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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year ended Commission File Number
December 31, 1996 0-4431
AUTO-GRAPHICS, INC.
95-2105641
3201 Temple Avenue
Pomona, California 91768
Registrant's telephone number: (909) 595-7204
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock ($.10 par value)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days.
Yes ( X ) No ( )
The aggregate market value of voting stock held by nonaffiliates
of the registrant was $563,000 as of December 31, 1996.
The number of shares of the registrant's Common Stock outstanding
was 1,109,278 as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement to be filed pursuant to Regulation
14A for the fiscal year ended December 31, 1996 is incorporated
herein by reference in Part III, Items 11-13 of Form 10-K. The
Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the close of the registrant's
most recent calendar year.
PART I
ITEM 1. BUSINESS
Auto-Graphics, Inc. provides software products and processing
services to information and database publishers. These products
and services are used to create, maintain and distribute
information databases through printed and/or electronic reference
products. Electronic products include compact disc (CD-ROM) and
client/server software systems (Internet/Web).
The Company provides state and local government customers with
products, services and outsourced facilities to maintain, publish
and distribute bibliographic databases of library holdings and to
manage interlibrary loan systems. Traditional commercial and
corporate publishers use the Company's print services to produce
and distribute print and electronic products such as dictionaries,
encyclopedias, Bibles, price catalogs and other reference works.
In recent years, the Company has made a major investment in the
development of online client/server software products and client-
shared Internet/Web services. In 1993, the Company launched the
development of an umbrella product concept called
Impact/ONLINE(tm) for Internet information distribution services.
This capability has been successfully applied to a range of
applications including the outsourcing by several statewide
library consortia to the Company of complete system design,
development, management, maintenance and operation of a web server
for each customer. The Company currently has five statewide and
three regional Impact/ONLINE(tm) systems operational servicing
over 2,600 libraries.
The Company's Impact/ONLINE(tm) products include:
Impact/ONLINE WebPAC(tm) enables patrons, directly from home,
school and office to search a database over the Internet using any
Web Browser such as Netscape Navigator or Microsoft Explorer.
Impact/ONLINE ILL(tm) provides the means to automate the
initiation, tracking and management of interlibrary borrowing and
lending.
Impact/ONLINE CAT(tm) is a powerful online cataloging utility for
copying, creation and maintenance of the bibliographic database.
Impact/NET(tm) is a support service that allows for configuring,
installing and managing Internet resources.
Impact/ACCESS(tm) provides for patron access to licensed
commercial databases.
Impact/SLims(tm), is a small library information management
system, which operates on a personal computer and integrates
patron access catalog, circulation control and inventory
management.
The Company's software products and processing services continue
to leverage technology and experience gained over more than 45
years of service to publishers. The Company provides standard and
custom products and services for database management, electronic
composition and CD-ROM search and retrieval. These software
products include:
SGML Smart Editor System(SES) provides publishers with full
editorial capabilities to create and maintain databases in
Standard Generalized Markup Language (SGML) format.
Impact(tm)/CD-ROM products provide comprehensive, powerful
searching, indexing, and cross-referencing features along with
search and retrieval capabilities for CD-ROMs and is available in
Windows, and MAC applications.
In addition to providing database creation, conversion and
maintenance services to a wide variety of commercial customers,
the Company provides a specialized database service for the
wholesale heating, ventilation, air conditioning and
refrigeration(HVACR) industry in conjunction with Datacat, Inc.,
which is 50 percent owned by the Company. The Company is a
supplier of software, database and compositions services to
Datacat for HVACR parts catalogs. (See Note 1 of "Notes to
Financial Statements").
Company Background
The Company was formed in 1950 and incorporated in 1960 in the
state of California. No single customer represents more than 10%
of net sales. Management believes that the loss of any single
customer or vendor would not have a material adverse effect on the
business of the Company. Hardware sales are not material to the
Company's business, representing less than 10% of sales, and are
not considered important to the future of the Company. Backlog
cannot be stated in a useful manner, as contracts are normally
statements of specifications and unit prices rather than total
sales volume.
The software and computerized database processing services
business is highly competitive. There are no definitive market
share statistics available. The Company first introduced
computerized database services in 1964, and believes that it has
been offering such services longer than any of its existing
competitors. Many competitors are smaller and local in character,
but some are larger and national with greater financial resources
than the Company. Contracts for computerized database publishing
services and the purchase/lease of equipment are typically awarded
according to the results of market pricing, competitive bidding,
technical capability and past performance.
Marketing Offices/Employees
The Company has marketing representatives and service centers
located in California, Connecticut, Illinois, Massachusetts,
Missouri, New Jersey, Pennsylvania and Washington. The Company
currently employs approximately 110 persons.
ITEM 2. PROPERTIES
The Company leases its corporate office and production facilities
constituting approximately 29,000 square feet located at 3201
Temple Avenue, Pomona, California 91768. The facility has been
custom designed for the Company's purposes, is fully utilized and
should be adequate for the Company's needs for the foreseeable
future. The facility is currently leased to the Company through
June 2001 under the second of two five-year renewal options. (See
Note 6 of "Notes to Financial Statements" and Item 13. "Certain
Relationships and Related Transactions").
ITEM 3. LEGAL PROCEEDINGS
Gannam/Kubat Publishing, Inc. (which is the other 50% stockholder
in the Company's Datacat, Inc. subsidiary) and such shareholder's
wholly owned affiliate Diversified Printing and Publishing, Inc.
(which has rendered printing services to Datacat payment of which
has been deferred) filed a complaint against the Company and its
President in a legal action previously initiated by Diversified
against Datacat seeking to collect payments for printing services
which it had previously agreed to defer in the approximate amount
of $350,000. The suit against the Company alleges that payments
by Datacat against a commitment to the Company for pre-1994
database creation and maintenance services in the approximate
amount of $575,000 were unauthorized or excessive; and that,
absent such prior obligation and payments in respect thereof,
Datacat would not have had to defer payment to Diversified. The
Company also agreed to defer collection for certain services
rendered to Datacat equal to or exceeding the amount claimed by
Diversified. The Company anticipates the resolution of such
matter in favor of Datacat, and thus the Company; and, in any
event, the Company does not expect the outcome of such dispute
will have a materially adverse effect on the Company's financial
position or results of operations. The pleadings in the above
referenced legal action are included as part of this Report. See
Index to Exhibits, Item No. 10.14. (See Note 1 of "Notes to
Financial Statements" under "Other Assets- Investment in
Datacat").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Stock quotations.
1996 1996 1996 1996 1995 1995 1995 1995
Bid Bid Asked Asked Bid Bid Asked Asked
Price Range High Low High Low High Low High Low
1st Quarter 1 7/8 1 3/8 2 3/8 1 7/8 1 1/8 1 1 1/4 1 1/8
2nd Quarter 2 1/4 1 3/4 2 3/4 2 1/4 1 5/8 1 2 1/8 1 5/8
3rd Quarter 2 5/16 1 7/8 3 3/8 2 5/16 1 15/32 1 5/16 1 5/8 1 15/32
4th Quarter 2 3/4 2 1/8 3 1/2 2 3/4 1 7/8 1 3/8 2 3/8 1 7/8
The Company's Common Stock ($.10 par value) is traded in the over-
the-counter market under the symbol "AUGR" (Cusip Number
05272510). The stock quotations set forth above, as published by
the National Quotation Bureau, Inc., represent the highest and
lowest bid and asked prices quoted by broker/dealers making a
market in the Company's Common Stock. Prices quoted do not
include retail markup, markdown or commissions and may not reflect
actual transactions in shares of the Company's stock. Quotations
for the Companys stock are also reported in the National
Association of Securities Dealers, Inc. NASDAQ OTC Bulletin
Board system.
As of December 31, 1996, the number of holders of record of the
Company's Common Stock was 237. The Company has never paid a cash
dividend and there are no plans to do so in the near future. (See
Note 3 of "Notes to Financial Statements" for information as to
the loan restriction on the payment of cash dividends).
ITEM 6. SELECTED FINANCIAL DATA
Dollar amounts in thousands except per share data.
1996 1995 1994 1993 1992
Operating results:
Net sales $9,218 $9,559 $9,165 $9,678 $9,362
Net income 236 194 158 132 28
Net income per share .21 .16 .12 .10 .02
At year-end:
Total assets 7,132 6,688 6,106 5,841 6,637
Long-term debt 2,101 1,906 1,696 1,592 1,750
No cash dividends have been declared.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
General and Future Business Trends
Liquidity and Capital Resources
The Company has a revolving credit facility (maximum
availability of $1,000,000, secured by accounts receivable) which
is renewed annually in May. Management believes that the current
line of credit will again be renewed in 1997, and is sufficient to
handle cyclical working capital needs. (See Note 2 of "Notes to
Financial Statements"). The Company also maintains a capital line
of credit facility (maximum availability $3,000,000) secured by
substantially all of the Company's capital assets which also
renews annually in May, and management believes that this credit
facility will again be renewed in 1997. Management does not
currently believe that increased credit availability will be
required to finance planned capital expenditures in 1997, which
are estimated at $1,000,000, to be used to upgrade computers,
production equipment and for software development. (See Note 3 of
"Notes to Financial Statements").
Cash, in 1996, was provided from operating activities and
long-term financing. Cash from operations in 1996 (which includes net income
and depreciation)increased $90,000, to $1,286,000 ($1,196,000 in 1995,
and $1,120,000 in 1994). The average collection days for accounts receivable
improved in 1996 to 67 days from 70 days in 1995 and 1994. As of
December 31, 1996 the Company's principal commitments consisted
primarily of leases on facilities. There were no material
commitments for capital expenditures at December 31, 1996.
The Company's principal uses of cash for investing
activities in 1996 were for the development of the Company's
Impact(tm) software family and for upgrades to the Company's
primary computer equipment to maintain premium service to its on-
line customers.
The Company's capital resources may be used to support
working capital requirements, capital investment and possible
acquisitions of businesses, products or technologies complementary
to the Company's current business. The Company believes that
current cash reserves and cash flow from operations are
sufficient to fund its operations in 1997. However, during this
period or thereafter, the Company may require additional
financing. There can be no assurance that such additional
financing will be available on terms favorable to the Company, or
at all.
Results of Operations
Net Sales in 1996 decreased $341,000 to $9,218,000 due
primarily to a decrease in print services sales of $693,000 in
1996, which was partially offset by increased sales of the
Company's Impact/ONLINE(tm) product line. An increase in sales
from $9,165,000 in 1994, to $9,559,000 in 1995, was realized as
the first full year of Impact/ONLINE(tm) sales was reported. Sales
prices remained constant in 1996, and in certain cases declined
due to competitive pressures in some markets. The Company's gross
margins continue to improve, closing at 40% in 1996 up from 38%
in 1995 and 32% in 1994. Continued process improvements combined
with a favorable product mix have been factors in the increase in
gross margin. Selling, general and administrative costs for 1996
and 1995 remained at 33% of sales, up from 28% in 1994. The
Company's focus on sales and marketing of its new products with
additional personnel and new product promotions have been the
primary factor in this expense level. Net interest expense in
1996 was $253,000, up $31,000 from $222,000 in 1995, due to higher
average balances on the Company's long-term credit facility. In
1994 net interest expense was $192,000.
Earnings per share continued to improve to $0.21 in 1996, from
$0.16 in 1995, and $0.12 in 1994. The Company anticipates that
net revenues (excluding equipment) in 1997 will be unchanged.
Management believes that favorable product mix and productivity
improvements are expected to result in higher earnings and
improved cash flow from operations.
Information Relating To Forward-Looking Statements
This annual report to shareholders of the Company includes
forward-looking statements which reflect the Company's current
views with respect to future events and financial performance.
The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information, future events or otherwise.
Impact of Inflation
Historical dollar accounting does not reflect changing costs
for operations, the future cost for expansion and the changing
purchasing power of the dollar. Inflation generally impacts the
Company in a negative manner, as prices cannot be adjusted quickly
due to the contract nature of the business, while costs of
personnel, materials and other purchases tend to escalate more
rapidly. However, inflation is not anticipated to have a material
effect on the Company's business in the near future.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Auto-Graphics, Inc.
We have audited the accompanying balance sheets of Auto-Graphics,
Inc. as of December 31, 1996 and 1995, and the related statements
of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Auto-
Graphics, Inc. at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Riverside, California
March 25, 1997
AUTO-GRAPHICS, INC.
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS DEC-31-1996 DEC-31-1995
Current assets:
Cash $ 364,094 $ 106,518
Accounts receivable, less allowance
for doubtful accounts ($38,000 in
1996 and 1995) 1,882,305 1,979,245
Unbilled production costs 94,143 163,517
Finished goods inventory 28,939 60,946
Other current assets 188,440 168,616
Total current assets 2,557,921 2,478,842
Equipment and leasehold improvements,
at cost 9,589,699 8,279,491
Less accumulated depreciation 5,164,177 4,192,170
Net equipment and leasehold
improvements 4,425,522 4,087,321
Other assets 148,507 121,543
$ 7,131,950 $ 6,687,706
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 330,056 $ 524,431
Deferred income 444,388 490,167
Accrued payroll and related
liabilities 191,290 187,901
Other accrued liabilities 127,037 38,585
Current portion of long-term debt 655,000 505,000
Total current liabilities 1,747,771 1,746,084
Long-term debt, less current portion 2,100,881 1,905,881
Deferred taxes based on income 664,939 593,939
Total liabilities 4,513,591 4,245,904
Commitments and contingencies (See Note 5)
Stockholders' equity:
Common stock, $.10 par value,
4,000,000 shares authorized,
1,109,278 shares issued and
outstanding in 1996, and
1,130,478 shares issued and
outstanding in 1995 110,928 113,048
Capital in excess of par value 1,138,651 1,151,092
Retained earnings 1,368,780 1,177,662
Total stockholders' equity 2,618,359 2,441,802
$ 7,131,950 $ 6,687,706
See accompanying notes.
AUTO-GRAPHICS, INC.
STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, 1994
1996 1995 1994
Net sales $ 9,217,937 $ 9,559,107 $ 9,164,849
Costs and expenses
Cost of sales 5,500,527 5,908,075 6,205,379
Selling, general and administrative 3,071,226 3,124,978 2,528,682
Interest 253,258 221,703 191,532
8,825,011 9,254,756 8,925,593
Income from operations 392,926 304,351 239,256
Other income 33,980 53,819 54,922
Income before taxes based on income 426,906 358,170 294,178
Provision for taxes based on income 190,000 164,000 136,000
Net income $ 236,906 $ 194,170 $ 158,178
Net income per share $ .21 $ .16 $ .12
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995, 1994
Common Common Capital in
Stock Stock Excess of Retained
Shares Amount Par Value Earnings
Balances
at January 1, 1994 1,304,866 $ 130,487 $1,243,565 $1,066,823
Net income - - - 158,178
Common stock purchased
and retired (24,788) (2,479) (45,848)
- -
Balances
at December 31, 1994 1,280,078 128,008 1,197,717 1,225,001
Net income - - - 194,170
Common stock purchased
and retired (149,600) (14,960) (46,625)
(241,509)
Balances
at December 31, 1995 1,130,478 113,048 1,151,092 1,177,662
Net income - - - 236,906
Common stock purchased
and retired (21,200) (2,120) (12,441)
(45,788)
Balances
at December 31, 1996 1,109,278 $ 110,928 $1,138,651 $1,368,780
See accompanying notes.
AUTO-GRAPHICS, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, 1994
1996 1995 1994
Cash flows from operating activities:
Net income $ 236,906 $ 194,170 $ 158,178
Adjus(tm)ents to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,048,639 1,001,821 961,486
Deferred taxes 71,000 106,507 72,076
Changes in operating assets
and liabilities:
Accounts receivable 96,940 72,519 (182,083)
Unbilled production costs 69,374 (15,406) (39,747)
Finished goods inventory 32,007 (5,757) 8,837
Other current assets (19,824) 29,424 (21,743)
Other assets (26,964) (29,355) (25,455)
Accounts payable (194,375) 233,265 (128,645)
Deferred income (45,779) 161,754 77,188
Accrued payroll and
related liabilities 3,389 52,226 (34,795)
Accrued other liabilities (16,601) (70,262) 80,435
Interest and income taxes payable 105,055 (57,976) (14,880)
Net cash provided by
operating activities 1,359,767 1,672,930 910,852
Cash flows from investing activities:
Capital expenditures (1,386,840) (1,609,170) (948,752)
Cash flows from financing activities:
Borrowings under long-term debt 900,000 715,000 554,000
Principal payments under debt
agreements (555,000) (450,000) (450,000)
Repurchase of capital stock (60,349) (303,094) (48,327)
Net cash provided by (used in)
financing activities 284,649 (38,094) 55,673
Net increase in cash 257,576 25,666 17,773
Cash at beginning of year 106,518 80,852 63,079
Cash at end of year $ 364,094 $ 106,518 $ 80,852
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 253,258 $ 221,703 $ 191,532
Income taxes 21,691 100,883 98,804
See accompanying notes.
AUTO-GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
1. Summary of significant accounting policies and description
of business.
Description of Business
Auto-Graphics, Inc. provides software products and
processing services to information and database publishers. These
products and services are used to create, maintain and distribute
information databases through printed and/or electronic reference
products. Electronic products include compact disc (CD-ROM) and
client/server software systems(Internet/Web).
Unbilled Production Costs
Costs associated with work in process inventory
including labor, materials, supplies, and overhead (excluding
selling, general and administrative expenses) are stated at the
lower of cost or net realizable value and are removed from
inventory on an average unit cost basis.
Finished Goods
Finished goods inventory consists primarily of
computer and CD-ROM equipment held for sale and related spare
parts and is stated at the lower of average cost or market.
Equipment and Leasehold Improvements
Valuation of equipment and leasehold improvements is
based on historical cost. Equipment and leasehold improvements at
December 31, 1996 and 1995 consist of the following:
1996 1995
Equipment $3,588,048 $3,449,380
Computer software and database 5,258,209 4,154,623
Furniture and fixtures 497,101 429,147
Leasehold improvements 246,341 246,341
9,589,699 8,279,491
Less accumulated depreciation
and amortization 5,164,177 4,192,170
$4,425,522 $4,087,321
Depreciation and Amortization
Depreciation: Depreciation is based on the straight-
line method over the estimated useful life of the asset and
commences in the year the asset is placed in and/or is available
for service or sale based on the half-year convention method.
Amortization: Certain costs incurred related to the
development and purchase of computer software are capitalized and
amortized in accordance with Statement of Financial Accounting
Standards No. 86. Amortization is based on a ratio of current and
future revenues (the ratio method) or, at a minimum, the straight-
line method, based on the full year convention in the first year
of product availability. Amortization of computer software was
approximately $501,000 in 1996, $452,000 in 1995, and $407,000 in
1994.
The following estimated useful lives are generally observed
for the respective asset categories:
Equipment - 5 to 15 years
Computer software
and databases - 5 to 7 years
Furniture and fixtures - 5 to 10 years
Leasehold improvements - the lesser of 5 to 15 years or
the lease term
Depreciation and amortization was $1,049,000 in 1996
($1,002,000 in 1995 and $961,000 in 1994).
Other Assets
Investment in Datacat, Inc.
In 1990, the Company acquired a 50% interest in
Datacat, Inc. Datacat was formed to market a new technology
developed by the Company for the production of parts catalogs for
the wholesale heating, ventilation and air conditioning, and
refrigeration (HVACR) industry. The investment has been accounted
for using the equity method wherein equity in the losses of
Datacat have been offset against investments in and advances to
Datacat. Losses in excess of investments and advances of
approximately $222,000 have not been recognized and will be
applied to subsequent earnings, as they are realized. The Company
has not guaranteed the obligations of Datacat, and is not
obligated to provide any further financial support to Datacat.
The other 50% shareholder in Datacat, and a wholly
owned affiliate of such shareholder which rendered printing
services to Datacat payment of which has been deferred and treated
as a capital investment by the partners, have filed an action
disputing payment by Datacat to the Company, for certain database
creation and maintenance services rendered by the Company to
Datacat prior to 1994, as unauthorized or excessive. The Company
anticipates the resolution of such matters in favor of Datacat,
and thus the Company; and, in any event, the Company does not
expect the outcome of such dispute will have a materially adverse
effect on the Company's financial position or results of
operations.
Use of Estimates
The preparation of the financial statements of
the Company requires management to make estimates and assumptions
that affect reported amounts. These estimates are based on
information available as of the date of the financial statements.
Actual results may differ from those estimated.
Income Recognition
Revenues are recognized as services are rendered or
when finished goods are shipped to customers. Certain future
software support costs are accrued in accordance with AICPA
Statement of Position (SOP) 91-1.
Income Taxes
Deferred tax assets and liabilities are recognized for
the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
Reclassification
Certain amounts reported in prior years have been
reclassified for consistent presentation with the current period.
Net Income Per Share
Per share calculations are based on the weighted
average number of shares of common stock outstanding during each
year.
2. Note Payable to Bank.
The Company has a revolving credit agreement under which
borrowings are secured by accounts receivable, whereby the Company
may borrow against its eligible accounts receivable up to a
maximum of $1,000,000 ($1,000,000 available at December 31, 1996)
with interest at 0.5% above the bank reference rate (8.25% at
December 31, 1996). The credit facility is renewable annually in
May. There was no outstanding balance at December 31, 1996 or
December 31, 1995. During the year ended December 31, 1996, the
approximate average borrowings outstanding were $175,000 ($241,000
in 1995), the approximate weighted average interest rate
was 8.8% (9.3% in 1995), and the maximum amount of month-end
borrowings outstanding was $425,000 ($675,000 in 1995). The
averages were computed based on the borrowings outstanding and the
applicable interest rate at the end of each month. There are no
compensating balance requirements, commitment fees or note
guarantors. This agreement contains the same loan covenants as
the capital line of credit note payable. At December 31, 1996, the
Company was in compliance with its loan covenants.
3. Long-term Debt.
Long-term debt at December 31, 1996 and 1995 consists of the
following:
1996 1995
Capital line of credit due in monthly
installments of $50,000 ($37,500 in
1995) plus interest at the bank reference
rate plus .75% (9.0% at December 31,
1996) through 2001;secured by software,
equipment, and leasehold improvements
with a net book value of approximately
$4,042,000 at December 31, 1996. $2,645,881 $2,245,881
Note payable to stockholder due in
annual installments of $55,000
plus interest at 5.5% per annum 110,000 165,000
Total long-term debt 2,755,881 2,410,881
Less current portion 655,000 505,000
Long-term portion $2,100,881 $1,905,881
Maturities of Long-Term Debt due after one year are: 1997--$655,000;
1998--$655,000; 1999--$600,000; 2000--$600,000 and 2001--$245,881.
The capital line of credit at December 31, 1996 provides for maximum
borrowings of $3,000,000 for the purchase of equipment and software, and
financing of up to $1,000,000 in internal software development costs. The
capital line of credit is subject to renewal annually in May. Among other
requirements, the capital line of credit requires the Company to maintain
minimum financial covenant ratios, and prohibits the payment of cash
dividends. There are no commitment fees, compensating balance requirements
or note guarantors. At December 31, 1996, the Company was in compliance
with its loan covenants.
In June 1995, the Company entered into a stock repurchase agreement
with a former director of the Company, whereby the Company agreed to
purchase and retire, in 1995, 115,000 of 141,000 shares of Company stock
owned by the stockholder. The total transaction cost of $230,000 will be
paid in four annual installments beginning in 1995 plus interest of 5.5%
per annum ($65,000 paid in June 1995, $55,000 paid in June 1996 and $55,000
to be paid in June 1997 and 1998).
