDX or ACS in conjunction with ACS Telecom. (b) The Seller has made available to the Purchaser prior to the Effective Date correct and complete copies of each written Agreement listed on Schedule 4.9, as amended to date, as well as a complete list of all retail customers of ACS Telecom and LDX. Each Contract is a valid, binding and enforceable obligation of LDX or ACS and the other party or parties thereto (subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar Laws affecting creditors' rights and remedies generally and subject as to enforceability to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing) and is in full force and effect. Except as set forth on Schedule 4.9 (i) neither LDX or ACS nor, to the Seller's Knowledge, any other party thereto, is in material breach of any term of any Contract or has repudiated any term of any Contract, (ii) no event, occurrence or condition exists that, with the lapse of time, the giving of notice, or both, would become a material default under any Contract by either LDX or ACS, or, to the Seller's Knowledge, any other party thereto and (iii) neither LDX nor ACS has waived or released any of its material rights under any Contract. (c) Except as set forth in Schedule 4.9, no default will be triggered, payment obligation accelerated, security requirement increased or other material adverse effect created with respect to any Contract as a result of removal of the Seller or any Affiliate of the Seller as a guarantor or additional guarantor. -8- 9 4.10 Real Property. (a) Neither LDX nor ACS in conjunction with ACS Telecom owns any real property. Schedule 4.10 contains a true and complete list of all lease and sublease Agreements relating to real property leased or subleased by LDX or ACS in conjunction with ACS Telecom, correct and complete copies of each of which has been made available to the Purchaser prior to the Effective Date. Except as set forth on Schedule 4.10, with respect to each such lease and sublease: (i) such lease or sublease constitutes the entire Agreement to which LDX or ACS is a party with respect to the real property leased thereunder; (ii) neither LDX nor ACS has assigned, sublet, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; (iii) all facilities leased or subleased thereunder have received all material approvals of Governmental Entities (including all Permits) required in connection with the operation thereof and have been operated and maintained in all material respects in accordance with all applicable Laws; and (b) To the Seller's Knowledge, all components of all improvements included within such leased real property are in working order and repair and do not require material repair or replacement in order to serve their intended purposes in all material respects, including use and operation consistent with their respective present use and operation, except for scheduled maintenance, repairs and replacements conducted or required in the ordinary course of the operation of such leased real property. (c) Other than options, rights of first refusal or other similar arrangements in favor of LDX or ACS under the leases and subleases relating to the real property leased by LDX or ACS. Neither LDX nor ACS has entered into any contract, arrangement or understanding with respect to the future ownership, development, use, occupancy or operation of any parcel of real property leased by LDX or ACS. (d) There are no pending or, to the Seller's Knowledge, threatened or contemplated condemnation or eminent domain proceedings that affect the real property leased by LDX or ACS in conjunction with, and neither LDX nor ACS in conjunction with ACS Telecom has received any notice, oral or written, of the intention of any Governmental Entity or other Person to take or use all or any part thereof. (e) Since LDX's or ASC's leasing of the real property leased by LDX or ACS in conjunction with ACS Telecom, none of such property or any part thereof has suffered any material damage by fire or other casualty that has not been completely restored. (f) Neither the Seller, LDX nor ACS in conjunction with ACS Telecom has received any written notice from any insurance company that has issued a policy to the Seller, LDX or ACS with respect to any of leased real property identified on Schedule 4.10 requiring the performance of any structural or other repairs or alterations to such property. 4.11 Personal Property. (a) Schedule 4.11 contains a true and complete list of all personal property owned or leased by LDX or ACS in conjunction with ACS Telecom. Except as set forth on Schedule 4.11, all such items of personal property are in working order and repair and do not require material repair or replacement in order to serve their intended purposes in all material respects, including use and operation consistent with its present use and operation, except for scheduled maintenance, repairs and replacements conducted or required in the ordinary course of the operation of such personal property. Except as set forth of Schedule 4.11, LDX or ACS is the sole owner and has good and marketable title to all owned personal property listed on Schedule 4.11, free and clear of any Lien. Except as set forth in Schedule 4.11, all warranties made with -9- 10 respect to the personal property that are in effect prior to the Closing will remain in effect subsequent to the Closing. (b) Schedule 4.11 contains a true and complete list of all Permits issued to or held by LDX or ACS in conjunction with ACS Telecom. Except as set forth on Schedule 4.11, all such Permits have been issued or lawfully transferred to LDX and are valid and existing and in full force and effect. Except as set forth on Schedule 4.11, LDX has obtained and lawfully holds all Permits necessary for the conduct of its business as currently conducted, as well as the conduct of ACS Telecom. Except as set forth on Schedule 4.11, neither LDX nor ACS is in violation under any of the Permits issued to or held by LDX or ACS in conjunction with ACS Telecom and no event has occurred which, with notice or lapse of time, would constitute such a violation. Except as set forth on Schedule 4.11, LDX or ACS have timely made all filings and taken all actions necessary to remain in compliance under the Permits issued to or held by LDX or ACS in conjunction with ACS Telecom. Except as set forth on Schedule 4.11, no Governmental Entity has initiated, or to the Seller's Knowledge threatened to initiate, any investigation, proceeding or other action for the purpose of revoking a Permit issued to or held by LDX or ACS in conjunction with ACS Telecom. (c) Schedule 4.11 contains a true and complete list of cash, cash equivalents, certificates of deposit, bank accounts, securities, prepayments made and received, security deposits made and received, accounts and notes receivable, rights to receive money or property by assignment, future interests, claims and rights against third parties, and other material intangible property owned or held, directly or beneficially, by or on behalf of, or for the account of LDX or ACS in conjunction with ACS Telecom. 4.12 Intellectual Property. (a) Schedule 4.12 contains a true and complete list of all patents and registered trademarks, service marks and copyrights owned or used by LDX or ACS in conjunction with ACS Telecom. To the Seller's Knowledge, each Intellectual Property item listed on Schedule 4.12 is good, valid and enforceable in law and equity. (b) LDX or ACS owns or is licensed to use all Intellectual Property used by LDX or ACS in conjunction with ACS Telecom. Schedule 4.12 identifies each license or other Agreement relating to Intellectual Property used by LDX or ACS in conjunction with ACS Telecom, with the exception of commercially distributed office computer software. (c) To the Seller's Knowledge, except as set out in Schedule 4.12, no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the Seller's Knowledge, threatened that challenges the legality, validity or enforceability of the underlying item of any item of Intellectual Property; and the transactions contemplated by this Agreement shall not constitute a breach or default under, give rise to a right of termination under or otherwise adversely affect the ability of the Purchaser to use the Intellectual Property in conducting the business of LDX and ACS Telecom after the Closing Date. 4.13 Litigation. Schedule 4.13 sets forth each instance in which LDX is (a) subject to any unsatisfied judgment order, decree, stipulation, injunction or charge or (b) a party to or, to the Seller's Knowledge, is threatened to be made a party to any charge, complaint, action, suit, proceeding, hearing or investigation of or in any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction. There are no judicial or administrative actions, proceedings or investigations pending or, to the Seller's Knowledge, threatened that question the validity of this Agreement or any action taken or to be taken by LDX, ACS or the Seller in connection with this Agreement or that, if adversely determined, -10- 11 would have a material adverse effect upon ACS's or the Seller's ability to enter into or perform its respective obligations under this Agreement. 4.14 Employee Benefits. (a) Schedule 4.14 contains a true and complete list of each Employee Benefit Plan that LDX or an Affiliate of LDX maintains with respect to current or former employees of LDX or to which LDX or an Affiliate of LDX contribute with respect to any of the current or former employees of LDX. With respect to each such Employee Benefit Plan: (i) such Employee Benefit Plan (and each related trust, insurance contract or fund) complies in form and in operation in all respects with the applicable requirements of ERISA, the Code and other applicable Laws; (ii) all required reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports and Summary Plan Descriptions) have been filed or distributed appropriately with respect to such Employee Benefit Plan and the requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code have been met with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan; (iii) all contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each such Employee Benefit Plan which is an Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each such Employee Pension Benefit Plan or accrued in accordance with the past custom and practice of LDX and any participating Affiliate of LDX. All premiums or other payments for all periods ending on or before the Closing Date have been paid with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan; (iv) each such Employee Benefit Plan which is an Employee Pension Benefit Plan meets the requirements of a qualified plan under Section 401(a) of the Code and has received, within the last two years, a favorable determination letter from the IRS; and (v) the Seller has made available to the Purchaser correct and complete copies of the plan documents and summary plan descriptions, the most recent determination letter received from the IRS, the most recent Form 5500 Annual Report, and all related trust Agreements, insurance contracts and other funding Agreements which implement such Employee Benefit Plan. (b) With respect to each Employee Benefit Plan that LDX (or an Affiliate of LDX for the benefit of LDX current or former employees) maintains or ever has maintained, or to which it contributes, ever has contributed or ever has been required to contribute, there have been no Prohibited Transactions with respect to such Employee Benefit Plan, no fiduciary has any liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of such Employee Benefit Plan, and no action, suit, proceeding, hearing or investigation with respect to the administration or the investment of the assets of such Employee Benefit Plan (other than routine claims for benefits) is pending or, to the Seller's Knowledge, threatened. -11- 12 (c) Schedule 4.14 contains a true and complete list of the names, as well as the salaries, bonuses, additional and other compensation and benefits due each officer and employee of LDX and each employee associated with ACS Telecom. 4.15 Environmental Matters. Except as set forth on Schedule 4.15, (a) LDX and ACS in conjunction with ACS Telecom has complied in all material respects with all Environmental Laws in connection with the use, maintenance and operation of all real property leased by it and otherwise in connection with its operations, (b) neither LDX nor ACS in conjunction with ACS Telecom has any liability, whether contingent or otherwise, under any Environmental Law with respect to its operations or properties, (c) no notices of any violation or alleged violation of, non-compliance or alleged non-compliance with or any liability under, any Environmental Law relating to the operations or properties of LDX or ACS Telecom has been received by them during the past five years, (d) there are no administrative, civil or criminal writs, injunctions, decrees, orders or judgments outstanding or any administrative, civil or criminal actions, suits, claims, proceedings or investigations pending or, to the Seller's Knowledge, threatened, relating to compliance with or liability under any Environmental Law affecting LDX or ACS in conjunction with ACS Telecom, and (e) no underground tank or other underground storage receptacle for Hazardous Materials is located on any of the real property leased by LDX or ACS in conjunction with ACS Telecom. 4.16 Legal Compliance. Except as set forth on Schedule 4.16, LDX and ACS in conjunction with ACS Telecom have complied in all material respects with all applicable Laws and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced against or, to the Seller's Knowledge, has been threatened against LDX or ACS alleging any failure to so comply. 4.17 Insurance. Schedule 4.17 contains a correct and complete list of all policies of insurance owned by the Seller or any of its Affiliates under which LDX or any of its properties or assets is insured. 4.18 Brokers' Fees. Neither LDX, ACS nor the Seller has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Purchaser could become liable or obligated or for which LDX or ACS, after the Closing Date, will have any continuing obligation. 4.19 Accuracy of Information. To the Seller's Knowledge , LDX and ACS, neither this Agreement nor any document, material or information furnished by the Seller, LDX, ACS or any Affiliate of the Seller, LDX, or ACS in connection with this Agreement or the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein not misleading. To the Seller's Knowledge , LDX and ACS, all documents, materials or information provided by the Seller, LDX, ACS or any Affiliate of the Seller, LDX, or ACS to a Governmental Entity or other Person pursuant to this Agreement are true, correct and complete. 4.20 No Other Representations or Warranties. Except for the representations and warranties contained in this Section 4, neither the Seller nor LDX nor any Affiliate of either of them, nor any other Person makes any express or implied representation or warranty on behalf of the Seller, LDX or ACS. Section 5. Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Seller that the statements contained in this Section 5 are correct and complete as of the Effective Date and will be correct and complete as of the Closing Date (as though then made and as though the Closing Date were substituted for the date of this Agreement throughout this Section 5). -12- 13 5.1 Organization. The Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California. 5.2 Authorization of Transaction. The Purchaser has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder and thereunder. This Agreement constitutes the valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms and conditions. Attached as Exhibit C is a duly executed resolution of the Board of Directors of the Purchaser authorizing the execution and delivery of this Agreement and approving the Purchaser's performance of the transactions contemplated hereby. 5.3 Noncontravention. (a) Neither the execution and the delivery of this Agreement by the Purchaser, nor, in the event that the Seller timely secures all necessary consents and approvals from Governmental Entities to assign or transfer control of the Permits held by LDX and ACS in conjunction with ACS Telecom, the consummation by the Purchaser of the transactions contemplated hereby, will violate any Law to which the Purchaser is subject or any provision of the charter or bylaws of the Purchaser. Neither the execution and delivery of this Agreement by the Purchaser, nor the consummation by the Purchaser of the transactions contemplated hereby or thereby, will constitute a violation of, be in conflict with or constitute or create a default under, any Agreement or commitment to which the Purchaser is a party or by which the Purchaser or any of its properties is bound or to which the Purchaser or any of such properties is subject. (b) The Purchaser has neither annual net sales nor total assets of sufficient size to activate the notification requirements under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. 5.4 Litigation. There are no judicial or administrative actions, proceedings (including bankruptcy proceedings) or investigations pending or, to the Purchaser's Knowledge, threatened that question the validity of this Agreement or any action taken or to be taken by the Purchaser in connection with this Agreement or that, if adversely determined, would have an adverse effect upon the Purchaser's ability to enter into or perform its obligations under this Agreement. -13- 14 5.5 Brokers' Fees. The Purchaser has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which LDX, ACS or the Seller could become liable or obligated. Section 6. Tax Matters. 6.1 Liability for Taxes and Related Matters. (a) The Seller shall be liable for and indemnify the Purchaser for all Taxes (including, without limitation, any obligation to contribute to the payment of a tax determined on a consolidated, combined or unitary basis, with respect to a group of corporations that includes or included LDX): (i) imposed on the Seller (other than LDX) for any taxable year and (ii) imposed on LDX or ACS in conjunction with ACS Telecom or for which LDX or ACS in conjunction with ACS Telecom may otherwise be liable for any taxable year or period that ends on or before the Closing Date and, with respect to any taxable year or period beginning before and ending after the Closing Date, the portion of such taxable year ending on and including the Closing Date. The Seller shall also indemnify, defend and hold harmless the Purchaser from all costs and expenses incurred by the Purchaser (including reasonable attorneys' fees and expenses) in connection with any liability to, or claim by, any taxing authority, for Taxes for which the Seller is required to indemnify the Purchaser under this Section 6. Except as set forth in Section 6.1(e), the Seller shall be entitled to any refund of Taxes of LDX received for such periods. Indemnification made pursuant to this Section 6.1(a) shall be made in accordance with Section 10 below. (b) The Purchaser shall be liable for and indemnify the Seller for the Taxes of LDX and ACS in conjunction with ACS Telecom for any taxable year or period that begins after the Closing Date and, with respect to any taxable year or period beginning before and ending after the Closing Date, the portion of such taxable year beginning after the Closing Date. The Purchaser shall also indemnify, defend and hold harmless the Seller from all costs and expenses incurred by the Seller (including reasonable attorneys' fees and expenses) in connection with any liability to, or claim by, any taxing authority, for Taxes for which the Purchaser is required to indemnify the Seller under this Section 6. The Purchaser shall be entitled to any refund of Taxes of LDX received for such periods. (c) For purposes of paragraphs (a) and (b) above, whenever it is necessary to determine the liability for Taxes of LDX or ACS for a portion of a taxable year or period that begins before and ends after the Closing Date, the determination of the Taxes of LDX or ACS for the portion of the year or period ending on, and the portion of the year or period beginning after, the Closing Date shall be determined by assuming that LDX or ACS had a taxable year or period which ended at the close of the Closing Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned on a time basis. (d) If the Seller becomes entitled to a refund or credit of Taxes for any period for which it is liable under Section 6.1(a) to indemnify the Purchaser and such Taxes are attributable solely to the carryback of losses, credits or similar items attributable to LDX or ACS in conjunction with ACS Telecom and from a taxable year or period that begins after the Closing Date, the Seller shall promptly pay to the Purchaser the amount of such refund or credit together with any interest thereon. In the event that any refund or credit of Taxes for which a payment has been made is subsequently reduced or disallowed, the Purchaser shall indemnify and hold harmless the Seller for any tax liability, including interest and penalties, assessed against the Seller by reason of the reduction or disallowance. (e) The Seller shall file or cause to be filed when due all Tax Returns that are required to be filed by or with respect to LDX and ACS in conjunction with ACS Telecom for taxable years or periods ending on or before the Closing Date and shall pay any Taxes due in respect of such Tax Returns, and the Purchaser shall file or cause to be filed when due all Tax Returns that are required to be filed by or with -14- 15 respect to LDX and ACS in conjunction with ACS Telecom for taxable years or periods ending after the Closing Date and shall remit any Taxes due in respect of such Tax Returns. The Seller shall pay the Purchaser the Taxes for which the Seller is liable pursuant to Section 6.1(a) but which are payable with Tax Returns to be filed by the Purchaser pursuant to the previous sentence within ten (10) days prior to the due date for the filing of such Tax Returns. (f) The Purchaser shall promptly notify the Seller in writing upon receipt by the Purchaser, any of its Affiliates or LDX of notice of any pending or threatened federal, state, local or foreign income or franchise tax audits or assessments which may materially affect the tax liabilities of LDX or ACS in conjunction with ACS Telecom for which the Seller would be required to indemnify the Purchaser pursuant to Section 6.1(a), provided, that failure to comply with this provision shall not affect the Purchaser's right to indemnification hereunder except and to the extent such delay is prejudicial to the Seller. The Seller shall have the right to participate with the Purchaser in the representation of LDX's and ACS's interests in any tax audit or administrative proceeding relating to taxable periods ending on or before the Closing Date, and to employ counsel of its choice at its expense. Notwithstanding the foregoing, the Seller shall not be entitled to settle, either administratively or after the commencement of litigation, any claim for Taxes which would adversely affect the liability for Taxes of the Purchaser or LDX for any period after the Closing Date to any extent (including, but not limited to, the imposition of income tax deficiencies, the reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation deductions, or the reduction of loss or credit carryforwards) without the prior written consent of the Purchaser. Such consent shall not be unreasonably withheld, and shall not be necessary to the extent that the Seller has indemnified the Purchaser against the effects of any such settlement. The Seller shall be entitled to participate at its expense in the defense of any claim for Taxes for a year or period ending after the Closing Date which may be the subject of indemnification by the Seller pursuant to Section 6.1(a) and, with the written consent of the Purchaser. Neither the Purchaser nor LDX may agree to settle any tax claim for the portion of the year or period ending on the Closing Date which may be the subject of indemnification by the Seller under Section 6.1(a) without the prior written consent of the Seller, which consent shall not be unreasonably withheld. 6.2 Transfer Taxes. All transfer taxes which may be imposed or assessed as a result of the Purchaser's acquisition of the LDX Shares shall borne equally by the Seller and the Purchaser. All fees associated with Permits required by LDX shall be borne by LDX. 6.3 Information to be Provided by the Purchaser. With respect to the taxable period in 2000 prior to the Closing Date, the Purchaser shall promptly cause LDX to prepare and provide to the Seller a package of tax information materials (a Tax Package), which shall be completed in accordance with past practice of LDX including past practice as to providing the information, schedules and work papers and as to the method of computation of separate taxable income or other relevant measure of income. The Purchaser shall cause the Tax Package for the portion of the taxable period ending on the Closing Date to be delivered to the Seller within One Hundred and Twenty (120) days after the Closing Date. 6.4 Assistance and Cooperation. After the Closing Date, each of the Seller and the Purchaser shall: (a) assist (and cause their respective Affiliates to assist) the other party in preparing any Tax Returns or reports which such other party is responsible for preparing and filing in accordance with this Section 6; (b) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of LDX or ACS in conjunction with ACS Telecom; -15- 16 (c) make available to the other and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of LDX or ACS in conjunction with ACS Telecom; (d) provide timely notice to the other in writing of any pending or threatened tax audits or assessments of LDX or ACS in conjunction with ACS Telecom or taxable period for which the other may have a liability under this Section 6; provided, that failure to comply with this provision shall not affect a party's rights to indemnification hereunder except and to the extent such delay is prejudicial to the other party; and (e) furnish the other with copies of all correspondence received from any taxing authority in connection with any tax audit or information request with respect to any such taxable period. 6.5 Survival of Obligations. Subject to Section 10.1, the obligations of the parties set forth in this Section 6 shall be unconditional and absolute and shall remain in effect without limitation as to time. Section 7. Pre-Closing Covenants. The parties agree as follows with respect to the period between the date of this Agreement and the Closing Date. 7.1 Operating Agreement. On the Effective Date, or at any time thereafter prior to the Closing, the Purchaser shall have the right, at its sole option, to assume operational control of the day-to-day operations of LDX and ACS Telecom. In the event that the Purchaser assumes operational control of the day-to-day operations of LDX and ACS Telecom prior to the Closing, it shall act in accordance with that certain Management Agreement by and between the Seller, LDX, ACS and the Purchaser attached hereto as Exhibit D. 7.2 General. Each of the parties will use its best efforts, consistent with sound business practice, to fully perform its obligations hereunder in a good faith effort to consummate and make effective the transactions contemplated by this Agreement (including satisfying the closing conditions set forth in Section 9 7.3 Notices and Consents. As soon as practicable after the Effective Date, the Seller and ACS will give all notices to third parties and will use their best efforts, consistent with sound business practice, at their sole expense to obtain all third party consents, including, without limitation, the consents of Governmental Entities, that are required in connection with the transactions contemplated by this Agreement, and will make all further filings pursuant thereto that may be necessary, proper or advisable. The Purchaser shall provide the Seller and ACS with all reasonable cooperation in this effort. 7.4 Conduct Business in Regular Course. The Seller will cause LDX and ACS to conduct the business of LDX and ACS Telecom diligently, in good faith, consistent with sound business practice, and in the ordinary course, and will not permit, without the prior written approval of the Purchaser, LDX or ACS in conjunction with ACS Telecom to engage in or enter into any material transaction or to change in any material respects its business policies or practices, including, without limitation, the institution of any unusual or novel methods of purchase, sale, lease, management, accounting or operation. The Seller will cause LDX and ACS in conjunction with ACS Telecom to maintain, preserve and protect all real, personal, and intangible property, as well as all Intellectual Property, used or held for use in their businesses, except where failure to do so would not have a material adverse effect on LDX or ACS Telecom. The Seller will further cause LDX and ACS in conjunction with ACS Telecom to maintain, preserve and protect all Permits used or held for use in their businesses, except where failure to do so would not have a material adverse effect on LDX or ACS Telecom. For purposes of this Section 7, a material adverse effect shall be deemed to be an adverse effect with a per-occurrence associated monetary impact of Ten Thousand Dollars ($10,000) or a monetary impact of Fifty Thousand Dollars ($50,000) when aggregated with all other adverse impacts under this Section 7. -16- 17 7.5 No General Increases. Except in the ordinary course of business consistent with past practice, (a) the Seller will not cause or permit, without the prior written approval, of the Purchaser LDX or ACS to grant any general or uniform increase in the rates of pay of employees of LDX or ACS in conjunction with ACS Telecom, nor grant any general or uniform increase in the benefits under any bonus or pension plan or other contract or commitment, and (b) the Seller will not cause or permit LDX or ACS in conjunction with ACS Telecom to increase the compensation payable or to become payable to officers, salaried employees with a base salary in excess of $50,000 per year or agents of LDX or ACS in conjunction with ACS Telecom, or increase any bonus, insurance, pension or other benefit plan, payment or arrangement made to, for or with any such officers, salaried employees or agents, except for any increase required under the terms of any collective bargaining Agreement or consulting or employment Agreement in effect on the date of this Agreement. 