-----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, RkhJFIAki+kE9RBogIR/3JiG9wX3mxOPL1xZO9Rfow20EJiJEkEOGCFKDRwnLTuf Rumj4eAOmKshls/tACviCg== 0000008598-99-000014.txt : 19990504 0000008598-99-000014.hdr.sgml : 19990504 ACCESSION NUMBER: 0000008598-99-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990423 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTO GRAPHICS INC CENTRAL INDEX KEY: 0000008598 STANDARD INDUSTRIAL CLASSIFICATION: 7374 IRS NUMBER: 952105641 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04431 FILM NUMBER: 99600091 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 [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to For the Fiscal Year ended Commission File Number December 31, 1998 0-4431 AUTO-GRAPHICS, INC. (Exact name of registrant as specified in its charter) California 95-2105641 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 3201 Temple Avenue Pomona, California 91768 (Address of principal (Zip Code) executive offices) Registrant's telephone number: (909) 595-7204 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10 par value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of voting stock held by non-affiliates of the registrant was $662,000 as of March 23, 1999. The number of shares of the registrant's Common Stock outstanding was 1,064,478 as of March 23, 1999. DOCUMENTS INCORPORATED BY REFERENCE The definitive Proxy Statement to be filed pursuant to Regulation 14A for the fiscal year ended December 31, 1998 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. including its wholly-owed A-G Canada, Ltd. and Datacat, Inc. subsidiaries (the "Company") provides software products and services used to create, organize, manage, and deliver electronic databases and information via the Internet/Web and/or other electronic media such as CD-ROM and via traditional publication media such as print. Revenue is generated from direct sales, licensing and support of these software products and services through outsourcing contracts to provide hardware, software and other facilities to manage customer Web sites (Web Hosting), and by using this technology to distribute "content" via the Company's own Web sites. The Company's products and services are presently sold into three primary customer categories: 1) Libraries, especially library consortia requiring systems to create, organize, manage, publish and access large bibliographic and holdings databases of multiple institutions used to implement resource sharing initiatives and services; 2) Corporate publishers, primarily manufacturers and distributors, who publish catalogs and promotional content used in their sales and marketing programs. The Company's capability, and customer's needs, now extends into e-commerce applications as a result of the Company's Internet/Web and database information expertise; and 3) Traditional database publishers (encyclopedias, dictionaries and bibles) who use the Company's products and services to manage the editorial process and create valuable content. Internet/Web distribution is a natural extension for these customers. Products Impact/CMS (Content Management System) is a modular and expandable editorial system that allows users to create, organize and manage information for multi-purpose publishing. Data structures are SGML/XML and are particularly suited to database applications. The system can be configured from single user to enterprise systems. Editorial control, iteration management and SGML/XML DTD validation are important features of the Company's Impact/CMS product line. Impact/CMS/Frame incorporates a module including Adobe's Frame+SGML software to provide WYSIWYG graphics and interactive database composition. Impact/CD is the system used to index, format and output SGML/XML/HTML data for CD-ROM distribution. The user interface is provided in Windows or Web browser formats. Impact/Web is the system used to build Web sites from SGML and XML data formats. HTML display is created "on the fly" allowing basic data structures to stay intact and providing greater page design flexibility. Customizing modules include e-commerce features providing ordering, credit card purchasing, multi-tier pricing and content scoping controls. These features provide users with capabilities to customize Web sites to individual requirements. Applications The Company provides outsourcing services to various types of customers. The Company has been contracted by the State of Texas to create a Web- based system providing library services to approximately 7,000 school libraries. To date, over 3,500 users are already included in this Texas state-wide system. The Company has similar contracts with the States of Kansas, Oklahoma, Tennessee and the Canadian Provinces of British Columbia and Ontario, and is the announced winning bidder for a state-wide contract with the State of Connecticut. Customers also include regional library organizations in the States of Illinois, New Jersey, Michigan, Ohio, and New Hampshire. The Company's outsourced Internet/Web database management services presently support approximately 7,500 distinct library sites, enabling library users to access these library services via the Internet from their offices and homes as well as from within the library. This large number of customer/users demonstrates the Company's ability to handle large capacity Internet communications assignments. The Company has developed a bibliographic database containing over 32 million records together with the holdings of U.S. and most Canadian public and university libraries, and including five million authority records. Through the Company's Internet/Web software, the Company provides bibliographic records for use by its U.S. and Canadian library customers. In the case of the Company's manufacturing and distribution catalog products, the Company provides services and Internet/Web software to create, maintain and provide access to product databases for these customers. One example is an HVACR-specific product database which is available on an annual site license basis to wholesalers in the HVACR (heating, ventilation, air conditioning and refrigeration) industry. This HVACR database, combined with the Company's Internet/Web software, provides HVACR wholesalers an ability to quickly and easily put their custom catalog on the Internet. The Company's software flexibility provides customers with the capability of individualizing their Internet catalogs to include features such as custom indexing, multi-tier pricing, customer specific pricing and order entry (e-commerce). From the database which is published on the Internet/Web, the Company's customer also has the ability to publish CD-ROM and print catalogs. The Company's Web access and Internet connectivity products and services, developed over the last five years for the library and publishing industries, provide the Company with the opportunity to further develop, and package this technology and expertise for use by a much broader category of customers. The Company is now in a position to begin marketing a complete Internet/Web database, information and knowledge management solution for utilization by customers, operated internally or on an outsourced "host" basis by the Company, for use both within the enterprise and outside the enterprise by suppliers, customers and other categories of users for whose benefit the Company's customer wants to provide access to this system. The Company's product line now allows businesses to create database content electronically, to organize and manage information then deliver it over the Internet and/or via traditional media such as CD-ROM and printed catalogs and other materials. The Company has developed and is refining an SGML "editor" software product for sale to business and other users who want to create, organize, maintain and publish large content database products in multi-media form. In addition to the Company's Internet/Web database information and knowledge management products and services, the Company will continue to provide ancillary services required by the customers/markets it currently serves. These ancillary services include database entry and database "clean-up", conversion and database loading services. These services enable customers to quickly and easily create an electronic database of information which may then be managed by the customer using the Company's suite of software and services. Product Development Core software embraces industry standard data structures, such as XML, SGML, and standards specific to the markets served, such as MARC and Z39.50 in the library industry. These standards afford customers the ability to create, organize, manage and output information/knowledge databases for the benefit of the enterprise and its customers, suppliers and other category of users independent of the media used to publish this data. Flexibility in the ability to distribute and use information/knowledge by an enterprise is increasingly a primary goal and is the underlying premise of the Company's Internet/Web products and services. All new product development is being written in C++ and runs on Microsoft NT/Intel platforms. The Company is using N-tiered architecture to allow for customer implementation flexibility. Microsoft SQL server provides the database engine for the second generation of the Company's flagship Impact/Online software product family. Development is based on an architecture that will work on multiple computers affording the system the ability to grow as the Company's needs increase. The Company provides its outsourcing customers a full T-1 and a back-up T-1 data communication line with automatic re-routing to enhance "fail- safe" communication. Internet connections ("hits") to Web pages maintained by the Company represent important information as to usage/capability. In 1998, this online activity increased [at an average rate of] 133% over 1997. Hits per month reached over 2 million early in 1999, and are expected to double again by the end of the year. Marketing Products are distributed to specific markets discretely branded even though the technology may be similarly applied across all markets served. In addition to corporate office marketing staff, the Company maintains a small direct sales force for each of the individual markets (library, publishing and Datacat-HVACR) it currently serves. Marketing activities include public relations, advertising, attendance at industry trade shows, and targeted mail campaigns. Products sold to the library market are generally sold by response to RFP's (requests for proposals) and, more frequently than not, competitive bidding managed by governmental purchasing departments. The Company maintains a