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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
For the Fiscal Year ended Commission File Number
December 31, 1997 0-4431
AUTO-GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
California 95-2105641
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3201 Temple Avenue
Pomona, California 91768
(Address of principal (Zip Code)
executive offices)
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 $679,000 as of December 31, 1997.
The number of shares of the registrant's Common Stock outstanding was
1,090,478 as of December 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement to be filed pursuant to Regulation 14A for
the fiscal year ended December 31, 1997 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. (the "Company") 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 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 substantial investment in the
development of online client/server software products and client-shared
Internet/Web services. In 1993, the Company launched the development of a
new product family called Impact/ONLINE(tm) for Internet information
distribution services. This capability has been successfully utilized 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 a number of statewide and regional
Impact/ONLINE(tm) systems operational serving over 4,500 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(tm) or Microsoft Explorer(tm).
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 a bibliographic database.
Impact/MARCit(tm) is a cataloging support system providing access to the A-G
Databases(tm) containing over 50 million bibliographic and authority records
via the Web.
Impact/TRACEit(tm) provides a one-stop source for satisfying quick reference
queries and for locating potential interlibrary loan (ILL) sources.
AVISO(tm) is an ISO standards compliant PC-based software system designed to
manage all aspects of the interlibrary loan process.
Impact/ACCESS(tm) provides for patron access to licensed commercial third-
party 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.
In July 1997, the Company acquired the assets of the Library Information
Systems ("LIS") division of ISM Information Systems Management Manitoba
Corporation ("ISM"), a subsidiary of IBM Canada, Ltd. The LIS business
includes bibliographic cataloging and interlibrary loan resource sharing
software and related services. The assets acquired include a
bibliographic database containing over 50 million records together with
the holdings of most Canadian public and university libraries, five
million authority records, software, computer equipment, furniture,
leasehold improvements and contracts to provide services to approximately
500 Canadian libraries. The Company also employed the former staff of the
LIS division each having an average of 17 years of experience in the
library services business. The acquisition achieved the strategic
objective of expanding the Company's customer base internationally,
improving access to the academic library market and obtaining one of the
largest bibliographic union databases in North America. The Company has
delivered its first new software products for the Canadian market (and
later the U.S. market) called Impact/MARCit(tm) and Impact/TRACEit(tm) within
six months of concluding the acquisition. The Company has formed a new
wholly-owned Canadian subsidiary, A-G Canada Ltd. located in Etobicoke,
Ontario (a suburb of Toronto), to operate the business.
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 customized
products and services used 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 searching, indexing, and
cross-referencing features along with search and retrieval capabilities
for CD-ROM's and are available in Windows and MAC versions.
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. This proprietary
publishing business is operated by Datacat, Inc., which became a wholly-
owned subsidiary of the Company effective October 2, 1998. The Company
supplies software, database and composition services for printed, CD-ROM
and Web-based HVACR parts catalogs. (See Note 1 of "Notes to Consolidated
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.
Backlog cannot be stated in a useful manner, as contracts are normally
expressed as statements of specifications and unit prices rather than
total sales volume in dollars.
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 awarded
according to the results of market pricing, competitive bidding, technical
capability, customer relationship and/or past performance.
Marketing Offices/Employees
The Company has marketing representatives and service centers located in
California, Connecticut, Illinois, Massachusetts, Washington, Texas and in
Ontario, Canada. The Company and its subsidiaries currently employ
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 occupied and should be adequate for
the Company's anticipated growth 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 Consolidated
Financial Statements" and Item 13. "Certain Relationships and Related
Transactions").
ITEM 3. LEGAL PROCEEDINGS
In June 1990, the Company and Gannam/Kubat Publishing ("G/K") formed a
50/50 joint venture company called Datacat, Inc. Datacat was formed to
produce printed illustrated parts catalogs for the wholesale heating,
ventilation, air conditioning, and refrigeration (HVACR) industry. In
1996, G/K filed suit against Datacat and the Company for non-payment of
their accounts receivable and allegedly unauthorized and excessive
payments by Datacat to the Company for database development costs incurred
prior to 1994 provided by the Company. On October 2, 1997, the Company
concluded a settlement agreement with its partner in Datacat, which
dismissed the lawsuit and all outstanding claims against Datacat and the
Company. In the settlement, Datacat paid G/K $200,000 against G/K's
accounts receivable from Datacat of $351,000 and G/K forgave the balance
of the accounts receivable ($151,000) and agreed to not compete with
Datacat for a period of five years. Concurrently, G/K also surrendered
their stock ownership in Datacat. The Company now owns 100% of Datacat,
Inc. as of October 2, 1997. The Settlement Agreement and Mutual Release
dated September 30, 1997 has been included as an exhibit to this Report.
See Index to Exhibits, Item No. 10.24. (See Note 1 of "Notes to
Consolidated Financial Statements" under "Other Assets - investment in
Datacat, Inc.").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Stock quotations.
1997 1996
Bid Asked Bid Asked
Price Range High Low High Low High Low High Low
1st Quarter 2.250 2.000 3.250 2.375 1.875 1.375 2.375 1.875
2nd Quarter 2.000 1.625 2.750 2.000 2.250 1.750 2.750 2.250
3rd Quarter 2.125 1.750 4.500 3.500 2.313 1.875 3.375 2.313
4th Quarter 2.625 2.500 4.250 2.625 2.750 2.125 3.500 2.750
The Company's Common Stock ($.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 Company's stock are also reported on the OTC Bulletin Board.
As of December 31, 1997 the number of holders of record of the Company's
Common Stock was 236. 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
Consolidated 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.
(See Note 1 of "Notes to Consolidated Financial
Statements" under "Other Assets")
Years Ended December 31
1997 1996 1995 1994 1993
Operating results:
Net sales $10,036 $ 9,218 $ 9,559 $ 9,165 $ 9,678
Net income 212 236 194 158 132
Earnings per share .19 .21 .16 .12 .10
At year-end:
Total assets 8,852 7,132 6,688 6,106 5,841
Long-term debt 2,911 2,101 1,906 1,696 1,592
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 with maximum availability of
$1,250,000(fully available at December 31, 1997), secured by accounts
receivable and renewed bi-annually in June. Management believes that the
current line of credit will again be renewed in June 1999 and is
sufficient to handle the Company's cyclical working capital needs. (See
Note 2 of "Notes to Consolidated 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 bi-annually in June and management believes that this
credit facility will again be renewed in June 1999. Management does not
currently believe that increased credit availability will be required to
finance planned capital expenditures in 1998, which are estimated at
$1,000,000, to be used to upgrade computers, production equipment and for
software development. The Company obtained a new term credit facility of
$750,000 to fund the 1997 acquisition of the assets of the Library
Information Systems division of ISM Information Systems Management
Manitoba Corporation. The term note is a three year note with interest
only for 12 months followed by a 24 month amortization schedule at bank
prime rate. Subsequent to December 31, 1997, the Company retired $375,000
of the balance outstanding in term borrowings. (See Note 3 of "Notes to
Consolidated Financial Statements").
Cash, in 1997, was provided from operating activities and long-term
financing. Cash flow from operations (net income and depreciation) in
1997 increased $61,000 to $1,346,000 ($1,285,000 in 1996 and $1,196,000 in
1995). The increase in accounts receivable from 1996 to 1997 is due to the
effect of the acquisitions. The average collection days for accounts
receivable improved in 1997 to 66 days from 67 days in 1996 and 70 days in
1995. As of December 31, 1997 the Company's principal commitments consisted
primarily of leases on facilities. There were also commitments of
approximately $100,000 in capital expenditures at December 31, 1997.
The Company's principal uses of cash for investing activities in 1997 were
for the continuing development of the Company's Impact(tm) software product
line, for upgrades to the Company's primary computer equipment to enhance its
online service to its customers and acquisition of the assets of the LIS
division of ISM and the remaining 50% share of Datacat, Inc.
