-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+rsTjbtHVPAafVWaWGk+nmGXXTVYudVpsvSGO0Qdh2pOl8cLNQ+0cCE4/ZG8Wz3 5Aqkur2DDwKYfeJJnEPmiA== 0000008598-97-000003.txt : 19970415 0000008598-97-000003.hdr.sgml : 19970415 ACCESSION NUMBER: 0000008598-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970414 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTO GRAPHICS INC CENTRAL INDEX KEY: 0000008598 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 952105641 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04431 FILM NUMBER: 97579963 BUSINESS ADDRESS: STREET 1: 3201 TEMPLE AVE CITY: POMONA STATE: CA ZIP: 91768 BUSINESS PHONE: 9095957204 MAIL ADDRESS: STREET 1: 3201 TEMPLE AVENUE CITY: POMONA STATE: CA ZIP: 91768 10-K 1 Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K For the Fiscal Year ended Commission File Number December 31, 1996 0-4431 AUTO-GRAPHICS, INC. 95-2105641 3201 Temple Avenue Pomona, California 91768 Registrant's telephone number: (909) 595-7204 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10 par value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) The aggregate market value of voting stock held by nonaffiliates of the registrant was $563,000 as of December 31, 1996. The number of shares of the registrant's Common Stock outstanding was 1,109,278 as of December 31, 1996. DOCUMENTS INCORPORATED BY REFERENCE The definitive Proxy Statement to be filed pursuant to Regulation 14A for the fiscal year ended December 31, 1996 is incorporated herein by reference in Part III, Items 11-13 of Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant's most recent calendar year. PART I ITEM 1. BUSINESS Auto-Graphics, Inc. provides software products and processing services to information and database publishers. These products and services are used to create, maintain and distribute information databases through printed and/or electronic reference products. Electronic products include compact disc (CD-ROM) and client/server software systems (Internet/Web). The Company provides state and local government customers with products, services and outsourced facilities to maintain, publish and distribute bibliographic databases of library holdings and to manage interlibrary loan systems. Traditional commercial and corporate publishers use the Company's print services to produce and distribute print and electronic products such as dictionaries, encyclopedias, Bibles, price catalogs and other reference works. In recent years, the Company has made a major investment in the development of online client/server software products and client- shared Internet/Web services. In 1993, the Company launched the development of an umbrella product concept called Impact/ONLINE(tm) for Internet information distribution services. This capability has been successfully applied to a range of applications including the outsourcing by several statewide library consortia to the Company of complete system design, development, management, maintenance and operation of a web server for each customer. The Company currently has five statewide and three regional Impact/ONLINE(tm) systems operational servicing over 2,600 libraries. The Company's Impact/ONLINE(tm) products include: Impact/ONLINE WebPAC(tm) enables patrons, directly from home, school and office to search a database over the Internet using any Web Browser such as Netscape Navigator or Microsoft Explorer. Impact/ONLINE ILL(tm) provides the means to automate the initiation, tracking and management of interlibrary borrowing and lending. Impact/ONLINE CAT(tm) is a powerful online cataloging utility for copying, creation and maintenance of the bibliographic database. Impact/NET(tm) is a support service that allows for configuring, installing and managing Internet resources. Impact/ACCESS(tm) provides for patron access to licensed commercial databases. Impact/SLims(tm), is a small library information management system, which operates on a personal computer and integrates patron access catalog, circulation control and inventory management. The Company's software products and processing services continue to leverage technology and experience gained over more than 45 years of service to publishers. The Company provides standard and custom products and services for database management, electronic composition and CD-ROM search and retrieval. These software products include: SGML Smart Editor System(SES) provides publishers with full editorial capabilities to create and maintain databases in Standard Generalized Markup Language (SGML) format. Impact(tm)/CD-ROM products provide comprehensive, powerful searching, indexing, and cross-referencing features along with search and retrieval capabilities for CD-ROMs and is available in Windows, and MAC applications. In addition to providing database creation, conversion and maintenance services to a wide variety of commercial customers, the Company provides a specialized database service for the wholesale heating, ventilation, air conditioning and refrigeration(HVACR) industry in conjunction with Datacat, Inc., which is 50 percent owned by the Company. The Company is a supplier of software, database and compositions services to Datacat for HVACR parts catalogs. (See Note 1 of "Notes to Financial Statements"). Company Background The Company was formed in 1950 and incorporated in 1960 in the state of California. No single customer represents more than 10% of net sales. Management believes that the loss of any single customer or vendor would not have a material adverse effect on the business of the Company. Hardware sales are not material to the Company's business, representing less than 10% of sales, and are not considered important to the future of the Company. Backlog cannot be stated in a useful manner, as contracts are normally statements of specifications and unit prices rather than total sales volume. The software and computerized database processing services business is highly competitive. There are no definitive market share statistics available. The Company first introduced computerized database services in 1964, and believes that it has been offering such services longer than any of its existing competitors. Many competitors are smaller and local in character, but some are larger and national with greater financial resources than the Company. Contracts for computerized database publishing services and the purchase/lease of equipment are typically awarded according to the results of market pricing, competitive bidding, technical capability and past performance. Marketing Offices/Employees The Company has marketing representatives and service centers located in California, Connecticut, Illinois, Massachusetts, Missouri, New Jersey, Pennsylvania and Washington. The Company currently employs approximately 110 persons. ITEM 2. PROPERTIES The Company leases its corporate office and production facilities constituting approximately 29,000 square feet located at 3201 Temple Avenue, Pomona, California 91768. The facility has been custom designed for the Company's purposes, is fully utilized and should be adequate for the Company's needs for the foreseeable future. The facility is currently leased to the Company through June 2001 under the second of two five-year renewal options. (See Note 6 of "Notes to Financial Statements" and Item 13. "Certain Relationships and Related Transactions"). ITEM 3. LEGAL PROCEEDINGS Gannam/Kubat Publishing, Inc. (which is the other 50% stockholder in the Company's Datacat, Inc. subsidiary) and such shareholder's wholly owned affiliate Diversified Printing and Publishing, Inc. (which has rendered printing services to Datacat payment of which has been deferred) filed a complaint against the Company and its President in a legal action previously initiated by Diversified against Datacat seeking to collect payments for printing services which it had previously agreed to defer in the approximate amount of $350,000. The suit against the Company alleges that payments by Datacat against a commitment to the Company for pre-1994 database creation and maintenance services in the approximate amount of $575,000 were unauthorized or excessive; and that, absent such prior obligation and payments in respect thereof, Datacat would not have had to defer payment to Diversified. The Company also agreed to defer collection for certain services rendered to Datacat equal to or exceeding the amount claimed by Diversified. The Company anticipates the resolution of such matter in favor of Datacat, and thus the Company; and, in any event, the Company does not expect the outcome of such dispute will have a materially adverse effect on the Company's financial position or results of operations. The pleadings in the above referenced legal action are included as part of this Report. See Index to Exhibits, Item No. 10.14. (See Note 1 of "Notes to Financial Statements" under "Other Assets- Investment in Datacat"). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Stock quotations. 1996 1996 1996 1996 1995 1995 1995 1995 Bid Bid Asked Asked Bid Bid Asked Asked Price Range High Low High Low High Low High Low 1st Quarter 1 7/8 1 3/8 2 3/8 1 7/8 1 1/8 1 1 1/4 1 1/8 2nd Quarter 2 1/4 1 3/4 2 3/4 2 1/4 1 5/8 1 2 1/8 1 5/8 3rd Quarter 2 5/16 1 7/8 3 3/8 2 5/16 1 15/32 1 5/16 1 5/8 1 15/32 4th Quarter 2 3/4 2 1/8 3 1/2 2 3/4 1 7/8 1 3/8 2 3/8 1 7/8
The Company's Common Stock ($.10 par value) is traded in the over- the-counter market under the symbol "AUGR" (Cusip Number 05272510). The stock quotations set forth above, as published by the National Quotation Bureau, Inc., represent the highest and lowest bid and asked prices quoted by broker/dealers making a market in the Company's Common Stock. Prices quoted do not include retail markup, markdown or commissions and may not reflect actual transactions in shares of the Company's stock. Quotations for the Companys stock are also reported in the National Association of Securities Dealers, Inc. NASDAQ OTC Bulletin Board system. As of December 31, 1996, the number of holders of record of the Company's Common Stock was 237. The Company has never paid a cash dividend and there are no plans to do so in the near future. (See Note 3 of "Notes to Financial Statements" for information as to the loan restriction on the payment of cash dividends). ITEM 6. SELECTED FINANCIAL DATA Dollar amounts in thousands except per share data.
1996 1995 1994 1993 1992 Operating results: Net sales $9,218 $9,559 $9,165 $9,678 $9,362 Net income 236 194 158 132 28 Net income per share .21 .16 .12 .10 .02 At year-end: Total assets 7,132 6,688 6,106 5,841 6,637 Long-term debt 2,101 1,906 1,696 1,592 1,750
No cash dividends have been declared. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General and Future Business Trends Liquidity and Capital Resources The Company has a revolving credit facility (maximum availability of $1,000,000, secured by accounts receivable) which is renewed annually in May. Management believes that the current line of credit will again be renewed in 1997, and is sufficient to handle cyclical working capital needs. (See Note 2 of "Notes to Financial Statements"). The Company also maintains a capital line of credit facility (maximum availability $3,000,000) secured by substantially all of the Company's capital assets which also renews annually in May, and management believes that this credit facility will again be renewed in 1997. Management does not currently believe that increased credit availability will be required to finance planned capital expenditures in 1997, which are estimated at $1,000,000, to be used to upgrade computers, production equipment and for software development. (See Note 3 of "Notes to Financial Statements"). Cash, in 1996, was provided from operating activities and long-term financing. Cash from operations in 1996 (which includes net income and depreciation)increased $90,000, to $1,286,000 ($1,196,000 in 1995, and $1,120,000 in 1994). The average collection days for accounts receivable improved in 1996 to 67 days from 70 days in 1995 and 1994. As of December 31, 1996 the Company's principal commitments consisted primarily of leases on facilities. There were no material commitments for capital expenditures at December 31, 1996. The Company's principal uses of cash for investing activities in 1996 were for the development of the Company's Impact(tm) software family and for upgrades to the Company's primary computer equipment to maintain premium service to its on- line customers. The Company's capital resources may be used to support working capital requirements, capital investment and possible acquisitions of businesses, products or technologies complementary to the Company's current business. The Company believes that current cash reserves and cash flow from operations are sufficient to fund its operations in 1997. However, during this period or thereafter, the Company may require additional financing. There can be no assurance that such additional financing will be available on terms favorable to the Company, or at all. Results of Operations Net Sales in 1996 decreased $341,000 to $9,218,000 due primarily to a decrease in print services sales of $693,000 in 1996, which was partially offset by increased sales of the Company's Impact/ONLINE(tm) product line. An increase in sales from $9,165,000 in 1994, to $9,559,000 in 1995, was realized as the first full year of Impact/ONLINE(tm) sales was reported. Sales prices remained constant in 1996, and in certain cases declined due to competitive pressures in some markets. The Company's gross margins continue to improve, closing at 40% in 1996 up from 38% in 1995 and 32% in 1994. Continued process improvements combined with a favorable product mix have been factors in the increase in gross margin. Selling, general and administrative costs for 1996 and 1995 remained at 33% of sales, up from 28% in 1994. The Company's focus on sales and marketing of its new products with additional personnel and new product promotions have been the primary factor in this expense level. Net interest expense in 1996 was $253,000, up $31,000 from $222,000 in 1995, due to higher average balances on the Company's long-term credit facility. In 1994 net interest expense was $192,000. Earnings per share continued to improve to $0.21 in 1996, from $0.16 in 1995, and $0.12 in 1994. The Company anticipates that net revenues (excluding equipment) in 1997 will be unchanged. Management believes that favorable product mix and productivity improvements are expected to result in higher earnings and improved cash flow from operations. Information Relating To Forward-Looking Statements This annual report to shareholders of the Company includes forward-looking statements which reflect the Company's current views with respect to future events and financial performance. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Impact of Inflation Historical dollar accounting does not reflect changing costs for operations, the future cost for expansion and the changing purchasing power of the dollar. Inflation generally impacts the Company in a negative manner, as prices cannot be adjusted quickly due to the contract nature of the business, while costs of personnel, materials and other purchases tend to escalate more rapidly. However, inflation is not anticipated to have a material effect on the Company's business in the near future. ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Auto-Graphics, Inc. We have audited the accompanying balance sheets of Auto-Graphics, Inc. as of December 31, 1996 and 1995, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Auto- Graphics, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Riverside, California March 25, 1997 AUTO-GRAPHICS, INC. BALANCE SHEETS December 31, 1996 and 1995
ASSETS DEC-31-1996 DEC-31-1995 Current assets: Cash $ 364,094 $ 106,518 Accounts receivable, less allowance for doubtful accounts ($38,000 in 1996 and 1995) 1,882,305 1,979,245 Unbilled production costs 94,143 163,517 Finished goods inventory 28,939 60,946 Other current assets 188,440 168,616 Total current assets 2,557,921 2,478,842 Equipment and leasehold improvements, at cost 9,589,699 8,279,491 Less accumulated depreciation 5,164,177 4,192,170 Net equipment and leasehold improvements 4,425,522 4,087,321 Other assets 148,507 121,543 $ 7,131,950 $ 6,687,706 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 330,056 $ 524,431 Deferred income 444,388 490,167 Accrued payroll and related liabilities 191,290 187,901 Other accrued liabilities 127,037 38,585 Current portion of long-term debt 655,000 505,000 Total current liabilities 1,747,771 1,746,084 Long-term debt, less current portion 2,100,881 1,905,881 Deferred taxes based on income 664,939 593,939 Total liabilities 4,513,591 4,245,904 Commitments and contingencies (See Note 5) Stockholders' equity: Common stock, $.10 par value, 4,000,000 shares authorized, 1,109,278 shares issued and outstanding in 1996, and 1,130,478 shares issued and outstanding in 1995 110,928 113,048 Capital in excess of par value 1,138,651 1,151,092 Retained earnings 1,368,780 1,177,662 Total stockholders' equity 2,618,359 2,441,802 $ 7,131,950 $ 6,687,706
See accompanying notes. AUTO-GRAPHICS, INC. STATEMENTS OF INCOME Years ended December 31, 1996, 1995, 1994
1996 1995 1994 Net sales $ 9,217,937 $ 9,559,107 $ 9,164,849 Costs and expenses Cost of sales 5,500,527 5,908,075 6,205,379 Selling, general and administrative 3,071,226 3,124,978 2,528,682 Interest 253,258 221,703 191,532 8,825,011 9,254,756 8,925,593 Income from operations 392,926 304,351 239,256 Other income 33,980 53,819 54,922 Income before taxes based on income 426,906 358,170 294,178 Provision for taxes based on income 190,000 164,000 136,000 Net income $ 236,906 $ 194,170 $ 158,178 Net income per share $ .21 $ .16 $ .12
STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1996, 1995, 1994
Common Common Capital in Stock Stock Excess of Retained Shares Amount Par Value Earnings Balances at January 1, 1994 1,304,866 $ 130,487 $1,243,565 $1,066,823 Net income - - - 158,178 Common stock purchased and retired (24,788) (2,479) (45,848) - - Balances at December 31, 1994 1,280,078 128,008 1,197,717 1,225,001 Net income - - - 194,170 Common stock purchased and retired (149,600) (14,960) (46,625) (241,509) Balances at December 31, 1995 1,130,478 113,048 1,151,092 1,177,662 Net income - - - 236,906 Common stock purchased and retired (21,200) (2,120) (12,441) (45,788) Balances at December 31, 1996 1,109,278 $ 110,928 $1,138,651 $1,368,780
See accompanying notes. AUTO-GRAPHICS, INC. STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995, 1994
1996 1995 1994 Cash flows from operating activities: Net income $ 236,906 $ 194,170 $ 158,178 Adjus(tm)ents to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,048,639 1,001,821 961,486 Deferred taxes 71,000 106,507 72,076 Changes in operating assets and liabilities: Accounts receivable 96,940 72,519 (182,083) Unbilled production costs 69,374 (15,406) (39,747) Finished goods inventory 32,007 (5,757) 8,837 Other current assets (19,824) 29,424 (21,743) Other assets (26,964) (29,355) (25,455) Accounts payable (194,375) 233,265 (128,645) Deferred income (45,779) 161,754 77,188 Accrued payroll and related liabilities 3,389 52,226 (34,795) Accrued other liabilities (16,601) (70,262) 80,435 Interest and income taxes payable 105,055 (57,976) (14,880) Net cash provided by operating activities 1,359,767 1,672,930 910,852 Cash flows from investing activities: Capital expenditures (1,386,840) (1,609,170) (948,752) Cash flows from financing activities: Borrowings under long-term debt 900,000 715,000 554,000 Principal payments under debt agreements (555,000) (450,000) (450,000) Repurchase of capital stock (60,349) (303,094) (48,327) Net cash provided by (used in) financing activities 284,649 (38,094) 55,673 Net increase in cash 257,576 25,666 17,773 Cash at beginning of year 106,518 80,852 63,079 Cash at end of year $ 364,094 $ 106,518 $ 80,852 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 253,258 $ 221,703 $ 191,532 Income taxes 21,691 100,883 98,804
See accompanying notes. AUTO-GRAPHICS, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994 1. Summary of significant accounting policies and description of business. Description of Business Auto-Graphics, Inc. provides software products and processing services to information and database publishers. These products and services are used to create, maintain and distribute information databases through printed and/or electronic reference products. Electronic products include compact disc (CD-ROM) and client/server software systems(Internet/Web). Unbilled Production Costs Costs associated with work in process inventory including labor, materials, supplies, and overhead (excluding selling, general and administrative expenses) are stated at the lower of cost or net realizable value and are removed from inventory on an average unit cost basis. Finished Goods Finished goods inventory consists primarily of computer and CD-ROM equipment held for sale and related spare parts and is stated at the lower of average cost or market. Equipment and Leasehold Improvements Valuation of equipment and leasehold improvements is based on historical cost. Equipment and leasehold improvements at December 31, 1996 and 1995 consist of the following: 1996 1995 Equipment $3,588,048 $3,449,380 Computer software and database 5,258,209 4,154,623 Furniture and fixtures 497,101 429,147 Leasehold improvements 246,341 246,341 9,589,699 8,279,491 Less accumulated depreciation and amortization 5,164,177 4,192,170 $4,425,522 $4,087,321 Depreciation and Amortization Depreciation: Depreciation is based on the straight- line method over the estimated useful life of the asset and commences in the year the asset is placed in and/or is available for service or sale based on the half-year convention method. Amortization: Certain costs incurred related to the development and purchase of computer software are capitalized and amortized in accordance with Statement of Financial Accounting Standards No. 86. Amortization is based on a ratio of current and future revenues (the ratio method) or, at a minimum, the straight- line method, based on the full year convention in the first year of product availability. Amortization of computer software was approximately $501,000 in 1996, $452,000 in 1995, and $407,000 in 1994. The following estimated useful lives are generally observed for the respective asset categories: Equipment - 5 to 15 years Computer software and databases - 5 to 7 years Furniture and fixtures - 5 to 10 years Leasehold improvements - the lesser of 5 to 15 years or the lease term Depreciation and amortization was $1,049,000 in 1996 ($1,002,000 in 1995 and $961,000 in 1994). Other Assets Investment in Datacat, Inc. In 1990, the Company acquired a 50% interest in Datacat, Inc. Datacat was formed to market a new technology developed by the Company for the production of parts catalogs for the wholesale heating, ventilation and air conditioning, and refrigeration (HVACR) industry. The investment has been accounted for using the equity method wherein equity in the losses of Datacat have been offset against investments in and advances to Datacat. Losses in excess of investments and advances of approximately $222,000 have not been recognized and will be applied to subsequent earnings, as they are realized. The Company has not guaranteed the obligations of Datacat, and is not obligated to provide any further financial support to Datacat. The other 50% shareholder in Datacat, and a wholly owned affiliate of such shareholder which rendered printing services to Datacat payment of which has been deferred and treated as a capital investment by the partners, have filed an action disputing payment by Datacat to the Company, for certain database creation and maintenance services rendered by the Company to Datacat prior to 1994, as unauthorized or excessive. The Company anticipates the resolution of such matters in favor of Datacat, and thus the Company; and, in any event, the Company does not expect the outcome of such dispute will have a materially adverse effect on the Company's financial position or results of operations. Use of Estimates The preparation of the financial statements of the Company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Actual results may differ from those estimated. Income Recognition Revenues are recognized as services are rendered or when finished goods are shipped to customers. Certain future software support costs are accrued in accordance with AICPA Statement of Position (SOP) 91-1. Income Taxes Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Reclassification Certain amounts reported in prior years have been reclassified for consistent presentation with the current period. Net Income Per Share Per share calculations are based on the weighted average number of shares of common stock outstanding during each year. 2. Note Payable to Bank. The Company has a revolving credit agreement under which borrowings are secured by accounts receivable, whereby the Company may borrow against its eligible accounts receivable up to a maximum of $1,000,000 ($1,000,000 available at December 31, 1996) with interest at 0.5% above the bank reference rate (8.25% at December 31, 1996). The credit facility is renewable annually in May. There was no outstanding balance at December 31, 1996 or December 31, 1995. During the year ended December 31, 1996, the approximate average borrowings outstanding were $175,000 ($241,000 in 1995), the approximate weighted average interest rate was 8.8% (9.3% in 1995), and the maximum amount of month-end borrowings outstanding was $425,000 ($675,000 in 1995). The averages were computed based on the borrowings outstanding and the applicable interest rate at the end of each month. There are no compensating balance requirements, commitment fees or note guarantors. This agreement contains the same loan covenants as the capital line of credit note payable. At December 31, 1996, the Company was in compliance with its loan covenants. 3. Long-term Debt. Long-term debt at December 31, 1996 and 1995 consists of the following: 1996 1995 Capital line of credit due in monthly installments of $50,000 ($37,500 in 1995) plus interest at the bank reference rate plus .75% (9.0% at December 31, 1996) through 2001;secured by software, equipment, and leasehold improvements with a net book value of approximately $4,042,000 at December 31, 1996. $2,645,881 $2,245,881 Note payable to stockholder due in annual installments of $55,000 plus interest at 5.5% per annum 110,000 165,000 Total long-term debt 2,755,881 2,410,881 Less current portion 655,000 505,000 Long-term portion $2,100,881 $1,905,881 Maturities of Long-Term Debt due after one year are: 1997--$655,000; 1998--$655,000; 1999--$600,000; 2000--$600,000 and 2001--$245,881. The capital line of credit at December 31, 1996 provides for maximum borrowings of $3,000,000 for the purchase of equipment and software, and financing of up to $1,000,000 in internal software development costs. The capital line of credit is subject to renewal annually in May. Among other requirements, the capital line of credit requires the Company to maintain minimum financial covenant ratios, and prohibits the payment of cash dividends. There are no commitment fees, compensating balance requirements or note guarantors. At December 31, 1996, the Company was in compliance with its loan covenants. In June 1995, the Company entered into a stock repurchase agreement with a former director of the Company, whereby the Company agreed to purchase and retire, in 1995, 115,000 of 141,000 shares of Company stock owned by the stockholder. The total transaction cost of $230,000 will be paid in four annual installments beginning in 1995 plus interest of 5.5% per annum ($65,000 paid in June 1995, $55,000 paid in June 1996 and $55,000 to be paid in June 1997 and 1998). 4. Taxes Based on Income. The provision for taxes based on income is composed of the following for the years ended December 31: 1996 1995 1994 Current taxes based on income Federal $ 69,000 $ 32,000 $ 47,000 State 43,000 38,000 28,000 Foreign -- -- 8,000 112,000 70,000 83,000 Deferred taxes based on income Federal 78,000 94,000 49,000 State -- -- 4,000 78,000 94,000 53,000 $190,000 $164,000 $136,000 A reconciliation of the provision for taxes based on income follows for the years ending December 31: 1996 1995 1994 Statutory federal income tax $145,200 $122,000 $100,000 State tax, net of federal benefit/other 28,500 24,400 21,000 Tax effect of exclusion on meals and entertainment (50%) 14,200 13,400 14,500 Tax effect of insurance premiums on officers' lives 2,100 4,200 500 $190,000 $164,000 $136,000 The deferred tax assets and liabilities are composed of the following at years ending December 31: 1996 1995 1994 Deferred tax liabilities: Tax over book amortization and depreciation $665,000 $594,000 $487,000 Deferred tax assets: Bad debts/accrued vacation/other 54,000 66,000 57,000 Investment tax credit -- -- 14,000 State taxes 15,000 10,000 11,000 Total deferred tax assets 69,000 76,000 82,000 Valuation allowance 0 0 0 Net deferred tax assets - current 69,000 76,000 82,000 Net deferred tax liability $596,000 $518,000 $405,000 5. Commitments and Contingencies. The Company incurred total facilities and equipment lease and rental expense of approximately $474,000 in 1996, $486,000 in 1995, and $443,000 in 1994. The Company is obligated under certain noncancellable operating leases for office facilities and equipment. Approximate minimum lease commitments are as follows: Years ended Operating December 31, Leases 1997 $ 474,000 1998 465,000 1999 448,000 2000 448,000 2001 224,000 Total minimum lease payments $2,059,000 6. Related Party Transactions. The Company leases its corporate office and production facility from a limited partnership owned by two principal officer/stockholders of the Company payable at $37,345 per month (plus expenses and applicable increases based on the consumer price index) through June 2001 under the second of two five-year renewal options. The five-year lease with options, which was entered into in June 1986, was approved and authorized by the independent members of the Company's Board of Directors. During 1996, the Company sold processing services of $264,000 to Datacat, Inc. for resale to Datacat's customers. At December 31, 1996, net accounts receivable from and advances to this affiliate totaled $84,455. The Company entered into a stock repurchase agreement in February 1995, with a former employee and officer, and current director, of the Company, Douglas K. Bisch, whereby the Company agreed to purchase and retire, over a seven year period, 156,000 of 171,000 shares of Company stock owned by Mr. Bisch. The total transaction cost of $825,000 includes stock, non-competition and consulting fees. In January 1996, the Company purchased and retired the second block of 15,600 shares. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of, and the positions and offices within the Company presently held by, all directors and officers of the Company: Name Age Position Douglas K. Bisch 75 Director. Has served in management capacities for more than ten years. Robert H. Bretz 53 Director and Assistant Secretary. Attorney who has acted as the Company's outside general legal counsel for more than ten years. Robert S. Cope 61 Director, President and Treasurer. Has served in those capacities for more than ten years. William J. Kliss 49 Chief Operating Officer. Has served the Company in this capacity for one year, prior to this position Mr. Kliss served as the Company's Vice President and General Manager of Library Services for two years. Mr. Kliss served as Vice President of Operations at Scan-Optics, Inc. for fifteen years prior to beginning his employment with the Company. Daniel E. Luebben 48 Chief Financial Officer and Secretary. Has served in those capacities for one year, prior to these positions Mr. Luebben served as the Company's Vice President Library Operations and Controller for the past six years. Mr. Luebben served as Controller for Ultrasystems Defense, Inc. prior to his employment with the Company. Directors serve until their successors are elected and qualified at the annual meeting of stockholders. All executive officers serve at the discretion of the Company's Board of Directors. ITEM 11. EXECUTIVE COMPENSATION A definitive Proxy Statement will be filed with the Securities and Exchange Commission ("the Commission") pursuant to Regulation 14A within 120 days after the close of the Company's most recent calendar year and, accordingly, Item 11 is incorporated by reference to said definitive Proxy Statement. The Proxy Statement includes information covering this item under the caption "Compensation of Executive Officers." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A definitive Proxy Statement will be filed with the Securities and Exchange Commission ("the Commission") pursuant to Regulation 14A within 120 days after the close of the Company's most recent calendar year and, accordingly, Item 12 is incorporated by reference to said definitive Proxy Statement. The Proxy Statement includes information covering this item under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Nominees for Election as Directors." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A definitive Proxy Statement will be filed with the Securities and Exchange Commission ("the Commission") pursuant to Regulation 14A within 120 days after the close of the Company's most recent calendar year and, accordingly, Item 13 is incorporated by reference to said definitive Proxy Statement. The Proxy Statement includes information covering this item under the caption "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial statements and financial statement schedules and exhibits: (1) Financial Statements: See Item 8. "Financial Statements." (2) All schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto. (3) Exhibits: 3.1 Articles of Incorporation of Auto-Graphics, Inc., as amended (incorporated by reference as filed with the SEC as Exhibit 3.1 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3.2 Bylaws, as amended (incorporated by reference as filed with the SEC as Exhibit 3.2 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 10.7 Agreement between Gannam/Kubat Publishing, Inc. and Auto-Graphics, Inc. regarding Datacat, Inc. dated June 12, 1990 (incorporated by reference as filed with the SEC as Exhibit 10.6 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990). 10.8 Lease Agreement between 664 Company and Auto-Graphics, Inc. dated May 27, 1986 (incorporated by reference as filed with the SEC as Exhibit 10.7 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990). 10.9 Agreement by, between and among Auto-Graphics, Inc. and Douglas K. and Ruth T. Bisch executed February 15, 1995 (incorporated by reference as filed with the SEC as Exhibit 10.9 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.13 Stock Purchase Agreement by, between and among Auto-Graphics, Inc. and Cary A. and Geri W. Marshall executed June 13, 1995 (incorporated by reference as filed with the SEC as Exhibit 10.13 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.14 Pleadings in Diversified Printing and Publishing, Inc. v. Datacat, Inc., Datacat, Inc. v. Diversified Printing and Publishing, Inc., Gannam/Kubat Publishing and Nasib Gannam, and Gannam/Kubat Publishing, Inc. v. Robert S. Cope and Auto-Graphics, Inc., Orange County Superior Court Case No. 766 695. 10.15 Third Amended and Restated Revolving Credit Agreement, Accounts and Equipment, between UNION BANK OF CALIFORNIA, N.A. and AUTO-GRAPHICS, INC. dated June 12, 1996. 10.16 Revolving Equipment/Capitalized Development Costs Note between UNION BANK OF CALIFORNIA, N.A. and AUTO-GRAPHICS, INC. dated June 12, 1996. 10.17 Revolving Credit Note between UNION BANK OF CALIFORNIA, N.A. and AUTO-GRAPHICS, INC. dated June 12, 1996. 10.18 General Security Agreement between UNION BANK OF CALIFORNIA, N.A. and AUTO-GRAPHICS, INC. dated June 12,1996. (b) The Company has not filed any reports on Form 8-K during the last quarter of the period covered by this Report. (c) The following document is filed herewith for information purposes, but is not part of this Annual Report, except as otherwise indicated: None. (d) None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AUTO-GRAPHICS, INC. (Registrant) Date: 3/31/97 By ss/ Robert S. Cope Robert S. Cope, President, Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated. Date: 3/31/97 By ss/ Robert S. Cope Robert S. Cope, President, Treasurer and Director Date: 3/31/97 By ss/ Daniel E. Luebben Daniel E. Luebben, Secretary and Chief Financial Officer Date: 3/31/97 By ss/ Robert H. Bretz Robert H. Bretz, Director EX-10.14 2 DESCRIPTION - Pleadings in Diversified Printing and Publishing, Inc. v. Datacat, Inc., Datacat, Inc. v. Diversified Printing and Publishing, Inc., Gannam/Kubat Publishing and Nasib Gannam, and Gannam/Kubat Publishing, Inc. v. Robert S. Cope and Auto-Graphics, Inc., Orange County Superior Court Case No. 766 695. .................Begin Pleading Dated 7/16/96.................. GRAHAM & JAMES LLP By: Kenneth B. Julian (State Bar 149840) Karl A. Sandoval (State Bar 170190) 4675 MacArthur Court, Suite 800 F I L E D Newport Beach, California 92660 (714) 224-2000 Attorneys for Plaintiff DIVERSIFIED PRINTING PUBLISHING SERVICES, INC. SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE Case Number: 766 695 DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation, COMPLAINT BY PLAINTIFF DIVERSIFIED PRINTING AND Plaintiff, PUBLISHING SERVICES, INC. FOR BREACH OF WRITTEN CONTRACT; vs. OPEN BOOK ACCOUNT; ACCOUNT STATED; WORK, LABOR AND DATACAT, INC., a California corporation; SERVICES RENDERED; MONEY PAID; and DOES 1 through 25, inclusive, AND QUANTUM MERUIT Defendants. COMES NOW, plaintiff DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC. ("Plaintiff') and, for its Complaint, alleges as follows: I. FIRST CAUSE OF ACTION (Against All Defendants for Breach of Written Contract) 1. Plaintiff is, and at all times herein relevant was, a California corporation organized and existing under the laws of the State of California. Plaintiff is in the printing and publishing business with its offices located in the County of Orange, State of California. 2. Plaintiff is informed and believes, and thereon alleges, that defendant DATACAT, INC. ("DATACAT" is, and at all times herein relevant was, a corporation organized and existing under the laws of the State of California, with its principle place of business located in the County of Los Angeles, State of California. 