proposal writing department. Recently, the Company's marketing strategy has included Internet advertising and sale to complement the Company's sales force in the field. Price points for the Company's various products/services are instrumental in determining the type of sales effort deployed by the Company, except that Internet advertising is used in all markets for the Company's products regardless of the price point of the various products/services. With the introduction by the Company of its Internet-centric line of products, branded advertising has changed somewhat. As indicated above, these Internet/Web products are now branded for a specific market. However, as to the library market the Company continues to market its products and services under the Company name (not by the name of the specific suite of software products and services used by these library customers). The Company's strategy for its Internet-centric products and services in the future includes the continued introduction of new products/services to the customers and markets the Company currently serves, and to further develop and refine these products for introduction and marketing to customers and markets not currently served by the Company. The Company's strategy for entering new markets in the future will include efforts to utilize strategic relationships with other companies who are already present or are otherwise knowledgeable about these prospective customers/markets. To be successful in these new products/services, customers and markets, the Company will need to be able to create, finance, develop and implement a new marketing initiative and capability designed to introduce and market its Internet/Web line of products and services to prospective users who are not already familiar with the Company, its products/services and/or their capabilities. The Company must compete successfully with other companies, many of whom will be larger, more established, better financed, more recognized and more experienced in the introduction, development, marketing, sales and service of the same or similar products and services to these targeted new customers/markets in a rapidly changing technological and distribution environment. Accordingly, there can be no assurances that the Company will be able to launch, sustain and profit in the near or long term from these new products/services, customers and markets initiative. Likewise, no assurances can be given that the Company will be successful in efforts to develop and utilize a strategic alliances strategy to assist in efforts to introduce and market its Internet/Web products and services to a broader range of customers/markets. However, as the market for managing and distributing information and knowledge continues to change, the Company intends, as it has in the past, to be responsive to the changing needs and requirements of customers by offering new products and services representing advances in the information/knowledge industry for the benefit of all concerned. Competition The Company was an early entrant into the computerized database composition business and industry, and believes it may have been offering these products and services longer than any of the other companies in competition with the Company today in respect of these products/services to the library and publishing markets. In the library market, the Company competes with numerous companies, such as OCLC Online Computer Library Center, Inc., which are larger with substantially greater resources than are available to the Company and offer a wider variety of products and services for the library industry. Although the Company has been successful to date in securing most of the awarded contracts involving the development and implementation of Internet/Web based "online" bibliographic catalog and interlibrary loan services systems for state- wide, regional or other consortia of libraries, if this category of library products/services business continues to grow, as the Company believes should be the case, increased emphasis on this products/services niche of the library market can be expected to generate increased attention, capability and effort by one or more of the Company's competitors in this now relatively small niche of the library market. The software and computerized database processing services business for corporate and traditional publishing is highly competitive. There are no definitive market share statistics available. 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 are awarded according to the results of market pricing, competitive bidding, technical capability, customer relationship and/or past performance. In seeking to expand its customers/markets in the Internet/Web publishing market, the Company can be expected to face intense competition from existing and future competitors with substantially greater financial, technical, marketing, distribution and other resources than the Company and, therefore, may be able to respond more quickly than the Company can to new challenging opportunities, technologies, standards or customer requirements. The Company will compete with other large, well-known software development and Internet/Web database platform companies that offer a variety of software products. The Company will also compete with a number of medium-sized, small and start-up companies that have introduced or are developing Internet/Web development, management, publishing and e-commerce products. Increasing competition could result in pricing pressures negatively impacting margins available to companies competing in this market and could make it difficult or even impossible for the Company to gain recognition and acceptance of its particular line of these products and services. Of course, it is also possible that companies that are now or in the future may be competing in the broader market where the Company is seeking to compete may determine to enter the Company's traditional markets with adverse impact on the Company as a result of this new competition. Company Background The Company was founded In 1950 and incorporated in 1960 in the State of California. Beginning in 1964, the Company was one of the pioneers in computerized typesetting and database composition services for the library and publishing industries. Over the years, the Company has migrated its products and services to the most current technology required to address changing customer needs and requirements. The Company started in print, moved to microfilm/fiche and then to CD-ROM as the media of choice for its products/services, and is now completing the process of adapting its products and services to the prevailing Internet/Web environment. In 1998, revenues attributable to the Company's Internet/Web products and services grew by 33%. In 1999, these revenues will again increase, and should account for over 50% of the Company's total revenues in 1999. Offices/Employees The Company's main office is in Pomona, California, in the greater Los Angeles area. The Company's wholly-owned Canadian subsidiary, A-G Canada, Ltd., is located in Toronto, Canada. Marketing representatives are located in California, Florida, New York, Washington State, Washington D.C. and Toronto, Canada. There are approximately 100 employees in all locations. 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 substantially occupied and should be adequate for the Company's anticipated growth for the foreseeable future. The facility is currently leased to the Company through June 2001 under the second of two five-year renewal options. (See Note 6 of "Notes to Consolidated Financial Statements" and Item 13. "Certain Relationships and Related Transactions"). ITEM 3. LEGAL PROCEEDINGS None. 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. 1998 1997 Bid Asked Bid Asked Price Range High Low High Low High Low High Low 1st Quarter 2.625 2.625 4.000 3.500 2.250 2.000 3.250 2.375 2nd Quarter 3.500 2.625 5.625 3.500 2.000 1.625 2.750 2.000 3rd Quarter 5.500 3.625 7.500 4.000 2.125 1.750 4.500 3.500 4th Quarter 2.750 2.500 4.000 3.000 2.625 2.500 4.250 2.625 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 closing bid and asked prices quoted by broker/dealers making a market in the Company's Common Stock. Prices quoted do not include retail markup, markdown or commissions and may not reflect actual transactions in shares of the Company's stock. Quotations for the Company's stock are also reported on the OTC Bulletin Board. As of December 31, 1998, the number of holders of record of the Company's Common Stock was 214. The Company has never paid a cash dividend and there are no plans to do so in the near future. (See Note 3 of "Notes to Consolidated Financial Statements" for information as to the loan restriction on the payment of cash dividends). ITEM 6. SELECTED FINANCIAL DATA Dollar amounts in thousands except per share data. (See Note 1 of "Notes to Consolidated Financial Statements" under "Other Assets") Years Ended December 31 1998 1997 1996 1995 1994 Operating results: Net sales $ 9,099 $10,036 $ 9,218 $ 9,559 $9,165 Net income/(loss) (1,065) 212 236 194 158 Earnings /(loss) per share ( 1.00) .19 .21 .16 .12 At year-end: Total assets 7,573 8,852 7,132 6,688 6,106 Long-term debt 2,588 2,911 2,101 1,906 1,696 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 Management believes that liquidity and capital resources will be adequate for operations in 1999. The Company has a revolving credit facility with maximum availability of $1,250,000 ($1,250,000 available at December 31, 1998), secured by accounts receivable, renewable every year. Management believes that the current line of credit will again be renewed in 1999 and is sufficient to handle the Company's cyclical working capital needs. (See Note 2 of "Notes to Consolidated Financial Statements"). The Company also maintains a capital line of credit facility with a maximum availability of $3,000,000 (fully utilized at December 31, 1998), secured by substantially all of the Company's capital assets, renewable every year. Management believes that this credit facility will again be renewed in 1999. Management believes that increased credit availability may be required to finance planned capital expenditures in 1999 which are estimated at $1,200,000, to be used to upgrade Internet server computers and for software development primarily for the next generation of Impact/ONLINE software required to accommodate the growing number of libraries, and resulting increasing volume of transactions, using the Company's Internet/Web product. The Company is evaluating alternative means of financing this investment, including lease financing for planned computer hardware purchases. The Company obtained