4. Taxes Based on Income.
The provision for taxes based on income is composed of the
following for the
years ended December 31:
1996 1995 1994
Current taxes based on income
Federal $ 69,000 $ 32,000 $ 47,000
State 43,000 38,000 28,000
Foreign -- -- 8,000
112,000 70,000 83,000
Deferred taxes based on income
Federal 78,000 94,000 49,000
State -- -- 4,000
78,000 94,000 53,000
$190,000 $164,000 $136,000
A reconciliation of the provision for taxes based on income
follows for the
years ending December 31:
1996 1995 1994
Statutory federal income tax $145,200 $122,000 $100,000
State tax, net of federal
benefit/other 28,500 24,400 21,000
Tax effect of exclusion on meals
and entertainment (50%) 14,200 13,400 14,500
Tax effect of insurance premiums
on officers' lives 2,100 4,200 500
$190,000 $164,000 $136,000
The deferred tax assets and liabilities are composed of the
following at
years ending December 31:
1996 1995 1994
Deferred tax liabilities:
Tax over book amortization and
depreciation $665,000 $594,000 $487,000
Deferred tax assets:
Bad debts/accrued vacation/other 54,000 66,000 57,000
Investment tax credit -- -- 14,000
State taxes 15,000 10,000 11,000
Total deferred tax assets 69,000 76,000 82,000
Valuation allowance 0 0 0
Net deferred tax assets - current 69,000 76,000 82,000
Net deferred tax liability $596,000 $518,000 $405,000
5. Commitments and Contingencies.
The Company incurred total facilities and equipment lease
and rental expense of approximately $474,000 in 1996, $486,000 in
1995, and $443,000 in 1994. The Company is obligated under
certain noncancellable operating leases for office facilities and
equipment.
Approximate minimum lease commitments are as follows:
Years ended Operating
December 31, Leases
1997 $ 474,000
1998 465,000
1999 448,000
2000 448,000
2001 224,000
Total minimum lease payments $2,059,000
6. Related Party Transactions.
The Company leases its corporate office and production
facility from a limited partnership owned by two principal
officer/stockholders of the Company payable at $37,345 per month
(plus expenses and applicable increases based on the consumer
price index) through June 2001 under the second of two five-year
renewal options. The five-year lease with options, which was
entered into in June 1986, was approved and authorized by the
independent members of the Company's Board of Directors.
During 1996, the Company sold processing services of
$264,000 to Datacat, Inc. for resale to Datacat's customers. At
December 31, 1996, net accounts receivable from and advances to
this affiliate totaled $84,455.
The Company entered into a stock repurchase agreement in
February 1995, with a former employee and officer, and current
director, of the Company, Douglas K. Bisch, whereby the Company
agreed to purchase and retire, over a seven year period, 156,000
of 171,000 shares of Company stock owned by Mr. Bisch. The total
transaction cost of $825,000 includes stock, non-competition and
consulting fees. In January 1996, the Company purchased and retired
the second block of 15,600 shares.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of, and the
positions and offices within the Company presently held by, all
directors and officers of the Company:
Name Age Position
Douglas K. Bisch 75 Director. Has served in management
capacities for more than ten
years.
Robert H. Bretz 53 Director and Assistant Secretary.
Attorney who has acted as the Company's
outside general legal counsel for more
than ten years.
Robert S. Cope 61 Director, President and Treasurer.
Has served in those capacities for more than
ten years.
William J. Kliss 49 Chief Operating Officer. Has served the
Company in this capacity for one year,
prior to this position Mr. Kliss served as
the Company's Vice President and General
Manager of Library Services for two years.
Mr. Kliss served as Vice President of
Operations at Scan-Optics, Inc. for fifteen
years prior to beginning his employment with
the Company.
Daniel E. Luebben 48 Chief Financial Officer and Secretary.
Has served in those capacities for one year,
prior to these positions Mr. Luebben served
as the Company's Vice President Library
Operations and Controller for the past six
years. Mr. Luebben served as Controller for
Ultrasystems Defense, Inc. prior to his
employment with the Company.
Directors serve until their successors are elected and qualified
at the annual meeting of stockholders. All executive officers
serve at the discretion of the Company's Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
A definitive Proxy Statement will be filed with the Securities and
Exchange Commission ("the Commission") pursuant to Regulation 14A
within 120 days after the close of the Company's most recent
calendar year and, accordingly, Item 11 is incorporated by
reference to said definitive Proxy Statement. The Proxy Statement
includes information covering this item under the caption
"Compensation of Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A definitive Proxy Statement will be filed with the Securities and
Exchange Commission ("the Commission") pursuant to Regulation 14A
within 120 days after the close of the Company's most recent
calendar year and, accordingly, Item 12 is incorporated by
reference to said definitive Proxy Statement. The Proxy Statement
includes information covering this item under the caption
"Security Ownership of Certain Beneficial Owners and Management"
and "Nominees for Election as Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A definitive Proxy Statement will be filed with the Securities and
Exchange Commission ("the Commission") pursuant to Regulation 14A
within 120 days after the close of the Company's most recent
calendar year and, accordingly, Item 13 is incorporated by
reference to said definitive Proxy Statement. The Proxy Statement
includes information covering this item under the caption "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial statements and financial statement schedules
and exhibits:
(1) Financial Statements: See Item 8. "Financial
Statements."
(2) All schedules are omitted since the required information
is not present or not present in amounts sufficient to
require submission of the schedule, or because the information
required is included in the financial statements, including
the notes thereto.
(3) Exhibits:
3.1 Articles of Incorporation of Auto-Graphics, Inc.,
as amended (incorporated by reference as filed with the SEC
as Exhibit 3.1 to Item 14(a) in the registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989).
3.2 Bylaws, as amended (incorporated by reference as filed
with the SEC as Exhibit 3.2 to Item 14(a) in the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989).
10.7 Agreement between Gannam/Kubat Publishing, Inc. and
Auto-Graphics, Inc. regarding Datacat, Inc. dated June 12, 1990
(incorporated by reference as filed with the SEC as Exhibit
10.6 to Item 14(a) in the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1990).
10.8 Lease Agreement between 664 Company and Auto-Graphics,
Inc. dated May 27, 1986 (incorporated by reference as filed
with the SEC as Exhibit 10.7 to Item 14(a) in the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1990).
10.9 Agreement by, between and among Auto-Graphics, Inc.
and Douglas K. and Ruth T. Bisch executed February 15, 1995
(incorporated by reference as filed with the SEC as Exhibit
10.9 to Item 14(a) in the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.13 Stock Purchase Agreement by, between and among
Auto-Graphics, Inc. and Cary A. and Geri W. Marshall executed
June 13, 1995 (incorporated by reference as filed with the
SEC as Exhibit 10.13 to Item 14(a) in the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.14 Pleadings in Diversified Printing and Publishing, Inc.
v. Datacat, Inc., Datacat, Inc. v. Diversified Printing and
Publishing, Inc., Gannam/Kubat Publishing and Nasib Gannam,
and Gannam/Kubat Publishing, Inc. v. Robert S. Cope and
Auto-Graphics, Inc., Orange County Superior Court
Case No. 766 695.
10.15 Third Amended and Restated Revolving Credit Agreement,
Accounts and Equipment, between UNION BANK OF CALIFORNIA, N.A.
and AUTO-GRAPHICS, INC. dated June 12, 1996.
10.16 Revolving Equipment/Capitalized Development Costs
Note between UNION BANK OF CALIFORNIA, N.A. and AUTO-GRAPHICS,
INC. dated June 12, 1996.
10.17 Revolving Credit Note between UNION BANK OF CALIFORNIA,
N.A. and AUTO-GRAPHICS, INC. dated June 12, 1996.
10.18 General Security Agreement between UNION BANK OF
CALIFORNIA, N.A. and AUTO-GRAPHICS, INC. dated June 12,1996.
(b) The Company has not filed any reports on Form 8-K during the
last quarter of the period covered by this Report.
(c) The following document is filed herewith for information
purposes, but is not part of this Annual Report, except as otherwise
indicated: None.
(d) None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AUTO-GRAPHICS, INC.
(Registrant)
Date: 3/31/97 By ss/ Robert S. Cope
Robert S. Cope, President,
Treasurer
and Director
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 capacity and on the dates
indicated.
Date: 3/31/97 By ss/ Robert S. Cope
Robert S. Cope, President, Treasurer
and Director
Date: 3/31/97 By ss/ Daniel E. Luebben
Daniel E. Luebben, Secretary and
Chief Financial Officer
Date: 3/31/97 By ss/ Robert H. Bretz
Robert H. Bretz, Director
EX-10.14
2
DESCRIPTION - Pleadings in Diversified Printing and Publishing, Inc.
v. Datacat, Inc., Datacat, Inc. v. Diversified Printing and Publishing,
Inc., Gannam/Kubat Publishing and Nasib Gannam, and Gannam/Kubat Publishing,
Inc. v. Robert S. Cope and Auto-Graphics, Inc., Orange County Superior
Court Case No. 766 695.
.................Begin Pleading Dated 7/16/96..................
GRAHAM & JAMES LLP
By: Kenneth B. Julian (State Bar 149840)
Karl A. Sandoval (State Bar 170190)
4675 MacArthur Court, Suite 800 F I L E D
Newport Beach, California 92660
(714) 224-2000
Attorneys for Plaintiff
DIVERSIFIED PRINTING PUBLISHING SERVICES, INC.
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE Case Number: 766 695
DIVERSIFIED PRINTING AND
PUBLISHING SERVICES, INC., a
California corporation, COMPLAINT BY PLAINTIFF
DIVERSIFIED PRINTING
AND
Plaintiff, PUBLISHING SERVICES,
INC. FOR
BREACH OF WRITTEN
CONTRACT;
vs. OPEN BOOK ACCOUNT;
ACCOUNT
STATED; WORK, LABOR
AND
DATACAT, INC., a California corporation; SERVICES RENDERED;
MONEY PAID;
and DOES 1 through 25, inclusive, AND QUANTUM MERUIT
Defendants.
COMES NOW, plaintiff DIVERSIFIED PRINTING AND PUBLISHING SERVICES,
INC. ("Plaintiff') and, for its Complaint, alleges as follows:
I. FIRST CAUSE OF ACTION
(Against All Defendants for Breach of Written Contract)
1. Plaintiff is, and at all times herein relevant was, a
California corporation organized and existing under the laws of
the State of California. Plaintiff is in the printing and
publishing business with its offices located in the County of
Orange, State of California.
2. Plaintiff is informed and believes, and thereon alleges, that
defendant DATACAT, INC. ("DATACAT" is, and at all times herein
relevant was, a corporation organized and existing under the laws
of the State of California, with its principle place of business
located in the County of Los Angeles, State of California.
3. The true names and capacities, whether individual, corporate,
associate, or otherwise, of the defendants sued herein as DOES I
through 25, inclusive, are unknown to Plaintiff, which therefore
sues said defendants by such fictitious names. Plaintiff will
amend this Complaint to allege their true names and capacities
when ascertained. Plaintiff is informed and believes, and thereon
alleges, that each of such fictitiously named defendants is
responsible in some manner for the occurrences herein alleged and
that Plaintiff s damages as herein alleged were proximately caused
by said defendants' conduct.
4. Plaintiff is informed and believes, and thereon alleges, that
each of the defendants was the agent, the partner, and/or the
employee of each of its co-defendants and, in doing the things
hereinafter alleged, was acting within the course and scope of
such agency, partnership, and/or employment.
5. Within the past four years Plaintiff and Defendants, and each
of them, entered into a written agreement whereby Plaintiff agreed
to provide printing and publishing services and advance freight
charges for defendants, and each of them, and defendants, and each
of them, agreed to pay Plaintiff the sum of $333,024.28 for such
services and charges. True and correct copies of Invoice Nos.
5405, 5427, 5497, 5550, 5588, 5602, 5630, 5639, 5696, 5773, 5786,
5896, 21 5900, 5905, and 5908 in the total amount of $333,024.28
for such services rendered and freight charges are attached hereto
as Exhibit "A" and are incorporated herein by this reference as
though set forth in full. Plaintiff further has performed
additional printing and publishing services in the amount of
$21,421.
6. Under the agreement, DATACAT also agreed to pay Plaintiff a
finance charge of 1.5% per month on any accounts over 30 days past
due (the "Finance Charges"). There is now due and owing $5,687.48
in Finance Charges, and such charges continue to accrue.
7. Plaintiff has fully performed all acts, services, and
conditions required by such agreement.
8. At this time, the total amount DATACAT owes Plaintiff under the
agreement is $360,132.76, calculated as $348,006.82 for services
rendered, $6,438.48 in freight charges paid, and $5,687.48 in
Finance Charges, plus interest on all sums.
9. Plaintiff has made demand upon defendants, and each of them,
for payment of such sums.
10. Despite due demand by Plaintiff, no portion of such sum has
been paid, and there is now due, owing, and unpaid from
defendants, and each of them, to Plaintiff the total sum of
$360,132.76, plus interest thereon at the legal rate.
II. SECOND CAUSE OF ACTION
(Against All Defendants for Open Book Account)
11. Plaintiff realleges and incorporates herein by this reference
as though set forth in full each and every allegation contained in
Paragraphs 1 through 10, inclusive, of this Complaint.
12. Within the last four years, defendants, and each of them,
became indebted to Plaintiff on an open book account due in the
sum of $360,132.76 for services rendered, at their special
insistence and request, freight charges paid on DATACAT's
behalf and finance charges on overdue invoices.
13. Despite a demand therefor, no portion of said sums has been
paid.
14. There is now due, owing, and unpaid from defendants, and each
of them, to Plaintiff the sum of $360,132.76, plus interest
thereon.
III. THIRD CAUSE OF ACTION
(Against All Defendants on Account Stated)
15. Plaintiff realleges and incorporates herein by this reference
as though set forth in full each and every allegation contained in
paragraphs 1 through 1O, inclusive, of this Complaint.
16. Within the last four years before the commencement of this
action, an account was stated in writing by and between Plaintiff
and defendants, and each of them, in which it was agreed that
defendants, and each of them, were indebted to Plaintiff in the
sum of $360,132.76.
17. Plaintiff has made demand upon defendants, and each of them,
for payment of said sum.
18. Despite due demand by Plaintiff, no portion of said sum has
been paid, and there is now due, owing, and unpaid from
defendants, and each of them, to Plaintiff the sum of $360,132.76,
plus interest thereon at the legal rate.
IV. FOURTH CAUSE OF ACTION
(Against All Defendants for Work, Labor, and Services Rendered)
19. Plaintiff realleges and incorporates herein by this reference
as though set forth in full each and every allegation contained in
Paragraphs 1 through 1O, inclusive, of this Complaint.
20. Within the last four years, Plaintiff rendered printing and
publishing services to defendants, and each of them, at
defendants' special instance and request, and defendants, and each
of them, agreed to pay Plaintiff the sum of $348,006.82 for such
services.
21. Despite due demand by Plaintiff, no portion of said sum has
been paid, and there is now due, owing, and unpaid to Plaintiff
from defendants, and each of them, the sum of $348,006.82 for such
services.
V. FIFTH CAUSE OF ACTION
(Against All Defendants For Money Paid)
22. Plaintiff realleges and incorporates herein by this reference
as though set forth in full each and every allegation contained in
Paragraphs 1 through 1O, inclusive, of this Complaint.
23. Within the last four years before the commencement of this
action, defendants, and each of them, became indebted to Plaintiff
in the sum of $6,438.46 for money paid, laid out, and expended for
defendants, and each of them, at their instance and request, for
freight charges.
24. Despite due demand by Plaintiff, no portion of such sum has
been paid, and there is now due, owing, and unpaid from
defendants, and each of them, to Plaintiff the sum of $6,438.46,
plus interest thereon.
VI. SIXTH CAUSE OF ACTION
(Against All Defendants For Quantum Meruit)
25. Plaintiff realleges and incorporates herein by this reference
as though set forth in full each and every allegation contained in
Paragraphs 1 through 10, inclusive, of this Complaint.
26. Within the last four years before the commencement of this
action, Plaintiff provided printing and publishing services at the
request of defendants, and each of them, and paid freight charges
on DATACAT's behalf. Such services and freight charges directly
have benefited defendants, and each of them.
27. The reasonable value of those services and expenditures is the
sum of $354,445.28, towards which defendants have paid Plaintiff
nothing to date.
28. Demand has been made upon defendants, and each of them, for
payment of such sums by which they, and each of them, have been
unjustly enriched, but defendants, and each of them, have failed
and refused, and continue to fail and refuse, to make any
payment whatsoever toward this amount.
WHEREFORE, plaintiff DIVERSIFIED PRINTING AND PUBLISHING SERVICES,
INC. prays for judgment against defendants, and each of them, as
follows:
1. For damages according to proof at trial;
2. For interest on all sums at the legal rate;
3. For costs of suit incurred herein;
4. For reasonable attorneys' fees pursuant to Cal. Civ. Code
1717.5; and
5. For such other and further relief as the Court may deem just
and proper.
DATED: July 16, 1996 GRAHAM & JAMES LLP
KENNETH B. JULIAN
KARL A. SANDOVAL
By: ss/K. Julian
KENNETH B. JULIAN
Attorneys for Plaintiff
DIVERSIFIED PRINTING AND
PUBLISHING SERVICES, INC.
..................End Pleading dated 7/16/96.....................
.................Begin Pleading dated 9/5/96.....................
Randolph Stiles, Esq. (SBN 62910)
LAW OFFICES OF RANDOLPH STILES
12015 Kling Street, #211
North Hollywood, California 91607
818/505-8026
Attorney for Defendant
Datacat, Inc.
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation,
Plaintiff,
v.
DATACAT, INC., a California corporation and DOES 1 through 25,
inclusive,
Defendants.
Case No. 766 695
ANSWER TO COMPLAINT BY DEFENDANT DATACAT
(Defendant 11 - Judge G. Robert Jameson)
Datacat, Inc., a California corporation through its attorney of
record ("Defendant"), for itself and for no other party, hereby
answers the Plaintiff's Complaint, and alleges affirmative
defenses, as follows:
Pursuant to and in accordance with California Code of Civil
Procedure Section 431.30(d), the Defendant generally denies each
and every allegation of the Complaint.
AFFIRMATIVE DEFENSES
As its affirmative defenses to each and every one of the
claims and causes of action set forth in the Complaint, the
Defendant hereby alleges the following as its affirmative defenses
to such claims and causes of action by the Plaintiff as set forth
in the Complaint:
FIRST AFFIRMATIVE DEFENSE
(No Claim Upon Which Relief Can Be Granted)
As its First Affirmative Defense, the Defendant hereby
incorporates by this reference its Answer as set forth above and
alleges that the Plaintiff's Complaint fails to state facts upon
which the Plaintiff is entitled to any relief against the
Defendant.
SECOND AFFIRMATIVE DEFENSE
(Superseding Agreement)
As its Second Affirmative Defense, the Defendant alleges that
the Plaintiff entered into an agreement with and/or for the
benefit of the Defendant whereby the Plaintiff agreed to forego
and/or defer payment of the monies Plaintiff seeks to
collect as a result of its Complaint against the Defendant.
THIRD AFFIRMATIVE DEFENSE
(Agreement To Subordinate)
As its Third Affirmative Defense, the Defendant alleges that the
Plaintiff entered into an agreement with and/or for the benefit of
the Debtor whereby the Plaintiff agreed to subordinate payments of
any and all monies due and owing by the Defendant to the Plaintiff
in favor of the Plaintiff's "third-party" creditors (creditors who
are not affiliated with the Defendant or its shareholders) and to
forego collection of any and all amounts due and owing by the
Defendant to such Plaintiff unless and until all of the
Defendant's current obligations to such third-party creditors had
been satisfied.
FOURTH AFFIRMATIVE DEFENSE
(Agreement For Capital Contribution)
As its Fourth Affirmative Defense, Defendant alleges that the
Plaintiff entered into an agreement with and/or for the benefit of
the Defendant whereby the Plaintiff agreed to use any amount due
and owing by the Defendant to the Plaintiff for the purpose of
making a capital contribution, and to make a further on-going
capital contribution, to the Defendant in the amount required to
satisfy the Defendant's obligations to third party (non-
affiliated) creditors.
FIFTH AFFIRMATIVE DEFENSE
(Course Of Dealing)
As its Fifth Affirmative Defense, Defendant alleges that through
their course of dealing and otherwise the Defendant and the
Plaintiff mutually understood, agreed and promised that the
Plaintiff, who is affiliated with Defendant as a result of the
100% ownership of and control exercised over the Plaintiff by
Nasib Gannam who is, directly or indirectly, a 50% shareholder of
the Defendant (the "Plaintiff/Affiliate"), would provide printing
and related services to and for the benefit of the Defendant with
the agreement and promise that the Plaintiff would not
demand payment for such services, and the Defendant would not
otherwise be obligated for or called upon to pay the
Plaintiff/Affiliate for such services, unless and
until the Defendant had paid all of its current obligations to
third-party (non-affiliated) creditors and had excess cash
available to pay affiliated parties, including the
Plaintiff/Affiliate, who provided services to the Defendant.
SIXTH AFFIRMATIVE DEFENSE
(Breach Of Contract)
As its Sixth Affirmative Defense, Defendant alleges that the
Plaintiff breached its agreement with the Defendant under which
the Plaintiff seeks relief from the Defendant by way of the
Complaint; and, as a result of such material breach and
resulting default by the Plaintiff under such agreement, Defendant
is entitled to suspend performance under such contract, including
without limitation payment by Defendant to Plaintiff for any and
all amounts, if any, otherwise due and owing thereunder.
SEVENTH AFFIRMATIVE DEFENSE
(Insolvency)
As its Seventh Affirmative Defense, Defendant alleges that
payment by the Defendant to the Plaintiff as prayed for in the
Complaint would render the Defendant insolvent and otherwise
unable to pay its debts and obligations as they come due to
non-affiliated third parties.
EIGHTH AFFIRMATIVE DEFENSE
(Preferential Payment)
As its Eighth Affirmative Defense, the Defendant alleges that
payment by the Defendant to the Plaintiff as prayed for in the
Complaint would constitute a preferential payment by the Defendant
to an affiliated party (the Plaintiff/Affiliate) in contravention
of Defendant's duties and responsibilities to other creditors.
NINTH AFFIRMATIVE DEFENSE
(Estoppel)
As its Ninth Affirmative Defense, the Defendant alleges that the
Plaintiff is estopped from asserting the claims set forth in the
Complaint as against the Defendant, including without limitation
for the reasons alleged in the foregoing Second, Third, Fourth and
Fifth Affirmative Defenses and otherwise.
TENTH AFFIRMATIVE DEFENSE
(Waiver)
As its Tenth Affirmative Defense, the Defendant alleges that the
Plaintiff has waived and/or otherwise relinquished the claims,
and/or the right to sue Defendant in respect of such claims, as
set forth in the Complaint.
ELEVENTH AFFIRMATIVE DEFENSE
(Breach Of Implied Covenant Of Good Faith And Fair Dealing)
As its Eleventh Affirmative Defense, Defendant alleges that the
assertion of the instant claim by the Plaintiff against the
Defendant constitutes a breach of the implied covenant of good
faith and fair dealing existing by, between and among the
Plaintiff and Defendant, including its shareholders and other
affiliates, by virtue of contracts or other agreements by,
between and among such parties pertaining to the subject matter of
the Complaint.
TWELFTH AFFIRMATIVE DEFENSE
(Promissory Estoppel)
As its Twelfth Affirmative Defense, the Defendant alleges that
Plaintiff's representations, agreements and promises to the
Defendant, and/or its shareholders for the benefit of the
Defendant, in respect of the providing of services by the
Plaintiff/Affiliate to the Defendant, and the Defendant's actions
and reasonable reliance thereon, constitutes promissory estoppel
and precludes the Plaintiff from instituting and maintaining the
within action against the Defendant.