3. The true names and capacities, whether individual, corporate, associate, or otherwise, of the defendants sued herein as DOES I through 25, inclusive, are unknown to Plaintiff, which therefore sues said defendants by such fictitious names. Plaintiff will amend this Complaint to allege their true names and capacities when ascertained. Plaintiff is informed and believes, and thereon alleges, that each of such fictitiously named defendants is responsible in some manner for the occurrences herein alleged and that Plaintiff s damages as herein alleged were proximately caused by said defendants' conduct. 4. Plaintiff is informed and believes, and thereon alleges, that each of the defendants was the agent, the partner, and/or the employee of each of its co-defendants and, in doing the things hereinafter alleged, was acting within the course and scope of such agency, partnership, and/or employment. 5. Within the past four years Plaintiff and Defendants, and each of them, entered into a written agreement whereby Plaintiff agreed to provide printing and publishing services and advance freight charges for defendants, and each of them, and defendants, and each of them, agreed to pay Plaintiff the sum of $333,024.28 for such services and charges. True and correct copies of Invoice Nos. 5405, 5427, 5497, 5550, 5588, 5602, 5630, 5639, 5696, 5773, 5786, 5896, 21 5900, 5905, and 5908 in the total amount of $333,024.28 for such services rendered and freight charges are attached hereto as Exhibit "A" and are incorporated herein by this reference as though set forth in full. Plaintiff further has performed additional printing and publishing services in the amount of $21,421. 6. Under the agreement, DATACAT also agreed to pay Plaintiff a finance charge of 1.5% per month on any accounts over 30 days past due (the "Finance Charges"). There is now due and owing $5,687.48 in Finance Charges, and such charges continue to accrue. 7. Plaintiff has fully performed all acts, services, and conditions required by such agreement. 8. At this time, the total amount DATACAT owes Plaintiff under the agreement is $360,132.76, calculated as $348,006.82 for services rendered, $6,438.48 in freight charges paid, and $5,687.48 in Finance Charges, plus interest on all sums. 9. Plaintiff has made demand upon defendants, and each of them, for payment of such sums. 10. Despite due demand by Plaintiff, no portion of such sum has been paid, and there is now due, owing, and unpaid from defendants, and each of them, to Plaintiff the total sum of $360,132.76, plus interest thereon at the legal rate. II. SECOND CAUSE OF ACTION (Against All Defendants for Open Book Account) 11. Plaintiff realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in Paragraphs 1 through 10, inclusive, of this Complaint. 12. Within the last four years, defendants, and each of them, became indebted to Plaintiff on an open book account due in the sum of $360,132.76 for services rendered, at their special insistence and request, freight charges paid on DATACAT's behalf and finance charges on overdue invoices. 13. Despite a demand therefor, no portion of said sums has been paid. 14. There is now due, owing, and unpaid from defendants, and each of them, to Plaintiff the sum of $360,132.76, plus interest thereon. III. THIRD CAUSE OF ACTION (Against All Defendants on Account Stated) 15. Plaintiff realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 1O, inclusive, of this Complaint. 16. Within the last four years before the commencement of this action, an account was stated in writing by and between Plaintiff and defendants, and each of them, in which it was agreed that defendants, and each of them, were indebted to Plaintiff in the sum of $360,132.76. 17. Plaintiff has made demand upon defendants, and each of them, for payment of said sum. 18. Despite due demand by Plaintiff, no portion of said sum has been paid, and there is now due, owing, and unpaid from defendants, and each of them, to Plaintiff the sum of $360,132.76, plus interest thereon at the legal rate. IV. FOURTH CAUSE OF ACTION (Against All Defendants for Work, Labor, and Services Rendered) 19. Plaintiff realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in Paragraphs 1 through 1O, inclusive, of this Complaint. 20. Within the last four years, Plaintiff rendered printing and publishing services to defendants, and each of them, at defendants' special instance and request, and defendants, and each of them, agreed to pay Plaintiff the sum of $348,006.82 for such services. 21. Despite due demand by Plaintiff, no portion of said sum has been paid, and there is now due, owing, and unpaid to Plaintiff from defendants, and each of them, the sum of $348,006.82 for such services. V. FIFTH CAUSE OF ACTION (Against All Defendants For Money Paid) 22. Plaintiff realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in Paragraphs 1 through 1O, inclusive, of this Complaint. 23. Within the last four years before the commencement of this action, defendants, and each of them, became indebted to Plaintiff in the sum of $6,438.46 for money paid, laid out, and expended for defendants, and each of them, at their instance and request, for freight charges. 24. Despite due demand by Plaintiff, no portion of such sum has been paid, and there is now due, owing, and unpaid from defendants, and each of them, to Plaintiff the sum of $6,438.46, plus interest thereon. VI. SIXTH CAUSE OF ACTION (Against All Defendants For Quantum Meruit) 25. Plaintiff realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in Paragraphs 1 through 10, inclusive, of this Complaint. 26. Within the last four years before the commencement of this action, Plaintiff provided printing and publishing services at the request of defendants, and each of them, and paid freight charges on DATACAT's behalf. Such services and freight charges directly have benefited defendants, and each of them. 27. The reasonable value of those services and expenditures is the sum of $354,445.28, towards which defendants have paid Plaintiff nothing to date. 28. Demand has been made upon defendants, and each of them, for payment of such sums by which they, and each of them, have been unjustly enriched, but defendants, and each of them, have failed and refused, and continue to fail and refuse, to make any payment whatsoever toward this amount. WHEREFORE, plaintiff DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC. prays for judgment against defendants, and each of them, as follows: 1. For damages according to proof at trial; 2. For interest on all sums at the legal rate; 3. For costs of suit incurred herein; 4. For reasonable attorneys' fees pursuant to Cal. Civ. Code 1717.5; and 5. For such other and further relief as the Court may deem just and proper. DATED: July 16, 1996 GRAHAM & JAMES LLP KENNETH B. JULIAN KARL A. SANDOVAL By: ss/K. Julian KENNETH B. JULIAN Attorneys for Plaintiff DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC. ..................End Pleading dated 7/16/96..................... .................Begin Pleading dated 9/5/96..................... Randolph Stiles, Esq. (SBN 62910) LAW OFFICES OF RANDOLPH STILES 12015 Kling Street, #211 North Hollywood, California 91607 818/505-8026 Attorney for Defendant Datacat, Inc. SUPERIOR COURT FOR THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation, Plaintiff, v. DATACAT, INC., a California corporation and DOES 1 through 25, inclusive, Defendants. Case No. 766 695 ANSWER TO COMPLAINT BY DEFENDANT DATACAT (Defendant 11 - Judge G. Robert Jameson) Datacat, Inc., a California corporation through its attorney of record ("Defendant"), for itself and for no other party, hereby answers the Plaintiff's Complaint, and alleges affirmative defenses, as follows: Pursuant to and in accordance with California Code of Civil Procedure Section 431.30(d), the Defendant generally denies each and every allegation of the Complaint. AFFIRMATIVE DEFENSES As its affirmative defenses to each and every one of the claims and causes of action set forth in the Complaint, the Defendant hereby alleges the following as its affirmative defenses to such claims and causes of action by the Plaintiff as set forth in the Complaint: FIRST AFFIRMATIVE DEFENSE (No Claim Upon Which Relief Can Be Granted) As its First Affirmative Defense, the Defendant hereby incorporates by this reference its Answer as set forth above and alleges that the Plaintiff's Complaint fails to state facts upon which the Plaintiff is entitled to any relief against the Defendant. SECOND AFFIRMATIVE DEFENSE (Superseding Agreement) As its Second Affirmative Defense, the Defendant alleges that the Plaintiff entered into an agreement with and/or for the benefit of the Defendant whereby the Plaintiff agreed to forego and/or defer payment of the monies Plaintiff seeks to collect as a result of its Complaint against the Defendant. THIRD AFFIRMATIVE DEFENSE (Agreement To Subordinate) As its Third Affirmative Defense, the Defendant alleges that the Plaintiff entered into an agreement with and/or for the benefit of the Debtor whereby the Plaintiff agreed to subordinate payments of any and all monies due and owing by the Defendant to the Plaintiff in favor of the Plaintiff's "third-party" creditors (creditors who are not affiliated with the Defendant or its shareholders) and to forego collection of any and all amounts due and owing by the Defendant to such Plaintiff unless and until all of the Defendant's current obligations to such third-party creditors had been satisfied. FOURTH AFFIRMATIVE DEFENSE (Agreement For Capital Contribution) As its Fourth Affirmative Defense, Defendant alleges that the Plaintiff entered into an agreement with and/or for the benefit of the Defendant whereby the Plaintiff agreed to use any amount due and owing by the Defendant to the Plaintiff for the purpose of making a capital contribution, and to make a further on-going capital contribution, to the Defendant in the amount required to satisfy the Defendant's obligations to third party (non- affiliated) creditors. FIFTH AFFIRMATIVE DEFENSE (Course Of Dealing) As its Fifth Affirmative Defense, Defendant alleges that through their course of dealing and otherwise the Defendant and the Plaintiff mutually understood, agreed and promised that the Plaintiff, who is affiliated with Defendant as a result of the 100% ownership of and control exercised over the Plaintiff by Nasib Gannam who is, directly or indirectly, a 50% shareholder of the Defendant (the "Plaintiff/Affiliate"), would provide printing and related services to and for the benefit of the Defendant with the agreement and promise that the Plaintiff would not demand payment for such services, and the Defendant would not otherwise be obligated for or called upon to pay the Plaintiff/Affiliate for such services, unless and until the Defendant had paid all of its current obligations to third-party (non-affiliated) creditors and had excess cash available to pay affiliated parties, including the Plaintiff/Affiliate, who provided services to the Defendant. SIXTH AFFIRMATIVE DEFENSE (Breach Of Contract) As its Sixth Affirmative Defense, Defendant alleges that the Plaintiff breached its agreement with the Defendant under which the Plaintiff seeks relief from the Defendant by way of the Complaint; and, as a result of such material breach and resulting default by the Plaintiff under such agreement, Defendant is entitled to suspend performance under such contract, including without limitation payment by Defendant to Plaintiff for any and all amounts, if any, otherwise due and owing thereunder. SEVENTH AFFIRMATIVE DEFENSE (Insolvency) As its Seventh Affirmative Defense, Defendant alleges that payment by the Defendant to the Plaintiff as prayed for in the Complaint would render the Defendant insolvent and otherwise unable to pay its debts and obligations as they come due to non-affiliated third parties. EIGHTH AFFIRMATIVE DEFENSE (Preferential Payment) As its Eighth Affirmative Defense, the Defendant alleges that payment by the Defendant to the Plaintiff as prayed for in the Complaint would constitute a preferential payment by the Defendant to an affiliated party (the Plaintiff/Affiliate) in contravention of Defendant's duties and responsibilities to other creditors. NINTH AFFIRMATIVE DEFENSE (Estoppel) As its Ninth Affirmative Defense, the Defendant alleges that the Plaintiff is estopped from asserting the claims set forth in the Complaint as against the Defendant, including without limitation for the reasons alleged in the foregoing Second, Third, Fourth and Fifth Affirmative Defenses and otherwise. TENTH AFFIRMATIVE DEFENSE (Waiver) As its Tenth Affirmative Defense, the Defendant alleges that the Plaintiff has waived and/or otherwise relinquished the claims, and/or the right to sue Defendant in respect of such claims, as set forth in the Complaint. ELEVENTH AFFIRMATIVE DEFENSE (Breach Of Implied Covenant Of Good Faith And Fair Dealing) As its Eleventh Affirmative Defense, Defendant alleges that the assertion of the instant claim by the Plaintiff against the Defendant constitutes a breach of the implied covenant of good faith and fair dealing existing by, between and among the Plaintiff and Defendant, including its shareholders and other affiliates, by virtue of contracts or other agreements by, between and among such parties pertaining to the subject matter of the Complaint. TWELFTH AFFIRMATIVE DEFENSE (Promissory Estoppel) As its Twelfth Affirmative Defense, the Defendant alleges that Plaintiff's representations, agreements and promises to the Defendant, and/or its shareholders for the benefit of the Defendant, in respect of the providing of services by the Plaintiff/Affiliate to the Defendant, and the Defendant's actions and reasonable reliance thereon, constitutes promissory estoppel and precludes the Plaintiff from instituting and maintaining the within action against the Defendant. THIRTEENTH AFFIRMATIVE DEFENSE (Unclean Hands) As its Thirteenth Affirmative Defense, the Defendant alleges that as a result of the Plaintiff/Affiliate's conduct and activities as alleged herein and otherwise, the Plaintiff should be denied the relief it is seeking based on the equitable principle of unclean hands. FOURTEENTH AFFIRMATIVE DEFENSE (Failure To Mitigate Damages) As its Fourteenth Affirmative Defense, Defendant alleges that Plaintiff knew that Defendant could not pay for the services Plaintiff rendered and continued to render to Defendant, which are the subject of Plaintiff's request for payment as alleged in the Complaint, and that the Plaintiff otherwise failed and refused to mitigate its damages. FIFTEENTH AFFIRMATIVE DEFENSE (Failure To Join Indispensable Party) As its Fifteenth Affirmative Defense, Defendant alleges that the Plaintiff has failed to join one or more indispensable parties. SIXTEENTH AFFIRMATIVE DEFENSE (Offset, Set-Off Or Deduction) As his Sixteenth Affirmative Defense, the Defendant alleges that as a result of the denial and other allegations made herein, and as otherwise exist, the Defendant in entitled to an offset, set- off or other deduction from the amounts claimed by the Plaintiff in the Complaint including without limitation as a result of Plaintiff's breach of its contract and/or agreement with and/or for the benefit of the Defendant. SEVENTEENTH AFFIRMATIVE DEFENSE (Statute Of Limitations Bar 337) As its Seventeenth Affirmative Defense, the Defendant alleges that the Plaintiff's claims are barred by the statute of limitations as provided for in California Civil Code Section 337. EIGHTEENTH AFFIRMATIVE DEFENSE (Statute Of Limitations Bar 339) As its Eighteenth Affirmative Defense, the Defendant alleges that the Plaintiff's claims are barred by the statute of limitations as provided for in California Civil Code Section 339. NINETEENTH AFFIRMATIVE DEFENSE (Statute of Frauds) As its Nineteenth Affirmative Defense, Defendant alleges that the claims which are the subject of the Complaint are barred or otherwise precluded by the statute of frauds. TWENTIETH AFFIRMATIVE DEFENSE (Fraud/Mistake) As its Twentieth Affirmative Defense, Defendant alleges that the claims which are the subject of the Complaint are barred or otherwise precluded based on the principles of fraud and/or mistake. TWENTY-FIRST AFFIRMATIVE DEFENSE (No Late Payment Charge) As its Twenty-First Affirmative Defense, Defendant alleges that the Plaintiff never billed, charged or otherwise imposed any "late payments charge" for services rendered by Plaintiff to the Defendant, Defendant never agreed to pay and is not otherwise obligated to pay Defendant, and never did pay, Defendant any late payment charge for any services rendered by Plaintiff to Defendant or otherwise; and, in any event, the imposition of any such late payment charge by the Plaintiff on the Defendant as alleged in the Complaint would be usurious and otherwise unlawful. REQUEST FOR RELIEF WHEREFORE, the Defendant prays that the Plaintiff take nothing as a result of its Complaint; and that Defendant be awarded its costs including reasonable attorney's fees/costs, if appropriate, and such other and further relief as the Court may deem appropriate in this case. Dated: September 5, 1996 Respectfully submitted, LAW OFFICES OF RANDOLPH STILES, ESQ. By: SS/Randolph Stiles Randolph Stiles, Esq. Attorney for Defendant Datacat, Inc. ..............End Pleading dated 9/5/96..................... ...........Begin Pleading dated 9/10/96..................... Randolph Stiles, Esq. (SBN 62910) LAW OFFICES OF RANDOLPH STILES 12015 Kling Street, #211 North Hollywood, California 91607 818/505-8026 Attorney for Cross-Claimant Datacat, Inc. SUPERIOR COURT FOR THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation, Plaintiff, v. DATACAT, INC., a California corporation and DOES 1 through 25, inclusive, Defendants. DATACAT, INC., a California corporation, Cross-Claimant, v. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation; NASIB GANNAM, an individual; and DOES 1 through 5, Cross-Defendants. Case No. 766 695 CROSS-COMPLAINT BY DEFENDANT DATACAT AGAINST DIVERSIFIED PRINTING AND PUBLISHING SERVICES, GANNAM/KUBAT PUBLISHING, INC. AND NASIB GANNAM FOR DECLARATORY RELIEF AND BREACH OF CONTRACT (Depar(tm)ent 11 - Judge G. Robert Jameson) Plaintiff Datacat, Inc., a California corporation ("Cross- Claimant" or the "Company"), as its cross-complaint ("Cross- Complaint"), including counter and cross-claims against Diversified Printing And Publishing Services, Inc. ("Diversified"), Gannam/Kubat Publishing, Inc. ("G/K") and Nasib Gannam an individual ("Gannam"), alleges as follows: I. THE PARTIES Cross-Claimant is a California corporation which is a resident of and does business in Los Angeles County, California, and elsewhere. Cross-Defendant Diversified Printing And Publishing Services, Inc., a California corporation, is a resident of Orange County, California, and does business in Los Angeles and Orange County, California, and elsewhere. Cross-Defendant Gannam/Kubat Publishing, Inc., a California corporation, is a corporation which, on information and belief, is a resident of Orange County, California and does business in Los Angeles and Orange County, California. Cross-Defendant Nasib Gannam is an individual who, on information and belief, is a resident of and does business in the Counties of Orange and Los Angeles, California, and elsewhere. Does 1 through 5, inclusive, are unknown to Cross-Claimant, which therefore sues said defendants by such fictitious names. Cross-Claimant will amend this Complaint to allege the Doe cross- defendants' true names and capacities when ascertained. Cross-Claimant is informed and believes, and thereon alleges, that each of such fictitiously named Doe cross-defendants is responsible in some manner for the occurrences herein alleged and that Cross-Claimant's damages as herein alleged were proximately caused by said cross-defendants' conduct. II. JURISDICTION/VENUE Jurisdiction is proper in this Court because Diversified has sued the Cross-Claimant in this Court, and because the damages sought to be recovered as a result of this Cross-Complaint exceed $25,000. Venue is proper in this Court because Diversified has sued the Cross-Claimant in this Court, and because Diversified and the other defendants do business in and can otherwise be found in Orange County, California. III. GENERAL ALLEGATIONS Cross-Claimant is in the business of publishing printed catalogs covering heating, ventilation, air conditioning and refrigeration products. Auto-Graphics, Inc., a California corporation ("A-G"), owns 50% of the issued and outstanding stock of Cross-Claimant. G/K owns 50% of the issued and outstanding stock of Cross- Claimant and, on information and belief, Gannam owns or controls 100% of G/K. On information and belief, Gannam owns or controls 100% of Diversified. Diversified is in the business of providing catalog printing and related services to publishers like the Cross-Claimant. On June 12, 1990, A-G and G/K entered into a written agreement a copy of which is attached hereto as Exhibit A (the "Agreement"). The Agreement covered the organization of the Cross-Claimant and, among other things, provided that the Company would purchase printing services from Diversified. Exhibit A, paragraph 9 . In accordance with the Agreement, Cross-Claimant endeavored to and did purchase printing services from Diversified. The Agreement also provides that the Cross-Claimant would purchase composition services from A-G. Exhibit A, paragraph 8. In accordance with the Agreement, Cross-Claimant endeavored to and did purchase composition services from A-G. As a result of Cross-Claimants having purchased printing and composition services from, respectively, Diversified and A-G, prior to October of 1995 the Company had accumulated a substantial payable to each of such stockholder/vendors which it could not pay on a current basis. In July of 1994, at a meeting of the board of directors of the Company, it was proposed that each of the Company's shareholders (A-G and G/K) make a further capital contribution to the Company in an amount which would allow the Company to pay all amounts then due and owing to such stockholder/vendors for current services, and as reasonably contemplated to be due and owing to such affiliated parties for current services anticipated to be rendered to the Company, and other creditors, in the future. In lieu of such proposal, it was suggested and mutually agreed by all representatives of A-G and G/K in attendance at the board meeting, for their respective companies and for and on behalf of the Cross-Claimant, that such stockholder/vendors would forego and/or otherwise defer collection of amounts due and owing by the Company to each of them for current services rendered by such stockholder/vendors to the Company unless and until such time as the Company had sufficient cash to pay all current payables to non-affiliated parties and the remaining available cash would be used, following payment of the Company's obligations for past services, to pay pro rata the current payables due and owing A-G and G/K for current services rendered by such stockholder/vendors to the Company. As an inducement and as partial consideration for A-G's agreement to such deferred payment arrangement and as a condition to A-G's agreement in respect thereof, the Cross-Claimant, with G/K's consent and approval through its two representatives in attendance at the board meeting, confirmed, acknowledged and further agreed that the Company owed A-G $575,000 for past, unpaid database development and maintenance services; and the Company further agreed and promised to execute and deliver to A-G a promissory note representing the Company's obligation to A-G for such past (non-current) database development and maintenance services previously rendered to the Company by A-G. The Cross-Claimant's agreement and promise in favor of A-G was memorialized in a written resolution which was considered, voted upon and approved at the conclusion of the above-referenced July 1994 board meeting, including by G/K's two representatives in attendance at such meeting, a copy of which corporate resolution ("Corporate Resolution") is attached hereto as Exhibit B. Based upon such agreements and promises, A-G agreed to and did continue to provide current composition services to Cross- Claimant; and A-G did not, thereafter, demand or otherwise insist that the Company pay for such composition services on a current basis. Based upon such agreements and promises, G/K caused Diversified and Diversified otherwise agreed to and did provide current printing services to Cross-Claimant; and Diversified did not demand or otherwise insist that the Company pay for such printing services on a current basis - - until approximately February of 1996 when G/K and Diversified notified the Company that all future printing services by Diversified for the Company would have to be paid for on a C.O.D. (cash on delivery) basis and subsequently such payment demand by Diversified was for payment in advance before the commencement of any printing services by Diversified. In February 1996, the amount due and owing by the Cross-Claimant to A-G and to G/K, respectively, for current services rendered by such stockholder/vendors was approximately $300,000 each. Beginning in February 1996, G/K refused to allow Diversified, and Diversified otherwise failed and refused, to provide the Cross-Claimant with any further printing services, except where the Company was willing and able to pay in advance for such services. A-G continued to provide composition services to the Cross- Claimant in accordance with the parties' (the Company, A-G and G/K-Diversified) deferred payment arrangement and agreement. Thereafter, when the Cross-Claimant had insufficient cash with which to pay its non-affiliated vendors for their current services, to pay other non-current obligations including the Company's monthly promissory note obligation to A-G (for past database creation and maintenance services) and with which to pay Diversified in advance for its current printing services, the Company and A-G requested that G/K agree to contribute or loan, on a 50-50 basis with A-G, capital to the Company in the total amount of $100,000 so as to provide the Company with financial resources with which to satisfy Diversified's payment demand and to allow the Company to continue to pay, pro rata, its obligations for current services to A-G and Diversified in their capacity as stockholder/vendors to the Company. G/K refused to enter into such agreement or to otherwise assist the Company to satisfy its financial obligations; and G/K caused Diversified and Diversified otherwise continued to demand that the Company pay in advance for any and all printing services to be rendered by Diversified to the Company. G/K and Diversified's failure and refusal to forego or otherwise defer payment on current services rendered by Diversified to the Company constituted a material breach and default by G/K and Diversified of such parties' deferred payment agreement with, and for the benefit of, the Cross-Claimant. Additionally, Diversified failed and refused to perform and otherwise fulfill its duties and responsibilities to the Cross- Claimant and its customers (including Hasan Alhasawi and Mortemp) in respect of past and proposed printing jobs by Diversified's failure and refusal to return or otherwise deliver to the Company and/or the Company's customers' property held by Diversified for and belonging to the Company and/or its customers previously provided to Diversified in connection with printing jobs including, by way of example, two film covers supplied by Mortemp for use in printing such customer's catalog and film promised by Datacat to Hasan Alhasawi under the terms of the contract between the Company and such customer. Such failure and refusal to release property belonging to the Company and or its customers, following proper notice/demand by the Company to Diversified requesting that such property be returned or otherwise provided to the Company and/or its customers, and constituting the conversion by Diversified of such property, caused and resulted in a material breach and default of Diversified's duties and responsibilities to the Company and/or its customers under the agreement by and between the Cross- Claimant and Diversified whereby Diversified provided printing services to the Company and under the Agreement (Exhibit A) providing that the Company would purchase printing services from Diversified. Such withholding of property by Diversified also constituted a material breach and default by G/K of the Agreement, thereby relieving the Company of any further obligation to purchase printing services from Diversified. The Company maintains and alleges herein that, as a result of Diversified's breach and default of its duties and responsibilities to the Company under the agreement(s) by which Diversified provided and was proposed to provide printing services to the Company and its customers, including the Agreement (Exhibit A), the Company is not obligated to purchase any future printing services from Diversified including under the Agreement. Further, the Cross-Claimant maintains and alleges herein that, in any event, the Company is not required under the Agreement or otherwise to purchase all of its printing services requirements from Diversified. Further, the Cross-Claimant maintains and alleges herein that, as a result of G/K's agreement to cause Diversified to forego or otherwise defer payment, or the right to collect, for current printing services provided by Diversified to the Company (all printing services covered by Diversified's claim against the Company in this action), the Company is not obligated to pay Diversified for any such printing services unless and until the Company has available cash resources sufficient to satisfy all of the Company's obligations to non-affiliated parties, all of the Company's other obligations for non-current services (including the Company's monthly payment obligation to A-G under the promissory note) and the pro rata payment for current services (all services received by the Company on or after July 1994) received by the Company from its stockholder/vendors A-G and G/K. On information and belief, G/K and Diversified and each of them disagree with and dispute the Cross-Claimant's positions as set forth in paragraphs 34, 35 and 36 above. As a result of the disagreements and disputes alleged herein, the Plaintiff believes and herein alleges that a present and actual genuine controversy exists between and among the Cross- Claimant, G/K and Diversified. As a result of such disagreements and disputes, the Cross- Claimant is uncertain as to its rights, entitlements, duties and/or responsibilities to G/K and/or Diversified under the Agreement and otherwise as alleged herein; and the Cross-Claimant brings this action for declaratory relief and otherwise requests that the Court determine, judicially declare and otherwise resolve by its orders and judgment thereon the respective parties' rights, entitlements, duties and responsibilities to one another under the Agreement, the Corporate Resolution and the other agreements alleged herein. Unless and until the Court renders such declaratory relief, on information and belief, the Cross-Claimant believes and alleges that the parties will be otherwise unable to resolve their disagreements and disputes as alleged herein and will, thereby, incur possible future, on-going debts, obligations and liabilities in respect of the parties' respective rights, entitlements, duties and/or responsibilities to one another and/or third parties under the Agreement or otherwise as alleged herein. Defendants G/K, Diversified and Gannam, and each of them, are the agents and representatives of each of such other defendants; G/K and Diversified, and each of such defendants, is the instrumentality and "alter-ego" of Defendant Gannam; Gannam owns and controls G/K and Diversified; and the acts, activities and conduct of G/K and Diversified as alleged herein are attributable to Gannam as the principal, controlling person, authorized representative and/or agent of such corporate defendants and each of them. In accordance with 25 of the Agreement, the party or parties determined by the Court to be the "prevailing" party in this action in respect of the disputes arising under or otherwise in respect of the Agreement as alleged herein is entitled, in addition to whatever other relief such prevailing party may be entitled to under and as a result of the Agreement, to recover its reasonable attorneys' fees and costs as provided for in the Agreement. IV. CAUSES OF ACTION FIRST CAUSE OF ACTION (Breach Of Oral Contract Against G/K And Gannam) Paragraphs 1 through 41 are re-alleged and incorporated herein by this reference. In July 1994, G/K through its authorized representatives, Nasib Gannam and Frank Kubat, entered into an oral agreement with Cross- Claimant, and for the benefit of Cross-Claimant, whereby G/K agreed for itself and Diversified that Diversified would forego and/or defer collection of any amounts due and owing by the Company for future current printing services to be rendered by Diversified to the Company unless and until the Company's available cash was sufficient to pay all non-affiliated obligations, all "non-current" obligations including the Company's monthly promissory note obligation to A-G and, with the remaining cash, to make a pro rata payment to the Company's shareholder/vendors including A-G and Diversified for current services rendered by such affiliates to the Company. Under the terms of such oral agreement, both A-G and Diversified agreed to continue to provide, respectively, such composition and printing services as the Cross-Claimant required from time to time in its business, A-G and G/K would not be required or otherwise requested to make any further capital contribution to the Company to be used by the Company to pay its then current and anticipated future obligations to such stockholder/vendors and, in lieu of any such capital contributions, A-G and Diversified would forego or defer any request for payment by, and/or collection against, the Company for such on-going current services to be rendered by, for and on behalf of such tockholder/vendors to the Company. Cross-Claimant, and A-G, performed and continue to perform all of their obligations under such agreement; and for a period of time following such agreement, G/K and Diversified performed their obligations under such agreement. In February 1996, however, G/K and Diversified refused to provide any further printing services to the Cross-Claimant on the deferred payment basis which had been agreed upon, and on July 22, 1996, G/K caused Diversified to and Diversified otherwise initiated this action against the Company to collect amounts set forth in Diversified's Complaint (which G/K and Diversified had agreed the Company would not be required to pay absent the satisfaction of certain conditions precedent), thereby causing a material breach and default of such agreement by G/K and Diversified. As a result of such breach/default, the Company has been injured and damaged in the amount to be proven at trial, but in no event less than the $360,133 sought by Diversified through its Complaint against the Company in this action. SECOND CAUSE OF ACTION (Breach Of Oral Contract Memorialized In Writing Against G/K And Gannam) Paragraphs 1 through 41 are re-alleged and incorporated herein by this reference. The oral agreement alleged in and as a basis for the Cross- Claimant's First Cause Of Action as set forth herein has been memorialized in the minutes of the proceedings of the meeting of the Company's board of directors. As a result of such breach/default, the Company has been injured and damaged in the amount to be proven at trial but in no event less than the $360,133 sought by Diversified through its Complaint against the Company in this action. THIRD CAUSE OF ACTION (Breach Of Contract Against G/K And Gannam) Paragraphs 1 through 47 and 50 are re-alleged and incorporated herein by this reference. G/K and Gannam's failure and refusal to perform, and to cause Diversified to perform, the agreement alleged as the basis for the Cross-Claimant's First and Second Causes Of Action as set forth herein, constituted a material breach and default by G/K and Gannam under the Agreement (Exhibit A). As a result of such breach/default, the Company has been injured and damaged in the amount to be proven at trial, but in no event less than the $360,133 sought by Diversified through its Complaint in this action. FOURTH CAUSE OF ACTION (Breach Of Oral Contract Against All Defendants Re Printing Services Provided) Paragraphs 1 through 41 are re-alleged and incorporated herein by this reference. Pursuant to an on-going agreement between the Cross-Claimant and G/K and Diversified, including as alleged as the basis for claims by Diversified against the Company such as set forth in the Complaint on file in this action, G/K and Diversified agreed to and did provide certain printing services to the Company. As part of such agreement, G/K and Diversified expressly or implicitly agreed to return to the Cross-Claimant and/or the Company's customer all property provided to Diversified by the Company and/or its customer for purposes of performing such printing services, such as the composition images to be printed by Diversified. On several occasions during the Summer of 1996, pertaining to the Hasan Alhasawi printing job and the Mortemp printing job proposed to be done at Diversified (but in respect of which Diversified failed and refused to perform absent the Company's ability to pay Diversified in advance for such job), the Cross-Claimant demanded and/requested that Diversified return to the Company or its customer property owned and provided to Diversified by the Company and/or the customer for purposes of the performance of such printing jobs; and Diversified failed and refused to return or otherwise deliver such property to the Company and/or its customers thereby intentionally interfering with the Company's performance of its contracts with its customers and Diversified otherwise unlawfully converted such property as its own. The conversion of property by Diversified belonging to the Company and/or its customers resulted in a material breach and default under the agreement whereby Diversified was providing printing services to the Company. As a result of such breach/default, the Company has been injured and damaged in the amount to be proven at trial but in no event less than $25,000. FIFTH CAUSE OF ACTION (Breach Of Contract Against G/K And Gannam Re Printing Services Provided) Paragraphs 1 through 42, and 56 through 59, are re-alleged and incorporated herein by this reference. Diversified's failure and refusal to return property to the Cross- Claimant and/or its customer as alleged as the basis for the Plaintiff's Fourth Cause Of Action, and G/K and Gannam's failure and refusal to cause Diversified to return or otherwise deliver such property to the Company and/or its customer constituted a material breach of and default under the Agreement (Exhibit A) under which Diversified performs printing services for the