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 1998. 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 1997 increased $818,000 to $10,036,000 due primarily to
additional revenues from the acquisitions of A-G Canada, Ltd. and Datacat, Inc.
and additional sales of the Company's Impact/ONLINE(tm) product line. The
decline in net sales from the Company's traditional business lines were more
than offset by revenues contributed by the acquisitions. Sales prices
remained generally constant in 1997 and in certain cases declined due to
competitive pressures in some markets. The Company's gross margins declined
in 1997 to 38% from 40% in 1996 (38% in 1995). Selling, general and
administrative expenses for 1997 declined to 31% of sales in 1997 from 33% of
sales in 1996 and in 1995. The Company's spending on sales and marketing of
its new products with additional personnel and new product promotions have
been the primary factor in this elevated expense level. Net interest expense
in 1997 was $290,000 up from $253,000 in 1996 due to additional borrowings
associated with acquisitions offset by lower interest rates from the new
credit facility.
Earnings per share declined in 1997 to $0.19 compared to $0.21 in 1996
($0.16 in 1995). The decline in earnings was due to expenses associated
with the acquisitions and duplicative and higher computer and
telecommunication costs of old technology incurred while the Canadian
business was being transitioned to the Company's Internet based
client/server technology. Management believes that favorable product mix
and productivity improvements should result in higher earnings and
improved cash flow from operations. The Company intends to consider other
acquisition opportunities which may become available in 1998.
Information Relating To Forward-Looking Statements
This Report 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 of
operations, the future cost of 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.
Foreign Exchange
The functional and reporting currency of the Company is the U.S. dollar,
while the functional and reporting currency for A-G Canada Ltd., the
Company's wholly-owned Canadian subsidiary, is the Canadian dollar. The
Company will now be exposed to foreign currency transaction gains or
losses as the relationship between the Canadian dollar and U.S. dollar
fluctuates. Since the date of acquisition, the Canadian dollar has lost
approximately 3.6% of its value against the U.S. dollar although it has
stabilized recently at approximately US$1.00=Cdn$1.43. Cash foreign
currency losses in 1997 totaled approximately $15,000. All other
transactions outside of A-G Canada Ltd. are denominated in U.S. dollars.
(See Note 1 of "Notes to Consolidated Financial Statements").
Year 2000
The Company has developed a plan to modify its information technology to
be ready for the Year 2000 and has begun converting critical data
processing systems. The Company currently expects the project to be
substantially complete by June 30, 1999 and to cost between $50,000 and
$100,000. This estimate includes internal costs, but excludes the costs
to upgrade and replace computer systems in the normal course of business.
The Company does not expect this project to have a significant effect on
operations. The Company will continue to implement key systems though
some projects may be delayed due to resource constraints.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Auto-Graphics, Inc.
We have audited the accompanying consolidated balance sheets of Auto-
Graphics, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Riverside, California
April 8, 1998
AUTO-GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
Current assets:
Cash $ 244,620 $ 364,094
Accounts receivable, less
allowance for doubtful accounts
($38,000 in 1997 and 1996) 2,365,837 1,882,305
Unbilled production costs 65,375 94,143
Finished goods inventory 18,049 28,939
Other current assets 122,416 188,440
Total current assets 2,816,297 2,557,921
Software, equipment and leasehold
improvements, net (See Note 1) 5,576,409 4,425,522
Other assets 459,241 148,507
$ 8,851,947 $ 7,131,950
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 669,237 $ 330,056
Deferred income 536,225 444,388
Accrued payroll and related
liabilities 272,485 191,290
Other accrued liabilities 155,383 127,037
Current portion of long-term debt 843,000 655,000
Total current liabilities 2,476,330 1,747,771
Long-term debt, less current portion 2,911,073 2,100,881
Deferred taxes based on income 695,000 664,939
Total liabilities 6,082,403 4,513,591
Commitments and contingencies (see Note 5)
Stockholders' equity:
Common stock, $.10 par value,
4,000,000 shares authorized,
1,090,478 shares issued and
outstanding in 1997 and
1,109,278 shares issued and
outstanding in 1996 109,048 110,928
Capital in excess of par value 1,128,319 1,138,651
Retained earnings 1,534,741 1,368,780
Foreign currency translation adjustments ( 2,564) -
Total stockholders' equity 2,769,544 2,618,359
$ 8,851,947 $ 7,131,950
See notes to consolidated financial statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996, 1995
1997 1996 1995
Net sales $10,035,824 $ 9,217,937 $ 9,559,107
Costs and expenses
Cost of sales 6,264,141 5,500,527 5,908,075
Selling, general and
administrative 3,076,078 3,071,226 3,124,978
Interest, net 290,855 253,258 221,703
9,631,074 8,825,011 9,254,756
Income from operations 404,750 392,926 304,351
Other income - 33,980 53,819
Income before taxes based on income 404,750 426,906 358,170
Provision for taxes based on income 193,000 190,000 164,000
Net income $ 211,750 $ 236,906 $ 194,170
Basic and diluted earnings
per share $ .19 $ .21 $ .16
Weighted average shares
outstanding 1,090,611 1,109,345 1,208,645
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, 1995
Common Common Capital in Foreign
Stock Stock Excess of Currency Retained
Shares Amount Par Value Translation Earnings
Balances at
Jan. 1,1995 1,280,078 $ 128,008 $1,197,717 -- $1,225,001
Net income -- -- -- -- 194,170
Common stock
retired (149,600) (14,960) (46,625) -- (241,509)
Balances at
Dec. 31,1995 1,130,478 113,048 1,151,092 -- 1,177,662
Net income -- -- -- -- 236,906
Common stock
retired (21,200) (2,120) (12,441) -- (45,788)
Balances at
Dec. 31,1996 1,109,278 110,928 1,138,651 -- 1,368,780
Net income -- -- -- -- 211,750
Common stock
retired (18,800) (1,880) (10,332) -- (45,789)
Foreign Currency
Translation
Adjustments -- -- -- $( 2,564) --
Balances at
Dec. 31,1997 1,090,478 $ 109,048 $1,128,319 $( 2,564) $1,534,741
See notes to consolidated financial statements.
AUTO-GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, 1995
1997 1996 1995
Cash flows from operating activities:
Net income $ 211,750 $ 236,906 $ 194,170
adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,134,348 1,048,639 1,001,821
Deferred taxes 30,061 71,000 106,507
Changes in operating assets and liabilities,
net of the effect of acquisitions
Accounts receivable (405,058) 96,940 72,519
Unbilled production costs 28,768 69,374 (15,406)
Finished goods inventory 137,612 32,007 (5,757)
Other current assets (39,908) (19,824) 29,424
Other assets (284,166) (26,964) (29,355)
Accounts payable 338,977 (194,375) 233,265
Deferred income (99,306) (45,779) 161,754
Accrued payroll and
related liabilities 2,275 3,389 52,226
Other accrued liabilities 28,343 88,454
(128,238)
Net cash provided by
operating activities 1,083,696 1,359,767 1,672,930
Cash flows from investing activities:
Capital expenditures (420,676) (611,840) (769,170)
Capitalized software development (750,676) (775,000) (840,000)
investment in Datacat, Inc.,
net of cash acquired (182,175) -- --
investment in A-G Canada, Ltd. (787,095) -- --
Net cash used in investing (2,140,622) ( 1,386,840) (1,609,170)
Cash flows from financing activities:
Borrowings under long-term debt 1,603,016 900,000 715,000
Principal payments under debt
agreements (605,000) (555,000) (450,000)
Repurchase of capital stock (58,000) (60,351) (303,094)
Net cash provided by (used in)
financing activities 940,016 284,649 (38,094)
Net increase(decrease) in cash (116,910) 257,576 25,666
Foreign currency effect on cash (2,564) -- --
Cash at beginning of year 364,094 106,518 80,852
Cash at end of year $ 244,620 $ 364,094 $ 106,518
See notes to consolidated financial statements.
AUTO-GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
1. Summary of significant accounting policies.
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).
Basis of Presentation
The consolidated financial statements include the accounts of Auto-Graphics,
Inc. and its wholly-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
Revenue 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) 97-2.
Use of Estimates
The preparation of the financial statements of the Company in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and revenues and expenses during the reporting period. These
estimates are based on information available as of the date of the
financial statements. Actual results may differ from those estimated.