THIRTEENTH AFFIRMATIVE DEFENSE
(Unclean Hands)
As its Thirteenth Affirmative Defense, the Defendant alleges
that as a result of the Plaintiff/Affiliate's conduct and
activities as alleged herein and otherwise, the Plaintiff should
be denied the relief it is seeking based on the equitable
principle of unclean hands.
FOURTEENTH AFFIRMATIVE DEFENSE
(Failure To Mitigate Damages)
As its Fourteenth Affirmative Defense, Defendant alleges that
Plaintiff knew that Defendant could not pay for the services
Plaintiff rendered and continued to render to Defendant, which are
the subject of Plaintiff's request for payment as alleged in
the Complaint, and that the Plaintiff otherwise failed and refused
to mitigate its damages.
FIFTEENTH AFFIRMATIVE DEFENSE
(Failure To Join Indispensable Party)
As its Fifteenth Affirmative Defense, Defendant alleges that the
Plaintiff has failed to join one or more indispensable parties.
SIXTEENTH AFFIRMATIVE DEFENSE
(Offset, Set-Off Or Deduction)
As his Sixteenth Affirmative Defense, the Defendant alleges that
as a result of the denial and other allegations made herein, and
as otherwise exist, the Defendant in entitled to an offset, set-
off or other deduction from the amounts claimed by the Plaintiff
in the Complaint including without limitation as a result of
Plaintiff's breach of its contract and/or agreement with and/or
for the benefit of the Defendant.
SEVENTEENTH AFFIRMATIVE DEFENSE
(Statute Of Limitations Bar 337)
As its Seventeenth Affirmative Defense, the Defendant alleges
that the Plaintiff's claims are barred by the statute of
limitations as provided for in California Civil Code Section 337.
EIGHTEENTH AFFIRMATIVE DEFENSE
(Statute Of Limitations Bar 339)
As its Eighteenth Affirmative Defense, the Defendant alleges
that the Plaintiff's claims are barred by the statute of
limitations as provided for in California Civil Code Section 339.
NINETEENTH AFFIRMATIVE DEFENSE
(Statute of Frauds)
As its Nineteenth Affirmative Defense, Defendant alleges that
the claims which are the subject of the Complaint are barred or
otherwise precluded by the statute of frauds.
TWENTIETH AFFIRMATIVE DEFENSE
(Fraud/Mistake)
As its Twentieth Affirmative Defense, Defendant alleges that the
claims which are the subject of the Complaint are barred or
otherwise precluded based on the principles of fraud and/or
mistake.
TWENTY-FIRST AFFIRMATIVE DEFENSE
(No Late Payment Charge)
As its Twenty-First Affirmative Defense, Defendant alleges that
the Plaintiff never billed, charged or otherwise imposed any "late
payments charge" for services rendered by Plaintiff to the
Defendant, Defendant never agreed to pay and is not otherwise
obligated to pay Defendant, and never did pay, Defendant any late
payment charge for any services rendered by Plaintiff to Defendant
or otherwise; and, in any event, the imposition of any such late
payment charge by the Plaintiff on the Defendant as alleged in the
Complaint would be usurious and otherwise unlawful.
REQUEST FOR RELIEF
WHEREFORE, the Defendant prays that the Plaintiff take
nothing as a result of its Complaint; and that Defendant be
awarded its costs including reasonable attorney's fees/costs, if
appropriate, and such other and further relief as the Court may
deem appropriate in this case.
Dated: September 5, 1996
Respectfully submitted,
LAW OFFICES OF RANDOLPH STILES, ESQ.
By: SS/Randolph Stiles
Randolph Stiles, Esq.
Attorney for Defendant Datacat, Inc.
..............End Pleading dated 9/5/96.....................
...........Begin Pleading dated 9/10/96.....................
Randolph Stiles, Esq. (SBN 62910)
LAW OFFICES OF RANDOLPH STILES
12015 Kling Street, #211
North Hollywood, California 91607
818/505-8026
Attorney for Cross-Claimant Datacat, Inc.
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation,
Plaintiff,
v.
DATACAT, INC., a California corporation and DOES 1 through 25,
inclusive,
Defendants.
DATACAT, INC., a California corporation,
Cross-Claimant,
v.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation;
GANNAM/KUBAT PUBLISHING, INC., a California corporation;
NASIB GANNAM, an individual; and DOES 1 through 5,
Cross-Defendants.
Case No. 766 695
CROSS-COMPLAINT BY DEFENDANT DATACAT AGAINST DIVERSIFIED PRINTING
AND PUBLISHING
SERVICES, GANNAM/KUBAT PUBLISHING, INC. AND NASIB GANNAM FOR
DECLARATORY RELIEF AND
BREACH OF CONTRACT
(Depar(tm)ent 11 - Judge G. Robert Jameson)
Plaintiff Datacat, Inc., a California corporation ("Cross-
Claimant" or the "Company"), as its cross-complaint ("Cross-
Complaint"), including counter and cross-claims against
Diversified Printing And Publishing Services, Inc.
("Diversified"), Gannam/Kubat Publishing, Inc. ("G/K") and Nasib
Gannam an individual ("Gannam"), alleges as follows:
I. THE PARTIES
Cross-Claimant is a California corporation which is a resident
of and does business in Los Angeles County, California, and
elsewhere. Cross-Defendant Diversified Printing And Publishing
Services, Inc., a California corporation, is a resident of Orange
County, California, and does business in Los Angeles and Orange
County, California, and elsewhere. Cross-Defendant Gannam/Kubat
Publishing, Inc., a California corporation, is a corporation
which, on information and belief, is a resident of Orange County,
California and does business in Los Angeles and Orange County,
California. Cross-Defendant Nasib Gannam is an individual who, on
information and belief, is a resident of and does business in the
Counties of Orange and Los Angeles, California, and elsewhere.
Does 1 through 5, inclusive, are unknown to Cross-Claimant,
which therefore sues said defendants by such fictitious names.
Cross-Claimant will amend this Complaint to allege the Doe cross-
defendants' true names and capacities when ascertained.
Cross-Claimant is informed and believes, and thereon alleges, that
each of such fictitiously named Doe cross-defendants is
responsible in some manner for the occurrences herein alleged and
that Cross-Claimant's damages as herein alleged were proximately
caused by said cross-defendants' conduct.
II. JURISDICTION/VENUE
Jurisdiction is proper in this Court because Diversified has
sued the Cross-Claimant in this Court, and because the damages
sought to be recovered as a result of this Cross-Complaint exceed
$25,000.
Venue is proper in this Court because Diversified has sued the
Cross-Claimant in this Court, and because Diversified and the
other defendants do business in and can otherwise be found in
Orange County, California.
III. GENERAL ALLEGATIONS
Cross-Claimant is in the business of publishing printed catalogs
covering heating, ventilation, air conditioning and refrigeration
products.
Auto-Graphics, Inc., a California corporation ("A-G"), owns 50%
of the issued and outstanding stock of Cross-Claimant.
G/K owns 50% of the issued and outstanding stock of Cross-
Claimant and, on information and belief, Gannam owns or controls
100% of G/K. On information and belief, Gannam owns or controls
100% of Diversified. Diversified is in the business of providing
catalog printing and related services to publishers like the
Cross-Claimant.
On June 12, 1990, A-G and G/K entered into a written agreement a
copy of which is attached hereto as Exhibit A (the "Agreement").
The Agreement covered the organization of the Cross-Claimant and,
among other things, provided that the Company would purchase
printing services from Diversified. Exhibit A, paragraph 9 .
In accordance with the Agreement, Cross-Claimant endeavored to
and did purchase printing services from Diversified. The
Agreement also provides that the Cross-Claimant would purchase
composition services from A-G. Exhibit A, paragraph 8.
In accordance with the Agreement, Cross-Claimant endeavored to
and did purchase composition services from A-G. As a result of
Cross-Claimants having purchased printing and composition services
from, respectively, Diversified and A-G, prior to October of 1995
the Company had accumulated a substantial payable to each of such
stockholder/vendors which it could not pay on a current basis.
In July of 1994, at a meeting of the board of directors of the
Company, it was proposed that each of the Company's shareholders
(A-G and G/K) make a further capital contribution to the Company
in an amount which would allow the Company to pay all amounts then
due and owing to such stockholder/vendors for current services,
and as reasonably contemplated to be due and owing to such
affiliated parties for current services anticipated to be rendered
to the Company, and other creditors, in the future.
In lieu of such proposal, it was suggested and mutually agreed
by all representatives of A-G and G/K in attendance at the board
meeting, for their respective companies and for and on behalf of
the Cross-Claimant, that such stockholder/vendors would forego
and/or otherwise defer collection of amounts due and owing by the
Company to each of them for current services rendered by such
stockholder/vendors to the Company unless and until such time as
the Company had sufficient cash to pay all current payables to
non-affiliated parties and the remaining available cash would be
used, following payment of the Company's obligations for past
services, to pay pro rata the current payables due and owing A-G
and G/K for current services rendered by such stockholder/vendors
to the Company.
As an inducement and as partial consideration for A-G's
agreement to such deferred payment arrangement and as a condition
to A-G's agreement in respect thereof, the Cross-Claimant, with
G/K's consent and approval through its two representatives in
attendance at the board meeting, confirmed, acknowledged and
further agreed that the Company owed A-G $575,000 for past, unpaid
database development and maintenance services; and the Company
further agreed and promised to execute and deliver to A-G a
promissory note representing the Company's obligation to A-G for
such past (non-current) database development and maintenance
services previously rendered to the Company by A-G.
The Cross-Claimant's agreement and promise in favor of A-G was
memorialized in a written resolution which was considered, voted
upon and approved at the conclusion of the above-referenced July
1994 board meeting, including by G/K's two representatives in
attendance at such meeting, a copy of which corporate resolution
("Corporate Resolution") is attached hereto as Exhibit B.
Based upon such agreements and promises, A-G agreed to and did
continue to provide current composition services to Cross-
Claimant; and A-G did not, thereafter, demand or otherwise insist
that the Company pay for such composition services on a current
basis.
Based upon such agreements and promises, G/K caused Diversified
and Diversified otherwise agreed to and did provide current
printing services to Cross-Claimant; and
Diversified did not demand or otherwise insist that the Company
pay for such printing services on a current basis - - until
approximately February of 1996 when G/K and Diversified notified
the Company that all future printing services by Diversified for
the Company would have to be paid for on a C.O.D. (cash on
delivery) basis and subsequently such payment demand by
Diversified was for payment in advance before the commencement of
any printing services by Diversified.
In February 1996, the amount due and owing by the Cross-Claimant
to A-G and to G/K, respectively, for current services rendered by
such stockholder/vendors was approximately $300,000 each.
Beginning in February 1996, G/K refused to allow Diversified,
and Diversified otherwise failed and refused, to provide the
Cross-Claimant with any further printing services, except where
the Company was willing and able to pay in advance for such
services.
A-G continued to provide composition services to the Cross-
Claimant in accordance with the parties' (the Company, A-G and
G/K-Diversified) deferred payment arrangement and agreement.
Thereafter, when the Cross-Claimant had insufficient cash with
which to pay its non-affiliated vendors for their current
services, to pay other non-current obligations including the
Company's monthly promissory note obligation to A-G (for past
database creation and maintenance services) and with which to pay
Diversified in advance for its current printing services, the
Company and A-G requested that G/K agree to contribute or loan, on
a 50-50 basis with A-G, capital to the Company in the total amount
of $100,000 so as to provide the Company with financial resources
with which to satisfy Diversified's payment demand and to allow
the Company to continue to pay, pro rata, its obligations for
current services to A-G and Diversified in their capacity as
stockholder/vendors to the Company.
G/K refused to enter into such agreement or to otherwise assist
the Company to satisfy its financial obligations; and G/K caused
Diversified and Diversified otherwise continued to demand that the
Company pay in advance for any and all printing services to be
rendered by Diversified to the Company.
G/K and Diversified's failure and refusal to forego or otherwise
defer payment on current services rendered by Diversified to the
Company constituted a material breach and default by G/K and
Diversified of such parties' deferred payment agreement with, and
for the benefit of, the Cross-Claimant.
Additionally, Diversified failed and refused to perform and
otherwise fulfill its duties and responsibilities to the Cross-
Claimant and its customers (including Hasan Alhasawi and Mortemp)
in respect of past and proposed printing jobs by Diversified's
failure and refusal to return or otherwise deliver to the Company
and/or the Company's customers' property held by Diversified for
and belonging to the Company and/or its customers previously
provided to Diversified in connection with printing jobs
including, by way of example, two film covers supplied by Mortemp
for use in printing such customer's catalog and film promised by
Datacat to Hasan Alhasawi under the terms of the contract between
the Company and such customer.
Such failure and refusal to release property belonging to the
Company and or its customers, following proper notice/demand by
the Company to Diversified requesting that such property be
returned or otherwise provided to the Company and/or its
customers, and constituting the conversion by Diversified of such
property, caused and resulted in a material breach and default of
Diversified's duties and responsibilities to the Company and/or
its customers under the agreement by and between the Cross-
Claimant and Diversified whereby Diversified provided printing
services to the Company and under the Agreement (Exhibit A)
providing that the Company would purchase printing services from
Diversified.
Such withholding of property by Diversified also constituted a
material breach and default by G/K of the Agreement, thereby
relieving the Company of any further obligation to purchase
printing services from Diversified.
The Company maintains and alleges herein that, as a result of
Diversified's breach and default of its duties and
responsibilities to the Company under the agreement(s) by which
Diversified provided and was proposed to provide printing services
to the Company and its customers, including the Agreement (Exhibit
A), the Company is not obligated to purchase any future printing
services from Diversified including under the Agreement.
Further, the Cross-Claimant maintains and alleges herein that,
in any event, the Company is not required under the Agreement or
otherwise to purchase all of its printing services requirements
from Diversified.
Further, the Cross-Claimant maintains and alleges herein that,
as a result of G/K's agreement to cause Diversified to forego or
otherwise defer payment, or the right to collect, for current
printing services provided by Diversified to the Company (all
printing services covered by Diversified's claim against the
Company in this action), the Company is not obligated to pay
Diversified for any such printing services unless and until the
Company has available cash resources sufficient to satisfy all of
the Company's obligations to non-affiliated parties, all of the
Company's other obligations for non-current services (including
the Company's monthly payment obligation to A-G under the
promissory note) and the pro rata payment for current services
(all services received by the Company on or after July 1994)
received by the Company from its stockholder/vendors A-G and G/K.
On information and belief, G/K and Diversified and each of them
disagree with and dispute the Cross-Claimant's positions as set
forth in paragraphs 34, 35 and 36 above.
As a result of the disagreements and disputes alleged herein,
the Plaintiff believes and herein alleges that a present and
actual genuine controversy exists between and among the Cross-
Claimant, G/K and Diversified.
As a result of such disagreements and disputes, the Cross-
Claimant is uncertain as to its rights, entitlements, duties
and/or responsibilities to G/K and/or Diversified under the
Agreement and otherwise as alleged herein; and the Cross-Claimant
brings this action for declaratory relief and otherwise requests
that the Court determine, judicially declare and otherwise resolve
by its orders and judgment thereon the respective parties' rights,
entitlements, duties and responsibilities to one another under the
Agreement, the Corporate Resolution and the other agreements
alleged herein.
Unless and until the Court renders such declaratory relief, on
information and belief, the Cross-Claimant believes and alleges
that the parties will be otherwise unable to resolve their
disagreements and disputes as alleged herein and will, thereby,
incur possible future, on-going debts, obligations and liabilities
in respect of the parties' respective rights, entitlements, duties
and/or responsibilities to one another and/or third parties under
the Agreement or otherwise as alleged herein.
Defendants G/K, Diversified and Gannam, and each of them, are
the agents and representatives of each of such other defendants;
G/K and Diversified, and each of such defendants, is the
instrumentality and "alter-ego" of Defendant Gannam; Gannam owns
and controls G/K and Diversified; and the acts, activities and
conduct of G/K and Diversified as alleged herein are attributable
to Gannam as the principal, controlling person, authorized
representative and/or agent of such corporate defendants and each
of them.
In accordance with 25 of the Agreement, the party or parties
determined by the Court to be the "prevailing" party in this
action in respect of the disputes arising under or otherwise in
respect of the Agreement as alleged herein is entitled, in
addition to whatever other relief such prevailing party may be
entitled to under and as a result of the Agreement, to recover its
reasonable attorneys' fees and costs as provided for in the
Agreement.
IV. CAUSES OF ACTION
FIRST CAUSE OF ACTION
(Breach Of Oral Contract Against G/K And Gannam)
Paragraphs 1 through 41 are re-alleged and incorporated herein
by this reference.
In July 1994, G/K through its authorized representatives, Nasib
Gannam and Frank Kubat, entered into an oral agreement with Cross-
Claimant, and for the benefit of Cross-Claimant, whereby G/K
agreed for itself and Diversified that Diversified would forego
and/or defer collection of any amounts due and owing by the
Company for future current printing services to be rendered by
Diversified to the Company unless and until the Company's
available cash was sufficient to pay all non-affiliated
obligations, all "non-current" obligations including the Company's
monthly promissory note obligation to A-G and, with the remaining
cash, to make a pro rata payment to the Company's
shareholder/vendors including A-G and Diversified for
current services rendered by such affiliates to the Company.
Under the terms of such oral agreement, both A-G and Diversified
agreed to continue to provide, respectively, such composition and
printing services as the Cross-Claimant required from time to time
in its business, A-G and G/K would not be required or otherwise
requested to make any further capital contribution to the Company
to be used by the Company to pay its then current and anticipated
future obligations to such stockholder/vendors and, in lieu of any
such capital contributions, A-G and Diversified would forego or
defer any request for payment by, and/or collection against, the
Company for such on-going current services to be rendered by, for
and on behalf of such tockholder/vendors to the Company.
Cross-Claimant, and A-G, performed and continue to perform all of
their obligations under such agreement; and for a period of time
following such agreement, G/K and Diversified performed their
obligations under such agreement.
In February 1996, however, G/K and Diversified refused to provide
any further printing services to the Cross-Claimant on the
deferred payment basis which had been agreed upon, and on July 22,
1996, G/K caused Diversified to and Diversified otherwise
initiated this action against the Company to collect amounts set
forth in Diversified's Complaint (which G/K and Diversified had
agreed the Company would not be required to pay absent the
satisfaction of certain conditions precedent), thereby causing a
material breach and default of such agreement by G/K and
Diversified.
As a result of such breach/default, the Company has been injured
and damaged in the amount to be proven at trial, but in no event
less than the $360,133 sought by Diversified through its Complaint
against the Company in this action.
SECOND CAUSE OF ACTION
(Breach Of Oral Contract Memorialized
In Writing Against G/K And Gannam)
Paragraphs 1 through 41 are re-alleged and incorporated herein by
this reference.
The oral agreement alleged in and as a basis for the Cross-
Claimant's First Cause Of Action as set forth herein has been
memorialized in the minutes of the proceedings of the meeting of
the Company's board of directors.
As a result of such breach/default, the Company has been injured
and damaged in the amount to be proven at trial but in no event
less than the $360,133 sought by Diversified through its Complaint
against the Company in this action.
THIRD CAUSE OF ACTION
(Breach Of Contract Against G/K And Gannam)
Paragraphs 1 through 47 and 50 are re-alleged and incorporated
herein by this reference.
G/K and Gannam's failure and refusal to perform, and to cause
Diversified to perform, the agreement alleged as the basis for the
Cross-Claimant's First and Second Causes Of Action as set forth
herein, constituted a material breach and default by G/K and
Gannam under the Agreement (Exhibit A).
As a result of such breach/default, the Company has been injured
and damaged in the amount to be proven at trial, but in no event
less than the $360,133 sought by Diversified through its Complaint
in this action.
FOURTH CAUSE OF ACTION
(Breach Of Oral Contract Against All Defendants
Re Printing Services Provided)
Paragraphs 1 through 41 are re-alleged and incorporated herein by
this reference.
Pursuant to an on-going agreement between the Cross-Claimant and
G/K and Diversified, including as alleged as the basis for claims
by Diversified against the Company such as set forth in the
Complaint on file in this action, G/K and Diversified agreed to
and did provide certain printing services to the Company.
As part of such agreement, G/K and Diversified expressly or
implicitly agreed to return to the Cross-Claimant and/or the
Company's customer all property provided to Diversified by the
Company and/or its customer for purposes of performing such
printing services, such as the composition images to be printed by
Diversified.
On several occasions during the Summer of 1996, pertaining to the
Hasan Alhasawi printing job and the Mortemp printing job proposed
to be done at Diversified (but in respect of which Diversified
failed and refused to perform absent the Company's ability to pay
Diversified in advance for such job), the Cross-Claimant demanded
and/requested that Diversified return to the Company or its
customer property owned and provided to Diversified by the Company
and/or the customer for purposes of the performance of such
printing jobs; and Diversified failed and refused to return or
otherwise deliver such property to the Company and/or its
customers thereby intentionally interfering with the Company's
performance of its contracts with its customers and Diversified
otherwise unlawfully converted such property as its own.
The conversion of property by Diversified belonging to the Company
and/or its customers resulted in a material breach and default
under the agreement whereby Diversified was providing printing
services to the Company.
As a result of such breach/default, the Company has been injured
and damaged in the amount to be proven at trial but in no event
less than $25,000.
FIFTH CAUSE OF ACTION
(Breach Of Contract Against G/K And Gannam
Re Printing Services Provided)
Paragraphs 1 through 42, and 56 through 59, are re-alleged and
incorporated herein by this reference.
Diversified's failure and refusal to return property to the Cross-
Claimant and/or its customer as alleged as the basis for the
Plaintiff's Fourth Cause Of Action, and G/K and Gannam's failure
and refusal to cause Diversified to return or otherwise deliver
such property to the Company and/or its customer constituted a
material breach of and default under the
Agreement (Exhibit A) under which Diversified performs printing
services for the Company.
As a result of such breach/default, the Company has been injured
and damaged in the amount to be proven at trial, but in no event
less than $25,000.
SIXTH CAUSE OF ACTION
(Breach Of Implied Covenant Of Good Faith
And Fair Dealing Against All Defendants)
Paragraphs 1 through 41 are re-alleged and incorporated herein by
this reference.
The acts and conduct alleged herein constituted a breach of the
implied covenant of good faith and fair dealing attendant to and
arising out of the agreements alleged herein, including the
Agreement (Exhibit A).
As a result of such breach of the implied covenant of good faith
and fair dealing, the Company has been injured and damaged in the
amount to be proven at trial, but in no event less than the
$360,133 sought be Diversified through its Complaint in this
action.
SEVENTH CAUSE OF ACTION
(Declaratory Relief Against All Defendants)
Paragraphs 1 through 41, 42 and 44 through 65, are alleged and
incorporated herein by this reference.