Company. As a result of such breach/default, the Company has been injured and damaged in the amount to be proven at trial, but in no event less than $25,000. SIXTH CAUSE OF ACTION (Breach Of Implied Covenant Of Good Faith And Fair Dealing Against All Defendants) Paragraphs 1 through 41 are re-alleged and incorporated herein by this reference. The acts and conduct alleged herein constituted a breach of the implied covenant of good faith and fair dealing attendant to and arising out of the agreements alleged herein, including the Agreement (Exhibit A). As a result of such breach of the implied covenant of good faith and fair dealing, the Company has been injured and damaged in the amount to be proven at trial, but in no event less than the $360,133 sought be Diversified through its Complaint in this action. SEVENTH CAUSE OF ACTION (Declaratory Relief Against All Defendants) Paragraphs 1 through 41, 42 and 44 through 65, are alleged and incorporated herein by this reference. As a result of the present and actual genuine controversy existing between and among the Cross-Claimant and the defendants, and each of them, as alleged in this Complaint, the Court is empowered and otherwise authorized to provide, and is hereby requested to provide, under California Code of Civil Procedure Section 1062, et seq., and otherwise, the following declaratory relief: (1) a declaration, order and judgment that the Cross- Claimant is relieved of any and all further obligation of whatsoever nature and kind to purchase printing services from Diversified under the Agreement; (2) a declaration, order and judgment that the Cross- Claimant is not obligated under the Agreement to purchase all of its printing requirements from Diversified; (3) a declaration, order and judgment that the Cross- Claimant is not obligated to pay for the printing services which are the subject of Diversified's Complaint against the Company unless and until the condition precedent to the Company's obligation to pay for such services (cash available to pay (i) all obligations to non-affiliated parties, (ii) the Company's monthly note obligation to A-G and (iii) a pro rata distribution to both A-G on amounts due and owing to such stockholder/vendors for current services) is satisfied; REQUEST FOR RELIEF WHEREFORE, the Cross-Claimant requests the following relief on its Cross-Complaint: 1. On the First Cause Of Action For Breach Of Oral Contract Against G/K and Gannam, for damages according to proof at trial, but in no event less than $360,133; 2. On the Second Cause Of Action For Breach Of Oral Contract Memorialized In Writing Against G/K and Gannam, for damages according to proof at trial, but in no event less than $360,133; 3. On the Third Cause Of Action For Breach Of Contract Against G/K And Gannam, for damages according to proof at trial, but in no event less than $360,133; 4. On the Fourth Cause Of Action For Breach Of Oral Contract Against Diversified, G/K Re Printing Services Provided, for damages according to proof at trial, but in no event less than $25,000; 5. On the Fifth Cause Of Action Against G/K And Gannam Re Printing Services Provided, for damages according to proof at trial, but in no event less than $25,000; 6. On the Sixth Cause Of Action For Breach Of Implied Covenant Of Good Faith And Fair Dealing Against Diversified, G/K And Gannam, for damages according to proof at trial, but in no event less than $360,133; 7. On the Seventh Cause Of Action For Declaratory Relief Against All Defendants, as follows: (i) a declaration, order and judgment that the Cross- Claimant is relieved of any and all further obligation of whatsoever nature and kind to purchase printing services from Diversified under the Agreement; (ii) a declaration, order and judgment that the Cross-Claimant is not obligated under the Agreement to purchase all of its printing requirements from Diversified; and (iii) a declaration; order and judgment that the Cross-Claimant is not obligated to pay for the printing services which are the subject of Diversified's Complaint against the Company unless and until the condition precedent to the Company's obligation to pay for such services (cash available to pay (i) all obligations to non-affiliated parties, (ii) the Company's monthly note obligation to A-G and (iii) a pro rata distribution to both A-G on amounts due and owing to such stockholders/vendors for current services)is satisfied; FURTHER, in respect of all of the above-referenced Causes Of Action, the Cross-Claimant requests further relief including costs of suit including reasonable attorneys' fees as provided for in the Agreement, pre-judgment interest and such other and further relief as the Court deems fair and appropriate under the circumstances. Dated: September 10, 1996 Respectfully submitted, LAW OFFICES OF RANDOLPH STILES, ESQ. ss/Randolph Stiles Randolph Stiles, Esq. Attorney for Cross-Claimant Datacat, Inc. ..............End Pleading dated 9/10/96................... .............Begin Pleading dated 11/7/96................. DIVERSIFIED vs. DATACAT SUMMONS ON CROSS-COMPLAINT (CITATION JUDICIAL) NOTICE TO CROSS-DEFENDANTS ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California corporation, Cross-Defendants, - - and - DATACAT, INC., a California Corporation, Nominal Cross-Defendant and Cross-Defendant YOU ARE BEING SUED BY: CROSS-COMPLAINANTS DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation You have 30 CALENDAR DAYS after this summons is served on you to file a typewritten response at this court. A letter or phone call will not protect you; your typewritten response must be in proper legal form it you want the court to hear your case. If you do not me your response on time, you may lose the case, and your wages, money and property may be taken without further warning from the court. There are other legal requirements. You may want to call an attorney right away. It you do not know an attorney, you may call an attorney referral service or a legal aid office (listed in the phone book). CASE NUMBER 766 695 Judge C. Robert Jameson Dept. 11 The name and address of the court is: Orange County Superior Court 700 Civic Center Drive, West PO Box 1994 Santa Ana, California 92701 County of Orange The name, address, and telephone number of Cross-Complainants attorney, is: GRAHAM AND JAMES LLP (714) 224-2000 KENNETH B. JULIAN, Bar No. 149840 KARL A. SANDOVAL, Bar No. 117111 4675 MacArthur Court, Suite 800 Newport Beach, California 92660 DATE 11/08/96 ALAN SLATER, Clerk, by ANGELA KN0X, Deputy GRAHAM & JAMES LLP ~ Kenneth B. Julian (State Bar # 149840) Karl A. Sandoval (State Bar #170190) 4675 MacArthur Court, Suite 800 Newport Beach, California 92660 (714) 224-2000 Attorneys for Plaintiff/Cross-Defendant/Cross-Complainant DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., Cross-Defendant/Cross-Complainant GANNAM/KUBAT PUBLISHING, INC., Cross-Defendant NASIB GANNAM SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE Case No.: 766695 Assigned For All Purposes To: Honorable G. Robert Jameson Depar(tm)ent 11 CROSS-COMPLAINT BY GANNAM/KUBAT PUBLISHING, INC. AND DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC. AGAINST CROSS-DEFENDANTS AUTO-GRAPHICS, INC. AND ROBERT S. COPE FOR DAMAGES AND INJUNCTIVE RELIEF (BREACH OF FIDUCIARY DUTY, WASTE OF CORPORATE ASSETS, BREACH OF CONTRACT, CONVERSION, FRAUD, CONSTRUCTIVE FRAUD, UNJUST ENRICHMENT, CONSTRUCTIVE TRUST, MONEY HAD AND RECEIVED, ACCOUNTING AND FRAUDULENT CONVEYANCES) DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation, Plaintiff, vs. DATACAT, INC., a California corporation; and DOES 1 through 25, inclusive Defendants. DATACAT, INC. a California corporation, Cross-Claimant, vs. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation GANNAM/KUBAT PUBLISHING, INC., a California corporation; NASIB GANNAM, an individual, and DOES 1 through 5, Cross-Defendants. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation GANNAM/KUBAT PUBLISHING, INC., a California corporation; Cross-Complainants. vs. ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California corporation, Cross-Defendants, - and - DATACAT, INC., a California corporation, Nominal Cross-Defendant and Cross-Defendant. COMES NOW, cross-complainant GANNAM/KUBAT PUBLISHING, INC., suing on its own behalf as well as derivatively on behalf of DATACAT, INC. and cross-complainant DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., suing on its own behalf, and for their Cross- Complaint, allege as follows: A. The Parties. 1. Cross-complainant GANNAM/KUBAT PUBLISHING, INC. ("GK") is and, at all times herein relevant, was a corporation organized and existing under the laws of the State of California. GK is in the publishing business with offices located in the County of Orange, State of California. GK is owned by cross-defendant NASIB GANNAM ("MR GANNAM"). 2. Cross-complainant DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC. ("DIVERSIFIED") is and, at all times herein relevant, was a corporation organized and existing under the laws of the State of California. DIVERSIFED is in the printing business with offices located in the County of Orange, State of California. DIVERSIFIED also is owned by MR. GANNAM. 3. Nominal cross-defendant DATACAT, INC. ("DATACAT") is and, at all times herein relevant, was a corporation organized and existing under the laws of the State of California. DATACAT is in the business of publishing printed catalogs, primarily for heating, air conditioning, refrigeration and related products. 4. Cross-complainants GK and DIVERSIFIED (collectively "Cross- Complainants") are informed and believe, and thereon allege, that cross-defendant AUTO-GRAPHICS, INC. ("AG") is and, at all times herein relevant, was a public corporation organized and existing under the laws of the State of California, doing business in the County of Orange. 5. Cross-Complainants are informed and believe, and thereon allege, that Cross-defendant ROBERT S. COPE ("MR. COPE") is and, at all times herein relevant, was the Chairman of the Board of Directors of DATACAT and the majority owner, President, and a controlling director of AG. 6. The true names and capacities, whether individual, corporate, associate, or otherwise, of the cross-defendants sued herein as ROES 1 through 25, inclusive, are unknown to Cross-Complainants, which therefore sue said cross-defendants by such fictitious names. Cross-Complainants will amend this Cross-Complaint to allege said cross-defendants' true names and capacities when ascertained. Cross-complainants are informed and believe, and thereon allege, that each of such fictitiously named cross- defendants is responsible in some manner for the occurrences herein alleged and that Cross-Complainants' damages as herein alleged were proximately caused by said cross-defendants' conduct. 7. Cross-Complainants are informed and believe, and thereon allege, that cross-defendants AG, MR. COPE, and ROES 1 through 25, inclusive (collectively "Cross-Defendants"), were the agent, partner, officer, and/or employee of each of their co-Cross- Defendants and, in doing the things hereinafter alleged, were acting within the course and scope of such agency, partnership, office, and/or employment. B. FACTUAL BACKGROUND 8. In or about 1989, GK was the owner of a valuable database (the "Database") containing information useful for producing printed catalogs for heating, air conditioning, refrigeration and related products. In or about mid-1989, GK and AG commenced discussions regarding the possible formation of a company to produce catalogs for the referenced products, whereby GK would contribute the Database, and AG would contribute certain Database development and maintenance services. 9. On or about June 12, 1990, GK and AG entered into a shareholders agreement (the "Shareholders Agreement") for the formation of DATACAT. A true and correct copy of the Shareholders Agreement is attached hereto as Exhibit "A" and is incorporated herein by this reference as though set forth in full. Effective on or about September 27, 1990, DATACAT was formed and incorporated, and adopted the Shareholders Agreement. 10. Pursuant to the Shareholders Agreement, GK and AG each respectively own, and have owned, 50% of the shares of DATACAT. Under that agreement, AG had right to appoint, and did appoint, the majority of DATACAT's Board of Directors (the "Board"). In addition to a mutual cash capital contribution, GK contributed the Database, and AG was to contribute certain services and labor for development and maintenance of the Database. 11. Pursuant to Paragraphs 8 and 9 of the Shareholders Agreement, DATACAT is and was required to purchase all catalog printing services from DIVERSIFIED, and to purchase all catalog composition services from AG. Under the shareholders Agreement, DIVERSIFIED and AG were to bill DATACAT for such services at reasonable and customary prices, and DATACAT was required to pay DIVERSIFIED and AG for such services, consistent with Paragraphs 8 and 9 of said agreement. 12. Cross-Complainants are informed and believe, and thereon allege that, at all relevant times, Michele Clark ("Ms. Clark") is and was employed fu11-time as the controller and/or assistant controller of AG and was under the direction and control of MR. COPE and AG. 13. Cross-Complainants are informed and believe, and thereon allege that, at all relevant times, a relationship of trust and confidence existed between AG, on the one hand, and DATACAT and GK, on the other, in that AG was entrusted by DATACAT and GK to handle, and did handle, all of DATACAT's bookkeeping, accounts payable, and other financial matters and, at all times, DATACAT and GK entrusted AG to perform these functions in accordance with the Shareholders agreement, the direction of the Board, and applicable law. 14 As a matter of practice, and the agreement of GK and AG, all moneys received by DATACAT were required first to be used to meet payroll and other necessary expenses, and to pay third-party creditors. Any excess funds were then to be applied to the invoices of DIVERSIFIED and AG for printing and composition services rendered, on an equal priority and roughly dollar-for- dollar basis. 15. Cross-Complainants are informed and believe, and thereon allege, that during the 1990 through 1993 time-frame, through mismanagement, miscalculations, and inefficiencies, AG experienced certain cost overruns on DATACAT-related projects and database services. On information and belief, during this period of time, AG also experienced a down-turn in the profitability of other aspects of its business, independent of DATACAT-related projects. 16. Cross-Complainants are informed and believe, and thereon allege that, in late 1993 and early 1994, Cross-Defendants, and each of them, demanded that AG receive additional compensation for services allegedly rendered, prior to 1994, for development and maintenance of the Database in the amount of several hundred thousand dollars (the "Database Recovery Demands"). On information and belief, the Database Recovery Demands were grossly over inflated, and contained proposed charges to DATACAT for services which AG was under an obligation to render free of charge as part of its initial capital contribution under the Shareholders Agreement, and for other items not properly or appropriately chargeable to DATACAT. 17. Cross-Complainants are informed and believe, and thereon allege, that a special meeting of the Board was held on or about July 28, 1994 (the "Board Meeting"), at the offices of AG. Among other items, the agenda proposed consideration of "Auto-Graphics Pre-1994 Database Recovery Issue." In this regard, AG provided GK with a memorandum outlining AG's latest Database recovery proposal (the "Database Recovery Memorandum"). A true and correct copy of the Database Recovery Memorandum is attached hereto as Exhibit "B" and is incorporated herein by this reference as though set forth in full. On information and belief, the Database Recovery Memorandum was prepared by Robert Bretz ("Mr. Bretz"), then a member of AG's Board of Directors. 18. The Database Recovery Memorandum proposed, among other things, that DATACAT pay to AG $575,000 for past "development and maintenance" work allegedly performed by AG on the Database from 1990 through December 31, 1993. The Database Recovery Memorandum further provided that the $575,000 was to be recovered from certain module selection fees, increased growth margins, and other AG "cost savings," and was to be paid over approximately three years (the "AG Database Recovery Proposal"). 19. During the Board Meeting on July 28, 1994, MR. GANNAM, and Frank Kubat ("Mr. Kubat"), another member of the Board and then President of DATACAT, rejected the AG Database Recovery Proposal. 20. After further discussion, in the spirit of compromise and cooperation, MR. GANNAM made a compromise proposal (the "GK Compromise Proposal") under which AG could recover some portion of the costs it was claiming for Database Recovery to be paid primarily out of any future profits of DATACAT (i.e., after necessary expenses and after DIVERSIFIED and AG were paid for their respective printing and composition services). At that time, AG, through MR. COPE and Mr. Bretz, would not agree to the GK Compromise Proposal, and the Board Meeting terminated without any agreement being reached with respect to Database Recovery. 21. On August 3, 1994, Mr. Bretz, on behalf of AG, made a counter-proposal to the GK Compromise Proposal which reduced the amount of proposed Database Recovery from $575,000 to $500,000, and changed other terms and conditions (the "AG Database Recovery Counter-Proposal"). A true and correct copy of a letter from Mr. Bretz, dated August 3, 1994, making the AG Database Recovery Counter-Proposal is attached hereto as Exhibit "C" and is incorporated herein by this reference as though set forth in full. No board meeting, or shareholders meeting, was ever held to discuss, adopt, or vote on the AG Database Recovery Counter- Proposal, or any other such further proposal. Nor did GK, Mr. Gannam, or Mr. Kubat ever give their consent to the AG Database Recovery Counter-Proposal, or any other such further proposal. 22. Cross-Complainants are informed and believe, and thereon allege, that sometime in late 1994 and early 1995, Cross- Defendants, and each of them, took advantage of the trust and confidence placed in AG with respect to DATACAT's financial affairs, and secretly, and without the consent, knowledge, or approval of the Board, Mr. Gannam, Mr. Kubat, or GK, Cross- Defendants began to misappropriate, misapply, and unlawfully divert to AG moneys belonging to DATACAT. Specifically, on information and belief, in early 1995, Cross-Defendants misappropriated, misapplied, and unlawfully diverted to AG moneys belonging to DATACAT in the sum of (1) $33,749 in January, (2) $67,769 in March, (3) $26,257 in April, (4) $15,972 in May, and (5) $15,972 in June, totaling almost $160,000. 23. Cross-Complaints are informed and believe, and thereon allege, that in early 1995, Mr. Kubat discussed with MR. COPE the lack of any agreement with respect to Database Recovery and other financial issues involving AG and DATACAT. During said conversations, MR. COPE concealed and failed to disclose to Mr. Kubat that Cross-Defendants, and each of them, had misappropriated, misapplied, and unlawfully diverted, and were continuing to misappropriate, misapply, and unlawfully divert the above-referenced funds of DATACAT. 24. Cross-Complaints are informed and believe, and thereon allege, that in or about June 1995, after Cross-Defendants had misappropriated almost $160,000, Mr. Bretz set-up a meeting with Mr. Kubat. At the meeting, Mr. Bretz informed Mr. Kubat for the first time that AG had taken and appropriated moneys from DATACAT`s accounts. 25. Cross-Complaints are informed and believe, and thereon allege, that shortly after the meeting with Mr. Bretz, Mr. Kubat asked Ms. Clark about the misappropriated funds. At that time, Ms. Clark told Mr. Kubat that MR. COPE instructed her take the above- referenced sums from DATACAT and pay them to AG, or words to that effect. On information and belief, Cross-Defendants caused unauthorized entries to be made in the books and records of DATACAT to cover-up, justify, and legitimize the referenced misappropriated funds. 26. Additionally, on or about July 18, 1995, Mr. Bretz drafted a letter which falsely stated that the DATACAT "Board formally approved payment by DATACAT of $575,000 over a three year period in equal monthly payments commencing September 1, 1994, and that such agreement has been properly performed by DATACAT pursuant to such prior Board approval and authority" and attached a proposed DATACAT Resolution ratifying Cross-Defendants' unlawful misappropriation of DATACAT's funds (the "Proposed Ratifying Resolution"). A true and correct copy of that letter and proposed resolution are attached hereto collectively as Exhibit "D" and are incorporated herein by this reference as though set forth in full. No board meeting, or shareholders meeting, was ever held to discuss, adopt, or vote on the Proposed Ratifying Resolution and GK, MR. GANNAM, and Mr. Kubat did not give, and would not give their consent, for DATACAT to ratify or retroactively approve of the unlawful conduct of Cross-Defendants, as alleged herein. 27. After learning of Cross-Defendants' fraud and misappropriation of funds, GK and Mr. Kubat demanded that Cross-Defendants immediately cause said moneys to be restored to DATACAT, but Cross-Defendants have failed and refused, and continue to fail and refuse, to restore such funds to DATACAT. Additionally, even after the Cross-Defendants' fraud was exposed, and over the objections of GK, MR. GANNAM, and others, on information and belief, Cross- Defendants continued to misappropriate, misapply, and unlawfully divert additional sums from DATACAT, at a rate of $15,972 per month, to AG during the time period July 1995 through the present, totaling over $250,000. Hence, as of the filing of this Cross- Complaint, on information and belief, Cross-Defendants, and each of them, have caused the misappropriation, misapplication, and unlawful diversion of over $410,000 from DATACAT to AG (the"Misappropriated Funds"). 28. As a direct and proximate result of Cross-Defendants' conduct, DATACAT has suffered financial hardship and has been unable to pay DIVERSIFIED for printing services rendered. 29. Despite the demands of Cross-Complainants, and each of them, as well as MR. GANNAM and others, Cross-Defendants, and each of them, have failed and refused, and continue to fail and refuse, to refrain from taking $15,972 per month from DATACAT and paying it to AG. 30. Cross-Complainants allege on information and belief, that Cross-Defendants, and each of them, have dominated and controlled the operations of DATACAT, and have appropriated, used, and transferred, DATACAT's assets and resources to AG unlawfully and without Board approval. 31. Any formal demand made by GK to DATACAT's Board is excused since such a demand would have been a futile and useless act for the following reasons: (1 ) AG has the right to appoint, and has appointed, a majority of the Board, which consists of MR. COPE, his son Paul Cope, and another director affiliated with AG (the "AG-Affiliated Directors"); (2) The Chairman of the Board, MR. COPE, is accused of committing and/or conspiring to commit the wrongs complained of in the Cross-Complaint; (3) The wrongful acts of Cross-Defendants constitute violations of law and fiduciary duties which conduct is incapable of ratification; (4) The AG Affiliated Directors cannot be relied upon to reach an independent decision as to whether to commence the demanded actions against Cross-Defendants because these directors are controlled by MR. COPE, and have consistently acceded to and will continue to accede to his directives and demands and such control by MR. COPE has impaired the ability of the AG-Affiliated Directors to exercise their own business judgment and rendered them incapable of reaching an independent judgment as to whether to accept the demands of Cross-Complainants; and (5) On information and belief, the AG-Affiliated Directors have long been aware of the wrongdoing of Cross-Defendants, as alleged herein, but have chosen not to protect DATACAT or seek to recover the misappropriated funds, and have refused to take action with respect to these claims because any such action would require them to sue themselves (Paul Cope would have to sue his father) and affiliated enterprises. 32. A true and correct copy of this Cross-Complaint was hand- delivered to DATACAT, prior to its filing with the Court. I. FIRST CAUSE OF ACTION (By GK Individually And Derivatively On Behalf Of DATACAT Against All Cross-Defendants For Breach of Fiduciary Duty) 33. Cross-Complainants reallege and incorporate herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 32, inclusive, of this Cross- Complaint. 34. GK is informed and believes, and thereon alleges, that by virtue of MR. COPE's position as Chairman of the Board and AG's status as a controlling shareholder of DATACAT, they owed fiduciary duties to DATACAT and to GK to exercise due care and honesty in the management, administration and operation of DATACAT's affairs and in their dealings with GK. Furthermore, by virtue of his position as Chairman of the Board, MR. COPE owed a fiduciary duty to DATACAT and to GK, not to favor his own interests, or the interests of AG, at the expense of DATACAT or GK. AG further owed a fiduciary duty as trustee of DATACAT's financial matters and custodian of its financial books and records as alleged herein. 35. Nevertheless, commencing in late 1994, and early 1995, Cross- Defendants, and each of them, secretly and unlawfully caused the misappropriated the funds of DATACAT, as alleged herein. The actions of Cross-Defendants, and each of them, in taking the misappropriated funds, constituted ultra vires actions, which were without notice to, or approval of, the Board or GK, and resulted in unauthorized and secret transactions in favor of Cross- Defendants, and each of them. Cross-Defendants, and each of them, later engaged in conduct to attempt to cover-up and legitimize the taking of the misappropriated funds, including, without limitation, causing unapproved and unauthorized entries in the financial books and records of DATACAT, and knowingly and falsely taking the position that the Database Recovery Proposal was adopted and approved by the Board at the Board Meeting of July 28, 1994. 36. GK further is informed and believes, and thereon alleges, that the unlawful and unauthorized taking of the misappropriated funds by Cross-Defendants, and each of them, constitutes self dealing, and represents a clear conflict of interest on the part of Cross-Defendants, and each of them, in breach of their fiduciary duties to DATACAT and GK. On information and belief, Cross-Defendants, and each of them, continue to engage in such self-dealing conduct, despite a demand that they cease such conduct and return the misappropriated funds to DATACAT. 37. Cross-Defendants therefore have breached their fiduciary duties as directors, de facto officers, controlling shareholders, and/or trustees of DATACAT's financial affairs in numerous respects, and have failed to exercise that requisite degree of care, skill, honesty and obedience to law and good faith which persons similarly situated would have exercised, as required by applicable law. 38. As the result of the Cross-Defendants' breaches of their fiduciary duties, DATACAT and GK have been damaged in a sum according to proof at trial. Furthermore, GK is entitled to injunctive relief to prevent Cross-Defendants, and each of them, from further misappropriating and dissipating the assets of DATACAT, without proper authorization of the Board. 39. GK is informed and believes, and thereon alleges, that Cross- Defendants, and each of them, in doing the acts herein alleged, acted with malice, oppression, fraud, and in conscious disregard of the rights of DATACAT and GK, such that DATACAT and GK are entitled to an award of punitive and exemplary damages against Cross-Defendants, each of them, in a sum according to proof at trial. II. SECOND CAUSE OF ACTION (By GK Individually And Derivatively On Behalf of DATACAT Against All Cross-Defendants For Waste of Corporate Assets) 40. GK realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 39, inclusive of this Cross-Complaint. 41. GK is informed and believes, and thereon alleges, that Cross- Defendants, and each of them, misappropriated and converted for AG's use and benefit the misappropriated funds, as alleged herein, and therefore have caused the dissipation and waste of DATACAT's corporate assets. By reason of their wrongful conduct, as alleged herein, Cross-Defendants, and each of them, have wasted DATACAT's valuable assets and otherwise caused DATACAT to be unable to meet its financial obligations to DIVERSIFIED and other creditors and, as a result of such conduct, DATACAT and GK have been substantially damaged. 42. As a proximate result of the conduct of Cross-Defendants, and each of them, DATACAT and GK have sustained damage in an amount according to proof at trial. Furthermore, GK is entitled to injunctive relief to prevent the further misappropriation funds by Cross-Defendants, to prevent the further transferring, dissipating, wasting, and misuse of any of DATACAT's assets and property without proper authorization of the Board, and ordering AG to restore all misappropriated funds to DATACAT. 43. GK is informed and believes, and thereon alleges, that Cross- Defendants, and each of them, acted with malice, oppression, fraud, and in conscious disregard of the rights of DATACAT and GK, such that DATACAT and GK are entitled to an award of punitive and exemplary damages in an amount according to proof at trial. . III. THIRD CAUSE OF ACTION (By GK Individually And Derivatively On Behalf of DATACAT, And By DIVERSIFIED Against AG For Breach Of The Shareholder Agreement) 44. Cross-Complainants, and each of them, reallege and incorporate herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 43 inclusive, of this Cross-Complaint. 45. Pursuant to the Shareholder Agreement, and the subsequent agreement of the parties, AG was entrusted to handle the day-to- day financial affairs of DATACAT and was entrusted with custody of financial books and records. AG breached the Shareholder Agreement by unlawfully misappropriating, diverting, and taking funds from DATACAT, and converting them to its own use and benefit. AG further breached the Shareholder Agreement by failing and refusing to return such misappropriated funds, and by failing and refusing to cease from further misappropriating the funds of DATACAT. 46. At all relevant times, DIVERSIFIED was an express third-party beneficiary of the Shareholder Agreement. AG further breached paragraph 9 of the Shareholder Agreement by taking steps to prevent DATACAT from paying DIVERSIFIED for printing services rendered in connection with DATACAT's projects, including, without limitation, taking above-referenced misappropriated funds. Pursuant to paragraph 9 of the Shareholder Agreement, DATACAT was required to purchase all printing services from DIVERSIFIED. In or about August, 1996, AG further breached the Shareholder Agreement by preventing DATACAT from sending its printing jobs and projects to DIVERSIFIED and caused DATACAT to cease using DIVERSIFIED for its printing on DATACAT projects. 47. Cross-Complainants, and each of them, have fully performed all acts, services, and conditions required by the Shareholder Agreement and have made a demand upon AG to return the misappropriated funds, to cease from further misappropriating the funds of DATACAT, to pay DIVERSIFIED monies owed for printing services and to cause DATACAT to continue to print with DIVERSIFIED, but Cross-Defendants, and each of them, have failed and refused to accede to such demands. 48. As a proximate result of the acts of the Cross-Defendants, and each of them, in breaching the Shareholder Agreement, Cross- Complainants, and each of them, have been damaged in an amount according to proof at trial. IV. FOURTH CAUSE OF ACTION (By GK Individually And Derivatively On Behalf of DATACAT Against All Cross-Defendants For Conversion) 49. Cross-Complainant GK realleges incorporates herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 48, inclusive, of this Cross- Complaint. 50. GK is informed and believes, and thereon alleges, that Cross- Defendants, and each of them, misappropriated, misapplied, and diverted to AG large sums of money belonging to DATACAT, as alleged herein, and have converted such sums for AG's use and benefit. On information and belief, Cross-Defendants, and each of them, acted secretly and fraudulently in taking the misappropriated funds, and have utilized such funds in favor of AG for purposes not disclosed, authorized, sanctioned or approved by the Board, and in violation of the Shareholder Agreement, and other applicable law. 51. Notwithstanding GK's demands for repayment of the misappropriated funds, Cross-Defendants, and each of them, have failed and refused, and continue to fail and refuse, to repay the converted funds to DATACAT. As a result of said conversion of funds, by Cross-Defendants, and each of them, DATACAT and GK have been damaged in a sum according to proof at trial. Furthermore, GK is entitled to injunctive relief to prevent the Cross-Defendants, and each of them, from further appropriating and diverting the funds of DATACAT without proper authorization. 52. GK is informed and believes, and thereon alleges, that Cross- Defendants, and each of them, acted with malice, oppression, and fraud and in conscious disregard of the rights of DATACAT and GK and others, such that DATACAT and GK are entitled to an award of punitive and exemplary damages in an amount subject to proof at trial. V. FIFTH CAUSE OF ACTION (By GK Individually And Derivatively On Behalf Of DATACAT Against All Cross-Defendants For Fraud) 53. GK realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 52, inclusive, of this Cross-Complaint. 54. By virtue of their respective positions as Chairman of the Board and/or controlling shareholders of DATACAT, and the trust and confidence placed in AG with respect to DATACAT's financial matters, Cross-Defendants, and each of them, had a duty to disclose to GK and DATACAT their diversion and taking of the misappropriated funds. By virtue of the contractual relationship between GK and AG, the covenant of good faith and fair dealing implied therein, and other applicable law, AG further owed a duty to GK to disclose fully the taking of the misappropriated funds 55. GK is informed and believes, and thereon alleges that, from late 1994 through mid 1995, Cross-Defendants took the misappropriated funds and failed to disclose, suppressed, and concealed to material facts concerning the misappropriated funds in their continued dealings with GK and DATACAT with intent to defraud DATACAT and GK. Cross-Defendants, and each of them, further created a duty to disclose fully to Cross-Defendants, and each of them, the existence, nature, and scope of their taking of the misappropriated funds, in early 1995, when MR. COPE undertook to speak to Mr. Kubat on various financial matters with respect to AG and DATACAT, including, without limitation, Database Recovery, but failed to disclose and concealed the taking of such funds. 56. Cross-Complainants are informed and believe, and thereon allege, that Cross-Defendants, and each of them, breached their respective duties to disclose to GK and DATACAT the material facts concerning the misappropriated funds. GK is informed and believes, and thereon alleges, that Cross-Defendants, and each of them, took the misappropriated funds and made the omissions concerning said funds, with the intent to defraud GK and DATACAT, to fraudulently and unjustly enrich AG, and to deprive DIVERSIFIED and GK of monies lawfully owing to them under the Shareholders Agreement. 57. During the time of Cross-Defendants' fraudulent conduct, GK was unaware of the true facts, and would have taken steps to recover the misappropriated funds, to prevent further misappropriation of funds, and to obtain monies lawfully owing to GK and DIVERSIFIED under the Shareholder Agreement. 58. As a proximate result of the fraudulent conduct of Cross- Defendants, and each of them, as alleged herein, DIVERSIFIED has been deprived of monies owing it under the Shareholder Agreement, DATACAT has been deprived of funds necessary for its operations, and GK and DATACAT otherwise have been damaged in an amount according to proof at trial. 59. GK is informed and believes, and thereon alleges, that in doing the acts alleged above, Cross-Defendants, and each of them, acted fraudulently, in bad faith, and with a deliberate intent to vex, injure and annoy GK and acted in conscious disregard of GK's and DATACAT's rights. The actions of Cross-Defendants, and each of them, therefore constitute despicable conduct and justify the imposition of punitive and exemplary damages. VI. SIXTH CAUSE OF ACTION (By GK Individually And Derivatively On Behalf Of DATACAT Against All Cross-Defendants For Constructive Fraud) 60. GK realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 59, inclusive, of this Cross-Complaint. 61. In the alternative, and in addition to the forgoing, the actions of Cross-Defendants in taking the misappropriated funds, concealing and failing to disclose same to GK and DATACAT, and later attempting to cover-up such conduct, constitutes constructive fraud in view of their respective fiduciary duties to GK and DATACAT, and the trust and confidence GK and DATACAT placed in AG with respect to DATACAT's financial affairs. 62. GK is informed and believes, and thereon alleges, that Cross- Defendants, and each of them, took the misappropriated funds and made the omissions concerning the misappropriated funds, with the intent to defraud GK and DATACAT, to fraudulently and unjustly enrich AG, and to deprive DIVERSIFIED and GK of monies lawfully owing them under the Shareholders Agreement. 63. During the time of Cross-Defendants' fraudulent conduct, GK was unaware of the true facts, and would have taken steps to recover the misappropriated funds, to prevent further misappropriation of funds, and to obtain monies lawfully owing to GK and DIVERSIFIED under the Shareholder Agreement. 64. As a proximate result of the fraudulent conduct of Cross- Defendants, and each of them, as alleged herein, DIVERSIFIED has been deprived of monies owing it under the Shareholder Agreement, DATACAT has been deprived of funds necessary for its operations, and GK and DATACAT otherwise have been damaged in an amount according to proof at trial. 