7.6 Contracts and Commitments. The Seller will cause LDX and ACS in conjunction with ACS Telecom to maintain, preserve and protect all Contracts used or held for use in their businesses. The Seller will not cause or permit LDX or ACS in conjunction with ACS Telecom to tender any bid, enter into any contract or commitment or engage in any transaction, including any contract, commitment or engagement with the Seller or any division, unit or Affiliate of the Seller, or effect any change to any program, not in the usual and ordinary course of business and consistent with sound business practice. The Seller will not cause or permit LDX or ACS in conjunction with ACS Telecom to waive any right of substantial value, except where failure to do so would not have a material adverse effect on LDX or ACS Telecom. 7.7 Dividends and Distributions. The Seller will not cause or permit LDX to declare or pay any dividend or distribution with respect to its capital stock or to repurchase, redeem or otherwise acquire for value any shares of its capital. The Seller will not cause or permit LDX to make payments or transfer assets to, at the direction of or for the benefit of an Affiliate of LDX other than as part of a commercially reasonable transaction. 7.8 Sale of Capital Assets. The Seller will not cause or permit LDX or ACS in conjunction with ACS Telecom to sell or otherwise dispose of any of its capital assets. 7.9 Preservation of Organization. The Seller will cause LDX and ACS in conjunction with ACS Telecom to use their respective best efforts to preserve their business organizations intact, to keep available to LDX and ACS in conjunction with ACS Telecom after the Closing Date the present officers and employees of LDX and ACS in conjunction with ACS Telecom and, subject to Section 7.10 below, to preserve the present relationships of LDX and ACS in conjunction with ACS Telecom with their respective suppliers and customers and others having business relations with LDX. The Seller will cause LDX and ACS in conjunction with ACS Telecom to maintain and preserve the books, accounts and records of LDX and ACS in conjunction with ACS Telecom 7.10 No Default. The Seller will not cause or permit LDX or ACS in conjunction with ACS Telecom to commit or omit to take any act which will cause a termination of or breach or default under any Contract, commitment or obligation to which LDX or ACS in conjunction with ACS Telecom is a party or by which its assets are bound, including the Contracts. 7.11 Compliance with Laws. The Seller will cause LDX or ACS in conjunction with ACS Telecom to comply in its operations in all material respects with all applicable Laws and as may be required for the valid and effective transfer to the Purchaser of the LDX Shares. 7.12 Full Access. The Seller will permit representatives of the Purchaser to have full access at all reasonable times to all premises, properties, books, records, contracts and documents of or pertaining to LDX and ACS in conjunction with ACS Telecom. -17- 18 7.13 Notice of Developments. The Seller will give prompt written notice to the Purchaser of any material development affecting LDX or ACS in conjunction with ACS Telecom. Each party will give prompt written notice to the other of any material development affecting the ability of the parties to consummate the transactions contemplated by this Agreement. 7.14 Exclusivity. The Seller and its Affiliates will not, and will not cause or permit LDX or ACS in conjunction with ACS Telecom to, solicit, initiate or encourage the submission of any proposal or offer from any Person, or negotiate any unsolicited offer or proposal, relating to any (a) liquidation, dissolution or recapitalization, (b) merger or consolidation, (c) acquisition or purchase of securities or assets or (d) similar transaction or business combination involving LDX or ACS in conjunction with ACS Telecom. The Seller will notify the Purchaser promptly if any Person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. 7.15 Tax Matters. No new elections with respect to Taxes, or any changes in current elections with respect to Taxes, relating to or affecting LDX will be made by LDX or the Seller after the date of this Agreement without the prior written consent of the Purchaser. On or prior to the Closing Date, the Seller will provide the Purchaser, at the Purchaser's request, with all clearance certificates or similar documents that may be required by any state, local or other taxing authority in order to relieve the Purchaser of any obligation to withhold or escrow any portion of the Purchase Price. On or prior to the Closing Date, the Seller will furnish to the Purchaser an affidavit stating, under penalty of perjury, LDX' and each of the Seller's United States tax identification numbers and that the Seller is not a foreign person, pursuant to Section 1445(b)(2) of the Code. 7.16 Carrier Agreement. During a period of five days following the Effective Date, North Star shall analyze the existing switched services proposal from MCI WorldCom. If thereafter North Star does not agree that LDX should accept the MCI WorldCom proposal, the Seller, ACS and the Purchaser shall promptly retain a mutually-acceptable, independent third party consultant to analyze the switched services proposal made by WorldCom to LDX/ACS and compare the rates, terms and conditions included therein to the rates, terms and conditions currently available by contract to the Purchaser. The parties shall act promptly to identify such consultant and within three days after the consultant's agreement to perform such analysis, the parties shall provide him or her with such information as is reasonably required. In the event that the WorldCom rates, terms and conditions are comparable, or become, through further negotiation with WorldCom, comparable, to the rates, terms and conditions currently available by contract to the Purchaser, the Purchaser shall authorize LDX to accept the WorldCom proposal and enter into a new switched services agreement with WorldCom. In the event that the WorldCom rates, terms and conditions are not comparable, and cannot be made, through further negotiation with WorldCom, comparable, to the rates, terms and conditions currently available by contract to the Purchaser, the Seller, prior to Closing, shall cause LDX/ACS to terminate LDX/ACS' current switched services agreement with WorldCom and shall be responsible for paying any termination, shortfall or other penalties imposed upon LDX/ACS which arise out of that action or LDX/ACS' performance under the agreement. 7.17 Funding of Operations. Throughout the period during which the Management Agreement is in effect, the Seller shall continue to fund, or cause to be funded, the operations of LDX and ACS Telecom in a manner consistent with past practice over the previous Twelve (12) months; provided, however, that the Purchaser shall fund the development of a planned Bombay, India site (exclusive of equipment costs) up to a maximum amount of Five Hundred Thousand Dollars ($500,000), as well as any action it desires LDX to take which is not in the ordinary course of business and which the Seller would otherwise not take in the ordinary course of business; provided further that in the event that this Agreement is terminated pursuant to Section 11, the Seller shall either (i) retain the economic benefits of any matter funded by the Purchaser and reimburse the Purchaser in the amount of such funding, or (ii) forgo the economic benefit of such matter and return any associated physical assets and assign any associated contractual rights to the Purchaser. -18- 19 From the Effective Date forward, LDX shall operate as a fully independent entity with the exception of the funding requirement noted above. Payments to Micro General or any entity affiliated with Micro General shall be limited to charges in the ordinary course of business, consistent with past practice, and based on actual cost consistent with market-based pricing where applicable. All payments shall be approved by North Star under the Management Agreement. Compensation paid to North Star during the Management Agreement shall be deemed satisfied at Closing if LDX retains net profits earned by LDX under the Management Agreement. Section 8. Post-Closing Covenants. The parties agree as follows with respect to the period following the Closing Date. 8.1 General. In case at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as the other party reasonably may request, at the sole cost and expense of the requesting party (unless the requesting party is entitled to indemnification therefor under Section 10 8.2 Litigation Support. In the event and for so long as any party is actively contesting or defending against any charge, complaint, action, audit, suit, proceeding, hearing, investigation, claim or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction on or prior to the Closing Date involving LDX or ACS in conjunction with ACS Telecom, the other party will provide its reasonable cooperation to the contesting or defending party and its counsel in the contest or defense, make available its personnel and provide such testimony and access to its books and records as may be necessary in connection with the contest or defense, at the sole cost and expense of the contesting or defending party (unless the contesting or defending party is entitled to indemnification therefor under Section 10. 8.3 Post-Closing Receipts. In the event that either party after the Closing Date receives any funds properly belonging to the other party in accordance with the terms of this Agreement, the receiving party will promptly so advise such other party, will segregate and hold such funds in trust for the benefit of such other party and will promptly deliver such funds, together with any interest earned thereon, to an account or accounts designated in writing by such other party. Section 9. Closing Conditions. 9.1 Conditions to Obligation of the Purchaser. The obligation of the Purchaser to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties of the Seller set forth in Section 4 will be true and correct in all material respects at and as of the Closing Date; (b) the Seller will have performed and complied with all of its covenants hereunder in all material respects through the Closing Date; (c) there will not be any action, suit or proceeding pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions -19- 20 contemplated by this Agreement to be rescinded following consummation, or (iii) affect materially and adversely the right of the Purchaser following the Closing Date to own the LDX Shares or to control LDX; (d) the Seller will have obtained all consents, releases, waivers and other documentation required in order for the Seller to transfer and deliver the LDX Shares to the Purchaser and fulfill its other obligations hereunder; (e) the Seller will have given all notices and obtained all licenses, Permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and parties to contracts of the Seller, LDX and ACS as are required in order to transfer the LDX Shares to the Purchaser and to permit ACS to transfer the Permits and all letters of agency held by it to LDX. (f) the Seller shall have delivered to the Purchaser a Carrier Agreement substantially incorporating the points set out in as Exhibit E attached hereto , executed by Fidelity National Financial, Inc.(Fidelity). . A breach by Fidelity of the Service Agreement shall be deemed to be a breach of this Agreement by Seller.(g) the Seller shall have delivered to the Purchaser documentary evidence that it had retired the debts of LDX and ACS listed on Exhibit F , which debts shall include all debts of LDX other than the leases listed on Schedule 4.11, and debts incurred as a result of intra company transactions undertaken in the ordinary course of business, consistent with both past practice and market-based pricing, while the Management Agreement entered into pursuant to Section 7.1 is in place. (j) the Seller shall have delivered to the Purchaser an opinion of telecommunications regulatory counsel substantially in the form of Exhibit G ; (k) the Seller will have delivered to the Purchaser a certificate to the effect that each of the conditions specified above is satisfied in all respects; (l) the Purchaser will have received the resignations, effective as of the Closing, of each of the directors and officers of LDX, other than those whom the Purchaser has specified in writing at least Five (5) business days prior to the Closing; (m) all actions to be taken by the Seller in connection with consummation of the transactions contemplated hereby will have been taken and all certificates, instruments and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Purchaser. The Purchaser may waive any condition specified in this Section 9.1 if it executes a writing so stating at or prior to the Closing. 9.2 Conditions to Obligation of the Seller. The obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties of the Purchaser set forth in Section 5 will be true and correct in all material respects at and as of the Closing Date; (b) the Purchaser will have performed and complied with all of its covenants hereunder in all material respects through the Closing Date; (c) there will not be any action, suit or proceeding pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation; -20- 21 (d) the Purchaser will have delivered to the Seller a certificate to the effect that each of the conditions specified above is satisfied in all respects; and (e) all actions to be taken by the Purchaser in connection with consummation of the transactions contemplated hereby and all certificates, instruments and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Seller. The Seller may waive any condition specified in this Section 9.2 if it executes a writing so stating at or prior to the Closing. Section 10. Remedies for Breaches of this Agreement. 