Foreign Currency Translation
The functional and reporting currency for operations located in Canada is
the Canadian dollar. Consequently, assets and liabilities must be
translated into U.S. dollars using current exchange rates and the effects
of the foreign currency translation adjustments are accumulated and
included as a component of stockholders' equity. As of December 31, 1997,
the accumulated foreign currency translation adjustments were not material
and the net foreign exchange transaction losses for 1997 were $12,222.
All other Company transactions are currently denominated in U.S. dollars.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk for
trade receivables. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company
maintains reserves for potential losses for uncollectible accounts and
such losses have been within management's expectations.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to
estimate that value:
Cash and Receivables. The carrying amount approximates fair
value because of the short-term maturity of these instruments.
Long-Term Debt. The carrying amount approximates fair value,
since the interest rate on the debt is at the bank's prime rate.
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.
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.
Software, Equipment and Leasehold Improvements
Software, equipment and leasehold improvements are recorded at historical
cost. Software, equipment and leasehold improvements at December 31, 1997
and 1996 consist of the following:
1997 1996
Computer software and database $7,391,351 $5,258,209
Equipment 3,568,573 3,588,048
Furniture and fixtures 535,706 497,101
Leasehold improvements 276,100 246,341
11,771,730 9,589,699
Less accumulated depreciation
and amortization 6,195,321 5,164,177
$5,576,409 $4,425,522
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. Unamortized computer software was approximately
$3,734,000 in 1997, $2,502,000 in 1996, and $2,125,000 in 1995. Amortization
of computer software was approximately $579,000 in 1997, $501,000 in 1996,
and $452,000 in 1995.
The following estimated useful lives are generally observed for the
respective asset categories:
Equipment - 5 to 15 years
Computer software
and databases - 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 $1,134,000 in 1997, $1,049,000 in 1996,
and $1,002,000 in 1995.
Other Assets
Capitalized Acquisition Costs
Certain legal and accounting costs totaling approximately $230,000 in 1997
associated with the following acquisitions have been capitalized as asset
acquisition costs and will be amortized over a five year period.
Investment in A-G Canada, Ltd.
As of July 1, 1997, the Company acquired the assets of the Library
Information Systems ("LIS") division of ISM Information Systems Management
Manitoba Corporation ("ISM"), a subsidiary of IBM Canada, Ltd. The LIS
business includes bibliographic cataloging and interlibrary loan resource
sharing software and related services. The assets acquired include a
bibliographic database containing over 50 million records together with
the holdings of most Canadian public and university libraries, five
million authority records, software, computer equipment, furniture,
leasehold improvements and contracts to provide services to approximately
500 Canadian libraries.
The Company purchased the LIS assets and business for US$879,000
(Cdn$1,211,000) of which US$763,000 was paid in cash plus the assumption
of approximately US$116,000 in liabilities. The transaction was treated
as a purchase with the purchase price fully allocated to the fair value of
the assets acquired and no goodwill or other intangibles were recognized.
Financing for the purchase was provided in the form of a new credit
facility through Wells Fargo Bank via a combination of an additional
US$750,000 in bank term debt and an additional US$250,000 in revolving
working capital financing.
The Company formed a wholly-owned Canadian subsidiary, A-G Canada Ltd.,
for purposes of acquiring and operating the LIS business located in
Etobicoke, Ontario near Toronto. Financial information for A-G Canada
Ltd. for the six months ending December 31, 1997 has been included in the
accompanying consolidated financial statements.
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, air
conditioning, and refrigeration (HVACR) industry. The investment has been
accounted for using the equity method. As of October 2, 1997, the Company
acquired the remaining 50% interest in Datacat, which it did not already
own. The Company invested $182,000 in Datacat. The accompanying consolidated
financial statements include financial information for Datacat for the
three month period ending December 31, 1997.
Pro Forma Information - Unaudited
The following table reflects unaudited pro forma combined results of
operations of the Company, A-G Canada Ltd. and Datacat, Inc. on the basis
that the acquisitions of A-G Canada, Ltd. and Datacat, Inc. had taken place
at the beginning of the fiscal year 1996 and 1997. The information for A-G
Canada, Ltd. was provided by the seller, ISM. The information provided is
unaudited and is not covered by the independent auditor's report.
Year Ended December 31,
1997 1996
(unaudited) (unaudited)
Net sales $12,550,000 $14,080,000
Net income (loss) $ 546,670 $ (201,317)
Earnings per share $ 0.53 $ (0.18)
Shares outstanding 1,090,611 1,109,345
It is management's opinion, that the pro forma combined results of
operations are not indicative of the actual results that would have
occurred had the acquisitions been consummated at the beginning of the
fiscal year 1996 or of future operations of the combined companies under
the ownership and management of the Company.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 128, Earnings per Share",
which is effective for interim and annual periods ending after December
15, 1997. The Company adopted the standard as of December 31, 1997. The
standard requires the Company to present basic earnings per share and
diluted earnings per share if applicable, using a revised methodology and
requires restatement of prior earnings per share data presented. Basic
earnings per share computations presented by the Company conform to the
standard and are based on the weighted average number of shares of common
stock outstanding during the year. Contingently issuable shares granted
under the Company's 1997 Non-Qualified Stock Option Plan have been excluded
from per share calculations because all necessary conditions for exercise of
said options have not been satisfied as of December 31, 1997. (See Note 7
of "Notes to Consolidated Financial Statements")
Supplemental Disclosure of Cash Flow Information
The Company paid interest in the amount of $290,937 in 1997, $253,258 in
1996 and $221,703 in 1995. The Company paid income taxes in the amount of
$182,682 in 1997, $21,691 in 1996 and $100,883 in 1995.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation". As permitted by this statement, the Company has
continued to account for employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation
expense has been recognized for the employee stock option plan. See Note
7 of Notes to the Consolidated Financial Statements.
Pending Pronouncements
In February 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure", which is effective for interim and
annual periods ending after December 15, 1997. The Company adopted the
statement as of December 31, 1997. The statement requires the Company to
disclose certain pertinent rights and privileges of the Company's equity
securities and therefore will have no material effect on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued "Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income", which is effective for interim and annual periods beginning after
December 15, 1997. The Company will adopt the standard in fiscal year
1998. The statement requires the Company to report comprehensive income
and its components in a set of general purpose financial statements and
therefore will have no material effect on the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued "Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of
an Enterprise and Related Information", which is effective for interim and
annual periods beginning after December 15, 1997. The Company will adopt
the statement in fiscal year 1998. The statement establishes standards
for reporting of information about operating segments in interim and
annual financial statements and therefore will have no material effect on
the Company's financial position or results of operations.
Reclassification
Certain amounts reported in 1996 and 1995 have been reclassified to
conform to the 1997 consolidated financial statement presentation.
2. Note Payable to Bank.
The Company has a revolving credit agreement under which borrowings are
secured by accounts receivable and inventory whereby the Company may
borrow against its eligible accounts receivable up to a maximum of
$1,250,000 ($1,250,000 available at December 31, 1997) with interest at
the bank prime rate (8.50% at December 31, 1997). The credit facility is
renewable bi-annually with the next renewal in June 1999. There was no
outstanding loan balance at December 31, 1997 or December 31, 1996. There
are no compensating balance requirements, material commitment fees or note
guarantors. This agreement contains the same loan covenants as the
capital line of credit. At December 31, 1997, the Company was in
compliance with its loan covenants.
3. Long-term Debt.
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
Capital line of credit due in monthly
installments of $50,000 plus interest
at the bank prime rate (8.5% at
December 31, 1997) through 2002;
secured by software, equipment, and
leasehold improvements with a net
book value of approximately $5,576,000
at December 31, 1997. $2,949,073 $2,645,881
Term note with interest only at bank prime
through June 30, 1998, and 24 monthly
installments of $31,250 plus interest
at bank prime rate through June 30, 2000. 750,000 --
Note payable to stockholder due in annual
installments of $55,000 plus interest at
5.5% per annum. 55,000 110,000
Total long-term debt 3,754,073 2,755,881
Less current portion 843,000 655,000
Long-term portion $2,911,073 $2,100,881
Maturities of Long-Term Debt due after one year are: 1998--
$843,000; 1999-$975,000; 2000--$787,000; 2001--$600,000 and 2002--$549,000.