65. GK is informed and believes, and thereon alleges, that in doing the acts alleged above, Cross-Defendants, and each of them, acted fraudulently, in bad faith, and with a deliberate intent to vex, injure and annoy GK and acted in conscious disregard of GK's and DATACAT's rights. The actions of Cross-Defendants, and each of them, therefore constitute despicable conduct and justify the imposition of punitive and exemplary damages. VII. SEVENTH CAUSE OF ACTION (By GK Individually And Derivatively On Behalf Of DATACAT Against All Cross-Defendants For Unjust Enrichment/Constructive Trust) 66. GK realleges and incorporates herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 65, inclusive, of this Cross-Complaint. 67. As alleged herein, GK and DATACAT entrusted AG to manage certain financial affairs on behalf of DATACAT and was entrusted to manage and use such funds for the benefit of DATACAT for lawful and approved purposes, consistent with the Shareholder Agreement, and for purposes approved by the Board. Cross-Defendants, and each of them, have been unjustly enriched at the expense of DATACAT and GK by the diversion of the misappropriated funds to AG, as alleged herein, despite AG's undertaking to receive and control such funds on behalf of DATACAT, in trust. 68. As a proximate result of unjust enrichment of Cross- Defendants, and each of them, GK and DATACAT are entitled to receive restitution of any of the benefits received by Cross- Defendants in connection with their, direct and indirect, receipt of the misappropriated funds, including, but not limited to, the amount of the misappropriated funds and any other amount to be proven at trial, plus accrued interest thereon. 69. By virtue of Cross-Defendants' unjust enrichment, GK and DATACAT are entitled to have a constructive trust imposed upon the misappropriated funds, and any other such funds, received for the direct and indirect benefit of Cross-Defendants, and each of them, and/or their agents, assignees, or transferees, in connection with the moneys entrusted to and misappropriated by Cross-Defendants. VIII. EIGHTH CAUSE OF ACTION (By GK Individually And Derivatively On Behalf Of DATACAT Against AG For Money Had And Received) 70. Cross-Complainants reallege and incorporate herein by this reference as though set forth in full each and every allegation contained in paragraphs 1 through 39, inclusive, of this Cross- Complaint. 71. Cross-Complainants are informed and believe, and thereon allege, that within the last four years, AG became indebted to DATACAT in the principle sum of approximately $410,000, for money had, received and taken by AG for its use and benefit, without the approval or consent of the Board, as alleged herein. 72. Despite demand for the full amount due and owing, no part of said sum has been paid, and there is now due, owing, and unpaid to DATACAT the principle sum of approximately $410,000, plus interest thereon at the legal rate. IX. NINTH CAUSE OF ACTION (By GK Individually And Derivatively On Behalf Of DATACAT Against All Cross-Defendants For An Accounting) 73. GK realleges and incorporates herein by this reference each and every allegation contained in paragraphs 1 through 72, inclusive, of this Cross-Complaint herein as though set forth in full. 74. Cross-Complainant has performed and fulfilled all of the covenants and obligations required to be performed by it under the Shareholder Agreement, except as to those which have been excused. 75. Cross-Complainant is informed and believes, and thereon alleges, that as a result of Cross-Defendants' misdeeds as alleged hereinabove, Cross-Defendants have wrongfully and unlawfully taken moneys belonging to DATACAT and misappropriated them for AG's use and benefit, without the knowledge or approval of the Board. 76. Despite due demand therefor, Cross-Defendants, and each of them, have failed and refused to account for said sums. Cross- Complainants therefore are entitled to an accounting of all sums taken or received by AG from DATACAT. X. TENTH CAUSE OF ACTION (By Cross-Complainants Against All Cross-Defendants For Fraudulent Transfers) 77. Cross-Complainants reallege and incorporate herein by this reference, as though set forth in full, each and every allegation contained in paragraphs 1 through 76, inclusive, of this Cross- Complaint. 78. Within the last four years, DATACAT became indebted to DIVERSIFIED for printing and publishing services rendered, and associated freight charges and other costs, in the sum of approximately $360,132.76, plus interest at the legal rate. 79. Cross-Complaints are informed and believe, and thereon allege, that from approximately early 1994 through the present, AG has unlawfully transferred approximately $410,000 of moneys belonging to DATACAT, entrusted to the control of AG for DATACAT's benefit, to AG's own accounts. DIVERSIFIED further is informed and believes, and thereon alleges, that AG's transfer of such funds was made with the actual intent to hinder, delay, and defraud DIVERSIFIED in collection of its receivables for printing and publishing services rendered, and related costs. 80. As a proximate result of the fraudulent transfers made by Cross-Defendants, and each of them, DATACAT has been financially unable to pay DIVERSIFIED and other creditors for moneys owing to them. As a further proximate result of the fraudulent transfers made by Cross-Defendants, and each of them, Cross-Complainants have been damaged in a sum according to proof at trial. 81. Cross-Complainants are informed and believe, and thereon allege, that the above referenced transfers were made, with the intent to defraud Cross-Complaints, and with intent to injure Cross-Complainants and to deprive them of the benefits of the Shareholder Agreement. 82. Cross-Complainants are informed and believe, and thereon allege, that in doing the acts alleged above, Cross-Defendants, and each of them, acted fraudulently, in bad faith, and with a deliberate intent to vex, injure and annoy Cross-Complainants and acted in conscious disregard of their rights. The actions of Cross-Defendants, and each of them, therefore constitute despicable conduct and justify the imposition of punitive and exemplary damages. WHEREFORE, Cross-Complainant GK, individually and derivatively on behalf of DATACAT, and Cross-Complainant DIVERSIFIED, prays for judgment against Cross-Defendants, and each of them, as follows: 1. For compensatory damages according to proof at trial; 2. For punitive and exemplary damages on the First, Second, Fourth, Fifth, Sixth, and Tenth Causes of Action; 3. For an accounting of all sums paid to AG from DATACAT; 4. For interest on all sums at the legal rate; 5. For costs of suit incurred herein; 6. For reasonable attorneys' fees pursuant to the Shareholder Agreement, Cal. Civ. Code 1717 and other applicable law; and 7. For such other and further relief as the Court may deem just and proper. DATED: November 7, 1996 GRAHAM & JAMES LLP By: ss/ Kenneth B. Julian KENNETH B. JULIAN Attorneys for Plaintiff/Cross-Defendant/Cross Complainant DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., Cross Defendant/Cross-Complainant GANNAM/KUBAT PUBLISHING, INC., Cross Defendant NASIB GANNAM ...........End Pleading dated 11/7/96....................... ...............Begin Pleading dated 11/8/96................. GRAHAM & JAMES LLP Kenneth B. Julian (State Bar # 149840) Karl A. Sandoval (State Bar # 170190) 4675 MacArthur Court, Suite 800 Newport Beach, California 92660 714) 224-2000 Attorneys for Plaintiff/Cross-Defendant/Cross-Complainant DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., Cross-Defendant/Cross-Complainant GANNAM/KUBAT PUBLISHING, INC., Cross-Defendant NASIB GANNAM SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE DIVERSIFIED PRINTING AND Case No.: 766695 PUBLISHING SERVICES, INC., a California corporation, Assigned For All Purposes To: Honorable G. Robert Jameson Department 11 vs. ANSWER BY DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., DATACAT, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., and DOES 1 through 25, inclusive, AND NASIB GANNAM TO CROSS- COMPLAINT BY DATACAT, INC. Defendants. DATACAT, INC. a California corporation, Cross-Claimant, vs. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation; NASIB GANNAM, an individual, and DOES I through 5, Cross-Defendants. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation, Cross-Complainants, vs. ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California corporation, Cross-Defendants, - - and - DATACAT, INC., a California corporation, Nominal Cross-Defendant and Cross-Defendant. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., GANNAM/KUBAT PUBLISHING, INC., and NASIB GANNAM (collectively the "Cross-Defendants") hereby answer the Cross-Complaint (the "Cross-Complaint") by Cross-Complainant DATACAT, INC. ("Cross-Complainant"), as follows: GENERAL DENIAL Pursuant to California Code of Civil Procedure 431.30(d), Cross- Defendants deny, generally and specifically, each and every allegation of the Cross-Complaint, each cause of action therein, and each and every part thereof, and deny that Cross-Complainant has been damaged in any manner or sum or is entitled to any relief whatsoever thereon. AFFIRMATIVE DEFENSES FIRST AFFIRMATIVE DEFENSE (Failure To State A Claim) 1. Cross-Complainant's causes of action, and each of them, fail to state facts sufficient to constitute a cause of action against the answering Cross-Defendants. SECOND AFFIRMATIVE DEFENSE (Limitation of Actions) 2. Cross-Complainant's causes of action, and each of them, are barred by the applicable statutes of limitation, including, without limitation, C.C.P. 337,338, 339, 340, and 343. THIRD AFFIRMATIVE DEFENSE (Estoppel) 3. Cross-Complainant's causes of action, and each of them, are barred by the doctrine of estoppel. FOURTH AFFIRMATIVE DEFENSE (Waiver) 4. Cross-Complainant's causes of action, and each of them, are barred by the doctrine of waiver. FIFTH AFFIRMATIVE DEFENSE (Laches) 5. Cross-Complainant's delay in commencing this suit was unreasonable and inexcusable and has caused substantial prejudice to Cross-Defendants. Cross-Complainant's purported causes of action, and each of them, therefore are barred in whole or in part by the doctrine of laches. SIXTH AFFIRMATIVE DEFENSE (Unclean Hands) 6. Cross-Complainant's causes of action, and each of them, are barred by the doctrine of unclean hands. SEVENTH AFFIRMATIVE DEFENSE (Privilege) 7. Cross-Complainant's causes of action, and each of them, are barred by the doctrine of privilege. EIGHTH AFFIRMATIVE DEFENSE (Full Performance) 8. Cross-Complainant's causes of action, and each of them, are barred because Cross-Defendants performed all of their contractual, statutory, and other duties, if any, owed to Cross-Complainant. NINTH AFFIRMATIVE DEFENSE (Good Faith) 9. Cross-Complainant's causes of action, and each of them, are barred because Cross-Defendants acted in good faith and conformity with all laws, and all express and/or implied agreements, if any, which might have existed concerning the matters allegedly set forth in the Cross-Complaint. TENTH AFFIRMATIVE DEFENSE (Lack of Consideration) 10. Cross-Complainant's causes of action, and each of them, are barred by a lack of, and/or failure of, consideration. ELEVENTH AFFIRMATIVE DEFENSE (Failure To Mitigate Damages) 11. Cross-Complainant's causes of action, and each of them, are barred in whole or in part by Cross-Complainant's failure to mitigate damages, if any. TWELFTH AFFIRMATIVE DEFENSE (Cross-Complainant's Lack Of Performance) 12. Cross-Complainant's causes of action, and each of them, are barred because Cross-Complainant did not perform the duties reasonably required of it as to the matters alleged in the Cross-Complaint. THIRTEENTH AFFIRMATIVE DEFENSE (Consent) 13. Cross-Complainant's causes of action, and each of them, are barred because Cross-Complainant consented to each of the acts complained of in the Cross-Complaint. FOURTEENTH AFFIRMATIVE DEFENSE (Ultra Vires) 14. The Cross-Complaint, and each and every part thereof, is barred because Cross-Complainant brought the Cross-Complaint without the approval of the Board of Directors and, as such, it constitutes an ultra vires act. FIFTEENTH AFFIRMATIVE DEFENSE (Lack of Injury) 15. Cross-Complainant's causes of action, and each of them, are barred because Cross-Complainant has not suffered any damages or other injury as a result of any actions taken by Cross-Defendants, or any of them. SIXTEENTH AFFIRMATIVE DEFENSE (Statutory Violations) 16. The Cross-Complainant, and each and every cause of action therein, is barred by Cross-Complainant's statutory violations. SEVENTEENTH AFFIRMATIVE DEFENSE (Statute of Frauds) 17. Cross-Complainant's causes of action, and each of them, are barred by the Statute of Frauds. EIGHTEENTH AFFIRMATIVE DEFENSE (Mistake) 18. Cross-Complainant's causes of action, and each of them, are barred by mutual and/or unilateral mistake. NINETEENTH AFFIRMATIVE DEFENSE (Comparative Fault) 19. Any and all damages claimed to have been sustained by Cross- Complainant in the Cross-Complaint were caused, either wholly or in part, by the intentional, negligent and careless conduct of Cross-Complainant. If any damages are awarded to Cross-Complainant against Cross-Defendants, those damages should be diminished in proportion to the amount of comparative fault attributable to Cross-Complainant. TWENTIETH AFFIRMATIVE DEFENSE (Damages as a Result of Cross-Complainant's Own Conduct) 20. Any and all damages alleged to have been sustained by Cross-Complainant were caused, either wholly or in part, by the intentional, negligent and careless conduct of Cross-Complainant. Cross-Defendants therefore are not liable to Cross-Complainant for damages in any amount. TWENTY-FIRST AFFIRMATIVE DEFENSE (Breach of Good Faith Covenant) 21. Any recovery by Cross-Complainant is barred by Cross-Complainant's prior breach of the implied covenant of good faith and fair dealing. TWENTY-SECOND AFFIRMATIVE DEFENSE (Breach of Fiduciary Duty) 22. Any recovery by Cross-Complainant is barred by Cross-Complainant's prior breach of fiduciary duties. WHEREUPON, Cross-Defendants pray for judgment as follows: 1. That the Cross-Complaint in its entirety be dismissed herein; 2. That Cross-Complainant take nothing by reason of its Complaint herein; 3. That Cross-Defendants be awarded their costs of suit herein, including their reasonable expert witness fees and attorneys' fees; and 4. Such other and further relief as the Court may deem just and proper. DATED: November 8,1996 GRAHAM & JAMES LLP By: ss/K. Julian KENNETH B. JULIAN Attorneys for Cross-Complainant/Cross- Defendant/Cross-Complainant DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., Cross-Defendant/Cross-Complainant GANNAM/KUBAT PUBLISHING, INC., Cross-Defendant NASIB GANNAM ......................End Pleading dated 11/7/96........................... .......................Begin Pleading dated 12/26/96....................... Robert H. Bretz, Esq., SB #55087 520 Washington Boulevard, #428 Marina del Rey, California 90292 310/578-1957 Attorney for Defendant Auto-Graphics and Robert S. Cope SUPERIOR COURT FOR THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation, Plaintiff, v. DATACAT, INC., a California corporation and DOES 1 through 25, inclusive, Defendants. DATACAT, INC., a California corporation, Cross-Claimant, v. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation; NASIB GANNAM, an individual; and DOES 1 through 5, Cross-Defendants. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation, Cross-Complainants, v. ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California corporation, Cross-Defendants, - and - DATACAT, INC., a California corporation, Nominal Cross-Defendant and Cross-Defendant Case No. 766 695 Assigned For All Purposes To: Honorable C. Robert Jameson, Department ANSWER BY AUTO-GRAPHICS, INC. AND ROBERT S. COPE TO CROSS- COMPLAINT OF GANNAM/KUBAT PUBLISHING, INC., DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC. (Non-Derivative Action Answer) COMES NOW Auto-Graphics, a California corporation ("Auto-Graphics"), and Robert S. Cope, an individual, through their attorney of record (herein collectively the "Cross-Defendants"), and for themselves and for no other party, hereby answer the cross-complaint (the "Cross-Complaint") against them by Gannam/Kubat Publishing, Inc. ("G/K") and Diversified Printing And Publishing Services, Inc. ("Diversified"), in their individual capacities (not for and on behalf of Datacat, Inc.), G/K and Diversified (individually and collectively referred to herein as "Cross-Claimants"), and the Cross-Defendants allege affirmative defenses thereto, as follows: Pursuant to and in accordance with California Code of Civil Procedure Section 431.30(d), the Cross-Defendants generally deny each and every allegation of the Cross-Complaint. AFFIRMATIVE DEFENSES As their affirmative defenses to each and every one of the claims and causes of action set forth in the Cross-Complaint, the Cross- Defendants and each of them (herein also referred to as the "Cross-Defendants") hereby allege as their affirmative defenses to such claims and causes of action by the Cross-Claimants as set forth in the Cross-Complaint the following: FIRST AFFIRMATIVE DEFENSE (No Claim Upon Which Relief Can Be Granted) As their First Affirmative Defense, the Cross-Defendants hereby incorporate by this reference their Answer as set forth above, and further allege that the Cross-Claimants' Cross-Complaint fails to state facts upon which the Cross-Claimants are entitled to any relief against the Cross-Defendants. SECOND AFFIRMATIVE DEFENSE (Legal Obligation Of Datacat) As their Second Affirmative Defense, the Cross-Defendants allege that payments by Datacat to Auto-Graphics for pre-1994 database recovery services and otherwise (herein "Services") represented legal obligations by Datacat to Auto-Graphics for Services rendered by Auto-Graphics to Datacat and fair value received by Datacat in the form of and otherwise constituting and comprising such Services. THIRD AFFIRMATIVE DEFENSE (No Fiduciary Or Other Duty To Diversified) As their Third Affirmative Defense, the Cross-Defendants allege that they do not owe Diversified any fiduciary or other similar duty as alleged in the Cross-Complaint or otherwise. FOURTH AFFIRMATIVE DEFENSE (Arm's Length Relationship/Services) As their Fourth Affirmative Defense, the Cross-Defendants allege accounting, financial or other services and/or functions rendered or otherwise performed by Auto-Graphics and/or its corporate personnel for Datacat were performed based on a good faith, arm's length contractual or similar basis for a reasonable fee and/or reimbursement of expenses as approved and authorized by Datacat and by G/K. FIFTH AFFIRMATIVE DEFENSE (Arm's Length Transaction/Approval) As their Fifth Affirmative Defense, the Cross-Defendants allege the Database Recovery Proposal (or Memorandum) referenced in paragraph 17 of the Cross-Complaint was the result of good faith, arm's length negotiations between representatives of Auto-Graphics and G/K and had been pre-approved by Frank Kubat as President of Datacat and in his capacity as G/K's representative for presentation and recommendation to and approval and adoption by the Datacat Board of Directors at the July 28, 1994 Meeting as acknowledged by Frank Kubat during the course of such Meeting. SIXTH AFFIRMATIVE DEFENSE (Approved Obligation/Payments) As their Sixth Affirmative Defense, the Cross-Defendants allege that the Database Recovery Proposal (or Memorandum) referenced in paragraph 17 of Cross-Complaint was adopted, approved and authorized as the resolution of the Datacat Board of Directors for and on behalf of Datacat at the July 28, 1994 Meeting (the "Database Recovery Resolution"). SEVENTH AFFIRMATIVE DEFENSE (Ratification Of Obligation/Payment) As their Seventh Affirmative Defense, the Cross-Defendants allege that following July 28, 1994, the Cross-Claimants including G/K approved and ratified, by their subsequent approval, acquiescence and/or lack of objection thereto, the Database Recovery Resolution adopted by the Board of Directors of Datacat at the July 28, 1994 Meeting. EIGHTH AFFIRMATIVE DEFENSE (No Contractual Duty To Diversified) As their Eighth Affirmative Defense, the Cross-Defendants allege that they owe Cross-Claimant Diversified no contractual or other similar duty. NINTH AFFIRMATIVE DEFENSE (Database Obligation/Payments Inherently Fair) As their Ninth Affirmative Defense, the Cross-Defendants allege that the obligation of and payments by Datacat to Auto-Graphics for the Database Recovery Services under the Database Recovery Resolution and otherwise was and is inherently fair and reasonable in respect of the Services rendered by Auto-Graphics to Datacat and the Services and benefit received by Datacat. TENTH AFFIRMATIVE DEFENSE (Arm's Length/Good Faith) As their Tenth Affirmative Defense, the Cross-Defendants allege that the providing of the Services by Auto-Graphics to Datacat, which are the subject of the Cross-Claimants' Cross-Complaint against them, and the obligation of and payment by Datacat to Auto-Graphics for such Services was the result of good faith, arm's length negotiations and agreement by and between Auto-Graphics and Datacat, including G/K in its capacity as a prospective and/or actual stockholder of Datacat and the resulting Agreement attached as Exhibit A to the Cross-Complaint. ELEVENTH AFFIRMATIVE DEFENSE (No Fiduciary Or Other Similar Duty By Auto-Graphics To G/K) As their Eleventh Affirmative Defense, the Cross-Defendants allege that Auto-Graphics does not owe G/K any fiduciary or other similar duty as alleged in the Cross-Complaint or otherwise. TWELFTH AFFIRMATIVE DEFENSE (Estoppel) As their Twelfth Affirmative Defense, the Cross-Defendants allege that the Cross-Claimants are estopped from asserting the claims and causes of action set forth in the Cross-Complaint as against the Cross-Defendants, including without limitation for the reasons alleged in the foregoing Fourth, Fifth, Seventh and Tenth Affirmative Defenses and otherwise. THIRTEENTH AFFIRMATIVE DEFENSE (Waiver) As their Thirteenth Affirmative Defense, the Cross-Defendants allege that the Cross-Claimants have waived and/or otherwise relinquished the claims and causes of action, and/or the right to sue Cross-Defendants in respect of such claims, as set forth in the Cross-Complaint. FOURTEENTH AFFIRMATIVE DEFENSE (Promissory Estoppel) As their Fourteenth Affirmative Defense, the Cross-Defendants allege that Cross-Claimants representations, agreements and promises to the Cross-Defendants, and/or to Datacat for the intended benefit of one or more of the Cross-Defendants and otherwise, in respect of the providing of on-going database related services by Auto-Graphics to Datacat, and the Cross-Defendants' actions and reasonable reliance thereon, constitutes promissory estoppel and precludes the Cross-Claimants from instituting and maintaining the within action against the Cross-Defendants. FIFTEENTH AFFIRMATIVE DEFENSE (Unclean Hands) As their Fifteenth Affirmative Defense, the Cross-Defendants allege that as a result of the Cross-Claimants conduct and activities as alleged herein and otherwise, the Cross-Claimants should be denied the relief they are seeking based on the equitable principle of unclean hands. SIXTEENTH AFFIRMATIVE DEFENSE (Superseding Agreement) As their Sixteenth Affirmative Defense, the Cross-Defendants allege that G/K entered into an agreement with and/or for the benefit of Datacat and/or with and for the benefit of the Cross-Defendants whereby G/K agreed to forego and/or defer payment of the monies G/K seeks to collect from the Cross-Defendants as a result of its Cross-Complaint. SEVENTEENTH AFFIRMATIVE DEFENSE (Breach Of Implied Covenant Of Good Faith And Fair Dealing) As their Seventeenth Affirmative Defense, Cross-Defendants allege that the assertion of the instant claim by the Cross-Claimants against the Cross-Defendant constitutes a breach of the implied covenant of good faith and fair dealing existing by, between and among the Cross-Claimants and Cross-Defendants, by virtue of contracts or other agreements by, between and among such parties pertaining to the subject matter of the Cross-Complaint. EIGHTEENTH AFFIRMATIVE DEFENSE (Failure To Mitigate Damages) As their Eighteenth Affirmative Defense, Cross-Defendants allege that Cross-Claimants knew that Datacat could not pay for the services Diversified rendered and continued to render to Datacat, which are the subject of Cross-Claimants' Cross-Complaint, and that the Cross-Claimants otherwise failed and refused to mitigate their damages vis-a-vis Datacat and the Cross-Defendants. NINETEENTH AFFIRMATIVE DEFENSE (Failure To Join Indispensable Party) As their Nineteenth Affirmative Defense, Cross-Defendants allege that the Cross-Claimants has failed to join one or more indispensable parties. TWENTIETH AFFIRMATIVE DEFENSE (Offset, Set-Off Or Deduction) As their Twentieth Affirmative Defense, the Cross-Defendants allege that Cross-Claimants are indebted and otherwise obligated to Cross-Defendants and that the Cross-Defendants are entitled to an offset, set-off or other deduction from any amounts claimed by the Cross-Claimants in the Cross-Complaint against the Cross-Defendants. TWENTY-FIRST AFFIRMATIVE DEFENSE (Statute Of Limitations Bar/339) As their Twenty-First Affirmative Defense, the Cross-Defendants allege that the Cross-Claimants' claims as set forth in the Cross-Complaint are barred by the statute of limitations as provided for in California Code of Civil Procedure Section 339. TWENTY-SECOND AFFIRMATIVE DEFENSE (Statute of Frauds) As their Twenty-Second Affirmative Defense, Cross-Defendants allege that the Cross-Claimants' claims which are the subject of the Cross- Complaint are barred or otherwise precluded by the statute of frauds. TWENTY-THIRD AFFIRMATIVE DEFENSE (Fraud/Mistake) As their Twenty-Third Affirmative Defense, Cross-Defendants allege that the Cross-Claimants' claims which are the subject of the Cross-Complaint are barred or otherwise precluded based on the principles of fraud and/or mistake. TWENTY-FOURTH AFFIRMATIVE DEFENSE (Statute Of Limitations Bar 338) As their Twenty-Fourth Affirmative Defense, the Cross-Defendants allege that the Cross-Claimants' claims as set forth in the Cross-Complaint are barred by the statute of limitations as provided for in California Code of Civil Procedure Section 338. TWENTY-FIFTH AFFIRMATIVE DEFENSE (Good Faith & Fair Dealing) As their Twenty-Fifth Affirmative Defense, the Cross-Defendants allege that at all times referenced in the Cross-Complaint, Cross-Defendants acted in good faith to protect and benefit the interests, including assets and property, of Datacat. TWENTY-SIXTH AFFIRMATIVE DEFENSE (Fault of Diversified) As their Twenty-Sixth Affirmative Defense the Cross-Defendants allege that the harm, injury and/or damages claimed by the Cross-Claimants in the Cross-Complaint was/were caused and otherwise resulted from the fault and action, including actions and failure to act, of the Cross-Claimants (including without limitation Diversified as to Cross-Claimants' Third Cause Of Action). TWENTY-SEVENTH AFFIRMATIVE DEFENSE (Knowledge Of Cross-Claimants) As their Twenty-Seventh Affirmative Defense, the Cross- Defendants allege that the Cross-Claimants knew about and were otherwise aware, and/or were reckless or negligent in not informing themselves, of the facts and circumstances alleged in the Cross-Complaint in respect of which Cross-Claimants allege in the Cross-Complaint that they were not aware and upon which they base their claims against the Cross-Defendants. REQUEST FOR RELIEF WHEREFORE, the Cross-Defendants pray that the Cross-Claimants take nothing as a result of their Cross-Complaint; and that the Cross-Defendants be awarded their costs including reasonable attorneys' fees/costs (if appropriate under the Agreement which is attached as Exhibit A to the Cross- Complaint, California Code of Civil Procedure Section 1717 and/or otherwise as provided for under California law), and such other and further relief as the Court may deem appropriate in this case. Dated: December 26, 1996 Respectfully submitted, ROBERT H. BRETZ, P.C. By: ss/Robert H. Bretz Robert H. Bretz, Esq. Attorney for Auto-Graphics and Robert S. Cope ........................End Pleading dated 12/26/96........................ ........................Begin Pleading dated 3/5/97........................ Randolph Stiles, Esq. (SBN 62910) FILED LAW OFFICES OF RANDOLPH STILES Orange County Superior Court 12015 Kling Street, #211 Mar 05 1997 North Hollywood, California 91607 Alan Slater, Executive Officer/Clerk 818/505-8026 ss/ D. Lamm BY D. LAMM Attorney for Datacat, Inc. SUPERIOR COURT FOR THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE DIVERSIFIED PRINTING AND Case No. 766 695 PUBLISHING SERVICES, INC., a California corporation, Plaintiff, Assigned For All Purposes To: Honorable C. Robert Jameson, v. Department 11 DATACAT, INC., a California corporation and DOES l through 25, inclusive, Defendants. ORDER GRANTING DATACAT'S MOTION FOR POSTING OF SECURITY FOR COSTS INCLUDING DATACAT, INC., a California REASONABLE ATTORNEYS' FEES corporation, UNDER CAL. CORPS. CODE 800 Cross-Claimant, DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., ) a California corporation; Nasib Gannam, an individual; and DOES 1 through 5 Cross- Defendants. DIVERSIFIED PRINTING AND PUBLISHING SERVICES, INC., a California corporation; GANNAM/KUBAT PUBLISHING, INC., a California corporation, Cross-Complainants, v. ROBERT S. COPE, an individual; AUTO-GRAPHICS, INC., a California corporation, Cross-Defendants, - and - DATACAT, INC., a California corporation, Nominal Cross-Defendant and Cross-Defendant Upon motion by Datacat, Inc. for an order requiring the posting of security for costs including reasonable attorneys' fees under California Corporations Code Section 800, and following hearing thereon whereat the Court considered the written and oral submissions of the parties, and for good cause having been shown, the motion is GRANTED and Gannam/Kubat Publishing, Inc. is hereby ordered to deposit with the Clerk of this Court a cash bond, or suitable undertaking by a surety company licensed to do business in this State or otherwise in conformity with California Code of Civil Procedure Section 995.310 et seq. (the "security", in the amount of $50,000 as security for costs including reasonable attorneys' fees and costs paid or incurred by Datacat in the defense of or otherwise in connection with the derivative action cross-complaint by Gannam/Kubat Publishing against Auto-Graphics, Inc., Robert S. Cope and Datacat, Inc. including any indemnity obligation by Datacat to Robert S. Cope, in his capacity as an officer/director or other corporate representative of Datacat, as a result of having been named as a cross-defendant in such derivative action under California Corporations Code Section 317. If such security has not been timely deposited in full and confirmed to have been so posted by written notice to the Court and to Datacat's counsel by 5:00 P.M. on MAR 10 1997, then the instant derivative action shall be automatically dismissed upon application of Datacat. Datacat shall give notice of this order to counsel for all parties. IT IS SO ORDERED. Dated: MARCH 05 , 1997 C. ROBERT JAMESON C. Robert Jameson JUDGE SUPERIOR COURT .........................End Pleading dated 3/5/97.......................... .......................Begin Pleading dated 3/10/97......................... ATTORNEY OR PARTY WITHOUT ATTORNEY: (714) 751-8800 GRAHAM & JAMES LLP KENNETH B. JULIAN, Bar No. 149840 FILED KARL A. SANDOVAL, Bar No. 117111 Orange County Superior Court 650 Town Center Drive , Sixth Floor March 10, 1997 Costa Mesa, California 92626-1925 Alan Slater, Executive Officer/Clerk BY: ss// David Thew ATTORNEY FOR: DIVERSIFIED PRINTING ORANGE COUNTY SUPERIOR COURT County of Orange PLAINTIFF/PETITIONER DIVERSIFIED PRINTING AND PUBLISHING SERVICES, DEFENDANT/RESPONDENT: DATACAT, INC., AND RELATED CROSS-ACTIONS REQUEST FOR DISMISSAL CASE NUMBER 766 695 Other (specify) Derivative Cross-Claims only A conformed copy will not be returned by the clerk unless a method of return is provided with the document. TO THE CLERK: Please dismiss this action as follows: a. Without prejudice b. (6) Other (specify). Derivative Cross-Claims by Gannam/Kubat Publishing, Inc., only, contained within the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, and Ninth Causes of Action of GK's Cross-Complaint. Date: March 5, 1997 GRAHAM & JAMES LLP KENNETH B. JULIAN ss// Kenneth B. Julian (TYPE OR PRINT NAME OF ATTORNEY OR PARTY WITHOUT ATTORNEY) (SIGNATURE) Attorney or party without attorney for: Cross-complainant 3. Dismissal entered as requested on (date): March 10, 1997 6. a. Attorney or party without attorney notified on (date): b. Attorney or party without attorney not notified. Filing party failed to provide a copy to conform means to return conformed copy Date: March 10, 1997 Clerk, by ss// David Thew , Deputy REQUEST FOR DISMISSAL ......................End Pleading dated 3/10/97............................ PLEADING EXHIBITS A through D ................Exhibit A - Shareholders Agreement ........................ AGREEMENT The undersigned parties, Gannam/Kubat Publishing, Inc. (herein "G/K") and Auto-Graphics, Inc. (herein "AG"), intending to be legally bound and obligated thereby, have made and entered into this Agreement dated effective as of June 12,1990. WHEREAS, G/K is the owner of a data base generally covering certain heating, ventilation, air conditioning, refrigeration, electrical, electronic, appliance and plumbing products customarily distributed by so-called HVACR (heating, ventilation, air conditioning and refrigeration) and plumbing, electric and appliance wholesalers (herein collectively the "Listed Products"), together with certain information, know-how, photographic and other composition materials and representative catalogs used to produce, publish and distribute the Listed Products catalogs (herein the "Catalog"); WHEREAS, A-G possesses certain data base development, maintenance and composition capabilities required in the production of the Catalog: WHEREAS, G/K and A-G have been exploring and considering the advisability of jointly organizing a business to own and periodically produce, publish and distribute the Catalog; WHEREAS, G/K and A-G have now determined to proceed with a joint endeavor in respect of such Catalog, and have made and entered into this Agreement to memorialize their understanding and agreements in respect of organizing/owning and conducting such venture; NOW, THEREFORE, the undersigned parties in consideration of the premises, the mutual agreements and promises contained herein and such other good and valuable consideration the legal sufficiency and adequacy of which are hereby acknowledged, and subject to the terms and conditions contained herein, hereby agree as follows. 1. The Company. The parties will organize a new corporation under the laws of the state of California adopting the corporate name "Datacat, Inc." (herein the "Company"), and will each subscribe to purchase and will purchase one-half of the number of shares of capital stock such corporation is authorized to issue for the purchase price of Twenty-Five Hundred Dollars ($2,500) each or an aggregate cash capitalization of Five Thousand Dollars ($5,000) for the Company. 2. Further Current Capital Contributions. In addition to the parties' initial cash capitalization as provided for hereinabove, the parties will make the following additional capital contributions to the Company: 2.1. G/K. G/K will contribute the manuscript, photographs and other composition materials, representative catalogs and all of its information, know-how and other assets and property of whatsoever kind and nature constituting, necessary and/or advisable to own and periodically produce, publish and distribute the Catalog (herein collectively the "Catalog Information".); and 2.2. A-G. A-G will contribute its expertise, knowledge and production know-how related to the composition of catalogs. The parties acknowledge that their respective non-cash capital contributions as provided for above in this paragraph are of approximately equal value, and that such contributions will not be valued for purposes of establishing the Company's capital account for financial reporting and other purposes which capital account at inception of the Company will reflect only the cash contribution made by the parties ($5,000) in organizing the Company and subscribing to the issuance and purchase of the Company's capital stock as provided for above. Further, G/K's capital contribution of the Catalog Information as provided for herein will be made free and clear of all claims, liens, security interests, debts, obligations and liabilities of whatsoever nature or kind; and G/K hereby represents and warrants to A-G and to the Company that G/K is the sole and exclusive owner of the Catalog Information as of the date of this Agreement and hereby agrees and promises to indemnify and hold harmless A-G and the Company from any and all claims, liens, security interests, debts, obligations and/or liabilities of whatsoever nature or kind, including reasonable attorneys' fees and costs paid or incurred in respect thereof, that may subsequently be asserted by any person or party against and/or paid or incurred by the Company and/or A-G arising out of, resulting from, or otherwise relating in any way to the Catalog Information constituting and comprising G/K's capital contribution to the Company. The foregoing indemnity and hold harmless provision from G/K is not intended to cover any claim of copyright infringement against the Company by any of the manufacturers or suppliers whose products and related pricing information are contained and set forth in any of the Company's Catalogs. G/K hereby further represents and warrants to the Company and to A-G that it has not received and is not otherwise aware of any copyright infringement or similar claim(s) by any manufacturer, supplier or any third person in respect of or otherwise relating to the Catalog Information being supplied by G/K as a capital contribution as provided for in this Agreement. 2.3. Future Capital Contributions. Except for the capital contributions referenced in paragraphs 1, 2.1 and 2.2, the parties are not in any way obligated to make any future capital contributions to the Company; however, in the event that the Company's Board of Directors shall determine at any time within twelve (12) months from the date of this Agreement that the Company needs additional working capital with which to organize the Company then the parties to this Agreement each hereby agree and promise, promptly upon receipt of written notification of such determination by the Company's Board of Directors, to pay to the Company in cash an additional capital contribution up to Fifty Thousand Dollars ($50,000) each without the receipt of any additional capital stock or other security or form of consideration for such additional cash capital contribution. 