10.1 Survival of Representations and Warranties. (a) the representations and warranties contained in Sections 4.1 (Organization), 4.2 (Authorization of Transaction) and 4.4 (Capitalization) shall continue in full force and effect forever; (b) the representations and warranties contained in Sections 4.8 (Tax Matters) or 4.14 (Employee Benefits), or contained in any certificate delivered by the Seller relating thereto, shall remain in full force and effect until Thirty (30) days after the expiration of the applicable statute of limitations with respect to the matter to which the claim relates, as such limitation period may be extended from time to time; (c) the representations and warranties contained in Sections 4.3 (Noncontraventions; Consents), 4.6 (Undisclosed Liabilities), 4.9 (Contracts), 4.10 (Real Property), 4.12 (Intellectual Property), 4.13 (Litigation), and 4.16 (Legal Compliance) shall continue in full force and effect for a period of Twelve (12) months following the Closing Date; (d) the remaining representations and warranties of the parties shall remain in effect for a period of Two (2) years following the Closing Date. 10.2 Indemnification Provisions for Benefit of the Purchaser. Provided that the Purchaser makes a written claim for indemnification against the Seller prior to the expiration of any applicable survival period, then the Seller will indemnify the Purchaser from and against the entirety of any losses, expenses (including reasonable attorneys', accountants' an experts' fees and expenses), damages and other liabilities, including Tax-related liabilities pursuant to Section 6 hereof (collectively, Losses), suffered or incurred by the Purchaser or any of its Affiliates (including LDX), or any of their respective stockholders, directors, officers, employees and agents (collectively, the Purchaser Indemnified Parties), resulting from, arising out of, relating to, in the nature of or caused by a breach by the Seller of any of the Seller's representations, warranties or covenants in this Agreement or a failure by the Seller to obtain prior to the Closing Date all licenses, Permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities as are required in order to enable the Seller and ACS to perform their respective obligations under this Agreement. Notwithstanding anything contained in this Agreement to the contrary, the Seller shall not have any liability to the Purchaser Indemnified Parties hereunder until the Losses against which indemnification is sought aggregate in excess of Ten Thousand Dollars ($10,000). The entire, aggregate liability of the Seller to all Purchaser Indemnified Parties hereunder shall in no event exceed the lesser of Nine Million Dollars ($9,000,000) or the Purchase Price. 10.3 Indemnification Provisions for Benefit of the Seller. Provided that the Seller makes a written claim for indemnification against the Purchaser, then the Purchaser will indemnify the Seller from and against the entirety of any Losses the Seller or any of its Affiliates (excluding LDX), or any of their respective stockholders, directors, officers, employees or agents (collectively, the Seller Indemnified Parties), may suffer or incur resulting from, arising out of, relating to, in the nature of or caused by a breach by the Purchaser of any of Purchaser's representations, warranties or covenants in this Agreement. Notwithstanding -21- 22 anything contained in this Agreement to the contrary, (i) the Purchaser shall have no liability to the Seller Indemnified Parties hereunder until the Losses against which indemnification is sought aggregate in excess of Ten Thousand Dollars ($10,000). ). The entire, aggregate liability of the Purchaser to all Seller Indemnified Parties hereunder shall in no event exceed the lesser of Nine Million Dollars ($9,000,000) or the Purchase Price. 10.4 Indemnification Procedures. Except for claims for indemnification made pursuant to Sections 6 hereof, which claims shall follow the procedures set forth in such Section, if any third party notifies any party hereto (the "Indemnified Party") with respect to any matter that may give rise to a claim for indemnification against the other party hereto (the "Indemnifying Party") under this Section 10, then the Indemnified Party will notify the Indemnifying Party thereof promptly and in any event within Thirty (30) days after receiving any written notice from a third party; provided, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party will relieve the Indemnifying Party from any obligation hereunder unless, and then solely to the extent that, the Indemnifying Party is prejudiced thereby. Once the Indemnified Party has given notice of the matter to the Indemnifying Party, the Indemnified Party may defend against the matter in any manner it reasonably may deem appropriate. In the event the Indemnifying Party notifies the Indemnified Party within 30 days after the date the Indemnified Party has given notice of the matter that the Indemnifying Party is assuming the defense of such matter (a) the Indemnifying Party will defend the Indemnified Party against the matter with counsel of its choice reasonably satisfactory to the Indemnified Party, (b) the Indemnified Party may retain separate counsel at its sole cost and expense (except that the Indemnifying Party will be responsible for the fees and expenses of such separate co-counsel to the extent the Indemnified Party concludes in good faith that the counsel the Indemnifying Party has selected has a conflict of interest), (c) the Indemnified Party will not consent to the entry of a judgment or enter into any settlement with respect to the matter without the written consent of the Indemnifying Party (not to be withheld or delayed unreasonably) and (d) the Indemnifying Party will not consent to the entry of a judgment with respect to the matter or enter into any settlement that does not include a provision whereby the plaintiff or claimant in the matter releases the Indemnified Party from all liability with respect thereto, without the written consent of the Indemnified Party (not to be withheld or delayed unreasonably). 10.5 Offset.Any amounts due the Purchaser from the Seller may, at the Purchaser's option, be offset against the cash payment to be made by the Purchaser at the Closing and/or the Notes following the Closing. Section 11. Termination. 11.1 Termination of Agreement. The Purchaser and the Seller may terminate this Agreement by mutual written consent at any time prior to the Closing 11.2 Effect of Termination. If the parties terminate this Agreement pursuant to Section 10 , all obligations of the parties hereunder will terminate without liability of any party to the other party (except for any liability of any party then in breach); provided, that the expense allocation provisions contained in Section 12.2 will survive termination and remain in full force and effect thereafter. Section 12. Miscellaneous. 12.1 Press Releases and Announcements. No party will issue any press release or announcement relating to the subject matter of this Agreement prior to the Closing Date without the prior approval of the other party; provided, that a party may make any public disclosure it believes in good faith is required by Law or by the rules and regulations of any stock exchange on which the securities of such party are listed. 12.2 Expenses: Transfer Taxes. Each of the parties hereto will bear all legal, accounting, investment banking and other expenses incurred by it or on its behalf in connection with the transactions -22- 23 contemplated by this Agreement, whether or not such transactions are consummated. The Seller will be responsible for the payment of all sales, use, transfer, documentary or stamp taxes and recording and filing fees applicable to the assignment of the LDX Shares to the Purchaser or to any other transaction contemplated by this Agreement 12.3 Remedies. Any party having any rights under any provision of this Agreement will have all rights and remedies set forth in this Agreement and all rights and remedies that such party may have been granted at any time under any other Agreement or contract and all of the rights that such party may have under any Law. Any such party will be entitled to enforce such rights specifically, without posting a bond or other security, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by Law. 12.4 Consent to Amendments. The provisions of this Agreement may be amended or waived only by a written Agreement executed and delivered by the Seller and the Purchaser. No other course of dealing between the parties to this Agreement or any delay in exercising any rights hereunder will operate as a waiver of any rights of such parties. 12.5 Successors and Assigns. No party hereto may assign or delegate any of such party's rights or obligations under or in connection with this Agreement without the written consent of the other party hereto; provided, that the Purchaser may without the written consent of LDX, ACS or the Seller assign its rights under this Agreement to one or more Affiliates of the Purchaser or to any Person acquiring all or substantially all of the stock or assets of LDX from the Purchaser. No assignment by the Purchaser pursuant to the proviso of the preceding sentence will release the Purchaser of any of its obligations under this Agreement or waive or release any right or remedy the Seller may have against the Purchaser hereunder or thereunder. All covenants and Agreements contained in this Agreement by or on behalf of any of the parties hereto or thereto will be binding upon and enforceable against the respective successors and assigns of such party and will be enforceable by and will inure to the benefit of the respective successors and permitted assigns of such party. 12.6 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable Law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable Law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 12.7 Counterparts. This Agreement may be executed simultaneously in two (2) or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. 12.8 Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 12.9 Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered personally to the recipient or when sent to the recipient by telecopy (receipt confirmed), or one business day after the date when sent to the recipient by reputable express courier service (charges prepaid). Such notices, demands and other communications will be sent to the Purchaser and the Seller at the addresses indicated below: If to the Purchaser: North Star Telecom, LLC. 29716 Avenida de las Banderas Rancho Santa Margarita, CA 92688 Fax No. 949/622-4104 -23- 24 Attn: Gail Howard Chief Executive Officer With a copy (which will not constitute notice) to: Hunter Communications Law Group 1620 I Street NW, Suite 701 Washington, DC 20006 Fax No: (202) 293-2571 Attn: Charles C. Hunter, Esq. If to the Seller: Micro General Corporation 2510 Red Hill Avenue, Suite 230 Santa Ana, CA 92705 Fax no. 949/477-6819 Attn: John Snedegar Chief Executive Officer With a copy (which will not constitute notice) to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive Newport Beach, California 92660 Fax no. 949/725-4100 Attn: C. Craig Carlson, Esq. or to such other address or to the attention of such other party as the recipient party has specified by prior written notice to the sending party. 12.10 No Third-Party Beneficiaries. This Agreement will not confer any rights or remedies upon any Person other than the Seller and the Purchaser and their respective successors and permitted assigns. 12.11 Entire Agreement. This Agreement (including the documents referred to herein), and the Disclosure Schedules and Exhibits attached hereto constitute the entire Agreement among the parties and supersedes any prior understandings, Agreements or representations by or among the parties, written or oral, that may have related in any way to the subject matter hereof. 12.12 Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rule of strict construction will be applied against any party. The use of the word including in this Agreement means including without limitations and is intended by the parties to be by way of example rather than limitation. 12.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 12.14 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS AND SCHEDULES HERETO WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF CALIFORNIA. -24- 25 IN WITNESS WHEREOF, the parties hereto have executed and deliver this Agreement on the date first written above. MICRO GENERAL CORPORATION. ACS SYSTEMS, INC. By: John Snedegar By: John Snedegar Its: Chief Executive Officer Its: Chief Executive Officer NORTH STAR TELECOM, LLC. By: Gail Howard Its: Chief Executive Officer -25- EX-10.32 3 a68920ex10-32.txt EXHIBIT 10.32 1 EXHIBIT 10.32 MANAGEMENT AGREEMENT This MANAGEMENT AGREEMENT ("Agreement"), dated as of May 4, 2000 (the "Effective Date"), is entered into by and among North Star Telecom, LLC, a California limited liability company ("North Star" or "Manager"), and Micro General Corporation, a Delaware corporation ("MGC"), LD Exchange.com, Inc., a Delaware corporation ("LDX"), and ACS Systems, Inc., a Delaware corporation ("ACS") (MGC, LDX and ACS shall collectively be referred to herein as the "Engaging Parties"). North Star, MGC, LDX, ACS shall each be referred to herein as a Party and shall be referred to collectively herein as the Parties. R E C I T A L S: WHEREAS, North Star, MGC and ACS are concurrently herewith entering into that certain Stock Purchase Agreement (Stock Purchase Agreement) pursuant to which North Star will acquire all of the issued and outstanding capital stock in LDX, as well as the telecommunications business of ACS ("ACS Telecom") (LDX and ACS Telecom shall collectively be referred to herein as the "Company"); WHEREAS, North Star, MGC and ACS believe that any adverse impact on the business and operations of the Company and its customers resulting from the transition in ownership and operation of LDX and ACS Telecom from MGC and ACS, respectively, to North Star would be substantially lessened by pre-acquisition participation by North Star in the operation of the Company, under the oversight and control of MGC and with the continued involvement of existing management personnel; WHEREAS, North Star desires to avail itself of the opportunity to participate in the pre-acquisition management and operation of the Company, and MGC, LDX and ACS are willing to afford North Star said opportunity; NOW, THEREFORE, in consideration of the premises and mutual covenants, agreements, representations and undertakings set forth herein, and subject to the terms and conditions hereof, the Parties agree as follows: 1. ENGAGEMENT. 1.1 Subject to the terms and conditions set forth herein, the Engaging Parties hereby engage Manager to provide, and Manager hereby agrees to provide, the Management Services, as set forth in Section 3, below. 2. TERM. 2.1 The Term of this Agreement shall commence on the Effective Date and continue until (i) closing of North Star's acquisition of LDX and ACS Telecom, or (ii) termination of the Stock Purchase Agreement, unless earlier terminated pursuant to the mutual agreement of the Parties or pursuant to Section 6, hereof. 3. MANAGEMENT SERVICES. 3.1 Subject to the oversight and control of the Engaging Parties, Manager shall oversee the -1- 2 business and operations, including, without limitation, the day-to-day operations, of the Company. To this end, Manager shall perform the duties of Chief Operating Officer of the Company, reporting directly to the respective Boards of Directors of LDX and ACS and the senior management of MGC. All executives and employees of LDX will report to Manager. While Manager performs the duties set out above, however, Manager shall not be named as an officer of LDX and shall not have the authority to bind or commit LDX other than in the ordinary course of business or pursuant to Section 4.2, hereof. For purposes of this Agreement, an action shall not be deemed to be in the ordinary course of business if it requires the expenditure of more than Ten Thousand Dollars ($10,000). 