The capital line of credit at December 31, 1997 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 bi-annually with the next
renewal in June 1999. 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,
1997, the Company was in compliance with its loan covenants.
The term note provides financing of $750,000 at December 31, 1997 for the
acquisition of the LIS division of ISM Information Systems Management
Manitoba Corporation. Terms of the note include interest at bank prime
rate with interest only for 12 months followed by a 24 month amortization
of the balance. The note carries an uncompensated guarantee by an
officer/stockholder of the Company. Subsequent to December 31, 1997, the
Company repaid $375,000 of the term debt financing.
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 is being paid in four
annual installments beginning in 1995 plus interest of 5.5% per annum
($65,000 paid in June 1995, and $55,000 paid in June 1996, 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:
1997 1996 1995
Current taxes based on income
Federal $ 63,000 $ 69,000 $ 32,000
State 47,000 43,000 38,000
Foreign 42,000 -- --
_______ _______ _______
152,000 112,000 70,000
Deferred taxes based on income
Federal 55,000 78,000 94,000
State ( 14,000) -- --
Foreign - -- --
_______ _______ _______
41,000 78,000 94,000
________ ________ ________
$193,000 $190,000 $164,000
A reconciliation of the provision for taxes based on income follows
for the years ended December 31:
1997 1996 1995
Statutory U.S. federal income tax $137,600 $145,200 $122,000
Excess foreign tax rates 11,800 -- --
State tax, net of federal benefit/other 21,800 28,500 24,400
Other 21,800 16,300 17,600
$193,000 $190,000 $164,000
The statutory U.S. federal income tax rate was 34% in 1997, 1996 and 1995.
The deferred tax assets and liabilities are composed of the following
at December 31:
1997 1996 1995
Deferred tax liabilities:
Tax over book amortization and
depreciation $695,000 $665,000 $594,000
Deferred tax assets:
Bad debts/accrued vacation/other 57,000 54,000 66,000
State taxes 11,000 15,000 10,000
________ ________ ________
Total deferred tax assets 68,000 69,000 76,000
________ ________ ________
Net deferred tax liability $627,000 $596,000 $518,000
5. Commitments and Contingencies.
The Company incurred total facilities and equipment lease and rental
expense of approximately $509,000 in 1997, $474,000 in 1996 and $486,000
in 1995. The Company is obligated under certain noncancellable operating
leases for office facilities and equipment. There were also non-
cancelable purchase commitments of approximately $100,000 for capital
expenditures outstanding at December 31, 1997.
Approximate minimum lease commitments are as follows:
Years ended Operating
December 31, Leases
1998 $ 555,000
1999 538,000
2000 538,000
2001 224,000
Total minimum lease payments $ 1,855,000
6. Related Party Transactions.
The Company leases its corporate office and production facility from a
limited partnership owned by two principal directors/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.
The Company entered into a stock repurchase agreement in February 1995,
with a former employee/officer and current director of the Company,
whereby the Company agreed to purchase and retire, over a seven year
period, 156,000 of 171,000 shares of Company stock owned by the
individual. The total transaction cost of $825,000 includes stock, non-
competition and consulting fees. In each of January 1997 and 1996, the
Company purchased and retired a block of 15,600 shares, in accordance with
the above referenced agreement.
7. Stockholders' Equity.
1997 Non-Qualified Stock Option Plan
The Company adopted and implemented a 1997 Non-Qualified Stock Option Plan
effective December 31, 1997. The plan is a non-qualified plan covering
only senior executives and related persons. The plan consists of 100,000
shares of the Company's authorized but unissued common stock. At the
inception of the plan, the Company granted options to four persons under
the plan whereby they may purchase up to a total of 47,500 shares over the
next five years at a price per share of $1.65. The recipient's right to
exercise such options and acquire the stock is conditioned upon further
employment with the Company and on the market trading price of the
Company's stock rising to a minimum of $6.50 per share. Shares actually
sold and issued pursuant to the plan will be restricted stock requiring
that such stock be held by the recipients for a minimum period of one year
following purchase before they are eligible to sell such stock in the
public market. Following such initial option grant, 52,500 shares remain
eligible for future grants under the plan. The Company also anticipates
submitting a proposed qualified stock option plan covering an additional
100,000 shares available for grant to all levels of employees of the
Company at the fair market value of shares of the Company's stock at the
date of grant.
8. Defined Benefit Plan
The Company sponsors a defined contribution plan qualified under Section
401(k) of the Internal Revenue Code for the benefit of its U.S. based
employees. All full time employees are eligible to participate beginning
in January or June of each year following a 90 day waiting period. The
Company pays the administrative expenses of the plan. Annually, the
Company may, at their sole discretion, award an amount out of the profits
of the Company as a match against employee contributions to the 401(k) plan.
The Company contribution was approximately $24,000 in 1997, $19,000 in 1996
and $16,000 in 1995.
9. Year 2000 - Unaudited
The Company has developed a plan to modify its information technology to
be ready for the Year 2000 and has begun converting critical data
processing systems. The Company currently expects the project to be
substantially complete by June 30, 1999 and to cost between $50,000 and
$100,000. This estimate includes internal costs, but excludes the costs
to upgrade and replace computer systems in the normal course of business.
The Company does not expect this project to have a significant effect on
operations. The Company will continue to implement key systems though
some projects may be delayed due to resource constraints.
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 76 Director. Has served in this capacity for
more than ten years.
Robert H. Bretz 54 Director and Assistant Secretary. Attorney
who has acted as the Company's outside general
legal counsel for more than ten years.
Robert S. Cope 62 Director, President and Treasurer. Has served
in these capacities for more than ten years.
William J. Kliss 50 Chief Operating Officer. Has served the Company
in this capacity for two years. Prior to this
position, Mr. Kliss served as the Company's
Vice President and General Manager of Library
Services for two years. Mr. Kliss formerly
served as Vice President of Operations at
Scan-Optics, Inc. for fifteen years prior to
his employment with the Company.
Daniel E. Luebben 49 Chief Financial Officer and Secretary. Has
served in these capacities for two years.
Prior to these positions, Mr. Luebben served
as the Company's Vice President, Operations
and Controller for the past six years. Mr.
Luebben formerly served as Controller of
Ultrasystems Defense, Inc. for two years 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 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 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).
10.8 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).
10.10 Asset Purchase Agreement between A-G Canada, Ltd., a wholly
owned subsidiary of Auto-Graphics, Inc. and ISM Information
Systems Management Manitoba Corporation, a subsidiary of IBM
Canada, Ltd. dated June 30, 1997 incorporated by reference as
filed with the SEC in the registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997).
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).
10.15 Credit Agreement between Wells Fargo Bank and Auto-Graphics,
Inc. dated May 12, 1997.
10.16 First Amendment to Credit Agreement between Wells Fargo Bank
and Auto-Graphics, Inc. dated June 23, 1997.
10.17 Second Amendment to Credit Agreement between Wells Fargo Bank
and Auto-Graphics, Inc. dated October 31, 1997.
10.18 Revolving Line of Credit Note (Working Capital) between Wells
Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997.
10.19 Revolving Line of Credit Note (Capital Equipment) between
Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997.
10.20 Term Note between Wells Fargo Bank and Auto-Graphics, Inc.
dated May 12, 1997.
10.21 Continuing Security Agreement Rights to Payment and Inventory
between Wells Fargo Bank and Auto-Graphics, Inc. dated
May 12, 1997.
10.22 Security Agreement Equipment between Wells Fargo Bank and
Auto-Graphics, Inc. dated May 12, 1997.
10.23 Guaranty between Wells Fargo Bank and Robert S. Cope dated
May 12, 1997.
10.24 Settlement Agreement and Mutual Release between Diversified
Printing & Publishing Services, Inc., Gannam/Kubat Publishing,
Inc. Nasib Gannam, and T. Ron Kahraman, and Datacat, Inc.,
Auto-Graphics, Inc. and Robert S. Cope dated September 30, 1997.
10.25 1997 Non-Qualified Stock Option Plan dated December 31, 1997.