3. Organizational Costs. All legal, accounting and other similar costs and expenses incurred in the incorporation and legal organization of the Company, together with the cost and expense of preparation of this Agreement, and for office space, receptionist and secretarial services (at A-G's corporate offices in Pomona, California), will be paid by the Company (herein "Organizational Costs"). However, by special agreement between A-G and G/K as the sole shareholders of the Company, such Organizational Costs, and only such Organizational Costs as defined herein, together with any interest paid or accrued in respect of the A-G loan to the Company and the resulting promissory note from the Company to A-G as provided for in paragraph 5 or this Agreement shall not be deemed by the Company or such parties to be an expense of the Company for purposes of computing the "net income" of the Company in determining amounts payable to G/K as Consulting Agreement compensation, in accordance with paragraph 6 of this Agreement. 4. Management. The initial Board of Directors of the Company shall consist of the following five (5) persons: (1) Frank J. Kubat, Jr. (2) Nasib Gannam (3) Robert S. Cope (4) Lee White (5} Paul Cope (or a fifth person to be designated by A-G subject to the approval of G/K which approval will not be unreasonably withheld). The Board of Directors shall be responsible for the management of the Company in accordance with the applicable laws of the state of California and, where applicable, the provisions of this Agreement. Following the incorporation of the Company, the Board of Directors shall adopt organizational minutes and corporate bylaws covering the management, operation and business of the Company. Thereafter, the Company's Board of Directors will hold and conduct regular meetings to manage and otherwise conduct the business of the Company. 5. Start-Up Costs. A-G will advance and thereby loan the Company sufficient funds, up to a maximum of Fifty Thousand Dollars ($50,000) in cash and/or equivalent value, to facilitate payment by the Company of the Company's "start-up" operations during the first six (6) months of operations. Such start-up activities and financing will include: (1) all Organizational Costs (as provided for in paragraph 3 of this Agreement); (2) one full-time sales/marketing person; t3) promotional materials; and (4) travel, lodging, meals and other miscellaneous sales/marketing expenses relating to the business of the Company. As the Company's cash flow requirements reasonably permit, as determined by the Company's Board of Directors in their sole and exclusive judgment, the Company shall repay the A-G loan. If repaid within the first eighteen (18) months such loan is outstanding, then such loan shall be interest free. If such loan is not repaid in full within such 18 month period, such loan, and all amounts outstanding from the inception of such loan, shall bear interest at the rate of twelve percent (l2%) per annum (not to exceed the maximum rate permitted by law from time to time during the period such loan/note remains outstanding. 6. Sales/Marketing Assistance. The Company will enter into a three (3) year agreement with G/K whereby G/K, through Mr. Frank Kubat, will be responsible for supervising and supporting the Company's sales/marketing activities (herein the "Consulting Agreement"). The Consulting Agreement will provide for annual compensation payable by the Company to Messrs. Kubat and Gannam as the principals of G/K at the end of each of the three full calendar years (ending December 31) covered by the Agreement commencing January 1, l991 and ending December 31, 1993 in a total, aggregate amount equal to a certain percentage of the Company's net income determined in accordance with generally accepted accounting principles consistently applied (except as otherwise agreed to by A-G and G/K as expressly provided for in paragraph 3 of this Agreement only), as follows: 1991 - 50%; 1992 - 30%; 1993 - 20%. As part of the services to be rendered pursuant to the Consulting Agreement, G/K will arrange for Mr. Frank Kubat, and Mr. Kubat hereby promises, to attend a minimum of three major conferences/exhibitions of and by providers of Listed Products goods and services each year; and, further and additionally, it is agreed that Mr. Kubat will devote a minimum of twenty (20) hours of his time per month in sales/marketing activities promoting the Company's Catalog. Such minimum personal services to be rendered by Mr. Kubat to and for the exclusive benefit of the Company are hereby accepted and agreed to by Mr. Kubat in his individual capacity. 7. Certain Conflicts of Interest. In the course of its business, the Company will obtain certain services from A-G and from G/K. The parties, in entering into and executing this Agreement, hereby acknowledge, agree to and approve the intended course of action whereby the Company will purchase and otherwise acquire certain goods and services from the undersigned parties/stockholders of the Company (and/or their affiliates); and hereby knowingly and intentionally waive and relinquish any and all claims of potential or actual conflicts of interest attending such proposed and/or actual related party transactions; provided, however, that such related party transactions are in accordance with the express provisions as contained in this Agreement applicable to any such transactions. All other agreements, transactions and dealings between the Company and any employee, officer, director, shareholder, agent or representative of the Company which are not contemplated by and expressly provided for in this Agreement shall be made, undertaken and performed in accordance with applicable California law. 8. A-G Services. From time to time, the Company will purchase from A-G data base development, processing, composition and related services (hereinafter collectively referred to as "Composition Services") used in periodically producing and publishing the Catalog. Following the contribution of such Composition Services as are required for the first such Catalog actually produced and published by the Company, notwithstanding any contrary provision (s) contained in this Agreement, A-G shall not be required to contribute any further such Composition Services as a capital contribution or otherwise and, thereafter, A-G shall be entitled to bill for and receive from the Company reasonable and customary compensation for all such future Composition Services. In pricing its Composition Services to the Company, A-G will attempt to charge the Company an amount for such Services which would allow the Company to attain a minimum gross profit of 25% on the production of such Catalog while maintaining a competitive profile in the market for the pricing of and purchase of such Catalog by customers of the Company. In no event, however, is A-G obligated to charge (and accept) compensation for its Composition Services which would be less than the minimum amount that A-G bills its other trade customers for similar work and services. Prior to performing any substantial amount of Composition Services for which A-G will bill the Company, A-G will attempt to obtain the prior written approval of one of G/K's designated board representatives as to the reasonableness of such services/charges. Attached hereto and incorporated herein as Exhibit A, is a schedule that has previously been approved by G/K as setting forth a reasonable basis and method to determine compensation to be paid by the Company to A-G for Composition Services to be performed by A-G from time to time in the periodic production and publishing of the Catalog. Ownership of all computer and data processing programs and other written instructions, manuals and implementation procedures, developed, created and/or used by A-G in the creation of the electronic data base derived from the Catalog Information to be supplied by G/K (but not the derived data base itself, which data base shall be owned exclusively by the Company) and/or the performance of Composition Services by A-G for the Company (herein collectively the "A-G Computer Resources") shall be and remain the sole and exclusive asset and property of A-G, and the Company (and/or G/K) shall have no claim of ownership, use or other interest in or to any such A-G Computer Resources, except as otherwise expressly provided for in the unnumbered paragraph hereinbelow. G/K hereby acknowledges and agrees that such A-G Computer Resources, and the information constituting and comprising such A-G Computer Resources (but not the derived data base itself, which data base shall be owned exclusively by the Company) shall be treated and maintained for all purposes as the confidential, proprietary and trade secret information, materials and property of A-G. The Company being organized by the parties as provided for in this Agreement hereby also acknowledges and agrees that such A-G Computer Resources, and the information constituting and comprising such A-G Computer Resources (but not the derived data base itself, which data base shall be owned exclusively by the Company) shall be treated and maintained for all purposes as the confidential, proprietary and trade secret information, materials and property of A-G, and further agrees and promises to use its best efforts to maintain the confidential, proprietary and trade secret nature of all such A-G Computer Resources and related information; and, following its incorporation, the parties hereby promise to cause the Company to ratify and approve this Agreement. Should the Company actually cease or otherwise permanently discontinue operations for any reason, then G/K shall have the right to a nonexclusive license to the A-G Computer Resources (as they then exist at such point in time) for a cash amount/payment to A-G equal to A-G's unrecovered costs and expenses, if any, associated with building, preparing and maintaining such A-G Computer Resources (including in respect of the derived data base itself) as reflected on A-G's own books and records at the time that the Company actually ceases or otherwise permanently discontinues operating. Such nonexclusive license to use A-G's Computer Resources shall be for a term of five (5) years and shall be conditioned upon its use being solely for continued production of the Catalog by G/K following actual dissolution of the Company; and such nonexclusive license shall include all A-G computer software object code, but exclude all A-G computer software source code, constituting and comprising A-G's Computer Resources in respect of the Catalog as provided for in this Agreement. Such nonexclusive license arrangement shall contain such other terms and conditions as the parties may hereinafter mutually agree upon in writing. 9. G/K Services. The Company will purchase printing services from Diversified Printing and Publishing Services, Inc., 2632 Saturn Street, Brea, California 92621, which company is 100% owned by Mr. Nasib Gannam ("Diversified"), in respect of the production of the Catalog. Diversified shall be entitled to bill for and receive reasonable and customary compensation for such printing services. In pricing its printing services to the Company, G/K will attempt to charge the Company an amount for such services which would allow the Company to attain a minimum 25% gross profit on the production of such Catalog while maintaining a competitive profile in the market for the pricing of and purchase of such Catalog by customers of the Company. In no event, however, is Diversified obligated to charge (and accept) compensation for its printing services which would be less than the minimum amount that Diversified bills its other trade customers for similar work and services. In the event that Mr. Nasib Gannam ceases to own at least twenty-five percent (25%) of all of Diversified's issued and outstanding voting stock at any point in time, then and only then, notwithstanding any of the foregoing provisions of this paragraph and/or of this Agreement to the contrary, the Company shall be entitled to purchase or otherwise acquire printing service" from any vendor or other provider of such services which the Company shall, at its sole election and discretion, be entitled to select; and, likewise, the Company shall not be obligated in any way to purchase any further printing services from Diversified. Mr. Gannam hereby individually agrees and promises to immediately notify the Company in writing if, at any future point in time, he ceases to own 25% of the issued and outstanding voting capital stock of Diversified. 10. Other A-G Goods/Services. In providing the Company with "start-up" and ongoing office facilities, receptionist and secretarial services, utilities and other miscellaneous services from time to time, A-G shall be entitled to and shall attempt to allocate and charge the Company an amount approximately equal to AG's costs to obtain, provide and/or supply such goods and services to the Company from time to time. 11. Accountants. The Company will retain a nationally recognized accounting and auditing firm (to be designated from time to time by A-G at its sole election and discretion) to provide the Company with start-up and ongoing accounting, auditing and related services. Such accountants and auditors may, and probably will, also provide similar such services to A-G on a regular or periodic basis. Such accountants and auditors will be responsible for assisting in the preparation, reviewing and/or auditing of the Company's periodic financial statements which will include, among other things, the Company's net income for purposes of paragraph 6 and gross revenue for purposes of paragraph 15 of this Agreement. 12. Fiscal Year. The Company will adopt a calendar year (ending December 31st) as its fiscal year for financial reporting and all other purposes. 13. Product Definition and Pricing. As part of the consideration for entering into this Agreement, A-G through its designated representatives to the Company's Board of Directors is entitled to determine, from time to time, product definition and pricing for the Company's Catalog subject to final review and approval by the Company's full Board of Directors which final approval will not be unreasonably withheld. 14. Ownership of Company Assets. Following organization of the Company and contribution of the Catalog Information by G/K and the contribution of initial composition services by A-G, except as otherwise expressly provided for in this Agreement (see paragraph 8 re A-G Computer Resources), all of the assets and property contributed by the parties, including without limitation the Catalog Information and the information data base derived therefrom (referred to in this Agreement as the "derived data base"), shall be the exclusive assets and property of the Company. Should the Company cease or otherwise permanently discontinue operations for any reason then, upon dissolution under applicable state corporate law and/or pursuant to this Agreement, both A-G and G/K shall be entitled to receive and the Company shall actually distribute and provide such two shareholders with a copy of the derived data base as it then exists at such point in time as the Company is dissolved which derived data base as received by each such shareholder shall be the sole and exclusive property of each such recipient thereof without further obligation to the Company or its other shareholders. 15. Future Rights to Ownership of Stock in the Company. 15.1 Right of First Refusal. Subject and subordinate to the rights of either party under the Option to Purchase as expressly provided for in subparagraph 15.2 of this Agreement and without payment of any additional consideration therefor, G/K and A-G each hereby grant and convey to the other a right of first refusal to acquire the stock ownership interest in the Company that either party owns and may desire to sell or otherwise dispose of from time to time in the future ("Right of First Refusal"). If at any time subsequent to the date of this Agreement either G/K or AG desires to sell or otherwise dispose of any shares of stock in the Company (including any interest therein) then owned by such prospective seller, the prospective seller will first provide the other party/shareholder with written notice of such party's desire and intention to sell or otherwise dispose of such stock (and/or any interest herein) including the prospective sale price and all other terms and conditions of such proposed sale transaction (the "Notice of Proposed Sale"). The party furnishing the Notice of Proposed Sale shall not obligate itself in any way to sell any shares or other ownership interest therein in respect of the Company until such time as the Notice of Proposed Sale has been provided and the prospective seller has otherwise performed and satisfied all of the terms and conditions of the Right of First Refusal. The party receiving the Notice of Proposed Sale shall have thirty (30) business days from the date of the Notice of Proposed Sale to provide written notice to the party having provided such Notice of Proposed Sale as to the recipient's intention to purchase the stock ownership interest which is the subject of such Notice and within offer for the price and on the terms and conditions set forth in the Notice of Proposed Sale (the "Responsive Notice"). If no such Responsive Notice is timely received by the party providing the Notice of Proposed Sale (or if the Responsive Notice states that the recipient is not accepting the offer to acquire the stock ownership which was the subject of such Notice of Proposed Sale), then the party having previously provided such Notice of Proposed Sale shall be entitled for a period of sixty (60) days from the deadline for receipt of the Responsive Notice (30 days following the date of the Notice of Proposed Sale) to extend any offer and consummate any sale of the stock ownership interest in the Company which was the subject of the Notice of Proposed Sale for the same price and otherwise upon the same terms and conditions as were set forth in the Notice of Proposed Sale (the "Sale Period"). If the stock ownership interest which was the subject of the Notice of Proposed Sale has not been actually sold and transferred within the Sale Period (60 day. from the deadline for receipt of the Responsive Notice), then the party having previously provided the Notice of Proposed Sale shall no longer be entitled to extend any offer and/or consummate any sale, or otherwise obligate the proposed seller in respect of the sale or other disposition of the subject stock ownership interest; and the party desiring and intending to sell or otherwise dispose of such stock ownership interest shall be required to ' provide the other party with a new (redated) Notice of Proposed Sale covering the proposed sale of such ownership interest: and, thereafter, the same procedures shall be followed by the recipient of such new (redated) Notice of Proposed Sale as are set forth above. If, having provided the other party with a Notice of Proposed Sale, the proposed seller subsequently determines to offer and/or sell a different ownership interest (different number of shares of the Company's stock for example) and/or desires to change the purchase price or any of the other terms and conditions of the proposed sale of such stock ownership interest from the price and other terms/conditions as set forth in the previously issued Notice of Proposed Sale, then the party who desires to offer and/or sell such ownership interest shall be required to issue a revised (redated) Notice of Proposed Sale covering any revised proposal to offer and/or sell or otherwise dispose of such stock ownership interest; and the recipient of any such revised (redated) Notice shall have thirty (30) days from the date of such revised (redated) Notice of Proposed Sale to respond thereto in accordance with the provisions of this Right of First Refusal. If the recipient of any Notice of Proposed Sale does not timely provide the Responsive Notice accepting the offer made therein and thereby agreeing to acquire the stock ownership interest that was the subject of such Notice of Proposed Sale and the party providing such Notice proceeds pursuant to and in accordance with the provisions of this Right of First Refusal to actually make an offer and consummate a sale or other disposition of such stock ownership interest, then such selling party shall also promptly provide the other party/stockholder with written notice confirming such actual sale or other disposition and the price, terms and conditions upon which such sale or other disposition was, in fact, entered into, made and consummated. If the party receiving any such Notice of Proposed Sale desires to acquire the ownership interest which is the subject of such Notice and timely provides the sending party with the Responsive Notice so stating in accordance herewith, then the responding party shall be entitled to consummate the acquisition which is the subject of such Notice at any time within thirty (30) days of the date of such Responsive Notice and such responding party shall set forth the actual time and date of such closing at the Company's corporate offices in the Responsive Notice to the proposed seller as provided for hereinabove (the "Closing"). If the responding party does not timely consummate the purchase at the Closing as defined above for any reason other than the fault of the proposed seller, then the responding party shall be obligated and liable to the proposed seller under this Agreement as provided for under the laws of the state of California. 15.2 Option to Purchase. Notwithstanding the above provisions of paragraph 15.1 of this Agreement and the Right of First Refusal provided for therein and without the payment of any additional consideration therefor, the respective parties to this Agreement each hereby grant and convey to each other an irrevocable option to purchase all of the other party's shares of the Company's stock and all right, title and interest in, to and under this Agreement of whatsoever nature or kind including without limitation the Consulting Agreement provided for under paragraph 6 of this Agreement (herein collectively the "Option Property") at any time during the period commencing January 1, 1991 and ending December 31, 1993 (the "Option Term") for an aggregate purchase price" (herein the "Option Purchase Price") equal to Six Hundred and Fifty Thousand Dollars ($650,000) plus five percent (5%) of the Company's gross revenues, determined by the Company's independent auditors to be in accordance with generally accepted accounting principles consistently applied, for each of the next five (5) succeeding fiscal years commencing with the end of the fiscal year which follows the closing of the purchase of the Option Property pursuant to this paragraph and the Option to Purchase provided for herein. The Option shall be exclusive and unconditional and remain in continuous existence for and during the Option Term; and, unless exercised prior thereto by either party, the Option shall automatically expire and terminate at the end of such Option Term. Payment of the $650,000 portion of the Option Purchase Price for the Option Property under the Option shall be one-half (50%) in cash and one-half (50%) in the form of the buyer's promissory note payable, in arrears, in equal annual installments over a period of five (5) years from the date of such note together with interest on the unpaid principal balance of such note at the rate of eight percent (8%) per annum. Pending payment of such promissory note, the stock of the Company being purchased pursuant to the Option is to be pledged by the buyer thereof as collateral to secure payment of such note payable to the seller; however, the buyer of such option shares as the owner of such pledged shares of stock will be entitled to vote and otherwise retain and exercise all rights and benefits constituting and attributable to the ownership of the stock being purchased. Payment of the 5% of gross revenues portion of the Option Purchase Price shall be made by the buyer within the first ninety (90) days following the close of each of the five successive fiscal years covered by such payment provision, and shall be paid in cash or check drawn upon the buyer's account payable to the seller(s). If the Option is exercised by G/K, then as part of the consideration for the purchase of such Option Property under the Option, G/K as the buyer shall furnish to A-G as the seller the personal guarantees, joint and several, of Frank J. Kubat, Jr. and Nasib Gannam covering the unconditional payment of the promissorynote from G/K payable to A-G as part of the Option Purchase Price. Such guarantees shall be in a form reasonably acceptable to A-G and its attorneys. The provision of such personal guarantees by G/K shall be a condition to A-G's obligation to consummate the closing of the purchase of such Option Property as otherwise provided for herein. The Option can be exercised by either party at any time during the Option Term by written notice dated and delivered in person or deposited for delivery via the U.S. Mail (Certified Mail-Return Receipt Requested) at anytime within the Option Term (herein "Exercise of the Option"). Upon Exercise of the Option by either party as provided for herein, the party exercising the Option shall be entitled to purchase and acquire the Option Property and the other party shall be obligated to sell, transfer and convey the Option Property free and clear of all liens, claims and encumbrances of whatsoever nature or kind to the party exercising the Option upon payment and receipt by such selling party of the Option Purchase Price at a "closing" to be held at the Company's corporate offices within thirty (30) days of the date of the Exercise of the Option (the date of the written notice of exercise by the party exercising the Option). During the Option Term, both parties agree and promise not to pledge, sell or otherwise convey any interest in the Option Property and to hold the Option Property subject to the Option and the respective parties' rights therein as provided for in this Agreement. The parties' rights under the Option shall survive and continue in full force and effect notwithstanding any claim by either party from time to time that the other party has breached any material provision(s) of this Agreement providing the nonbreaching party with a right of rescission and/or to suspend performance under the Agreement as against the alleged breaching party. During the Option Term, all rights and entitlements of the parties under the Right of First Refusal as provided for in subparagraph 15.1 above are subordinated to the parties' rights and entitlements under the Option; and, in addition to the information required to be furnished in the Responsive Notice, during the Option Term the party receiving any Notice of Proposed Sale shall notify the party providing such Notice of the receiving party's intention to exercise such receiving party's rights under the Option and otherwise provide the information normally required in the Notice of Exercise to be included in the Responsive Notice in lieu of proceeding further with the receiving party's rights and entitlements under the Right of First Refusal (and if such Notice of Exercise is not so timely provided in the Responsive Notice, then all rights under the Option shall be suspended, not terminated, for a period of ninety (90) days). Once one party has exercised the Option in accordance with this Agreement, then the other party is precluded from seeking to exercise the option or providing any Notice of Proposed Sale. If the party exercising the Option is G/K then, in addition to the Option Purchase Price, A-G shall be entitled to receive an additional payment from the Company, receipt of which payment shall be a condition to G/K's right to consummate the purchase of the Option Property from A-G and A-G's obligation to consummate the sale of such Option Property, in an amount equal to A-G's unrecovered costs and expenses, if any, associated with building, preparing and maintaining such A-G Computer Resources (including in respect of the derived data base itself which will continue to be owned by the Company) as reflected on A-G's own books and records at the time that A-G receives G/K's Notice of Exercise of the Option up to a maximum of $50,000. Once the option has been exercised by a party, if such party does not timely consummate the purchase of the Option Property as provided for herein otherwise than as a result of the nonperformance of the selling party, the other (selling) party shall have such rights and remedies as against the nonperforming (buying) party who sought to exercise the Option under this Agreement as such aggrieved party is entitled to under California law. Upon the consummation of the purchase of the Option Property by the party who first exercised the Option, the other party is relieved of any further duties and obligations under this Agreement of whatsoever nature or kind. 16. Negative (Competition) Covenant and Related Matters. By entering into this Agreement, the undersigned parties hereby acknowledge, agree and promise that neither of them will, directly or indirectly, undertake to or actually compete in any manner whatsoever with the Company in the production, publishing and/or distribution of the Catalog or in any business activity which could reasonably be understood to be competitive with the Company's Catalog business (including price sheets, pricing services, inventory control systems and other similar types of data processing products). All business opportunities in respect of or relating to the Company's Catalog business shall be the entitlement of the Company. Except for the Catalog business to be operated by the Company as contemplated and provided for by this Agreement, the parties are free to independently pursue and actually engage in all other business activities without obligation or liability of any kind or nature whatsoever to the Company or to each other. G/K hereby acknowledges and agrees that A-G is now and intends to continue in the future to, and is entitled to under the provisions of this Agreement, explore, pursue and actually engage in the business of owning and periodically producing, publishing, distributing and otherwise dealing in, for its own account, right, title and benefit, catalogs for and covering goods and services other than the Listed Products (collectively the "A-G Catalogs"). If any such A-G Catalog (or any catalog subsequently explored, pursued, produced, published, distributed and/or otherwise dealt in by G/K with A-G's subsequent express written acknowledgment and approval to G/K) includes as an incidental (or secondary) category of products or services covered by such A-G Catalog any of the pictures and/or information on individual products constituting and comprising the Company's Catalog (herein referred to as "modules) then, provided that such modules do not exceed thirty-five percent (35%) of the total number of modules constituting and comprising the non-Company catalog, A-G; (or in the case of G/K then G/K) shall be entitled to utilize any such modules constituting and comprising the Company's derived data base as it exists from time to time for the purpose only of such non-Company catalog in consideration of payment by A-G (or in the case of G/K then by G/K) of a licensing fee for the use of such modules in an amount to be determined as fair and reasonable by the Company through a unanimous vote of the Company's Board of Directors. G/K for its own account and as a prospective shareholder of the Company hereby agrees and promises not to assert any claim, right and/or entitlement against A-G and/or any of its officers, directors, employees, agents or representatives (by way of "corporate opportunity" or otherwise) arising out of, resulting from or otherwise in respect of the A-G catalogs and/or A-G's current and/or future involvement with catalogs and the catalog business so long as such A-G Catalogs are basically separate, distinct and different from the Catalog covering the Listed Products (and only such Listed Products) to be owned, produced, published and distributed by the Company as expressly provided for in this Agreement. None of A-G's activities in respect of such A-G Catalogs as they presently or may exist at any time in the future are intended by the parties to this Agreement, or shall be deemed by any third party including without limitation the Company, as a "corporate opportunity" of the Company or otherwise in contravention of G/K's rights and entitlements as a shareholder of the Company. 17. Employment Agreement. Subject to a determination by the Company's Board of Directors that the Company's current and reasonably anticipated net income and cash flow would allow the Company to timely perform such agreement in accordance with its terms, Mr. Frank J. Kubat, Jr. shall be entitled to request from the Company, and the Company is thereby obligated to enter into and perform, an employment agreement with Mr. Kubat covering Kubat's sole and exclusive, full-time employment with the Company for a period of two (2) years from the date of such agreement for compensation equal to a total of One Hundred Thousand Dollars ($100,000) per year (the "Kubat Employment Agreement"). Mr. Kubat's right to request and actually enter into the Kubat Employment Agreement, and the Company's obligation to enter into and perform such Employment Agreement with Mr. Kubat (subject only to the conditions expressly provided for herein), shall be for a period of two (2) years commencing January 1, 1991 and ending December 31, 1992, after which time all parties' rights and obligations in respect of such possible Kubat Employment Agreement shall automatically expire and terminate and be of no further force or effect. Mr. Kubat's right to enter into and receive such Employment Agreement from the Company is further conditioned upon Mr. Kubat's complete and timely performance of his personal duties and obligations under the Consulting Agreement as expressly provided for under paragraph 6 of this Agreement through the period of time prior to the date that Mr. Kubat notifies the Company that he desires to enter into the Employment Agreement provided for herein. At the time that Mr. Kubat decides to enter into the Employment Agreement with the Company as provided for herein, he will so notify the Company in writing stating the date upon which he is available to commence such full-time employment for the Company. If the Company enters into an employment agreement with Mr. Kubat at any time during the period of time that the Company is still obligated to G/K and/or Mr. Kubat for his services under the Consulting Agreement provided for under paragraph 6 of this Agreement, then during the balance of the term of such Consulting Agreement the Company's obligation and payments thereunder shall be automatically reduced by twenty-five percent (25%). 18. Complete Agreement/Amendment. This Agreement supersedes all prior understandings, arrangements and/or agreements regarding the specific subject matter hereof, and the parties, further acknowledge and agree that this Agreement accurately and completely sets forth such parties' understanding, arrangement and agreement in respect of the subject matter hereof and that none. of the parties hereto in entering into this Agreement is relying upon any statement, representation, understanding, arrangement, commitment, agreement, promise, warranty and/or guarantee constituting or in any way relating to the subject matter of this Agreement which is not specifically set forth in this Agreement. This Agreement may not be modified, amended or otherwise changed except in writing, so stating, and executed by the party against which any such modification, amendment or change is sought to be enforced. This Agreement (including herein the exhibit hereto) shall be deemed to have been drafted and otherwise prepared by all of the parties and no party shall suffer the existence of any ambiguity in the language of this Agreement as a result of having been deemed or otherwise determined to have drafted or prepared or to have been responsible for the drafting and/or preparation of this Agreement. Each of the parties hereto further acknowledges the opportunity to consult with independent legal counsel or other professional advisors in respect of the matters which are the subject of this Agreement, and the Agreement itself, and hereby waives, releases and relinquishes any future claim that such party did not have the opportunity to consult with, or benefit from having consulted with separate, independent legal counsel or other professional advisor in respect of the Agreement or the subject matter thereof. 19. No Waiver. Except as may be expressly and specifically stated elsewhere in this Agreement, failure by any party to enforce any right, entitlement, benefit and/or remedy granted by or otherwise available under this Agreement shall not constitute a waiver of such right, entitlement, benefit and/or remedy, and waiver of any provision of this Agreement shall not constitute a waiver of any other provision(s) or of any right, entitlement, benefit and/or remedy under this Agreement. Any party to this Agreement shall be entitled to waive in writing the timely or other performance of any agreement, promise or the satisfaction of any condition expressly made in favor of or for the benefit of such waiving party. 20. Successors and Assigns. This Agreement and the rights, entitlements, benefits, duties and obligations as set forth herein shall inure to the benefit, and be the continuing legal obligation of, the undersigned parties, and each of them, and their respective heirs, assignees, transferees and all other successors in interest whether by voluntary action of the parties or by operation of law. 21. Notice. Any notice, instrument or communication required or permitted under this Agreement shall be deemed to have been effectively given and made if in writing and if served whether by personal delivery to the party for whom it is intended, or by being deposited, postage prepaid, registered or certified mail, return receipt requested, in the United States mail, addressed to the party for whom it is intended at the following addresses (or such other address as any of the parties shall hereafter designate in writing): If to Auto-Graphics: Auto-Graphics, Inc. 3201 Temple Ave. Pomona, California 91768 Attention: Robert S. Cope, President With a copy to: Robert H. Bretz, Esq. Robert H. Bretz, P.C. 10350 Santa Monica Blvd. #130 Los Angeles, California 90025 If to G/K: . Gannam/Kubat Publishing, Inc. 2632 Saturn Street Brea, California 92621 Attention: Frank J. Kubat, Jr. With a copy to: Edward H. Petersen, Esq. Edward H. Petersen, P.C. 800 South Beach Blvd., Suite H La Habra, California 90631 22. Severability. If any portion of this Agreement is held to be unenforceable, said portion shall be severed from this Agreement, the remainder of which shall be deemed to and continue in full force and effect. 