an additional credit facility of $750,000 used to fund the 1997 acquisition of the Company's Canadian subsidiary. The term note is a three year note with interest only for 12 months followed by a 24 month amortization schedule. In January 1998, the Company prepaid $375,000 of the term loan. The balance outstanding at December 31, 1998 was $375,000 and the loan is scheduled to be repaid by June of 2000. (See Note 3 of "Notes to Consolidated Financial Statements"). In 1998, cash flow provided by operating activities increased $226,000, to $1,310,000, from $1,084,000 in 1997. Cash flow attributable to non-cash depreciation and amortization was $1,676,000, collection of accounts receivable was $639,000 and additional customer advances (deferred income) was $278,000 in 1998. The average collection days for accounts receivable was unchanged at 66 days in both 1998 and 1997. The substantial decrease in accounts receivable of 28% resulted from the decrease in fourth quarter sales in 1998, down 27% from the prior period. (See Results of Operations below). At December 31, 1999, the Company's principal financial commitments involved the lease of corporate facilities in Pomona, California and Toronto, Ontario. The Company's principal uses of cash for investing activities, $968,000 in 1998 and $2,141,000 in 1997, were for the continuing development of the Company's Impact/ONLINE software, and for upgrades to the Company's computer equipment (Internet servers) to expand and enhance online service to the Company's current and prospective Internet/Web customers. Liquidity was adversely affected by the decline in sales in 1998 and resulting net loss of $1,065,000 ($1,462,000 before tax benefit). (See Results of Operations below). Working capital at December 31, 1998 was ($459,000) versus $340,000 in 1997. As a result of the loss, the Company was in non-compliance with two financial ratio loan covenants under its bank credit facility in the quarter ending September 30, 1998, and five financial ratio loan covenants for the year ended December 31, 1998. The Company was also in non-compliance with financial ratio loan covenants for the quarter ended March 31, 1999. The Company's bank agreed to waive default rights under the Company's bank loans pertaining to all these financial ratio loan covenant violations through March 31, 1999, and further agreed to reduce and in some cases eliminate these financial ratio loan covenants on a going forward basis. The Company is in the process of re-negotiating terms and conditions of its bank loan agreements to reflect the Company's anticipated results of operations and financial condition in 1999 and beyond. The Company was timely in all payments to the bank in 1998, and anticipates timely payments in 1999. Notwithstanding the substantial 1998 loss, the Company's cash position at December 31, 1998 was $293,000, up $49,000 from the same period in 1997, and the Company was once again able to fully pay its revolving line of credit (maximum $1,250,000) down to zero at December 31, 1998, due in part to increased customer advances attributable to the Company's new Internet/Web products which deposits (deferred revenue) were up $278,000 in 1998 versus 1997. The Company's capital resources are available for use as working capital, for capital investments and, although less likely for the immediate future, possible acquisitions of businesses, products or technologies complementary to the Company's business. Management believes that cash reserves and cash flow from operations will be sufficient to fund operations in 1999, although the Company believes that the bank may require the Company to seek alternative sources of financing to complement use of bank financing for planned 1999 capital expenditures. The Company believes that it is imperative to continue to invest in Internet/Web capability for the foreseeable future. Accordingly in 1999, and thereafter, the Company may and likely will require additional financing to continue to develop and refine its new Internet/Web line of products and to seek to expand the market for these products. (See "Item 1. Business" herein). There can, however, be no assurance that any additional financing, if and when needed, will be available on terms favorable to the Company, or at all. Results of Operations Overall, 1998 consolidated sales revenues were down $936,000 or 9.3% from the prior year. Sales for the first six months of 1998 were up $806,000 or 21% from the same period in 1997. However sales in the second six month period of 1998 were down $1,743,000 or 28% from the same period the prior year. For the year ending December 31, 1998, the Company incurred a net loss of $1,065,000, which was not only a significant loss but was the first time the Company had experienced a loss in the last 23 years (since 1975). A number of factors contributed to this result. The loss was due in part to the continued effect on the Company of the Canadian acquisition completed in July of 1997. Sales of the Canadian subsidiary, although additive to the Company's revenues in the last six months of 1997, continued to decline as Canadian customers turned to alternative sources for their bibliographic cataloging services following the acquisition and were slow to commit to the Company's new Internet/Web based library services products. Since the acquisition, annualized sales of the Canadian subsidiary have declined approximately 40%. Within the first year following the acquisition, customers in Japan deferred several major contract awards to the Company indefinitely due to the deepening recession in that country. Approximately half of the decline in annualized sales revenues was due to the drop in international business from Japan, where all of this business originated. The Company introduced its new cataloging products into the Canadian market, and the decline in sales revenues from Canada has slowed recently and is expected to stabilize in 1999 - - although libraries in both Canada and the United States appear to be seeking cheaper and sometimes even free alternative sources for the high quality bibliographic cataloging records service that the Company's product line has traditionally offered and libraries traditionally preferred. In response to this trend, the Company has modified its selling model from a fee per record based service to a subscription based service entitling customers to quality cataloging record information for a flat fee per year, which appears to be gaining acceptance with customers and ameliorating the "alternative sources" problem somewhat. Sales revenues from the U.S. library market were down $1 million in 1998 from 1997 and declined in virtually all of the Company's traditional (bibliographic cataloging and print publishing) product and service lines due primarily to lower demand. The drop was exacerbated by the conversion of many of the Company's customers from CD-ROM to the Company's Internet/Web based products which has led to disruptions in the timing of revenue as the Company has transitioned from a fee-for-service business model to a monthly subscription model. Customers who did commit to adopt the Company's new Internet/Web based technology product line cancelled revisions to their CD-ROM catalogs otherwise scheduled for 1998 in order to be able to allocate expenditures to the implementation of the Company's Internet/Web delivery system in 1999. Now that most the CD-ROM customers in both the U.S. and Canada have been converted to the Company's new Internet/Web products, revenue from library services should become more stable and predictable. Sales revenues in the publishing markets were somewhat lower in 1998 from 1997 due primarily to a delay in the completion of a major editor project which, like the transition from CD- ROM to the Internet/Web in the library markets, occasioned a shift in anticipated revenues from one period to a succeeding period. Gross margins declined approximately $900,000 in 1998 from 1997. Approximately half the decline was due to additional depreciation and amortization expense associated with the acquisition of the Canadian business assets (which transaction did not involve any goodwill). The difference in gross margin also reflects additional depreciation and amortization expense in the amount of $383,000 associated with an adjustment of the useful life of some computer hardware and software assets. General and administrative expenses were up in 1998 over 1997 by $867,000. As revenues from the Canadian operation continued to decline, management began adjusting the Canadian cost structure, mostly payroll, to reflect decreasing revenue forecasts. There were staff reductions commencing in June and continuing through December 1998, from 19 down to 9 employees in the Company's Toronto office; and the Company plans further reductions and other cost savings steps for implementation in 1999. The combined cost savings measures, primarily employee severance benefits payable under Canadian law, resulted in a nonrecurring charge in 1998 of $318,000, which is reflected under 1998 accrued payroll which exceeded 1997 by $300,000. Legal expenses were up $243,000 over 1997. The Company challenged the award of a large library contract to a competing bidder based on what the Company believed, and the customer eventually concluded, was inaccurate information supplied by the competing vendor. Although time consuming and expensive, the Company was successful in getting a reversal of the decision. The customer has now announced that the Company is the winning bidder for this important contract which should be signed shortly and provide the Company with substantial revenue over a period of the next several years. Separately, an employee in the Company's Datacat subsidiary, resigned to set-up a competing business using the Company's own proprietary heating, ventilation, air conditioning and refrigeration (HVACR) catalog database. Through extensive negotiations, copyright application proceedings before the United States Patent Office and other action, the Company was able to overcome this problem and the previously departed employee returned the mis-appropriated Company HVACR material, agreed not to compete with the Company in the future and accepted a consulting role with Datacat. Additionally, during 1998 the Company made a substantial effort to investigate the possible acquisition of another company in the library services and information delivery system business. Ultimately, the business was sold by its owner to the management/employees of the subject company. The Company incurred substantial legal and related outside consulting services expenses attributable to this possible acquisition opportunity in 