(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: 4/15/98 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: 4/15/98 By Ss/ Robert S. Cope
Robert S. Cope, President, Treasurer
and Director
Date: 4/15/98 By Ss/ Daniel E. Luebben
Daniel E. Luebben, Secretary and
Chief Financial Officer
Date: 4/15/98 By Ss/ Robert H. Bretz
Robert H. Bretz, Director
EX-10.15
2
DESCRIPTION - Credit Agreement between Wells Fargo Bank and Auto-Graphics,
Inc. dated May 12, 1997.
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of May 12, 1997, by and between AUTO-
GRAPHICS, INC., a California corporation ("Borrower"), and WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described below
(each, a "Credit" and collectively, the "Credits"), and Bank has agreed
to provide the Credits to Borrower on the terms and conditions contained
herein. NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Bank and Borrower hereby
agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this Agreement,
Bank hereby agrees to make advances to Borrower from time to time up to
and including June 1, 1.999, not to exceed at any time the aggregate
principal amount of One Million Two Hundred Fifty Thousand Dollars
($1,250,000.00) ("Line of Credit"), the proceeds of which shall be used
for working capital. Borrower's obligation to repay advances under the
Line of Credit shall he evidenced by a promissory note substantially in
the form of Exhibit A attached hereto ("Line of Credit Note"), all terms
of which are incorporated herein by this reference.
(b) Limitation on Borrowings. Outstanding borrowings under the Line of
Credit, to a maximum of the principal amount set forth above, shall not at
any time exceed an aggregate of the sum of eighty percent (80%) of the
eligible accounts receivable of Borrower "Borrower's Borrowing Base") plus
eighty percent (80%) of the eligible accounts receivable of A-G Canada
Ltd., a Canadian corporation ("A-G Canada") which is a wholly-owned
subsidiary of Borrower ("A-G Canada's Borrowing Base"). All of the
foregoing shall be determined by Bank upon receipt and review of all
collateral reports required hereunder and such other documents and
collateral information as Bank may from time to time require.
(i) Borrower's Borrowing Base. Borrower acknowledges that Borrower's
Borrowing Base was established by Bank with the understanding that among
other items, the aggregate of all returns, rebates, discounts, credits and
allowances for the immediately preceding three (3) months at all times
shall be less than five percent (5%) of Borrower's, gross sales for said
period. If such dilution of Borrower's accounts for the immediately
preceding three (3) months at any time exceeds five percent (5%) of
Borrower's a gross sales for said period, or if there at any time exists
any other matters, events, conditions or contingencies which Bank
reasonably believes may affect payment of any portion of Borrower's
accounts Bank, in its sole discretion, may reduce the foregoing advance
rate against eligible accounts receivable to a percentage appropriate to
reflect such dilution and/or establish additional reserves against
Borrower's eligible accounts receivable. As used herein with respect to
Borrower's Borrowing Base "eligible accounts receivable" shall consist
solely of trade accounts created in the ordinary course of Borrower's
business, upon which Borrower's right to receive payment is absolute and
not contingent upon the fulfillment or any condition whatsoever, and in
which Bank has a perfected security interest of first priority, and shall
not include:
(A) any account which is past due more than twice Borrower's, standard
selling terms;
(B) that portion of any account for which there exists any right of
setoff, defense or discount (except regular discounts allowed in the
ordinary course of business to promote prompt payment) or for which any
defense or counterclaim has been asserted;
(C) any account which represents an obligation of the United States
government or any political subdivision thereof (except accounts which
represent obligations of the United States government and for which Bank's
forms N-138 and N-139 been duly executed and acknowledged);
(D) any account which represents an obligation of an account debtor
located in a foreign country other than an account debtor located in the
Canadian provinces of Alberta, British Columbia, Manitoba, Ontario,
Saskatchewan or the Yukon Territory so long as, in Bank's determination,
such Canadian jurisdictions recognize Bank's first priority security
interest in and right to collect such account as a consequence of any
security agreements and UCC filings in favor of Bank, and other than an
account debtor located in any other Canadian province where Bank has
obtained a perfected security interest of first priority pursuant to the
applicable laws of such province;
(E) any account which arises from the sale or lease to or performance of
services for, or represents an obligation of, an employee, affiliate,
partner, member, parent or subsidiary of Borrower;
(F) any account which represents an obligation of any account debtor when
twenty-five percent (25%) or more of Borrower's accounts from such account
debtor are not eligible pursuant to (A) above;
(G) that portion of any account from an account debtor which represents
the amount by which Borrower's total accounts from said account debtor
exceeds twenty-five (25%) of Borrower's total accounts;
(H) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or financial condition of the
account debtor, or the industry in which the account debtor is engaged, to
be unsatisfactory.
(ii) A-G Canada's Borrowing Base. Borrower acknowledges that A-G Canada's
Borrowing Base was established by Bank with the understanding that, among
other items, the aggregate of all returns, rebates, discounts, credits and
allowances for the immediately preceding three (3) months at all times
shall be less than five percent (5%) of A-G Canada's gross sales for said
period. If such dilution of A-G Canada's accounts for the immediately
preceding three (3) months at any time exceeds five percent (5%) of A-G
Canada's gross sales for said period, or if there at any time exists any
other matters, events, conditions, or contingencies which Bank reasonably
believes may affect payment of any portion of A-G Canada's accounts, Bank,
in its sole discretion, may reduce the foregoing advance rate against
eligible accounts receivable to a percentage appropriate to
reflect such additional dilution and/or establish additional reserves
against A-G Canada's eligible accounts receivable. As used herein with
respect to A-G Canada's Borrowing Base, "eligible accounts receivable"
shall consist solely of trade accounts created in the ordinary course of
A-G Canada's business, upon which A-G Canada's right to receive payment is
absolute and not contingent upon the fulfillment of any condition
whatsoever, and in which Bank has a perfected security interest of first
priority, and shall not include:
(A) any account which is past due more than twice A-G Canada's standard
selling terms;
(B) that portion of any account for which there exists any right of
setoff, defense or discount (except regular discounts allowed in the
ordinary course of business to promote prompt payment) or for which any
defense or counterclaim has been asserted;
(C) any account which represents an obligation of an account debtor
located in a country other than Canada;
(D) any account which arises from the sale or lease to or performance of
services for, or represents an obligation of, an employee, affiliate,
partner, member, parent or subsidiary of A-G Canada;
(E) any account which represents an obligation of any account debtor when
twenty-five percent (25%) or more of A-G Canada's accounts from such
account debtor are not eligible pursuant to (A) above;
(F) that portion of any account from an account debtor which represents
the amount by which A-G Canada's total accounts from said account debtor
exceeds twenty-five percent (25%) of A-G Canada's total accounts;
(G) any account deemed ineligible by Bank when Bank, in its sole
discretion, deems the creditworthiness or financial condition of the
account debtor, or the industry in which the account debtor is engaged, to
be unsatisfactory. (c) Borrowing and Repayment. Borrower may from time to
time during the term of the Line of Credit borrow, partially or wholly
repay its outstanding borrowings, and reborrow, subject to all of the
limitations, terms and conditions contained herein or in the Line of
Credit Note; provided however, that the total outstanding borrowings under
the Line of Credit shall not at any time exceed the maximum principal
amount available thereunder, as set forth above.
SECTION 1.2. EQUIPMENT LINE OF CREDIT.
(a) Equipment Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to
time up to and including June 1, 1999, not to exceed at any time the
aggregate principal amount of Three Million Dollars ($3,000,000.00)
("Equipment Line of Credit"), the proceeds of which shall be used to
finance the purchase and/or development of equipment and software.
Borrower's obligation to repay advances under the Equipment Line of Credit
shall be evidenced by a promissory note substantially in the form of
Exhibit B attached hereto ("Equipment Line of Credit Note"), all terms of
which are incorporated herein by this reference.
(b) Limitation on Borrowings. Each request for an advance under the
Equipment Line of Credit shall be accompanied by Borrower's written
statement as to the use of the proceeds of such advance. Advances under
the Equipment Line of Credit shall not exceed eighty percent (80-%) of the
purchase price of equipment and software developed by a person or entity
other than Borrower, and shall not exceed eighty percent (80%) of the
development cost of equipment and software developed by Borrower, in each
case as evidenced by the invoices and/or expense reports therefor.
Moreover, the aggregate amount of all advances under the Equipment Line of
Credit which are to be used to finance the development cost of equipment
and software developed by Borrower shall not exceed One Million Dollars
($1,000,000.00) during any given fiscal year.