3.2 Names of all persons designated by North Star to perform the Manager function shall be submitted to and approved by MGC in advance of assuming such duties, which approval shall not be unreasonably withheld. Attached hereto as Schedule A is a list of individuals approved by MGC to perform the Manager function on behalf of North Star. It is understood that no former employee of an Engaging Party will perform any part of the Manager function. 4. AUTHORITY OF MANAGER. 4.1 Except as otherwise expressly provided herein, Manager shall have all of the authority of, and be authorized to take all actions that could be taken by, the Chief Operating Officer of the Company. 4.2 Manager shall not have the authority to undertake any of the following actions without the prior written approval of the senior management of MGC, such approval not to be unreasonably withheld; provided, however, that the actions listed on Schedule 1, attached hereto and incorporated by reference herein have been preapproved by the senior management of MGC. The Engaging Parties agree and acknowledge that it would be unreasonable to withhold approval of any action sought to be taken by Manager, if Manager is willing to independently fund the cost of such action for the benefit of the Company and to indemnify MGC, LDX and ACS against any losses or liabilities that may arise from such action. Actions funded by Manager shall be documented contemporaneously to establish their economic benefit, if any, to LDX. (a) Terminate, or alter the compensation or benefits of, any current executives or employees of the Company or appoint or hire any new executives or employees for the Company; (b) Sell or otherwise dispose of, or grant a security interest in, any capital assets of the Company other than in the ordinary course of business; (b) Materially change the organizational structure of LDX; (c) Tender any bid, enter into any contract or commitment or engage in any transaction other than in the ordinary course of business; or (d) Initiate any new, or settle any existing, legal action, litigation or arbitration in the name of the Company, or waive any rights of the Company of any substantial value. -2- 3 5. COMPENSATION. 5.1 As full compensation for the Management Services provided, Manager will receive an amount equal to the Net Income generated by the Company during the Term of this Agreement, Net Income being defined as the net earnings of LDX as reflected in the monthly financial statements of LDX, prepared in accordance with GAAP . Payments to affiliated entities for expenses incurred during the Management Agreement shall be limited to expenses incurred in the ordinary course of business, consistent with past practice and further consistent with market-based pricing for such activities. Such compensation shall be reported to North Star monthly no later than the thirtieth (30th) day of the month following the month in which the revenues were received. The total amount of such compensation accrued during this Agreement shall be paid to North Star at the closing of the Stock Purchase Agreement provided, however, that in the event that the Stock Purchase Agreement is terminated, other than as a result of a material breach by MGC and/or ACS, Manager shall waive all right to compensation. Except as expressly provided elsewhere in this Agreement, Manager hereby waives any claims for reimbursement of expenses incurred by it in performing its obligations under this Agreement. In the event that LDX Net Income for a given month is negative, then negative income shall be accrued. If, however, the total compensation accrued during the term of this Agreement is negative, then such total shall be adjusted to zero as of the closing of the Stock Purchase Agreement. 6. TERMINATION. 6.1 This Agreement shall automatically terminate upon (i) termination of the Stock Purchase Agreement; or (ii) closing of the acquisition of LDX and ACS Telecom by North Star. 6.2 This Agreement may be terminated by the Engaging Parties on five (5) days written notice in the event of a breach in substantial part of a material provision of this Agreement by Manager, which breach is not cured within ten (10) days of written notice of such breach by the Engaging Parties to North Star. 6.3 This Agreement may be terminated by Manager (i) on five (5) days written notice in the event of a breach in substantial part of a material provision of this Agreement by any of the Engaging Parties, which breach is not cured within ten (10) days of written notice of such breach by North Star to the Engaging Parties, or (ii) on thirty (30) days written notice to the Engaging Parties. 6.4 In the event that this Agreement is terminated pursuant to this Section 6, other than Section 6.1(ii), the Engaging Parties may, at their option, either (i) retain the economic benefit of any action taken by Manager which they approved because Manager independently funded the cost of such action for the benefit of the Company and indemnified MGC, LDX and ACS against any losses or liabilities that arose from such action, and reimburse Manager in the amount of such funding and release Manager from its associated indemnification obligation; or (ii) forego the economic benefit of such action and return any associated physical assets and assign any associated contractual rights to Manager. -3- 4 7. INDEMNIFICATION. 7.1 Manager shall defend, indemnify, and hold harmless the Engaging Parties and the Engaging Parties' parents, employees, officers, agents, affiliates and subsidiaries from all claims and liabilities, including costs and expenses and reasonable attorney's fees which are directly attributable to acts or omissions of Manager while performing the Management Services. 7.2 If a claim by a third party is made against the Engaging Parties for which they are indemnified under this Section 7, and the Engaging Parties intend to seek indemnification with respect thereto, they shall promptly give written notice to Manager of such claim; provided, however, that failure by the Engaging Parties to give prompt notice of a claim shall not relieve Manager of its obligations unless said failure materially prejudices Manager's ability to defend the claim, in which case Manager's relief from its obligations shall be limited to prejudice actually suffered by reason of such failure. Manager shall have ten (10) business days after said notice is given to elect by written notice given to the Engaging Parties to undertake, conduct and control, through counsel of its own choosing (subject, as to choice of counsel, to the consent of the Engaging Parties, such consent not to be unreasonably withheld) and at its sole expense, the good faith settlement or defense of the claim, and the Engaging Parties shall cooperate with Manager in connection therewith; provided, however, that the Engaging Parties shall be entitled to participate in such settlement or defense through counsel chosen by them, but the fees and expenses of such counsel shall be borne by the Engaging Parties; provided further that if the defendants in an action include both the Engaging Parties and Manager and either the Engaging Parties or Manager shall reasonably conclude that there may be reasonable defenses available to it/them which are different from or in addition to those available to the other Party(ies) or if the interests of the Engaging Parties reasonably may be deemed to conflict with the interests of Manager, the Engaging Parties and Manager each shall have the right to select separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be paid by each of the Engaging Parties and Manager as incurred. So long as Manager is contesting a claim in good faith, the Engaging Parties shall not pay or settle the claim. If Manager does not make a timely election to undertake the good faith defense or settlement of the claim, or if Manager fails to proceed with the good faith defense or settlement of the matter after making such election, then, in either event, the Engaging Parties shall, upon ten (10) days' written notice to Manager, have the right to contest the claim at its sole discretion, at the risk and expense of Manager to the full extent set forth in this Section 7. 8. CONFIDENTIALITY. 8.1 Each Party acknowledges that the other Party (the Proprietary Party') may disclose to it, or it may receive in the performance of this Agreement, information which is considered proprietary, confidential and/or competitively-sensitive by the Proprietary Party ("Proprietary Information") . Proprietary Information shall include all information, in whatever form or medium, which is disclosed to a Party pursuant to or in connection with this Agreement (whether disclosed in writing, electronically, orally or otherwise) and which is marked as confidential or proprietary or which the receiving Party knows or has reason to know is confidential or proprietary. Without limiting the generality of the above, Proprietary -4- 5 Information shall include methods of doing business, business plans and projections, marketing strategies, be deemed to concepts, and methods, sales goals, customer and vendor lists, price and cost lists, contracts, financial data, technical information, and legal and regulatory data. This Agreement and its contents shall be deemed to be Proprietary Information of both Parties. 8.2 The receiving Party shall take all reasonable and necessary steps to preserve the confidentiality of all Proprietary Information, using at least the same degree of care and discretion it uses with regard to its own proprietary or confidential information to prevent the disclosure, unauthorized use or publication of Proprietary Information, including, but not limited to taking steps to: (i) advise all receiving Party employees and representatives with access to the Proprietary Information of the obligation to protect the Proprietary Information; and (ii) restrict disclosure of the Proprietary Information solely to its employees and representatives with a need to know and not disclose such Proprietary Information to any other parties. The Proprietary Information shall neither be used, nor allowed to be used, by the receiving Party for any purpose other than to facilitate the performance by it of its obligations hereunder nor shall the Proprietary Information be disclosed to any third party without the Proprietary Party's prior written consent. 8.3 Proprietary Information shall not include (i) information which at the time of disclosure was generally available to the public; (ii) information which subsequent to its disclosure by the Proprietary Party to the receiving Party, is published or otherwise becomes available to the public through any means other than an act or omission of the receiving Party; (iii) information which was previously known to the receiving Party free of any obligation to keep it confidential or which is subsequently developed in good faith by the receiving Party; and (iv) information rightfully acquired in good faith from a third party on a non-confidential basis without breach of an agreement to maintain said information in confidence. A receiving Party may disclose Proprietary Information (i) if required to do so by law; or (ii) if ordered to do so by a court or other governmental authority of competent jurisdiction; provided, however, that a receiving Party shall provide the Proprietary Party prior written notice of any such disclosure and exercise its best efforts, consistent with sound business practice, to both afford the Proprietary Party an opportunity to contest the disclosure and to limit the extent of the disclosure to the maximum extent practicable. 8.4 Proprietary Information disclosed to a Party is and shall remain the property of the Proprietary Party. By disclosing Proprietary Information, the Proprietary Party does not relinquish any of its proprietary rights and interests therein and hereby specifically reserves all such proprietary rights and interests to said Proprietary Information. A Party shall return (or, with the consent of the Proprietary Party, which shall not be unreasonably withheld, destroy) all Proprietary Information and all copies thereof, including, without limitation, written and electronic copies, as well as all summaries, notes or other documents, materials or things containing Proprietary Information, to the Proprietary Party promptly upon the reasonable written request of the Proprietary Party and upon termination of this Agreement. 8.5 The obligations set forth in this Section 8 shall survive any termination of this Agreement. 9. REPRESENTATIONS AND WARRANTIES. 9.1 Each of the Engaging Parties represents and warrants to Manager, and Manager represents and warrants to each of the Engaging Parties, which representations and warranties shall survive for the Term of this Agreement, that (i) it is duly organized, validly existing and in good standing under the laws of the state of its formation and is fully qualified to transact business in the State of California; (ii) it has full corporate power and authority and all authorizations necessary to carry on the businesses in which it is engaged and to own and use the properties owned and used by it; (iii) it has full power and authority to -5- 6 execute and deliver this Agreement and to perform its obligations hereunder; (iv) this Agreement constitutes the Party's valid and legally binding obligation, enforceable in accordance with its terms and conditions; (v) neither the execution and the delivery of this Agreement by it, nor the consummation by it of the transactions contemplated hereby, will violate any law, rule or regulation to which it is subject or any provision of its formative or operational documents or constitute a violation of, be in conflict with or constitute or create a default under, any agreement or commitment to which it is a party or by which it or any of its properties is bound or to which it or any of its properties is subject; and (vi) there are no judicial or administrative actions, proceedings (including bankruptcy proceedings) or investigations pending or, to the best of its knowledge, threatened, that question, or draw into question, the validity of this Agreement or any action taken or to be taken by it in connection with this Agreement or that, if adversely determined, would have an adverse effect upon its ability to enter into or perform its obligations under this Agreement. 10. OTHER INTERESTS. 