As a result of the present and actual genuine controversy existing
between and among the Cross-Claimant and the defendants, and each
of them, as alleged in this Complaint, the Court is empowered and
otherwise authorized to provide, and is hereby requested to
provide, under California Code of Civil Procedure Section 1062, et
seq., and otherwise, the following declaratory relief:
(1) a declaration, order and judgment that the Cross-
Claimant is relieved of any and all further obligation of
whatsoever nature and kind to purchase printing services from
Diversified under the Agreement;
(2) a declaration, order and judgment that the Cross-
Claimant is not obligated under the Agreement to purchase all of
its printing requirements from Diversified;
(3) a declaration, order and judgment that the Cross-
Claimant is not obligated to pay for the printing services which
are the subject of Diversified's Complaint against the Company
unless and until the condition precedent to the Company's
obligation to pay for such services (cash available to pay (i) all
obligations to non-affiliated parties, (ii) the Company's monthly
note obligation to A-G and (iii) a pro rata distribution to both
A-G on amounts due and owing to such stockholder/vendors for
current services) is satisfied;
REQUEST FOR RELIEF
WHEREFORE, the Cross-Claimant requests the following relief
on its Cross-Complaint:
1. On the First Cause Of Action For Breach Of Oral Contract
Against G/K and Gannam, for damages according to proof at trial,
but in no event less than $360,133;
2. On the Second Cause Of Action For Breach Of Oral
Contract Memorialized In Writing Against G/K and Gannam, for
damages according to proof at trial, but in no event less than
$360,133;
3. On the Third Cause Of Action For Breach Of Contract
Against G/K And Gannam, for damages according to proof at trial,
but in no event less than $360,133;
4. On the Fourth Cause Of Action For Breach Of Oral
Contract Against Diversified, G/K Re Printing Services Provided,
for damages according to proof at trial, but in no event less than
$25,000;
5. On the Fifth Cause Of Action Against G/K And Gannam Re
Printing Services Provided, for damages according to proof at
trial, but in no event less than $25,000;
6. On the Sixth Cause Of Action For Breach Of Implied
Covenant Of Good Faith And Fair Dealing Against Diversified, G/K
And Gannam, for damages according to proof at trial, but in no
event less than $360,133;
7. On the Seventh Cause Of Action For Declaratory Relief
Against All Defendants, as follows:
(i) a declaration, order and judgment that the Cross-
Claimant is relieved of any and all further obligation of
whatsoever nature and kind to purchase printing services from
Diversified under the Agreement;
(ii) a declaration, order and judgment that the
Cross-Claimant is not obligated under the Agreement to purchase
all of its printing requirements from Diversified; and
(iii) a declaration; order and judgment that the
Cross-Claimant is not obligated to pay for the printing services
which are the subject of Diversified's Complaint against the
Company unless and until the condition precedent to the Company's
obligation to pay for such services (cash available to pay
(i) all obligations to non-affiliated parties, (ii) the Company's
monthly note obligation to A-G and (iii) a pro rata distribution
to both A-G on amounts due and owing to such stockholders/vendors
for current services)is satisfied;
FURTHER, in respect of all of the above-referenced Causes Of
Action, the Cross-Claimant requests further relief including costs
of suit including reasonable attorneys' fees as provided for in
the Agreement, pre-judgment interest and such other and further
relief as the Court deems fair and appropriate under the
circumstances.
Dated: September 10, 1996
Respectfully submitted,
LAW OFFICES OF RANDOLPH STILES, ESQ.
ss/Randolph Stiles
Randolph Stiles, Esq.
Attorney for Cross-Claimant
Datacat, Inc.
..............End Pleading dated 9/10/96...................
.............Begin Pleading dated 11/7/96.................
DIVERSIFIED vs. DATACAT
SUMMONS ON CROSS-COMPLAINT
(CITATION JUDICIAL)
NOTICE TO CROSS-DEFENDANTS
ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California
corporation,
Cross-Defendants,
- - and -
DATACAT, INC., a California Corporation,
Nominal Cross-Defendant and
Cross-Defendant
YOU ARE BEING SUED BY: CROSS-COMPLAINANTS
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation;
GANNAM/KUBAT PUBLISHING, INC., a California corporation
You have 30 CALENDAR DAYS after this summons is served on you to
file a typewritten response at this court. A letter or phone call
will not protect you; your typewritten response must be in proper
legal form it you want the court to hear your case. If you do
not me your response on time, you may lose the case, and your
wages, money and property may be taken without further warning
from the court. There are other legal requirements. You may want
to call an attorney right away. It you do not know an attorney,
you may call an attorney referral service or a legal aid office
(listed in the phone book).
CASE NUMBER 766 695
Judge C. Robert Jameson Dept. 11
The name and address of the court is:
Orange County Superior Court
700 Civic Center Drive, West
PO Box 1994
Santa Ana, California 92701
County of Orange
The name, address, and telephone number of Cross-Complainants
attorney, is:
GRAHAM AND JAMES LLP (714) 224-2000
KENNETH B. JULIAN, Bar No. 149840
KARL A. SANDOVAL, Bar No. 117111
4675 MacArthur Court, Suite 800
Newport Beach, California 92660
DATE 11/08/96 ALAN SLATER, Clerk, by ANGELA KN0X,
Deputy
GRAHAM & JAMES LLP ~
Kenneth B. Julian (State Bar # 149840)
Karl A. Sandoval (State Bar #170190)
4675 MacArthur Court, Suite 800
Newport Beach, California 92660
(714) 224-2000
Attorneys for Plaintiff/Cross-Defendant/Cross-Complainant
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC.,
Cross-Defendant/Cross-Complainant
GANNAM/KUBAT PUBLISHING, INC.,
Cross-Defendant NASIB GANNAM
SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE
Case No.: 766695
Assigned For All Purposes To: Honorable G. Robert Jameson
Depar(tm)ent 11
CROSS-COMPLAINT BY GANNAM/KUBAT PUBLISHING, INC. AND DIVERSIFIED
PRINTING AND PUBLISHING SERVICES, INC. AGAINST CROSS-DEFENDANTS
AUTO-GRAPHICS, INC. AND ROBERT S.
COPE FOR DAMAGES AND INJUNCTIVE RELIEF
(BREACH OF FIDUCIARY DUTY, WASTE OF CORPORATE ASSETS, BREACH OF
CONTRACT, CONVERSION, FRAUD, CONSTRUCTIVE FRAUD, UNJUST
ENRICHMENT, CONSTRUCTIVE TRUST, MONEY HAD AND RECEIVED, ACCOUNTING
AND FRAUDULENT CONVEYANCES)
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation,
Plaintiff,
vs.
DATACAT, INC., a California corporation; and DOES 1 through 25,
inclusive
Defendants.
DATACAT, INC. a California corporation,
Cross-Claimant,
vs.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a
California corporation
GANNAM/KUBAT PUBLISHING, INC., a California corporation;
NASIB GANNAM, an individual, and DOES 1 through 5,
Cross-Defendants.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a
California corporation
GANNAM/KUBAT PUBLISHING, INC., a California corporation;
Cross-Complainants.
vs.
ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California
corporation,
Cross-Defendants,
- and -
DATACAT, INC., a California corporation,
Nominal Cross-Defendant and Cross-Defendant.
COMES NOW, cross-complainant GANNAM/KUBAT PUBLISHING, INC., suing
on its own behalf as well as derivatively on behalf of DATACAT,
INC. and cross-complainant DIVERSIFIED PRINTING AND PUBLISHING
SERVICES, INC., suing on its own behalf, and for their Cross-
Complaint, allege as follows:
A. The Parties.
1. Cross-complainant GANNAM/KUBAT PUBLISHING, INC. ("GK") is and,
at all times herein relevant, was a corporation organized and
existing under the laws of the State of California. GK is in the
publishing business with offices located in the County of Orange,
State of California. GK is owned by cross-defendant NASIB GANNAM
("MR GANNAM").
2. Cross-complainant DIVERSIFIED PRINTING AND PUBLISHING
SERVICES, INC. ("DIVERSIFIED") is and, at all times herein
relevant, was a corporation organized and existing under the laws
of the State of California. DIVERSIFED is in the
printing business with offices located in the County of Orange,
State of California. DIVERSIFIED also is owned by MR. GANNAM.
3. Nominal cross-defendant DATACAT, INC. ("DATACAT") is and, at
all times herein relevant, was a corporation organized and
existing under the laws of the State of California. DATACAT is in
the business of publishing printed catalogs, primarily for
heating, air conditioning, refrigeration and related products.
4. Cross-complainants GK and DIVERSIFIED (collectively "Cross-
Complainants") are informed and believe, and thereon allege, that
cross-defendant AUTO-GRAPHICS, INC. ("AG") is and, at all times
herein relevant, was a public corporation organized and existing
under the laws of the State of California, doing business in the
County of Orange.
5. Cross-Complainants are informed and believe, and thereon
allege, that Cross-defendant ROBERT S. COPE ("MR. COPE") is and,
at all times herein relevant, was the Chairman of the Board of
Directors of DATACAT and the majority owner, President, and a
controlling director of AG.
6. The true names and capacities, whether individual, corporate,
associate, or otherwise, of the cross-defendants sued herein as
ROES 1 through 25, inclusive, are unknown to Cross-Complainants,
which therefore sue said cross-defendants by such fictitious
names. Cross-Complainants will amend this Cross-Complaint to
allege said cross-defendants' true names and capacities when
ascertained. Cross-complainants are informed and believe, and
thereon allege, that each of such fictitiously named cross-
defendants is responsible in some manner for the occurrences
herein alleged and that Cross-Complainants' damages as herein
alleged were proximately caused by said cross-defendants' conduct.
7. Cross-Complainants are informed and believe, and thereon
allege, that cross-defendants AG, MR. COPE, and ROES 1 through 25,
inclusive (collectively "Cross-Defendants"), were the agent,
partner, officer, and/or employee of each of their co-Cross-
Defendants and, in doing the things hereinafter alleged, were
acting within the course and scope of such agency, partnership,
office, and/or employment.
B. FACTUAL BACKGROUND
8. In or about 1989, GK was the owner of a valuable database (the
"Database") containing information useful for producing printed
catalogs for heating, air conditioning, refrigeration and related
products. In or about mid-1989, GK and AG commenced discussions
regarding the possible formation of a company to produce catalogs
for the referenced products, whereby GK would contribute the
Database, and AG would contribute certain Database development and
maintenance services.
9. On or about June 12, 1990, GK and AG entered into a
shareholders agreement (the "Shareholders Agreement") for the
formation of DATACAT. A true and correct copy of the Shareholders
Agreement is attached hereto as Exhibit "A" and is incorporated
herein by this reference as though set forth in full. Effective on
or about September 27, 1990, DATACAT was formed and incorporated,
and adopted the Shareholders Agreement.
10. Pursuant to the Shareholders Agreement, GK and AG each
respectively own, and have owned, 50% of the shares of DATACAT.
Under that agreement, AG had right to
appoint, and did appoint, the majority of DATACAT's Board of
Directors (the "Board"). In addition to a mutual cash capital
contribution, GK contributed the Database, and AG was to
contribute certain services and labor for development and
maintenance of the Database.
11. Pursuant to Paragraphs 8 and 9 of the Shareholders Agreement,
DATACAT is and was required to purchase all catalog printing
services from DIVERSIFIED, and to purchase all catalog composition
services from AG. Under the shareholders Agreement, DIVERSIFIED
and AG were to bill DATACAT for such services at reasonable and
customary prices, and DATACAT was required to pay DIVERSIFIED and
AG for such services, consistent with Paragraphs 8 and 9 of said
agreement.
12. Cross-Complainants are informed and believe, and thereon
allege that, at all relevant times, Michele Clark ("Ms. Clark") is
and was employed fu11-time as the controller and/or assistant
controller of AG and was under the direction and control of MR.
COPE and AG.
13. Cross-Complainants are informed and believe, and thereon
allege that, at all relevant times, a relationship of trust and
confidence existed between AG, on the one hand, and DATACAT and
GK, on the other, in that AG was entrusted by DATACAT and GK to
handle, and did handle, all of DATACAT's bookkeeping, accounts
payable, and other financial matters and, at all times, DATACAT
and GK entrusted AG to perform these functions in accordance with
the Shareholders agreement, the direction of the
Board, and applicable law.
14 As a matter of practice, and the agreement of GK and AG, all
moneys received by DATACAT were required first to be used to meet
payroll and other necessary expenses, and to pay third-party
creditors. Any excess funds were then to be applied to the
invoices of DIVERSIFIED and AG for printing and composition
services rendered, on an equal priority and roughly dollar-for-
dollar basis.
15. Cross-Complainants are informed and believe, and thereon
allege, that during the 1990 through 1993 time-frame, through
mismanagement, miscalculations, and inefficiencies, AG experienced
certain cost overruns on DATACAT-related projects and database
services. On information and belief, during this period of time,
AG also experienced a down-turn in the profitability of other
aspects of its business,
independent of DATACAT-related projects.
16. Cross-Complainants are informed and believe, and thereon
allege that, in late 1993 and early 1994, Cross-Defendants, and
each of them, demanded that AG receive additional compensation for
services allegedly rendered, prior to 1994, for development and
maintenance of the Database in the amount of several hundred
thousand dollars (the "Database Recovery Demands"). On information
and belief, the Database Recovery Demands were grossly over
inflated, and contained proposed charges to DATACAT for services
which AG was under an obligation to render free of charge as part
of its initial capital contribution under the Shareholders
Agreement, and for other items not properly or appropriately
chargeable to DATACAT.
17. Cross-Complainants are informed and believe, and thereon
allege, that a special meeting of the Board was held on or about
July 28, 1994 (the "Board Meeting"), at the offices of AG. Among
other items, the agenda proposed consideration of "Auto-Graphics
Pre-1994 Database Recovery Issue." In this regard, AG provided GK
with a memorandum outlining AG's latest Database recovery proposal
(the "Database Recovery Memorandum"). A true and correct copy of
the Database Recovery Memorandum is attached hereto as Exhibit "B"
and is incorporated herein by this reference as though set forth
in full. On information and belief, the Database Recovery
Memorandum was prepared by Robert Bretz ("Mr. Bretz"), then a
member of AG's Board of Directors.
18. The Database Recovery Memorandum proposed, among other
things, that DATACAT pay to AG $575,000 for past "development and
maintenance" work allegedly performed by AG on the Database from
1990 through December 31, 1993. The Database Recovery Memorandum
further provided that the $575,000 was to be recovered from
certain module selection fees, increased growth margins, and other
AG "cost savings," and was to be paid over approximately three
years (the "AG Database Recovery Proposal").
19. During the Board Meeting on July 28, 1994, MR. GANNAM, and
Frank Kubat ("Mr. Kubat"), another member of the Board and then
President of DATACAT, rejected the AG Database Recovery Proposal.
20. After further discussion, in the spirit of compromise and
cooperation, MR. GANNAM made a compromise proposal (the "GK
Compromise Proposal") under which AG could recover some portion of
the costs it was claiming for Database Recovery to be paid
primarily out of any future profits of DATACAT (i.e., after
necessary expenses and after DIVERSIFIED and AG were paid for
their respective printing and composition services). At that time,
AG, through MR. COPE and Mr. Bretz, would not agree to the GK
Compromise Proposal, and the Board Meeting terminated without any
agreement being reached with respect to Database Recovery.
21. On August 3, 1994, Mr. Bretz, on behalf of AG, made a
counter-proposal to the GK Compromise Proposal which reduced the
amount of proposed Database Recovery from $575,000 to $500,000,
and changed other terms and conditions (the "AG Database Recovery
Counter-Proposal"). A true and correct copy of a letter from Mr.
Bretz, dated August 3, 1994, making the AG Database Recovery
Counter-Proposal is attached hereto as Exhibit "C" and is
incorporated herein by this reference as though set forth in full.
No board meeting, or shareholders meeting, was ever held to
discuss, adopt, or vote on the AG Database Recovery Counter-
Proposal, or any other such further proposal. Nor did GK, Mr.
Gannam, or Mr. Kubat ever give their consent to the AG Database
Recovery Counter-Proposal, or any other such further proposal.
22. Cross-Complainants are informed and believe, and thereon
allege, that sometime in late 1994 and early 1995, Cross-
Defendants, and each of them, took advantage of the trust and
confidence placed in AG with respect to DATACAT's financial
affairs, and secretly, and without the consent, knowledge, or
approval of the Board, Mr. Gannam, Mr. Kubat, or GK, Cross-
Defendants began to misappropriate, misapply, and unlawfully
divert to AG moneys belonging to DATACAT. Specifically, on
information and belief, in early 1995, Cross-Defendants
misappropriated, misapplied, and unlawfully diverted to AG moneys
belonging to DATACAT in the sum of (1) $33,749 in January, (2)
$67,769 in March, (3) $26,257 in April, (4) $15,972 in May, and
(5) $15,972 in June, totaling almost $160,000.
23. Cross-Complaints are informed and believe, and thereon allege,
that in early 1995, Mr. Kubat discussed with MR. COPE the lack of
any agreement with respect to Database Recovery and other
financial issues involving AG and DATACAT. During said
conversations, MR. COPE concealed and failed to disclose to Mr.
Kubat that Cross-Defendants, and each of them, had
misappropriated, misapplied, and unlawfully diverted, and were
continuing to misappropriate, misapply, and unlawfully divert the
above-referenced funds of DATACAT.
24. Cross-Complaints are informed and believe, and thereon allege,
that in or about June 1995, after Cross-Defendants had
misappropriated almost $160,000, Mr. Bretz set-up a meeting with
Mr. Kubat. At the meeting, Mr. Bretz informed Mr. Kubat for the
first time that AG had taken and appropriated moneys from
DATACAT`s accounts.
25. Cross-Complaints are informed and believe, and thereon allege,
that shortly after the meeting with Mr. Bretz, Mr. Kubat asked Ms.
Clark about the misappropriated funds. At that time, Ms. Clark
told Mr. Kubat that MR. COPE instructed her take the above-
referenced sums from DATACAT and pay them to AG, or words to that
effect. On information and belief, Cross-Defendants caused
unauthorized entries to be made in the books and records of
DATACAT to cover-up, justify, and legitimize the referenced
misappropriated funds.
26. Additionally, on or about July 18, 1995, Mr. Bretz drafted a
letter which falsely stated that the DATACAT "Board formally
approved payment by DATACAT of $575,000 over a three year period
in equal monthly payments commencing September 1, 1994, and that
such agreement has been properly performed by DATACAT pursuant to
such prior Board approval and authority" and attached a proposed
DATACAT Resolution ratifying Cross-Defendants' unlawful
misappropriation of DATACAT's funds (the "Proposed Ratifying
Resolution"). A true and correct copy of that letter and proposed
resolution are attached hereto collectively as Exhibit "D" and are
incorporated herein by this reference as though set forth in full.
No board meeting, or shareholders meeting, was ever held to
discuss, adopt, or vote on the Proposed Ratifying Resolution and
GK, MR. GANNAM, and Mr. Kubat did not give, and would not give
their consent, for DATACAT to ratify or retroactively approve of
the unlawful conduct of Cross-Defendants, as alleged herein.
27. After learning of Cross-Defendants' fraud and misappropriation
of funds, GK and Mr. Kubat demanded that Cross-Defendants
immediately cause said moneys to be restored to DATACAT, but
Cross-Defendants have failed and refused, and continue to fail and
refuse, to restore such funds to DATACAT. Additionally, even after
the Cross-Defendants' fraud was exposed, and over the objections
of GK, MR. GANNAM, and others, on information and belief, Cross-
Defendants continued to misappropriate, misapply, and unlawfully
divert additional sums from DATACAT, at a rate of $15,972 per
month, to AG during the time period July 1995 through the present,
totaling over $250,000. Hence, as of the filing of this Cross-
Complaint, on information and belief, Cross-Defendants, and each
of them, have caused the misappropriation, misapplication, and
unlawful diversion of over $410,000 from DATACAT to AG
(the"Misappropriated Funds").
28. As a direct and proximate result of Cross-Defendants'
conduct, DATACAT has suffered financial hardship and has been
unable to pay DIVERSIFIED for printing services rendered.
29. Despite the demands of Cross-Complainants, and each of them,
as well as MR. GANNAM and others, Cross-Defendants, and each of
them, have failed and refused, and continue to fail and refuse, to
refrain from taking $15,972 per month from DATACAT and paying it
to AG.
30. Cross-Complainants allege on information and belief, that
Cross-Defendants, and each of them, have dominated and controlled
the operations of DATACAT, and have appropriated, used, and
transferred, DATACAT's assets and resources to AG unlawfully and
without Board approval.
31. Any formal demand made by GK to DATACAT's Board is excused
since such a demand would have been a futile and useless act for
the following reasons:
(1 ) AG has the right to appoint, and has appointed, a
majority of the Board, which consists of MR. COPE, his son Paul
Cope, and another director affiliated with AG (the "AG-Affiliated
Directors");
(2) The Chairman of the Board, MR. COPE, is accused of
committing and/or conspiring to commit the wrongs complained of in
the Cross-Complaint;
(3) The wrongful acts of Cross-Defendants constitute
violations of law and fiduciary duties which conduct is incapable
of ratification;
(4) The AG Affiliated Directors cannot be relied upon to
reach an independent decision as to whether to commence the
demanded actions against Cross-Defendants because these directors
are controlled by MR. COPE, and have consistently acceded to and
will continue to accede to his directives and demands and such
control by MR. COPE has impaired the ability of the AG-Affiliated
Directors to exercise their own business judgment and rendered
them incapable of reaching an independent judgment as to whether
to accept the demands of Cross-Complainants;
and
(5) On information and belief, the AG-Affiliated Directors
have long been aware of the wrongdoing of Cross-Defendants, as
alleged herein, but have chosen not to protect DATACAT or seek to
recover the misappropriated funds, and have refused to take action
with respect to these claims because any such action would require
them to sue themselves (Paul Cope would have to sue his father)
and affiliated enterprises.
32. A true and correct copy of this Cross-Complaint was hand-
delivered to DATACAT, prior to its filing with the Court.
I. FIRST CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf Of DATACAT Against
All Cross-Defendants For Breach of Fiduciary Duty)
33. Cross-Complainants reallege and incorporate herein by this
reference as though set forth in full each and every allegation
contained in paragraphs 1 through 32, inclusive, of this Cross-
Complaint.
34. GK is informed and believes, and thereon alleges, that by
virtue of MR. COPE's position as Chairman of the Board and AG's
status as a controlling shareholder of DATACAT, they owed
fiduciary duties to DATACAT and to GK to exercise due care and
honesty in the management, administration and operation of
DATACAT's affairs and in their dealings with GK. Furthermore, by
virtue of his position as Chairman of the Board, MR. COPE owed a
fiduciary duty to DATACAT and to GK, not to favor his own
interests, or the interests of AG, at the expense of DATACAT or
GK. AG further owed a fiduciary duty as trustee of DATACAT's
financial matters and custodian of its financial books and records
as alleged herein.
35. Nevertheless, commencing in late 1994, and early 1995, Cross-
Defendants, and each of them, secretly and unlawfully caused the
misappropriated the funds of DATACAT, as alleged herein. The
actions of Cross-Defendants, and each of them, in taking the
misappropriated funds, constituted ultra vires actions, which were
without notice to, or approval of, the Board or GK, and resulted
in unauthorized and secret transactions in favor of Cross-
Defendants, and each of them. Cross-Defendants, and each of them,
later engaged in conduct to attempt to cover-up and legitimize the
taking of the misappropriated funds, including, without
limitation, causing unapproved and unauthorized entries in the
financial books and records of DATACAT, and knowingly and falsely
taking the position that the Database Recovery Proposal was
adopted and approved by the Board at the Board Meeting of July 28,
1994.
36. GK further is informed and believes, and thereon alleges, that
the unlawful and unauthorized taking of the misappropriated funds
by Cross-Defendants, and each of
them, constitutes self dealing, and represents a clear conflict of
interest on the part of Cross-Defendants, and each of them, in
breach of their fiduciary duties to DATACAT and GK. On information
and belief, Cross-Defendants, and each of them, continue to engage
in such self-dealing conduct, despite a demand that they cease
such conduct and return the misappropriated funds to DATACAT.
37. Cross-Defendants therefore have breached their fiduciary
duties as directors, de facto officers, controlling shareholders,
and/or trustees of DATACAT's financial affairs in numerous
respects, and have failed to exercise that requisite degree of
care, skill, honesty and obedience to law and good faith which
persons similarly situated would have exercised, as required by
applicable law.
38. As the result of the Cross-Defendants' breaches of their
fiduciary duties, DATACAT and GK have been damaged in a sum
according to proof at trial. Furthermore, GK is entitled to
injunctive relief to prevent Cross-Defendants, and each of them,
from further misappropriating and dissipating the assets of
DATACAT, without proper authorization of the Board.