(c) Borrowing and Repayment. Borrower may from time to time during the
term of the Equipment Line of Credit borrow, partially or wholly repay its
outstanding borrowings, and reborrow, subject to all of the limitations,
terms and conditions contained herein or in the Equipment Line of Credit
Note; provided, however, that the total outstanding borrowings under the
Equipment Line of Credit shall not at any time exceed the maximum
principal amount available thereunder, as set forth above.
(d) Option to Cancel and Amortize. Borrower shall have a one-time option
during the term of the Equipment Line of Credit to cancel the Equipment
Line of Credit and to amortize the principal balance then outstanding over
a period of five (5) years, to be repaid in sixty (60) equal monthly
installments, as set forth in the promissory note to be executed by
Borrower upon the exercise of the option. Borrower may exercise this
option at anytime during the term of the Equipment Line of Credit upon
sending written notice thereof to Bank; provided, however, Borrower may
not exercise this option if an Event of Default, or an event or
act which with the giving of notice or the passage or time or both would
constitute an Event of Default, has occurred and is continuing.
SECTION 1.3. TERM LOAN.
(a) Term Loan. Subject to the terms and conditions of this Agreement, Bank
hereby agrees to make a loan to Borrower in the principal amount of Seven
Hundred Fifty Thousand Dollars ($750,0OO.00) ("Term Loan"), the proceeds
of which shall be used by Borrower and/or contributed by Borrower to A-G
Canada to finance the acquisition (the "ISM Acquisition") by Borrower
and/or by A-G Canada of the assets of ISM Information Systems Management
Manitoba Corporation pursuant to the terms of that certain Asset Purchase
Agreement between A-G Canada and ISM Information Systems Management
Manitoba Corporation to be dated as of June 1 1997 (the "Purchase
Agreement"). Borrower's obligation to repay the Term Loan shall be
evidenced by a promissory note substantially in the form of Exhibit C
attached hereto ("Term Note"), all terms of which are incorporated herein
by this reference. Bank's commitment to grant the Term Loan shall
terminate on June 30, 1997.
(c) Repayment. The principal amount of the Term Loan shall be repaid in
accordance with the provisions of the Term Note.
(d) Prepayment. Borrower may prepay principal on the Term Loan at any
time, in any amount and without penalty.
SECTION 1.4 INTEREST/FEES.
(a) Interest. The outstanding principal balances of the Line of Credit,
Equipment Line of Credit and the Term Loan shall bear interest at the
rates of interest set forth in the Line of Credit Note, Equipment Line of
Credit Note, and the Term Note (collectively, the "Notes").
(b) Computation and Payment. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times
and place set forth in the Notes.
(c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one-
eighth percent (1/8%) per annum (computed on the basis of a 360 day year,
actual days elapsed) on the average daily unused amount of the Line of
Credit, which fee shall be calculated on a quarterly basis by Bank and
shall be due and payable by Borrower in arrears within ten (10) days after
each billing is sent by Bank.
SECTION 1.5 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all principal, interest and fees due under each Credit by charging
Borrower's demand deposit account with Bank, or any other demand deposit
account maintained by Borrower with Bank, for the full amount thereof.
Should there be insufficient funds in any such demand deposit account to
pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
SECTION 1.6. COLLATERATAL. As security for all indebtedness of Borrower to
Bank subject hereto, Borrower hereby grants to Bank security interests of
first priority in all Borrower's accounts receivable and other rights to
payment, general intangibles, inventory, equipment and all proceeds of the
foregoing. As security for all indebtedness of Borrower to Bank subject
hereto, on or before June 30, 1997, Borrower shall cause A-G Canada to
grant to Bank security interests of first priority in all of A-G Canada's
accounts receivable and other rights to payment, general intangibles,
inventory, equipment and all proceeds of the foregoing. All of the
foregoing shall be evidenced by and subject to the terms of such security
agreements, financing statements and other documents as Bank shall
reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and
expenses incurred by Bank in connection with any of the foregoing
security, including without limitation, filing and recording fees and
costs of appraisals and audits.
SECTION l.7. GUARRANTIES. All indebtedness of Borrower to Bank under the
Term Loan shall be guaranteed by Robert S. Cope in the principal amount of
Seven Hundred Fifty Thousand Dollars ($750,000.00), as evidenced by and
subject to the terms of a guaranty in form and substance satisfactory to
Bank.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and
final payment, and satisfaction and discharge, of all obligations of
Borrower to Bank subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of California,
and is qualified or licensed to do business (and is in good standing as a
foreign corporation, if applicable) in jurisdictions in which such
Qualification or licensing is required or in which the failure to so
qualify or to be so licensed could have a material adverse effect on
Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument required hereby or at any
time hereafter delivered to Bank in connection herewith (collectively,
the "Loan Documents") have been duly authorized, and upon their execution
and delivery in accordance with the provisions hereof will constitute
legal, valid and binding agreements and obligations of Borrower or the
party which executes the same, enforceable in accordance with their
respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any
law or regulation, or contravene any provision of the Articles of
Incorporation or By-Laws of Borrower, or result in any breach of or
default under any contract, obligation, indenture or other instrument to
which Borrower is a party or by which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material, adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated March 31, 1997, a true copy of which has beer,
delivered by Borrower to Bank prior to the date hereof, (a) is complete
and correct and presents fairly the financial condition of Borrower, (b)
discloses all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether
liquidated or unliquidated, fixed or contingent, and (c) has been prepared
in accordance with generally accepted accounting principles consistently
applied. Since the date of such financial statement -there has been no
material adverse change in the financial condition of Borrower, nor has
Borrower mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except in favor of Bank or as
otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX.RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any
year.
SECTION 2.7. NO SUBORDINATION. There is no agreement indenture, contract
or instrument to which Borrower is a party or by which Borrower is a party
or by which Borrower may be bound that requires the subordination in right
of payment of any of Borrower's obligations subject to this Agreement to
any obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and
fictitious names, if any, necessary to enable it to conduct the business
in which it is now engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended or remodified from time to time ("ERISA");
Borrower has not violated any provision of any defined employee pension
benefit plan (as defined in ERISA) maintained or contributed to by
Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has
occurred and is continuing with respect to any Plan initiated by Borrower;
Borrower has met its minimum funding requirements under ERISA with respect
to each Plan; and each Plan will be able to fulfill its benefit
obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental,
hazardous waste, health-and safety statutes, and; any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's
operations and/or properties, including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Superfund Amendments and Reauthorization Act of 1986, the
Federal Resource Conservation and Recovery Act of 1976, and the Federal
Toxic Substances Control Act, as any of the same may be amended, modified
or supplemented from time to time. None of the operations of Borrower is
the subject of any federal or state investigation evaluating whether any
remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any
release of any toxic or hazardous waste or substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of
Bank to grant any of the Credits is subject to the fulfillment to Bank's
satisfaction of all of the following conditions: (a) Approval of Bank
Counsel. All legal matters incidental to the granting of each of the
Credits shall be satisfactory to Bank's counsel. (b) Documentation. Bank
shall have received, in form and substance satisfactory to Bank, each of
the following, duly executed: (i) This Agreement and the Notes. (ii)
Articles of Incorporation. (iii) Corporate Borrowing Resolution. (iv)
Incumbency Certificate. (v) Security Agreement covering Equipment. (vi)
Security Agreement covering Account Receivable and Inventory. (vii) UCC
Financing Statement. (viii) Guaranty (ix) Such other documents as Bank may
require under any other Section of this Agreement. And by June 30, 1977,
Bank shall have received, in form and substance satisfactory to Bank, each
of the following, duly executed: (x) Third Party Security Agreement: All
Accounts, Inventory, Equipment and Fixtures. (xi) Financing Statement or
such other filings as may be required under Canadian law. (xii) Corporate
Resolution authorizing endorsement and hypothecation of property. (xiii)
Incumbency Certificate. (xiv) Such other documents as Bank may require
under any other Section of this Agreement. (c) Financial Condition. There
shall have been no material adverse change, as determined by Bank, in the
financial condition or business of Borrower or any guarantor hereunder,
nor any material decline, as determined by Bank, in the market value of
any collateral required hereunder or a substantial or material portion of
the assets of Borrower or any such guarantor. (d) Insurance. Borrower
shall have delivered to Bank evidence of insurance coverage on all
Borrower's property, in form, substance, amounts, covering risks and
issued by companies satisfactory to Bank, and where required by Bank, with
loss payable endorsement in favor of Bank, including without limitation,
policies of fire and extended coverage insurance covering all real
property collateral required hereby, with replacement cost and mortgagee
loss payable endorsements, and such policies of insurance against specific
hazards affecting any such real property as may be required by
governmental regulation or Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder
shall be subject to the fulfillment to Bank's satisfaction of each of the
following conditions: (a) Compliance. The representations and warranties
contained herein and in each of the other Loan Documents shall be true on
and as of the date of the signing of this Agreement and on the date of
each extension of credit by Bank pursuant hereto, with the same as though
such representations and warranties had been made on and as of each such
date, and on each such date, no Event of Default as defined herein, and no
condition, event or act which with the giving of notice or the passage of
time or both would constitute such an Event of Default, shall have
occurred and be continuing or shall exist. (b) Documentation. Bank shall
have received all additional documents which may be required in connection
with such extension of credit.