23. Counterparts. Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same original Agreement. 24. Choice of Law. This Agreement shall be governed by and interpreted for all purposes under California law. 25. Attorneys' Fees. If legal action be instituted by any party to enforce the provisions of this Agreement or otherwise in respect of this Agreement, then the prevailing party in any such legal action. 26. Recitals. The Recitals as first set forth in this Agreement are hereby incorporated into and made a part if this Agreement. 27. Paragraph Headings. Paragraph and sub-paragraph headings used in this Agreement are for convenience only and are not a part of this Agreement and shall not be used in construing it. IN WITNESS WHEREOF, the undersigned parties through their duly authorized representatives have executed and delivered this Agreement in Pomona, California, dated effective as of June 12, 1990. Gannam/Kubat Publishing, Inc. By: ss/ Frank J. Kubat, Jr. By: ss/ Nasib Gannam Auto-Graphics, Inc. By: ss/ Robert S. Cope, President Acknowledged and Agreed (as to the provisions applicable to such individuals in paragraphs 6 (Kubat) 9 (Gannam) and 17 (Kubat and Gannam) of the Agreement. By: ss/ Frank J. Kubat, Jr. By: ss/ Nasib Gannam ................Exhibit B - Database Recovery Memorandum.................... A-G DATABASE RECOVERY ISSUE In consideration of the cost incurred by Auto-Graphics, Inc. in the creation, development and maintenance of the Datacat, Inc. HVACR database through December 31, 1993, Auto-Graphics will be entitled to recover an amount equal to $575,000 from Datacat, as provided for herein ("Database Recovery"). The Database recovery shall commence September 1, 1994. The liability represented by such Database Recovery shall be booked by Datacat at August 30, 1994. Payments in respect of such Database recovery shall be made by Datacat on a priority basis (before any dividends or other payment or distribution or payment out of or in respect of capital or equity to the shareholder owners of Datacat) from the following sources: 1. Model Selection Fee. An amount equal to $5.80 shall be paid by Datacat to Auto-Graphics for each module selected by any Datacat customer out of Datacat's current and future HVACR database; 2. Increased Gross Margin Any amount paid by Datacat to Auto-Graphics in respect of any customer job which is designated in writing by Datacat as an "Increased margin job, whereby Auto-Graphics is authorized to bill and collect from Datacat an amount for Auto-Graphics' composition and/or other services over and above twenty-five percent (25%) profit margin to Auto-Graphics for the work performed on such job, shall be credited to and thereby reduce Datacat's obligation to Auto-Graphics for Database Recovery; and 3. A-G Cost Savings. Any amount which Auto-Graphics expressly consents to and approves in writing as representing, in Auto-Graphics' sole and exclusive judgment, a recognized cost savings in Auto-Graphics' basic composition services business attributable to suggestions made by Datacat personnel shall be credited to and thereby reduce Datacat's obligation to Auto-Graphics for Database Recovery. In the event that Auto-Graphics does not actually receive in each twelve month period commencing September 1, 1994 an amount equal to one-third (33 1/3%) of such Database Recovery ($191,667), then upon Auto-Graphics written request to Datacat and its shareholders, the shareholders of Datacat shall then immediately contribute, pro rata to their then current stock ownership positions in Datacat, an additional amount of cash as a further capital contribution to Datacat which will enable Datacat to then immediately pay Auto-Graphics the balance of any such minimum one-third Database Recovery amount due in any such particular twelve month period during the three year period ending August 31, 1997. ................Exhibit C - AG Database Recovery Counter-Proposal............. ROBERT H. BRETZ A PROFESSIONAL CORPORATION 520 WASHINGTON BOULEVARD, #428 MARINA DEL REY, CALIFORNIA 90292 Telephone 310/578-1957 Fax 310/578-5443 August 3, 1994 via Fax No 697-7265 Edward H. Petersen, Esq. 800 South Beach Blvd., Suite H La Habra, California 90631 Re: Datacat, Inc. Dear Ed: This will confirm my telephone report to you following the Datacat Board Meeting as to the database recovery issue. Auto-Graphics, Inc.'s proposal is as follows: (1) Total Recovery: $500,000 (recorded as a liability on Datacat Is financial books and records); and (2) Gannam/Kubat guarantee responsibility would be for a total of $300,000 based upon the current projected and budgeted module selection fee payable to Auto-Graphics for the balance of 1994 ($75,000), 1995 ($100,000) and 1996 ($125,000). Accordingly, if Datacat did not meet its budgeted module selection fee ("MSF") payment to A-G of $75,000 during the remainder of 1994, then the shortfall would be guaranteed by the stockholders of Datacat on a 50/50 basis (one-half each A-G and G/K) ; and G/K's share, therefore, would be 50% of the shortfall ($75,000 less actual MSF payment to A-G in 1994 up to a maximum of $37,500 if no MSF payments were made to A-G by Datacat for the remainder of 1994). The same analysis would apply for 1995 and 1996, except G/K's exposure would increase as the budgeted MSF payments increase. The Gannam/Kubat guarantee of Datacat's obligation to Auto-Graphics would be joint and several. Please see if Nappy and Frank will agree to Auto-Graphics proposal. If so, it is my understanding that agreement has been reached that the two shareholder groups, Auto-Graphics and Gannam/Kubat, will provide Datacat with a line of credit of $100,000 each totaling $200,000 to ensure Datacat's smooth financial operation through 1994. We will send along proposed resolutions covering the mechanics of any such future Datacat "call" and the mechanics as to how it would work. If you have any ideas you would like to send along before we begin drafting, please feel free to provide them to us. I was please to hear that the "day after thoughts" about the qualifications/guidance re Frank Kubat's proposed employment arrangement with Datacat are still positive. I concur, again, with Frank that it would be a good idea for him and Bob Cope to get together to dismiss the proposed co-manager role that has been proposed for them, and their feelings and suggestions as to how they can work together in the most productive manner for the benefit of Datacat. As discussed, I will try to provide you and Frank with a further draft of the proposed employment contract by no later than this coming Monday, August 8, 1994. As indicated, I hope to be able to take advantage of a planned two week vacation starting Tuesday, August 9, 1994, but I will be available by telephone, fax, and Federal Express to keep matters moving along during the August 9-22 period that I will be out of town. Hopefully, this brings us up to date on the matters we are discussing. Very truly yours, ss/ Bob Bretz Robert H. Bretz cc: Frank Kubat c/o Auto Graphics, Inc. (Via Fax No. 909/595-3506) Bob Cope RHB/sn/ag2l76 ................Exhibit D - Proposed Ratifying Resolution................... .....................Letter........................ ROBERT H. BRETZ A PROFESSIONAL CORPORATION 520 WASHINGTON BOULEVARD, #428 MARINA DEL REY, CALIFORNIA 90292 Telephone 310/578-1957 Fax 310/578-5443 July 18, 1995 Via Fax No. 697-7265 Edward Petersen, Esq. 800 South Beach Boulevard, Suite H La Habra, CA 90631 Re: Datacat, Inc. (Data Base Recovery Matter) Dear Ed: Per our conversation this date, we are enclosing resolutions covering the Auto-Graphics data base recovery item. As previously indicated to you and Messrs. Gannam and Kubat on several occasions, the Auto-Graphics representatives to the Datacat Board believe that the Board formally approved payment by Datacat of $575,000 over a three year period in equal monthly payments commencing September 1, 1994, and that such agreement has been properly performed by Datacat pursuant to such prior Board approval and authority. Auto-Graphics likewise believes that the $15,972 monthly payments by Datacat to A-G which have taken place and are scheduled for payment in the future have not been unduly burdensome to Datacat (or its shareholder/creditors), and that such payments should become increasingly affordable as Datacat sales increase in accordance with projections submitted to the Board at its July 1994 meeting. Nevertheless, we understand that Messrs. Gannam and Kubat are currently uncomfortable with the level of cash payments by Datacat in respect of such data base recovery obligation to Auto-Graphics and have asked Auto-Graphics to consider a new arrangement to become effective August 1, 1995. Auto-Graphics has expressed a willingness to consider such request, and hereby submits a proposal which we believe will meet with your client's approval. (Mr. Kubat has already told me that he will go along with whatever Mr. Gannam decides is okay). The proposal is set for the in the form of the Datacat corporate resolutions enclosed herewith (the "Proposal"). If for any reason the within proposal is not acceptable to Gannam/Kubat, then Auto-Graphics will expect the existing payment arrangement to continue in effect and to be regularly and timely performed by Datacat: (it being understood that the within Proposal is made subject to and without prejudice to any and all rights Auto-Graphics has or may hereafter have in respect of the obligation of Datacat to Auto-Graphics in respect of such data base recovery matter). As Auto-Graphics understands it, assuming that the data base recovery matter is restructured to the mutual satisfaction of the parties, the agenda considered and acted upon by the Datacat Board in July 1994 will have been endorsed and ratified by both Diversified and Auto-Graphics. With your assistance, I would like to be able to report Gannam/Kubat's approval of the within Proposal before the end of this week. (Toward this end, we are forwarding the original Minute Book copy of the within Proposal directly to Diversified for execution by Messrs. Gannam and Kubat and return to us for further signature by Auto-Graphics people). Thanks. Very truly yours, ss/ Bob Bretz Robert H. Bretz Enclosure CC: Auto-Graphics, Inc. (Via -Fax No. 909/595-3506) Diversified Printing Company (Via fax No. 714/996-0342) ................Proposed Resolution.............. RESOLUTIONS OF THE BOARD OF DIRECTORS OF DATACAT, INC. The undersigned persons, constituting all of the members of the Board of Directors of Datacat, Inc., a California corporation (the "Company"), acting without holding a formal meeting, through this unanimous written consent as provided for under California Corporations Code Section 307(b), do hereby approve, consent to, adopt and ratify as the action of the Company the following resolutions effective as of July 21, 1995 (the "Resolutions"): WHEREAS, the Board of Directors of the Company has previously authorized payment to Auto-Graphics, Inc. ("A-G") in respect of the costs incurred to create the Company's initial HVACR data base in the agreed upon amount of $575,000 (herein the "Data Base Recovery Cost") , and now desires to revise the regular periodic payments to be made by the Company to A-G in respect of such Data Base Recovery Cost; NOW, THEREFORE, BE IT RESOLVED that the Company's obligation to A-G in respect of the balance of such Data Base Recovery Cost in the amount of $399,308 shall be paid, commencing effective August 1, 1995, in equal monthly installments over a period of forty-one (41) months of $9,739 per month until the balance of such Data Base Recovery Cost obligation has been paid in full in December of 1998; RESOLVED FURTHER, that if the balance due and owing by the Company to A-G in respect of such Data Base Recovery Coat is not paid in full prior to the end of the twenty-ninth (29) month (December, 1997), then in addition to the regular payment by the Company to A-G the then existing balance of such Data Base Recovery Cost, A-G shall be entitled to receive and the Company shall pay interest on such remaining balance payable monthly at the maximum rate allowable by law but in no event more than ten percent (10%) per annum; RESOLVED FURTHER, that payment by the Company to A-G of amounts due and owing in respect of such Data Base Recovery Cost shall be subordinated to the payment of current payable to third party (non-related parties and the Datacat rent, payroll and miscellaneous expenses advanced by and reimbursed to A-G which are deemed to be third party payables) vendors but shall be paid prior to payment by the Company of payables due and owing to Diversified and A-G for catalog services rendered by such related parties to Datacat, RESOLVED FURTHER, that appropriate officers, agents and representatives of the Company are hereby authorized and directed to implement, carry-out and effectuate the foregoing resolutions by, in the name of and for and behalf of the Company including without limitation the making, execution and delivery of a promissory note by the Company evidencing the Company's obligation to A-G in respect of such Data Base Recovery Cost in the form attached hearto as Exhibit A; and RESOLVED FURTHER, that for purposes of the approval of the within Resolutions, the A-G representatives on the Company's Board of Directors, Messrs. Robert S. Cope, Douglas K. Bisch and Paul Cope, shall be deemed to have abstained from the voting on and approval of these Resolutions. IN WITNESS WHEREOF, the undersigned have executed the Resolutions effective as of the date first indicated above. Nasib Gannam Frank J. Kubat, Jr. Robert S. Cope Douglas K. Bisch Paul Cope ...............Proposed Promissory Note................... PROMISSORY NOTE $350,613 December 31, 1995 Pomona, California FOR THE VALUE RECEIVED, Datacat, Inc., a California corporation (the "Maker"), promises to pay to Auto-Graphics, Inc., a California corporation, or its order (the "Payee"), at the Maker's corporate office the principal sum of Three Hundred and Fifty Thousand Six Hundred and Thirteen Dollars ($350,613) in equal monthly installments of Nine Thousand Seven Hundred and Thirty-Nine Dollars ($9,739) each commencing January 1, 1996 and continuing thereafter until the principal balance of this Promissory Note has been paid in full in December of 1998. This Promissory Note may be prepaid by the Company at any time. If this Promissory Note is not prepaid in full on or before December 31, 1997 then, in addition to the principal payments to the Payee as provided for herein, the Payee shall be entitled to receive and the Maker shall be obligated to and shall pay to the Payee each month commencing January 1, 1998 interest on the unpaid principal balance of this Note at the maximum rate allowable by law during such period of time not to exceed ten percent (10%) per annum. If the Maker fails to make three consecutive monthly payments as provided for herein, then the Payee shall have the right to declare a default under this Promissory Note and accelerate payment of all past due and remaining payments under this Note which shall hereby all become due and owing by the Maker at the date of any such notice default by the Payee. The Maker hereby waives presentment, notice non-payment or other formal demand prior to the initiation of legal action by the Payee to recover amounts due and owing on this Promissory Note, except that the Payee agrees to and shall provide written notice of intention to file legal action on this Promissory Note to Nasib Gannam and Frank Kubat c/o Diversified Printing Company, 2632 Saturn Street, Brea, California 92621, any no later than thirty (30) days prior to actually filing any such suit. If the Payee is forced for any reason to initiate legal action to collect or otherwise in respect of this Promissory Note and the obligation represented thereby then, in addition to whatever other relief the Payee may be entitled to receive as a result of such action , the Payee shall also be entitled to such Payee's reasonable attorneys' fees and costs, and other costs of suit, as part of any settlement of or judgment on such legal action. This Promissory Note is made, and shall be governed, interpreted and enforced for all purposes under the laws of the State of California. IN WITNESS WHEREOF, the undersigned having been duly authorized has executed this Promissory Note in Pomona, California effective as of the date first above written. DATACAT, INC. (a California Corporation) By: Nasib Gannam By: Robert S. Cope This Promissory Note is made, and shall be governed, interpreted and enforced for all purposes under the law of the State of California. IN WITNESS WHEREOF, the undersigned having been duly authorized has executed this Promissory Note in Pomona, California effective as of the date first above written. DATACAT, INC. (a California Corporation) By: Nasib Gannam By: Robert S. Cope ..........................End Exhibits....................................... EX-10.15 3 THIRD AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, ACCOUNTS AND EQUIPMENT, BETWEEN UNION BANK OF CALIFORNIA, NA AND AUTO-GRAPHICS, INC. DATED JUNE 12, 1996. Exhibit 10-15 THIRD AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT ACCOUNTS AND EQUIPMENT This Agreement is made as of June 12, 1996 between AUTO-GRAPHICS, INC., a California corporation ("Borrower") and THE BANK OF CALIFORNIA, A DIVISION OF UNION BANK OF CALIFORNIA, N.A. ("Bank"). RECITALS A. As of the date hereof, Borrower is indebted to Bank pursuant to the terms of that certain Second Amended and Restated Revolving Credit Agreement dated as of August 28, 1992, as amended January 5, 1993, June 9, 1993, June 13, 1994, January 27, 1995, June 30, 1994, June 9, 1995, July 3, 1995 and September 30, 1995 (collectively, the "1992 Agreement") under which Bank provided Borrower (i) a revolving credit ("Prior Revolving Credit") evidenced by that certain promissory note dated as of June 13, 1994, in the maximum principal amount of $1,000,000.00 subject to the Borrowing Base (as defined in the 1992 Agreement) ("Prior Revolving Credit Note") and which, as of June 10, 1996, has an outstanding principal amount of $500,000.00 and (ii) a revolving credit equipment/capitalized software development costs credit ("Prior Revolving Equipment/Capitalized Software Development Costs Credit" or "Revolving E/CSDC Loan") evidenced by that certain promissory note dated August 28, 1992, as modified June 9, 1993 and June 13, 1994, in the original principal amount of $2,250,000.00 subject to Revolving Equipment/Capitalized Software Development Costs Borrowing Base (as defined in the 1992 Agreement) ("Prior Revolving Equipment /Capitalized Software Development Costs Note" or "Prior Revolving E/CSDC Note") and which, as of June 10, 1996, has an outstanding principal balance of $2,095,880.92. The Prior Revolving Credit Note and the Prior Revolving E/CSDC Note may each hereafter in these Recitals be referred to as a "Note" and, collectively, as the "Notes". B. To secure its obligations to Bank evidenced by the 1992 Agreement, the Notes and all other Loan Documents (as that term is defined hereinafter), Borrower granted to Bank a security interest in certain of its assets ("Collateral") pursuant to that certain Security Agreement Equipment dated as of May 31, 1989, and that certain Security Agreement Accounts dated as of June 13, 1994, each by and between Bank and Borrower (each a "Security Agreement" and collectively, the "Security Agreements"). Pursuant to the Security Agreement, Bank has a valid, perfected lien of first priority on the Borrower's Accounts and Equipment (as these terms are defined hereinafter). C. Bank and Borrower mutually desire to amend and restate the 1992 Agreement on the terms and conditions set forth in this Agreement in order to extend the maturity dates of the Revolving Credit and Revolving E/CSDC Credit, increase the availability under the Revolving E/CSDC Credit to $3,000,000.00, and to reset certain terms and conditions set forth herein. Borrower and Bank intend this Agreement to replace and supersede the 1992 Agreement for all purposes. AGREEMENT Incorporation of Recitals. Each of the above Recitals is incorporated herein and deemed to be the agreement of the Bank and Borrower, and is relied upon by each party to this Agreement in agreeing to the terms of this Agreement. ARTICLE I - DEFINITIONS The following definitions shall be applicable to both the singular and plural forms of the defined terms: "Account Debtor" means the Person obligated upon an Account. "Accounts" means all rights to the payment of money now owned or hereafter acquired by Borrower, whether due or to become due and whether or not earned by performance, including but not limited to, accounts, chattel paper, instruments, and general intangibles. "Advance" means an extension of credit under the Revolving Credit or the Revolving E/CSDC Credit. "Affiliate" means any Person which directly or indirectly controls, is controlled by, or is under common control with, Borrower. "Control", "controlled by" and "under common control with" means direct or indirect possession of the power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise); provided that control shall be conclusively presumed when any Person or affiliated group directly or indirectly owns five percent or more of the securities having ordinary voting power for the election of directors of a corporation. "Agreement" means this Third Amended and Restated Revolving Credit Agreement, as it may be amended from time to time. "Borrowing Base" means the lesser of the following sums, which may be adjusted under the terms of this Agreement by the creation of a special reserve if employee wages or payroll taxes have not been paid: (a) ONE MILLION DOLLARS ($1,000,000.00); or (b) Eighty percent (80%) of Borrower's Eligible Accounts. For purposes of calculating the Borrowing Base, the value of Eligible Accounts shall be computed as of the date of the most recently required Borrowing Base Certificate. "Borrowing Base Certificate" means the certificate in form and substance satisfactory to Bank, executed by Borrower to evidence the Borrowing Base. "Capitalized Software Development Costs Certificate" means the certificate setting forth Eligible Capitalized Software Development Costs (as hereinafter defined) to be furnished by Borrower to Bank as required under the terms of this Agreement, and in form and substance satisfactory to Bank. "Closing Date" means the date of this Agreement. "Commercial Account" means Borrower's demand deposit account No. 032-012275 at Bank's Los Angeles Regional Office, as referred to in Article Two. "Eligible Account" means an Account: (a) Arising from the sale of goods or the performance of services by Borrower in the ordinary course of Borrower's business; (b) Upon which Borrower's right to receive payment is absolute and not contingent upon the fulfillment of any condition whatever; (c) Against which is asserted no defense, counterclaim, discount, or setoff, (d) That is an accurate statement of the indebtedness incurred by the Account Debtor; (e) Owned by Borrower free and clear of all Liens, rights, claims, and interests of others except security interests in favor of Bank; (f) That does not arise from a sale to or performance of services for a Related Person; (g) That is not in default. An Account shall be deemed in default upon the occurrence of any of the following: (i)The Account is not paid or payable within a ninety-one (91) day period starting from the original invoice date; (ii) The Account Debtor suspends business, becomes insolvent, or fails to pay its debts generally as they come due; (iii) Any petition is filed by or against the Account Debtor under the Bankruptcy Reform Act, Title 11 of the United States Code or under any other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; or (iv) More than twenty-five (25%) of the total balance due of the Accounts of the Account Debtor are not paid or payable within a ninety-one (91) day period starting on the original invoice date; (h) That is not the obligation of an Account Debtor that is the federal government, unless Borrower has complied in form and substance satisfactory to Bank with the Assignment of Claims Act(s) or any successor thereof in effect from time to time, or other applicable law(s) or regulation(s); (i) That is not the obligation of an Account Debtor located in a foreign country, except Canada, unless the Bank consents in writing and the Account is guaranteed by an EXIMBank guaranty, insured by the Foreign Credit Insurance Association or covered by a letter of credit issued or confirmed by a bank located in the United States of America acceptable to Bank, each such guarantee, insurance policy or letter of credit being in form and substance satisfactory to Bank; (j) That is otherwise acceptable to Bank. "Eligible Capitalized Software Development Costs" means capitalized software development costs: (a) Arising from the development of software programs by Borrower in the ordinary course of Borrower's business; (b) Incurred and capitalized during the fiscal year in which a request for an Advance is made; (c) Certified in each Capitalized Software Development Costs Certificate as an accurate statement of software development costs in accordance with GAAP; (d) Reported in the financial statements of Borrower required under the terms of this Agreement; and (e) Otherwise acceptable to Bank. "Eligible New Equipment" means Equipment which is: (a) Owned by Borrower free and clear of all Liens, rights, claims, and interests of others, except security interests in favor of Bank; (b) Located only in the places identified in the security agreement(s) covering such Equipment that constitutes one or more of the Loan Documents; (c) In Bank's judgment is not obsolete, unsalable, damaged, or unfit for further disposition; (d) Evidenced by original invoices, in form and substance satisfactory to Bank, which show that the Equipment (and installation charge, if applicable) was incurred by Borrower after the date of the most recent Advance on the Revolving E/CSDC Credit; and (e) Otherwise acceptable to Bank. "ERISA" means the Employee Retirement Income Security Act of 1974, or any successor thereof, in effect from time to time. "Equipment" means all of Borrower's equipment now owned or hereafter acquired, including but not limited to machinery, machine parts, furniture, furnishings and all tangible personal property used in the business of Borrower and all such property which is or is to become fixtures on real property, and all improvements, replacements, accessions and additions thereto, wherever located, and all proceeds thereof arising from the sale, lease, rental or other use or disposition of any such property, including all rights to payment with respect to insurance or condemnation, returned premiums, or any cause of action relating to any of the foregoing. "Event of Default" means any event described in Article Nine. "Facilities" means the Revolving Credit and the Revolving Equipment/Capitalized Software Development Costs Credit. "GAAP" means generally accepted accounting principles and practices consistent with those principles and practices promulgated or adopted by the Financial Accounting Standards Board and the Board of the American Institute of Certified Public Accountants, their respective predecessors and successors. Each accounting term used but not otherwise expressly defined herein shall have the meaning given it by GAAP. "Inventory" means all inventory, raw material, work in process or materials used or consumed in Borrower's business, warehouse receipts, bills of lading and other documents evidencing goods now owned or hereafter acquired by Borrower, and all goods covered thereby including returned goods, accessions, additions, improvements, and all products thereof, whether in Borrower's possession or in the possession of warehousemen, bailees or any other Person, and all proceeds thereof, including without limitation all rights to payment with respect to any insurance, including returned premiums, or any cause of action relating to any of the foregoing. "Lien" means any voluntary or involuntary security interest, mortgage, pledge, claim, charge, encumbrance, title retention agreement, or lessors interest, covering all or any part of the property of Borrower or any other Person. "Loan Documents" means, individually and collectively, the Revolving Credit Note and the Revolving E/CSDC Note, the 1992 Agreement, this Agreement, any rate option agreement, guaranty, subordination agreement, security or pledge agreement, and all other contracts, instruments, documents and addenda executed in connection with the extensions of credit which are the subject of this Agreement. "Notes" means collectively the Revolving Credit Note and the Revolving E/CSDC Note. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto established under ERISA. "Person" means any individual or entity, including without limitation Bank where the context so permits and in Bank's sole discretion. "Plan" means any employee benefit plan of the Borrower subject to ERISA. "Prime Rate" means the rate Bank announces to be in effect from time to time as its Prime Rate. The Prime Rate is a rate set by Bank based on various factors, including general economic and market conditions, and is used as a reference point for pricing certain loans. Bank may price its loans at, above or below the Prime Rate. "Related Person" means any Affiliate of Borrower, or any officer, employee, director or shareholder of Borrower or any Affiliate, or a relative of any of them. "Revolving Credit" means the credit accommodation being provided Borrower described in Article Two. "Revolving Credit Note" means the promissory note in form and substance satisfactory to Bank executed by Borrower to further evidence the Revolving Credit. "Revolving E/CSDC Borrowing Base" means the lesser of the following sums, which may be adjusted under the terms of this Agreement by the creation of a special reserve if employee wages or payroll taxes have not been paid: (a) THREE MILLION DOLLARS ($3,000,000.00); or (b) The sum of (i) Eighty percent (80%) of Borrower's Eligible New Equipment including tax license, installation costs; and (ii) Eighty percent (80%) of Borrower's Eligible Capitalized Software Development Costs, to a maximum of $1,000,000.00. For purposes of calculating the Revolving E/CSDC Borrowing Base, the value of Eligible New Equipment and Eligible Capitalized Software Development Costs shall be computed as of the date of the most recently required Eligible New Equipment invoice or Eligible Capitalized Software Development Costs Certificate, as applicable, and the value of Eligible Capitalized Software Development Costs shall be based upon the lesser of the value stated in the most recently required Capitalized Software Development Costs Certificate or Bank's independent determination of the value of Eligible Capitalized Software Development Costs. "Revolving E/CSDC Credit" means the credit accommodation provided Borrower as described in Article Three of this Agreement. "Revolving E/CSDC Note" means the promissory note in form and substance satisfactory to Bank executed by Borrower to further evidence the Revolving E/CSDC Credit. "Subject Documents" means the documents defined in Section 10.12. "Tangible Net Worth" means the net book value of (a) all Borrower's assets, exclusive of intangibles, and loans to and notes and receivables from Related Persons, minus (b) all Borrower's liabilities, in each case, determined in accordance with GAAP. "Termination Date" means the earlier of (a) May 30, 1997 for the Revolving Credit and the Revolving Equipment/Capitalized Software Development Costs Credit, or (b) the date Bank may terminate making Advances pursuant to the rights of Bank under Article Nine. "UCC" means the Uniform Commercial Code as enacted in the applicable jurisdiction, in effect on the Closing Date and as amended from time to time. ARTICLE TWO - REVOLVING CREDIT 2.1 Advances and Revolving Credit Note. Subject to the terms and conditions of this Agreement, from time to time prior to the Termination Date, upon request by Borrower, Bank will make Advances to Borrower which, in the aggregate, shall not exceed at any time the Borrowing Base. The Revolving Credit shall be evidenced by the Revolving Credit Note. Borrower may borrow, repay and reborrow under the Revolving Credit, as Borrower may elect in minimum amounts of TEN THOUSAND DOLLARS ($ 10,000.00). Borrower shall pay to Bank all sums outstanding under the Revolving Credit and due under this Agreement no later than the Termination Date. As of the date of this Agreement, all unpaid principal, interest and other amounts accrued and outstanding under the Prior Revolving Credit shall for all purposes be and constitute unpaid amounts outstanding under, and evidenced by, the Revolving Credit Note. 2.2 Requests for Advances. Advances may be requested in writing, by telephone, telex or otherwise on behalf of Borrower. Borrower recognizes and agrees that Bank cannot effectively determine whether a specific request purportedly made by or on behalf of Borrower is actually authorized or authentic. As it is in Borrower's best interest that Bank advance funds in response to these forms of request, Borrower assumes all risks regarding the validity, authenticity and due authorization of any request purporting to be made by or on behalf of Borrower. Borrower promises to repay any sums, with interest, that are advanced by Bank pursuant to any request which Bank in good faith believes to be authorized, or when the proceeds of any Advance are deposited to the account of Borrower with Bank, regardless of whether any Person other than Borrower may have authority to draw against such account. 2.3 Use of Proceeds. Borrower shall use the proceeds of the Revolving Credit only for working capital; and not directly or indirectly to purchase or carry any margin stock, as defined from time to time by the Board of Governors of the Federal Reserve System in Federal Regulation U. 2.4 Advances and Payments. Each Advance shall be made by a deposit to Borrowers Commercial Account, unless Borrower shall otherwise direct Bank in writing. 2.5 Exceeding the Borrowing Base. Borrower agrees that if at any time the amounts due Bank under the Revolving Credit exceed the amount available under the Borrowing Base, Borrower will immediately upon Bank's demand pay Bank the excess. 2.6 Interest. Interest on the outstanding principal balance of the Revolving Credit shall accrue daily from the date of the first Advance until the Termination Date at the Prime Rate plus one half of one percent (0.50%). Interest shall be payable on the last day of each consecutive month, beginning on the first such date after the first Advance and continuing through the Termination Date, on which date all accrued interest and principal remaining unpaid shall be due and payable in full. ARTICLE THREE - REVOLVING CREDIT-EQUIPMENT 3.1 Advances and Revolving E/CSDC Credit. Subject to the terms and conditions of this Agreement, from time to time prior to the Termination Date, upon request by Borrower, Bank will make Advances to Borrower which, in the aggregate, shall not exceed at any time the Revolving E/CSDC Credit Borrowing Base. The Revolving E/CSDC Credit shall be evidenced by the Revolving E/CSDC Note. Borrower may borrow, repay and reborrow under the Revolving E/CSDC Credit, as Borrower may elect, in minimum amounts of ONE THOUSAND DOLLARS ($ 1,000.00). Borrower shall pay to Bank all sums outstanding under the Revolving E/CSDC Credit and due under this Agreement no later than the Termination Date. As of the date of this Agreement, all unpaid principal, interest and other amounts accrued and outstanding under the Prior Revolving E/CSDC Credit identified in Recital A shall for all purposes be and constitute unpaid amounts outstanding under, and evidenced by, the Revolving E/CSDC Note. 3.2 Use of Proceeds. Borrower shall use the proceeds of the Revolving E/CSDC Credit only for the purchase and installation of Eligible New Equipment and/or to finance Eligible Capitalized Software Development Costs; and not directly or indirectly to purchase or carry any margin stock, as defined from time to time by the Board of Governors of the Federal Reserve System in Federal Regulation U. 3.3 Requests for Advances. Advances must be requested in writing, by telephone, telex or otherwise on behalf of Borrower. Borrower recognizes and agrees that Bank cannot effectively determine whether a specific request purportedly made by or on behalf of Borrower is actually authorized or authentic. As it is in Borrower's best interest that Bank advance funds in response to these forms of request, Borrower assumes all risks regarding the validity, authenticity and due authorization of any request purporting to be made by or on behalf of Borrower. Borrower promises to repay any sums, with interest, that are advanced by Bank pursuant to any request which Bank in good faith believes to be authorized, or when the proceeds of any Advance are deposited to the account of Borrower with Bank, regardless of whether any Person other than Borrower may have authority to draw against such account. 3.4 Advances and Payments. Each Advance shall be made by a deposit to Borrower's Commercial Account, unless Borrower shall otherwise direct Bank in writing. 3.5 Exceeding the Revolving E/CSDC Borrowing Base. Borrower agrees that if at any time the amounts due Bank under the Revolving E/CSDC Credit exceed the amount available under the Revolving E/CSDC Borrowing Base, Borrower will immediately upon Bank's demand pay Bank the excess. 