39. GK is informed and believes, and thereon alleges, that Cross-
Defendants, and each of them, in doing the acts herein alleged,
acted with malice, oppression, fraud, and in conscious disregard
of the rights of DATACAT and GK, such that DATACAT and GK are
entitled to an award of punitive and exemplary damages against
Cross-Defendants, each of them, in a sum according to proof at
trial.
II. SECOND CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf of DATACAT Against
All Cross-Defendants For Waste of Corporate Assets)
40. GK realleges and incorporates herein by this reference as
though set forth in full each and every allegation contained in
paragraphs 1 through 39, inclusive of this Cross-Complaint.
41. GK is informed and believes, and thereon alleges, that Cross-
Defendants, and each of them, misappropriated and converted for
AG's use and benefit the misappropriated funds, as alleged herein,
and therefore have caused the dissipation and waste of DATACAT's
corporate assets. By reason of their wrongful conduct, as alleged
herein, Cross-Defendants, and each of them, have wasted DATACAT's
valuable assets and otherwise caused DATACAT to be unable to meet
its financial obligations to DIVERSIFIED and other creditors and,
as a result of such conduct, DATACAT and GK have been
substantially damaged.
42. As a proximate result of the conduct of Cross-Defendants, and
each of them, DATACAT and GK have sustained damage in an amount
according to proof at trial. Furthermore, GK is entitled to
injunctive relief to prevent the further misappropriation funds by
Cross-Defendants, to prevent the further transferring,
dissipating, wasting, and misuse of any of DATACAT's assets and
property without proper authorization of the Board, and ordering
AG to restore all misappropriated funds to DATACAT.
43. GK is informed and believes, and thereon alleges, that Cross-
Defendants, and each of them, acted with malice, oppression,
fraud, and in conscious disregard of the rights of DATACAT and GK,
such that DATACAT and GK are entitled to an award of punitive and
exemplary damages in an amount according to proof at trial.
.
III. THIRD CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf of DATACAT, And By
DIVERSIFIED Against AG For Breach Of The Shareholder Agreement)
44. Cross-Complainants, and each of them, reallege and incorporate
herein by this reference as though set forth in full each and
every allegation contained in paragraphs 1 through 43 inclusive,
of this Cross-Complaint.
45. Pursuant to the Shareholder Agreement, and the subsequent
agreement of the parties, AG was entrusted to handle the day-to-
day financial affairs of DATACAT and was entrusted with custody of
financial books and records. AG breached the Shareholder
Agreement by unlawfully misappropriating, diverting, and taking
funds from DATACAT, and converting them to its own use and
benefit. AG further breached the Shareholder Agreement by failing
and refusing to return such misappropriated funds, and by failing
and refusing to cease from further misappropriating the funds of
DATACAT.
46. At all relevant times, DIVERSIFIED was an express third-party
beneficiary of the Shareholder Agreement. AG further breached
paragraph 9 of the Shareholder Agreement by taking steps to
prevent DATACAT from paying DIVERSIFIED for printing services
rendered in connection with DATACAT's projects, including, without
limitation, taking above-referenced misappropriated funds.
Pursuant to paragraph 9 of the Shareholder Agreement, DATACAT was
required to purchase all printing services from DIVERSIFIED. In or
about August, 1996, AG further breached the Shareholder Agreement
by preventing DATACAT from sending its printing jobs and projects
to DIVERSIFIED and caused DATACAT to cease using DIVERSIFIED for
its printing on DATACAT projects.
47. Cross-Complainants, and each of them, have fully performed all
acts, services, and conditions required by the Shareholder
Agreement and have made a demand upon AG to return the
misappropriated funds, to cease from further misappropriating the
funds of DATACAT, to pay DIVERSIFIED monies owed for printing
services and to cause DATACAT to continue to print with
DIVERSIFIED, but Cross-Defendants, and each of them, have failed
and refused to accede to such demands.
48. As a proximate result of the acts of the Cross-Defendants, and
each of them, in breaching the Shareholder Agreement, Cross-
Complainants, and each of them, have been damaged in an amount
according to proof at trial.
IV. FOURTH CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf of DATACAT Against
All Cross-Defendants For Conversion)
49. Cross-Complainant GK realleges incorporates herein by this
reference as though set forth in full each and every allegation
contained in paragraphs 1 through 48, inclusive, of this Cross-
Complaint.
50. GK is informed and believes, and thereon alleges, that Cross-
Defendants, and each of them, misappropriated, misapplied, and
diverted to AG large sums of money belonging to DATACAT, as
alleged herein, and have converted such sums for AG's use and
benefit. On information and belief, Cross-Defendants, and each of
them, acted secretly and fraudulently in taking the
misappropriated funds, and have utilized such funds in favor of AG
for purposes not disclosed, authorized, sanctioned or approved by
the Board, and in violation of the Shareholder Agreement, and
other applicable law.
51. Notwithstanding GK's demands for repayment of the
misappropriated funds, Cross-Defendants, and each of them, have
failed and refused, and continue to fail and refuse, to repay the
converted funds to DATACAT. As a result of said conversion of
funds,
by Cross-Defendants, and each of them, DATACAT and GK have been
damaged
in a sum according to proof at trial. Furthermore, GK is entitled
to
injunctive relief to prevent the Cross-Defendants, and each of
them, from further appropriating and diverting the funds of
DATACAT without proper authorization.
52. GK is informed and believes, and thereon alleges, that Cross-
Defendants, and each of them, acted with malice, oppression, and
fraud and in conscious disregard of the rights of DATACAT and GK
and others, such that DATACAT and GK are entitled to an award of
punitive and exemplary damages in an amount subject to proof at
trial.
V. FIFTH CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf Of DATACAT Against
All Cross-Defendants For Fraud)
53. GK realleges and incorporates herein by this reference as
though set forth in full each and every allegation contained in
paragraphs 1 through 52, inclusive, of this Cross-Complaint.
54. By virtue of their respective positions as Chairman of the
Board and/or controlling shareholders of DATACAT, and the trust
and confidence placed in AG with respect to DATACAT's financial
matters, Cross-Defendants, and each of them, had a duty to
disclose to GK and DATACAT their diversion and taking of the
misappropriated funds. By virtue of the contractual relationship
between GK and AG, the covenant of good faith and fair dealing
implied therein, and other applicable law, AG further owed a duty
to GK to disclose fully the taking of the misappropriated funds
55. GK is informed and believes, and thereon alleges that, from
late 1994 through mid 1995, Cross-Defendants took the
misappropriated funds and failed to disclose, suppressed, and
concealed to material facts concerning the misappropriated funds
in their continued dealings with GK and DATACAT with intent to
defraud DATACAT and GK. Cross-Defendants, and each of them,
further created a duty to disclose fully to Cross-Defendants, and
each of them, the existence, nature, and scope of their taking of
the misappropriated funds, in early 1995, when MR. COPE undertook
to speak to Mr. Kubat on various financial matters with respect to
AG and DATACAT, including, without limitation, Database Recovery,
but failed to disclose and concealed the taking of such funds.
56. Cross-Complainants are informed and believe, and thereon
allege, that Cross-Defendants, and each of them, breached their
respective duties to disclose to GK and DATACAT the material facts
concerning the misappropriated funds. GK is informed and believes,
and thereon alleges, that Cross-Defendants, and each of them, took
the misappropriated funds and made the omissions concerning said
funds, with the intent to defraud GK and DATACAT, to fraudulently
and unjustly enrich AG, and to deprive DIVERSIFIED and GK of
monies lawfully owing to them under the Shareholders
Agreement.
57. During the time of Cross-Defendants' fraudulent conduct, GK
was unaware of the true facts, and would have taken steps to
recover the misappropriated funds, to prevent further
misappropriation of funds, and to obtain monies lawfully owing to
GK and DIVERSIFIED under the Shareholder Agreement.
58. As a proximate result of the fraudulent conduct of Cross-
Defendants, and each of them, as alleged herein, DIVERSIFIED has
been deprived of monies owing it under the Shareholder Agreement,
DATACAT has been deprived of funds necessary for its operations,
and GK and DATACAT otherwise have been damaged in an amount
according to proof at trial.
59. GK is informed and believes, and thereon alleges, that in
doing the acts alleged above, Cross-Defendants, and each of them,
acted fraudulently, in bad faith, and with a deliberate intent to
vex, injure and annoy GK and acted in conscious disregard of GK's
and DATACAT's rights. The actions of Cross-Defendants, and each of
them, therefore constitute despicable conduct and justify the
imposition of punitive and exemplary damages.
VI. SIXTH CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf Of DATACAT Against
All Cross-Defendants For Constructive Fraud)
60. GK realleges and incorporates herein by this reference as
though set forth in full each and every allegation contained in
paragraphs 1 through 59, inclusive, of this Cross-Complaint.
61. In the alternative, and in addition to the forgoing, the
actions of Cross-Defendants in taking the misappropriated funds,
concealing and failing to disclose same to GK and DATACAT, and
later attempting to cover-up such conduct, constitutes
constructive fraud in view of their respective fiduciary duties to
GK and DATACAT, and the trust and confidence GK and DATACAT placed
in AG with respect to DATACAT's financial affairs.
62. GK is informed and believes, and thereon alleges, that Cross-
Defendants, and each of them, took the misappropriated funds and
made the omissions concerning the misappropriated funds, with the
intent to defraud GK and DATACAT, to fraudulently and unjustly
enrich AG, and to deprive DIVERSIFIED and GK of monies lawfully
owing them under the Shareholders Agreement.
63. During the time of Cross-Defendants' fraudulent conduct, GK
was unaware of the true facts, and would have taken steps to
recover the misappropriated funds, to prevent further
misappropriation of funds, and to obtain monies lawfully owing to
GK and DIVERSIFIED under the Shareholder Agreement.
64. As a proximate result of the fraudulent conduct of Cross-
Defendants, and each of them, as alleged herein, DIVERSIFIED has
been deprived of monies owing it under the Shareholder Agreement,
DATACAT has been deprived of funds necessary for its operations,
and GK and DATACAT otherwise have been damaged in an amount
according to proof at trial.
65. GK is informed and believes, and thereon alleges, that in
doing the acts alleged above, Cross-Defendants, and each of them,
acted fraudulently, in bad faith, and with a deliberate intent to
vex, injure and annoy GK and acted in conscious disregard of GK's
and DATACAT's rights. The actions of Cross-Defendants, and each
of them, therefore constitute despicable conduct and justify the
imposition of punitive and exemplary damages.
VII. SEVENTH CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf Of DATACAT Against
All Cross-Defendants For Unjust Enrichment/Constructive Trust)
66. GK realleges and incorporates herein by this reference as
though set forth in full each and every allegation contained in
paragraphs 1 through 65, inclusive, of this Cross-Complaint.
67. As alleged herein, GK and DATACAT entrusted AG to manage
certain financial affairs on behalf of DATACAT and was entrusted
to manage and use such funds for the benefit of DATACAT for lawful
and approved purposes, consistent with the Shareholder Agreement,
and for purposes approved by the Board. Cross-Defendants, and each
of them, have been unjustly enriched at the expense of DATACAT and
GK by the diversion of the misappropriated funds to AG, as alleged
herein, despite AG's undertaking to receive and control such funds
on behalf of DATACAT, in trust.
68. As a proximate result of unjust enrichment of Cross-
Defendants, and each of them, GK and DATACAT are entitled to
receive restitution of any of the benefits received by Cross-
Defendants in connection with their, direct and indirect, receipt
of the misappropriated funds, including, but not limited to, the
amount of the misappropriated funds and any other amount to be
proven at trial, plus accrued interest thereon.
69. By virtue of Cross-Defendants' unjust enrichment, GK and
DATACAT are entitled to have a constructive trust imposed upon the
misappropriated funds, and any other such funds, received for the
direct and indirect benefit of Cross-Defendants, and each of them,
and/or their agents, assignees, or transferees, in connection with
the moneys entrusted to and misappropriated by Cross-Defendants.
VIII. EIGHTH CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf Of DATACAT Against
AG For Money Had And Received)
70. Cross-Complainants reallege and incorporate herein by this
reference as though set forth in full each and every allegation
contained in paragraphs 1 through 39, inclusive, of this Cross-
Complaint.
71. Cross-Complainants are informed and believe, and thereon
allege, that within the last four years, AG became indebted to
DATACAT in the principle sum of approximately $410,000, for money
had, received and taken by AG for its use and benefit, without the
approval or consent of the Board, as alleged herein.
72. Despite demand for the full amount due and owing, no part of
said sum has been paid, and there is now due, owing, and unpaid to
DATACAT the principle sum of approximately $410,000, plus interest
thereon at the legal rate.
IX. NINTH CAUSE OF ACTION
(By GK Individually And Derivatively On Behalf Of DATACAT Against
All Cross-Defendants For An Accounting)
73. GK realleges and incorporates herein by this reference each
and every allegation contained in paragraphs 1 through 72,
inclusive, of this Cross-Complaint herein as though set forth in
full.
74. Cross-Complainant has performed and fulfilled all of the
covenants and obligations required to be performed by it under the
Shareholder Agreement, except as to those which have been excused.
75. Cross-Complainant is informed and believes, and thereon
alleges, that as a result of Cross-Defendants' misdeeds as alleged
hereinabove, Cross-Defendants have wrongfully and unlawfully taken
moneys belonging to DATACAT and misappropriated them for AG's use
and benefit, without the knowledge or approval of the Board.
76. Despite due demand therefor, Cross-Defendants, and each of
them, have failed and refused to account for said sums. Cross-
Complainants therefore are entitled to an accounting of all sums
taken or received by AG from DATACAT.
X. TENTH CAUSE OF ACTION
(By Cross-Complainants Against All Cross-Defendants For Fraudulent
Transfers)
77. Cross-Complainants reallege and incorporate herein by this
reference, as though set forth in full, each and every allegation
contained in paragraphs 1 through 76, inclusive, of this Cross-
Complaint.
78. Within the last four years, DATACAT became indebted to
DIVERSIFIED for printing and publishing services rendered, and
associated freight charges and other costs, in the sum of
approximately $360,132.76, plus interest at the legal rate.
79. Cross-Complaints are informed and believe, and thereon allege,
that from approximately early 1994 through the present, AG has
unlawfully transferred approximately $410,000 of moneys belonging
to DATACAT, entrusted to the control of AG for DATACAT's benefit,
to AG's own accounts. DIVERSIFIED further is informed and
believes, and thereon alleges, that AG's transfer of such funds
was made with the actual intent to hinder, delay, and defraud
DIVERSIFIED in collection of its receivables for printing and
publishing services rendered, and related costs.
80. As a proximate result of the fraudulent transfers made by
Cross-Defendants, and each of them, DATACAT has been financially
unable to pay DIVERSIFIED and other creditors for moneys owing to
them. As a further proximate result of the fraudulent transfers
made by Cross-Defendants, and each of them, Cross-Complainants
have been damaged in a sum according to proof at trial.
81. Cross-Complainants are informed and believe, and thereon
allege, that the above referenced transfers were made, with the
intent to defraud Cross-Complaints, and with intent to injure
Cross-Complainants and to deprive them of the benefits of the
Shareholder Agreement.
82. Cross-Complainants are informed and believe, and thereon
allege, that in doing the acts alleged above, Cross-Defendants,
and each of them, acted fraudulently, in bad faith, and with a
deliberate intent to vex, injure and annoy Cross-Complainants and
acted in conscious disregard of their rights. The actions of
Cross-Defendants, and each of them, therefore constitute
despicable conduct and justify the imposition of punitive and
exemplary damages.
WHEREFORE, Cross-Complainant GK, individually and derivatively on
behalf of DATACAT, and Cross-Complainant DIVERSIFIED, prays for
judgment against Cross-Defendants, and each of them, as follows:
1. For compensatory damages according to proof at trial;
2. For punitive and exemplary damages on the First, Second,
Fourth, Fifth, Sixth, and Tenth Causes of Action;
3. For an accounting of all sums paid to AG from DATACAT;
4. For interest on all sums at the legal rate;
5. For costs of suit incurred herein;
6. For reasonable attorneys' fees pursuant to the Shareholder
Agreement, Cal. Civ. Code 1717 and other applicable law; and
7. For such other and further relief as the Court may deem just
and proper.
DATED: November 7, 1996 GRAHAM & JAMES LLP
By: ss/ Kenneth B. Julian
KENNETH B. JULIAN
Attorneys for Plaintiff/Cross-Defendant/Cross
Complainant DIVERSIFIED PRINTING AND
PUBLISHING SERVICES, INC., Cross
Defendant/Cross-Complainant
GANNAM/KUBAT PUBLISHING, INC., Cross
Defendant NASIB GANNAM
...........End Pleading dated 11/7/96.......................
...............Begin Pleading dated 11/8/96.................
GRAHAM & JAMES LLP
Kenneth B. Julian (State Bar # 149840)
Karl A. Sandoval (State Bar # 170190)
4675 MacArthur Court, Suite 800
Newport Beach, California 92660
714) 224-2000
Attorneys for Plaintiff/Cross-Defendant/Cross-Complainant
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC.,
Cross-Defendant/Cross-Complainant GANNAM/KUBAT PUBLISHING, INC.,
Cross-Defendant NASIB GANNAM
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
DIVERSIFIED PRINTING AND Case No.: 766695
PUBLISHING SERVICES, INC., a
California corporation, Assigned For All Purposes To:
Honorable G. Robert Jameson
Department 11
vs. ANSWER BY DIVERSIFIED PRINTING
AND PUBLISHING SERVICES, INC.,
DATACAT, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC.,
and DOES 1 through 25, inclusive, AND NASIB GANNAM TO CROSS-
COMPLAINT BY DATACAT, INC.
Defendants.
DATACAT, INC. a California corporation,
Cross-Claimant,
vs.
DIVERSIFIED PRINTING AND PUBLISHING
SERVICES, INC., a California corporation;
GANNAM/KUBAT PUBLISHING, INC., a California
corporation; NASIB GANNAM, an individual,
and DOES I through 5,
Cross-Defendants.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a
California corporation; GANNAM/KUBAT PUBLISHING,
INC., a California corporation,
Cross-Complainants,
vs.
ROBERT S. COPE, an individual; AUTO-GRAPHICS,
INC., a California corporation,
Cross-Defendants,
- - and -
DATACAT, INC., a California corporation,
Nominal Cross-Defendant and Cross-Defendant.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., GANNAM/KUBAT PUBLISHING,
INC., and NASIB GANNAM (collectively the "Cross-Defendants") hereby answer
the Cross-Complaint (the "Cross-Complaint") by Cross-Complainant DATACAT,
INC. ("Cross-Complainant"), as follows:
GENERAL DENIAL
Pursuant to California Code of Civil Procedure 431.30(d), Cross-
Defendants deny, generally and specifically, each and every allegation of the
Cross-Complaint, each cause of action therein, and each and every part
thereof, and deny that Cross-Complainant has been damaged in any manner
or sum or is entitled to any relief whatsoever thereon.
AFFIRMATIVE DEFENSES
FIRST AFFIRMATIVE DEFENSE
(Failure To State A Claim)
1. Cross-Complainant's causes of action, and each of them, fail to state
facts sufficient to constitute a cause of action against the answering
Cross-Defendants.
SECOND AFFIRMATIVE DEFENSE
(Limitation of Actions)
2. Cross-Complainant's causes of action, and each of them, are barred by
the applicable statutes of limitation, including, without limitation,
C.C.P. 337,338, 339, 340, and 343.
THIRD AFFIRMATIVE DEFENSE
(Estoppel)
3. Cross-Complainant's causes of action, and each of them, are barred by
the doctrine of estoppel.
FOURTH AFFIRMATIVE DEFENSE
(Waiver)
4. Cross-Complainant's causes of action, and each of them, are barred by
the doctrine of waiver.
FIFTH AFFIRMATIVE DEFENSE
(Laches)
5. Cross-Complainant's delay in commencing this suit was unreasonable and
inexcusable and has caused substantial prejudice to Cross-Defendants.
Cross-Complainant's purported causes of action, and each of them, therefore
are barred in whole or in part by the doctrine of laches.
SIXTH AFFIRMATIVE DEFENSE
(Unclean Hands)
6. Cross-Complainant's causes of action, and each of them, are
barred by the doctrine of unclean hands.
SEVENTH AFFIRMATIVE DEFENSE
(Privilege)
7. Cross-Complainant's causes of action, and each of them, are
barred by the doctrine of privilege.
EIGHTH AFFIRMATIVE DEFENSE
(Full Performance)
8. Cross-Complainant's causes of action, and each of them, are
barred because Cross-Defendants performed all of their contractual,
statutory, and other duties, if any, owed to Cross-Complainant.
NINTH AFFIRMATIVE DEFENSE
(Good Faith)
9. Cross-Complainant's causes of action, and each of them, are
barred because Cross-Defendants acted in good faith and conformity with
all laws, and all express and/or implied agreements, if any, which might
have existed concerning the matters allegedly set forth in the
Cross-Complaint.
TENTH AFFIRMATIVE DEFENSE
(Lack of Consideration)
10. Cross-Complainant's causes of action, and each of them, are
barred by a lack of, and/or failure of, consideration.
ELEVENTH AFFIRMATIVE DEFENSE
(Failure To Mitigate Damages)
11. Cross-Complainant's causes of action, and each of them, are
barred in whole or in part by Cross-Complainant's failure to mitigate
damages, if any.
TWELFTH AFFIRMATIVE DEFENSE
(Cross-Complainant's Lack Of Performance)
12. Cross-Complainant's causes of action, and each of them, are
barred because Cross-Complainant did not perform the duties reasonably
required of it as to the matters alleged in the Cross-Complaint.
THIRTEENTH AFFIRMATIVE DEFENSE
(Consent)
13. Cross-Complainant's causes of action, and each of them, are
barred because Cross-Complainant consented to each of the acts complained
of in the Cross-Complaint.
FOURTEENTH AFFIRMATIVE DEFENSE
(Ultra Vires)
14. The Cross-Complaint, and each and every part thereof, is barred
because Cross-Complainant brought the Cross-Complaint without the
approval of the Board of Directors and, as such, it constitutes an
ultra vires act.
FIFTEENTH AFFIRMATIVE DEFENSE
(Lack of Injury)
15. Cross-Complainant's causes of action, and each of them, are
barred because Cross-Complainant has not suffered any damages or other
injury as a result of any actions taken by Cross-Defendants, or any of them.
SIXTEENTH AFFIRMATIVE DEFENSE
(Statutory Violations)
16. The Cross-Complainant, and each and every cause of action
therein, is barred
by Cross-Complainant's statutory violations.
SEVENTEENTH AFFIRMATIVE DEFENSE
(Statute of Frauds)
17. Cross-Complainant's causes of action, and each of them, are
barred by the
Statute of Frauds.
EIGHTEENTH AFFIRMATIVE DEFENSE
(Mistake)
18. Cross-Complainant's causes of action, and each of them, are
barred by mutual and/or unilateral mistake.
NINETEENTH AFFIRMATIVE DEFENSE
(Comparative Fault)
19. Any and all damages claimed to have been sustained by Cross-
Complainant in the Cross-Complaint were caused, either wholly or in part,
by the intentional, negligent and careless conduct of Cross-Complainant.
If any damages are awarded to Cross-Complainant against Cross-Defendants,
those damages should be diminished in proportion to the amount of comparative
fault attributable to Cross-Complainant.
TWENTIETH AFFIRMATIVE DEFENSE
(Damages as a Result of Cross-Complainant's Own Conduct)
20. Any and all damages alleged to have been sustained by Cross-Complainant
were caused, either wholly or in part, by the intentional, negligent and
careless conduct of Cross-Complainant. Cross-Defendants therefore are not
liable to Cross-Complainant for damages in any amount.
TWENTY-FIRST AFFIRMATIVE DEFENSE
(Breach of Good Faith Covenant)
21. Any recovery by Cross-Complainant is barred by Cross-Complainant's
prior breach of the implied covenant of good faith and fair dealing.