1998. Recruiting fees were also up substantially in 1998 over 1997 as the Company filled several key management and sales positions utilizing the services of outside placement professionals. Interest expense in 1998 was up $33,000 on higher average borrowings, due to lower sales revenues, offset somewhat by lower interest rates. As a result of the substantial net loss incurred in 1998 of $1,064,622 ($1,461,622 before effect of anticipated tax benefits), the Company recognized a $397,000 tax benefit attributable to the carryback and carryforward provisions of the United States income tax laws. Due to the relatively recent acquisition, and lack of profitability, of the Canadian business, the Company did not recognize the full potential amount of the tax benefit in Canada resulting in an unrecorded net operating loss carryforward (NOL) in the amount of $370,000. See Note 4 of "Notes to Consolidated Financial Statements". The Company anticipates sales revenues will decline again to the $8.0-$8.5 million range in 1999, resulting in approximately break-even net income, as the transition to the Company's Internet/Web line of products continues and the Company seeks to develop new markets for the information and knowledge management products, originally developed for library and publishing customers, for adoption by expanding categories of customers educated to the capabilities and benefits to be derived from these products. Some of the Company's products/markets are mature, such as the bibliographic cataloging records business, and are not perceived as growth opportunities and are expected to continue to decline in succeeding years as more and more of this information is available at reduced cost or for free from sources like the Library of Congress and book distributors. Accordingly, costs and expenses attributable to the "traditional" products/markets have been reduced to be more in line with going forward sales forecast. However, further cost and expense reductions in variable product costs, and related fixed costs, will be much more difficult to achieve given the Company's current, largely fixed, cost structure. Should sales fall short of expected levels in 1999, the Company can be expected to incur further, but more modest, losses. Any further significant losses, however, could be expected to adversely affect the Company's banking relationship and its ability to secure alternative sources of capital. Information Relating To Forward-Looking Statements This Report may include 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 Inflation is not anticipated to have a material effect on the Company's business in the near future. Historical dollar accounting does not reflect changing costs of operations, the future cost of expansion and the changing purchasing power of the dollar. Should inflation occur in the future, it can be expected to impact the Company in an adverse 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. Foreign Exchange The functional and reporting currency of the Company is the U.S. dollar, while the functional and reporting currency for A-G Canada Ltd., the Company's wholly-owned Canadian subsidiary, is the Canadian dollar. Accordingly, the Company is now exposed to foreign currency translation gains or losses as the relationship between the Canadian dollar and U.S. dollar fluctuates. Since the date of the Company's Canadian acquisition, the Canadian dollar has lost over 10% of its value against the U.S. dollar. More recently, the value of the Canadian dollar has stabilized at approximately U.S.$1.00=Cdn$1.54. Cash foreign currency losses, expressed in terms of U.S. dollars, were approximately $47,000 in 1998 as compared to $12,222 for the six month period in 1997. Further declines in the value of the Canadian dollar against the U.S. dollar will result in additional foreign exchange losses. Other than for sales by A-G Canada in Canada, all other transactions involving the Company are denominated in U.S. dollars. See Note 1 of "Notes to Consolidated Financial Statements". Year 2000 The Year 2000 issue relates to the ability of computer software programs to recognize the arrival of the Year 2000 because of a common software design feature that describes the current year by only its last two digits. The Company has developed a plan to modify its information technology from a computer hardware and software perspective to be ready for the Year 2000 ("Y2K") and has begun converting critical data processing systems to be Y2K compliant. The Company currently expects the conversion project to be largely complete before the end of 1999. This conversion project is budgeted to cost between $50,000 and $100,000, including internal and external costs but excluding costs to upgrade and replace computer systems in the normal course of business, to ensure that all key systems are ready for the Year 2000. The Company's main computer systems have been upgraded and are now compliant according to their manufacturers. Many of the Company's personal computers will require a software and in some cases a hardware upgrade or other "fixes" which are underway. Third-party application software is being upgraded where necessary to be Y2K compliant. All new products and services developed and offered by the Company will be Y2K compliant as a matter of corporate policy. Most of the Company's internally developed applications software products have now been tested for compliance, except that it is not economical to upgrade certain of the internally developed software which will be replaced by available third- party software. The Company's management information system software is also being replaced with a third-party software product. The Company does not currently have any contingency plans to address a systemic failure such as an interruption in power or telephone utility service used by the Company and its customers (and/or their customers). Likewise, the Company has not made provision for alternate site computer and related processing services due to the lack of comparable alternative computer processing alternatives. Should the Company experience an unforeseen Year 2000 problem with one of its products, it is believed that the Company has sufficient internal personnel and other resources to adequately address any this problem. Of course, the actual occurrence of any unforeseen problem, and/or the Company's inability to timely address and resolve problems which the Company can reasonably foresee, could be expected to adversely affect sales revenues in the short to mid-term, increase costs and expenses and could expose the Company to substantial litigation costs and expenses and possible judgments. The Company is unable to determine with any high degree of certainty whether or not the Year 2000 problem will ultimately have any material adverse effect on the Company's business, products, customers, results of operations, financial condition or otherwise. ITEM 8. FINANCIAL STATEMENTS Index to Financial Statements covered by Reports of Independent Certified Public Accountants. Page Reference Report of Independent Certified Public Accountants 11 Report of Independent Auditors 12 Consolidated Balance Sheets at December 31, 1998 and 1997 13 Consolidated Statements of Operations for the years ended 14 December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the 14 years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years 15 ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 16 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Auto-Graphics, Inc. Pomona, California We have audited the accompanying consolidated balance sheet of Auto- Graphics, Inc. and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Auto-Graphics, Inc. and its subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Los Angeles, California March 5, 1999 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Auto-Graphics, Inc. We have audited the accompanying consolidated balance sheet of Auto- Graphics, Inc. as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Auto- Graphics, Inc. at December 31, 1997, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Riverside, California April 8, 1998 AUTO-GRAPHICS, INC. CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 Current assets: Cash $ 292,744 $ 244,620 Accounts receivable, less allowance for doubtful accounts ($38,000 in 1998 and 1997) 1,697,826 2,365,837 Unbilled production costs 86,573 83,424 Other current assets 360,170 122,416 Total current assets 2,437,313 2,816,297 Software, equipment and leasehold improvements, net (See Note 1) 5,016,627 5,787,301 Other assets 119,162 248,349 $ 7,573,102 $ 8,851,947 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 632,809 $ 669,237 Deferred income 813,113 536,225 Accrued payroll and related liabilities 578,569 272,485 Other accrued liabilities 84,282 155,383 Current portion of long-term debt 787,500 842,500 Total current liabilities 2,896,273 2,475,830 Long-term debt, less current portion (See Note 3) 2,587,500 2,911,573 Deferred taxes based on income (See Note 4) 486,000 695,000 Total liabilities 5,969,773 6,082,403 Commitments and contingencies (see Note 5) Stockholders' equity: Common stock, $.10 par value, 4,000,000 shares authorized, 1,064,478 shares issued and outstanding in 1998 and 1,090,478 shares issued and outstanding in 1997 106,448 109,048 Capital in excess of par value 1,123,899 1,128,319 Retained earnings 375,389 1,534,741 Accumulated other comprehensive income ( 2,407) (2,564) Total stockholders' equity 1,603,329 2,769,544 $ 7,573,102 $ 8,851,947 See notes to consolidated financial statements. AUTO-GRAPHICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1998, 1997, 1996 1998 1997 1996 Net sales $ 9,099,198 $10,035,824 $ 9,217,937 Costs and expenses Cost of sales 6,258,523 6,264,141 5,500,527 Selling, general and administrative 3,943,143 3,076,078 3,071,226 10,201,666 9,340,219 8,571,753 Income/(loss) from operations ( 1,102,468) 695,605 646,184 Interest expense, net ( 311,797)( 278,591)( 253,258) Other income/(expense) ( 47,357)( 12,264) 33,980 Income/(loss) before taxes ( 1,461,622) 404,750 426,906 Provision/(benefit) for taxes ( 397,000) 193,000 190,000 Net income/(loss) $(1,064,622)$ 211,750 $ 236,906 Basic and diluted earnings per share $ (1.00) .19 $ .21 Weighted average shares outstanding 1,066,645 1,090,611 1,109,345 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1998, 1997, 1996 Accumulated Common Stock Capital in other com- excess of prehensive Retained Shares Amount par value Income earnings Balances at Jan. 1,1996 1,130,478$ 113,048 $1,151,092 - $1,177,662 Net income - - - - 236,906 Common stock retired ( 21,200) ( 2,120) ( 12,441) ( 45,788) Balances at Dec. 31,1996 1,109,278 110,928 1,138,651 - 1,368,780 Net income - - - - 211,750 Common stock retired ( 18,800) ( 1,880) ( 10,332) ( 45,789) Foreign Currency Translation Adjustments - - - $( 2,564) - Balances at Dec. 31,1997 1,090,478 109,048 1,128,319 ( 2,564)1,534,741 Net loss - - - - (1,064,622) Common stock retired ( 26,000) ( 2,600) ( 4,420) - ( 94,730) Foreign Currency Translation Adjustments - - - 157 - Balances at Dec. 31,1998 1,064,478 $ 106,448 $1,123,899 $( 2,407) $ 375,389