3.6 Monthly Installment Payments and Interest. Principal amounts outstanding under the Revolving E/CSDC Credit shall be payable in monthly installments equal to not less than $50,000.00, and shall be made on the last day of each consecutive month, beginning the first such date after the Closing Date and continuing through the Termination Date. If the outstanding principal balance of the Revolving E/CSDC Credit is at any time less than $50,000.00 then Borrower shall pay Bank such lesser amount on the next principal installment due date. Interest on the outstanding principal balance of the Revolving E/CSDC Credit shall accrue daily from the date of the first Advance until the Termination Date at the Prime Rate plus three quarters of one percent (0.75%). Interest shall be payable on the last day of each consecutive month, beginning on the first such date after the first Advance and continuing through the Termination Date, on which date all accrued interest and principal remaining shall be due and payable in full. 3.7 Conversion to Term Loan. Notwithstanding the foregoing, however, if on the Termination Date Borrower is in compliance with all terms and conditions of this Agreement, Revolving E/CSDC Note and any Loan Documents, and any other credit arrangements Borrower has with Bank, and no Event of Default has occurred or is continuing, then Bank agrees to convert up to the then outstanding principal balance of the Revolving E/CSDC Credit, which shall be evidenced by the new Revolving E/CSDC Note, which shall bear interest and be payable in accordance with the terms set forth therein. ARTICLE FOUR - GENERAL CREDIT PROVISIONS 4.1 Advances and Payments. (a) The obligation of Bank to make any Advance, the proceeds of which are, at Borrower's request, to be wire transferred to Borrower or any other Person, shall be subject to all applicable laws and regulations, and the policy of the Board of Governors of the Federal Reserve System on Reduction of Payments System Risk in effect from time to time ("Applicable Law and Policy"). Borrower acknowledges that, as a result of Applicable Law and Policy, the transmission of any funds which Borrower has requested to be wire-transferred may be significantly delayed. (b) Principal, interest, and all other sums owed Bank under any Loan Document shall be evidenced by entries in records maintained by Bank for such purpose. Each payment on and any other credits with respect to principal, interest and all other sums outstanding under any Loan Document shall be evidenced by entries in such records. Bank's records shall be conclusive evidence thereof. (c) Notwithstanding the rights given to Borrower pursuant to California Civil Code sections 1479 and 2822 or equivalent provisions in the laws of the state specified in the governing law clause of this document (and any amendments or successors thereto), to designate how payments will be applied, Borrower hereby waives such rights and Bank shall have the right in its sole discretion to determine the order and method of the application of payments to this and/or any other credit facilities that may be provided by Bank to Borrower and to revise such application prospectively or retroactively at its discretion. (d) Borrower hereby expressly authorizes Bank to debit Borrower's Commercial Account for the amount of each payment of principal and interest and all other sums owed Bank under any Loan Document. Borrower shall have sufficient collected balances in said account in order that each such payment shall be available when due. (e) Any unpaid payments of principal or interest on the Facilities shall bear interest from their respective maturities, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the Prime Rate plus 5%, until paid in full, whether before or after judgment. (f) Interest and fees shall be calculated for actual days elapsed on the basis of a 360-day year, which results in higher interest payments than if a 365-day year were used. Each change in the rate of interest shall become effective on the date each Prime Rate change is announced within the Bank. In no event shall Borrower be obligated to pay interest at a rate in excess of the highest rate permitted by applicable law from time to time in effect. 4.2 Collateral. Borrower shall ensure Bank is granted a security interest of first priority in such collateral as might be required by Bank under a pledge agreement, deed of trust, or other security agreement, as appropriate, in form and substance satisfactory to Bank. ARTICLE FIVE - REPRESENTATIONS AND WARRANTIES Borrower represents and warrants that as of the Closing Date and the date of each Advance under the Revolving Credit and the Revolving E/CSDC Credit: 5.1 Due Organization. Borrower is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to conduct business in each jurisdiction where failure to so qualify would have a material adverse effect on its business. 5.2 Authorization, Validity and Enforceability. The execution, delivery and performance of all Loan Documents executed by Borrower are within Borrower's powers, have been duly authorized, and are not in conflict with Borrower's articles of incorporation or by-laws, or the terms of any charter or other organizational document of Borrower; and all such Loan Documents constitute valid and binding obligations of Borrower, enforceable in accordance with their terms. 5.3 Compliance With Applicable Laws. Borrower has complied with all licensing, permit and fictitious name requirements necessary to lawfully conduct the business in which it is engaged and with all laws and regulations applicable to any sales, leases or the furnishing of services by Borrower, including without limitation those requiring consumer or other disclosures. 5.4 Licenses, Trademarks. Borrower has all patents, licenses, trademarks, trademark rights, trade names, trade name rights, copyrights, permits and franchises required in order for Borrower to conduct its business and operate its properties as now or proposed to be conducted without conflict with the rights of others. 5.5 No Conflict. The execution, delivery, and performance by Borrower of all Loan Documents are not in conflict with any law, rule, regulation, order or directive, or any indenture, agreement, or undertaking to which Borrower is a party or by which Borrower may be bound or affected. 5.6 No Litigation, Claims or Proceedings. There is no litigation, tax claim, proceeding or dispute pending, or, to the knowledge of Borrower, threatened against or affecting Borrower or its property, except as disclosed in writing to Bank prior to the Closing Date. 5.7 Correctness of Financial Statements. Borrower's financial statements which have been delivered to Bank fairly and accurately reflect Borrower's financial condition as of December 31, 1995; and, since that date, there has been no material adverse change in Borrower's financial condition or business. 5.8 No Subsidiaries. Borrower is not a majority owner of or in a control relationship with any other business entity. 5.9 No Event of Default. No Event of Default has occurred and is continuing. 5.10 Reaffirmation of Representations. Each request for an Advance shall be deemed a representation by Borrower that all representations and warranties contained herein or otherwise made by Borrower to Bank are then accurate in all material respects as though made on the date of such request; and if the request is for an Advance under the Revolving Credit or Revolving E/CSDC Credit, that all information contained in each Borrowing Base Certificate or Revolving E/CSDC Borrowing Base, as the case may be is accurate and that the requested Advance plus all credit outstanding under the Revolving Credit and Revolving E/CSDC Credit will not exceed the Borrowing Base or Revolving E/CSDC Borrowing Base, as the case may be. 5.11 Title to Assets. Borrower has good and clear title to its assets, which are not subject to any Liens other than those permitted by the terms of Section 8.2. 5.12 Tax Status. Borrower has filed all tax returns and reports required to be filed and has paid all applicable federal, state and local franchise and income taxes which are due and payable. 5.13 ERISA. Borrower has not incurred any material accumulated funding deficiency within the meaning of ERISA, and has not incurred any material liability to the PBGC in connection with any Plan or other class of benefit which PBGC has elected to insure. 5.14 Environmental Quality. Borrower has complied with all applicable state and federal laws and regulations relating to environmental quality; Borrower is not aware that it is under investigation by any state or federal agency designed to enforce such laws and regulations. 5.15 Other Laws/Regulations. Borrower is not subject to the Investment Company Act of 1940, the Public Utility Holding Company Act of 1935, the Interstate Commerce Act, or any successor thereof, as any are in effect from time to time, or any other statute or regulation restricting the execution or performance of this Agreement or any Loan Document by Borrower. 5.16 Labor, Salaries and Wages. All Inventory has been and will be produced in compliance with all applicable state and federal laws and regulations, including but not limited to the Fair Labor Standards Act, or any successor thereof, in effect from time to time. All Inventory has been and will be produced in compliance with the minimum wage and overtime pay provisions of such Fair Labor Standards Act. All salaries and wages due have been paid, and no wage claims have been filed by any employee or former employee. ARTICLE SIX - CONDITIONS PRECEDENT 6.1 Required Delivery. The obligation of Bank to extend any credit under this Agreement is subject to the condition that, on or before the date of any Advance, there shall have been delivered to Bank, each in form and substance satisfactory to Bank, and duly executed as required by Bank: (a) This Agreement, the replacement Revolving Credit Note and the replacement Revolving E/CSDC Note; (b) When an Advance is requested for (i) Eligible New Equipment, an original invoice(s) setting forth the amount paid for such Eligible New Equipment ("Eligible Equipment Invoice"); and when the Advance request is for (ii) Eligible Capitalized Software Development Costs, a Capitalized Software Development Costs Certificate setting forth the amount of Eligible Capitalized Software Development Costs to be financed by such Advance; (c) Any and all Loan Documents Bank may require to evidence any Lien granted to Bank in connection with this Agreement; (d) Financing statement(s) and other security interest perfection documentation in form and substance satisfactory to Bank, duly filed under the Uniform Commercial Code in all jurisdictions as may be necessary, or in Bank's judgment, desirable to perfect the Bank's Liens created under any Loan Document; and all filings, recordings, and other actions that are necessary or advisable, in Bank's judgment, in order to establish, perfect, preserve and protect Bank's Liens as legal, valid and enforceable first Liens; and all property, including without limitation documents of title and certificates of ownership in cases in which possession is required for the perfection of Bank's Lien; (e) Evidence that the Liens in favor of Bank are perfected, valid, enforceable, and prior to the rights and interests of others; (f) Certified copies of Requests for Information from the appropriate governmental entities listing the financing statements referred to in subsection (d) and all other effective financing statements which name Borrower as debtor, together with copies of all such other financing statements, none of which shall cover the collateral purported to be covered by the Loan Documents; (g) Where Borrower or any party executing a Loan Document is a business entity, such authorization documents as Bank may require; (h) Evidence that all insurance and endorsements required by this Agreement are in full force and effect; (i) Payment in full of any fee if due under the terms of any Loan Document; (j) If required by Bank, the favorable written opinion of Borrower's counsel addressed to Bank covering such matters as Bank may require; (k) Such subordination agreements as Bank may require; and (1) Such other documents, instruments or agreements as Bank may require to further evidence the Facilities. ARTICLE SEVEN - AFFIRMATIVE COVENANTS During the term of this Agreement and until its performance of all obligations to Bank, Borrower will, unless Bank otherwise consents in writing: 7.1 Financial Covenants. (a) Maintain current assets in an amount at least equal to 1.25 times current liabilities on a quarterly basis; (b) Not permit Borrower's total indebtedness to exceed 2.00 times Borrower's Tangible Net Worth; (c) Maintain net profit after taxes in an amount not less than $50,000.00 on a annual basis; (d) Maintain a ratio of cash flow (Net income after taxes, minus dividends and distributions, plus depreciation and amortization), for the previous financial reporting period, to the current portion of long term debt at the time of determination, of at least 1.25 to 1.0, as calculated quarterly on an annualized basis. 7.2 Additional Financial Covenants. Comply with the terms of all financial covenants contained in any Addendum to this Agreement; 7.3 Notice to Bank. Promptly give written notice to Bank of; (a) Any litigation or administrative or regulatory proceeding affecting Borrower where the amount claimed against Borrower is $50,000.00 or more, or where the granting of the relief requested would have a material adverse effect on Borrower's financial condition or business; (b) Any substantial dispute which may exist between Borrower and any governmental or regulatory body or law enforcement authority; (c) Any Event of Default; (d) Any change in the location of any of Borrower's places of business or of the establishment of any new, or the discontinuance of any existing, place of business; (e) Borrower shall furnish Bank (or cause the Plan administrator to furnish Bank) with the annual report for each Plan filed with the PBGC not later than 10 days after such report has been filed with the PBGC; (f) As soon as possible and in any event within 30 days after Borrower knows or has reason to know that any event, which would constitute a reportable event under ERISA with respect to any Plan has occurred, or that the PBGC or Borrower has instituted or will institute proceedings under ERISA to terminate any Plan, Borrower will deliver to Bank a certificate of the chief financial officer of the Borrower setting forth details as to such reportable event and the action which Borrower proposes to take with respect thereto, together with a copy of any notice of such reportable event which may be required to be filed with the PBGC, or any notice delivered by the PBGC evidencing its intent to institute such proceedings or any notice to the PBGC that any Plan is to be terminated, as the case may be. For all purposes of this covenant, Borrower shall be deemed to have knowledge of all facts attributable to the Plan administrator under ERISA; and (g) Any other matter which has resulted or might result in a material adverse change in Borrower's financial condition, operations or business. 7.4 Financial Statements/Reporting Requirements. Deliver to Bank, in form and detail satisfactory to Bank, the following financial information, which Borrower warrants shall be accurate and complete in all material respects: (a) As soon as available but no later than 45 days after the end of each financial reporting quarter, Borrower's balance sheet as of the end of such period, and Borrower's income statement for such period and for that portion of Borrower's financial reporting year ending with such period, prepared and attested by a responsible financial officer of Borrower as being complete and correct and fairly presenting Borrower's financial condition and the results of Borrower's operations; (b) As soon as available but no later than 120 days after the end of each financial reporting year, a complete copy of Borrower's audit report, which shall include balance sheet, income statement, statement of changes in equity and statement of cash flows for such year, prepared and certified by an independent certified public accountant selected by Borrower and satisfactory to Bank (the "Accountant"). The Accountant's certification shall not be qualified or limited due to a restricted or limited examination by the Accountant of any material portion of Borrower's records or otherwise. The certification shall include, or be accompanied by, a statement from the Accountant that during the examination there was observed no Event of Default, or a statement of the Event of Default if any is found. The certification shall include or be accompanied by the accountant's management letter. Borrower shall not change its financial reporting year end from the current December 31 without Bank's prior written consent; (c) No later than 20 days after the end of each month, statements showing aging and reconciliation of Accounts and collections, and if requested by Bank, whenever collections on Accounts are delivered to Bank, a schedule of the amounts so collected and delivered as of the last day of such month; (d) No later than 20 days after the end of each month, and, if requested by Bank more often, at the time so requested, a Borrowing Base Certificate setting forth the amount of Eligible Accounts and Eligible Inventory as of the last day of such month, or as of the date requested by Bank; (e) Promptly after sending, making available or filing, copies of all reports, proxy statements and financial statements that Borrower sends or makes available to its stockholders and all registration statements and reports that Borrower files with the Securities and Exchange Commission, or any other governmental official, agency or authority; and (f) Such other statements, lists of property and accounts, budgets, forecasts, reports or other financial information as Bank may from time to time request. 7.5 Existence. Maintain and preserve Borrower's existence, present form of business, and all rights, privileges and franchises necessary or desirable in the normal course of its business; and keep all Borrower's property in good working order and condition, ordinary wear and tear excepted; 7.6 Insurance. Maintain and keep in force insurance with companies acceptable to Bank and in such amounts and types as is usual in the business carried on by Borrower, or as Bank may reasonably request. Such insurance policies must be in form and substance satisfactory to Bank. 7.7 Accounting Records. Maintain adequate books, accounts and records, and prepare all financial statements in accordance with GAAP, and in compliance with the regulations of any governmental or regulatory body having jurisdiction over Borrower or Borrower's business, and permit employees or agents of Bank at such reasonable times as Bank may request to inspect Borrower's properties, including without limitation regular collateral audits, and to examine, audit, and make copies and memoranda of Borrower's books, accounts and records. 7.8 Compliance With Laws. Comply with all laws, rules, regulations, orders and directives of any governmental or regulatory authority having jurisdiction over Borrower or Borrower's business, and comply with all material agreements to which Borrower is a party. 7.9 Taxes and Other Liabilities. Pay all Borrower's obligations when due; pay all taxes and other governmental assessments before delinquency or before any penalty attaches thereto, except as may be contested in good faith by the appropriate procedures and for which Borrower shall maintain appropriate reserves; and timely file all required tax returns. 7.10 ERISA Compliance. Comply with the minimum funding requirements of ERISA with respect to any Plan. 7.11 Environmental Quality. Comply with all applicable laws, rules regulations, orders and directives relating to environmental quality. ARTICLE EIGHT - NEGATIVE COVENANTS During the term of this Agreement and until the performance of all obligations to Bank, Borrower will not, without the prior written consent of Bank: 8.1 Indebtedness. Be indebted for borrowed money, the deferred purchase price of property, or leases which would be capitalized in accordance with GAAP; or become liable as a surety, guarantor, accommodation party or otherwise for or upon the obligation of any other Person, except: (a) The acquisition of supplies or Inventory on normal trade credit; (b) The endorsement of negotiable instruments for deposit or collection in the ordinary course of Borrower's business; (c) The indebtedness of Borrower under this Agreement; (d) Indebtedness which has been disclosed to Bank in writing prior to the Closing Date; and (e) The indebtedness of Borrower under a three year $165,000.00 note payable to Cary Marshall. 8.2 Liens. Create, incur, assume or permit to exist any Lien, or grant any other Person or entity a negative pledge, on any of Borrower's property, except: (a) Involuntary Liens which, in the aggregate, would not have a material adverse effect on Borrower's financial condition or business; (b) Liens for current taxes or other governmental assessments which are not delinquent, or which are contested in good faith by the appropriate procedures and for which appropriate reserves are maintained; (c) Liens in favor of Bank; and (d) Liens which have been disclosed to Bank in writing prior to the Closing Date. Borrower and Bank agree that this covenant is not intended to constitute a lien, deed of trust, or equitable mortgage, or security interest of any kind on any of Borrower's real property, and this Agreement shall not be recorded or recordable. Notwithstanding the foregoing, however, violation of this covenant by Borrower shall constitute an Event of Default. 8.3 Dividends. Pay any dividends except those payable solely in Borrower's capital stock; or purchase, redeem or otherwise acquire for value or make any other distribution with respect to any of Borrower's capital stock; provided, that Borrower may repurchase shares of Borrower's common stock, if the aggregate expense to Borrower of such stock repurchase does not exceed $150,000.00 during any one calendar year, and if such stock repurchase does not result in a violation of any other provision of this Agreement. 8.4 Changes/Mergers. Change its name; liquidate or dissolve, or enter into any consolidation, merger, partnership, joint venture or other combination; issue, redeem, purchase, retire or otherwise acquire any shares of any class of capital stock of Borrower or grant or issue any warrant, right or option pertaining thereto or other security convertible into any of the foregoing; reorganize, reclassify or recapitalize its capital stock; prepay any subordinated debt, debt for borrowed money, or debt secured by any permitted Lien, or enter into or modify any agreement as a result of which the terms of payment of any such debt are waived or modified. 8.5 Sale of Assets. Sell, transfer, lease or otherwise dispose of any of Borrower's assets except for fair consideration and in the ordinary course of its business; or enter into any sale and leaseback agreement covering any of Borrower's fixed or capital assets. 8.6 Acquisitions. Acquire or purchase all or substantially all the assets or business of any other individual or entity; or acquire or purchase securities, except those permitted under Section 8.7. 8.7 Loans/Investments. Make or suffer to exist any loans, advances, or investments, except: (a) Bank accounts in the ordinary course of Borrower's business; (b) Accounts receivable in the ordinary course of Borrower's business; (c) Investments in domestic certificates of deposit issued by, and other domestic investments with, financial institutions organized under the laws of the United States or a state thereof, having $100 million in capital and a rating of at least "investment grade" or "A" by Moody's or any successor rating agency; (d) Investments in short term marketable obligations of the United States of America and in open market commercial paper given the highest credit rating by a national credit agency and maturing not more than one year from the creation thereof; (e)Securities of the United States Government; and (f) Temporary advances to cover incidental expenses to be incurred in the ordinary course of business. 8.8 Limitation on Capital Expenditures. Expend or be committed to expend $1,500,000.00 or more in the aggregate for the acquisition of gross fixed or capital assets, including capitalized software development costs during any financial reporting year. 8.9 Transactions With Related Persons. Directly or indirectly enter into any transaction with or for the benefit of a Related Person on terms more favorable to the Related Person than would have been obtainable in "arms' length" dealings. 8.10 Other Business. Conduct any business other than the business Borrower conducts as of the Closing Date. ARTICLE NINE - EVENTS OF DEFAULT 9.1 Events of Default. The occurrence of any of the following shall give Bank the right at its sole discretion without notice or demand of any kind to do any one or more of the following: (1) terminate any obligation of Bank to make or continue the Facilities; (2) make all sums of interest and principal and any other sums owing under this Agreement or any Loan Document immediately due and payable; and (3) exercise any other right or remedy provided by contract or applicable law. (a) Borrower shall fail to make any payment of principal or interest when due under this Agreement or to pay any fees or other charges when due, or Borrower or any other Person shall fail to provide Bank with, or to perform any obligation under, this Agreement or under any Loan Document. (b) Any representation or warranty made, or financial statement, certificate or other document provided, by Borrower shall prove to have been false or misleading. (c) Borrower shall fail to pay its debts generally as they become due or shall file any petition or action for relief under any bankruptcy, insolvency, reorganization, moratorium, creditor composition law, or any other law for the relief of or relating to debtors; an involuntary petition shall be filed under any bankruptcy law against Borrower, or a custodian, receiver, trustee, assignee for the benefit of creditors, or other similar official, shall be appointed to take possession, custody or control of the properties of Borrower; or the death, incapacity, dissolution or termination of the business of Borrower. (d) Borrower shall fail to perform under any other agreement involving the borrowing of money, the purchase of property, the advance of credit or any other monetary liability of any kind to any Person; or any guaranty of Borrower's obligations to Bank or any subordination agreement constituting a Loan Document shall be revoked or terminated. (e) Any governmental or regulatory authority shall take any action, or any other event shall occur, which, in the judgment of Bank, might have a material adverse effect on the financial condition or business of Borrower. (f) Any sale, transfer or other disposition of all or a substantial or material part of the assets of Borrower, including without limitation to any trust or similar entity, shall occur. (g) Any Person shall fail to perform its obligations under the terms of any promissory note, contract or other obligation that is held by Bank as collateral for the obligations evidenced by the Loan Documents; or Bank shall not have a perfected security interest in, or shall deem itself insecure with respect to the value of, any collateral being held for the obligations evidenced by this Agreement or the Loan Documents. (h) Any judgment(s) shall be entered against Borrower, or any involuntary lien(s) of any kind or character shall attach to any assets or property of Borrower, any of which, in the judgment of Bank, might have a material adverse effect on the financial condition or business of Borrower. (i) Without Bank's prior written consent: if Borrower is a corporation, Borrower's shareholders of record as of the Closing Date shall cease to own a majority of the voting interest in Borrower; or any change shall occur in the executive management or managing partner(s) of Borrower; or any change shall occur in the corporate or legal structure of Borrower. (j) Any Plan shall be terminated pursuant to ERISA, a trustee shall be appointed by the appropriate United States District Court to administer any Plan, the PBGC shall institute proceedings to terminate any Plan, or any Plan shall fail to satisfy the minimum funding standard for such Plan for a plan year as established by the Internal Revenue Code, as amended from time to time. (k) Borrower shall fail to perform any of its duties or obligations under any Loan Document not specifically referenced in this Article Nine. ARTICLE TEN - GENERAL PROVISIONS 10.1 Notices. Any notice given by any party under this Agreement, or any Loan Document shall be in writing and personally delivered, deposited in the United States mail, postage prepaid, or sent by tested telex or other authenticated message, charges prepaid, and addressed as follows: To Borrowers: Auto-Graphics, Inc. 3201 Temple Avenue Pomona, CA 91768 Attn: Robert S. Cope, President FAX No. (714) 595-3506 To Bank: The Bank of California, N.A. 550 South Hope Street Los Angeles, CA 90071 Attn: John Allred, Vice President FAX No: (213) 243-3091 Each party may change the address to which notices, requests and other communications are to be sent by giving written notice of such change to each other party. 10.2 Binding Effect. This Agreement shall be binding upon and inure to the benefit of Borrower and Bank and their successors and assigns; provided, however, that Borrower may not assign or transfer Borrower's rights or obligations under this Agreement without the prior written consent of Bank. Bank reserves the right to sell, assign, transfer, negotiate or grant participation in all or any part of, or any interest in, Bank's rights and obligations under this Agreement and the Loan Documents. In that connection, Bank may disclose all documents and information which Bank now or hereafter may have relating to the Facilities, Borrower, or their business. 10.3 No Waiver. Any waiver, permit, consent or approval by Bank of any Event of Default or breach of any provision, condition or covenant of this Agreement or any Loan Document must be in writing and shall be effective only to the extent set forth in writing. No waiver of any breach or default shall be deemed a waiver of any later breach or default of the same or any other provision of this Agreement or any Loan Document. Any failure or delay on the part of Bank in exercising any power, right or privilege under this Agreement or any Loan Document shall not operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any further exercise thereof. Bank has the right at its sole option to continue to accept interest and/or principal payments due under the Loan Documents after default, and such acceptance shall not constitute a waiver of said default or an extension of the Termination Date unless Bank agrees otherwise in writing. 10.4 Rights Cumulative. All rights and remedies existing under the Loan Documents are cumulative to, and not exclusive of, any other rights or remedies available under contract or applicable law, 10.5 Unenforceable Provisions. Any provision of any Loan Document executed by Borrower which is prohibited or unenforceable in any jurisdiction, shall be so only as to such jurisdiction and only to the extent of such prohibition or unenforceability, but all the remaining provisions any such Loan Document shall remain valid and enforceable. 10.6 Governing Law. Except as may be otherwise expressly stated therein, the Loan Documents shall be governed by and construed in accordance with, the laws of the State of California. 10.7 Accounting Terms. Except as otherwise provided in this Agreement, accounting terms and financial covenants and information shall be determined and prepared in accordance with GAAP as in effect as of the date of this Agreement. 10.8 Indemnification. Borrower shall pay and protect, defend and indemnify Bank and Bank's employees, officers, directors, shareholders, affiliates, correspondents, agents and representatives (other than Bank, collectively "Agents") against, and hold Bank and each such Agent harmless from, all claims, actions, proceedings, liabilities, damages, losses, expenses (including, without limitation, attorney's fees and costs) and other amounts incurred by Bank and each such Agent, arising from (i) the matters contemplated by this Agreement or any Loan Document or (ii) any contention that Borrower has failed to comply with any law, rule, regulation, order or directive applicable to Borrower's sales, leases or performance of services to Borrower's customers, including without limitation those sales, leases and services requiring consumer or other disclosures; provided, however, that this indemnification shall not apply to any of the foregoing incurred solely as the result of Bank's or any Agent's gross negligence or willful misconduct. This indemnification shall survive the payment and satisfaction of all of Borrower's obligations and liabilities to Bank. 10.9 Reimbursement. Borrower shall reimburse Bank for all costs and expenses, including without limitation reasonable attorneys' fees and disbursements (and fees and disbursements of Bank's in-house counsel) expended or incurred by Bank in any arbitration, mediation, judicial reference, legal action or otherwise in connection with (a) the negotiation, preparation, amendment, interpretation and enforcement of the Loan Documents, including without limitation during any workout, attempted workout, and/or in connection with the rendering of legal advice as to Bank's rights, remedies and obligations under the Loan Documents, (b) collecting any sum which becomes due Bank under any Loan Document, (c) any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal, or (d) the protection, preservation or enforcement of any rights of Bank. For the purposes of this section, attorneys' fees shall include, without limitation, fees incurred in connection with the following: (1) contempt proceedings; (2) discovery; (3) any motion, proceeding or other activity of any kind in connection with a bankruptcy proceeding or case arising out of or relating to any petition under Title 11 of the United States Code, as the same shall be in effect from time to time, or any similar law; (4) garnishment, levy, and debtor and third party examinations; and (5) postjudgment motions and proceedings of any kind including without limitation any activity taken to collect or enforce any judgment. Borrower shall also reimburse Bank for the cost of all collateral audits conducted by Bank under Section 7.7. 10.10 Facility Costs. Upon notice from Bank, Borrower shall promptly reimburse Bank for any increase in its costs relating to any capital adequacy, deposit insurance, reserve, or similar fees, charges, or requirements imposed by any governmental or regulatory authority against Bank and attributed by Bank from time to time to any Facility. Bank shall provide Borrower with a written statement of the amount and basis of its request for compensation under this Section, which statement shall be a conclusive determination of the amount owed, absent obvious error. 10.11 Execution in Counterparts. This Agreement may be executed in any number of counterparts which, when taken together, shall constitute but one agreement. 10.12 Dispute Resolution. (a) Mandatory Mediation/Arbitration. Any controversy or claim between or among the parties, their agents, employees and affiliates, including but not limited to those arising out of or relating to this Agreement or any related agreements or instruments ("Subject Documents"), including without limitation any claim based on or arising from an a alleged tort, shall, at the option of any party, and at that party's expense, be submitted to mediation, using either the American Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services, Inc. ("JAMS"). If mediation is not used, or if it is used and it fails to resolve the dispute within 30 days from the date AAA or JAMS is engaged, then the dispute shall be determined by arbitration in accordance with the rules of either JAMS or AAA (at the option of the party initiating the arbitration) and Title 9 of the U. S. Code, notwithstanding any other choice of law provision in the Subject Documents. All statutes of limitations or any waivers contained herein which would otherwise be applicable shall apply to any arbitration proceeding under this subparagraph (a). The parties agree that related arbitration proceedings may be consolidated. The arbitrator shall prepare written reasons for the award. Judgment upon the award rendered may be entered in any court having jurisdiction. This subparagraph (a) shall apply only if, at the time of the proposed submission to AAA or JAMS, none of the obligations to Bank described in or covered by any of the Subject Documents are secured by real property collateral or, if so secured, all parties consent to such submission. (b) Jury Waiver/Judicial Reference. If the controversy or claim is not submitted to arbitration as provided and limited in subparagraph (a), but becomes the subject of a judicial action, each party hereby waives its respective right to trial by jury of the controversy or claim. In addition, any party may elect to have all decisions of fact and law determined by a referee appointed by the court in accordance with applicable state reference procedures. The party requesting the reference procedure shall ask AAA or JAMS to provide a panel of retired judges and the court shall select the referee from the designated panel. The referee shall prepare written findings of fact and conclusions of law. Judgment upon the award rendered shall be entered in the court in which such proceeding was commenced. (c) Provisional Remedies, Self Help, and Foreclosure. No provision of, or the exercise of any rights under, subparagraph (a) shall limit the right of any party to exercise self help remedies such as setoff, to foreclose against any real or personal property collateral, or to obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from a court having jurisdiction before, during or after the pendency of any mediation or arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for judicial relief or pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to mediation or arbitration. To the extent any provision of the dispute resolution clause is different than the terms of this Agreement, the terms of this dispute resolution clause shall prevail. 10.13 Further Assurances. At any time or from time to time upon the request of Bank, Borrower will execute and deliver such further documents and do such other acts as Bank may reasonably request in order to effect fully the purposes of the Loan Documents and provide for the payment of the Facilities and interest thereon in accordance with the terms of the Loan Documents. 10.14 Joint and Several. Should more than one Person sign this agreement as Borrower, the obligations of each signer shall be joint and several. 