TWENTY-SECOND AFFIRMATIVE DEFENSE
(Breach of Fiduciary Duty)
22. Any recovery by Cross-Complainant is barred by Cross-Complainant's
prior breach of fiduciary duties.
WHEREUPON, Cross-Defendants pray for judgment as follows:
1. That the Cross-Complaint in its entirety be dismissed herein;
2. That Cross-Complainant take nothing by reason of its Complaint herein;
3. That Cross-Defendants be awarded their costs of suit herein, including
their reasonable expert witness fees and attorneys' fees; and
4. Such other and further relief as the Court may deem just and proper.
DATED: November 8,1996 GRAHAM & JAMES LLP
By: ss/K. Julian
KENNETH B. JULIAN
Attorneys for Cross-Complainant/Cross-
Defendant/Cross-Complainant DIVERSIFIED
PRINTING AND PUBLISHING SERVICES, INC.,
Cross-Defendant/Cross-Complainant
GANNAM/KUBAT PUBLISHING, INC.,
Cross-Defendant NASIB GANNAM
......................End Pleading dated 11/7/96...........................
.......................Begin Pleading dated 12/26/96.......................
Robert H. Bretz, Esq., SB #55087
520 Washington Boulevard, #428
Marina del Rey, California 90292
310/578-1957
Attorney for Defendant Auto-Graphics
and Robert S. Cope
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation,
Plaintiff,
v.
DATACAT, INC., a California corporation and DOES 1 through 25,
inclusive,
Defendants.
DATACAT, INC., a California corporation,
Cross-Claimant,
v.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation;
GANNAM/KUBAT PUBLISHING, INC., a California corporation;
NASIB GANNAM, an individual; and DOES 1 through 5,
Cross-Defendants.
DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California
corporation;
GANNAM/KUBAT PUBLISHING, INC., a California corporation,
Cross-Complainants,
v.
ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California
corporation,
Cross-Defendants,
- and -
DATACAT, INC., a California corporation,
Nominal Cross-Defendant and
Cross-Defendant
Case No. 766 695
Assigned For All Purposes To: Honorable C. Robert Jameson,
Department
ANSWER BY AUTO-GRAPHICS, INC. AND ROBERT S. COPE TO CROSS-
COMPLAINT OF GANNAM/KUBAT PUBLISHING, INC., DIVERSIFIED PRINTING
AND PUBLISHING SERVICES, INC.
(Non-Derivative Action Answer)
COMES NOW Auto-Graphics, a California corporation ("Auto-Graphics"), and
Robert S. Cope, an individual, through their attorney of record (herein
collectively the "Cross-Defendants"), and for themselves and for no other
party, hereby answer the cross-complaint (the "Cross-Complaint") against
them by Gannam/Kubat Publishing, Inc. ("G/K") and Diversified Printing And
Publishing Services, Inc. ("Diversified"), in their individual capacities
(not for and on behalf of Datacat, Inc.), G/K and Diversified (individually
and collectively referred to herein as "Cross-Claimants"), and the
Cross-Defendants allege affirmative defenses thereto, as follows:
Pursuant to and in accordance with California Code of Civil Procedure
Section 431.30(d), the Cross-Defendants generally deny each and every
allegation of the Cross-Complaint.
AFFIRMATIVE DEFENSES
As their affirmative defenses to each and every one of
the claims and causes of action set forth in the Cross-Complaint, the Cross-
Defendants and each of them (herein also referred to as the "Cross-Defendants")
hereby allege as their affirmative defenses to such claims and causes of
action by the Cross-Claimants as set forth in the Cross-Complaint the
following:
FIRST AFFIRMATIVE DEFENSE
(No Claim Upon Which Relief Can Be Granted)
As their First Affirmative Defense, the Cross-Defendants hereby
incorporate by this reference their Answer as set forth above, and further
allege that the Cross-Claimants' Cross-Complaint fails to state facts upon
which the Cross-Claimants are entitled to any relief against the
Cross-Defendants.
SECOND AFFIRMATIVE DEFENSE
(Legal Obligation Of Datacat)
As their Second Affirmative Defense, the Cross-Defendants allege that
payments by Datacat to Auto-Graphics for pre-1994 database recovery services
and otherwise (herein "Services") represented legal obligations by Datacat to
Auto-Graphics for Services rendered by Auto-Graphics to Datacat and fair
value received by Datacat in the form of and otherwise constituting and
comprising such Services.
THIRD AFFIRMATIVE DEFENSE
(No Fiduciary Or Other Duty To Diversified)
As their Third Affirmative Defense, the Cross-Defendants allege
that they do not owe Diversified any fiduciary or other similar duty as
alleged in the Cross-Complaint or otherwise.
FOURTH AFFIRMATIVE DEFENSE
(Arm's Length Relationship/Services)
As their Fourth Affirmative Defense, the Cross-Defendants allege
accounting, financial or other services and/or functions rendered or
otherwise performed by Auto-Graphics and/or its corporate personnel for
Datacat were performed based on a good faith, arm's length contractual or
similar basis for a reasonable fee and/or reimbursement of expenses as
approved and authorized by Datacat and by G/K.
FIFTH AFFIRMATIVE DEFENSE
(Arm's Length Transaction/Approval)
As their Fifth Affirmative Defense, the Cross-Defendants allege the
Database Recovery Proposal (or Memorandum) referenced in paragraph 17 of the
Cross-Complaint was the result of good faith, arm's length negotiations between
representatives of Auto-Graphics and G/K and had been pre-approved by Frank
Kubat as President of Datacat and in his capacity as G/K's representative for
presentation and recommendation to and approval and adoption by the Datacat
Board of Directors at the July 28, 1994 Meeting as acknowledged by Frank
Kubat during the course of such Meeting.
SIXTH AFFIRMATIVE DEFENSE
(Approved Obligation/Payments)
As their Sixth Affirmative Defense, the Cross-Defendants allege that
the Database Recovery Proposal (or Memorandum) referenced in paragraph 17 of
Cross-Complaint was adopted, approved and authorized as the resolution of the
Datacat Board of Directors for and on behalf of Datacat at the July 28, 1994
Meeting (the "Database Recovery Resolution").
SEVENTH AFFIRMATIVE DEFENSE
(Ratification Of Obligation/Payment)
As their Seventh Affirmative Defense, the Cross-Defendants allege that
following July 28, 1994, the Cross-Claimants including G/K approved and
ratified, by their subsequent approval, acquiescence and/or lack of objection
thereto, the Database Recovery Resolution adopted by the Board of Directors of
Datacat at the July 28, 1994 Meeting.
EIGHTH AFFIRMATIVE DEFENSE
(No Contractual Duty To Diversified)
As their Eighth Affirmative Defense, the Cross-Defendants allege that
they owe Cross-Claimant Diversified no contractual or other similar duty.
NINTH AFFIRMATIVE DEFENSE
(Database Obligation/Payments Inherently Fair)
As their Ninth Affirmative Defense, the Cross-Defendants allege that
the obligation of and payments by Datacat to Auto-Graphics for the Database
Recovery Services under the Database Recovery Resolution and otherwise was
and is inherently fair and reasonable in respect of the Services rendered by
Auto-Graphics to Datacat and the Services and benefit received by Datacat.
TENTH AFFIRMATIVE DEFENSE
(Arm's Length/Good Faith)
As their Tenth Affirmative Defense, the Cross-Defendants allege that
the providing of the Services by Auto-Graphics to Datacat, which are the
subject of the Cross-Claimants' Cross-Complaint against them, and the
obligation of and payment by Datacat to Auto-Graphics for such Services was
the result of good faith, arm's length negotiations and agreement by and
between Auto-Graphics and Datacat, including G/K in its capacity as a
prospective and/or actual stockholder of Datacat and the resulting Agreement
attached as Exhibit A to the Cross-Complaint.
ELEVENTH AFFIRMATIVE DEFENSE
(No Fiduciary Or Other Similar Duty By Auto-Graphics To G/K)
As their Eleventh Affirmative Defense, the Cross-Defendants allege that
Auto-Graphics does not owe G/K any fiduciary or other similar duty as alleged
in the Cross-Complaint or otherwise.
TWELFTH AFFIRMATIVE DEFENSE
(Estoppel)
As their Twelfth Affirmative Defense, the Cross-Defendants allege that
the Cross-Claimants are estopped from asserting the claims and causes of action
set forth in the Cross-Complaint as against the Cross-Defendants, including
without limitation for the reasons alleged in the foregoing Fourth, Fifth,
Seventh and Tenth Affirmative Defenses and otherwise.
THIRTEENTH AFFIRMATIVE DEFENSE
(Waiver)
As their Thirteenth Affirmative Defense, the Cross-Defendants allege
that the Cross-Claimants have waived and/or otherwise relinquished the claims
and causes of action, and/or the right to sue Cross-Defendants in respect of
such claims, as set forth in the Cross-Complaint.
FOURTEENTH AFFIRMATIVE DEFENSE
(Promissory Estoppel)
As their Fourteenth Affirmative Defense, the Cross-Defendants allege
that Cross-Claimants representations, agreements and promises to the
Cross-Defendants, and/or to Datacat for the intended benefit of one or more of
the Cross-Defendants and otherwise, in respect of the providing of on-going
database related services by Auto-Graphics to Datacat, and the
Cross-Defendants' actions and reasonable reliance thereon, constitutes
promissory estoppel and precludes the Cross-Claimants from instituting and
maintaining the within action against the Cross-Defendants.
FIFTEENTH AFFIRMATIVE DEFENSE
(Unclean Hands)
As their Fifteenth Affirmative Defense, the Cross-Defendants allege
that as a result of the Cross-Claimants conduct and activities as alleged
herein and otherwise, the Cross-Claimants should be denied the relief they
are seeking based on the equitable principle of unclean hands.
SIXTEENTH AFFIRMATIVE DEFENSE
(Superseding Agreement)
As their Sixteenth Affirmative Defense, the Cross-Defendants allege
that G/K entered into an agreement with and/or for the benefit of Datacat
and/or with and for the benefit of the Cross-Defendants whereby G/K agreed
to forego and/or defer payment of the monies G/K seeks to collect from the
Cross-Defendants as a result of its Cross-Complaint.
SEVENTEENTH AFFIRMATIVE DEFENSE
(Breach Of Implied Covenant Of Good Faith And Fair Dealing)
As their Seventeenth Affirmative Defense, Cross-Defendants allege
that the assertion of the instant claim by the Cross-Claimants against the
Cross-Defendant constitutes a breach of the implied covenant of good faith
and fair dealing existing by, between and among the Cross-Claimants and
Cross-Defendants, by virtue of contracts or other agreements by, between and
among such parties pertaining to the subject matter of the Cross-Complaint.
EIGHTEENTH AFFIRMATIVE DEFENSE
(Failure To Mitigate Damages)
As their Eighteenth Affirmative Defense, Cross-Defendants allege that
Cross-Claimants knew that Datacat could not pay for the services Diversified
rendered and continued to render to Datacat, which are the subject of
Cross-Claimants' Cross-Complaint, and that the Cross-Claimants otherwise
failed and refused to mitigate their damages vis-a-vis Datacat and the
Cross-Defendants.
NINETEENTH AFFIRMATIVE DEFENSE
(Failure To Join Indispensable Party)
As their Nineteenth Affirmative Defense, Cross-Defendants allege
that the Cross-Claimants has failed to join one or more indispensable parties.
TWENTIETH AFFIRMATIVE DEFENSE
(Offset, Set-Off Or Deduction)
As their Twentieth Affirmative Defense, the Cross-Defendants allege
that Cross-Claimants are indebted and otherwise obligated to Cross-Defendants
and that the Cross-Defendants are entitled to an offset, set-off or other
deduction from any amounts claimed by the Cross-Claimants in the
Cross-Complaint against the Cross-Defendants.
TWENTY-FIRST AFFIRMATIVE DEFENSE
(Statute Of Limitations Bar/339)
As their Twenty-First Affirmative Defense, the Cross-Defendants
allege that the Cross-Claimants' claims as set forth in the Cross-Complaint
are barred by the statute of limitations as provided for in California Code of
Civil Procedure Section 339.
TWENTY-SECOND AFFIRMATIVE DEFENSE
(Statute of Frauds)
As their Twenty-Second Affirmative Defense, Cross-Defendants
allege that the Cross-Claimants' claims which are the subject of the Cross-
Complaint are barred or otherwise precluded by the statute of frauds.
TWENTY-THIRD AFFIRMATIVE DEFENSE
(Fraud/Mistake)
As their Twenty-Third Affirmative Defense, Cross-Defendants
allege that the Cross-Claimants' claims which are the subject of the
Cross-Complaint are barred or otherwise precluded based on the principles
of fraud and/or mistake.
TWENTY-FOURTH AFFIRMATIVE DEFENSE
(Statute Of Limitations Bar 338)
As their Twenty-Fourth Affirmative Defense, the Cross-Defendants
allege that the Cross-Claimants' claims as set forth in the Cross-Complaint
are barred by the statute of limitations as provided for in California Code
of Civil Procedure Section 338.
TWENTY-FIFTH AFFIRMATIVE DEFENSE
(Good Faith & Fair Dealing)
As their Twenty-Fifth Affirmative Defense, the Cross-Defendants
allege that at all times referenced in the Cross-Complaint, Cross-Defendants
acted in good faith to protect and benefit the interests, including assets
and property, of Datacat.
TWENTY-SIXTH AFFIRMATIVE DEFENSE
(Fault of Diversified)
As their Twenty-Sixth Affirmative Defense the Cross-Defendants
allege that the harm, injury and/or damages claimed by the Cross-Claimants
in the Cross-Complaint was/were caused and otherwise resulted from the fault
and action, including actions and failure to act, of the Cross-Claimants
(including without limitation Diversified as to Cross-Claimants' Third Cause
Of Action).
TWENTY-SEVENTH AFFIRMATIVE DEFENSE
(Knowledge Of Cross-Claimants)
As their Twenty-Seventh Affirmative Defense, the Cross-
Defendants allege that the Cross-Claimants knew about and were otherwise
aware, and/or were reckless or negligent in not informing themselves, of the
facts and circumstances alleged in the Cross-Complaint in respect of which
Cross-Claimants allege in the Cross-Complaint that they were not aware and
upon which they base their claims against the Cross-Defendants.
REQUEST FOR RELIEF
WHEREFORE, the Cross-Defendants pray that the Cross-Claimants take
nothing as a result of their Cross-Complaint; and that the Cross-Defendants
be awarded their costs including reasonable attorneys' fees/costs (if
appropriate under the Agreement which is attached as Exhibit A to the Cross-
Complaint, California Code of Civil Procedure Section 1717 and/or otherwise
as provided for under California law), and such other and further relief as
the Court may deem appropriate in this case.
Dated: December 26, 1996
Respectfully submitted,
ROBERT H. BRETZ, P.C.
By: ss/Robert H. Bretz
Robert H. Bretz, Esq.
Attorney for Auto-Graphics
and Robert S. Cope
........................End Pleading dated 12/26/96........................
........................Begin Pleading dated 3/5/97........................
Randolph Stiles, Esq. (SBN 62910) FILED
LAW OFFICES OF RANDOLPH STILES Orange County
Superior Court
12015 Kling Street, #211 Mar 05 1997
North Hollywood, California 91607 Alan Slater,
Executive Officer/Clerk
818/505-8026 ss/ D. Lamm
BY D. LAMM
Attorney for Datacat, Inc.
SUPERIOR COURT FOR THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
DIVERSIFIED PRINTING AND Case No. 766 695
PUBLISHING SERVICES, INC., a
California corporation,
Plaintiff, Assigned For All Purposes To:
Honorable C. Robert Jameson,
v. Department 11
DATACAT, INC., a California
corporation and DOES l through
25, inclusive,
Defendants. ORDER GRANTING
DATACAT'S MOTION FOR POSTING
OF SECURITY FOR COSTS INCLUDING
DATACAT, INC., a California REASONABLE ATTORNEYS' FEES
corporation, UNDER CAL. CORPS. CODE 800
Cross-Claimant,
DIVERSIFIED PRINTING AND
PUBLISHING SERVICES, INC., a
California corporation;
GANNAM/KUBAT PUBLISHING, INC., ) a California corporation;
Nasib Gannam, an individual; and DOES 1 through 5
Cross- Defendants.
DIVERSIFIED PRINTING AND
PUBLISHING SERVICES, INC., a California corporation;
GANNAM/KUBAT PUBLISHING, INC., a California corporation,
Cross-Complainants,
v.
ROBERT S. COPE, an individual;
AUTO-GRAPHICS, INC., a California corporation,
Cross-Defendants,
- and -
DATACAT, INC., a California corporation,
Nominal Cross-Defendant and Cross-Defendant
Upon motion by Datacat, Inc. for an order requiring the posting of
security for costs including reasonable attorneys' fees under California
Corporations Code Section 800, and following hearing thereon whereat the
Court considered the written and oral submissions of the parties, and for
good cause having been shown, the motion is GRANTED and Gannam/Kubat
Publishing, Inc. is hereby ordered to deposit with the Clerk of this
Court a cash bond, or suitable undertaking by a surety company licensed
to do business in this State or otherwise in conformity with California
Code of Civil Procedure Section 995.310 et seq. (the "security", in the
amount of $50,000 as security for costs including reasonable attorneys'
fees and costs paid or incurred by Datacat in the defense of or otherwise
in connection with the derivative action cross-complaint by Gannam/Kubat
Publishing against Auto-Graphics, Inc., Robert S. Cope and Datacat, Inc.
including any indemnity obligation by Datacat to Robert S. Cope, in his
capacity as an officer/director or other corporate representative of
Datacat, as a result of having been named as a cross-defendant in such
derivative action under California Corporations Code Section 317. If such
security has not been timely deposited in full and confirmed to have been
so posted by written notice to the Court and to Datacat's counsel by
5:00 P.M. on MAR 10 1997, then the instant derivative action shall be
automatically dismissed upon application of Datacat.
Datacat shall give notice of this order to counsel for all parties.
IT IS SO ORDERED.
Dated: MARCH 05 , 1997
C. ROBERT JAMESON
C. Robert Jameson
JUDGE SUPERIOR COURT
.........................End Pleading dated 3/5/97..........................
.......................Begin Pleading dated 3/10/97.........................
ATTORNEY OR PARTY WITHOUT ATTORNEY:
(714) 751-8800
GRAHAM & JAMES LLP
KENNETH B. JULIAN, Bar No. 149840 FILED
KARL A. SANDOVAL, Bar No. 117111 Orange County
Superior Court
650 Town Center Drive , Sixth Floor March 10, 1997
Costa Mesa, California 92626-1925 Alan Slater,
Executive Officer/Clerk
BY: ss// David Thew
ATTORNEY FOR: DIVERSIFIED PRINTING
ORANGE COUNTY SUPERIOR COURT
County of Orange
PLAINTIFF/PETITIONER
DIVERSIFIED PRINTING AND PUBLISHING SERVICES,
DEFENDANT/RESPONDENT:
DATACAT, INC., AND RELATED CROSS-ACTIONS
REQUEST FOR DISMISSAL CASE NUMBER 766 695
Other (specify) Derivative Cross-Claims only
A conformed copy will not be returned by the clerk unless a method
of return is
provided with the document.
TO THE CLERK: Please dismiss this action as follows:
a. Without prejudice
b. (6) Other (specify). Derivative Cross-Claims by Gannam/Kubat Publishing,
Inc., only, contained within the First, Second, Third, Fourth, Fifth, Sixth,
Seventh, Eighth, and Ninth Causes of Action of GK's Cross-Complaint.
Date: March 5, 1997 GRAHAM & JAMES LLP
KENNETH B. JULIAN ss// Kenneth B. Julian
(TYPE OR PRINT NAME OF ATTORNEY
OR PARTY WITHOUT ATTORNEY) (SIGNATURE)
Attorney or party without attorney for: Cross-complainant
3. Dismissal entered as requested on (date): March 10, 1997
6. a. Attorney or party without attorney notified on (date):
b. Attorney or party without attorney not notified. Filing party
failed to provide a copy to conform means to return conformed copy
Date: March 10, 1997 Clerk, by ss// David Thew , Deputy
REQUEST FOR DISMISSAL
......................End Pleading dated 3/10/97............................
PLEADING EXHIBITS A through D
................Exhibit A - Shareholders Agreement ........................
AGREEMENT
The undersigned parties, Gannam/Kubat Publishing, Inc. (herein "G/K") and
Auto-Graphics, Inc. (herein "AG"), intending to be legally bound and obligated
thereby, have made and entered into this Agreement dated effective as of
June 12,1990.
WHEREAS, G/K is the owner of a data base generally covering certain heating,
ventilation, air conditioning, refrigeration, electrical, electronic,
appliance and plumbing products customarily distributed by so-called HVACR
(heating, ventilation, air conditioning and refrigeration) and plumbing,
electric and appliance wholesalers (herein collectively the "Listed Products"),
together with certain information, know-how, photographic and other composition
materials and representative catalogs used to produce, publish and distribute
the Listed Products catalogs (herein the "Catalog");
WHEREAS, A-G possesses certain data base development, maintenance and
composition capabilities required in the production of the Catalog:
WHEREAS, G/K and A-G have been exploring and considering the advisability of
jointly organizing a business to own and periodically produce, publish and
distribute the Catalog;
WHEREAS, G/K and A-G have now determined to proceed with a joint endeavor in
respect of such Catalog, and have made and entered into this Agreement to
memorialize their understanding and agreements in respect of organizing/owning
and conducting such venture;
NOW, THEREFORE, the undersigned parties in consideration of the premises, the
mutual agreements and promises contained herein and such other good and
valuable consideration the legal sufficiency and adequacy of which are hereby
acknowledged, and subject to the terms and conditions contained herein, hereby
agree as follows.
1. The Company. The parties will organize a new corporation under the laws of
the state of California adopting the corporate name "Datacat, Inc." (herein
the "Company"), and will each subscribe to purchase and will purchase one-half
of the number of shares of capital stock such corporation is authorized to
issue for the purchase price of Twenty-Five Hundred Dollars ($2,500) each or
an aggregate cash capitalization of Five Thousand Dollars ($5,000) for the
Company.
2. Further Current Capital Contributions. In addition to the parties' initial
cash capitalization as provided for hereinabove, the parties will make the
following additional capital contributions to the Company:
2.1. G/K. G/K will contribute the manuscript, photographs and other composition
materials, representative catalogs and all of its information, know-how and
other assets and property of whatsoever kind and nature constituting, necessary
and/or advisable to own and periodically produce, publish and distribute the
Catalog (herein collectively the "Catalog Information".); and
2.2. A-G. A-G will contribute its expertise, knowledge and production know-how
related to the composition of catalogs.
The parties acknowledge that their respective non-cash capital contributions
as provided for above in this paragraph are of approximately equal value, and
that such contributions will not be valued for purposes of establishing the
Company's capital account for financial reporting and other purposes which
capital account at inception of the Company will reflect only the cash
contribution made by the parties ($5,000) in organizing the Company and
subscribing to the issuance and purchase of the Company's capital stock as
provided for above. Further, G/K's capital contribution of the Catalog
Information as provided for herein will be made free and clear of all claims,
liens, security interests, debts, obligations and liabilities of whatsoever
nature or kind; and G/K hereby represents and warrants to A-G and to the
Company that G/K is the sole and exclusive owner of the Catalog Information
as of the date of this Agreement and hereby agrees and promises to indemnify
and hold harmless A-G and the Company from any and all claims, liens, security
interests, debts, obligations and/or liabilities of whatsoever nature or kind,
including reasonable attorneys' fees and costs paid or incurred in respect
thereof, that may subsequently be asserted by any person or party against
and/or paid or incurred by the Company and/or A-G arising out of, resulting
from, or otherwise relating in any way to the Catalog Information constituting
and comprising G/K's capital contribution to the Company. The foregoing
indemnity and hold harmless provision from G/K is not intended to cover any
claim of copyright infringement against the Company by any of the manufacturers
or suppliers whose products and related pricing information are contained and
set forth in any of the Company's Catalogs. G/K hereby further represents and
warrants to the Company and to A-G that it has not received and is not
otherwise aware of any copyright infringement or similar claim(s) by any
manufacturer, supplier or any third person in respect of or otherwise relating
to the Catalog Information being supplied by G/K as a capital contribution as
provided for in this Agreement.