10.1 Nothing in this Agreement shall be deemed to preclude Manager from engaging in other business ventures of whatever nature or description, independently or with others, whether currently existing or hereafter created. Nothing in this Agreement shall be deemed to preclude transactions between Manager acting in and for its own account and Company, provided that any services performed by the Manager are services which the Manager reasonably believes, at the time of the performance thereof, to be in the reasonable best interests of the Company, and are performed on terms no less favorable than could be obtained from an unaffiliated third party on an arms' length basis. 11. RELATIONSHIP OF PARTIES. 11.1 This Agreement constitutes Manager only as an independent contractor and not as a general or special agent or representative of Manager. Neither does this Agreement create a partnership or joint venturer nor confer on Manager any status, power, or authority other than to the extent expressly provided herein. Neither the Engaging Parties nor Manager shall have any rights by virtue of this Agreement in any other business ventures of any other Party or any revenues, profits or losses derived therefrom. No Party shall represent that its relationship with the other Party(ies) is other than that expressly created by this Agreement. 11.2 No Party's employees, agents and representatives shall have any claim for compensation, benefits or reimbursement against any other Party based on this Agreement. No Party, or its officers, directors, employees or agents, shall be entitled to participate in, or receive any benefit or right as an employee under, any benefit or welfare plan of any other Party, including, but not limited to, employee insurance, pension or security plans, based on this Agreement. 12. MISCELLANEOUS. 12.1 ASSIGNMENT. This Agreement may not be assigned by a Party without the prior written consent of the other Parties, which consent shall not be unreasonably withheld, and any attempted assignment without such consent shall be void; provided, however, that the Engaging Parties shall be deemed to -6- 7 have consented to any assignment of this Agreement by North Star to an Affiliate so long as that assignment is undertaken in good faith. 12.2. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, APPLICABLE TO AGREEMENTS MADE AND TO BE ENTIRELY PERFORMED THEREIN, WITHOUT REGARD TO ITS PRINCIPLES OF CHOICE OF LAW. THE PARTIES AGREE THAT ANY ACTION TO ENFORCE OR INTERPRET THE TERMS OF THIS AGREEMENT SHALL BE INSTITUTED AND MAINTAINED ONLY IN THE FEDERAL DISTRICT COURT FOR THE SOUTHERN DIVISION OF THE SOUTHERN DISTRICT OF CALIFORNIA, OR IF JURISDICTION IS NOT AVAILABLE IN FEDERAL COURT, THAN A STATE COURT LOCATED IN SANTA ANA, CALIFORNIA. ALL PARTIES HEREBY CONSENT TO THE JURISDICTION AND VENUE OF SUCH COURTS AND WAIVE ANY RIGHT TO OBJECT TO SUCH JURISDICTION AND VENUE. 12.3 NOTICES. All notices, demands, requests, solicitations of consent or approval, and other communications required or permitted hereunder shall be in writing and shall be deemed to have been given when received by hand delivery, telecopy (followed by notice transmitted, postage prepaid, by U.S. registered or certified mail, return receipt requested), or overnight delivery service, with acknowledged receipt, addressed to the Party at the addresses listed below for that Party, or to such other addresses which such Party shall have given for such purpose by notice hereunder. If to the Manager:: North Star Telecom, LLC. 29716 Avenida de las Banderas Rancho Santa Margarita, CA 92688 Fax No. 949/622-4104 Attn: Gail Howard Chief Executive Officer With a copy (which will not constitute notice) to: Hunter Communications Law Group 1620 I Street NW, Suite 701 Washington, DC 20006 Fax No: (202) 293-2571 Attn: Charles C. Hunter, Esq. If to an Engaging Party: Micro General Corporation 2510 Red Hill Avenue, Suite 230 Santa Ana, CA 92705 Fax no. 949/477-6819 Attn: John Snedegar Chief Executive Officer -7- 8 With a copy (which will not constitute notice) to: Stradling Yocca Carlson & Rauth 660 Newport Center Drive Newport Beach, California 92660 Fax no. 949/725-4100 Attn: C. Craig Carlson, Esq 12.4 INTERPRETATION AND CONSTRUCTION. The headings and captions of this Agreement are inserted for convenience and identification only and are in no way intended to define, limit or expand the scope and intent of this Agreement or any provision hereof. Where the context so requires, the singular shall include the plural. The references contained in this Agreement to "Sections" are to sections of this Agreement unless the context clearly requires otherwise. This Agreement represents the joint work product of the Parties and has been negotiated by the Parties and their respective counsels, and, accordingly, this Agreement shall be interpreted fairly in accordance with its terms and in the event of an ambiguity, no inference shall be drawn against any Party. 12.5 AMENDMENT AND WAIVER. Unless otherwise provided herein, this Agreement may be amended only by an instrument in writing duly executed by all Parties. Any waiver by any Party of any breach of or failure to comply with any provision of this Agreement by another Party shall not be construed as, or constitute, a continuing waiver of such provision, or a waiver of any other provision hereof. 12.6 THIRD PARTIES. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, and their respective assigns (as permitted hereunder), heirs, successors and legal representatives. It is not the intent of the Parties that there be any third party beneficiaries of this Agreement, and this Agreement is exclusively for the benefit of the Parties hereto or their respective assigns. 12.7 ENTIRE UNDERSTANDING. THIS AGREEMENT SETS FORTH THE ENTIRE UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDES ALL PRIOR AGREEMENTS AND COLLATERAL COVENANTS, ARRANGEMENTS, COMMUNICATIONS, REPRESENTATIONS AND WARRANTIES, WHETHER ORAL OR WRITTEN, BY ANY PARTY (OR ANY OFFICER, DIRECTOR, EMPLOYEE OR REPRESENTATIVE OF THEREOF) WITH RESPECT TO THE SUBJECT MATTER HEREOF. 12.8 SEVERABILITY. If any provision or provisions of this Agreement are determined to be invalid or contrary to any existing or future law, statute or ordinance of any jurisdiction or any order, rule or regulation of a court or regulatory or other governmental authority of competent jurisdiction, such invalidity shall not impair the operation of or affect those provisions in any other jurisdiction or any other provisions hereof which are valid, and the invalid provisions shall be construed in such manner as shall be as similar in terms to such invalid provisions as may be possible, consistent with applicable law; provided, however, that if a provision cannot be severed without substantially diminishing the economic value of this Agreement to a Party, that Party, notwithstanding anything to the contrary herein, may terminate this Agreement on thirty (30) days' written notice to the other Parties consistent with Section 6, hereof. -8- 9 12.9 FURTHER ASSURANCES. The Parties covenant to one another to execute and deliver such further instruments and do such further reasonable acts and things as may reasonably be required to carry out the intent and purposes of this Agreement. 12.10 SURVIVAL. The covenants and agreements of Customer contained in this Agreement with respect to payment of amounts due, confidentiality, and indemnification and non-solicitation shall survive termination and expiration of this Agreement. The rights and obligations under this Agreement shall survive any merger or sale of a Party and shall be binding upon the successors and permitted assigns of each Party. 12.11 REMEDIES. Any Party having any rights under any provision of this Agreement will have all rights and remedies set forth in this Agreement and all rights and remedies that such Party may have been granted at any time under any other agreement or contract and all of the rights that such party may have under any Law. Any such Party will be entitled to enforce such rights specifically, without posting a bond or other security, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by Law. -9- 10 12.12 COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original for all purposes, but all of which together shall constitute one agreement. IN WITNESS WHEREOF, the Parties have caused this MANAGEMENT AGREEMENT to be executed as of the day and year first above written. NORTH STAR TELECOM, LLC By: ______________________ Name: ______________________ Title: ______________________ MICRO GENERAL CORPORATION By: ______________________ Name: ______________________ Title: ______________________ LD EXCHANGE.COM, INC. By: ______________________ Name: ______________________ Title: ______________________ ACS SYSTEMS, INC. By: ______________________ Name: ______________________ Title: ______________________ -10- EX-10.33 4 a68920ex10-33.txt EXHIBIT 10.33 1 EXHIBIT 10.33 ASSET TRANSFER, RIGHT OF FIRST REFUSAL, AND STOCK PURCHASE AGREEMENT THIS ASSET TRANSFER, RIGHT OF FIRST REFUSAL AND STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of May 19, 2000 (the "Effective Date"), by and between Micro General Corporation, a Delaware corporation ("Assignor"), and TXMNet, Inc., a Delaware corporation ("Assignee"). RECITALS A. Assignor owns 1,000 shares (the "RealEC Shares") of RealEC, Inc., a Delaware corporation ("RealEC"), such shares being Assignor's entire interest in RealEC and 50% of the outstanding capital stock of RealEC. B. Assignor desires to assign to Assignee the entire right, title, and interest in the Intellectual Property (as hereinafter defined), the Transferred Assets (as hereinafter defined), and the RealEC Shares (as hereinafter defined). C. Assignee desires to sell to Assignor, and Assignor desires to purchase from Assignee, 6,500,000 shares of Series A Preferred Stock, $.001 par value per share, of Assignee. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: AGREEMENT 1. Definitions. (a) "Copyrights" means any and all copyrights set forth on Exhibit A hereto, including all copyright applications therefor, any renewal or extension thereof, all other copyright rights accruing by reason of international copyright conventions and any moral rights pertaining thereto, and the right to sue for, settle, or release any past, present, or future infringement thereof and regardless of whether or not registration for any such copyright exists or is pending. (b) "Excluded Technology" means the technology set forth on Exhibit B hereto, provided, however, that such technology is limited in all instances to standard routines, development tools, programming techniques and other code or content that are non-specific to any Intellectual Property. (c) "Intellectual Property" means any and all Copyrights, Trademarks, Patents, the Website, the Software, business plans, financial data, marketing plans, supplier or customer lists, forecasts, know-how, concepts, inventions, techniques, system designs, prototypes, ideas or other intellectual property or proprietary rights of Assignor or any subsidiary of Assignor, developed for or acquired in connection with the TXMNet business, other than the Excluded Technology. (d) "Patents" means all patents and patent applications set forth on Exhibit A hereto. 2 (e) "Software" means the software set forth on Exhibit A hereto in object code and source code, and solely as modified or created in connection with the TXMNet business, and all documentation, copies and licenses thereof, and all Intellectual Property underlying such software. (f) "Trademarks" means all United States and foreign registered and common law trademarks, trade names and service marks, or applications therefore set forth Exhibit A, whether or not registration for such mark exists or is pending, together with all other trademark, trade name or service mark interests accruing by reason of international trademark conventions, accompanied by the goodwill of all business connected with the use of and symbolized by such marks including the right to sue for, settle, or release any past, present, or future infringement thereof or unfair competition involving the same. (g) "Transferred Assets" means the assets set forth on Exhibit C hereof. (h) "Website" shall mean all images, text, graphics, Internet domain names (together with all foreign, state or national registrations thereof and accompanied by the goodwill of all business connected with the use of and symbolized by such domain names, including the right to sue for, settle, or release any past, present, or future infringement thereof or unfair competition involving the same), computer code, website designs and processes, uniform resource locators and other technology of Assignor relating to the website located at txmnet.com or transactionmanager.com or any substitute or related website. 2. Assignment and Transfer. (a) Assignor hereby assigns, grants, transfers, and sets over to Assignee free and clear of any and all mortgages, security interests, liens, options, pledges, equities, claims, charges, restrictions, conditions, conditional sale contracts and any other adverse interests or other encumbrances of any kind whatsoever all right, title, and interest in and to the (i) Intellectual Property and all goodwill associated with such Intellectual Property, including, without limitation, (A) the right to use, copy, modify, exploit, license, assign, convey and pledge the Intellectual Property, (B) the right to exclude others from using the Intellectual Property, (C) the right to sue others and collect damages for past present and future infringement of the Intellectual Property, (D) the right to create modifications and derivative works of the Intellectual Property and retain full ownership thereof, and (E) the right to file and prosecute applications for registration, now pending or hereinafter initiated, to protect any rights in the Intellectual Property, (ii) the Transferred Assets and (iii) the RealEC Shares. Notwithstanding anything to the contrary herein, all modifications or derivative works made by or on behalf of Assignor shall be solely owned by Assignor. (b) Assignor agrees that Assignee shall not be obligated to assume or perform and is not assuming or performing any liabilities or obligations of Assignor, whether known or unknown, fixed or contingent, certain or uncertain, and regardless of when such liabilities or obligations may arise or may have arisen or when they are or were asserted (the "Retained Liabilities"), and Assignor shall remain responsible for all Retained Liabilities. 3. Irrevocable License. Assignor hereby grants to Assignee a worldwide, royalty-free, perpetual, nonexclusive, transferable, sublicensable and irrevocable license to use the Excluded Technology in connection with the Intellectual Property. 4. Covenant Not to Compete. 