See notes to consolidated financial statements. AUTO-GRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997, 1996 1998 1997 1996 Cash flows from operating activities: Net income $(1,064,622) $ 211,750 236,906 Adjustments to reconcile net Income/(loss) to net cash provided by operating activities: Depreciation and amortization 1,676,056 1,134,348 1,048,639 Deferred taxes ( 209,000) 30,061 71,000 Changes in operating assets and liabilities, net of the effect of acquisitions Accounts receivable 937,971 (405,058) 96,940 Unbilled production costs ( 3,149) 166,380 101,381 Other current assets ( 241,303) (39,908) (19,824) Other assets 22,245 (284,166) (26,964) Accounts payable ( 32,062) 338,977 (194,375) Deferred income 277,642 (99,306) (45,779) Accrued payroll and related liabilities 313,030 2,275 3,389 Other accrued liabilities ( 66,698) 28,343 88,454 Net cash provided by operating activities 1,310,110 1,083,696 1,359,767 Cash flows from investing activities: Capital expenditures ( 173,233) (420,676) (611,840) Capitalized software development ( 795,000) (750,676) (775,000) Investment in Datacat, Inc., net of cash acquired - (182,175) - Investment in A-G Canada, Ltd. - (787,095) - Net cash used in investing ( 968,233) ( 2,140,622)( 1,386,840) Cash flows from financing activities: Borrowings under long-term debt 650,927 1,603,016 900,000 Borrowings under life insurance 150,278 - - Principal payments under debt agreements (1,030,000) (605,000) (555,000) Repurchase of capital stock (101,750) (58,000) (60,351) Net cash provided by (used in) financing activities ( 330,545) 940,016 284,649 Net increase(decrease) in cash 11,332 (116,910) 257,576 Foreign currency effect on cash 36,792 (2,564) - Cash at beginning of year 244,620 364,094 106,518 Cash at end of year $ 292,744 $ 244,620 $ 364,094 See notes to consolidated financial statements. AUTO-GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 1. Summary of significant accounting policies. Description of Business Auto-Graphics, Inc. including its wholly-owed A-G Canada, Ltd. and Datacat, Inc. subsidiaries (the "Company") provides software products and services used to create, organize, manage, and deliver electronic databases and information via the Internet/Web and/or other electronic media such as CD-ROM and via traditional publication media such as print. Basis of Presentation The consolidated financial statements include the accounts of Auto- Graphics, Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Revenue Recognition Revenues are recognized as services are rendered monthly or when finished goods are shipped to customers. Certain future software support costs are accrued in accordance with American Institute of Certified Public Accountant's Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9. Use of Estimates The preparation of the financial statements of the Company in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements. Actual results may differ from those estimated. Foreign Currency Translation The functional and reporting currency for operations located in Canada is the Canadian dollar. Consequently, assets and liabilities must be translated into U.S. dollars using current exchange rates and the effects of the foreign currency translation adjustments are accumulated and included as a component of stockholders' equity. As of December 31, 1998, the accumulated foreign currency translation adjustments were not material and the net foreign exchange transaction losses for 1998 were $47,357 and $12,222 in 1997. All other Company transactions are currently denominated in U.S. dollars. Concentration of Credit Risk The Company is potentially subject to a concentration of credit risk for trade receivables. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential losses for uncollectible accounts and such losses have been within management's expectations. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value: Cash and Receivables. The carrying amount approximates fair value because of the short-term maturity of these instruments. Long-Term Debt. The carrying amount approximates fair value, since the interest rate on the debt is at the bank's prime rate. 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. Software, Equipment and Leasehold Improvements Software, equipment and leasehold improvements are recorded at historical cost. Software, equipment, furniture, fixtures and leasehold improvements at December 31, 1998 and 1997 consist of the following: 1998 1997 Computer software and database $7,575,129 $7,602,243 Equipment 3,015,946 3,568,573 Furniture and fixtures 534,134 535,706 Leasehold improvements 273,973 276,100 11,399,182 11,982,622 Less accumulated depreciation and amortization 6,382,555 6,195,321 $5,016,627 $5,787,301 Capitalized Acquisition Costs Certain legal and accounting costs associated with several asset acquisitions in 1997 have been capitalized as asset acquisition costs And will be amortized over a five year period. 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 using 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, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Amortization is based on the straight-line method and commences in the first year of product availability. Unamortized computer software was approximately $3,695,000 in 1998, $3,734,000 in 1997, and $2,502,000 in 1996. Amortization of computer software was approximately $798,000 in 1998, $579,000 in 1997, and $501,000 in 1996. The following estimated useful lives are generally observed for the respective asset categories: Equipment - 5 years Computer software and databases - 7 years Furniture and fixtures - 5 to 10 years Leasehold improvements - the lesser of 5 to 15 years or the lease term Depreciation and amortization was $1,676,000 in 1998, $1,134,000 in 1997, and $1,049,000 in 1996. Other Assets Investment in A-G Canada, Ltd. As of July 1, 1997, the Company acquired the assets of the Library Information Systems ("LIS") division of ISM Information Systems Management Manitoba Corporation ("ISM"), a subsidiary of IBM Canada, Ltd. The LIS business includes bibliographic cataloging and interlibrary loan resource sharing software and related services. The assets acquired include a bibliographic database containing over 50 million records together with the holdings of most Canadian public and university libraries, five million authority records, software, computer equipment, furniture, leasehold improvements and contracts to provide services to approximately 500 Canadian libraries. The Company purchased the LIS assets and business for US$879,000 (Cdn$1,211,000) of which US$763,000 was paid in cash plus the assumption of approximately US$116,000 in liabilities. The transaction was treated as a purchase with the purchase price fully allocated to the fair value of the assets acquired and no goodwill or other intangibles were recognized. Financing for the purchase was provided in the form of a new credit facility through Wells Fargo Bank via a combination of an additional US$750,000 in bank term debt and an additional US$250,000 in revolving working capital financing. The Company formed a wholly-owned Canadian subsidiary, A-G Canada Ltd., for purposes of acquiring and operating the LIS business located in Etobicoke, Ontario near Toronto. Financial information for A-G Canada Ltd. for the six months ending December 31, 1997 and twelve months ending December 31, 1998 has been included in the accompanying consolidated financial statements. Investment in Datacat, Inc. In 1990, the Company acquired a 50% interest in Datacat, Inc. Datacat was formed to market a new technology developed by the Company for the production of parts catalogs for the wholesale heating, ventilation, air conditioning, and refrigeration (HVACR) industry. The investment has been accounted for using the equity method. As of October 2, 1997, the Company acquired the remaining 50% interest in Datacat, which it did not already own. The Company invested $200,000 in Datacat. The accompanying consolidated financial statements include financial information for Datacat for the three month period ending December 31, 1997 and twelve months ending December 31, 1998. Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per Share", which is effective for interim and annual periods ending after December 15, 1997. The Company adopted the standard as of December 31, 1997. The standard requires the Company to present basic earnings per share and diluted earnings per share if applicable, using a revised methodology and requires restatement of prior earnings per share data presented. Basic earnings per share computations presented by the Company conform to the standard and are based on the weighted average number of shares of common stock outstanding during the year. Contingently issuable shares granted under the Company's 1997 Non-Qualified Stock Option Plan have been excluded from per share calculations because all necessary conditions for exercise of said options have not been satisfied as of December 31, 1998. (See Note 7 of "Notes to Consolidated Financial Statements"). Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The statement establishes standards for reporting and display of comprehensive income and its components in interim and annual financial statements. Comprehensive income is defined as the change in the equity (net assets) of an entity during a period from transactions, events and circumstances excluding all transactions involving investments by or distributions to the owners. Total comprehensive income for the Company for the years ending December 31, 1998 and 1997 is as follows: 1998 1997 1996 Net income/(loss) $(1,064,622) $ 211,750 $ 236,906 Foreign currency translation Adjustments 157 (2,564) - Total comprehensive income/(loss) $(1,064,465) $ 209,186 $ 236,906 Supplemental Disclosure of Cash Flow Information The Company paid interest in the amount of $326,294 in 1998, $290,937 in 1997 and $253,258 in 1996. The Company paid income taxes in the amount of $59,609 in 1998, $182,682 in 1997 and $21,691 in 1996. Stock Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." As permitted by this statement, the Company has continued to account for employee stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense has been recognized for the employee stock option plan. (See Note 7 of Notes to the Consolidated Financial Statements). Segment Reporting In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The FAS is effective for fiscal years beginning after December 15, 1997 and the Company has adopted the statement in fiscal year ending December 31, 1998. The statement establishes standards for reporting of information about operating segments in interim and annual financial statements. The Company provides various standard and custom database management products and services to its customers, who are publishers of information in various forms such as print, CD-ROM and Internet/Web. Geographically, the Company provides these same database management products and services to customers in both the US and Canada as its primary markets. The Company is managed and financial results reported as a single operating unit (or profit center), which is managed by a Chief Executive Officer and a Chief Operating Officer. The Company and its subsidiaries are managed by a single organization which is organized by functional discipline, such as Operations, Sales, Marketing, Finance, and Software Development each headed by a manager who reports to the CEO or COO. The Company is, therefore, a single "operating segment" according to the definition of the above referenced standard. The following table summarizes results of operations and total assets presented on the basis of GAAP (generally accepted accounting principles) accounting for the years ending December 31, 1998, 1997 and 1996. 1998 1997 1996 Geographic areas Net sales United States $ 6,967,453 $ 7,856,245 $ 8,518,490 Foreign-Canada 1,924,660 1,648,535 699,447 Foreign-Japan/Other 207,085 531,044 - Long-lived assets, net United States 4,796,917 5,468,218 4,425,522 Foreign-Canada 219,710 319,083 - 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. Pending Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Opinion ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. The SOP requires that the Company continue to capitalize certain costs of software developed for internal use once certain criteria are met. The Company does not expect this SOP will have a material effect on the Company's financial position or results of operations. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits," which is effective for fiscal years beginning after December 31, 1997. The Company does not expect this FAS will have a material effect on the Company's financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Opinion ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The SOP provides guidance and examples of the types of expenses associated with one-time (start-up) activities which under this SOP must be expensed as incurred. The Company does not expect this SOP will have a material effect on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal quarters of all fiscal years beginning after June 15, 1999. The Company plans to adopt the statement in the fiscal year ending December 31, 2000. The statement establishes standards for accounting for derivatives and hedging instruments (of which the Company currently has none) and therefore the Company does not expect this FAS will have a material effect on the Company's financial position or results of operations. In October 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," which is effective for the first fiscal quarter beginning after December 31, 1998. The Company does not expect this FAS will have a material effect on the Company's financial position or results of operations. In February 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections," which is effective for financial statements issued for fiscal years ending after February 15, 1999. The Company does not expect this FAS will have a material effect on the Company's financial position or results of operations. Reclassification Certain amounts reported in 1997 and 1996 have been reclassified to conform to the 1998 consolidated financial statement presentation. 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 $1,250,000 ($1,250,000 available at December 31, 1998 and 1997) with interest at the bank prime rate (7.75% at December 31, 1998). The credit facility is renewable annually with the next renewal in June 1999. Among other requirements, the revolving line of credit requires the Company to maintain minimum financial covenant ratios, and restricts the payment of cash dividends. There are no compensating balance requirements, material commitment fees or note guarantors. For the quarter ending September 30, 1998 and the year ending December 31, 1998, the Company was not in compliance with certain loan covenant financial ratios. For the quarter ending March 31, 1999, the Company also expects to be in non-compliance with its loan covenants. The Company's bank has agreed to waive these loan covenant violations and has amended the credit agreement with less restrictive covenants for the balance of the loan term. 3. Long-term Debt. Long-term debt at December 31, 1998 and 1997 consists of the following: 1998 1997 Capital line of credit due in monthly installments of $50,000 plus interest at the bank prime rate (7.75% at December 31, 1998) through 2003; secured by software, equipment, and leasehold improvements with a net book value of approximately $5,017,000 at December 31, 1998. $3,000,000 $2,949,073 Term note with interest only at bank prime (7.75% at December 31, 1998) through June 30, 1999, and 12 monthly install- ments of $31,250 plus interest at bank prime rate through June 30, 2000. 375,000 750,000 Note payable to stockholder due in annual installments of $55,000 plus interest at 5.5% per annum. - 55,000 Total long-term debt 3,375,000 3,754,073 ` Less current portion 787,500 842,500 Long-term portion $2,587,500 $2,911,573 Maturities of Long-Term Debt due after one year are: 1999--$787,500; 2000--$600,000; 2001--$600,000; and 2002--$600,000. The capital line of credit at December 31, 1998 provides for maximum borrowings of $3,000,000 for the purchase of equipment and software, and financing of up to $1,000,000 annually in internal software development costs. The capital line of credit is subject to renewal annually with the next renewal in June 1999. This agreement contains the same loan covenants as the revolving line of credit. (See Note 2 of Notes to the Consolidated Financial Statements). There are no commitment fees, compensating balance requirements or note guarantors. For the quarter ending September 30, 1998 and the year ending December 31, 1998, the Company was not in compliance with certain loan covenant financial ratios. For the quarter ending March 31, 1999, the Company also expects to be in non-compliance with its loan covenants. The Company's bank has agreed to waive these loan covenant violations and has amended the credit agreement with less restrictive covenants for the balance of the loan term. The term note provided financing of $750,000 for the acquisition of the LIS division of ISM Information Systems Management Manitoba Corporation in July 1997. Terms of the note include interest at bank prime rate with interest only for 12 months followed by a 24 month amortization of the balance. The note carries an uncompensated guarantee by an officer/stockholder of the Company. In January 1998, the Company prepaid $375,000 of the term debt financing. In June 1995, the Company entered into a stock repurchase agreement with a former director of the Company, whereby the Company agreed to purchase and retire, in 1995, 115,000 of 141,000 shares of Company stock owned by the stockholder. The total transaction cost of $230,000 is being paid in four annual installments beginning in 1995 and ending in 1998 plus interest of 5.5% per annum ($65,000 paid in June 1995, and $55,000 was paid in June 1996, 1997 and 1998). 4. Taxes Based on Income. The provision /(benefit) for taxes based on income is composed of the following for the years ended December 31: 1998 1997 1996 Current taxes based on income Federal $(188,000) $ 63,000 $ 69,000 State ( 35,000) 47,000 43,000 Foreign - 42,000 - (223,000) 152,000 112,000 Deferred taxes based on income Federal ( 147,000) 55,000 78,000 State ( 27,000) ( 14,000) - Foreign - - - ( 174,000) 41,000 78,000 $(397,000) $ 193,000 $ 190,000 A reconciliation of the provision for taxes based on income follows for the years ended December 31: 1998 1997 1996 Statutory U.S. federal income tax $(497,000) $ 137,600 $ 145,200 Adjustments for foreign tax rates ( 55,000) 11,800 - Valuation Allowance 254,000 - - State tax, net of federal benefit ( 77,000) 21,800 28,500 Other ( 22,000) 21,800 16,300 $(397,000) $ 193,000 $ 190,000 The statutory U.S. federal income tax rate was 34% in 1998, 1997 and 1996. The deferred tax assets and liabilities are composed of the following at December 31: 1998 1997 1996 Deferred tax liabilities: Tax over book amortization and depreciation $ 729,000 $ 695,000 $ 665,000 State taxes 28,000 - - Total deferred tax liabilities 757,000 695,000 665,000 Deferred tax assets: Net Operating Loss 463,000 - - Bad debts/accrued vacation/other 62,000 57,000 54,000 State taxes - 11,000 15,000 Total deferred tax assets 525,000 68,000 69,000 Valuation allowance ( 254,000) - - Net deferred tax assets 271,000 68,000 69,000 Net deferred tax liability $ 486,000 $ 627,000 $ 596,000 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. The valuation allowance at December 31, 1998 reflects an unrecognized foreign tax loss carryforward. At December 31, 1998, the Company has available federal, state and Canadian net operating loss carryforwards of approximately $462,000, $886,000 and $569,000, respectively, for income tax purposes. These net operating loss carryforwards expire in 2018 for federal taxes, 2005 for state and for foreign taxes. 5. Commitments and Contingencies. The Company incurred total facilities and equipment lease and rental expense of approximately $415,000 in 1998, $509,000 in 1997 and $474,000 in 1996. The Company is obligated under certain noncancellable operating leases for office facilities and equipment. Approximate minimum lease commitments as of December 31, 1998 are as follows: Years ended Operating December 31 Leases 1999 $ 415,000 2000 383,000 2001 351,000 Total minimum lease payments $ 1,149,000 6. Related Party Transactions. The Company leases its corporate office and production facility from a limited partnership owned by two principal directors/stockholders of the Company payable at $29,260 per month (plus expenses and applicable increases based on the consumer price index) through June 2001 under the second of two five-year renewal options. The five-year lease with options, which was entered into in June 1986, was approved and authorized by the independent members of the Company's Board of Directors. The Company entered into a stock repurchase agreement in February 1995, with a former employee/officer of the Company, whereby the Company agreed to purchase and retire, over a seven year period, 156,000 of 171,000 shares of Company stock owned by the individual. The total transaction cost of $825,000 includes stock, non-competition and consulting fees. In January 1998, the Company purchased and retired a block of 26,000 shares, and in each January 1997 and 1996, the Company purchased and retired a block of 15,600 shares, in accordance with the above referenced agreement, at the then current fair market value of the stock. 