SECTION 3.3. SPECIAL CONDITION TO TERM LOAN. The obligation of Bank to
make the Term Loan shall be subject to receipt by Bank of such assurances
and/or evidence as Bank may require that concurrently with or prior to the
funding of the Term Loan, the ISM Acquisition shall be or shall have been
completed in compliance with all applicable laws, and that Borrower and/or
A-G Canada shall acquire or shall have acquired the assets described in
the Purchase Agreement free from any liens or claims of any person or
entity except for "Permitted Encumbrances" as defined in the Purchase
Agreement.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of
the Loan Documents remain outstanding, and payment in full of all
obligations of Borrower subject hereto, Borrower shall, unless Bank
otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS Punctually pay all principal, interest,
fees or other liability ties due under any of the Loan Documents at the
times and place and in the manner specified therein, and immediately upon
demand by Bank, the amount by which the outstanding principal balance of
any of the Credits at any time
exceeds any limitation on borrowings applicable thereto.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and to inspect the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank: (a) not later than 120 days after
and as of the end of each fiscal year, a audited consolidated financial
statement of Borrower, prepared by an certified public accountant
acceptable to Bank, to include a balance sheet, income statement and
statement of cash flow and all footnotes; (b) not later than 45 days after
and as of the end of each fiscal quarter, a consolidated financial
statement of Borrower, prepared by Borrower, to include a balance sheet
and income statement; (c) not later than 20 days after and as of the end
of each month, a borrowing base certificate of Borrower and A-G
Canada, an aged listing of accounts receivable and accounts payable of
Borrower and of A-G Canada, a reconciliation of accounts of Borrower and
A-G Canada, and by March 31 of each year, a list of the names and
addresses of Borrower's and A-G Canada's account debtors; (d) not later
than 90 days after the end of each calendar year, a financial statement of
each guarantor hereunder, prepared by such guarantor, to include all
assets and liabilities, and within 15 days filing, but in no event later
than each April 30th, copies of guarantor's filed federal income tax
returns for such year; (e) from time to time such other
information as Bank may reasonably request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for
the conduct of its business; and comply with the provisions all documents
pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the requirements of all laws, rules,
regulations and orders of any governmental authority applicable to
Borrower and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types
and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting
forth all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time
make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.
SECTION 4.7. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower with a claim in excess
of $100,000.00. SECTION 4.8. FINANCIAL CONDITION. Maintain Borrower's
consolidated financial condition as follows using generally accepted
accounting principles consistently applied and used consistently with
prior practices (except to the extent modified by the definitions herein),
with compliance determined commencing with Borrower's financial statements
for the period ending June 30, 1997: (a) Current Ratio not at any time
less than 1.10 to 1.0, with "Current Ratio" defined as total current
assets divided by total current liabilities. (b) Tangible Net Worth not at
any time less than $2,500,000.00, with "Tangible Net Worth" defined as the
aggregate of total stockholders' equity plus subordinated debt less any
intangible assets. (c) Total Liabilities divided by Tangible Net Worth not
at any time greater than 2.25 to 1.0, with "Total Liabilities" defined as
the aggregate of current liabilities and non-current liabilities less
subordinated debt, and with "Tangible Net Worth" defined as the aggregate
of total stockholders' equity plus subordinated debt less any intangible
assets. (d) EBITDA Coverage Ratio not less than 2. 0 to 1. 0 as of each
fiscal year end and as of the end of each fiscal quarter, on a rolling
four-quarter basis, with "EBITDA" defined as net profit before tax plus
interest expenses (net of capitalized interest expense), depreciation
expense and amortization expense, and with "EBITDA Coverage Ratio"'
defined as EBITDA divided by the aggregate of total interest expense plus
the prior period current maturity of long-term debt and the prior period
current maturity of subordinated debt. (e) Net income after taxes not less
than $1.00 on an annual basis, determined as of each fiscal year end, and
pre-tax profit not less than $1.00 on a quarterly basis, determined as of
each fiscal quarter end.
SECTION 4.9. NOTICE TO BANK. Promptly (but in no event more than five (5)
days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or
the passage of time or both would constitute an Event of Default; (b) any
change in the name or organizational structure of Borrower; (c) the
occurrence and nature of any Reportable Event or Prohibited Transaction,
each as defined in ERISA, or any funding deficiency with respect to any,
Plan; or (d) any termination or cancellation of any insurance policy which
Borrower is required to maintain, or any uninsured or partially uninsured
loss through liability or property damage, or through fire, theft or any
other cause affecting Borrower's property in excess of an aggregate of
$100,000.00.
ARTICLE V
NEGATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of
the Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without Bank's ,
prior or written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed
assets in any fiscal year in excess of an aggregate of $2,000,000.00
(excluding U.S.$1,000,000.00 of the purchase price of the ISM
Acquisition).
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated
or unliquidated, joint or several, except (a) the liabilities of Borrower
to Bank, and (b) any other liabilities of Borrower existing as of, and
disclosed to Bank prior to, the date hereof.
SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the
nature of Borrower's business as conducted as of the date hereof; acquire
all or substantially all of the assets of any other entity; nor sell,
lease, transfer or otherwise dispose of all or a substantial or material
portion of Borrower's assets except in the ordinary course of its
business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser or negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as
security for, any liabilities or obligations or any other person or
entity, except any of the foregoing in favor of Bank.
SECTION 5.6. LOANS, ADVANCES, investmentS. Make any loans or advances to
or investments in any person or entity, except any of the foregoing
existing as of, and disclosed to Bank prior to, the date hereof.
SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's
stock now or hereafter outstanding, nor redeem, retire, repurchase or
otherwise acquire any shares of any class of Borrower's stock now or
hereafter outstanding; provided, however, Borrower may repurchase its
common stock for a purchase price not to exceed $100,000.00 in the
aggregate during any given year, so long as no other term or provision of
this Agreement would be violated after giving effect to any such
repurchase.
SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist
a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of foregoing in favor
of Bank or which is existing as of, and disclosed to Bank in writing prior
to, the date hereof.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement: (a) Borrower shall fail to pay
when due any principal, interest, fees or other amounts payable under any
or the Loan Documents. (b) Any financial statement or certificate
furnished to Bank in connection with, or any representation or warranty
made by Borrower or any other party under this Agreement or any other Loan
Document shall prove to be incorrect, false or misleading in any material
respect when furnished or made. (c) Any default in the performance of or
compliance with any obligation, agreement or other provision contained
herein or in any other Loan Document (other than those referred to in
subsections (a) and (b) above), and with respect to any such default which
by its nature can be cured, such default shall continue for a period of
twenty (20) days from its occurrence. (d) Any default in the payment or
performance of any obligation, or any defined event of default, under the
terms of any contract or instrument (other than any of the Loan Documents)
pursuant to which Borrower or any guarantor hereunder has incurred any
debt or other liability to any person or entity, including Bank. (e) The
filing of a notice of judgment lien against Borrower or any guarantor
hereunder; or the recording or any abstract of judgment against Borrower
or any guarantor hereunder in any county in which Borrower or such
guarantor has an interest in real property; or the service of a notice of
levy and/or of a writ of attachment or execution, or other like process,
against the assets of Borrower or any guarantor hereunder; or the entry of
a judgment against Borrower or any guarantor hereunder. (f) Borrower or
any guarantor hereunder shall become insolvent, or shall suffer or consent
to or apply for the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall generally fail to
pay its debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any guarantor hereunder shall file a
voluntary petition in bankruptcy, or seeking reorganization, in order to
effect a plan or other arrangement with creditors or any other relief
under the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time ("Bankruptcy Code"), or under
state or federal law granting relief to debtors, whether now or hereafter
in effect; or any involuntary petition or proceeding pursuant to the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or
commenced against Borrower or any guarantor hereunder, or Borrower or any
such guarantor shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or
Borrower or any such guarantor shall be adjudicated a bankrupt, or an
order for relief shall be entered against Borrower or any such guarantor
by any court of competent jurisdiction under the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors. (g) There shall exist or occur
any event or condition which Bank in good faith believes impairs, or is
substantially likely to impair, the prospect of payment or performance by
Borrower of its obligations under any of the Loan Documents. (h) The death
or incapacity of any guarantor hereunder. The dissolution or liquidation
or Borrower; or Borrower or any of its directors, stockholders or members
shall take action seeking to effect the dissolution or liquidation of
Borrower. (i) Any change in ownership during the term of this Agreement of
an aggregate of twenty-five percent (25%) or more of the common stock of
Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower under each of the Loan Documents, any term
thereof to the contrary notwithstanding, shall at Bank's option and
without notice become immediately due and payable without presentment,
demand, protest or notice of dishonor, all of which are hereby expressly
waived by each Borrower; (b) the obligation, if any, of Bank to extend any
further credit under any of the Loan Documents shall immediately cease and
terminate; and (c) Bank shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all security for any of
the Credits and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. All rights, powers and remedies
of Bank may be exercised at any time by Bank and from time to time after
the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided
by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy; nor
shall any single or partial exercise of any such right, power or remedy
preclude, waive or other wise affect any other or further exercise thereof
or exercise of any other right, power or remedy. Any waiver, permit,
consent or approval of any kind by Bank of any breach of or default under
of the Loan Documents must be in writing and shall be effective only to
the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any Provision of
this Agreement must be in writing delivered to each party at the following
address: BORROWER: AUTO-GRAPHICS, INC. 3201 Temple Avenue Pomona,
California 91768 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Regional
Commercial Banking Office 9000 Flair Drive, Suite 100 El Monte, CA 91731
or to such other address as any party may designate by written notice to
all other parties. Each such notice, request and demand shall be deemed
given or made as follows: (a) if sent by hand delivery, upon delivery; (b)
if sent by mail, upon the earlier of the date of receipt or three (3) days
after deposit in the U.S. mail, first class and postage prepaid; and (c)
if sent by telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all- advances, charges,
costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in house counsel),
expended or incurred by Bank in connection with (a) the negotiation and
preparation of this Agreement and the other Loan Documents, Bank's
continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank's
rights and/or the collection of any amounts which become due to Bank under
any of the Loan Documents, and (c) the prosecution or defense of any
action in any way related to any of the Loan Documents, including without
limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating
to any Borrower or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign,
transfer, negotiate or grant participation's in all or any part of, or any
interest in, Bank's rights and benefits under each of the Loan Documents.
In connection therewith, Bank may disclose all documents and information
which Bank now has or may hereafter acquire relating to any of the
Credits, Borrower or its business, any guarantor hereunder or the business
of such guarantor, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank
with respect to the Credits and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject
matter hereof. This Agreement may be amended or modified only in writing
signed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or
indirect cause of action or claim in connection with, this Agreement or
any other of the Loan Documents to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such Prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to
be an original, and all of which when taken together shall constitute one
and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or
hereafter arising under or in connection with, or in any way pertaining
to, any of the Loan Documents, or any past, present or future extensions
of credit and other activities, transactions or obligations of any kind
related directly or indirectly to any of the Loan Documents, including
without limitation , any of the foregoing arising in connection with the
exercise of any self-help, ancillary or other remedies pursuant to any of
the Loan Documents. Any party may by summary proceedings bring an action
in court to compel arbitration of a Dispute. Any party who fails or
refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with AAA the
Commercial Arbitration Rules. All Disputes submitted to arbitration shall
be resolved in accordance with the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice of law
provision in any of the Loan Documents. The arbitration shall be conducted
at a location in California selected by the AAA or other administrator. If
there is any inconsistency between the terms hereof and any such rules,
the terms and procedures set forth herein shall control. All statutes of
limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to matters
directly relevant to the Dispute being arbitrated. Judgment upon any award
rendered in an arbitration may me entered in any court having
jurisdiction; provided however, that nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Provisional Remedies, Self-Help and
Foreclosure. No provision hereof shall limit the right of any party to
exercise self-help remedies such as setoff, foreclosure against or sale of
any real or personal property collateral or security, or to obtain
provisional or ancillary remedies, including without limitation injunctive
relief, sequestration, attachment, garnishment or the appointment of a
receiver, from a court of competent it jurisdiction before, after or
during the pendency or any arbitration or other proceeding. The exercise
of any such remedy shall not waive the right of any party to compel
arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state
or federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior
to the final arbitration hearing. Arbitrators (i) shall resolve all
Disputes in accordance with the substantive law of the state of
California, (ii) may grant any remedy or relief that a court of the state
of California could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any
award, and (iii) shall have the power to award recovery of all costs and
fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other
applicable law. Any Dispute in which the amount in controversy is
$5,000,000 or less shall be decided by a single arbitrator who shall not
render an award of greater than $5,000,000 (including damages, costs, fees
and expenses) . By submission to a single arbitrator, each party expressly
waives any right or claim to recover more than $5,000,000. Any Dispute in
which the amount in controversy exceeds $5, 000, COO shall be decided by
majority vote of a panel of three arbitrators; provided however, that all
three arbitrators must actively participate in all hearings and
deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of
fact and conclusions of law. In such arbitration's (i) the arbitrators
shall not have power to make any award which is not supported by
substantial evidence or which is based on legal error, (ii) an award shall
not be binding upon the parties unless the findings of fact are supported
by substantial evidence and the conclusions of law are not erroneous under
the substantive law of the state of California, and (iii) the parties
shall have in addition to the grounds referred to in the Federal
Arbitration Act for vacating, modifying or correcting an award the right
to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be
entered only if a court determines the award is supported by substantial
evidence and not based on legal error under the substantive law of the
state of California.
(f ) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to
arbitration if the Dispute concerns indebtedness secured directly or
indirectly, in whole or in part, by any real property unless (i) the
holder of the mortgage, lien or security interest specifically elects in
writing to proceed with the arbitration, or (ii) all parties to the
arbitration waive any rights or benefits that might accrue to them by
virtue of the single action rule statute of California, thereby agreeing
that all indebtedness and obligations of the parties, and all mortgages,
liens and security interests securing such indebtedness and obligations,
shall remain fully valid and enforceable. If any such Dispute is not
submitted to arbitration, the Dispute shall be referred to a referee in
accordance with California Code of Civil Procedure Section 638 et seq.,
and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by
a referee shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil Procedure Sections
644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with
the AAA. No arbitrator or other party to an arbitration proceeding may
disclose the existence, content or results thereof, except for disclosures
of information by a party required in the ordinary course of its business,
by applicable law or regulation, or to the extent necessary to exercise
any judicial review rights set forth herein. If more than one agreement
for arbitration by or between the parties potentially applies to a
Dispute, the arbitration provision most directly related to the Loan
Documents or the subject matter of the Dispute shall control. This
arbitration provision shall survive termination, amendment or expiration
of any of the Loan Documents or any relationship between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
AUTO-GRAPHICS, INC. NATIONAL ASSOCIATION
By: Ss/Robert S. Cope By Ss/Kirk C. Smith
By: Robert S. Cope By: Kirk C. Smith
Title: President Title: Vice President