2 3 (a) For a period of five (5) years after the date hereof, Assignor shall not, for itself or any third party, directly or indirectly engage in the business of Assignee as now conducted or proposed to be conducted, including without limitation providing electronic commerce services designed to facilitate real estate and related transactions anywhere in the world. (b) The parties hereto intend that the covenant not to compete under this Section 4 shall be construed as a series of covenants, one in each county, state, country, province or territory in the world. If in any judicial proceedings a court shall refuse to enforce any of the separate covenants deemed included in this Section 4, then such unenforceable covenant shall be deemed eliminated from this Section 4 for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. (c) Assignor acknowledges and agrees (i) that the covenants and agreements of Assignor in this Section 4 are reasonably necessary to protect the interests of Assignee in whose favor such covenants and agreements are imposed, (ii) the restrictions imposed by this Section 4 are not greater than are necessary for the protection of Assignee in light of the harm that Assignee will suffer if Assignor breaches this Agreement, (iii) the period, nature, kind and character of the restrictions are reasonably required to protect the interests of Assignee, (iv) the geographical restrictions are reasonable in light of Assignee's world-wide business, and (v) Assignee would not have otherwise entered into this Agreement without the protection afforded under this Section 4. 5. Further Assurances. Assignor agrees to execute such additional documents, complete such other formalities, and extend such other cooperation as may be reasonably requested or required to perfect Assignee's interest in the Intellectual Property and to permit Assignee to be duly recorded as the registered owner and proprietor of the rights hereby conveyed, including, without limitation, any appropriate instruments required to be filed in the applicable national trademark, copyright or patent offices or other appropriate offices. 6. Issuance of Stock. Assignee hereby agrees to issue to Assignor 6,500,000 shares of Assignee's Series A Preferred Stock (the "Series A Preferred Stock") as consideration for the transfer of the Intellectual Property, Transferred Assets and RealEC Shares as set forth in Section 2 hereof. The shares of Common Stock issued upon conversion of the Series A Preferred Stock shall be subject to registration and other investor rights granted to investors in the Company's round of financing associated with such conversion, if any. 7. Right of First Refusal. (a) Pro Rata Right. Assignee hereby grants to Assignor the right of first refusal to purchase a pro rata share of all New Securities (as defined in paragraph 7(b) below) which Assignee may, from time to time, propose to sell and issue. Assignor's pro rata share, for purposes of this right of first refusal, is a ratio, (A) the numerator of which is the number of shares of Series A Preferred Stock held by Assignor on the date of the Company's written notice pursuant to paragraph 7(c) below; and (B) the denominator of which is the total number of shares of common stock then outstanding (assuming full conversion and exercise of all securities convertible or exercisable into shares of common stock). (b) Definition of New Securities. "New Securities" shall mean any capital stock of Assignee whether now authorized or not, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that are, or may become, convertible into or exercisable for 3 4 shares of capital stock. New Securities, however, shall not include any of the following issuances or sales: (i) securities to employees, consultants, officers or directors pursuant to any stock purchase plan or arrangement, stock option plan or other stock incentive plan or agreement approved by the Board of Directors; (ii) securities pursuant to or after consummation of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities to the general public for the account of Assignee; (iii) securities pursuant to the conversion or exercise of convertible or exercisable securities; (v) securities issued in connection with the acquisition of all or part of another company by the Corporation by merger or other reorganization, or by purchase of all or part of the assets of another company, pursuant to a plan or arrangement approved by the Board of Directors; and (vi) securities issued in connection with equipment lease, real property lease or bank financings, as approved by the Board of Directors of the Corporation. (c) Required Notices. In the event Assignee proposes to undertake an issuance of New Securities, it shall give Assignor written notice of the proposed issuance, describing the type of New Securities, the price, the general terms upon which Assignee proposes to issue the same and the pro rata portion of such New Securities Assignor is entitled to purchase. Assignor shall have thirty (30) days after the date of receipt of such notice to agree to purchase Assignor's pro rata share of such New Securities for the price and upon the general terms specified in the notice by giving written notice to Assignee and stating therein the quantity of New Securities to be purchased. (d) Assignee's Right to Sell. In the event Assignor fails to exercise the right of first refusal within the 30 day period, Assignee shall have sixty (60) days after the expiration of such period to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) and to sell all such New Securities respecting which the Holders' options were not exercised, at a price and upon general terms no more favorable in any material respect to the purchasers thereof than specified in Assignee's notice. In the event Assignee has not sold within said sixty (60) day period or entered into an agreement to sell all such New Securities within said sixty (60) day period (or sold and issued all such New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), Assignee shall not thereafter issue or sell any New Securities, without first offering such securities to Assignor in the manner provided above. (e) Assignment. The right of first refusal set forth in this Section 7 is transferable by Assignor provided that any such transferee executes any agreement to be bound by the terms and conditions hereof. 8. Representations and Warranties of Assignee. Assignee hereby represents and warrants to Assignor as follows: 4 5 (a) Authorization. The execution and delivery by Assignee of this Agreement and the issuance of the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) by Assignee, as contemplated herein, have been duly authorized by all requisite corporate action of Assignee and will not result in a breach, acceleration or violation of any agreement to which Assignee is a party. (b) Valid Issuance of Stock. The Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) have been duly and validly authorized and, when issued and paid for in accordance with the terms hereof and thereof, will be validly issued and nonassessable securities of Assignee and shall be free of any preemptive rights. (c) Investment Representations. (i) Assignee understands that the RealEC Shares are not registered under the Securities Act of 1933 ("Securities Act") and are not qualified or registered under any state securities laws ("Blue Sky Laws") pursuant to exemptions from registration or qualification contained in the Securities Act and in the Blue Sky Laws. Assignee understands that the RealEC Shares must be held indefinitely unless subsequently registered or qualified under the Securities Act and under the Blue Sky Laws unless exemptions from the registration or qualification requirements under the Securities Act and under the Blue Sky Laws are available in connection with any proposed transfer of the RealEC Shares by Assignee. (ii) Assignee agrees that none of the RealEC Shares, nor any interest in the RealEC Shares, will be resold or otherwise transferred by Assignor without registration or qualification under the Securities Act and the Blue Sky Laws unless Assignee first demonstrates to the satisfaction of RealEC that specific exemptions from such registration or qualification requirements are available with respect to the proposed transfer and provides RealEC an opinion of counsel satisfactory to RealEC that the proposed transfer may be made without violation of the Securities Act or the Blue Sky Laws and will not affect the exemptions relied upon by RealEC in connection with the original issuance of the RealEC Shares. (iii) Assignee is aware of RealEC's business affairs and financial condition and has acquired sufficient information about RealEC to reach an informed and knowledgeable decision regarding the merits and risks of investing in the RealEC Shares. Assignee has had ample opportunity to review information regarding RealEC and to ask questions of RealEC and its representatives and to seek independent investment, tax, and legal advice prior to investing in the RealEC Shares. THE ASSIGNEE RECOGNIZES THAT THE REALEC SHARES ARE A SPECULATIVE INVESTMENT INVOLVING A HIGH DEGREE OF RISK OF LOSS BY THE ASSIGNEE AND THAT THE ASSIGNEE COULD LOSE THE ENTIRE AMOUNT OF THE ASSIGNEE'S INVESTMENT. THE ASSIGNEE IS ABLE TO BEAR THE ECONOMIC RISK OF SAID INVESTMENT AND AT THE PRESENT TIME COULD AFFORD A COMPLETE LOSS OF SAID INVESTMENT. (iv) The RealEC Shares are being acquired for private investment for Assignee's own account and not with a view to or for sale in connection with any distribution of the RealEC Shares. 5 6 (v) The sale of the RealEC to Assignee was not accompanied by the publication of any written or printed communication or any communication by means of recorded telephone messages or spoken on radio, television, or similar communications media. (vi) Assignee is duly organized in the State of Delaware. (vii) Assignee is an "Accredited Investor" as defined under Section 501(a) of the Securities Act of 1933, as amended. (viii) Assignee acknowledges that the certificates representing the RealEC Shares will bear the legends set forth herein: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. (ix) Assignee understands that the RealEC constitute "restricted securities" for the purposes of Rule 144 promulgated under the Securities Act. (x) Assignee understands that Assignor will rely upon the foregoing for the purposes of transferring the RealEC. Assignee hereby agrees to indemnify Assignor and its officers, directors, agents, and counsel and hold them harmless from and against any and all damages suffered and liabilities incurred by them (including costs of investigation, defense, and attorneys' fees) arising out of any breach by Assignee of the agreements or inaccuracy in the representations and warranties which Assignee has made herein. 9. Representations and Warranties of Assignor. Assignor hereby represents and warrants to Assignee as follows: (a) Investment Representations. (i) Assignor understands that the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) will be issued by Assignee without registration under the Securities Act and without qualification or registration under Blue Sky Laws pursuant to exemptions from registration or qualification contained in the Securities Act and in the Blue Sky Laws. Assignor understands that the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) must be held indefinitely unless subsequently registered or qualified under the Securities Act and under the Blue Sky Laws unless exemptions from the registration or qualification requirements under the Securities Act and under the Blue Sky Laws are available in connection with any proposed transfer of the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) by Assignor. (ii) Assignor agrees that none of the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof), nor any interest in the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof), will be resold or otherwise transferred by Assignor without registration or qualification under the Securities Act and the Blue Sky Laws unless 6 7 Assignor first demonstrates to the satisfaction of Assignee that specific exemptions from such registration or qualification requirements are available with respect to the proposed transfer and provides Assignee an opinion of counsel satisfactory to Assignee that the proposed transfer may be made without violation of the Securities Act or the Blue Sky Laws and will not affect the exemptions relied upon by Assignee in connection with the original issuance of the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof). (iii) Assignor is aware of Assignee's business affairs and financial condition and has acquired sufficient information about Assignee to reach an informed and knowledgeable decision regarding the merits and risks of investing in the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof). Assignor has had ample opportunity to review information regarding Assignee and to ask questions of Assignee and its representatives and to seek independent investment, tax, and legal advice prior to investing in the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof). THE ASSIGNOR RECOGNIZES THAT THE SERIES A PREFERRED STOCK (AND THE COMMON STOCK ISSUABLE UPON EXERCISE THEREOF) ARE A SPECULATIVE INVESTMENT INVOLVING A HIGH DEGREE OF RISK OF LOSS BY THE ASSIGNOR AND THAT THE ASSIGNOR COULD LOSE THE ENTIRE AMOUNT OF THE ASSIGNOR'S INVESTMENT. THE ASSIGNOR IS ABLE TO BEAR THE ECONOMIC RISK OF SAID INVESTMENT AND AT THE PRESENT TIME COULD AFFORD A COMPLETE LOSS OF SAID INVESTMENT. (iv) The Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) are being acquired for private investment for Assignor's own account and not with a view to or for sale in connection with any distribution of the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) to others. (v) The sale of the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) to Assignor was not accompanied by the publication of any written or printed communication or any communication by means of recorded telephone messages or spoken on radio, television, or similar communications media. (vi) Assignor is duly organized in the State of Delaware. (vii) Assignor is an "Accredited Investor" as defined under Section 501(a) of the Securities Act of 1933, as amended. (viii) Assignor acknowledges that the certificates representing the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) will bear the legends set forth herein: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. 