7. Stockholders' Equity. 1997 Non-Qualified Stock Option Plan The Company adopted and implemented a 1997 Non-Qualified Stock Option Plan effective December 31, 1997. The plan is a non-qualified plan covering only senior executives and related persons. The plan consists of 100,000 shares of the Company's authorized but unissued common stock. At the inception of the plan, the Company granted options to four persons under the plan whereby they may purchase up to a total of 47,500 shares over the next five years at a price per share of $1.65. The recipient's right to exercise such options and acquire the stock is conditioned upon further employment with the Company and on the market trading price of the Company's stock rising to a minimum of $6.50 per share. Shares actually sold and issued pursuant to the plan will be restricted stock requiring that such stock be held by the recipients for a minimum period of one year following purchase before they are eligible to sell such stock in the public market. As of December 31, 1998 no options were exercisable. Following such initial option grant, 52,500 shares remain eligible for future grants under the plan. 8. Defined Benefit Plan The Company sponsors a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code for the benefit of its U.S. based employees. All full time employees are eligible to participate beginning in January or June of each year following a 90 day waiting period. The Company pays the administrative expenses of the plan. Annually, the Company may, at its sole discretion, award an amount out of the profits of the Company as a match against employee contributions to the 401(k) plan. The Company contribution was approximately $25,000 in 1998, $24,000 in 1997 and $19,000 in 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 6, 1998, the Company was notified by Ernst & Young, LLP that such firm would not stand for re-election for the fiscal year ending December 31, 1998 and also tendered its resignation as the Company's independent auditors. A. Pursuant to Item 304(a)(1) of Regulation S-K, the Company reports the following specific information: (i) On August 7, 1998, the Company received written notification from Ernst & Young, LLP dated August 6, 1998 that such firm would not stand for re-election for the fiscal year ending December 31, 1998 and was tendering its resignation as the Company's independent auditors. (ii) The reports of Ernst & Young, LLP on the Company's financial statements for each of the past two years were unqualified and contained no adverse opinion or disclaimer of opinion and no such report was qualified or modified as to uncertainty, audit scope, or accounting principles. (iii) The Company's Board of Directors have accepted the resignation of Ernst & Young, LLP as the Company's independent auditors. (iv) There were no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, between the Company and its independent auditors during the Company's two most recent fiscal years or subsequent thereto. (v) No event requiring disclosure under Item 304(a)(1)(v) of Regulation S-K has occurred. B. No event requiring disclosure under Item 304(a)(2) of Regulation S-K has occurred. On December 28, 1998, the Company engaged the services of BDO Seidman, LLP as its principal accountant to audit the Company's consolidated balance sheet as of December 31, 1998 and the related statements of operations, stockholder's equity, and cash flows for the fiscal year ending December 31, 1998. The engagement was approved by the Company's Board of Directors. Prior to the engagement of BDO Seidman, LLP, the Company did not consult with such firm regarding the application of accounting principles to a specific completed or contemplated transaction, or any matter that was either the subject of a disagreement or a reportable event. The Company also did not consult with BDO Seidman, LLP regarding the type of audit opinion which might be rendered on the Company's financial statements and no written or oral report was provided by BDO Seidman, LLP. The Company has provided BDO Seidman, LLP with a copy of the disclosures contained herein, and such firm has indicated that no letter will be provided containing any new information, clarification of the Company's expression of its views, or the respects in which such firm does not agree with the statements made by the Company in response to Item 304(a). No other event requiring disclosure under Item 304(a)(2) of Regulation S-K has occurred. 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 Robert S. Cope 63 Director, President and Treasurer. Has served in these capacities for more than ten years. Robert H. Bretz 55 Director and Assistant Secretary. Attorney who has acted as the Company's outside general legal counsel for more than ten years. William J. Kliss 51 Chief Operating Officer. Has served the Company in this capacity for three years. Prior to this position, Mr. Kliss served as the Company's Vice President and General Manager of Library Services for two years. Mr. Kliss formerly served as Vice President of Operations at Scan-Optics, Inc. for fifteen years prior to his employment with the Company. Daniel E. Luebben 50 Chief Financial Officer and Secretary. Has served in these capacities for three years. Prior to these positions, Mr. Luebben served as the Company's Vice President, Operations and Controller for the past six years. Mr. Luebben formerly served as Controller of Ultrasystems Defense, Inc. for two years prior to his employment with the Company. Directors serve until their successors are elected and qualified at the annual meeting of stockholders. All executive officers serve at the discretion of the Company's Board of Directors. ITEM 11. EXECUTIVE COMPENSATION A definitive Proxy Statement will be filed with the Securities and Exchange Commission ("the Commission") pursuant to Regulation 14A within 120 days after the close of the Company's most recent calendar year and, accordingly, Item 11 is incorporated by reference to said definitive Proxy Statement. The Proxy Statement includes information covering this item under the caption "Compensation of Executive Officers". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A definitive Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days after the close of the Company's most recent calendar year and, accordingly, Item 12 is incorporated by reference to said definitive Proxy Statement. The Proxy Statement includes information covering this item under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Nominees for Election as Directors". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A definitive Proxy Statement will be filed with the Commission pursuant to Regulation 14A within 120 days after the close of the Company's most recent calendar year and, accordingly, Item 13 is incorporated by reference to said definitive Proxy Statement. The Proxy Statement includes information covering this item under the caption "Certain Relationships and Related Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- K (a) Financial statements and financial statement schedules and exhibits: (1) Financial Statements: See Item 8. "Financial Statements." (2) All schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto. (3) Exhibits: 3.1 Articles of Incorporation of Auto-Graphics, Inc., as amended (incorporated by reference as filed with the SEC as Exhibit 3.1 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 3.2 Bylaws, as amended (incorporated by reference as filed with the SEC as Exhibit 3.2 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989). 10.8 Lease Agreement between 664 Company and Auto-Graphics, Inc. dated May 27, 1986 (incorporated by reference as filed with the SEC as Exhibit 10.7 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990). 10.9 Agreement by, between and among Auto-Graphics, Inc. and Douglas K. and Ruth T. Bisch executed February 15, 1995 (incorporated by reference as filed with the SEC as Exhibit 10.9 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 10.10 Asset Purchase Agreement between A-G Canada, Ltd., a wholly owned subsidiary of Auto-Graphics, Inc. and ISM Information Systems Management Manitoba Corporation, a subsidiary of IBM Canada, Ltd. dated June 30, 1997 incorporated by reference as filed with the SEC in the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997). 10.13 Stock Purchase Agreement by, between and among Auto-Graphics, Inc. and Cary A. and Geri W. Marshall executed June 13, 1995 (incorporated by reference as filed with the SEC as Exhibit 10.13 to Item 14(a) in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.15 Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997. 10.16 First Amendment to Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc. dated June 23, 1997. 10.17 Second Amendment to Credit Agreement between Wells Fargo and Auto-Graphics, Inc. dated October 31, 1997. 10.18 Revolving Line of Credit Note (Working Capital) between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997. 10.19 Revolving Line of Credit Note (Capital Equipment) between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997. 10.20 Term Note between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997. 10.21 Continuing Security Agreement Rights to Payment and Inventory between Wells Fargo Bank and Auto-Graphics, Inc. dated May 12, 1997. 10.22 Security Agreement Equipment between Wells Fargo Bank and Auto- Graphics, Inc. dated May 12, 1997. 10.23 Guaranty between Wells Fargo Bank and Robert S. Cope dated May 12, 1997. 10.24 Settlement Agreement and Mutual Release between Diversified Printing & Publishing Services, Inc., Gannam/Kubat Publishing, Inc. Nasib Gannam, and T. Ron Kahraman, and Datacat, Inc., Auto-Graphics, Inc. and Robert S. Cope dated September 30, 1997. 10.25 1997 Non-Qualified Stock Option Plan dated December 31, 1997. 10.26 Third Amendment to Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc. dated June 1, 1998. 