2.3. Future Capital Contributions. Except for the capital contributions
referenced in paragraphs 1, 2.1 and 2.2, the parties are not in any way
obligated to make any future capital contributions to the Company; however,
in the event that the Company's Board of Directors shall determine at any
time within twelve (12) months from the date of this Agreement that the
Company needs additional working capital with which to organize the Company
then the parties to this Agreement each hereby agree and promise, promptly
upon receipt of written notification of such determination by the Company's
Board of Directors, to pay to the Company in cash an additional capital
contribution up to Fifty Thousand Dollars ($50,000) each without the receipt
of any additional capital stock or other security or form of consideration
for such additional cash capital contribution.
3. Organizational Costs. All legal, accounting and other similar costs and
expenses incurred in the incorporation and legal organization of the Company,
together with the cost and expense of preparation of this Agreement, and for
office space, receptionist and secretarial services (at A-G's corporate
offices in Pomona, California), will be paid by the Company (herein
"Organizational Costs"). However, by special agreement between A-G and G/K as
the sole shareholders of the Company, such Organizational Costs, and only
such Organizational Costs as defined herein, together with any interest paid
or accrued in respect of the A-G loan to the Company and the resulting
promissory note from the Company to A-G as provided for in paragraph 5 or
this Agreement shall not be deemed by the Company or such parties to be an
expense of the Company for purposes of computing the "net income" of the
Company in determining amounts payable to G/K as Consulting Agreement
compensation, in accordance with paragraph 6 of this Agreement.
4. Management. The initial Board of Directors of the Company shall consist of
the following five (5) persons:
(1) Frank J. Kubat, Jr.
(2) Nasib Gannam
(3) Robert S. Cope
(4) Lee White
(5} Paul Cope (or a fifth person to be designated by A-G subject to the
approval of G/K which approval will not be unreasonably withheld).
The Board of Directors shall be responsible for the management of the Company
in accordance with the applicable laws of the state of California and, where
applicable, the provisions of this Agreement. Following the incorporation of
the Company, the Board of Directors shall adopt organizational minutes and
corporate bylaws covering the management, operation and business of the
Company. Thereafter, the Company's Board of Directors will hold and conduct
regular meetings to manage and otherwise conduct the business of the Company.
5. Start-Up Costs. A-G will advance and thereby loan the Company sufficient
funds, up to a maximum of Fifty Thousand Dollars ($50,000) in cash and/or
equivalent value, to facilitate payment by the Company of the Company's
"start-up" operations during the first six (6) months of operations. Such
start-up activities and financing will include: (1) all Organizational Costs
(as provided for in paragraph 3 of this Agreement); (2) one full-time
sales/marketing person; t3) promotional materials; and (4) travel, lodging,
meals and other miscellaneous sales/marketing expenses relating to the
business of the Company. As the Company's cash flow requirements reasonably
permit, as determined by the Company's Board of Directors in their sole and
exclusive judgment, the Company shall repay the A-G loan. If repaid within
the first eighteen (18) months such loan is outstanding, then such loan shall
be interest free. If such loan is not repaid in full within such 18 month
period, such loan, and all amounts outstanding from the inception of such
loan, shall bear interest at the rate of twelve percent (l2%) per annum (not
to exceed the maximum rate permitted by law from time to time during the
period such loan/note remains outstanding.
6. Sales/Marketing Assistance. The Company will enter into a three (3) year
agreement with G/K whereby G/K, through Mr. Frank Kubat, will be responsible
for supervising and supporting the Company's sales/marketing activities
(herein the "Consulting Agreement"). The Consulting Agreement will provide
for annual compensation payable by the Company to Messrs. Kubat and Gannam as
the principals of G/K at the end of each of the three full calendar years
(ending December 31) covered by the Agreement commencing January 1, l991 and
ending December 31, 1993 in a total, aggregate amount equal to a certain
percentage of the Company's net income determined in accordance with generally
accepted accounting principles consistently applied (except as otherwise
agreed to by A-G and G/K as expressly provided for in paragraph 3 of this
Agreement only), as follows: 1991 - 50%; 1992 - 30%; 1993 - 20%. As part of
the services to be rendered pursuant to the Consulting Agreement, G/K will
arrange for Mr. Frank Kubat, and Mr. Kubat hereby promises, to attend a
minimum of three major conferences/exhibitions of and by providers of Listed
Products goods and services each year; and, further and additionally, it is
agreed that Mr. Kubat will devote a minimum of twenty (20) hours of his time
per month in sales/marketing activities promoting the Company's Catalog. Such
minimum personal services to be rendered by Mr. Kubat to and for the exclusive
benefit of the Company are hereby accepted and agreed to by Mr. Kubat in his
individual capacity.
7. Certain Conflicts of Interest. In the course of its business, the Company
will obtain certain services from A-G and from G/K. The parties, in entering
into and executing this Agreement, hereby acknowledge, agree to and approve
the intended course of action whereby the Company will purchase and otherwise
acquire certain goods and services from the undersigned parties/stockholders
of the Company (and/or their affiliates); and hereby knowingly and
intentionally waive and relinquish any and all claims of potential or actual
conflicts of interest attending such proposed and/or actual related party
transactions; provided, however, that such related party transactions are in
accordance with the express provisions as contained in this Agreement
applicable to any such transactions. All other agreements, transactions and
dealings between the Company and any employee, officer, director, shareholder,
agent or representative of the Company which are not contemplated by and
expressly provided for in this Agreement shall be made, undertaken and
performed in accordance with applicable California law.
8. A-G Services. From time to time, the Company will purchase from A-G data
base development, processing, composition and related services (hereinafter
collectively referred to as "Composition Services") used in periodically
producing and publishing the Catalog. Following the contribution of such
Composition Services as are required for the first such Catalog actually
produced and published by the Company, notwithstanding any contrary provision
(s) contained in this Agreement, A-G shall not be required to contribute any
further such Composition Services as a capital contribution or otherwise and,
thereafter, A-G shall be entitled to bill for and receive from the Company
reasonable and customary compensation for all such future Composition Services.
In pricing its Composition Services to the Company, A-G will attempt to charge
the Company an amount for such Services which would allow the Company to
attain a minimum gross profit of 25% on the production of such Catalog while
maintaining a competitive profile in the market for the pricing of and
purchase of such Catalog by customers of the Company. In no event, however,
is A-G obligated to charge (and accept) compensation for its Composition
Services which would be less than the minimum amount that A-G bills its
other trade customers for similar work and services. Prior to performing
any substantial amount of Composition Services for which A-G will bill the
Company, A-G will attempt to obtain the prior written approval of one of
G/K's designated board representatives as to the reasonableness of such
services/charges. Attached hereto and incorporated herein as Exhibit A, is a
schedule that has previously been approved by G/K as setting forth a
reasonable basis and method to determine compensation to be paid by the
Company to A-G for Composition Services to be performed by A-G from time to
time in the periodic production and publishing of the Catalog. Ownership of
all computer and data processing programs and other written instructions,
manuals and implementation procedures, developed, created and/or used by A-G
in the creation of the electronic data base derived from the Catalog
Information to be supplied by G/K (but not the derived data base itself,
which data base shall be owned exclusively by the Company) and/or the
performance of Composition Services by A-G for the Company (herein
collectively the "A-G Computer Resources") shall be and remain the sole and
exclusive asset and property of A-G, and the Company (and/or G/K) shall have
no claim of ownership, use or other interest in or to any such A-G Computer
Resources, except as otherwise expressly provided for in the unnumbered
paragraph hereinbelow. G/K hereby acknowledges and agrees that such A-G
Computer Resources, and the information constituting and comprising such A-G
Computer Resources (but not the derived data base itself, which data base
shall be owned exclusively by the Company) shall be treated and maintained
for all purposes as the confidential, proprietary and trade secret information,
materials and property of A-G. The Company being organized by the parties as
provided for in this Agreement hereby also acknowledges and agrees that such
A-G Computer Resources, and the information constituting and comprising such
A-G Computer Resources (but not the derived data base itself, which data base
shall be owned exclusively by the Company) shall be treated and maintained
for all purposes as the confidential, proprietary and trade secret information,
materials and property of A-G, and further agrees and promises to use its
best efforts to maintain the confidential, proprietary and trade secret
nature of all such A-G Computer Resources and related information; and,
following its incorporation, the parties hereby promise to cause the Company
to ratify and approve this Agreement.
Should the Company actually cease or otherwise permanently discontinue
operations for any reason, then G/K shall have the right to a nonexclusive
license to the A-G Computer Resources (as they then exist at such point in
time) for a cash amount/payment to A-G equal to A-G's unrecovered costs and
expenses, if any, associated with building, preparing and maintaining such
A-G Computer Resources (including in respect of the derived data base itself)
as reflected on A-G's own books and records at the time that the Company
actually ceases or otherwise permanently discontinues operating. Such
nonexclusive license to use A-G's Computer Resources shall be for a term of
five (5) years and shall be conditioned upon its use being solely for
continued production of the Catalog by G/K following actual dissolution of
the Company; and such nonexclusive license shall include all A-G computer
software object code, but exclude all A-G computer software source code,
constituting and comprising A-G's Computer Resources in respect of the
Catalog as provided for in this Agreement. Such nonexclusive license
arrangement shall contain such other terms and conditions as the parties may
hereinafter mutually agree upon in writing.
9. G/K Services. The Company will purchase printing services from Diversified
Printing and Publishing Services, Inc., 2632 Saturn Street, Brea, California
92621, which company is 100% owned by Mr. Nasib Gannam ("Diversified"), in
respect of the production of the Catalog. Diversified shall be entitled to
bill for and receive reasonable and customary compensation for such printing
services. In pricing its printing services to the Company, G/K will attempt
to charge the Company an amount for such services which would allow the
Company to attain a minimum 25% gross profit on the production of such
Catalog while maintaining a competitive profile in the market for the pricing
of and purchase of such Catalog by customers of the Company. In no event,
however, is Diversified obligated to charge (and accept) compensation for its
printing services which would be less than the minimum amount that Diversified
bills its other trade customers for similar work and services. In the event
that Mr. Nasib Gannam ceases to own at least twenty-five percent (25%) of all
of Diversified's issued and outstanding voting stock at any point in time,
then and only then, notwithstanding any of the foregoing provisions of this
paragraph and/or of this Agreement to the contrary, the Company shall be
entitled to purchase or otherwise acquire printing service" from any vendor
or other provider of such services which the Company shall, at its sole
election and discretion, be entitled to select; and, likewise, the Company
shall not be obligated in any way to purchase any further printing services
from Diversified. Mr. Gannam hereby individually agrees and promises to
immediately notify the Company in writing if, at any future point in time, he
ceases to own 25% of the issued and outstanding voting capital stock of
Diversified.
10. Other A-G Goods/Services. In providing the Company with "start-up" and
ongoing office facilities, receptionist and secretarial services, utilities
and other miscellaneous services from time to time, A-G shall be entitled to
and shall attempt to allocate and charge the Company an amount approximately
equal to AG's costs to obtain, provide and/or supply such goods and services
to the Company from time to time.
11. Accountants. The Company will retain a nationally recognized accounting
and auditing firm (to be designated from time to time by A-G at its sole
election and discretion) to provide the Company with start-up and ongoing
accounting, auditing and related services. Such accountants and auditors may,
and probably will, also provide similar such services to A-G on a regular or
periodic basis. Such accountants and auditors will be responsible for
assisting in the preparation, reviewing and/or auditing of the Company's
periodic financial statements which will include, among other things, the
Company's net income for purposes of paragraph 6 and gross revenue for
purposes of paragraph 15 of this Agreement.
12. Fiscal Year. The Company will adopt a calendar year (ending December 31st)
as its fiscal year for financial reporting and all other purposes.
13. Product Definition and Pricing. As part of the consideration for entering
into this Agreement, A-G through its designated representatives to the
Company's Board of Directors is entitled to determine, from time to time,
product definition and pricing for the Company's Catalog subject to final
review and approval by the Company's full Board of Directors which final
approval will not be unreasonably withheld.
14. Ownership of Company Assets. Following organization of the Company and
contribution of the Catalog Information by G/K and the contribution of
initial composition services by A-G, except as otherwise expressly provided
for in this Agreement (see paragraph 8 re A-G Computer Resources), all of the
assets and property contributed by the parties, including without limitation
the Catalog Information and the information data base derived therefrom
(referred to in this Agreement as the "derived data base"), shall be the
exclusive assets and property of the Company. Should the Company cease or
otherwise permanently discontinue operations for any reason then, upon
dissolution under applicable state corporate law and/or pursuant to this
Agreement, both A-G and G/K shall be entitled to receive and the Company
shall actually distribute and provide such two shareholders with a copy of
the derived data base as it then exists at such point in time as the Company
is dissolved which derived data base as received by each such shareholder
shall be the sole and exclusive property of each such recipient thereof
without further obligation to the Company or its other shareholders.
15. Future Rights to Ownership of Stock in the Company.
15.1 Right of First Refusal. Subject and subordinate to the rights of either
party under the Option to Purchase as expressly provided for in subparagraph
15.2 of this Agreement and without payment of any additional consideration
therefor, G/K and A-G each hereby grant and convey to the other a right of
first refusal to acquire the stock ownership interest in the Company that
either party owns and may desire to sell or otherwise dispose of from time
to time in the future ("Right of First Refusal"). If at any time subsequent
to the date of this Agreement either G/K or AG desires to sell or otherwise
dispose of any shares of stock in the Company (including any interest therein)
then owned by such prospective seller, the prospective seller will first
provide the other party/shareholder with written notice of such party's
desire and intention to sell or otherwise dispose of such stock (and/or any
interest herein) including the prospective sale price and all other terms and
conditions of such proposed sale transaction (the "Notice of Proposed Sale").
The party furnishing the Notice of Proposed Sale shall not obligate itself
in any way to sell any shares or other ownership interest therein in respect
of the Company until such time as the Notice of Proposed Sale has been
provided and the prospective seller has otherwise performed and satisfied
all of the terms and conditions of the Right of First Refusal. The party
receiving the Notice of Proposed Sale shall have thirty (30) business days
from the date of the Notice of Proposed Sale to provide written notice to the
party having provided such Notice of Proposed Sale as to the recipient's
intention to purchase the stock ownership interest which is the subject of
such Notice and within offer for the price and on the terms and conditions
set forth in the Notice of Proposed Sale (the "Responsive Notice"). If no
such Responsive Notice is timely received by the party providing the Notice
of Proposed Sale (or if the Responsive Notice states that the recipient is
not accepting the offer to acquire the stock ownership which was the subject
of such Notice of Proposed Sale), then the party having previously provided
such Notice of Proposed Sale shall be entitled for a period of sixty (60) days
from the deadline for receipt of the Responsive Notice (30 days following the
date of the Notice of Proposed Sale) to extend any offer and consummate any
sale of the stock ownership interest in the Company which was the subject of
the Notice of Proposed Sale for the same price and otherwise upon the same
terms and conditions as were set forth in the Notice of Proposed Sale (the
"Sale Period"). If the stock ownership interest which was the subject of the
Notice of Proposed Sale has not been actually sold and transferred within the
Sale Period (60 day. from the deadline for receipt of the Responsive Notice),
then the party having previously provided the Notice of Proposed Sale shall
no longer be entitled to extend any offer and/or consummate any sale, or
otherwise obligate the proposed seller in respect of the sale or other
disposition of the subject stock ownership interest; and the party desiring
and intending to sell or otherwise dispose of such stock ownership interest
shall be required to ' provide the other party with a new (redated) Notice of
Proposed Sale covering the proposed sale of such ownership interest: and,
thereafter, the same procedures shall be followed by the recipient of such
new (redated) Notice of Proposed Sale as are set forth above. If, having
provided the other party with a Notice of Proposed Sale, the proposed seller
subsequently determines to offer and/or sell a different ownership interest
(different number of shares of the Company's stock for example) and/or
desires to change the purchase price or any of the other terms and conditions
of the proposed sale of such stock ownership interest from the price and other
terms/conditions as set forth in the previously issued Notice of Proposed Sale,
then the party who desires to offer and/or sell such ownership interest shall
be required to issue a revised (redated) Notice of Proposed Sale covering any
revised proposal to offer and/or sell or otherwise dispose of such stock
ownership interest; and the recipient of any such revised (redated) Notice
shall have thirty (30) days from the date of such revised (redated) Notice of
Proposed Sale to respond thereto in accordance with the provisions of this
Right of First Refusal.
If the recipient of any Notice of Proposed Sale does not timely provide the
Responsive Notice accepting the offer made therein and thereby agreeing to
acquire the stock ownership interest that was the subject of such Notice of
Proposed Sale and the party providing such Notice proceeds pursuant to and
in accordance with the provisions of this Right of First Refusal to actually
make an offer and consummate a sale or other disposition of such stock
ownership interest, then such selling party shall also promptly provide the
other party/stockholder with written notice confirming such actual sale or
other disposition and the price, terms and conditions upon which such sale or
other disposition was, in fact, entered into, made and consummated. If the
party receiving any such Notice of Proposed Sale desires to acquire the
ownership interest which is the subject of such Notice and timely provides
the sending party with the Responsive Notice so stating in accordance
herewith, then the responding party shall be entitled to consummate the
acquisition which is the subject of such Notice at any time within thirty (30)
days of the date of such Responsive Notice and such responding party shall
set forth the actual time and date of such closing at the Company's corporate
offices in the Responsive Notice to the proposed seller as provided for
hereinabove (the "Closing"). If the responding party does not timely
consummate the purchase at the Closing as defined above for any reason other
than the fault of the proposed seller, then the responding party shall be
obligated and liable to the proposed seller under this Agreement as provided
for under the laws of the state of California.
15.2 Option to Purchase. Notwithstanding the above provisions of paragraph 15.1
of this Agreement and the Right of First Refusal provided for therein and
without the payment of any additional consideration therefor, the respective
parties to this Agreement each hereby grant and convey to each other an
irrevocable option to purchase all of the other party's shares of the
Company's stock and all right, title and interest in, to and under this
Agreement of whatsoever nature or kind including without limitation the
Consulting Agreement provided for under paragraph 6 of this Agreement (herein
collectively the "Option Property") at any time during the period commencing
January 1, 1991 and ending December 31, 1993 (the "Option Term") for an
aggregate purchase price" (herein the "Option Purchase Price") equal to Six
Hundred and Fifty Thousand Dollars ($650,000) plus five percent (5%) of the
Company's gross revenues, determined by the Company's independent auditors to
be in accordance with generally accepted accounting principles consistently
applied, for each of the next five (5) succeeding fiscal years commencing
with the end of the fiscal year which follows the closing of the purchase of
the Option Property pursuant to this paragraph and the Option to Purchase
provided for herein. The Option shall be exclusive and unconditional and
remain in continuous existence for and during the Option Term; and, unless
exercised prior thereto by either party, the Option shall automatically
expire and terminate at the end of such Option Term. Payment of the $650,000
portion of the Option Purchase Price for the Option Property under the Option
shall be one-half (50%) in cash and one-half (50%) in the form of the
buyer's promissory note payable, in arrears, in equal annual installments
over a period of five (5) years from the date of such note together with
interest on the unpaid principal balance of such note at the rate of eight
percent (8%) per annum. Pending payment of such promissory note, the stock of
the Company being purchased pursuant to the Option is to be pledged by the
buyer thereof as collateral to secure payment of such note payable to the
seller; however, the buyer of such option shares as the owner of such
pledged shares of stock will be entitled to vote and otherwise retain and
exercise all rights and benefits constituting and attributable to the
ownership of the stock being purchased. Payment of the 5% of gross revenues
portion of the Option Purchase Price shall be made by the buyer within the
first ninety (90) days following the close of each of the five successive
fiscal years covered by such payment provision, and shall be paid in cash or
check drawn upon the buyer's account payable to the seller(s). If the Option
is exercised by G/K, then as part of the consideration for the purchase of
such Option Property under the Option, G/K as the buyer shall furnish to A-G
as the seller the personal guarantees, joint and several, of Frank J. Kubat,
Jr. and Nasib Gannam covering the unconditional payment of the promissorynote
from G/K payable to A-G as part of the Option Purchase Price. Such
guarantees shall be in a form reasonably acceptable to A-G and its attorneys.
The provision of such personal guarantees by G/K shall be a condition to
A-G's obligation to consummate the closing of the purchase of such Option
Property as otherwise provided for herein. The Option can be exercised by
either party at any time during the Option Term by written notice dated and
delivered in person or deposited for delivery via the U.S. Mail (Certified
Mail-Return Receipt Requested) at anytime within the Option Term (herein
"Exercise of the Option"). Upon Exercise of the Option by either party as
provided for herein, the party exercising the Option shall be entitled to
purchase and acquire the Option Property and the other party shall be
obligated to sell, transfer and convey the Option Property free and clear of
all liens, claims and encumbrances of whatsoever nature or kind to the party
exercising the Option upon payment and receipt by such selling party of the
Option Purchase Price at a "closing" to be held at the Company's corporate
offices within thirty (30) days of the date of the Exercise of the Option
(the date of the written notice of exercise by the party exercising the
Option). During the Option Term, both parties agree and promise not to pledge,
sell or otherwise convey any interest in the Option Property and to hold the
Option Property subject to the Option and the respective parties' rights
therein as provided for in this Agreement. The parties' rights under the
Option shall survive and continue in full force and effect notwithstanding
any claim by either party from time to time that the other party has breached
any material provision(s) of this Agreement providing the nonbreaching party
with a right of rescission and/or to suspend performance under the Agreement
as against the alleged breaching party. During the Option Term, all rights
and entitlements of the parties under the Right of First Refusal as provided
for in subparagraph 15.1 above are subordinated to the parties' rights and
entitlements under the Option; and, in addition to the information required
to be furnished in the Responsive Notice, during the Option Term the party
receiving any Notice of Proposed Sale shall notify the party providing such
Notice of the receiving party's intention to exercise such receiving party's
rights under the Option and otherwise provide the information normally
required in the Notice of Exercise to be included in the Responsive Notice in
lieu of proceeding further with the receiving party's rights and entitlements
under the Right of First Refusal (and if such Notice of Exercise is not so
timely provided in the Responsive Notice, then all rights under the Option
shall be suspended, not terminated, for a period of ninety (90) days). Once
one party has exercised the Option in accordance with this Agreement, then
the other party is precluded from seeking to exercise the option or providing
any Notice of Proposed Sale. If the party exercising the Option is G/K then,
in addition to the Option Purchase Price, A-G shall be entitled to receive an
additional payment from the Company, receipt of which payment shall be a
condition to G/K's right to consummate the purchase of the Option Property
from A-G and A-G's obligation to consummate the sale of such Option Property,
in an amount equal to A-G's unrecovered costs and expenses, if any, associated
with building, preparing and maintaining such A-G Computer Resources
(including in respect of the derived data base itself which will continue to
be owned by the Company) as reflected on A-G's own books and records at the
time that A-G receives G/K's Notice of Exercise of the Option up to a maximum
of $50,000.
Once the option has been exercised by a party, if such party does not timely
consummate the purchase of the Option Property as provided for herein
otherwise than as a result of the nonperformance of the selling party, the
other (selling) party shall have such rights and remedies as against the
nonperforming (buying) party who sought to exercise the Option under this
Agreement as such aggrieved party is entitled to under California law. Upon
the consummation of the purchase of the Option Property by the party who
first exercised the Option, the other party is relieved of any further duties
and obligations under this Agreement of whatsoever nature or kind.