7 8 (ix) Assignor understands that the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof) constitute "restricted securities" for the purposes of Rule 144 promulgated under the Securities Act. (x) Assignor understands that Assignee will rely upon the foregoing for the purposes of issuing the Series A Preferred Stock (and the Common Stock issuable upon exercise thereof). Assignor hereby agrees to indemnify Assignee and its officers, directors, agents, and counsel and hold them harmless from and against any and all damages suffered and liabilities incurred by them (including costs of investigation, defense, and attorneys' fees) arising out of any breach by Assignor of the agreements or inaccuracy in the representations and warranties which Assignor has made herein. (b) Intellectual Property and Asset Warranties. (i) To the best of Assignor's knowledge, the Intellectual Property assigned and the Excluded Technology licensed hereunder shall be sufficient in all respects for the operation of the business of Assignee as now conducted and as proposed to be conducted. (ii) The Intellectual Property has been independently created and developed solely by Assignor, and Assignor owns or has obtained all rights, licenses, releases, assignments, or other rights in the Intellectual Property, and made all payments and satisfied all obligations to any third party or employee, necessary to make the assignment set forth in Section 2 hereof. No third party or employee shall have any right, title or interest in and to the Intellectual Property. Each employee, consultant or contractor of Assignor who has contributed to the development of the Intellectual Property has entered into an agreement requiring such employee, consultant or contractor to assign to Assignor forever all right, title and interest that such employee, consultant or contractor may have accrued in the Intellectual Property, and Assignee shall not incur any liability or obligation, including payment or other compensation, to such employee, consultant, contractor or other third party by reason of the assignment in Section 2 hereof. (iii) Assignee has the full corporate power to enter into this Agreement and to carry out its obligations under this Agreement. Assignor has not previously granted, and will not grant, any right, license or interest in, to or under the Intellectual Property, or Excluded Technology, or any portion thereof, which is inconsistent with the rights and licenses granted to Assignee herein or that will adversely affect any exercise by Assignee of its rights under this Agreement. There are no actions, suits, investigations, claims or proceedings pending or, to the knowledge of Assignor, threatened in any way relating to the Intellectual Property, Software or Excluded Technology. (iv) The Intellectual Property and Excluded Technology do not and will not infringe or misappropriate any patents, copyrights, trade secrets, trade names or other intellectual or proprietary rights of any third-party, and Assignor is not aware of any claims or basis for such infringement. (v) The Software will function correctly when dealing with dates, times, and date/time (including calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year calculations, and with respect to the processing of date/time data, the Software will neither contain nor create any logical or mathematical inconsistency, will not malfunction, and will not cease to function. 8 9 (vi) Assignor has and will convey and transfer to Assignee, good, complete and marketable title to all of the Transferred Assets, free and clear of all encumbrances of any nature whatsoever. All of the Transferred Assets are in the exclusive possession and control of Assignor, and Assignor has the unencumbered right to use, and to sell to Assignee in accordance with the terms and provisions of this Agreement, all of the Transferred Assets without interference from and free of the rights and claims of others. (c) Authority; Noncontravention. The execution and delivery by Assignor of this Agreement and the performance of the terms hereunder have been duly authorized by all requisite corporate action of Assignee and will not result in a breach, acceleration or violation of any agreement to which Assignor is a party. (d) Stock Ownership. Assignor is the sole owner, beneficially and of record, of all of the RealEC Shares, free and clear of all claims, liens, encumbrances, security interests, pledges, options, charges, restrictions, defects in title and any adverse interests of any nature whatsoever, other than restrictions imposed by federal and applicable state securities laws which do not constitute an impediment to the transfer of such RealEC Shares to Assignee as described in this Agreement. Assignor is not a party to any agreement, commitment or understanding, written or oral, that provides for the grant or sale of, and has not granted or sold to any person or entity, any options, warrants or other rights to purchase, nor does any person or entity (other than Assignee) have any right to acquire from the Assignor, any of the Real EC Shares. (e) Capitalization. The authorized capital stock of RealEC consists of 10,000 shares of common stock, $0.001 par value per share, of which only the RealEC Shares and 1,000 shares owned by Stewart Title Company are issued and outstanding, and no other shares of any other class or series of capital stock of Company are issued and outstanding. There are no subscriptions, options, warrants, calls, rights, contracts, commitments, understandings, restrictions or arrangements relating to the issuance, sale, transfer or voting of any shares of capital stock of RealEC, including any rights of conversion or exchange under any outstanding securities or other instruments. All of the RealEC Shares have been validly issued and are fully paid, nonassessable and free of preemptive rights. 10. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California. 11. Entire Agreement; Waiver; Amendment. This Agreement shall constitute the entire agreement between the parties pertaining to the subject matter hereof, and shall supersede all prior and contemporaneous oral negotiations, agreements, commitments, representations, and understandings relating to the subject matter hereof. No supplement, modification, waiver, or amendment to this Agreement shall be binding on any party unless in writing and signed by the party against whom enforcement is sought. 12. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 13. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. 9 10 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the Effective Date. MICRO GENERAL CORPORATION, TXMNET, INC., A DELAWARE CORPORATION A DELAWARE CORPORATION By: By: ------------------------------- ------------------------------------- Name: Name: ----------------------------- ----------------------------------- Title: Title: ---------------------------- ---------------------------------- 10 11 EXHIBIT A 1. Copyrights 2. Trademarks -- Transaction Manager TXMNet Closing Place Vendor Manager Closing Manager Transactionmgr.com Vendormgr.com Closingplace.com Closingmgr.com 3. Patents 4. Software 11 12 EXHIBIT B EXCLUDED TECHNOLOGY 13 EXHIBIT C TRANSFERRED ASSETS Lease to office space at 10200 Richmond Avenue, Suite 175, Houston, TX 77042 Office equipment located at ___________________. 13 EX-10.34 5 a68920ex10-34.txt EXHIBIT 10.34 1 EXHIBIT 10.34 MUTUAL RELEASE AND SETTLEMENT AGREEMENT This MUTUAL RELEASE AND SETTLEMENT AGREEMENT ("Agreement"), dated as of December 28, 2000 (the "Effective Date"), is entered into by and among North Star Enterprises, LLC, a California Limited Liability Company, North Star Telecom, LLC, a California Limited Liability Company, and all subsidiaries and entities owned by and/or related to either of said North Star companies, on the one hand ("North Star" or "Purchaser"), and Micro General Corporation, a Delaware corporation ("MGEN" or "Seller"), LD Exchange.com, Inc., a Delaware corporation ("LDX"), and ACS Systems, Inc., a Delaware corporation ("ACS"), on the other hand. In addition, this Agreement is expressly made for the benefit of Michael Kest, an individual, Kest Children's Trust, SCKG Company, LLC, a California Limited Liability Company, Robert S. Manns, an individual, RSM Trust I, Betty Gail Howard, an individual, and DLH Trust ("Third Party Beneficiaries"). North Star, MGEN, LDX, ACS shall each be referred to herein as a Party and shall be referred to collectively herein as the Parties. R E C I T A L S: WHEREAS, North Star, MGEN and ACS entered into that certain Stock Purchase Agreement ("Stock Purchase Agreement"), dated as of May 5, 2000, pursuant to which North Star was to acquire all of the issued and outstanding capital stock in LDX, as well as the telecommunications business of ACS ("ACS Telecom"); and WHEREAS, North Star, MGEN and ACS entered into that certain Management Agreement ("Management Agreement"), dated as of May 5, 2000, regarding the management responsibility for LDX; and WHEREAS, the parties have concluded that their interests are best served by terminating both the Stock Purchase Agreement and the Management Agreement, and desire to amicably resolve all issues related thereto; NOW, THEREFORE, in consideration of the premises and mutual covenants, agreements, representations and undertakings set forth herein, and subject to the terms and conditions hereof, the Parties agree as follows: 1. TERMINATIONS. 1.1 The Stock Purchase Agreement is hereby terminated effective immediately by the mutual agreement of the Parties and as is provided in Paragraph 11.1 thereof. 1.2 The Management Agreement is hereby terminated, effective immediately, by the mutual agreement of the Parties and automatically terminated upon termination of the Stock Purchase Agreement, as is provided in Paragraph 6.1 (i) thereof. 2. PAYMENTS 2.1 Funds held in escrow pursuant to Paragraph 2.1 of the Stock Purchase Agreement will be released immediately to MGEN. North Star will take immediate action to implement such release by having an appropriate representative of North Star make contact with the escrow agent and issuing instructions to release such funds to MGEN on or before December 29, 2000. 2.2 North Star will pay to MGEN the sum of Fifty Thousand dollars ($50,000) cash, on or before December 29, 2000. 2 3. RELEASES 3.1 Upon the execution hereof, the Parties hereby release and discharge one another, their shareholders, officers, affiliates, subsidiaries, directors, attorneys, employees, agents, heirs, family members, executors, representatives (legal or otherwise), insurers, administrators, successors and assigns (legal or otherwise) as well as the Third Party Beneficiaries and their trustees from any and all actions, causes of action, suits, debts, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, claims and demands whatsoever which they, their partners, directors, financial manager, employees, agents, executors, representatives (legal or otherwise), administrators, successors and assigns, and any parent, subsidiary or affiliated entity or person, past, present or future, or any of them, if any, ever had, now have or hereafter can, shall or may have against one another, of any type, nature or description which in any way arise out of, are related to, or are connected with the Stock Purchase Agreement, Management Agreement, and/or the performance or conduct thereof, including, without limitation, any fees or payments due or that may become due thereunder. With respect to the matters herein described as the subject of release, each and all the Parties hereby waive and relinquish any and all rights that they may have under the provisions of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR." IT IS UNDERSTOOD AND AGREED BY EACH AND ALL OF PARTIES HERETO THAT IF THE FACTS OR LAW WITH RESPECT TO WHICH THE FOREGOING RELEASE IS GIVEN HEREAFTER TURN OUT TO BE OTHER THAN OR DIFFERENT FROM THE FACTS OR LAW IN THAT CONNECTION NOT KNOWN TO BE OR BELIEVED BY ANY SUCH PARTY TO BE TRUE, THEN EACH AND ALL PARTIES HERETO EXPRESSLY ASSUMES THE RISK OF THE FACTS OR LAW TURNING OUT TO BE SO DIFFERENT, AND EACH AND ALL PARTIES AGREES THAT THE FOREGOING RELEASE SHALL BE IN ALL RESPECTS EFFECTIVE AND NOT SUBJECT TO TERMINATION OR RESCISSION BASED UPON SUCH DIFFERENCES IN FACT OR LAW. 4. GENERAL 4.1 Authorization of Transaction. (a) MGEN, ACS and LDX represent and warrant as follows: MGEN, ACS and LDX each has the capacity and authority to execute and deliver this Agreement and to perform its respective obligations hereunder. This Agreement constitutes the valid and legally binding obligation of each of MGEN, ACS and LDX, enforceable in accordance with its respective terms 3 and conditions. Joseph E. Root is the duly elected Secretary of each of MGEN, ACS and LDX and has full authority to execute this Agreement. (b) North Star represents and warrants as follows: North Star has the capacity and authority to execute and deliver this Agreement and to perform its respective obligations hereunder. This Agreement constitutes the valid and legally binding obligation of North Star, enforceable in accordance with its respective terms and conditions. Michael Kest is a member of each North Star entity and has full authority to execute this Agreement. 4.2 Consent to Amendments. The provisions of this Agreement may be amended or waived only by a written Agreement executed and delivered by the Seller and the Purchaser. No other course of dealing between the Parties to this Agreement or any delay in exercising any rights hereunder will operate as a waiver of any rights of such parties. 4.3 Successors and Assigns. All covenants and Agreements contained in this Agreement by or on behalf of any of the parties hereto or thereto will be binding upon and enforceable against the respective successors and assigns of such Party and will be enforceable by and will inure to the benefit of the respective successors and permitted assigns of such Party. 4.4 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable Law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable Law, such provision shall be deemed to be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement, so long as such interpretation is consistent with the spirit and intent of this Agreement. 4.5 Counterparts. This Agreement may be executed simultaneously in two (2) or more counterparts, any one of which need not contain the signatures of more than one Party, but all such counterparts taken together will constitute one and the same Agreement. 4.6 Governing law. All questions concerning the construction, validity and interpretation of this agreement and the exhibits and schedules hereto will be governed by the internal law, and not the law of conflicts, of the State of California. IN WITNESS WHEREOF, the parties hereto have executed and deliver this Agreement on the date first written above. MICRO GENERAL CORPORATION ACS SYSTEMS, INC. - ---------------------------------- ----------------------------------------- By: Joseph E. Root By: Joseph E. Root 4 Its: Secretary Its: Secretary LD Exchange.com, Inc. By: Joseph E. Root Its: Secretary NORTH STAR ENTERPRISES, LLC NORTH STAR TELECOM, LLC A Calif. Limited Liability Company A Calif. Limited Liability Company - ---------------------------------- ----------------------------------------- By: Michael Kest, Member By: Michael Kest, Manager EX-21 6 a68920ex21.txt EXHIBIT 21 1 EXHIBIT 21 MICRO GENERAL CORPORATION LIST OF SUBSIDIARIES 1. ACS Systems, Inc. 2. LDExchange.com, Inc. 3. Interactive Associates, Inc. EX-23.1 7 a68920ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Micro General Corporation: We consent to incorporation by reference in the registration statements (no. 2-85485, 2-94290, 333-22240, 333-64289 and 333-95913) on Form S-8 of Micro General Corporation of our report dated March 28, 2000, relating to the consolidated balance sheets of Micro General Corporation as of December 31, 2000 and 1999, 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, 2000, and the related schedule, which report appears in the December 31, 2000 annual report on Form 10-K of Micro General Corporation. KPMG LLP Los Angeles, California March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----