10.27 Term Note between Wells Fargo Bank and Auto-Graphics, Inc. dated June 1, 1998. 10.28 Fourth Amendment to Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc. dated September 15, 1998. 10.29 Fifth Amendment to Credit Agreement between Wells Fargo Bank and Auto-Graphics, Inc. dated December 24, 1998. (b) The Company has filed a Report on Form 8-K dated December 28, 1998 reporting the engagement of BDO Seidman, LLP as its independent certified public accountant. (c) The following document is filed herewith for information purposes, but is not part of this Annual Report, except as otherwise indicated: None. (d) None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AUTO-GRAPHICS, INC. (Registrant) Date: 4/20/99 By ss/ Robert S. Cope Robert S. Cope, President, Treasurer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated. Date: 4/20/99 By ss/ Robert S. Cope Robert S. Cope, President, Treasurer and Director Date: 4/20/99 By ss/ Daniel E. Luebben Daniel E. Luebben, Secretary and Chief Financial Officer Date: 4/20/99 By ss/ Robert H. Bretz Robert H. Bretz, Director EX-10.26 2 Exhibit 10-26 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of June 1, 1998, by and between AUTO-GRAPHICS, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of May 12, 1997, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Exhibit C as referenced in Section 1.3(a) is hereby substituted with a new Exhibit C as attached hereto, to reflect the new principal payment schedule of the Term Loan. 2. Section 4.8(a),(b),(c) and (d) are hereby deleted in their entirety, and the following substituted therefor: "(a) Current Ratio not at any time less than 1.05 to 1.0, with "Current Ratio" defined as total current assets divided by total current liabilities (to include borrowings under Line of Credit). (b) Tangible Net Worth not at any time less than $2,400,000.00, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Total Liabilities divided by Tangible Net Worth not at any time greater than 2.50 to 1.0 from the date of this Amendment up to December 31, 1998 and not at anytime greater than 2.25 to 1.0 at December 31, 1998 and at all times thereafter, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (d) EBITDA Coverage Ratio not less than 1.75 to 1.0 as of each fiscal year end and not less than 1.75 to 1.0 as of the end of each fiscal quarter excluding quarter ending December 31, on a rolling four-quarter basis, with "EBITDA" defined as net profit before tax plus interest expenses (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt (to be adjusted for the Amendment to the Term Loan repayment period, of interest only, from the date of this Amendment up to July 1, 1999) and the prior period current maturity of subordinated debt." 3. The following is hereby added to the Credit Agreement as Section 4.10: "SECTION 4.10. YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require." 4. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 5. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, AUTO-GRAPHICS, INC. NATIONAL ASSOCIATION By: ss/Robert S. Cope By: ss/Kirk C. Smith Robert S. Cope Kirk C. Smith President Vice President EX-10.27 3 Exhibit 10-27 WELLS FARGO BANK TERM NOTE $375,000.00 West Covina, California June 1, 1998 FOR VALUE RECEIVED, the undersigned AUTO-GRAPHICS, INC, ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at this office at San Gabriel Valley RCBO, 1000 Lakes Drive, Suite 250, West Covina, CA 91790, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $375,000.00, with interest thereon as set forth herein. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) at a rate per annum equal to the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. (b) Payment of Interest. Interest accrued on this Note shall be payable on the 1st day of each month, commencing July 1, 1998. (c) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. REPAYMENT AND PREPAYMENT: (a) Repayment. Principal shall be payable on the 1st day of each month in installments of $31,250.00 each, commencing July 1, 1999, and continuing up to and including May 1, 2000, with a final installment consisting of all remaining unpaid principal due and payable in full on June 1, 2000. (b) Application of Payments. Each payment made on this Note shall be credited first to any interest then due and second, to the outstanding principal balance hereof. (c) Prepayment. Borrower may prepay principal on this Note at any time, in any amount and without penalty. All prepayments of principal shall be applied on the most remote principal installment or installments then unpaid. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of May 12, 1997, as amended from time to time (the "Credit Agreement"). Any default in the payment of performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitutes and "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default as defined in the Credit Agreement, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the state of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. AUTO-GRAPHICS, Inc. By: ss/ Robert S. Cope Robert S. Cope President EX-10.28 4 FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of September 15, 1998, by and between AUTO-GRAPHICS, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of May 12, 1997, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 1.1.(b)(i)(A) is hereby deleted in its entirety, and the following substituted therefor: "(i) any account which is more than ninety-three (93) days past due;" 2. Section 4.3.(e) is hereby renumbered as Section 4.3.(f). 3. The following is hereby added to the Credit Agreement as Section 4.3.(e): "(e) not later than 20 days after and as of the end of each month, Borrower will provide Bank a detailed report which evidences that at least 80% of Borrower's invoices for that period were billed on the last day of that month;" 4. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 5. Borrower hereby remakes all representations and warranties Contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event, which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. AUTO-GRAPHICS, INC WELLS FARGO BANK, NATIONAL ASSOCIATION By: ss/ Robert S. Cope By ss/ Debbie Dillard-Bell Robert S. Cope Debbie Dillard-Bell President Vice President EX-10.29 5 FIFTH AMENDMENT TO CREDIT AGREEMENT THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of December 24, 1998, by and between AUTO-GRAPHICS, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of May 12, 1997, as amended from time to time ("Credit Agreement"); WHEREAS, as evidenced by Borrower's financial statements for the quarter ending September 30, 1998, Borrower has violated the EBITDA Coverage Ratio covenant and the profitability covenant set forth in Section 4.9 (d) and (e) of the Credit Agreement (the "Existing Violations"), which Existing Violations constitute Events of Default; WHEREAS, Borrower has requested that Bank forbear from exercising its rights and remedies with respect to the Existing Violations, and Bank is willing to do so, subject to certain conditions; WHEREAS, Bank and Borrower wish to amend two of the Events of Default in the Credit Agreement; NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Bank hereby agrees to forbear from exercising its rights and remedies in connection with the Existing Violations until February 15, 1999, except that Bank reserves the right to refuse to make advances under the Credits in Bank's sole discretion. Such agreement to forbear is conditioned upon (a) delivery to Bank by January 4, 1999, of a current financial statement of Robert S. Cope, in form and substance satisfactory to Bank, and (b) delivery to Bank upon Bank's request of any additional financial information Bank may require, including without limitation information relating to the business plan submitted by Borrower to Bank on December 11, 1998. Failure to comply with such conditions shall terminate Bank's forbearance. 2. The forbearance by Bank described above shall not be deemed a waiver of the Existing Violations, nor a waiver or agreement to forbear with respect to any future violation which may occur under the Credit Agreement or the other Loan Documents. 3. Section 6.1(f) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (f) Borrower or any guarantor hereunder shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any guarantor hereunder shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title II of the United States Code, as amended or recodified from time to time, or under the Bankruptcy and Insolvency Act (Canada) or comparable legislation in Canada or any other jurisdiction (collectively, the "Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any guarantor hereunder, and with respect to any such filing by or against any guarantor hereunder, such petition is unopposed or has not been stayed by such guarantor within 60 days of such filing, or Borrower or any such guarantor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any such guarantor shall be adjudicated a bankrupt, or an order of relief shall be entered against Borrower or any such guarantor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. 4. Section 6.1(h) of the Credit Agreement is hereby amended and Restated in its entirety to read as follows: (h)The death or incapacity of any individual guarantor hereunder. The dissolution or liquidation of Borrower or any guarantor hereunder; or Borrower or any guarantor hereunder, or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or any such guarantor, and with respect to any such guarantor, such action is unopposed or has not been stayed by such guarantor within 60 days of the date such action was taken. 5. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 6. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement except for the Existing Violations, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. AUTO-GRAPHICS, INC. WELLS FARGO BANK, NATIONAL ASSOCIATION By ss/ Robert S. Cope By ss/ Debbie Dillard-Bell Robert S. Cope Debbie Dillard-Bell President Vice-President Acknowledged by the undersigned guarantor, who confirms that the guaranty executed by him continues in full force and effect, and who agrees to deliver to Bank, the financial statement referred to above. By ss/ Robert S. Cope Robert S. Cope EX-27 6 ART. 5 FINANCIAL DATA SCHEDULE FOR FYE 12/31/98
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, 1998, and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1998 DEC-31-1998 292744 0 1735826 38000 86573 2437313 11399182 6382555 7573102 2896273 0 0 0 106448 1496881 7573102 9099198 9099198 6258523 3943143 47357 0 311797 (1461622) (397000) (1064622) 0 0 0 (1064622) (1.00) (1.00)
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