10.15 Entire Agreement. The Loan Documents are intended by the parties as the final expression of their agreement and therefore contain the entire agreement between the parties and supersede all prior understandings or agreements concerning the subject matter hereof. This Agreement may be amended only in a writing signed by both Borrower and Bank. IN WITNESS THEREOF, Borrower and Bank have executed this Agreement as of the date set forth in the preamble. AUTO-GRAPHICS, INC., a California corporation BY: ss/Robert S. Cope TITLE: President THE BANK OF CALIFORNIA, N.A. BY: ss/John Allred TITLE: Vice-President EX-10.16 4 REVOLVING EQUIPMENT/CAPITALIZED DEVELOPMENT COSTS NOTE BETWEEN UNION BANK OF CALIFORNIA, N.A. AND AUTO-GRAPHICS, INC. DATED JUNE 12, 1996. Exhibit 10-16 REVOLVING EQUIPMENT/CAPITALIZED SOFTWARE DEVELOPMENT COSTS NOTE June 12, 1996 $3,000,000.00 (SUBJECT TO REVOLVING E/CSDC BORROWING BASE) The signer of this Note ("Borrower") promises to pay to the order of THE BANK OF CALIFORNIA, A DIVISION OF UNION BANK OF CALIFORNIA, N.A. ("Bank") at its office at 550 South Hope Street, Los Angeles CA 90071 or at such other place as Bank may designate in writing, in lawful money of the United States of America, the principal sum of THREE MILLION DOLLARS ($3,000,000.00), or so much thereof as may be advanced and outstanding under the Revolving E/CSDC Borrowing Base established by the Agreement defined below, with interest on each Advance from the date it is disbursed until maturity, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the rate Bank announces to be in effect from time to time as its prime rate (the "Prime Rate") plus three quarters of one percent (3/4%). The Prime Rate is a rate set by Bank based upon various factors, including general economic and market conditions, and is used as a reference point for pricing certain loans. Bank may price its loans at, above or below the Prime Rate. During the term of this Note, Borrower may borrow, subject to all of the limitations, terms and conditions contained herein and in that certain Third Amended and Restated Revolving Credit Agreement between Bank and Borrower dated June 12, 1996, as amended from time to time ("Agreement"), provided however, that the outstanding principal balance of this Note shall at no time exceed the maximum principal amount stated above. Borrower shall repay the outstanding principal balance of this Note in monthly principal installment payments equal to not less than $50,000.00, made on the last day of each consecutive month, beginning the first such date after the Closing Date and continuing through the month-end date which is one month prior to the Termination Date. If the outstanding principal balance of the E/CSDC Credit is at any time less than $50,000.00, then Borrower shall pay such lesser amount on the next principal installment due date. Interest shall be payable on the last day of each consecutive month beginning the first such date after the Closing Date, and continuing through the Termination Date on which date all accrued interest and principal remaining unpaid shall be due and payable in full. Bank's records of all payments of principal and interest on this Note shall be conclusive and binding on Borrower, absent clerical error. Notwithstanding the foregoing, however, if on the Termination Date Borrower is in compliance with all terms and conditions of this Note and any Loan Documents, and any other credit arrangements Borrower has with Bank, and no Event of Default has occurred and is continuing, Bank agrees to convert up to the then outstanding principal balance of this Note to a Term Loan. The Term Loan evidenced by this Note shall bear interest as set forth above and shall be payable as follows: (a) Interest shall be payable on the last day of each consecutive month beginning June 30, 1997, and continuing through April 30, 2002. (b) Principal shall be payable in fifty-nine (59) equal consecutive monthly installments, each installment in an amount sufficient to fully amortize the principal balance by the final maturity date, with such installment beginning June 30, 1997, and continuing on the last day of each consecutive month through April 30, 2002, plus a final installment equal to the entire unpaid principal balance and all accrued and unpaid interest on May 31, 2002. Any unpaid payments of principal or interest on this Note shall bear interest from maturity, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the Prime Rate plus 5%, until paid in full, whether before or after judgment. Interest shall be calculated for actual days elapsed on the basis of a 360-day year, which results in higher interest payments than if a 365-day year were used. Each change in the rate of interest shall become effective on the date each Prime Rate change is announced within the Bank. In no event shall Borrower be obligated to pay interest at a rate in excess of the highest rate permitted by applicable law from time to time in effect. Advances may be requested in accordance with the terms of the Agreement, and shall be made in accordance with such terms. This Note is the Revolving E/CSDC Note defined in the Agreement and is governed by the terms thereof, and supersedes and replaces that certain Revolving Equipment/Capitalized Software Development Costs Note dated August 28, 1992, as modified/amended from time to time, executed by Borrower in favor of Bank (the "Previous Note"). As of the effective date of the Agreement, all unpaid principal, interest and other amounts accrued and outstanding under the Previous Note shall for all purposes be and constitute unpaid amounts outstanding under, and evidenced by, this Note. Reference is made to the Agreement for the terms and conditions under which this Note may be repaid or its maturity accelerated. Each capitalized term not otherwise defined in this Note shall have the meaning set forth in the Agreement. Should any Event of Default occur, Bank at its sole discretion without notice or demand of any kind may do any one or more of the following: (a) terminate any obligation of Bank to make or continue the Facilities or to convert to the Term Loan; (b) make all sums of interest and principal and any other sums owing under this Agreement immediately due and payable, without presentment, demand for payment, notice of dishonor or other notice or demand; and (c) exercise any other right or remedy provided by contract or applicable law. Borrower shall reimburse Bank for all costs and expenses, including without limitation reasonable attorneys' fees, as set forth in the Agreement. This Note shall be governed by and construed in accordance with the laws of the State of California. Borrower hereby waives presentment, demand, protest, notice of dishonor and all other notices and demands. AUTO-GRAPHICS, INC., a California corporation BY: ss/ Robert S. Cope TITLE: President EX-10.17 5 REVOLVING CREDIT NOTE BETWEEN UNION BANK OF CALIFORNIA, N.A. AND AUTO-GRAPHICS, INC. DATED JUNE 12, 1996. Exhibit 10-17 REVOLVING CREDIT NOTE June 12, 1996 $1,000,000.00 (SUBJECT TO BORROWING BASE) The signer of this Note ("Borrower") promises to pay to the order of The Bank of California, a division of Union Bank of California, N.A. ("Bank") at its office at 550 South Hope Street, Los Angeles, CA 90071 or such other place as Bank may designate in writing, in lawful money of the United States of America, the principal sum of ONE MILLION DOLLARS ($ 1,000,000.00) so much thereof as may be advanced and outstanding under the Borrowing Base established by the Agreement defined below, with interest on each Advance from the date it is disbursed until maturity, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the rate Bank announces to be in effect from time to time as it prime rate (the "Prime Rate") plus one half of one percent (0.50%). The Prime Rate is a rate set by Bank based upon various factors including general economic and market conditions, and is used as a reference point for pricing certain loans. Bank may price loans at, above or below the Prime Rate. During the term of this Note, Borrower may borrow, repay and reborrow as Borrower may elect, in minimum amounts of TEN THOUSAND DOLLARS ($ 10,000.00) and subject to all limitations, terms and conditions contained herein and in that certain Third Amended and Restated Revolving Credit Agreement between Bank and Borrower dated June 12, 1996 as amended from time to time ("Agreement"), provided however, that the outstanding principal balance of this Note shall at no time exceed the maximum principal amount stated above. Interest shall be payable on the last day of each consecutive month beginning the first such date after the first Advance, and continuing through the Termination Date, on which date all accrued interest and principal remaining unpaid shall be due and payable in full. Any unpaid payments of principal or interest on this Note shall bear interest from their respective maturities, whether scheduled or accelerated, at a fluctuating rate per annum at all times equal to the Prime Rate plus 5%, until paid in full, whether before or after judgment. Interest and fees shall be calculated for actual days elapsed on the basis of a 360-day year, which results in higher interest payments than if a 365-day year were used. Each change in the rate of interest shall become effective on the date each Prime Rate change is announced within the Bank. In no event shall Borrower be obligated to pay interest at a rate in excess of the highest rate permitted by applicable law from time to time in effect. Each Advance shall be made as provided in the Agreement. Advances may be requested in writing, by telephone, telex or otherwise on behalf of Borrower. Borrower recognizes and agrees that Bank cannot effectively determine whether a specific request purportedly made by or on behalf of Borrower is actually authorized or authentic. As it is in Borrower's best interest that Bank advance funds in response to these forms of request, Borrower assumes all risks regarding the validity, authenticity and due authorization of any request purporting to be made by or on behalf of Borrower. Borrower promises to repay any sums, with interest, that are advanced by Bank pursuant to any request which Bank in good faith believes to be authorized, or when the proceeds of any Advance are deposited to the account of Borrower with Bank, regardless of whether any individual or entity ("Person") other than Borrower may have authority to draw against such account. This Note is the Revolving Credit Note defined in the Agreement and is governed by the terms thereof, and supersedes and replaces that certain Revolving Credit Note dated June 13, 1994, as amended from time to time, executed by Borrower in favor of Bank (the "Previous Note"). As of the effective date of the Agreement, all unpaid principal, interest and other amounts accrued and outstanding under the Previous Note shall for all purposes be and constitute unpaid amounts outstanding under, and evidenced by, this Note. Reference is made to the Agreement for the terms and conditions under which this Note may be repaid or its maturity accelerated. Each capitalized term not otherwise defined in this Note shall have the meaning set forth in the Agreement. The occurrence of any Event of Default as defined in the Agreement shall (1) terminate any obligation of Bank to make or continue the Facilities; and shall, at Bank's option, (2) make all sums of interest, principal and any other amounts owing under any Loan Documents immediately due and payable without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor or any other notices or demands; and (3) give Bank the right to exercise any other right or remedy provided by contract or applicable law. Borrower shall reimburse Bank for all costs and expenses, including without limitation reasonable attorneys' fees, as set forth in the Agreement. Each Borrower is jointly and severally liable for the obligations evidenced by this Note, and all references to "Borrower" shall be to "each" or "any" Borrower as the context requires. This Note shall be governed by, and construed in accordance with, the laws of the State of California. AUTO-GRAPHICS, INC., a California corporation BY: ss/Robert S. Cope TITLE: President EX-10.18 6 GENERAL SECURITY AGREEMENT BETWEEN UNION BANK OF CALIFORNIA, N.A. AND AUTO-GRAPHICS, INC. DATED JUNE 12, 1996 Exhibit 10-18 The Bank of California, a division of Union Bank of California, N.A. GENERAL SECURITY AGREEMENT This General Security Agreement ("Agreement") is made as of June 12, 1996, by and between Auto-Graphics, Inc., a California corporation ("Debtor") and The Bank of California, a division of Union Bank of California, N.A. ("Bank"). In consideration of any financial accommodations given. to be given or continued, Bank and Debtor agree to the following terms and conditions. 1. Grant Of Security Interest. Debtor grants to Bank a security interest in the following described personal property of Debtor now or hereafter existing or acquired: 1.1 Any and all tangible and Intangible property in the Bank's possession or control in any manner or for any purpose; and 1.2 All of the kinds and classes of property indicated below: Equipment, including without limitation: machinery, furniture, fixtures, furnishings, fittings, parts, attachments, motor vehicles and farm equipment; and consumer goods (subject to Section 2"). Accounts, including without limitation: accounts receivable, rights to payment or performance under invoices or contracts or to payment for goods sold or leased or for services rendered, whether or not yet earned by Debtor's performance, and all forms of obligations of and receivables from others. Chattel paper; Instruments, including notes, drafts and acceptances; documents; documents of title and receipts, including bills of lading and warehouse receipts, and the goods relating thereto; money; general Intangibles, including without limitation: cash value, return premiums; and other rights under insurance policies, causes of action, judgments, royalty contracts, contracts relating to the sale, finance or lease of real property, goodwill, trademarks, trade names, trade styles, patents and applications therefor; books and records; and demand, time, savings, or any other accounts maintained with Bank or any other financial institutions; deposit accounts, including time, savings, passbook or other accounts. 1.3 Any and all proceeds, accessions, replacements, improvements, increases and products of the personal property specified in Sections 1.1 and 1.2 above, together with any accounts into which any such proceeds may be placed, and any and all records (including computer software and hardware, data processing information, written documents, books, ledgers, and statements.) The property described in Sections 1.1, 1.2 and 1.3 are Individually and collectively called "Collateral". 2. Obligations Secured. The security interest granted by Debtor to Bank secures payment and performance of all of the Debtor's present and future debts, obligations and liabilities to Bank, whether absolute or contingent, direct or indirect, liquidated or unliquidated, arising under loans, as overdrafts or in any other manner, and whether or not secured by assets In addition to the Collateral, except: any consumer credit indebtedness under the Federal Truth In Lending Act and regulations thereunder unless the Collateral and type of security interest granted to Bank under this Agreement is disclosed at the time incurred if and as then required by such Act and regulations (the foregoing to be hereinafter collectively called "Obligations"). 3. Ownership; Value. Debtor owns absolutely and has unrestricted power to encumber all Collateral unless Bank agrees otherwise in writing. No other person or entity has or claims any title, lien, share arrangement or other interest in any Collateral except for taxes not yet delinquent, and for any interest disclosed to and accepted by Bank in writing. Debtor will defend any proceeding which may affect title to or Bank's security interest in any Collateral. Copies of all financing statements and all other documents publicly recorded or filed naming Debtor as debtor or obligor have been delivered to Bank prior to the date of this Agreement. Debtor shall promptly give Bank notice of any decrease in the value of any Collateral. 4. Collateral In Debtor's Possession. As to all Collateral now or later in Debtor's possession (unless specifically otherwise agreed by Bank in writing"), Debtor will: 4.1 Keep the Collateral at the following location(s") or at such other locations disclosed in writing to Bank, and will not remove the Collateral from such location(s") except temporarily for use In Debtor's business or for repairs: 3201 Temple Ave.. Pomona, CA 91768 4.2 Keep the Collateral separate and Identifiable to the fullest extent possible. 4.3 Maintain all of Collateral in good and salable condition: repair the Collateral if necessary: deal with the Collateral in all ways considered good practice by owners of like property: use the Collateral lawfully, only in Debtor's business and as permitted by Insurance policies: and permit Bank to inspect the Collateral at any reasonable time. 4.4 Within 30 days after issuance of any certificate of registration or title to any Collateral, deliver any such certificate to Bank showing Bank's security interest noted thereon. 4.5 Keep all Collateral as personal property or trade fixtures and keep it from becoming part of the real property where located (notwithstanding that Collateral Includes fixtures"), and at Bank's request obtain and deliver to Bank a waiver or subordination on Bank's standard form from any owner and encumbrancer of the real property of any rights in the Collateral, and of any rights to prevent removal of the Collateral by Bank. 5. Inventory And Accounts. If Collateral includes inventory or accounts, Debtor: 5.1 May, until notice from Bank, sell or lease inventory Collateral in the ordinary course of trade only, and collect cash proceeds of inventory Collateral. 5.2 At Bank's request, will deposit all cash proceeds as received in a general account with Bank or at Bank's option an account containing only such proceeds, and/or deliver statements identifying units or inventory acquired, disposed of and/or returned, and accounts and names and addresses of account debtors. 5.3 Will receive in trust, schedule on forms satisfactory to Bank, and deliver to Bank all non-cash proceeds other than inventory received in trade. 6. Collateral Representing Obligations Of Others. If Collateral includes accounts, chattel paper, Instruments, documents, general intangibles, rights to payment, deposit accounts, or proceeds, at and after the time Debtor's rights under each hem of such Collateral arise: 6.1 All such Collateral is and will be genuine, enforceable in accordance with its terms, free from default, prepayment, defenses and conditions precedent (except as disclosed to and accepted by Bank in writing"). Debtor will supply Bank with invoices or other evidence of Debtor's rights and With all originals of documents evidencing instruments, chattel paper and general intangibles on Bank's request. 6.2 All persons appearing to be obligated on such Collateral have authority and capacity to contract 6.3 All instruments and chattel paper are and will be in compliance with law as to form, content and manner of preparation and execution, and properly registered and filed to perfect Debtors interest thereunder. 6.4 Bank shall be under no duty to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protest or notices or dishonor, to collect any Collateral or its proceeds, or to take any steps to preserve rights against prior parties in connection with the Collateral whether or not it has possession of the Collateral. 6.5 Debtor will not compromise, settle or adjust any such Collateral or renew or extend the time of payment thereof without Bank's prior written consent. 7. Payment Of Liens And Taxes. Debtor will pay when due all existing and future charges, liens or encumbrances on and all taxes and assessments now or hereafter imposed on or affecting the Collateral, Including taxes on realty owned by Debtor on or at which Collateral is located. 8. Insurance On Collateral. Debtor, will at all times keep the Collateral insured naming Bank as loss payee under policies, including such lenders loss payable and/or additional Insured endorsements as Bank shall require, each in form and amounts, with companies, and against risks and liability satisfactory to Bank. In addition to amounts payable by reason of loss or damage to any Collateral (in which amounts Bank has a security interest as proceeds), Debtor hereby assigns to Bank as security for the Obligations all rights under such policies and any other policies constituting Collateral, will deliver such policies to Bank at Bank's request, and authorizes Bank to make any claim thereunder, to cancel the insurance on Debtor's default, and to receive payment of and endorse any instrument in payment of any loss, return premium or dividend. 9. Information From Debtor. Debtor will give Bank any information it reasonably requires from time to time regarding Debtors financial condition or the Collateral and events which could affect either or both, and will permit Bank access at reasonable times to its records containing such information. All information received by Bank at any time from Debtor (including but not limited to the value, condition and ownership of Collateral, financial statements, financing statements, and statements made in documentary Collateral) is and will be correct and complete as of the time such information is supplied whether or not specifically requested by Bank, and Debtor will notify Bank of any later adverse change in any such information. Debtor will notify Bank in writing of any change of Debtors name, residence, chief place of business, chief executive office or mailing address before such change occurs. 10. Bank's Rights To Protect Collateral. Bank is irrevocably appointed Debtor's attorney in fact at any time before or after default, without notice to Debtor, to obtain any insurance, discharge any lien, make any payment and do any other act which Debtor is obligated to do under this Agreement to exercise such rights as Debtor might exercise, to use such equipment as Debtor might use to enter Debtors premises, to give notice of Bank's security interest to collect Collateral including proceeds to execute and file in Debtors name any financing statements, other filings and amendments thereto, or applications for registration or like documents required to perfect Bank's security interest in any Collateral, and to take any other reasonable action, all to protect and preserve the Collateral and Bank's rights. No action or inaction by Bank, nor any term of this Agreement, shall relieve Debtor of the obligation to do any of the foregoing acts or impose on Bank any such obligations. Debtor shall, to the extent permitted by applicable law, reimburse Bank promptly for all costs and expenses incurred by Bank in performing any agreement of Debtor which Debtor shall fail to perform, or in taking any other action which Bank deems necessary for the maintenance or preservation of any Collateral or Bank's interest therein. Without limiting the Bank in the exercise of any of the foregoing rights, Bank may: 10.1 Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; 10.2 Make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable on it or security for the payment of it, and compromise disputes in connection with it; 10.3 Use or operate Collateral for the purpose of preserving any Collateral or its value or for preparing and disposing of Collateral, or abandon any Collateral. 11. Prohibited Transfers. Debtor will not sell, lease, contract to sell or lease, transfer or create any encumbrance, purchase money or other security interest in any Collateral (other than to sell or lease inventory Collateral as permitted by Section 5.1) until all Obligations have been paid, even though Bank has a security interest in proceeds of such Collateral and regardless of whether any sale, lease, encumbrance or transfer is to an organization or person controlled by Debtor or its then principals. If Debtor is an organization, Debtor will not without Bank's prior written consent change the legal form of its organization or its business structure in any way which Bank in good faith decides might adversely affect the prospect of repayment of any of the Obligations, impair the continuing validity or perfection of its security interest as to any Collateral (including later-acquired property), or make a filed financing statement misleading. 12. Events Of Default. The occurrence of any of the following shall constitute an Event of Default: 12.1 Debtor shall fail to pay any fees or other charges when due under this Agreement, or Debtor or any other person or entity ("Person") shall fail to perform any obligation under, this Agreement or any document or instrument executed in connection herewith or in connection with the Obligations ("Loan Documents"), or any default shall occur under any Loan Document 12.2 Any representation or warranty made, or financial statement, certificate or other document provided, by Debtor or any guarantor of the Obligations ("Guarantor") to Bank shall prove to have been false or misleading. 12.3 Debtor or any Guarantor shall fail to pay its debts generally as they become due or shall file any petition or action for relief under any bankruptcy, insolvency, reorganization, moratorium, creditor composition law, or any other law for the relief of or relating to debtors: an involuntary petition shall be filed under any such law against Debtor or any Guarantor, or a custodian, receiver, trustee, assignee for the benefit of creditors or other similar official shall be appointed to take possession, custody or control of the properties of Debtor or any Guarantor; or the death, incapacity, dissolution or termination of the business of Debtor or any Guarantor. 12.4 Debtor or any Guarantor shall fail to perform under any other agreement involving the borrowing of money, the purchase of property, the advance of credit or any other monetary liability of any kind to any Person; or any guaranty of the indebtedness shall be revoked or terminated. 12.5 Any governmental authority shall take any action, any defined benefit pension plan maintained by Debtor or any Guarantor shall have any unfunded liabilities, or any other event shall occur, any of which, in the judgment of Bank, might have a material adverse effect on the financial condition or business of Debtor or any Guarantor. 12.6 Any sale, transfer or other disposition of all or a substantial or material part of the assets of Debtor or any Guarantor. Including without limitation to any trust or similar entity, shall occur. 12.7 Any Person shall fall to perform its obligations under the terms of any promissory note contract or other obligation that is held by Bank as Collateral; or Bank shall not have a first-priority perfected security interest in, or shall deem itself insecure with respect to the value of, any Collateral. 12.8 Any judgment shall be entered against Debtor or any Guarantor, or any involuntary lien of any kind or character shall attach to any assets or property of Debtor or any Guarantor, any of which, in the judgment of Bank, will have a material adverse effect on the financial condition or business of Debtor or any Guarantor. 12.9 If Debtor is a business organization, without Bank's prior written consent, Debtor's equity holders as of the date of this Agreement shall cease to own a majority of the equity interest in Debtor any change shall occur in the executive management of Debtor, or any change shall occur in the legal structure of Debtor. 12.10 Any deterioration or impairment of any of the Collateral or any decline or depreciation in the value or the market price thereof (whether actual or reasonably anticipated"), which causes the Collateral in Bank's judgment. to become unsatisfactory as to character or value. 12.11 Bank reasonably determines, in good faith, that its security interest in the Collateral or the prospect of payment or performance under this Agreement or any Loan Document secured hereby is materially impaired. 12.12 Bank, in good faith, believes any or all of the Collateral, including any proceeds, to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy. 12.13 Any employee benefit plan of Borrower ("Plan"") subject to the Employee Retirement Income Security Act of 1974 ("ERISA"") or any successor thereto shall be terminated pursuant to ERISA, a trustee shall be appointed to administer any Plan, the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan, or any Plan shall fail to satisfy the minimum funding standard for such Plan for a plan year as established by the Internal Revenue Code, as amended from time to time. 12.14 Debtor shall fail to perform any of its duties or obligations under this Agreement not specifically referenced in this Section 12. 13. Bank's Rights On Default. Upon the occurrence of an Event of Default, Bank shall be entitled to declare any of the Obligations immediately due and payable, and Bank shall have all rights provided in the California Uniform Commercial Code and otherwise available by law, may take possession of any Collateral and enter any premises where any Collateral is kept, with or without judicial process, may sue for the full amount of any or all of the Obligations without proceeding against any or all of the Collateral or sue for any deficiency remaining after disposition of any or all of the Collateral, may without notice or demand setoff and apply toward payment of any Obligations any and all demand, time, savings or any other deposit accounts, instruments, or other property under Bank's possession or control, and may sell or lease in any commercially reasonable manner in one or more transactions any or all of the Collateral in its then condition or following any commercially reasonable preparation or processing. Sales for cash or on credit to any wholesaler, retailer or user of the Collateral, or at public auction or private sale, are all commercially reasonable. Bank may require Debtor to assemble any or all of the Collateral and make it available to Bank at the entrance to the location of the Collateral, or at any office of Bank in the county where the Collateral is or should have been located under the terms of this Agreement. Bank may sell or lease any or all of the Collateral without having it present at the place of the transaction. Whenever any Collateral is in the Bank's possession, Bank may use, operate and consume it in any commercially reasonable manner or as it deems appropriate for paying or performing the Obligations. Bank shall have no liability to the Debtor for any damage to real or personal property which is not Collateral caused by acts or omissions of Bank or its agents done in good faith in the course of removing, storing, processing, maintaining, preserving, protecting or disposing of Collateral nor for any such damage to Collateral except as a result of Bank's failure to sell or lease Collateral in a commercially reasonable manner. Bank is not obligated to collect, take possession of, or otherwise realize on any Collateral. 14. Multiple Debtors. If more than one Debtor signs this Agreement, their liability under this Agreement is joint and several. Any Debtor who is a married person agrees to recourse against his or her separate property for all Obligations. The breach of any provisions of this Agreement by any Debtor shall be a breach by all Debtors unless waived by Bank. Any release or substitution of Collateral or any impairment or suspension of Bank's rights against a Debtor, or any transfer of a Debtor's interest to another, shall not affect the liability of any other Debtor. All Debtors waive to the extent permitted by law: (a) any right to require Bank to proceed against any Debtor before any other, or to pursue any other remedy; (b) presentment protest and notice of protest, demand and notice of nonpayment demand of performance, notice of sale, and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until all Obligations shall have been paid; and (d) any right of subrogation to Bank until all Obligations shall have been paid or performed in full. 15. Modification And Waiver. Any forbearance or failure or delay by Bank In exercising any right, power or remedy hereunder, or acceptance of partial or delinquent payments, shall not be deemed a waiver thereof or of any other right hereunder, and any single or partial exercise of any right, power or remedy shall not preclude the further exercise thereof. No waiver or consent shall be effective unless it is in writing and signed by an officer of Bank. No waiver of a current breach shall be deemed a waiver of a future breach. Bank may cure any Event of Default at Debtor's expense. 16. Assignment. Debtor may not assign or transfer Debtor's obligations hereunder without Bank's prior written consent Bank reserves the right to sell, assign or transfer its rights and duties under this Agreement, in whole or in part, notice to Debtor. In that connection, Bank may disclose all documents and information which Bank may have pertaining to this Agreement Debtor or Debtors business. On transfer of all or any part of the Obligations or a participation Interest therein, Bank may transfer all or any part of or interest in the Collateral. Bank may deliver all or any part of the Collateral to any Debtor at any time. Any such transfer or delivery shall discharge Bank from all liability and responsibility with respect to such Collateral transferred or delivered. This Agreement benefits Bank's successors and assigns and binds Debtors heirs, legatees, personal representatives, successors and assigns. Debtor agrees not to assert against any assignee of Bank any claim or defense Debtor may have against Bank. 17. Miscellaneous. Time is of the essence of this Agreement and all its provisions. Debtor will execute any additional agreements, assignments, notices, filings or documents reasonably required by Bank to effectuate this Agreement or to preserve and protect any Collateral and Bank's rights. This Agreement shall be governed by the laws of the State of California and, unless otherwise defined or provided herein, all words used in this Agreement have the meanings given them in the California Uniform Commercial Code. Titles preceding any paragraph of this Agreement are for convenience only and are not a part of this Agreement. All rights herein are cumulative and in addition to all fights available under law or contract Any notices or other communications provided for or allowed hereunder shall be effective only when given by one of the following methods and addressed to the respective party at Its address given with the signatures at the end of this Agreement and shall be considered to have been validly given (a) upon delivery, if delivered personally, or (b) upon receipt, if mailed upon placement in the United States mail, first class postage prepaid or if sent by overnight courier service of recognized standing, and (c) upon telephoned confirmation of receipt, if sent by telecopy or facsimile. Unless separate notice is requested in writing by any Debtor, notice given to any Debtor shall constitute notice to all Debtors. Should any one or more provisions of this Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. Except for the Loan Documents and documents and instruments referenced herein, this Agreement and any exhibits, schedules and addenda constitute the entire agreement between Bank and Debtor in connection with the Collateral and supersede all prior understandings or agreements concerning the subject matter hereof. 18. Indemnification. Debtor shall pay and protect, defend and indemnify Bank and Bank's employees, officers, directors, shareholders, affiliates, correspondents, agents and representatives (other than Bank, collectively "Agents") against, and hold Bank and each Agent harmless from, all claims, actions, proceedings, liabilities, damages, losses, expenses (including without limitation attorneys fees and costs) and other amounts incurred by Bank and each Agent arising from the matters contemplated by this Agreement or by any Loan Document; provided, however, that this indemnification shall not apply to any of the foregoing incurred solely as the result of Bank's or any Agent's gross negligence or willful misconduct. This indemnification shall survive the payment and satisfaction of all of the Obligations. 19. Reimbursement. Debtor shall reimburse Bank for all costs and expenses, including without limitation reasonable attorneys' fees and disbursements (and fees and disbursements of Bank's in-house counsel) expended or incurred by Bank in any arbitration, mediation, judicial reference, legal action or otherwise in connection with (a) the negotiation, preparation, amendment, interpretation and enforcement of this Agreement (b) any workout or attempted workout, (c) the rendering of legal advice as to Bank's rights, remedies and obligations under this Agreement or any of the Loan Documents, (d) collecting any sum which becomes due Bank under this Agreement or any Loan Document (e) any proceeding for declaratory relief, counterclaim to any proceeding, appeal, contempt proceeding, discovery, or post-judgment motions and proceedings of any kind, including without limitation any action taken to collect or enforce any judgment, (f) the protection, preservation or enforcement of any rights of Bank, (g) any motion, proceeding or other activity i connection with a case under Title 11 of the United States Code or any similar law, or (h) garnishment, levy and third party examinations. 20. Hazardous Substances. Except as disclosed in writing to Bank, Debtor's propert never has been and never will be used for the generation. manufacture, storage, treatment, disposal, release or threatened release of any flammable explosives, radioactive materials, asbestos or any other hazardous substance, as those or any similar terms are defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss 9601 et seq. ("CERCLA"), any regulation promulgated thereunder, or any state or local law, rule, regulation. or order in effect from time to time. Debtor hereby agrees to indemnify and hold harmless Bank against any and all claims and losses resulting from a breach of this provision. 21. Copy. Each Debtor acknowledges receipt of a copy of this Agreement 22. N/A Designation. Whenever "N/A" appears in this Agreement it means that the space or section in which it appears is deemed deleted from this Agreement. DEBTOR: Auto-Graphics, Inc., a California corporation ss/Robert S. Cope Robert S. Cope President This General Security Agreement Is a replacement of that certain Security Agreement-Accounts dated June 13, 1994 and that certain Security Agreement-Equipment dated May 31, 1989 Address(es) of chief place(s) of business and chief executive office, or if none, residence: 3201 Temple Ave. Pomona, CA 91768 EX-27 7 ART. 5 FINANCIAL DATA SCHEDULE FOR FYE 12/31/96
5 This schedule contains summary financial information extracted from the Balance Sheet and related Statement of Income of Auto-Graphics, Inc. as of December 31, 1996, and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 364094 0 1920304 38000 123082 2557921 9589699 5164177 7131950 1747770 0 0 0 110928 2507431 7131950 9217937 9251917 5500527 8571753 0 0 253258 426906 190000 236906 0 0 0 236906 .21 .21
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