16. Negative (Competition) Covenant and Related Matters. By entering into
this Agreement, the undersigned parties hereby acknowledge, agree and promise
that neither of them will, directly or indirectly, undertake to or actually
compete in any manner whatsoever with the Company in the production,
publishing and/or distribution of the Catalog or in any business activity
which could reasonably be understood to be competitive with the Company's
Catalog business (including price sheets, pricing services, inventory control
systems and other similar types of data processing products). All business
opportunities in respect of or relating to the Company's Catalog business
shall be the entitlement of the Company. Except for the Catalog business to
be operated by the Company as contemplated and provided for by this Agreement,
the parties are free to independently pursue and actually engage in all other
business activities without obligation or liability of any kind or nature
whatsoever to the Company or to each other. G/K hereby acknowledges and agrees
that A-G is now and intends to continue in the future to, and is entitled to
under the provisions of this Agreement, explore, pursue and actually engage
in the business of owning and periodically producing, publishing,
distributing and otherwise dealing in, for its own account, right, title and
benefit, catalogs for and covering goods and services other than the Listed
Products (collectively the "A-G Catalogs"). If any such A-G Catalog (or any
catalog subsequently explored, pursued, produced, published, distributed
and/or otherwise dealt in by G/K with A-G's subsequent express written
acknowledgment and approval to G/K) includes as an incidental (or secondary)
category of products or services covered by such A-G Catalog any of the
pictures and/or information on individual products constituting and comprising
the Company's Catalog (herein referred to as "modules) then, provided that
such modules do not exceed thirty-five percent (35%) of the total number of
modules constituting and comprising the non-Company catalog, A-G; (or in the
case of G/K then G/K) shall be entitled to utilize any such modules
constituting and comprising the Company's derived data base as it exists from
time to time for the purpose only of such non-Company catalog in consideration
of payment by A-G (or in the case of G/K then by G/K) of a licensing fee for
the use of such modules in an amount to be determined as fair and reasonable
by the Company through a unanimous vote of the Company's Board of Directors.
G/K for its own account and as a prospective shareholder of the Company
hereby agrees and promises not to assert any claim, right and/or entitlement
against A-G and/or any of its officers, directors, employees, agents or
representatives (by way of "corporate opportunity" or otherwise) arising out
of, resulting from or otherwise in respect of the A-G catalogs and/or A-G's
current and/or future involvement with catalogs and the catalog business so
long as such A-G Catalogs are basically separate, distinct and different from
the Catalog covering the Listed Products (and only such Listed Products) to
be owned, produced, published and distributed by the Company as expressly
provided for in this Agreement. None of A-G's activities in respect of such
A-G Catalogs as they presently or may exist at any time in the future are
intended by the parties to this Agreement, or shall be deemed by any third
party including without limitation the Company, as a "corporate opportunity"
of the Company or otherwise in contravention of G/K's rights and entitlements
as a shareholder of the Company.
17. Employment Agreement. Subject to a determination by the Company's Board
of Directors that the Company's current and reasonably anticipated net income
and cash flow would allow the Company to timely perform such agreement in
accordance with its terms, Mr. Frank J. Kubat, Jr. shall be entitled to
request from the Company, and the Company is thereby obligated to enter into
and perform, an employment agreement with Mr. Kubat covering Kubat's sole and
exclusive, full-time employment with the Company for a period of two (2)
years from the date of such agreement for compensation equal to a total of
One Hundred Thousand Dollars ($100,000) per year (the "Kubat Employment
Agreement"). Mr. Kubat's right to request and actually enter into the Kubat
Employment Agreement, and the Company's obligation to enter into and perform
such Employment Agreement with Mr. Kubat (subject only to the conditions
expressly provided for herein), shall be for a period of two (2) years
commencing January 1, 1991 and ending December 31, 1992, after which time all
parties' rights and obligations in respect of such possible Kubat Employment
Agreement shall automatically expire and terminate and be of no further force
or effect. Mr. Kubat's right to enter into and receive such Employment
Agreement from the Company is further conditioned upon Mr. Kubat's complete
and timely performance of his personal duties and obligations under the
Consulting Agreement as expressly provided for under paragraph 6 of this
Agreement through the period of time prior to the date that Mr. Kubat
notifies the Company that he desires to enter into the Employment Agreement
provided for herein. At the time that Mr. Kubat decides to enter into the
Employment Agreement with the Company as provided for herein, he will so
notify the Company in writing stating the date upon which he is available to
commence such full-time employment for the Company. If the Company enters
into an employment agreement with Mr. Kubat at any time during the period of
time that the Company is still obligated to G/K and/or Mr. Kubat for his
services under the Consulting Agreement provided for under paragraph 6 of
this Agreement, then during the balance of the term of such Consulting
Agreement the Company's obligation and payments thereunder shall be
automatically reduced by twenty-five percent (25%).
18. Complete Agreement/Amendment. This Agreement supersedes all prior
understandings, arrangements and/or agreements regarding the specific subject
matter hereof, and the parties, further acknowledge and agree that this
Agreement accurately and completely sets forth such parties' understanding,
arrangement and agreement in respect of the subject matter hereof and that
none. of the parties hereto in entering into this Agreement is relying upon
any statement, representation, understanding, arrangement, commitment,
agreement, promise, warranty and/or guarantee constituting or in any way
relating to the subject matter of this Agreement which is not specifically
set forth in this Agreement. This Agreement may not be modified, amended or
otherwise changed except in writing, so stating, and executed by the party
against which any such modification, amendment or change is sought to be
enforced. This Agreement (including herein the exhibit hereto) shall be
deemed to have been drafted and otherwise prepared by all of the parties and
no party shall suffer the existence of any ambiguity in the language of this
Agreement as a result of having been deemed or otherwise determined to have
drafted or prepared or to have been responsible for the drafting and/or
preparation of this Agreement. Each of the parties hereto further
acknowledges the opportunity to consult with independent legal counsel or
other professional advisors in respect of the matters which are the subject
of this Agreement, and the Agreement itself, and hereby waives, releases and
relinquishes any future claim that such party did not have the opportunity
to consult with, or benefit from having consulted with separate, independent
legal counsel or other professional advisor in respect of the Agreement or
the subject matter thereof.
19. No Waiver. Except as may be expressly and specifically stated elsewhere
in this Agreement, failure by any party to enforce any right, entitlement,
benefit and/or remedy granted by or otherwise available under this Agreement
shall not constitute a waiver of such right, entitlement, benefit and/or
remedy, and waiver of any provision of this Agreement shall not constitute a
waiver of any other provision(s) or of any right, entitlement, benefit and/or
remedy under this Agreement. Any party to this Agreement shall be entitled to
waive in writing the timely or other performance of any agreement, promise or
the satisfaction of any condition expressly made in favor of or for the
benefit of such waiving party.
20. Successors and Assigns. This Agreement and the rights, entitlements,
benefits, duties and obligations as set forth herein shall inure to the
benefit, and be the continuing legal obligation of, the undersigned parties,
and each of them, and their respective heirs, assignees, transferees and all
other successors in interest whether by voluntary action of the parties or by
operation of law.
21. Notice. Any notice, instrument or communication required or permitted
under this Agreement shall be deemed to have been effectively given and made
if in writing and if served whether by personal delivery to the party for
whom it is intended, or by being deposited, postage prepaid, registered or
certified mail, return receipt requested, in the United States mail,
addressed to the party for whom it is intended at the following addresses
(or such other address as any of the parties shall hereafter designate in
writing):
If to Auto-Graphics:
Auto-Graphics, Inc.
3201 Temple Ave.
Pomona, California 91768
Attention: Robert S. Cope, President
With a copy to:
Robert H. Bretz, Esq. Robert H. Bretz, P.C.
10350 Santa Monica Blvd. #130
Los Angeles, California 90025
If to G/K: .
Gannam/Kubat Publishing, Inc.
2632 Saturn Street
Brea, California 92621
Attention: Frank J. Kubat, Jr.
With a copy to:
Edward H. Petersen, Esq.
Edward H. Petersen, P.C.
800 South Beach Blvd., Suite H
La Habra, California 90631
22. Severability. If any portion of this Agreement is held to be
unenforceable, said portion shall be severed from this Agreement, the
remainder of which shall be deemed to and continue in full force and effect.
23. Counterparts. Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same original Agreement.
24. Choice of Law. This Agreement shall be governed by and interpreted for
all purposes under California law.
25. Attorneys' Fees. If legal action be instituted by any party to enforce
the provisions of this Agreement or otherwise in respect of this Agreement,
then the prevailing party in any such legal action.
26. Recitals. The Recitals as first set forth in this Agreement are hereby
incorporated into and made a part if this Agreement.
27. Paragraph Headings. Paragraph and sub-paragraph headings used in this
Agreement are for convenience only and are not a part of this Agreement and
shall not be used in construing it.
IN WITNESS WHEREOF, the undersigned parties through their duly authorized
representatives have executed and delivered this Agreement in Pomona,
California, dated effective as of June 12, 1990.
Gannam/Kubat Publishing, Inc.
By: ss/ Frank J. Kubat, Jr.
By: ss/ Nasib Gannam
Auto-Graphics, Inc.
By: ss/ Robert S. Cope, President
Acknowledged and Agreed
(as to the provisions applicable to such individuals in paragraphs 6 (Kubat)
9 (Gannam) and 17 (Kubat and Gannam) of the Agreement.
By: ss/ Frank J. Kubat, Jr.
By: ss/ Nasib Gannam
................Exhibit B - Database Recovery Memorandum....................
A-G DATABASE RECOVERY ISSUE
In consideration of the cost incurred by Auto-Graphics, Inc. in the creation,
development and maintenance of the Datacat, Inc. HVACR database through
December 31, 1993, Auto-Graphics will be entitled to recover an amount equal
to $575,000 from Datacat, as provided for herein ("Database Recovery").
The Database recovery shall commence September 1, 1994. The liability
represented by such Database Recovery shall be booked by Datacat at August 30,
1994. Payments in respect of such Database recovery shall be made by Datacat
on a priority basis (before any dividends or other payment or distribution or
payment out of or in respect of capital or equity to the shareholder owners
of Datacat) from the following sources:
1. Model Selection Fee. An amount equal to $5.80 shall be paid by
Datacat to Auto-Graphics for each module selected by any Datacat customer out
of Datacat's current and future HVACR database;
2. Increased Gross Margin Any amount paid by Datacat to Auto-Graphics in
respect of any customer job which is designated in writing by Datacat as an
"Increased margin job, whereby Auto-Graphics is authorized to bill and
collect from Datacat an amount for Auto-Graphics' composition and/or other
services over and above twenty-five percent (25%) profit margin to
Auto-Graphics for the work performed on such job, shall be credited to and
thereby reduce Datacat's obligation to Auto-Graphics for Database Recovery;
and
3. A-G Cost Savings. Any amount which Auto-Graphics expressly consents
to and approves in writing as representing, in Auto-Graphics' sole and
exclusive judgment, a recognized cost savings in Auto-Graphics' basic
composition services business attributable to suggestions made by Datacat
personnel shall be credited to and thereby reduce Datacat's obligation to
Auto-Graphics for Database Recovery.
In the event that Auto-Graphics does not actually receive in each twelve
month period commencing September 1, 1994 an amount equal to one-third
(33 1/3%) of such Database Recovery ($191,667), then upon Auto-Graphics
written request to Datacat and its shareholders, the shareholders of Datacat
shall then immediately contribute, pro rata to their then current stock
ownership positions in Datacat, an additional amount of cash as a further
capital contribution to Datacat which will enable Datacat to then immediately
pay Auto-Graphics the balance of any such minimum one-third Database Recovery
amount due in any such particular twelve month period during the three year
period ending August 31, 1997.
................Exhibit C - AG Database Recovery Counter-Proposal.............
ROBERT H. BRETZ
A PROFESSIONAL CORPORATION
520 WASHINGTON BOULEVARD, #428
MARINA DEL REY, CALIFORNIA 90292
Telephone 310/578-1957
Fax 310/578-5443
August 3, 1994
via Fax No 697-7265
Edward H. Petersen, Esq.
800 South Beach Blvd., Suite H
La Habra, California 90631
Re: Datacat, Inc.
Dear Ed:
This will confirm my telephone report to you following the Datacat Board
Meeting as to the database recovery issue.
Auto-Graphics, Inc.'s proposal is as follows:
(1) Total Recovery: $500,000 (recorded as a liability on Datacat Is
financial books and records); and
(2) Gannam/Kubat guarantee responsibility would be for a total of
$300,000 based upon the current projected and budgeted module selection fee
payable to Auto-Graphics for the balance of 1994 ($75,000), 1995 ($100,000)
and 1996 ($125,000).
Accordingly, if Datacat did not meet its budgeted module selection fee
("MSF") payment to A-G of $75,000 during the remainder of 1994, then the
shortfall would be guaranteed by the stockholders of Datacat on a 50/50 basis
(one-half each A-G and G/K) ; and G/K's share, therefore, would be 50% of the
shortfall ($75,000 less actual MSF payment to A-G in 1994 up to a maximum of
$37,500 if no MSF payments were made to A-G by Datacat for the remainder of
1994). The same analysis would apply for 1995 and 1996, except G/K's
exposure would increase as the budgeted MSF payments increase.
The Gannam/Kubat guarantee of Datacat's obligation to Auto-Graphics would be
joint and several.
Please see if Nappy and Frank will agree to Auto-Graphics proposal. If so,
it is my understanding that agreement has been reached that the two
shareholder groups, Auto-Graphics and Gannam/Kubat, will provide Datacat with
a line of credit of $100,000 each totaling $200,000 to ensure Datacat's
smooth financial operation through 1994. We will send along proposed
resolutions covering the mechanics of any such future Datacat "call" and the
mechanics as to how it would work. If you have any ideas you would like to
send along before we begin drafting, please feel free to provide them to us.
I was please to hear that the "day after thoughts" about the
qualifications/guidance re Frank Kubat's proposed employment arrangement with
Datacat are still positive. I concur, again, with Frank that it would be a
good idea for him and Bob Cope to get together to dismiss the proposed
co-manager role that has been proposed for them, and their feelings and
suggestions as to how they can work together in the most productive manner
for the benefit of Datacat.
As discussed, I will try to provide you and Frank with a further draft of the
proposed employment contract by no later than this coming Monday, August 8,
1994.
As indicated, I hope to be able to take advantage of a planned two week
vacation starting Tuesday, August 9, 1994, but I will be available by
telephone, fax, and Federal Express to keep matters moving along during the
August 9-22 period that I will be out of town.
Hopefully, this brings us up to date on the matters we are discussing.
Very truly yours,
ss/ Bob Bretz
Robert H. Bretz
cc: Frank Kubat
c/o Auto Graphics, Inc. (Via Fax No. 909/595-3506)
Bob Cope
RHB/sn/ag2l76
................Exhibit D - Proposed Ratifying Resolution...................
.....................Letter........................
ROBERT H. BRETZ
A PROFESSIONAL CORPORATION
520 WASHINGTON BOULEVARD, #428
MARINA DEL REY, CALIFORNIA 90292
Telephone 310/578-1957
Fax 310/578-5443
July 18, 1995
Via Fax No. 697-7265
Edward Petersen, Esq.
800 South Beach Boulevard, Suite H
La Habra, CA 90631
Re: Datacat, Inc.
(Data Base Recovery Matter)
Dear Ed:
Per our conversation this date, we are enclosing resolutions covering the
Auto-Graphics data base recovery item.
As previously indicated to you and Messrs. Gannam and Kubat on several
occasions, the Auto-Graphics representatives to the Datacat Board believe
that the Board formally approved payment by Datacat of $575,000 over a three
year period in equal monthly payments commencing September 1, 1994, and that
such agreement has been properly performed by Datacat pursuant to such prior
Board approval and authority.
Auto-Graphics likewise believes that the $15,972 monthly payments by Datacat
to A-G which have taken place and are scheduled for payment in the future
have not been unduly burdensome to Datacat (or its shareholder/creditors),
and that such payments should become increasingly affordable as Datacat sales
increase in accordance with projections submitted to the Board at its July
1994 meeting.
Nevertheless, we understand that Messrs. Gannam and Kubat are currently
uncomfortable with the level of cash payments by Datacat in respect of such
data base recovery obligation to Auto-Graphics and have asked Auto-Graphics
to consider a new arrangement to become effective August 1, 1995.
Auto-Graphics has expressed a willingness to consider such request, and hereby
submits a proposal which we believe will meet with your client's approval.
(Mr. Kubat has already told me that he will go along with whatever Mr. Gannam
decides is okay). The proposal is set for the in the form of the Datacat
corporate resolutions enclosed herewith (the "Proposal").
If for any reason the within proposal is not acceptable to Gannam/Kubat, then
Auto-Graphics will expect the existing payment arrangement to continue in
effect and to be regularly and timely performed by Datacat: (it being
understood that the within Proposal is made subject to and without prejudice
to any and all rights Auto-Graphics has or may hereafter have in respect of
the obligation of Datacat to Auto-Graphics in respect of such data base
recovery matter).
As Auto-Graphics understands it, assuming that the data base recovery matter
is restructured to the mutual satisfaction of the parties, the agenda
considered and acted upon by the Datacat Board in July 1994 will have been
endorsed and ratified by both Diversified and Auto-Graphics.
With your assistance, I would like to be able to report Gannam/Kubat's
approval of the within Proposal before the end of this week. (Toward this end,
we are forwarding the original Minute Book copy of the within Proposal
directly to Diversified for execution by Messrs. Gannam and Kubat and return
to us for further signature by Auto-Graphics people). Thanks.
Very truly yours,
ss/ Bob Bretz
Robert H. Bretz
Enclosure
CC: Auto-Graphics, Inc.
(Via -Fax No. 909/595-3506)
Diversified Printing Company
(Via fax No. 714/996-0342)
................Proposed Resolution..............
RESOLUTIONS
OF THE
BOARD OF DIRECTORS
OF
DATACAT, INC.
The undersigned persons, constituting all of the members of the Board of
Directors of Datacat, Inc., a California corporation (the "Company"), acting
without holding a formal meeting, through this unanimous written consent as
provided for under California Corporations Code Section 307(b), do hereby
approve, consent to, adopt and ratify as the action of the Company the
following resolutions effective as of July 21, 1995 (the "Resolutions"):
WHEREAS, the Board of Directors of the Company has previously authorized
payment to Auto-Graphics, Inc. ("A-G") in respect of the costs incurred to
create the Company's initial HVACR data base in the agreed upon amount of
$575,000 (herein the "Data Base Recovery Cost") , and now desires to revise
the regular periodic payments to be made by the Company to A-G in respect of
such Data Base Recovery Cost;
NOW, THEREFORE, BE IT RESOLVED that the Company's obligation to A-G in
respect of the balance of such Data Base Recovery Cost in the amount of
$399,308 shall be paid, commencing effective August 1, 1995, in equal monthly
installments over a period of forty-one (41) months of $9,739 per month until
the balance of such Data Base Recovery Cost obligation has been paid in full
in December of 1998;
RESOLVED FURTHER, that if the balance due and owing by the Company to A-G in
respect of such Data Base Recovery Coat is not paid in full prior to the end
of the twenty-ninth (29) month (December, 1997), then in addition to the
regular payment by the Company to A-G the then existing balance of such Data
Base Recovery Cost, A-G shall be entitled to receive and the Company shall
pay interest on such remaining balance payable monthly at the maximum rate
allowable by law but in no event more than ten percent (10%) per annum;
RESOLVED FURTHER, that payment by the Company to A-G of amounts due and owing
in respect of such Data Base Recovery Cost shall be subordinated to the
payment of current payable to third party (non-related parties and the
Datacat rent, payroll and miscellaneous expenses advanced by and reimbursed
to A-G which are deemed to be third party payables) vendors but shall be paid
prior to payment by the Company of payables due and owing to Diversified and
A-G for catalog services rendered by such related parties to Datacat,
RESOLVED FURTHER, that appropriate officers, agents and representatives of
the Company are hereby authorized and directed to implement, carry-out and
effectuate the foregoing resolutions by, in the name of and for and behalf
of the Company including without limitation the making, execution and
delivery of a promissory note by the Company evidencing the Company's
obligation to A-G in respect of such Data Base Recovery Cost in the form
attached hearto as Exhibit A; and
RESOLVED FURTHER, that for purposes of the approval of the within Resolutions,
the A-G representatives on the Company's Board of Directors, Messrs.
Robert S. Cope, Douglas K. Bisch and Paul Cope, shall be deemed to have
abstained from the voting on and approval of these Resolutions.
IN WITNESS WHEREOF, the undersigned have executed the Resolutions effective
as of the date first indicated above.
Nasib Gannam
Frank J. Kubat, Jr.
Robert S. Cope
Douglas K. Bisch
Paul Cope
...............Proposed Promissory Note...................
PROMISSORY NOTE
$350,613
December 31, 1995
Pomona, California
FOR THE VALUE RECEIVED, Datacat, Inc., a California corporation (the "Maker"),
promises to pay to Auto-Graphics, Inc., a California corporation, or its
order (the "Payee"), at the Maker's corporate office the principal sum of
Three Hundred and Fifty Thousand Six Hundred and Thirteen Dollars ($350,613)
in equal monthly installments of Nine Thousand Seven Hundred and Thirty-Nine
Dollars ($9,739) each commencing January 1, 1996 and continuing thereafter
until the principal balance of this Promissory Note has been paid in full in
December of 1998.
This Promissory Note may be prepaid by the Company at any time. If this
Promissory Note is not prepaid in full on or before December 31, 1997 then,
in addition to the principal payments to the Payee as provided for herein,
the Payee shall be entitled to receive and the Maker shall be obligated to
and shall pay to the Payee each month commencing January 1, 1998 interest on
the unpaid principal balance of this Note at the maximum rate allowable by
law during such period of time not to exceed ten percent (10%) per annum.
If the Maker fails to make three consecutive monthly payments as provided for
herein, then the Payee shall have the right to declare a default under this
Promissory Note and accelerate payment of all past due and remaining payments
under this Note which shall hereby all become due and owing by the Maker at
the date of any such notice default by the Payee.
The Maker hereby waives presentment, notice non-payment or other formal
demand prior to the initiation of legal action by the Payee to recover amounts
due and owing on this Promissory Note, except that the Payee agrees to and
shall provide written notice of intention to file legal action on this
Promissory Note to Nasib Gannam and Frank Kubat c/o Diversified Printing
Company, 2632 Saturn Street, Brea, California 92621, any no later than thirty
(30) days prior to actually filing any such suit.
If the Payee is forced for any reason to initiate legal action to collect or
otherwise in respect of this Promissory Note and the obligation represented
thereby then, in addition to whatever other relief the Payee may be entitled
to receive as a result of such action , the Payee shall also be entitled to
such Payee's reasonable attorneys' fees and costs, and other costs of suit,
as part of any settlement of or judgment on such legal action.
This Promissory Note is made, and shall be governed, interpreted and enforced
for all purposes under the laws of the State of California.
IN WITNESS WHEREOF, the undersigned having been duly authorized has executed
this Promissory Note in Pomona, California effective as of the date first
above written.
DATACAT, INC.
(a California Corporation)
By:
Nasib Gannam
By:
Robert S. Cope
This Promissory Note is made, and shall be governed, interpreted and enforced
for all purposes under the law of the State of California.
IN WITNESS WHEREOF, the undersigned having been duly authorized has executed
this Promissory Note in Pomona, California effective as of the date first
above written.
DATACAT, INC.
(a California Corporation)
By:
Nasib Gannam
By:
Robert S. Cope
..........................End Exhibits.......................................